Pause or Lull

The stockmarket fell last week three days before Barcelona. Stock prices had been weak since the first of the year and when last week's break came they were already back at what Dow theorists call "resistance levels" (146 for Dow-Jones industrial averages, 28.8 for railroads) set by the previous reaction in November and December. Both industrial and railroad averages plummeted through these levels on heavy trading volume.

With most of Europe convinced that the fall of Barcelona was not the end of the trouble but perhaps the real beginning, war-scare was doubtless primarily to blame for the break. Brokers reported heavy liquidation from abroad. Acute weakness in foreign dollar issues led bond prices down. The Dutch guilder was weak. And, as always when Europe has the jitters, the heavy flow of gold to the U. S. quickened. In one day last week London arranged to ship -L-14,000,000.

Despite this heavy drain, the price of sterling remained steady--which was not surprising since England has lately taken far-reaching steps to bolster her money. First such step came three weeks ago when the British Government transferred at one fell swoop -L-350,000,000 in gold from the Bank of England to the British Exchange Equalisation Fund, whose purpose is to control the price of sterling in the world's markets. This left the Bank of England in the weakest position in seven years, with gold holdings of -L-223,000,000. At the old parity price of 85s. per ounce, these holdings are valued by the Bank at only -L-126,400,000--less than the Bank's 1931 gold holdings when England was forced off the gold standard.

Fortnight ago the Bank of England asked London commercial banks to put the brakes on the flow of English gold to the U. S. by not facilitating speculations in U. S. securities. Last week this caused substantial British liquidation of U. S. stocks.

This was undoubtedly a contributing cause of last week's market break. A more important contributing cause was the prolonged hesitation in U. S. business recovery. After the six-month recovery which culminated in December, a reaction was to be expected. But by last week recovery had been stalled a full month and there was still no indication of immediate improvement.

The Federal Reserve Board reported that industrial production was about at December's level, although a rise in January would be normal. The fact that public spending as indicated by bank debits showed a marked downtrend, posed the possibility that consumption might not support even the present rate of production. Balance of expert opinion, however, continued last week to term this industrial hesitation a "pause that refreshes" rather than a "lull before the storm."

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