PRICES OF CHEMICALS & DRUGSBUILDING MATERIALS IN THE WAR PERIOD 1913 100 CHART 45 PRICES OF TEXTILES CHART 46 IN THE WAR PERIOD 1913=100 HIDES & LEATHER INDEX 340 moderately in the middle of 1918. The first 2 months of serious Government effort brought prices in the controlled group down 8 and 15 percent, respectively. Clearly, uncontrolled prices continued to go up while controlled prices went down. Actually the rise of the uncontrolled and the fall of the controlled prices was greater than is indicated by this chart which is based on a weighted chain index to show the percentage rise or fall from preceding months. This chain index has a moving base. There is probably no more accurate way to show the effect of price control because, by reason of the moving base, it is possible to transfor commodities from the uncontrolled to the controlled list from month to month, precisely at the time that they were brought under control. According to the War Industries Board The behavior of the food group chain index, significantly, is very like that of "all commodities" in which it has a large weighting. The clothing group chain index shows that the eontrolled series went somewhat higher in their monthly rises between May and September 1918 than those not under control, and then fell below. The outstanding features of the chain index for the metals group are the extent to which prices were scaled from previous heights and the strength with which they were held afterward. Metal prices, in September 1917, were brought 9.32 percent below their August level; in October they were brought 24.82 percent below their September level; and in November they were brought 9.68 percent below their October level. Metal prices, once reduced to this lower level, show scarcely the variation of 1 percent up to the signing of the Armistice. The fuels group chain index shows a fairly stable price movement except for the enormous increase of 20.9 percent in April 1918, the beginning of the new "coal year" when the annual contracts, under which a very large proportion of all coal mined is sold, were reversed.2 PRICE AND FRODUCTION The price of a commodity is, of course, related to the supply of and demand for it. If rising demand can be balanced with a corresponding increase in supply, then, naturally, the price is held down. But one of the most significant aspects 2 War Industries Board, Government Control Over Prices, by Paul Willard Garrett, pp. 493, 494. Source; War Industries Board, Government Control 5 5 5 S 5 5 5 5 5 5 5 5 5 5 5 5 USSO MAS 3-106/19/19 Weighted chain index for prices. All commodities" (1,366 series) controlled and uncontrolled during the war, showing changes as control is extended. (Controlled, 0-573 series; uncontrolled, 1,366793 series.) of runaway prices is that they do not produce an increase in supply. This is shown most clearly in chart 49. Between 1913 and 1915 the physical volume of production increased 16 percent with no increase in the average level of prices. In the following year, 1916, prices rose 22 percent while production increased from CHART 49 75 1922 1921 1920 6161 1918 1917 1916 SOURCE: US Bureau of Labor Statistics; Economic Tendencies in the United States, F.C.Mills. 1914 1913 1915 D.D. 39-293 116 to 123. By 1920, prices had risen from 125 to 224 while production increased only 4 points further. In other words, practically all of the expansion of supply took place before price inflation, which added little or nothing to the supply. In fact, it undoubtedly interferred with long-term planning of expansion of capacity. This chart graphically shows one of the problems we face which relates directly to the legislation under consideration. Between 1915 and 1916, and to a still greater extent between 1916 and 1917, a disproportionate price rise induced merely INDEX 300 PRICE AND PRODUCTION DURING THE WORLD WAR 200 a small amount of additional production. Yet increase in output was urgently needed. But a 46-point rise in the price index in order to get a 7-point increase in output is manifestly dangerous. Not only is the disproportion costly; it also sets forces to work which cannot be stopped, and the result was still higher prices in the following years with declining production. Though it serves no useful purpose and is positively harmful, inflation is inevitable if, in order to get a very small increase in output, the price on the entire supply is raised high enough to cover the cost of the small producers who often have a cost much higher than the average. In other words, the so-called bulk line cost principle of fixing prices CHART 50 100 O 1913 14 SOURCE Bureau of Lotor Statistics, REVIEW OF ECONOMIC STATISTICS, 1920, 1921. 100 INDEX INDEX -300 200 200 100 100 PRICE INDEX LIME PRICE 200 100 GLASS PRODUCTION PRODUCTION PETROLEUM PRICE (Crude) O 1913 14 15 16 17 O O 1913 14 15 16 17 18 19 20 21 1922 PRODUCTION INDEX 200 100 INDEX 200 100 O O 1913 14 15 16 17 18 19 20 21 1922 involves the paying of enormous windfall profits to the majority of producers in order to get a few high cost producers into the market. Most important, the result is to raise costs to all the users of a given commodity and, if the process is pyramided throughout the economy, inflation such as we had from 1918 to 1920 results. Charts 50 and 51 graphically emphasize the fact that increasing prices do not bring about commensurate increases in production. While the index of cottonseed prices soared from about 110 in 1915 to 300 in 1918, production was actually declining. Other commodities show somewhat similar movements with production of only 2 of the 13 commodities approximately paralleling price increases during a part of the period 1913–22. INDEX Chart 52 shows that, contrary to popular belief, the enormous inflation of farm prices and land values did not bring a striking increase in supply. There was a |