Review of the Year 1927

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  • Review of the Year 1927Source: The Review of Economics and Statistics, Vol. 10, No. 1 (Feb., 1928), pp. 1-17Published by: The MIT PressStable URL: .Accessed: 28/06/2014 07:53

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  • TheReviewofEconomicStatistics Beginning with February I928, the quarterly months of publication of this REviEw will be February, May, August, and Novem-

    ber instead of January, April, July, and October, as heretofore.



    I927 business in general was substantially above normal and its volume even approached

    the high level of I926. Indeed, both the dollar volume of business transactions, as measured by bank debits outside New York City, and the

    I926. Thus, railroad earnings and carloadings were lower, partly in consequence of the coal strike; the construction of new buildings de- clined; the production of iron and steel, auto- mobiles, railroad equipment, and other basic


    FPrice of industrial stocks A Price of r-ailroad 5tocks(af terlOdl) M4 ewYork Citti bank debits (beforel3g6

    +4 J3ank debits for 140 cities outside N.Y.C. 4 DWholesale commodity prices C Rates on tort-time morej



    A- pecu1ation B-Business o Q

    I C~~~~~-MoneyjCMn ~ - -

    B-u5ines I

    i ?545'G 7a910111a2 I)45 67091011Y1 E4 3e56 7 8 9910111212 67e91011 5 34567 8910111212 3456679101115l 2345 67a 910111Z 1l2I 1922 19E5 1924 19?5 926 1927

    physical volume, as reflected by electric power production, exceeded the record of the preceding year by more than the amount we allow for normal growth. Certain industries which were unfavorably situated in the previous year (not- ably rubber, cotton textiles, and leather) bet- tered their positions in I927; the construction of new engineering projects and road building in- creased; agriculture-especially in the North- west-prospered; and retail trade was well maintained. A number of important industrial groups, however, failed to equal the records of

    materials fell off substantially; and the flood of oil brought depression to that industry.

    During the first three or four months of the year the number of freight cars loaded, the vol- ume of manufacturing and mining, and new building construction were well maintained but the tendency during the remainder of the year was moderately downward. Despite the decline in these important branches of industry, the dis- tribution of commodities to dealers and con- sumers continued in large volume, the general wholesale price level turned upward after the

    [ I ]

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    middle of the year, agricultural conditions im- proved, and outside bank debits continued to expand. Meanwhile, Curve B of our index chart moved on a distinctly lower level in I927 than in I925 because wholesale prices, although ad- vancing after June, averaged below those of the earlier year. In retrospect we may characterize I927 as one of well sustained general business in spite of dullness or depression in individual in- dustries and the decline of railroad traffic and the volume of manufacture in the second half of the year.

    One of the most significant developments of the year was the rise of average wholesale com- modity prices. This began in June and con- tinued without interruption until October. The increase of commodity prices is significant not because of its magnitude - the increase amounted to a little more than three per cent - but because it was the first real interruption of the steady decline in the world level of gold prices which had been in progress since the autumn of I925. This decline we have attrib- uted to adverse European developments con- nected with the return of important countries to the gold basis, combined with high money rates abroad, and the absorption by the United States of a large volume of gold. In the third quarter of I927 the federal reserve banks re- duced their rediscount rates and gold moved out of the United States. The expressed purposes of the rate decrease were "to assist foreign buyers in making their autumn purchases of grain, cotton, and other American farm products" and "to attract a larger volume of the financing of the exports to the baanks of this country, and consequeintly to reduce the demand for credit for this purpose -Abroad," thus . . . "exerting, a favor- able influence in the international financial situ- ation."' In both particulars the policy proved successful.

    Probably the most spectacular development of the year was the steady advance of security prices. Industrial stock prices advanced month after month until October, receded moderately, then resumed the advance and closed the year at a new high monthly average. Railroad stock prices were also strong and in September attained the highest figure on record. Bond prices in December reached the highest level in 13 years

    and the issue of new securities surpassed the previous record of I926 by a third. The expan- sion of new securities and the increase of stock and bond prices were obviously a consequence of the easy money situation rather than the dis- counting of great business expansion and the general increase of profits.

    Although the reversal in the movement of commodity prices may have been the most sig- nificant occurrence and the increase of security prices the most spectacular feature of the year, the interrelations of these and othel develop- ments were, from an economic point of view, the most interesting and suggestive. These develop- ments were the decline in money rates, the reversal in the international movemnent of gold, the increase of bank investments and collateral loans, and the influence exerted upoll gold move- ments and the money market by federat reserve operations, particularly transactions in govern- ment securities and changes in discount rates.

    The money market was unusually easy during the year and the tendency of rates was down- ward. Thus, rates on prime eligible bankers' go-day acceptances, bid and asked, were 3Y4-3 8 at the end of I927 as compared with 3 3-3V8 a year previous. The course of rates from season- to-season, however, was contrary to the usual seasonal movement. Thus, money rates rose moderately between March and June - when they usually experience a seasonal decline to the lowest point of the year, - then declined in July and August - when they usually advance in response to the summer-to-autumn expansion of business, - and finally moved horizontally be- tween September and December at the lowest level of the year - when, in response to seasonal demands of trade, rates usually attain the high- est level of the year. In short, except for the decline in January and February -a normal seasonal movement which occurred in I927 - the movements of money rates in 1927 were the inverse of those normally occurring in pre-war years and reflccting the seasonal expansion and contraction of business.

