demand for construction work of all kinds. The contraction in the physical volume of business which results from these shrinkages in demand is cumulative, since every reduction of employment causes a reduction in consumer's demand, thereby starting again the whole series of reactions at a higher pitch of intensity.

With this contraction goes a fall in prices. For when current orders are insufficient to employ the existing equipment competition for business becomes keener. This decline spreads through the regular commercial channels which connect one enterprise with another, and is cumulative, since every reduction in price facilitates reductions in other prices, and the latter reductions react to cause fresh reductions at the starting-point.

The fall in prices is characterized by certain regularly recurring differences in degree. Wholesale prices fall faster than retail and the prices of raw materials faster than those of manufactured products. The prices of raw mineral products follow a more regular course than those of forest or farm products. Wages and interest on long-time loans decline in less degree than commodity prices. The only important group of prices to rise is high-grade bonds.

The contraction in the volume of trade and the fall in prices reduce the margin of present and prospective profits, spread discouragement, and check enterprise. But they also set in motion certain processes of readjustment by which the depression is overcome.

The prime costs of doing business are reduced by the fall in the prices of raw material and of bank loans, by the marked increases in the efficiency of labor which comes when employment is scarce, and by closer economy by managers. Supplementary costs are reduced by reduction of rentals and refunding of loans, by writing down depreciated properties, and by admitting that a recapitalization has been effected on the basis of lower profits.

While costs are being reduced, the demand for goods begins slowly to expand. Accumulated stocks left over from prosperity are exhausted, and current consumption requires current production. Clothing, furniture, and machinery are discarded and replaced. New tastes appear among consumers and new methods among producers, giving rise to demand for novel products. Most important of all, the investment demand for industrial equipment revives. Capitalists become less timid as the crisis recedes into the past, the low rates of interest on long-time bonds encourage borrowing, and contracts can be let on most favorable conditions.

Once these forces have set the physical volume of trade to expanding the increase proves cumulative. Business prospects become gradually brighter. Everything awaits a revival of activity which will begin when some fortunate circumstance gives a fillip to demand, or, in the absence of such an event, when the slow growth of the volume of business has filled order books and paved the way for a new rise in prices. Such is the stage of the business cycle with which the analysis begins, and, having accounted for its own beginning, the analysis ends.

75. SEASONAL VARIATIONS AND PANICS1

BY EDWIN WALTER KEMMERER

It has been found that the two periods of the year in which the money market is most likely to be strained are the periods of the "spring revival," about March, April, and early May, and that of the crop-moving demand in the fall; and that the two periods of easiest money market are the "readjustment" period, extending from about the middle of January to nearly the 1st of March, and the period of the summer depression, extending through the three summer months. Of the eight panics, four occurred in the fall or early winter (i.e., those of 1873, 1890, 1899, and 1907), and these four included two of the three really severe panics of the period (i.e., those of 1873 and 1907); three occurred in May (i.e., those of 1884, 1893, and 1901); and one (i.e., that of 1903), probably the least important one from the standpoint of the country as a whole, extended from March until well along in November.

The evidence accordingly points to a tendency for panics to occur during the seasons normally characterized by stringent money markets. This does not mean that the seasonal stringencies are the causes of the panics; it does mean that the months in which they occur are the weakest links in the seasonal chain, and that in periods of extraordinary tension the chain breaks at these links.

76. THE PERIOD OF DEPRESSION

A few facts and figures will indicate the extent of the present industrial depression. Bank exchanges at all the leading cities of the United States were $2,073,910,424 for the week ending January

Adapted from Seasonal Variations in the Relative Demand for Money and Capital in the United States, p. 222. (National Monetary Commission, 1910.)

2

Adapted from an editorial in Moody's Magazine, V (1908), 151-54

30, 1908, a decrease of 23.3 per cent compared with the corresponding week of 1907 and 37.2 per cent compared with the corresponding week of 1906. The decrease in New York and Philadelphia exceeded 28 per cent, compared with 1906, and was greater than in any other cities.

For the first two weeks of January, 1908, gross earnings of railroads were about 13 per cent less than in 1907. For the last week in December they were 15.52 per cent below those of 1906. For the entire month of December gross earnings were 1.13 per cent, while net earnings were 17.46 per cent less than were those for December, 1906.

Transactions of the New York Stock Exchange amounted to 16,634,817 shares, compared with 22,712,420 in January, 1907.

The sharp falling off in the net earnings of the United States Steel Corporation in the last quarter of 1907 shows the remarkable decline in industry. The net earnings fell from $17,052,211 in October to $10,467,253 in November, and to $5,034,531 in December. This is a decline of over 70 per cent.

