# Current Economic Affairs/Chapter 5

CHAPTER V
WHY PRICES CONTINUE HIGH
Beginning in 1915 the prices for commodities started sharply upward. In 1916 the general average in the United States was about 125 in comparison with that for 1913 taken as 100, or the base. Contemporaneously we thought that advance an economic enormity, but after 1916 the rise became even steeper and more rapid. Wages rose like commodities, lagging behind them at first, but then outrunning them. What caused all this?
The common answer is inflation, meaning the blowing up of government credit by the issuance of paper currency and by broad borrowing; and the extension of commercial credit. Obviously this would not have been done without a good reason. It should be equally obvious that the reason in 1916–18 was a sudden demand for goods and labor that was far in excess of the immediate supply, a demand moreover that was reckless and not to be checked by high prices as normally. Therefore both prices and wages rose to extraordinary heights and credits were necessarily expanded in order to carry on business. Inflation of credit and currency was an effect, not a cause.
The extraordinary demand for goods and labor did not cease with the end of the war in 1918 but continued into 1920, wherefore the rise in prices and wages kept on. Of course the post-war demand was to ​a large extent of a different nature than during the war, but it was directly consequential from the latter. In 1920-22 there was a decline, which was more in commodities than in wages, followed in 1922-23 by a renewed rise.
The maintenance of high levels of prices and wages in the United States is popularly ascribed to inflation. We have fallen into the habit of talking about inflation and deflation, owing to their being convenient expressions meaning the raising or lowering of price levels, but in fact the majority of economists bold that there is no such thing as monetary inflation in the United States at the present time. This may be affirmed positively.
The price level is therefore determined by something else, and what else is there but physical demand and supply? As I have tried to make clear elsewhere, the natural demand of an increasing population in this country is directed against a supply that is not increasing commensurately. Let there be a reversal of this condition and I think it is quite obvious that prices will fall. I can see no good reason why they should not fall to the pre-war level if sound policies be established and complete freedom of competitive action be restored. They may not go quite so low, on general average. On the other hand, it is conceivable that eventually they may fall below the pre-war level.
We see ships now selling for much lower than pre-war prices; transatlantic freight rates at near the pre-war ​level, while rubber, although it has lately had a sharp rise, is much below the prices of 10 years ago. On the other hand, platinum is about five times as high as it was 20 years ago. These instances show that prices can descend to pre-war level. Also that single things may fail to conform to the general trend owing to particular conditions of demand and supply.
The fact that we are now saving for reinvestment less than we used to, and less than we ought to, does not affect the demand for goods in the aggregate. It means that what might be taken for houses and railways is actually taken for less durable purposes. Although this may be reflected in high rents, it may also result in relatively cheap automobiles. However, the total expenditure will be the same and will correspond with the amount of the national income (barring certain questions of external investment, gold movement, etc.). The economic penalty for inadequate saving is paid in shortage of capital goods, which may be a long time in manifesting itself so as to be uncomfortable.
The fundamental thing that curtails supply and leads therefore to high prices is lack of production due to diminution of effort and diversion of too much labor to service. The people who so slacken and who are so diverted have at least the same needs as before. Without any further slackening or diversion to service, prices would tend to rise merely by virtue of increasing population. This is self evident.
It must also be evident that increasing immigration adds to the demand for goods and that the only advantage to be expected in this way is from increasing production ​production in greater ratio by the skillful use of the new labor, which may open constrictions in our industrial system that have arisen from the refusal of our existing labor to function in certain capacities.
It is no more than common sense to figure that if brickmasons would lay 100 bricks per hour instead of 70 and that if they would work 55 or 60 hours per week instead of 44, or 40, we should quickly acquire more houses and rents would fall. Similarly would the supply of all things be increased and all prices would fall.
The present situation has been produced by economic unbalancing and artificial restrictions upon production. Except for dislocations, both physical and mental (the latter being possibly the more serious) the consequences of the war have relatively little to do with it, speaking only of the United States, which incurred no external indebtedness. The pension bill, which is a measure of the impairment in human working ability, is not so big as to trouble us very much. The bond charges, which are collected from some people via taxation are paid out to others as interest. The greatest economic consequences of the war in the material way have been the enhanced demands for replenishment of depleted stocks of goods and the repair of deteriorated property.
The economic and political restrictions that have been imposed upon supplies are manifold. There are people in foreign countries who are favorably situated with respect to certain kinds of production and want to furnish things to us, which we prevent for the avowed purpose of keeping up our prices.
​Unionized labor imposes restrictions upon the practice of certain of our trades and thereby diminishes the supply of goods that those trades produce, again with the natural consequence of raising prices. In some overmanned industries we are expected to support a large superfluous personnel without their producing anything.
In railway transportation the government itself sanctions the annulment of competitive conditions and fixes terms whereby men doing a certain kind of work on the railway right of way get 50 cts. per hour while the same kind of men doing the same work in private fields immediately adjoining get only 30 cts. per hour. This policy increases the cost of railway transportation, which is reflected in the prices for goods.
