Review of the Third Quarter of 1934

Abstract

BUSINESS definitely receded during the third quarter of I934, following signs of irregularity which had begun to appear in the preceding three months. Toward the end of the quarter, the recession became less rapid, the business curve of our index chart showing little further decline in September, after a considerable drop in August. The speculation curve at the end of the quarter was considerably lower than at the beginning, though it showed a small recovery in August, and did not revert to the July low in September. Bond prices were weak during most of the quarter, despite the continuance of an abnormally low level of short time money rates. That government measures to stimulate business had failed to bring about a sustained and substantial recovery was clearly demonstrated by the recession of the third quarter. This failure presents two rather different, though not entirely separable, aspects: the first of these relates to the effectiveness of Administration measures, once production and activity had risen to a higher level, to sustain activity at the higher prices made inevitable by higher costs. If there was an increased flow of funds into the hands of consumers because of shorter hours and higher wage rates for labor a development not susceptible of statistical proof it did not result in buying sufficient to maintain the production rates of last spring. The effects of the introduction of codes had, after a year of their operation, pretty well worked themselves out; but at the higher price levels that had been reached readjustment to meet demand was necessary, and this adversely affected both business activity and the prices of industrial products. A second aspect involves the failure to maintain the confidence of business in the whole gamut of governmental measures undertaken by the Administration. Criticism of the Administration's industrial program became insistent during the quarter; there was increasing distrust of past and anticipated monetary measures in part because of the action taken regarding silver; and realization of the adverse budgetary aspects of government spending on public works and of federal provision for relief was heightened by the clearly evident deterioration in the business outlook. The quarter until near its end was thus one of growing apprehension and loss of confidence, despite the fact that the recovery program was in part reorganized. It cannot be doubted that this apprehension exerted an important retarding effect on business activity. Probably its most important effect was the weakness which appeared in the bond market, at a time when further advance was indicated by most factors except the condition of the government finances and the confused monetary situation. In the closing month of the quarter, certain factors which had retarded business in the summer showed improvement. The drought, after inflicting great hardships in the agricultural districts, was broken in September. The nationwide textile strike, which had closed down many mills, was brought to an end, with a consequent increase in operations and employment in that industry. Meanwhile retail trade in part, at least, as the result of government spending had shown unmistakable improvement, despite the curtailment in manufacturing operations. The economic situation abroad continued unsatisfactory. Slowing down of business in countries still on the gold standard was ev'ident, and there occurred a sharp drop in sterling exchange which proved a disturbing element in international markets. Part of this decline was seasonal; but it became large as gold began to leave the United States, since these exports were regarded as signifying the willingness of the United States to maintain the dollar on its present basis at least for the time being.' Following such action by this country the decline in sterling probably marks a further step in competitive debasement of currencies, whether such a development is intentional or unintentional.