Looking Ahead

By Alvin T. Simonds, President, Simonds Saw and Steel Co.

Avoiding Another Serious Depression

"Just as the basis of every depression is laid in the preceding period of prosperity, so the basis of every prosperity islaid in the preceding period of depression. . . We never see'the impelling forces from which revival springs until afterw11d5."-Jhs National City Bank of New York.

Are we to believe that bankers and business leaders, including business publishers and editors, in general never see -the impelling forces fromwhich depression springs until afterwards? The record shows that if they do see these forces during prosperity (for it is then when the forces are impelling us towards depression) they do not themselves spread the knowledge and they severely censure others who do. We are about to enter a new era of prosperiry. The impelling forces have been at work for a year or longer. As George E. Ro'berts states, they have not been seen. Later on we shall have many post facto accounts of what they were and how they changed depression to prosperity.

"Looking Ahead" has for many years been pointing out that while we may not at any given period of the business cycle be able to see all or even the decisive forces that bring about a change in the trend of business, yet there is an economic factor that is the resultant of all these impelling forces. This factor is the cost of credit. This rve can see and follow its changes.

date forecasts, as it has in each similar situation since the war, a business revival. As in each preceding case, there is a possibility that this forecast may not prove to be correct. We believe it will prove true; but the particular point we wish to stress now is this-if business revives through 1931 to another cyclical peak in the first half of 1932, let us make sure that the unseen forces acting during the revival and impelling business down into depression are discovered or, if this is impossible, that they are counteracted. Long before sea captains knew what caused disastrous storms they were guided by the barometer, expecting them and making ready to fight them. We believe, as in the past, revival will be accompaniecl by increasing money rates. If be,cause of speculation, because of business excesses or for any other reason, money rates are allorved to go to extreme highs, then a depression is bound to follow. Let us educate to the end that they do not. Let us organize to accomreo plish that end.

The dotted line is conmercial paper rotes, Net! York City, rerersed. The heauy solid. line is the aolume of industrial production, Federal Reserzte Bulletin. The light solid line running through l93l into 1932 is the eshimated tolume'of industr'ial production, it the fifth cycle develops as have the preceding f our. tffi, the bose line lor industrial production, is adiusted to on annual increasc of 3-1/3%.

The chart shows some interesting facts. It shows that in 1920, in 1923 and in 1929, in each case. industrial production at its peak was 16% above the normal trend of 3-l/3% increase annually. It shorvs that it was 2O7o below in l92l and 23V" below in 1930, but only l0% belorv in 1924. The 1926 peak was but lO% above ancl the 1927 bottom l>ut 5% below the trend line.

The accompanying chart shows that each short cyclical swing in business since the war has been preceded (beginning about a year ea-rlier) by-a corresponding movement in money rates reversed. The chart uses cornmercial paper rates, New York. In the short cyclical swings of the cost of credit, the various rates fluctuate practically together. A composite of money rates would doubtless be preferable to any single series. Rates for credit used in speculation in 1928 and 1929 would influence this composite rate more than commercial rates. Excessive speculation in 1929 was perhaps the ,chief of the impelling forces towards depression. In 1919 and the first half of. l92O commercial rates exercised a relative influence much greater than they did in 1928 and 1929. Business excesses in 1919-1920 were probably equally to blame with speculation. What a comment upon the intelligence of our business leaders and bankers isMr. Roberts' implied statement that these impelling forces were not seen until afterwards, when it was too late to ,counteract their disastrous effect. Can we not do something to prevent a repetition of this during the coming revival up to prosperity?