The elevation of prices in this way, in the absence of monetary inflation, is, of course, possible only by the creation of conditions that give some classes of workers an undue share of the goods that are produced, or the ability to command them, at the expense of other classes. This is the real thing in profiteering.
The most glaring and most serious manifestation of this is the profiteering at the expense of the farmers, although clerks and the white-collar classes are victimized in the same way. The farmer, as a direct producer, is closer to the operation of the law of supply and demand than is the proletariat. The farmer, too, might curtail supply but he knows enough to understand that high prices for a diminished product would be of no benefit to him, but the opposite. Therefore the farmer, who is characteristically confused in his ideas about money and credit, looks first for the way out of his difficulties by monetary inflation, which ​economists know would soon make things worse for him.
Similarly, the white-collar classes, squirming under famine prices for anthracite and increases in railway commutation fares for which labor dictations are responsible, are the victims of economic insanity in praying for governmental operation of the coal mines and the railways, which is just what the labor organizations want and which would make conditions far worse for everybody, as would quickly appear in prices.
There is a big economic difference between labor that grabs more than its due, like the anthracite workers, but nevertheless works, and labor that aims under governmental management to get more men on the job, as happened when railway transportation was being directed by Mr. McAdoo.
The way to lower prices is the removal of artificial restrictions that counteract free competition and the curtailment of the diversion of labor to service. The first of these policies would increase production by the promotion of efficiency. The second would add to the number of workers available for the production of needful things and would be expressed to a large extent in contraction of governmental operations, that would result in lower taxes. In speaking of governmental operations, I refer, of course, not only to the Federal but also to the state and municipal.
If the Federal expense for bond charges and pensions be deducted, about one-eighth of the national income in 1922 was drafted for the expense of government. The present administration has effected praiseworthy economies, but after all it has not gone very far in cutting down service. The states and municipalities ​have done even less. No doubt the public insists on having a good deal more than formerly, which contributes to raising prices against itself.
Inflation is a resonant word, and the idea it conveys is a convenient scapegoat; but at present it is a phantom. Railway passenger rates have been 3.6 c. per mile compared with 2 c. pre-war and commodity freight rates something like 0.8 c. per ton mile vs. 0.5 c. and even so the railways have been starved. Every intelligent person knows that this is due to what is paid to railway labor. So does he know that anthracite costs $15 per ton in New York, just twice the pre-war figure, owing to the exactions of miners, plus railway men plus teamsters, etc. Rents are high because building costs in 1922 were about 1.7 times the pre-war for the same reasons plus the terms of the building mechanics and during the early part of 1923 rose sharply and high. Farm products are low because the farmers have not been able to arrange any restrictions upon production, but by the time the foodstuffs have reached the consumers the labor that has touched them has seen to it that they become costly enough.
The argument of labor is that it must have high wages in order to meet the high cost of living, but in fact it puts up the cost of living to itself, and, unfortunately, to the farmers and other people at the same time. The natural outcome of these vicious reactions is to raise prices so high as to develop a buyers’ strike, i.e., people are constrained to do without so many things as previously.
The present position is that we are dividing a quantity of production about the same as in 1913 among ​about an eighth more people. The production is expressed in more dollars through being multiplied by about 1.7 as an average. Some classes of people get more than their share by virtue of a multiplier of 2 or so, while for others the multiplier is 1.5, or maybe 1.1. We may get a better idea of this by reference to the accompanying table, which shows the compensation of workers in several major occupations.
* ↑ This statement was made by Professor Bullock at a Harvard Economic Conference in New York in the early part of 1923 and drew out no expression of dissent. I am aware, of course, that economic opinion respecting this subject is not unanimous, but I think that it is preponderatingly as I have summarized in my text.
* ↑ On basis of 100 for period 1898 to 1913, inclusive, statistics of British ocean freight rates for whole cargoes show average to have been 120.28 last July, against 124.27 in June, 133.27 in May and 280.14 at end of 1920.
* ↑ This subject is discussed more fully in Chapter IX.
* ↑ These figures refer to bulk commodity rates and are not in conflict with the data cited in Chapter III.
* ↑ As computed in Chapter III.
* ↑ Indices of average earnings in factories in State of New York; assumed to be typical of factory wages throughout the United States.
* ↑ Indices computed from data of U. S. Steel Corporation.
* ↑ Indices computed from man-shifts of work performed annually, as reported by the U. S. Geological Survey; and from total compensation as reported by E. W. Parker, Director of Anthracite Bureau of Information for 1913, and from the Department of Internal Affairs of the State of Pennsylvania for 1915-21. For 1922 these data have not been available from the latter authority. These indices are only approximate.
* ↑ Earnings of office employees in factories in State of New York, roughly.
* ↑ As explained in Chapter III.
If we could have similar indices for building mechanics we should surely find them running as high, if not higher, than for railway and factory labor. The indices for clerical labor are not very satisfactory, but are the best available. The compensation for city ​clerical labor has probably not increased so much as it has in the factories, where it is easier for clerks to shift to employment as operatives.
