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(caption title) Some Economic Effects of the World War
William Henry Glasson
Edwards & Broughton Printing Co.
Call number C806 N87L 19th (North Carolina Collection, University of North Carolina at Chapel Hill)
Appears in Proceedings of the nineteenth annual session of the State Literary and Historical Association of North Carolina
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[Title Page Image]
BY WILLIAM H. GLASSON
Professor of Economics in Trinity College
The people of the United States have all been profoundly affected in wealth and welfare during the past five years by causes growing out of the gigantic conflict between the nations of the world. Values have been violently disturbed by potent forces which individuals could neither control nor fully comprehend. Economic stability and security have been shaken to their foundations. We have been living in a period of many undeserved losses and many unmerited gains. Our ordinary expectations as to the consequences of economic conduct have been to a large degree disappointed. Thrift and foresight and prudence have too often failed of their usual reward and suffered heartbreaking losses. On the other hand, the favors of fortune have been distributed with unusual lavishness to individuals and enterprises that were speculative, extravagant, and frequently unscrupulous. Some men have stood helpless while the forces of the economic world have caused their lifetime savings to shrink and have cut their real incomes in two. Others have seen their debts unexpectedly dwindle, while their assets have been swollen by a rising flood of easy profits. The political readjustment of the world's affairs has involved an economic readjustment--a general and radical alteration of values which, when expressed in terms of money, has amounted to a price revolution. It is the effect of this price revolution upon the various classes of people of which economic society is composed that engages my attention in this paper.
How far reaching has the price revolution been? Without troubling you with statistical tables, it is substantially true to say that general commodity prices have doubled in the United States since the beginning of the World War. In some cases the increase has been much more; in others, somewhat less. The principal causes of the price revolution are doubtless familiar to this audience. Millions of men were withdrawn from their ordinary productive activities by the great nations of the world and engaged in the rapid consumption and destruction of goods. The workers left at home were to a large extent withdrawn from peace-time employments and set at work to produce munitions of war and engines of destruction rather than the regular supplies of food, clothing, and other commodities required by the civilian population. Thus a shortage of goods was produced. But, in contrast, the supply of money and credit to be offered in payment for goods was vastly increased. Some countries printed paper money lavishly. In the years
before we entered the war an excessive supply of gold was accumulated in the United States in payment for the goods sold to foreigners. This gold in bank reserves became the basis for expanding credits. After the United States entered the war, a succession of great war loans furnished the government with unlimited purchasing power with which to demand goods; but the government war bonds in the hands of individuals became a gilt-edge security upon which private persons could obtain credits from their banks and also enter the markets as purchasers of raw materials, commodities, and stocks. Living in a time of scarcity of goods and inflated purchasing power, we have seen prices advance by leaps and bounds.
If we divide the population into two general classes of creditors and debtors, it is clear that the cheapening of the dollar has been unfavorable to creditors. The man, who loaned $5,000 ten years ago and receives payment of the debt today, finds the purchasing power of the money cut in two. He receives back command over about one-half the goods that his money might have purchased at the time he made the loan. A large class of creditors throughout the United States consists of savings bank depositors, and we often rejoice at the increase of their deposits as an indication of the thrift of the masses of our people. It is surely a lamentable fact that the price revolution has seriously impaired the fruits of past thrift. Deposits which have been slowly accumulated by many years of care and self-denial will, if withdrawn today, buy for the owner far less of the goods and necessities of life than when the deposits were made. The man who placed $1,000 in a savings bank in 1914, and who withdraws the amount today, will find that the dollars purchase only half as many goods as might have been bought in 1914. If the depositor had invested his $1,000 in non-perishable commodities in 1914, they might, on the contrary, be sold for more than $2,000 today. The annual increase in prices has far more than offset the modest interest paid the depositor for his funds. If the present level of prices is long to continue, there can be no doubt that the savings bank depositors of the past have suffered a real and permanent loss in the power of their funds to aid them in meeting the needs of the proverbial "rainy day." However, if we are to assume that the purchasing power of the dollar will be gradually restored, some of the loss may be replaced to those who can afford to wait, and cheap dollars deposited now may be returned in dollars of greater purchasing power in future years.