The upward movement in money rates reversed (i. e. the filling up of the credit reservoir) from December, 1929, to

From the fallof 1924 to the fall of. 1928, industrial production fluctuated between l0% above and 5% below the trend line. Please read that statement carefully and then compare it rvith this : From the fall of 1923 to the fall of 1928, commercial paper rates, NewYork, fluctuated between 3% and 5%. Business maintained itself on nearly an even keel during 1925, 1926, 1927 and the larger part of 1928. It is only'when money rates move to extreme highs as in 1920 and 1929 that we are likely to have a serious depression. The revival from the serious depression may be carried too far, even though money rates do not go extremely high. This rvas the .case in 1923. Then Secretary Mellon and Secretary Hoover warned business and especially the building industry that they were going too fast and too far and unless thev called a halt. we should have a repetition of 1921. But for this warning money rates rvould doubtless have risen much higher than they did.

Fromthe beginning, "Looking Ahead" has been sent gratis to those rvho asked to be put upon the mailing list. We have ilone this for the benefit of our customers and friends and to help increase general economic intelligence among business men. In 192oit was stated that only five outstanding bankers and business leaders saw the coming depression and warned the American people that it was coming. We had hoped that ten years later such a condi- tion csuld not be repeated-that bankers, business leaders and the business press would know so. much more about the workings of economic larv that everyone would be warned in time to prevent hidden forces in a year of prosperity causing a depression perhaps even more serious than that ol1921.

Nearly everyone seems to be stunned by the sharp de'cline in prices through which 'we have just passed. September, 1923, we called attention to the decline in prices that was likely to follow the armistice. Prices have been falling very sharply since September 1928. This sharp fall in prices in itself should have been a warning of the coming sharp decline in business. We had a similar warning in 1920, in 1923 and in 1926 tor although the general trend of pri.ces since 1920 have been .downward, )'et it has not bgen continuously downward. There have been minor upswlngs.

We are very strongly impressed with the necessity of doing those things through 1931 and 1932 that will prevent another serious depression following. We believe that if we ,can convin'ce the readers of "Looking Ahead" and through them as many other bankers and business men-as possible ofthe fact that short cy,clical swings in money rates reversed have forecast correctly every major swing in business since the war, then we shall have a starting point for constru,ctive work. Let every reader of this issue of "Looking Ahead" carefully weigh the following statements which give in brief the forecasts made by "Looking Ahead" and in other published statements since 1920 based on the forecaster which we use in "Looking Ahead."

"Looking Ahead" has been published since luly, 1922. March, 1920, by letter, we warned our employees of the coming depression. February, 1922, we declared that 1922 would be a year of revival. July,1923, we'called attention to the coming de'cline. May,1925, we pointed out that the Florida boom would soon blow up. January, 1926, we analyzed the relations between the volume of available credit and building operations. May, 7926, we forecast the decline into 1927 and the revival to a peak in 1929. Mty, 1928, we said that if the cost bf credit continued to in'crease and building to fall off, the existing upswing in business would be followed in about a year by a decline. November, 1928, we charted business moving up to a peak in April, l9D, and then down to a hole in July, 1930. We repeated the forecast in each issue of 1929. During 1930 we have forecast an upward swing through 1931 into the first half of. 1932. In this issue we point out that this upward swing will be followed by a decline unless-business men and others prevent it'by not allowing money rates to g'o to extreme highs. Is it not sound reasoning and good logic to claim that if we can prevent money rates from rising to extreme highs in 1931 and 1932, we shall avoid a serious depression?

I / Tacoma Lumbermen's Club V Holds Annual Meeting

Governor Roland H. Hartley was the principal speaker at the annual banquet of the Tac.oma Lumbermen's Club, held at the Winthrop Hotel, Tacoma, December 12. The banquet was attended by 250 lumbermen from all parts of the Northwest.

Retiring president Roy J. Sharp introduced the new president Philip Garland, secretary-treasurer of the Oregon-Washington Plywood Company; the new vice-president, G. Corydon Wagner, of the St. Paul & Tacoma Lumber Company, and the new secretary-treasurer, G. E. Karlen, of the Karlen-Davis Lumber Company.

Mr. Sharp was presente<i with a watch in appreciation of his seivices to the club during the past year.