AMERICAN INSTITUTE /or ECONOMIC RESEARCH

GREAT HARRINGTON MASSACHUSETTS

WEEKLY BULLETIN September 6 1948

RESEARCH
COMING EFFECTS OF CURRENT EVENTS Are Depressions Wholly Undesirable?
The repeated warnings by Government officials and others of an impending "depression" imply that depressions yield no benefits and are wholly undesirable. Certainly in the period from 1929 to 1933, the years of the Great Depression, the public had ample reason to learn that a depression may involve unemployment, loss of income, the failure of many businesses, and a lower standard of living for many individuals. Nevertheless, there are reasons for believing that depressions yield some benefits, in particular by facilitating the restoration of economic health. Depressions as an Antidote Economists often discuss business-cycle phenomena by using as an analogy the state of health of human beings. For example, when a period of prosperity unaccompanied by increasing maladjustments is being experienced, the economy is said to be healthy; but, when the Nation is experiencing a hectic boom, such as the one now prevailing, symptoms analogous to fever, a toorapid pulse, etc., are taken as evidence that the economy is ill. However, the medical profession has an advantage, because the scientific advance in medicine has progressed much farther than the comparable advance in the field of economics. Economists are not agreed as to which phenomena are symptoms of economic sickness and which are causes of economic disease. Consequently, they are unable to reach agreement concerning the medicine that should be taken in order to restore economic health. Past experience indicates that a depression inevitably follows a boom. Rapidly rising prices and wages and relative shortages of finished goods and raw materials are generally recognized as symptoms of underlying maladjustments or economic illness. To date, alleviation of the symptoms and presumably correction of the underlying maladjustments, that is, cures for economic illness, have been effected only during periods of depression. Just as bad-tasting medicine is distasteful, the depression cure for boom-time ills also is disagreeable. Moreover, in those aspects of the economy where the maladjustments have become greatest, the suffering tends to be most intense. For example, suicides were most frequent among stock speculators during the 1929 crash. 147

REPORTS
Nevertheless, in spite of widespread resistance to the depression medicine, the maladjustments of the preceding boom are corrected, and the health of the economy is restored. Then the Nation can once again progress toward its economic goal. Causes and Results of Depression In order to understand the corrective readjustments effected during a period of depression, knowledge of the causes of booms and depressions is needed. Many volumes have been written about this aspect of our economic problems, and there is not sufficient space here to offer a complete explanation.1 However, the principal causes of depressions appear to be the distortions among various economic relationships that occurred during the preceding boom. Moreover, the basic cause of the boom appears to be an excess of demand with respect to supply made possible by the issue of too many dollars in relation to the supply of goods in the markets. Unfortunately, most past depressions have been aggravated by the reversal of this situation; that is, demand has been unnecessarily curtailed as a result of fear-induced hoarding of purchasing media to some extent. If the withdrawal of purchasing media from the channels of trade could be limited to the excess previously placed in circulation, depressions might be less severe, albeit not less necessary as medicine for economic ills. The reversal of the boom usually is initiated by deflation, which is the retirement of the inflationary purchasing media from circulation. Inability to make adjustments promptly, particularly downward price and wage adjustments, during a period of deflation aggravates the situation.2 Furthermore, increasing pessimism during a depression may result in hoarding, thereby reducing effective demand unnecessarily. Such developments tend to accentuate and prolong the depression. Nevertheless, the depression does serve as an economic bludgeon that beats into submission the recalcitrant elements that resist and postpone essential reajustments. Depression is a ruthless weapon, but it is the only one that has thus far proved effective. After

depression has corrected the serious maladjustments, the

recommend the Institute publication Cause and Control of the Business Cycle by E. C. Harwood for a more detailed analysis of the causes of booms and depressions. 2 Readers of these bulletins presumably are familiar with this aspect of the problem, but for further analysis we suggest a review of the lead discussion in the August 9 bulletin.

economy can recover. Then sound relationships between goods and gold and between opportunities for employment and idle men and money can be restored. Unfortunately, the readjustments effected during the early stages of a depression may be counterbalanced by attempts to reverse the downward trend of business activity by various means, such as the pump-priming undertaken during the 1930's. The resulting distortion of economic relationships caused by such foolhardy attempts in that instance, at least, apparently almost prevented the recovery that normally would have followed. Should Depressions be Feared? Because past experience has provided no assurance that widespread unemployment and a lower standard of living for many can be avoided during depressions, the public naturally fears "bad times." Perhaps, if understandings of the reasons for depressions and knowledge of what can be done to avoid serious and unnecessary repercussions were more widely disseminated, the public's fear could be somewhat lessened. If employers were to continue operating their plants at the most efficient rate and were to take what they could get for their product, many manufacturers would be no worse off than they would be if they closed their plants completely, as many have in the past. Moreover, widespread unemployment would be reduced to some extent, thereby eliminating one of the undesirable effects associated with depressions. If price and wage adjustments were made more promptly, depressions would be less severe and of shorter duration. One purpose of the National Bureau of Economic Research, The Brookings Institution, and other research organizations, including our oivn, is to disseminate the re' suits of research on business-cycle problems. However, relatively few citizens can be expected to read the publications of such organizations. This raises the question, How can the public generally be informed concerning the reasons for and the means of alleviating major fluctuations in the business cycle? We shall answer this question only by asking two more. Have not the President of the United States, the Secretary of the Treasury, and the Federal Reserve Board a definite responsibility to inform the public in these matters? Instead of "scare" announcements used as propaganda to urge specific measures, shouldn't these gentlemen inform the public regarding the little that is known about the beneficial as well as the harmful aspects of depression?
1935

