Profiteering and Prices
WHERE are the profiteers? The country has been combed by federal agents, state commissions, and local grand juries, in a search for the profiteers on whom is laid the blame for high prices. What is the result? The proprietor of a little grocery store in Wiscasset, Maine, was haled to court in Portland, according to metropolitan newspaper reports, because he charged a couple of cents too much for sugar. A small shoe retailer is said to have been indicted, perhaps unjustly, by a grand jury in South Carolina for taking a profit somewhat above normal. A firm of shoe retailers, in Providence, Rhode Island, was fined $3500, according to published statements, for instructing its salesmen to obtain as high prices as possible. Here and there a few similar instances have been reported. Yet at the opening of the year 1920 prices were still tending upwards. This is practically the net result of the expenditure of several millions of public money.
The blame for high prices has been placed most frequently upon the retailer. And for two reasons. In the first place, the retailer is the last party through whose hands the merchandise passes on its route to the consumer, and his prices are the only ones with which the consumer is familiar. Secondly, the retailer, with a few exceptions, is a small business man; he is less able to defend himself than the wholesaler or the manufacturer. Yet the figures that have been collected for several years by the Bureau of Business Research of Harvard University indicate that, generally speaking, operating expenses in several of the leading retail and wholesale trades have advanced about as rapidly as prices. The ratio of net profit to sales has shown no marked change.
Although occasional instances of abnormally large profits may exist, nevertheless, if the average merchant were to sell his merchandise at a price that just covered what he paid for the goods, plus his operating expenses, his selling prices ordinarily would be lowered only from two to six per cent. The saving to consumers by wiping out all net profits in retail and wholesale business would be small.
A similar analysis would doubtless show much the same results in manufacturing industries. Business has been active, and there have been fewer commercial failures during the last three or four years than in normal times. Yet the responsibility for high prices cannot be pinned to any one group or class of business men, farmers, or laborers. Honesty and fairmindedness in business practice are certainly as common as at any time in the past.
In nearly all branches of industry and trade, prices of raw materials and finished products have shown heavy advances since 1914. Wages in numerous occupations also have increased in nearly the same proportion as prices. Teachers, clergymen, and a few other groups dependent on fixed salaries or incomes are about the only persons who are not receiving substantially greater money compensation for their services than was the case six years ago.
Such a general rise in prices is not a new phenomenon in the world’s history. It has occurred under similar circumstances in the past.
In this particular instance the general rise in prices in the United States was stimulated by the influx of gold during the early years of the war. It has been due also in part to the heavy demands, domestic and foreign, arising from the destructive processes of the war — demands that were only partially counterbalanced by the forced and voluntary economies of manufacturers and consumers. In some industries there have been other contributing factors, such as the short cotton crop.
The chief reason, however, for the abnormal increase in prices which has continued for over a year since the signing of the Armistice, has been the inflation of our credit and currency through the workings of the Federal Reserve banking system. This system has many admirable features, but it also was a potential source of inflation. As it was managed under war conditions and up to November, 1919, a high degree of inflation was brought about.
The Federal Reserve system began operations in 1914. From July 1, 1914, to July 1, 1919, the amount of currency in circulation in the United States increased $2,440,000,000, or 71 per cent. The annual rate of increase in currency in circulation during these years was five times as rapid as during the fifteen years prior to 1914, which also was a period of generally rising prices. The main additions to our currency have been in the form of Federal Reserve notes. These notes, or paper money, are issued on the basis of credit granted by the Federal Reserve banks, which rediscount borrowers’ notes for other banks. There has been also an increase in deposits resulting from loans — another form of credit inflation.
In order to finance the war, the United States government did not issue paper money directly, as was done to excess in most of the European countries. Yet the issue of paper money was stimulated indirectly by inducing the Federal Reserve banks to give especially favorable terms for credit based on government bonds. Large quantities of war bonds became the security for the issue of Federal Reserve notes. The amount of currency in circulation was increased without a corresponding increase in the quantity of merchandise produced. More currency and no more goods has meant higher prices. The Federal Reserve Board also permitted a large expansion of credit and currency by its liberal terms for rediscounts on ordinary commercial loans. The policy of the government in financing the war may have been the wisest one to follow. Nevertheless, the fact remains that, in the United States as well as in Europe, inflation is at the bottom of a large portion of our price troubles and is one of the chief causes of widespread social unrest.
To show how inflation works, take the following example, stated in its simplest terms.
A shoe manufacturer in the ordinary course of business goes to a bank for a loan. The amount that the bank will lend him is strongly influenced by his net assets, especially by the value of the materials and merchandise on hand, cash, and the amount of sound debts owed him by his customers, as compared with his current liabilities. With the proceeds of the loan received from the bank, the manufacturer buys raw material and hires labor. If it is easy for him to secure the loan, because of the ability of the bank to rediscount his notes at the Federal Reserve bank at a low rate of interest, the manufacturer does not hesitate to bid up the market for materials and to offer higher wages to secure workmen.
The higher the prices paid for materials and labor, the greater is the value that is placed on his stock on hand when he seeks the next loan. Such credit, granted leniently because of the opportunity of the bank to turn round and borrow from the Federal Reserve bank at a low rate of interest, has rolled up prices like a snowball.
