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workers were able to save an average of $76 per family after all expenses. In 1917 despite substantially higher money income, they sustained an average deficit; were obliged to cut into their savings or to run up bills at the corner grocery to the extent of $48 per family. In the case of the lower-paid workers' families, the average deficit was more than twice as great-$105. Thus, not only was the real consumption of railway workers curtailed during the war inflation but their ability to meet the hardships of the deflation was seriously impaired.

In 1917 railway labor demanded an adjustment of wage rates. Early in 1918 the Commission, on the basis of these facts, awarded wage increases amounting to about 15 percent, which brought the average wage level nearly 37 percent above that of June 1915. Yet by April 1918, when the report was submitted and the award made, the living costs of railway workers had risen still further,

CHART 41

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40 to 43 percent above the 1915 level, so that despite the wage increase real wages remained below the pre-war level. This is a typical example of the impact of inflation upon wage earners and of the lag between the rise in the cost of living and the increase of wages.

Equally typical of the decline in real income was the experience of workers in the building trades. In chart 41 cash and real weekly wages are shown for

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160

WEEKLY WAGES

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0

WEEKLY

100

REAL

WAGES

80

09

1921

1920

6161

1918

1917

1916

1915

2880

By 1918, despite a 20 percent rise in cash weekly wages,

1914

09

DOUGLAS, PAUL-REAL WAGES IN THE UNITED STATES, 1890-1926

US BUREAU OF LABOR STATISTICS

the years of 1914-21.

real wages declined by more than 20 percent from the 1914 level.

The same situation holds for salaried workers and is illustrated in the chart showing cash and real income of teachers, 1914-21 (chart 42).

One of the major causes of discontent was the wide disparity of income between wage earners in various industries, since there were, of course, some groups of

workers whose real income increased during the inflation period. But the gain even to these groups was temporary. The inflation of the war period had an inevitable aftermath. The wage rates of the fortunate groups came down with a bang. Even more significant, millions of workers in all industries were deprived of employment. In the light of our experience in the early thirties the effects of deflation upon wage earners should require little elaboration. Wage and salary, earners have a vital stake in preventing the repetition of such a disaster. It is only by preventing inflation during the emergency period that we can hope to prevent the problems of post-emergency adjustment from overwhelming us.

Nearly 7,000,000 families, a quarter of the Nation's population, live on the farm and derive their livelihood from agriculture. No economic group has suffered more from instability in the prices of their production. No group has suffered more from inflation and its inevitable aftermath. Farm prices rose very rapidly during the first World War. On the average they more than doubled between 1914 and 1918, and basic crops, such as cotton, corn, and wheat brought prices from 150 to 200 percent above the prewar level. Cash farm income per capita likewise doubled during the same period, but the improvement in the real position of the farmer was not nearly so great, for the prices he paid increased also. These facts are shown in table 10.

1913. 1916.

1917

1918

1919

1920

1921

1922

INFLATION AND THE FARMER

TABLE 10.-Comparison of prices received by farmers, prices paid by farmers, and farm income per capita, 1913 and 1916–22

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Source: U. S. Department of Agriculture, Agricultural Statistics, 1940:

Column 1, table 693, p. 573, index numbers converted to base 1931-100.
Column 2, table 692, p. 572, index numbers converted to base 1931 = 100.
Column 3, table 677, p. 552.

Column 4, column 3 deflated by column 2.
Column 5, computed from column 4.

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Real farm income per capita in 1917 was 16 percent higher than in 1913, and in 1918 reached its peak of 24 percent above the 1913 level. The table also shows the penalty the farmer paid in the post-war deflation for the improvement in his position during the war. Even before the decline of farm prices, which began in the summer of 1920, the real income of farmers declined. This was due to the relative stability of farm prices between 1918 and 1920, while the prices the farmer paid continued to rise during these years. In 1920 real per capita income of farmers fell to 8 percent below the 1913 level. In 1921 it was 19 percent below. Thus, the improved position of the farmer during the years of inflation was more than offset by the post-war decline in farm prices. But this falls far short of describing the disastrous repercussions of inflation upon the farmer.