It is well-known how agriculture has suffered since 1919 at the hands of town labor. The foregoing table shows how among the classes of town labor there has been maldivision, to the profit of mechanics and laborers and to the detriment of the white collar classes. It appears also that unionism has not been the sole determinative factor in this, for the position of labor employed in the steel industry, which is conducted on the principle of the open shop has improved more than in the strongly unionized railway service. The explanation of these maldivisions is of course to be found in demand and supply, perverted by the primary unbalance between capital and labor, and affected by artificial economic restrictions of one kind or another.
It would follow as a logical conception, even if there were no evidence, that the maldivision which resulted in giving too much to some classes of labor would tend to cause them to ease off in their work and diminish production. At the same time there has been an increased diversion of labor to service (mainly public service) contributing toward the same result. Examination of the statistics of production brings out strong evidence of the actuality of diminished production, especially since the end of the war (see Chapter VI).
We need look no further for the explanation of the high prices still prevailing in the United States. The increase in population together with the increase in the buying power of many classes of wage earners intensifies the demand for some commodity, e.g., ​anthracite coal, whereof the production has not increased and the price for it is bid high. The people whose buying power has been diminished must still have that essential fuel, which then they can get only by the sacrifice of something else. If on the contrary needed commodities are produced in superfluity the price for them goes low, as in the instance of wheat, or even to pre-war level as has recently happened in the instance of gasoline.
The position of prices in Europe is confused by the derangement of exchanges, the absence of gold basis, and the real inflation of paper currency in some of the countries. In general we may deduce, however, that prices in Europe continue far above the pre-war level, just as with us, and that the true explanation is even more unmistakeably the deficiency of production, which insofar as western Europe is concerned is probably not more than 75 to 80 per cent of the pre-war figures.
On this subject, the Swiss Bank Corporation, whose occasional bulletins on the international situation, financial and economic, have attracted wide attention in European business circles, predicted in a recent review that the tendency of prices for commodities will in the long run continue to be toward the pre-war level, and that such a level may be re-established in the not very remote future. This bank combats the theory that the fall of prices since the high point of 1920 was a result of intentional “deflation.”’ That theory, it argues, could hold good only when production and consumption are normal, and in this case appeals only to “the imagination of manufacturers and producers who have always been inflationists at heart.” It continues:
The contention that the fall in prices and the crisis are due to deflation—that is to say, to intentional contraction of the circulation and of credit—is in reality only an advocacy of a return to the extravagant methods of war-time finance in some milder form. The banks have been accused of having aggravated and contributed to the outbreak of the crisis by withholding credit. Their balance sheets, however, show that they went to the very utmost limit of prudence. What happened, as a result of stoppage of war-time finance, was that the banks ceased to receive fresh deposits and new cash and could, in consequence, not increase their commitments.
Looked at from this point of view, there is no reason why the pre-war level of prices should not be re-established in a fairly near future in the world’s market. At the moment there is, however, a break in the fall and even a slight tendency to rise, the index number fluctuating round about 50 per cent to 70 per cent above the pre-war level in countries with normal exchanges. The immense increase of taxation and the restriction of production, which necessitates increased overhead charges being borne by smaller production, might well militate against a continuation of the fall and toward maintaining the present level.
On the other hand, the fall in prices has not been uniform in all trades; in fact, it has been much more pronounced in the case of international commerce, no doubt owing to the competition of countries with depreciated exchanges, than in those trades which in every country hold a kind of monopoly, such as the railways, building, printing and retail trades. An adjustment has to come sooner or later and may well be accompanied by a further drop in prices.
Whenever an individual has sustained a financial loss, this is brought home to him as a reduction of income. In the same way the impoverishment of the world, through the war, finds its expression in a decrease in production.
We can not, even in the United States, return quickly to the situation in which we were before the war. For one thing we have outstanding a large volume of internal indebtedness, which was contracted during a period when prices were very high. When the bonds representing this indebtedness are paid it may be possible for their holders to buy with the proceeds two pounds of goods against one pound at the time of issue of the bond. Deflation will therefore be in favor of these bondholders and against the tax payers. Moreover, the bonds, which of course are good for their face value will be a basis for expanded credit so long as ​they are outstanding and that may easily have an effect upon prices. However, that may be greatly overestimated.
Now and then we observe attempts to bull the market for a commodity on the strength of the idea that by virtue of its being lower than other commodities things are out of tune and ought to come into tune, which is of course a reflection of the inflation hypothesis. We have observed failures of such attempts owing to their prompt stimulation of production, causing the market to fall even lower than before. Competition is therefore still the real corrective of high prices. With us, however, competition is more or less restricted by bad laws and bad practices. These must be eventually broken down, for that is bound to happen to any system that is so devastating as what we have at present. When and how that will begin, I venture no prophecy.
Of course the American people as a whole would be better off with the same volume of goods per family, the same area of house room, etc., that they had in 1913. They can get it only by increasing production and balancing it properly. They will not get it by consenting to a 40-hour week for work, or by governmental control of the mines and railways. I should think that any one who experienced the consequences of macadoodling the railways might see that. I should think, too, that the aggrieved and bewildered public might begin to see where the evil is really rooted. Let there be reflection upon the thought that in quarrelling about the division of produce we have been forgetting to produce enough, and have been blind to the unbalance and distortion of our production.