Forward March

After Labor Day two years ago something happened to Recovery which had been booming--the bottom fell out of it. After Labor Day last week something happened to the business stagnation, miscalled Recovery, which succeeded 1937's sharp Recession. What happened did not even vaguely resemble 1914's war-induced economic scare. It resembled far more 1933's midsummer buying spree -- when NRA was around the corner everyone wanted to spend his money before prices went up.

For months before the present war began business was not bad--many businesses showed a profit--but there was not enough of it to cheer about:

> During July and August the New York Stock Exchange averaged about 680,000 shares a day (less than half the volume needed to keep Wall Street in the black) and stock prices got nowhere.

> The Steel industry, operating between 50% and 60% of capacity, was overproducing a little, did not know where its next week's business was coming from.

> In the first half retail trade (one of business's best performers) was still down 6% from 1937 and had increased its inventories by 5% since Jan. 1.

> Nearly every major crop was at or close to a record surplus andthe Bureau of Labor Statistics' index of wholesale prices stood at 74.8% (of 1926), the lowest since June 1934.

> The U. S. export balance for July was $60,703,000, down 30% from July 1938.

> The textile industry was curtailing production 25% in order to correct last spring's topheavy inventories.

In the first full week of World War II many of these things changed and all of them took on a new complexion. The New York Stock Exchange averaged 3,995,000 shares a day for four days running, the Dow Jones industrial average rose from 143.99 to 150.04. This week started with a 4,678,640-share day and the average ballooned to 155.12. Although the U. S. exports little cotton goods, textile orders pyramided from public to retailers to wholesalers to fabricators, adding up to 1,000,000,000 yards, the largest single week's business since the end of War I's boom in 1920.

For the first time since the early 1937 shortage, steelmen enjoyed a sellers' market, began turning down small-lot orders which are expensive to fill. What set off last week's steel boom were export orders actually booked plus feelers, hopes and promises of less than 250,000 tons (July exports: slightly more than 500,000 tons). Largest buyer was "London Merchants," No. 1 foreign steel jobber. U. S. steel exporters jacked up their prices $5 to $9 a ton. This prompted steel's domestic customers to see panicky visions of a war famine. They bombarded suppliers with orders for some seven million tons, enough to keep the industry operating well above 80% for two to three months. Ironically, this wave of domestic fear-buying may tie up many mills so that they may not be able to fill export orders yet to come. U. S. Steel Corp., inured to being called uneconomically large, started booking orders from customers it had not seen for months. In the Pittsburgh area it mobilized all its barges (many of them previously idle or rented to other users) and started to stock up raw materials. During the summer the industry lays in ore (from Minnesota) before the Great Lakes freeze. In July only 180 of 302 ore boats were in service; last week 230 were busy hauling for the winter's stock pile, and 15 more were being readied to handle the load.

Most depressed of capital goods industries has been railroad equipment. Last week John Jeremiah Pelley, head of the Association of American Railroads, declared that U. S. rail capacity can carry any imminent emergency freight load. Before the week was out Chesapeake & Ohio, Virginian, Norfolk & Western railroads, anticipating booming shipments from their coal districts, gave orders for freight cars. The far from prosperous New York Central is inquiring for cars. Even the struggling Delaware & Hudson and the bankrupt Erie started looking for 1,000 cars each. Altogether last week's speculative car business may total 30,000 (total 1938 orders: 15,000 cars).

Prices of major crops rose violently (see col. 3). Leading U. S. copper producers rationed their customers at 12-c- a pound, refused speculative orders from outsiders. Similarly St. Joseph Lead Co.'s shrewd Clinton H. Crane, announced a price advance to 5.55-c- a pound.

Two Dangers. All of this did not amount to a war boom. It amounted to speculation on a boom. Actually the number of war orders placed was negligible. The week saw no notable speed up of consumption. Inventories and surpluses did not disappear; they merely changed hands at mounting prices, while production was speeded up to enlarge speculative inventories of manufactured goods.

Because of this the Administration was alive to two dangers.

One was the threat of a runaway commodity price inflation. An emergency had been proclaimed and there was small doubt that Franklin Roosevelt was prepared, if necessary, to fix prices and limit profits. What form this "might take was not yet settled. In the view of many a New Dealer most industry has been making passable profits on a mediocre volume of business (Federal Reserve Production Index was between 95 and 100); a larger volume should rather reduce than raise prices, for unit costs will fall. Anticipating Administration pressure if not a Presidential outburst against profiteering, copper and lead producers confined themselves to moderate price rises, announced that there would be ample supplies available.

The other threat was peace. If peace comes unexpectedly, before enormous export orders bail out those who last week speculated on that huge business, U. S. industry might face a 1921-type collapse. The Securities and Exchange Commission kept a weather eye out for a peace scare that might shake the public out of the market, precipitate a crash severe enough to compel it to close markets; or the New York Stock Exchange to fix maximum daily price changes.

Meanwhile, speculation and the illusion of prosperity may itself encourage an increase of consumption, giving business a genuine stimulus. And although Congress last summer rejected the idea of Capital Goods spending, the crisis had put into Franklin Roosevelt's hands the means of carrying it out in the name of preparedness. Gone was the Administration's peacetime notion of self-liquidating projects. Peace itself had been liquidated. Last week even Henry Morgenthau, who opposed public works spending, rehired Chicago's learned Jacob Viner, Princeton's Winfield William Riefler, No. 1 & 2 Treasury anti-spending brain trusters, and Princeton's Walter W. Stewart, to advise him how to spend for preparedness in the U. S.'s greatest crisis.

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