Holders of insurance policies and their beneficiaries form another class of creditors who have suffered an unmerited loss through the price revolution. The policyholder whose long term endowment contract
becomes payable during the present year, receives the number of dollars agreed upon, but their purchasing power in providing for the declining years of his life is gravely disappointing. Widows and orphans find that insurance benefits, which would a few years ago have provided an income adequate for their support, are pitifully small in meeting present living expenses. The dollars that are now being received in payment of insurance claims have an exchange value in the commodity markets far inferior to that of the dollars paid through long years as premiums. But, for the man who takes a new policy in these days of cheap dollars, there is perhaps a more encouraging prospect. By the time that such a policy becomes a claim payable by the company, dollars may have become more valuable and their former purchasing power may have been partly or wholly restored. However, if prices remain on the present level, it is clear that the protection afforded by the older policies of our insurance companies has been cut in two.
Another illustration of damage done to creditors is found in the present position and problems of our colleges and universities. These institutions have usually invested their funds according to the most conservative financial judgment in bonds or other similar securities bearing a fixed rate of interest over long periods of years. Their money return on old endowment funds is precisely the same as it was in low price days. But, if their teachers are to live respectably and maintain families under present conditions, salaries must be largely increased. Running expenses for fuel, books, supplies, and upkeep of plants are doubled. Though the income of a college may be as large in dollars as before the war, it will not suffice to maintain the institution even on the old scale. With students crowding all our universities and colleges in numbers never before known, the old endowments are doubly inadequate. The situation has brought urgent appeals for new endowments from nearly all the leading universities of the country. An educational institution that does not exert itself to gain new resources to meet the present emergency is lacking in vitality and vision. Harvard asks for $15,000,000, Cornell for $10,000,000, Princeton, Columbia and others for amounts proportionate to their estimated needs. The South should not lag behind in this matter. In our own state the publicly owned and privately endowed institutions of learning should receive liberal additions to their funds from alumni, from taxpayers, or from private benefactors, if we are to train effectively for useful citizenship the young men and women of the commonwealth.
I might go on to give other illustrations of individuals and institutions that have suffered by the fall in the value of the dollar. Possibly
some of those present here have in mind relatives or friends, unable to play an active part in business life, who have been living on the income of funds invested in supposedly safe and conservative securities, bearing a fixed rate of interest. Seven or eight years ago these securities seemed gilt edged, and the income they produced was adequate for the support of the owners. Now such investors may receive precisely the same income in dollars, but they can command a real income only half as large in food, clothing, and shelter. Influences beyond human foresight and control have destroyed the fruits of past saving. If funds have been placed in the bonds of some of our standard railroads, formerly considered only second to government or municipal bonds in safety, very likely a great shrinkage in the market value of the invested principal has also been experienced, due to the fact that many of the leading railroads of the country have avoided receiverships only by aid of a government guarantee of earnings which may soon be withdrawn.
The extreme rise of prices has brought depression or disaster to railroads, local traction companies, and other public utility enterprises whose rates for service are fixed by law, by franchise, or by some governmental commission. With employees demanding greatly increased wages to meet the higher cost of living, with current expenses for fuel, repairs, replacements, and maintenance doubled, a business which is not permitted to increase its charges to the public is in a difficult plight. This is well illustrated in Greater New York where the local traction companies operating under a five-cent fare have experienced financial collapse and their security holders are bearing severe losses. The railroads have been permitted to make considerable advances in rates, but in general such advances have been by no means adequate to cover the increased expenses of operation and maintenance. For the time being, a government guarantee of earnings throws upon the public treasury the burden of part of the railroad losses. But the uncertainty of the continuance of the guarantee, and new demands for wage advances, make the future of the transportation companies precarious.
Earners of wages and salaries are creditors for the amount of their money compensation, and it is to their interest that the purchasing power of money be maintained. Usually wage increases lag far behind increases in the prices of commodities, and the workers experience loss accordingly. The extraordinary circumstances of the present price inflation have, however, saved many classes of wage earners from harm and have to a considerable extent given them a positive gain. The government called millions of men from the ranks of industry into the army and thereby created a scarcity of labor. But there were as many
mouths to be fed and as many backs to be clothed as ever. In addition tremendous amounts of military work had to be done in pressing haste. To get quick results in the most urgent work, the government became a lavish employer paying extraordinary compensation. Private industry had to pay corresponding prices or lose its working force. Consequently, during the recent period of rising prices, the wages of common laborers and of many classes of artisans were promptly increased in a manner to offset, or more than offset, the increase in the cost of living. Where production was urgently needed, strikes, or the threat of strikes, were quickly effective in securing increases of wages. Many laborers and artisans, indeed, now find themselves more prosperous than ever before.