The unparalleled number of idle cars affords a barometer of our industrial condition. Today there are approximately 320,000 freight cars and 8,000 locomotives standing idle, representing an investment of more than $400,000,000, and there are more than 30,000 unemployed trainmen. And yet three months ago there were not enough railroad cars to move the traffic of the country.

The general state of industry and trade is summarized by Bradstreet's as follows: "It is safe to say that estimates of shrinkages of 30 to 50 per cent in sales and general turnover are not unreasonable. Iron output will probably be 50 per cent below a year ago. Shoe shipments are about 30 per cent below January, 1907. Lumber and all kinds of building material are very quiet the country over. Coke production, though larger than in December, is easily 50 per cent below the fullest capacity. Coal has been helped by cold weather, but is dull; stocks have accumulated because of past mild weather or of reduced industrial consumption, and there is talk of miners of bituminous coal being asked to take lower wages as an alternative to reducing production. There are widespread reports of large numbers of unemployed in all sections of the country, and some southern reports point to a return of idle city labor to the farms."

The returns for the prices of commodities show a probable decline of about 10 per cent in the cost of living.

The money market affords one of the best barometers of the great change that has come over the industrial situation. From a deficit of $54,103,600 on November 23, in the surplus reserves of the New York Associated Banks, there was a surplus of $40,626,725 on February 1. From rates of 25 per cent or more last fall for call money we now have rates of less than 2 per cent. From rates of from 7 to 12 per cent for time money last fall we now have rates of from 4 to 4 per cent on Stock Exchange collateral and from 5 to 6 per cent on commercial paper. The return of hoarded money and the slackening demand for money in industrial and commercial operations are mainly responsible for this sudden transformation of the money market.

Already gold exports have begun from this country. They may reach a considerable volume before next July. Money rates, however, may be expected to remain about as at present. Money rates are being followed by rising prices for bonds and other secure securities. During January the price of bonds rose about twice as much as the price of common stock. Under existing conditions investors find bonds very attractive in view of the uncertainty of the situation. Many interior banks have put their idle funds in bonds on account of the comparatively high interest return they can secure by such

a course.

77. BANKING CONDITIONS DURING DEPRESSIONS1

BY WALTER W. STEWART

The business conditions prevailing during periods of depression bring about certain changes in the loans, the deposits, and the reserves of banks. Those concerns which are borrowers at the banks find that their declining volume of business can be financed with smaller banking accommodations. Consequently, as accounts are collected and goods are sold, the funds are first deposited and then used to pay their loans at the banks. This method of payment, by which the borrower gives back to the bank the desposit account and receives in return his canceled note, results in the reduction of deposits as well as the cancellation of loans. Both the loans and the deposits, therefore, are lower during the depression than during the prosperity. In case the banks have pursued a policy of loan contraction during the crisis preceding the depression, then early in the depression the 1 From an unpublished article.

loans will increase. But it is an increase only as compared to the low point of the crisis, and not as compared to the period of prosperity.

The business conditions of depression are also reflected in the movement of bank reserves during the period, for the decrease in sales reduces cash requirements as well as credit requirements. The diminished volume of business causes merchants to keep less tillmoney; the increased unemployment causes wage-earners to carry less pocket-money; and the depositors who withdrew money during the crisis now redeposit it. This new distribution of money between the banks and the public results in an accumulation of reserve-money during the depression.

Thus it comes about that the cash held by the banks is actually increasing at the very time that the deposits are decreasing. The result is a favorable ratio between reserves and deposits, which in part explains the easy money market and the low interest rates. characteristic of the depression.

78. BANKING POLICY IN PERIODS OF EXPANDING BUSINESS' BY O. M. W. SPRAGUE

At the beginning of the ten years of business activity which cul\minated in 1907 the banks were in an exceedingly strong condition, as is usually the case at the end of a long period of depression. During the four years following the crisis of 1893 the loans, deposits, and cash reserves for the banks fluctuated within narrow limits, reflecting the stagnant condition of trade. On October 5, 1897, against net deposits of $2,195,000,000, the national banks held a cash reserve of $388,900,000, giving them the tolerably high ratio of 17.7 per cent to deposit liabilities. Their loans also must have been of high average quality after four years of thoroughgoing liquidation and recuperation in the business world.

Beginning with the autumn of 1897, the cash reserves of the banks increased rapidly. At first the gain was due to gold imports secured through abnormally large grain exports to Europe, and afterward on account of increasing gold production, of which the United States acquired a considerable share. A further gain was secured indirectly as a result of the currency act of 1900. As a result of these various influences, the cash holdings of the national banks increased from $388,900,000 on October 5, 1897, to $701,600,000 on October 22, 1907.

1 Adapted from Crises under National Banking System, pp. 216–26. (National Monetary Commission, 1910.)