    The explanation of the unusual course of money rates during the first half of the year is to be found, in part, in the tremendous volume of new security issues, and the increase of security prices and o-f collateral loans, and during the second half of the year in the reduced demands 'Federal Reserve Bulletin, September I027, p. 6x3I.

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    for bank credit by manufacturers and the rail- roads, but it is to be found mainly, at least after May or Juhe, in federal reserve operations. That is to say, the continuous purchases of securities between June and the end of the year, and the reductioni of discount rates in the summer, con- stitute the real explanation of the unusual course of money rates in I927. In other words, the large purchases of securities of the sccond half of the year, coupled with the reduction of the re- discount rate to 312 per cent, resulted in a general easing of the money market. These operations are, of course, also directly connected with the reversal in the international movement of gold which took place in September.

    In spite of large importations of gold during the first eight months, the net result for the year after allowing for the exports of the last four months and for "earmarking" was a substantial reduction of our stock of the yellow metal. Under ordinary conditions such a development, even with an efficient central banking system, would mean rising interest rates, pressure upon security markets, and perhaps the beginning of a change in trade conditions which would presently check the outward flow of gold. But under the very unusual, and even abnormal, conditions result- ing from the war, which placed us in possession of such a large percentage of the world's gold supply, the exports of gold produced little or no effect on money rates. This is because the federal reserve banks were able and willing to expand federal reserve credit to an extent that offset gold exports. After the end of August, net gold exports amounted to approximately I40 million dollars; and an additional loss to gold stocks of the country was sustained because of the "ear- marking" of some 75 million dollars for foreign account. During this interval, total federal reserve credit-as represented by the sum of (I) discounts and rediscounts and (2) acceptance and security holdings of the reserve banks -rose 540 million dollars. Although part of this in- crease was in response to the normal demands of the autumn and holiday trade, it is note- worthy that holdings of government securities by the systenm, which represent primarily opera- tions undertaken at its initiative and designed to influence the money market, rose I30 million dollars- an amount not far from our net gold exports.

    In short, financial conditions in the United States were made favorable for the export of gold by the reduction of the rediscount rate of the Federal Reserve Bank of New York on August 5 and by the other banks between July 29 and September I2; and the outward move- ment of gold during the ensuing months of the year was facilitated by purchases of government securities by the federal reserve banks. These purchases placed funds in the market, offset the effects of the outward movement of gold, and made possible the continuance of low money rates and an easy market. At the same time the purchases relieved the member banks of the necessity of greater borrowing from the reserve banks. The result, as we have said, was an un- usually easy money situation. The reduced demands from manufacturing industry con- tributed to some extent to this condition of ease; but besides the outward movement of gold there was another hardening influence on money dur- ing the autumn and early winter in the large volume of security issues. In the last quarter of the year, flotations were the highest on record, averaging almost 950 million dollars a month; while, in the second quarter, a somewhat smaller volume of flotations (926 million dollars monthly) resulted in congestion in the bond market suffi- cient to harden money rates. The experience of I927, even to a greater extent than that of pre- vious years, indicates clearly the important influ- ence exerted upon the money market by federal reserve operations, particularly transactions in government securities.

    OUTPUT, TRANSPORT, AND TRADE The year I927 was one of substantial pros-

    perity and. the general volume of business approached the exceptional level of I926 (Chart 2). Indeed, bank debits outside New York City, the most reliable single index of the dollar volume of business, and the production of electric power, an index of physical volume, attained new high records. For the year actual outside bank debits totalled 282.4 billion dollars, a figure 5 per cent above that of I926, the pre- vious high record, and io per cent above I925; and the production of electricity per business day, in kilowatt-hours, was 9 per cent greater than in I926, and 2I per cent greater than in I925. Other individual indexes, however, reflect

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    1% 1996 'Np

    11~~* _ _ __ - _ . _

    1 I 3 4 5 6 7 8 9 10 11 1I

    ELECTRIC POWER PRODUCTION -OO ___ __Unit: 1,000,000 kilowatt hours


    900 9- -_ _ _ _

    169 - - ---- 2 z 4 5 CD 7 8 9 10 11 10

    Daily averagef FREIGHT CAR LOADING*

    Unit: 1,000 cars

    _.0 ,1 I 1 _ _

    Z 3 4 5 6 7 t 9 10 11 I-. * Daily avepnage



    50 - _ _-- - F *1 : 4 5 6 7 5 9 10 11 1L

    PIG-IRON PRODUCTION 49 - Unil: 1,000,000 tons

    199 - _ 1 t 4 5 6 7 8 9 10 11 10

    a decline in certain important groups of indus- tries. Thus, the yearly totals of freight car

    loadings, the area of new floor space of building contracts awarded, and pig-iron production were all less in I927 than in I926. Freight car loadings per business day in I927 were 3 per cent less, the area of new floor space of building contracts awarded was 2 per cent smaller, and pig-iron production was 7 per cent less in I927 than in the previous year. Moreover, the three series just named reflected less active business at the end of I927 than at the beginning. In fact the items for March I927 compared favor- ably with corresponding items of the two pre- ceding years while the items for November and December were below those of the corresponding months of both I925 and I926.

    New building. As compared with I926, the year I9...


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