The last Cleveland Trust Bulletin to come from his pen, dated Oct. 15, was typical of his best writing. Two paragraphs from it not only illustrate his forthright analysis, but throw a sharp light on the current business situation:
“It is nearly incredible that this great essential [automobile] business, with its huge backlogs of unsatisfied demands, should be losing money in this postwar period. If the automobile industry and the construction industry were prosperous, this country would be experiencing a business boom that could be of exceptional duration. As things are, both of them are far from being prosperous. Their output is low and erratic; their prices are high; and their customers are dissatisfied. They are making progress toward greater efficiency of production, but it is disappointingly slow progress. Conditions in these two industries typify those in many other industries. The companies are suffering from shortages of materials, extreme wage increases, and low per capita production by employees.
“We have great productive capacity. We have more workers employed than ever before. There is ample credit available on easy terms for almost any constructive enterprise that needs credit. We have great accumulated shortages of many kinds of goods, and large numbers of eager buyers competing for opportunities to buy the things they want. It is preposterous that under this combination of conditions the prospects for profits are so dubious that we have had a collapse of security prices. Wage costs per unit of production have advanced too rapidly, and price relationships are disorganized.”
In 1939 Ayres published a volume on “Turning Points in Business Cycles.” He found that over the previous 75 years a certain economic sequence had occurred “with almost complete regularity:” A rise in short-term interest rates had brought about a downturn in bond prices. This had been shortly followed by a downturn in stock prices. Declines in security prices had created unfavorable markets for new securities; the volume of new issues had consequently shrunk. With this decrease in the inflow of new funds into productive enterprise, a business decline had been started.
If we apply this description of the business cycle to current conditions, we find that part of this sequence has already occurred. Short-term interest rates began to stiffen perceptibly in March. In the first week of April high-grade bonds reached their peak level and then began to decline. The high point for stocks was not reached until May 29, and a violent fall has since taken place.
All this, however, does not in itself mean that a business decline is now necessarily in the offing; it may be doubted whether General Ayres himself, on this ground alone, would have predicted such a decline. For short-term interest rates today are highly artificial; their rise has been slight; they are still fantastically low; they still promote inflation. They can be held down to the present levels, in fact, only by a continued inflationary policy of keeping the money market flooded with funds. A moderate rise in short-term interest rates today need mean nothing more than the termination of dangerous artificial situations that should never have been permitted to occur.
A far more serious menace to continued prosperity has been a recent rise in wage rates without any corresponding rise in productivity. Leonard Ayres in his last Bulletin calculated that manufacturing costs per unit of production had risen by March of this year 64 percent above their 1939 level; 42 percent of this increase occurred in the preceding eleven months. Unless we can now achieve an increase in the volume of production without corresponding increases in hourly pay, this startling rise in costs may lead to a crisis.