But the adjustment of wages and salaries to the new level of prices has been, in many occupations and professions, slow, uneven, illogical, and inadequate. Many physical and mental workers are today resentful or discontented because they feel that they have unjustly lost ground in comparison with other classes as respects their relative position in economic society. We live in a day when plumbers and bricklayers and iron workers are frequently better compensated than librarians and ministers and college professors. In some cities the janitor who sweeps out the school-rooms and feeds the furnace is better paid than many of the teachers who train the minds of the pupils. All over the country there are salaried workers in positions of varying degrees of importance who are feeling the pinch of the effort to make a slightly increased salary meet the demands of a greatly increased living cost. Officials and employees of national, state, and municipal governments have very generally not received increases adequate to maintain their former standard of living under the new conditions. However heartily we may agree that policemen and firemen and other guardians of the public safety cannot be permitted to strike, we should see to it that some other method is found for doing justice to their claims for increased compensation. Even high officers of the federal government and of great states are finding themselves ground between the upper and nether millstones of high cost of living and constitutional or statutory limitations upon the increase of salaries. They will not starve, they only occasionally resign, but their efficiency is doubtless lessened by the difficulties of their economic situation.
So far I have dwelt in the main upon the losses of classes of people who have been hurt by the price revolution. There is another tale to tell. While rapidly rising prices of commodities and labor have harmed creditors, the burden of debtors has been lightened. Merchants, manufacturers, contractors, and the directors of industry are usually debtors
doing business with money borrowed on long or short term securities. To them the unprecedented expansion of the money and credit supply has meant a brisk demand for their goods at rapidly rising prices. To be sure raw materials and wages have advanced, but many concerns have been so fortunate as to own large reserve supplies of raw materials. If costs have been rising, prices of finished products have been rising faster. The great gains made by many of our industrial corporations have meant increased dividends and largely enhanced market values for their stocks. Thus the fortunate owners who bought at a lower level have reaped easy profits.
Merchants who bought stocks of goods at lower price levels have been enabled to dispose of them at profits far beyond their most optimistic expectations. Buying new stocks on higher levels, they have been able to mark up the goods and get their price from a public afraid that even higher prices would rule in the near future. Price advances have been made easy by the presence in the market of large classes of careless or inexperienced buyers with more money to spend than ever before in their lives. The existence of such buyers has increased the difficulties of the situation for those who are obliged to satisfy their needs upon the basis of incomes which have not been increased.
Such prosperity in business circles promotes expansion. A general spirit of optimism is produced. Active business men are likely to be well content with abundant profits in dollars. Projects for recapitalization and expansion, for the construction of new mills and factories, and for a further reaching out after trade are set on foot. The profits of conservative industries overflow into industries of a more speculative character, and the danger is that the enkindled imagination of those who have enjoyed great profits may lead them to misdirect capital into enterprises that will finally fall with a crash.
The price revolution is a boon to our farmers and planters--the directors of agricultural industry. Old prices for the products of the farm are doubled, or tripled, and sometimes even quadrupled. Though agricultural labor is scarce and its wages high, though the farmer pays more for machinery and fertilizers and manufactured goods, yet on the whole he is a great gainer in this era of high prices. This is the time to pay off the farm mortgage. The farmer who mortgaged his land for $3,000 when cotton was $75 a bale received the equivalent of forty bales of cotton. Now, if his cotton brings $150 a bale or more, he can pay off the debt by selling twenty bales or less.
Naturally the great increase of farm profits and the amount of agricultural and other gains seeking investment have caused in some parts of the country an extensive speculation in farm lands. Prices are
often reached which even present agricultural profits do not justify, and the chances are that, if the present prices of farm products seriously decline, some owners will have farms on their hands which will not pay a fair income on the investment.
Just now the conflict in the economic interest of city dwellers and farmers is particularly striking. Railroad employees, salaried men, and the millions of wage earners in our great cities are crying out for cheaper bread, meat, milk, eggs, cotton and woolen cloth, and other household staples. The railroad brotherhoods have stated with great force that the cost of living must come down or their wages must again be increased. But the producers of cotton, cattle, milk, grain, sugar, fruits and other agricultural products are combining to keep prices up, and even in some cases to withhold their products from the markets unless further price advances can be obtained. This struggle of conflicting interests places the government in a dilemma. Shall it come to the aid of the city dwellers, or shall it look with favor upon the efforts of producers to maintain high prices? Either policy may cause political opposition. Just now the federal government is favoring the urban populations and using many means to depress prices. But the same governmental sale of army supplies which cuts in two the cost of my winter's stock of bacon and provides my family with cheap army blankets may well lessen the profits of producers of pork and wool. The governments of our agricultural states are more apt to use their forces in behalf of the farmers, who have great political power, and the minority of town dwellers must cope with the high prices as well as they can.