Under the impact of rising prices, the market value of farm property increased enormously, and farmers were induced to go heavily into debt both to acquire farms and to purchase equipment to work them. This is shown in chart 43.

The collapse of farm prices following the war not only decreased cash farm income and drastically deflated the value of farm acreage, but it also drastically increased the burden of farm debt. The increase in the real burden of debt is

FARM MORTGAGE DEBT, VALUE PER ACRE OF FARM REAL ESTATE,

AND GROSS FARM INCOME, 1910-39

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illustrated by the fact that in 1910 the total interest burden on all farms in the country was the equivalent of 224,000,000 bushels of wheat, or 36 percent of the Nation's wheat crop. By 1923 the total interest burden amounted to 733,000,000 bushels, or 97 percent of the wheat crop. The same story could be told in terms of bales of cotton, hundredweight of hogs, or bushels of corn. In every case the CHART 43

1940

NEG 35780

BUREAU OF AGRICULTURAL ECONOMICS

burden of interest payments roughly tripled. The more fortunate farmers, by dint of redoubled effort and the strictest economy, were able to retain their farms. The less fortunate lost them, and with them their lifetime savings. Only the speculator profited by the rise and fall of farm values.

For years agriculture has been a depressed industry, and the farmer has been denied prices which would cover his cost of production and a fraction of the national income which could be regarded as equitable. It is extremely important, both in the interest of equity and in the interest of farm production, which is vital to the defense effort, that farm prices be in balance in the price structure. It is equally important, however, to prevent such an increase of farm prices as would go beyond restoration of balance and create unbalance in the opposite direction. A rise in farm prices which created such unbalance would have the effect of inducing an increase in wages and in the prices of manufactured goods generally. It would not be difficult to repeat the experience of the last war. Farmers have the strongest reasons for avoiding any such repetition.

INFLATION AND BUSINESS

In the long run the interest of business must coincide with the interests of farmers and workers. As these groups have nothing to gain from inflation and its aftermath, neither has business anything to gain. During a period of rising prices, to be sure, business profits expand rapidly. This results from the fact that the productive process is one extending over an appreciable period of time, so that costs are laid out well in advance of the sale of the product, and from the further fact that many costs are fixed by contract. There are some businessmen, therefore, who suffer from the delusion that inflation confers benefits upon them. But the counterpart of falling wages and of unemployment for the workers, of falling prices and of foreclosures for the farmers, is the deflation of prices, collapse of markets, and bankruptcy for businessmen.

Businessmen, like workers and farmers, know the "years of the locust" from bitter experience. In 1920-21, the deflation forced business firms to write down the value of their inventories by nearly $11,000,000,000. In 1921 liabilities in bankruptcy were almost double those of any previous year. Inflation and its aftermath make business a gamble. As in the case of the farmer, the fortunate businessman manages to hold on, the unfortunate loses his stake.

INFLATION AND THE SAVER

There is scarcely a family in the community that does not have a savings account or an insurance policy. So important do Americans consider the possession of savings and insurance that in recent years a national program has been established to bring economic security to every family. Inflation would gravely impair, and if extreme, would utterly destroy this security, and thereby the foundation of social stability. There is no aspect of price inflation more dangerous to the stability of society than the destruction of the accumulated savings of the mass of the community.

We need not turn to the extreme examples of post-war European inflation. Consider only what happened to the holders of insurance policies in this country during the war years. The cost of living doubled between 1914 and 1920. The average man who bought a life-insurance policy and who died in 1918 left his family to face a period of rising living costs with an insurance settlement worth only two-thirds the sum he planned for their protection. If he died in 1920, that sum was still smaller-only one-half the planned value.

It is no answer to point out that in the years of deflation which followed, insurance recovered somewhat in value. For insurance benefits to have recovered fully to the level contemplated by the policyholder, there would have been necessary so drastic a deflation that it is open to the most serious question whether the insurance companies would have survived the general bankruptcy entailed. Precisely the same proposition can be made with regard to savings generally. There can be no offset to the penalties of extreme inflation; the penalties of extreme deflation are doubly great.

CONCLUSION

Inflation clearly raises the problem of the general welfare, the common good, the very continuity, survival, and preservation of our political and economic institutions. Once inflation is permitted to get under way, there is the greatest

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