The amount of credit granted on any particular occasion depends in large measure upon existing prices. Yet, as soon as the credit is granted, it immediately tends to increase prices by placing new buying power in the hands of the party who has received the loan. In other words, the statement that the increase in currency and credit has been the result of high prices is based on a fallacious and oft-exploded theory. Inflation is the cause, not the result. By granting loans without proper restraint, moreover, inflation increases until banking resources can stand the strain no longer, and the bubble bursts. Several of the worst commercial crises in the past have resulted from inflation.
In November, 1919, the Federal Reserve banks at New York—the pivotal point — and at Boston began to increase their rediscount rates. This indicated that the Federal Reserve Board was attempting to check inflation, and resulted immediately in bringing down the prices of securities in the stock market. But up to the beginning of February, 1920, no effect on commodity prices had been shown. Another substantial increase in rediscount rates was made on January 23, 1920. It remains to be seen whether still more drastic action is necessary to curtail the demand for commercial loans, unless in the meantime a crisis is precipitated by other forces. At all events, the action of the Federal Reserve banks, even if somewhat belated, is a sound public policy.
Large quantities of merchandise, such as shoes, hosiery, and dry goods, have been ordered by wholesalers and retailers for delivery during the spring months of 1920 at prices twenty to forty per cent above those that ruled last autumn. There are some indications that additional increases are anticipated for the coming fall season. To carry on their business at these prices, wholesalers and retailers, as well as the manufacturers, will require much larger credits than heretofore. The burden will fall on the banks. It is doubtful if the resources even of the Federal Reserve system are great enough to carry this additional burden. If not, prices must come down. It is also doubtful if the public will pay these higher prices. If not, the goods must be sold for what they will bring, in order that the merchants may pay their bills.
Once the upward movement of prices is stopped, loss of confidence probably will result, and a period of general readjustment will begin. Sooner or later a readjustment will be forced by some means. The longer deflation is postponed by laxity in granting credit, the greater will be the eventual hardship imposed upon business and the public.
For many commodities, especially luxuries, the demand from consumers has been unusually heavy during this period of rising prices. This demand has been stimulated by the process of inflation in suddenly and rapidly augmenting money wages and other monetary income of a portion of the community. Some workmen, who are producing no more than in the past, have been purchasing expensive hats and shirts; their wives and daughters have been buying silk stockings and other luxuries to which they were not previously accustomed. Some other consumers have had their money incomes abnormally increased, and they too have been spending more or less recklessly. This is the demand that has characterized, to some extent at least, the active retail trade of recent months.
Many unfilled requirements of the war period, however, are not yet being satisfied. Our facilities for producing essential articles are not being sufficiently expanded. Most manufacturers are cautious about expanding their plants under present conditions. The railroads of the country cannot now afford to provide adequate equipment. There is a large accumulated demand for new homes, which is not being filled while the prices for labor and materials are at the present high levels.
A substantial portion of the unusual business activity of recent months, therefore, is to be attributed, not to requirements arising from curtailed consumption during the war, but to inflation. Such business is not built on a firm foundation.
The inflation of currency and credit, and therefore of prices, is one of the chief causes of social unrest. That this has always been the result under similar conditions, in this country and in other countries, is a lesson clearly taught by history. Throughout Europe the problems of social unrest have been greatly intensified by the vast quantities of paper money issued during the last five years. The Bolsheviki have turned out paper roubles as voluminously and as recklessly as assignats were issued during the French Revolution — and with the same results. Austria and Germany are almost swamped with paper money that soon may be worthless. France and Italy have departed far from sound monetary principles. Great Britain issued a large amount of paper money during the war. To only a slight extent have any of these countries taken steps to rehabilitate their currencies. In the United States, inflation fortunately was less than in the belligerent countries of Europe; our gold standard was maintained; and the recent action of the Federal Reserve Board indicates that in this country the period of increasing inflation definitely has come to an end. It appears that our government at last has taken action — the only practical action — which eventually will result in bringing prices down.
The process of deflation may bring with it temporary hardships to business. These hardships, nevertheless, will be the lesser of two evils. We shall suffer less from this process of readjustment, if it comes soon, than we should suffer were the upward swing of prices to go further, and eventually come down with a severe crash. If prices were to continue to rise, our labor problems would become far more difficult than any that we have yet experienced. Another rapid increase in prices would furnish the radical agitator with the best ammunition that he could wish. Under present conditions, an additional rise in prices would enable the radicals to secure sympathy in many quarters where their preachings ordinarily are not heeded. For these reasons, temporary hardships during the period of deflation are a small price to pay for safeguarding our institutions. Once this fundamental readjustment is made, a period of real and widespread prosperity may be expected.
As for profiteering, most manufacturers and merchants can be freed from that charge. They are not to be relieved to the slightest degree, however, from their public responsibility to introduce more economical methods into their factories and stores, and to pass on the savings in the form of lower prices to the public. Operating expenses in many retail stores, for example, are unnecessarily high. It is the duty of merchants to work out practical means whereby these expenses eventually can be reduced by better and more economical management.