One direction in which the failure of prompt adjustment to the new level of costs is causing great distress is in the matter of housing in our towns and cities. Rents of houses and apartments rise slowly and after much friction and resistance. City dwellers whose salaries have been only moderately increased can with difficulty meet demands for higher rentals. Consequently the prospect of gain is not sufficiently attractive to stimulate the erection of many new houses at the present costs of labor and building materials. Many families are thus compelled to live in overcrowded and uncomfortable quarters. The situation gives old houses a decided scarcity value. Nominally the owners are made richer. But there is much danger of illusion here. Perhaps before the war the assessors valued my residence at $4,000 and I considered it worth $8,000--what it had cost me. Now I am offered $15,000 for it, because houses are very scarce, and it cannot be duplicated for less. I may consider that the price revolution has added $7,000 to my wealth, and my frame of mind may be very optimistic.
But after all I have only precisely the same house. My real wealth in house has not changed. If I sell the property for $15,000, I shall probably have to spend the whole amount to provide my family with an equally good house. If I invest the money in other goods than houses, they will probably cost twice as much as before the war. Where is my real gain? Doubtless we shall many of us feel richer if under the present era of tax reform all of our real estate and personal properties are placed on the tax books at 100 per cent of present inflated values in dollars. But, if we continue to own the same houses and chattels and personal possessions, our real riches will be precisely the same as before.
It is probably a fact that handling more money--more counters--often creates a feeling of prosperity and ability to spend which, in the long run, leads to extravagance and debt. We hear from many sides that people are buying regardless of prices, that many persons will no longer accept low priced articles. The bricklayer who made $18 a week a few years ago may feel that, with $35 to $40 a week now, he is in a position to have what he wants. But when he comes to the realization that his rent has been increased, his grocery bill doubled, that milk for his children costs two or three times as much as before the war, that shoes and clothing have ascended to prices not before known in his lifetime, he will be undeceived as to his real economic position. Probably he will strike for higher wages. If he succeeds, he will increase costs to somebody else. In the meantime extravagant and unintelligent spending has made the situation immensely more difficult for mental and physical workers who are struggling to meet a 100 per cent increase in prices with a 10 or 20 per cent increase in income. It often requires considerable moral courage today to compare prices and qualities before buying and to object to undue profits in the face of the dealer's condescending assertion: "That is what we are getting," or that equally odious saying: "They are sure to be much higher next season."
Some economists tell us that we are on a permanently higher level of prices which will not be much reduced in a generation. If this is true, there are many persons living under a pleasant delusion. Suppose that you were worth $10,000 before the war and that you have prospered and now count your wealth as $20,000. You may be pardoned for feeling complacent, but what have you really gained? On the present scale of prices you are hardly richer at all. Twenty thousand dollars will do little, if any, more in buying houses, food, clothing, and the necessities and luxuries of life than would $10,000 before
the war. And, if you are so unfortunate as to be able to command only the
same number of dollars as before, you have actually been impoverished one-half in purchasing power.
In conclusion I want to contrast 1896 with 1919 and to point out that prices move in cycles. At that time the gold dollar had been appreciating in value year by year, and the burden of all debtors was increased. The South and the West were suffering from the low price of their cotton and wheat. The silver bullion in the silver dollar was not worth fifty cents. There were charges that moneyed interests had conspired to oppress the masses of the people and that mankind was being "crucified on a cross of gold." How the situation has been reversed in less than a quarter of a century! Gold has been cheapened in comparison with practically all other goods. The depreciation of the dollar has lightened the burdens of all debtors. The farmers of the South and West are selling their cotton and wheat and corn at prices that mean comfort and prosperity. Even the formerly despised silver dollar has a bullion value of more than a dollar in gold, and fears are expressed that it is becoming so precious that it will be withdrawn from circulation and melted down for its bullion. This reversal illustrates the extreme instability of our monetary measure of values and shows that we live under a monetary system which falls far short of doing ideal justice to all. But, if such a change can occur in less than twenty-five years, may we not believe that when the world is again fully and efficiently organized for production the supply of goods and commodities may be greatly increased in relation to the supply of money and credit? The gold production of the world has already been checked by the increased cost of gold mining. Expanded credits of the nations of the world may gradually be contracted. With the prospect of renewed abundance of all sorts of goods and a possible contraction of money and credit, may not those who suffer from the high prices of today at least hope for a gradual descent to lower levels which will bring them better fortune in future years?