NEW CONSUMER GOODS PER CAPITA

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revised total of 113,324 vehicles reported for the previous week. Walk-outs, attributable to the heat, particularly in the Chrysler and Packard plants, were primarily responsible for the decreased output. A prolonged strike in a foundry company has hampered production of Chrysler products and has forced the Hudson Motor Company to cease operations. Studebaker ha& announced that operations will be reduced to a 4-day week through September because of steel shortages. This curtailment is expected to reduce total possible output by approximately 5.000 cars per week. 1929 1932 1937 1938 1947 1948 Vehicles (000 omitted )f 118 25 83 30 88 103p Electric-power production during the week ended August 28, 1948, increased to 5,477,741,000 kilowatthours from 5,390,788,000 kilowatt-hours reported for the previous week.
1929 1932 1937 1938 1947 1948

Billion Kilowatt-Hourst 1.76 1.44 2.29 2.13 4.94 5.48 Lumber production during the week ended August 21, 1948, increased. The New York Times seasonally adjusted index was 2.8 points above the index for the previous week and was 11.4 points above that reported in the corresponding week last year.
The New York Times Indext 135
1929 1932 1937 1938 1947 1948 87 98 35 85 96 p=preliminary tLatest weekly data: corresponding weeks of earlier years *Week includes holiday

New Consumer Goods

The Institute's unadjusted index of new consumer goods per capita remained at a record high in July. (Revisions of construction data revealed that the unadjusted index was slightly lower in June than was at first indicated.) However production during the month was curtailed in four of the seven more important industries that contribute to the supply of consumer goods. Large gains in automobile production and in estimated construction activity during July were sufficient to counterbalance the losses in other consumer-goods industries. Production of new consumer goods per capita in July was 10 percent greater than that of a year ago and was 12 percent more than the prewar peak reached in July 1941. The unadjusted index is now approximately 38 percent above the average level during the last 3 years of World War II. The index adjusted for long-term trend continued in July at the same level that has prevailed for all but one of the preceding 6 months. Although the adjusted in-

SUPPLY Industrial Production

Steel-ingot production, scheduled at 95.2 percent of capacity for the week ended September 4, 1948, was 1 percent less than output in the preceding week but was 6 percent more than production in the corresponding week last year. Absenteeism because of the heat was the principal reason for the slightly reduced rate of operations during the current week.
Percent of Capacityt Weekly Cap. (Million Tons) Production (Million Tons) 1929 1932 1937 1938 1947 1948 88* 15* 73* 41* 92 95p 1.38 1.52 1.51 1.54 1.75 1.80 1.21 .23 1.10 .63 1.61 1.71

Automobile and truck production during the week ended August 28, 1948, in the United States and Canada was estimated at 102,685 vehicles, compared with a

148

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dex is 8 percent greater than that of July 1947, this index is 8 percent below the peak reported in July, 1941. Residential construction activity is one of the mainstays of the index at the present time. The record number of dwellings built in June was approximately 7 percent more than those erected in May. An increase of as much as 10 percent apparently occurred in July, and no reports of curtailed activity in August have appeared in any of the usual sources. The automobile industry manufactured 11 percent more vehicles in July than were made in the preceding month. However, the rate of operations slackened somewhat in August, because of walk-outs caused by labor difficulties and excessive heat. The retardation of activity in the shoe, textile, and furniture industries continued through July. Shoe production was 18 percent less than it was in June and has decreased 28 percent since February. Wool production is reported to be at the lowest rate of operations in some time, having decreased approximately 50 percent in the last few years. Many cotton mills in New England have changed from a 5- to a 4day work week. Curtailment of furniture production has been uninterrupted during the first 7 months of 1948. A decrease of 2 percent during July reduced production to a leveL 12 percent below that for January. However, new orders during the year to date have been sufficient to justify a seasonal increase in production this fall. Undoubtedly, the excessive inventories in department stores last spring had muck to do with the recent slump in textile manufacturing. Outstanding orders of department stores (which are large buyers of textile products) decreased from $633,000,000 to $339,000,000 in the first 5 months of the year. However, the unsound inventory situation appears to have been corrected for the most part (see "Ratio of Retail Inventories to Sales" in August 16 Research Reports), and the 37-percent increase in outstanding orders to $464,000,000 in June suggests that demand for consumer textile goods is improving. Decreases in textile and shoe production also occurred in the first half of 1947, but gains during the final 6 months of that year, together with increased activity in the other components, raised the index 10 percent. Although a similar increase is improbable during 149

the remaining months of 1948, no substantial decline in the index of new consumer goods per capita is expected.

