and to include such a subject indicates a startling disregard for scientific method. An index on such factors could, at best, be only guess work.

Both Babson's selection of subjects and his treatment of the figures are open to criticism. If only twelve subjects were to be used in preparing the business barometer, these twelve should have been the most sensitive and the most trustworthy. Babson's selection seems to me to fall far short of that requirement. It is especially notable that no strictly industrial statistics are used. The selection of subjects, however, is open to less criticism than the methods of manipulating the statistics.

In order to secure a common basis of comparison for these diverse denominations and to eliminate the effects of seasonal fluctuations, a set of intermediary "scale" figures was worked out.1 Taking immigration for illustration, a table of scale figures was prepared for each month. For January the highest and lowest figures for the month of January during the years of 1898-1908 were found, -18,300 in 1901 and 56,200 in 1905. The range between these two figures was taken as equal to 100 points. The difference between the two actual figures (37,900) was divided by 10. By adding this quotient, 3,790, to 18,300, the point ten "degrees above the lowest was found, and by repeating the process the entire scale was built up in arithmetical progression until it reached the highest actual figure, 56,200. The same scheme was used in working out a scale for each month. For February the lowest and highest figures for immigration in the month of February, 1898-1908, were found and a 100 point scale similarly ascertained, and so on for the other months. Thus there is a separate scale for each subject for each month.

1 " Preparing the Composite Plot," Babson's Reports, 1912.

To quote Mr. Babson's own explanation: -"We then arrange the scale figures in column, placing zero over the column whose average approximates most closely to the average conditions of the years 1903 and 1904, that is the depression following the 1903 panic. This date is taken arbitrarily as the starting point of the Barometer. We then place our index figures in series to the left and right of zero. If the volume of business increases so as to go beyond the scale, higher scale figures are added, using the same arithmetical progression as at first, so that the actual condition of the years 1898-1908 serves as a constant by which to compare succeeding years. Scales similar to this one on immigration have been prepared for all subjects."

As an example of the way in which the immigration scales for January, February, and March are worked out the following table is given.

On each scale the range would not necessarily be from - 40 to 60, but in every case it would have a range of 100 points, with the lowest actual figure for that month, 1898-1908, at the bottom, the highest actual figure at the top, and "zero" fixed by the figures for 1903-04.

1 "Preparing the Composite Plot," Babson's Reports, 1912.

This scale is then used for determining the index figure for the current month. For January, 1914, for example, the number of immigrants was 44,700. This evidently falls between + 20 and + 30 on the January scale for immigration. 41,040 corresponds to +20 on that scale. Subtracting from 44,700, the difference is 3,660. The last figure is then divided by 379, which is the value of each degree on the scale. The quotient, 9.6, is added to +20, giving an index of + 29.6 for immigration in January, 1914.

An index number is similarly worked out for each of the subjects, by finding the scale figure to which the actual figure for the month of January, 1914, corresponds. Each month in each year is handled in the same way.

For business failures, surplus reserves, and idle cars, inverted scales are used, since these subjects vary inversely with business conditions. But for surplus reserves, when the figures fall below a certain point, weakness rather than strength is indicated, hence, to quote Mr. Babson again," below $5,000,000 this subject is put upon what we call a deficit scale, declining quickly to zero as the reserves are wiped out and reading 66 for a deficit of $50,000,000, as in November, 1907." Similarly "when money rates for the best commercial paper reach about 5 per cent an average occurring only in a period of excess loans the scale figures begin to work downward again, for the 'lack of confidence' shown by the high rate overshadows the excess of business' feature shown by a majority of other subjects. On this panic scale the index moves to - 60 rapidly when rates advance from 5 per cent to 8 per cent or above." Both of these scales are purely arbitrary adjustments.

Having found the index for each of the subjects for a certain month these figures are averaged, giving double

weight to bank clearings, domestic money rates, and the stock market index. The final figure thus obtained is the index to business conditions. Before undertaking to examine the use which is made of this summary figure, let us make a critical examination of this method of securing index numbers.

In the first place, it is evident that the index numbers are in no sense percentages. Since the lowest point is not zero, they do not show even the percentage of the range above the lowest points. The index numbers depend upon this range and upon the location of the zero point. The question of whether or not 1903-04 can fairly be assumed to have been representative of normal conditions for all of these subjects is of minor importance. The heart of the problem is the method of determinating the range upon which the scale figures are based.

The use of the range between the highest and lowest figures for each month over a ten-year period as a base for the scale figures presupposes that there were no abnormally high and no abnormally low figures in any instance. If in any month one subject showed an exceptionally high figure because of extraordinary circumstances which did not affect the other subjects and which had no influence in other months, the range was thereby made abnormally wide. The scale figures and the index numbers determined from such a range are not properly comparable with those for other subjects and for other months. The range, in other words, may be said to have been placed at the mercy of the extraordinary events during this ten-year period. As a matter of fact, a little experimenting will show that the exclusion of a single high figure, using instead the one next in order, materially modifies the scale figures for any subject.

Take the liabilities of business failures, which showed as its high point $100,045,440 in October, 1907. The greatest force of the panic was then felt by that subject. Altho in the following months failures were heavier than prior to the panic, they by no means exceeded the averages for the respective months to anything like the same degree as in October. Consequently the scale for liabilities of business failures for October is not fairly comparable with the failures scales for the other months. Again, as has already been shown, the approach and the effects of the crisis were not felt synchronously to the same degree by all the subjects. Domestic money rates, for example, reached their highest point in December, 1907,1 and security prices their highest point in September, 1906. A brief examination of the statistics for the other subjects will show that there was no such correlation in their fluctuations as to warrant the use of this method of establishing a common basis of comparison or to justify the averaging of the index numbers.

The summary index figure which is obtained by averaging the index figures for the twelve subjects does not, therefore, indicate the percentage of anything, nor does it show the percentage change from month to month. It merely gives the average of the figures obtained by the use of this questionable range-scale method.

The summary figure is obtained solely for making the Composite Plot. The theory which underlies the Composite Plot is that in business, as in the physical sciences, "action and reaction" are equal and that the summary index figure for the twelve subjects measures business

1 From the explanation which has been given of the "deficit scale" used for money rates when they rise above 5 per cent, the latter figure must have been taken as the maximum in fixing the scale. If this same plan were to be commonly followed, the scales would become entirely arbitrary, depending upon the judgment of the person who made them out.