DEMAND Department-Store Sales

For the fourth consecutive month the dollar volume of department-store sales rose to a new all-time high in July. The Federal Reserve Board's seasonally adjusted index increased 1 percent to a level 10 percent above that reported in July last year. Little of the increase that has occurred in dollar volume during the past 4 months can be attributed to increases in prices, but the gain in comparison with sales at this time last year is almost entirely attributable to higher prices. The estimated physical volume of July sales, derived by dividing the dollar-volume index by an index of prices, also increased. This index rose 1 percent during July to the highest level reported in nearly 2 years. Compared with the July 1947 figure, this index has increased only 3 percent. The index of potential physical volume for June was nearly 4 percent less than the figure for May. (This series, based on the production of goods usually sold in department stores, is a 3-months' moving average plotted on the mid-month.) This series and the series of estimated physical volume are still diverging. Therefore, we assume that department-store inventories have decreased rapidly in relation to sales. Probably the most significant recent development that will affect department-store sales is the imposition of restrictions on consumer credit and installment loans, which is to become effective September 20. Thus far this year, only about 7 percent of total department-store sales have been financed through installment credit. Probably most financing of this nature by department stores is for sales of the consumer-durable goods that will be affected by the new restrictions. Even if all installment sales are of that type of goods, total sales of department stores will not be greatly affected. A decrease of 30 to 50 percent in the volume of such sales would reduce total department-store sales only 2 to 3 percent. During the paM 2 years the dollar volume of sales has decreased in the late summer and early fall. A sim-

70

COST OF LIVING

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ilar trend may be followed in the next several weeks, especially inasmuch as some of the agricultural areas will be less prosperous this year. However, the declines in the prices of the stable agricultural products have not much more than counterbalanced the increased quantities expected. Consequently, most farmers apparently will have nearly as much to spend this fall and winter as they did last year. There is no apparent reason to fear serious declines in the volume of department-store sales during the remainder of 1948. Latest Weekly Data Department-store sales for the week ended August 28, 1948, were 6 percent less than sales reported for the previous week and were 8 percent less than sales in the corresponding week last year. Many stores in the metropolitan areas reported a smaller volume of sales during the last week of August and attributed this development to the heat wave prevailing throughout most of the Middle West and East.

PRICES Cost of Living

A new all-time peak (173.7) was reached in the costof-living index on July 15. The increase of more than 1 percent between June 15 and July 15 continued the upward trend that has occurred since the declines in February and March. Retail prices rose more than 4 percent in the 4 months subsequent to March and on July 15 were nearly 3 percent higher than those prevailing at the beginning of the year. The cost of living in July was approximately 10 percent more than it was a year ago and was about 16 percent higher than the prewar peak reached in 1920. Since August 1939, the cost of living has increased 76 percent. The accompanying chart shows the Bueau of Labor Statistics' index of consumer prices. The index reflects changes in the retail prices of goods, rents, and services bought by families of wage earners and moderate-income workers in large cities. A study was made in 1934-36 in order to ascertain what physical quantities of specific goods and types of services were purchased by moderate-income families. These same quantities of identical goods and types of services are valued monthly at the prevailing prices in order to ascertain the changes in the cost of living. 150

Retail prices of food, which today is the consumer's largest single budget item, increased slightly more than 1 percent from June 15 to July 15. The cost of meats, poultry, and fish increased 2.6 percent. Dairy products and eggs also were at slightly higher prices than those of a month earlier. In spite of a substantial decrease of 23 percent in the price of carrots and 14 percent in the cost of cabbage, prices of fresh fruits and vegetables in general declined less than seasonally. Little change was reported in the prices of wearing apparel. Small seasonal reductions for cotton summer clothing failed to offset completely higher prices for men's wool suits. Higher transportation costs, largely attributable to increased prices for automobiles and tires, and higher automobile insurance rates were reflected in an advance of 2 percent in the prices of miscellaneous items. The varying rates of increase of the major components of the consumers' price index since 1935-39 have changed the proportions of the family income that must be devoted to certain groups of commodities or services. During 1935-39, food represented 34 percent of the value of all goods and services purchased; in July 1948 almost 43 percent of a citiy family's income was required in order to purchase an equal quantity of food. Because of excellent harvests, the supply of certain food commodities has increased to such an extent that further increases in the retail prices of food may be avoided. However, no evidence is yet available that suggests a decline in the cost of living in the next month or two. Rents will continue to increase as adjustments are made under the Rent Control Act. Moreover, retail prices have not yet fully reflected the latest round of wage increases. Certainly, no effective attack on inflation has been inaugurated, nor is any apparently to be expected until after the November elections at least. Not until the present excessive amount of inflationary purchasing media is greatly reduced can we expect a permanent decline in the cost of living.

Commodities at Wholesale
1947
(August 1939=100) Sept. p 2 Spot-Market Prices 307 (28 basic raw materials) 319 Commodity Futures Prices (Dow-Jones Daily Index)

1948 Aug. 2 g 26 Sept. p

313 300 315 294