INDEX 260 When prices go up, manufacturers, fabricators, and merchandisers naturally seek to avoid consumers' resistance to higher prices. To an important extent this is accomplished by smaller packages, reduction of quality, reduction of services, special offers, and so forth. In a severe inflation with acute shortages of basic materials it is almost necessary and, in fact, desirable that quality be reduced. It is practically impossible to take account of changes in quality in price reporting. There is no doubt that the quality of many commodities was lower in the war years and that their real price was correspondingly higher than is indicated by available price statistics. As early as the fall of 1917, clothiers sacrificed quality to maintain price lines. They refused to buy the finer grade fabrics that were still available and substituted cheaper materials in men's suits and overcoats. Civilian men's clothing classed as heavyweight material weighed less than 14 ounces compared with the normal CHART 63 REAL WAGES weight of 28 to 32 ounces. Following a general meeting of wool manufacturers in October, there were no 100 percent wool fabrics for civilian use. After April 1918 when the Government had taken over all of the raw wool and the Army was using all of the reworked wool from new clips, only reworked wool from old rags was available for civilian fabrics. According to a War Industries Board Bulletin, rug manufacturers substituted cheaper materials and manufactured rugs and carpets with less compact construction. In order to protect consumers of bread, regulations were necessary requiring bread to be sold by weight rather than by loaf and to standardize the formula for bread ingredients. In some cases, of course, standardization may hold down rising prices without any significant loss of consumer value, but current reports indicate that some textile fabricators are reducing the quality of the construction in order to hold down prices. The effect of rising prices on distribution was to create millionaires and paupers. Many people saw the value of their life insurance and savings diminish, and, consequently, their living standards were impaired by the World War inflation. At the other extreme, the number in the upper brackets increased faster than ever before in history. According to the statistics of income published by the Treasury, the number of millionaires doubled during the year between 1914 and 1915 and increased 343 percent during the 2 years 1914 to 1916. All of those classes over $150,000 more than trebled during the 2 years 1914 to 1916. Chart 64 indicates the phenomenal growth of millionaires relative to the medium income group. In 1914, the total income of millionaires amounted to 16 percent of the total income of the $3,000 to $5,000 class; but during 1915 and 1916, it increased to 37 and 75 percent, respectively. According to Wilford I. King's statistics, the number of persons with incomes under $5,000 increased 7 percent between 1914 and 1919 while the number with incomes from $5,000 to $25,000 increased 16 percent. In the same period, those with incomes from $25,000 to $150,000 increased 70 percent, and those over $150,000 increased 250 percent between 1914 and 1916.3 CHART 64 TOTAL INCOME OF THE MILLIONAIRE CLASS COMPARED WITH PERCENT Income of $3,000 to $5,000 group Income of $1.000,000 and over group SOURCE: U. S. STATISTICS OF INCOME INFLATION IN ENGLAND AND FRANCE AND ITS EFFECT ON THE UNITED STATES The inflationary movement in France and England preceded the rise in the United States and our own price rise was, in part, a result of their increased demand for our export goods. (See chart 65.) In France there was a 42-percent increase in the average level of prices and in England a 28-percent increase before we experienced any rise. By the time we entered the war, prices in France were 124 percent and in England 96 percent above the prewar level. During the first 9 months of 1917, prices in the United States increased as rapidly as in England and France but when controls were instigated here, the gap between domestic prices and those in the Allied nations again increased. The cause of the 75-percent increase in prices during the period of our neutrality was that expenditures were increasing faster than the supply without measures for checking price advances. As long as supplies can be increased fast enough to match every additional dollar that is spent, price inflation will not get out of hand. But the danger exists that expenditures will increase faster than it is possible to expand output-at least in important lines. At the outbreak of the last war, there was far less unemployment than existed in 1939. The primary initial cause of the increase in expenditures was the Wilford I. King, The National Income and Its Purchasing Power, National Bureau of Economic Research, p. 172. gigantic spending of foreign nations in our markets. Though our imports increased and in part offset the huge stepping up of exports, our net export balance in dollar terms increased 135 percent in 1915 and almost 400 percent in 1916 over the 1914 level. CHART 65 As shown in chart 66 exports increased from $2,300,000,000 in 1914 to almost $8,000,000,000 in 1919-a jump of 230 percent. Before our entry into the war, the level of exports had increased 140 percent in dollar terms. The increase to Europe was, of course, relatively greatest but the other continental divisions also shared in the expansion. Chart 67 shows trade with France and the United Kingdom. Our exports to France increased almost 600 percent in dollar terms while imports fell sharply. Exports to the United Kingdom increased over 300 percent as did those to Canada. Exports to neutral nations also greatly increased. Exports to Argentina quadrupled. The increase in trade with the Scandinavian and Low Countries was due in part to the ineffectiveness of the economic blockade until late in the war. The expanded trade of the South American countries with the belligerents increased their demands for our goods, our rising demand increased imports from their countries, and they were enabled to buy more goods here. There are three terrible aspects of inflation. (1) National defense suffers because of the adverse effects upon production. (2) The dislocations in distribution make millionaires and paupers. (3) Deflation. DEFLATION CHART 66 EXPORTS OF MERCHANDISE Fiscal Years 1913-19 Calendar Years 1936-39 1913 1914 1915 Estimated on basis of first 9 months. 1916 1917 1918 1919 1936 1937 1938 1939* Source: U. S. Department of Commerce 8 The history of an entire century shows that each inflationary price movement is followed by a severe deflation. Chart 68 shows that following three great inflations of the century, prices not only crashed to their prewar levels but declined far below them, with the single exception of a brief interval in the 1920's for which there are special reasons. Each such deflation has brought a serious and costly depression. Perhaps the most dangerous thing of all is a tendency, following such drastic deflations, toward stagnation at the lower levels. Inflation carries within itself the seeds of deflation and deflation spells business losses and failures, unemployment, mortgage foreclosures, bank failures, and staggering losses of farm income. In the 2 years from 1919 to 1921, the index of gross farm income fell almost one-half, from 250 to 132; the value of farm real estate fell sharply, but farm mortgages continued to rise. The dislocations of the war marked the beginning of disaster for American farmers from which they have not, even yet, fully recovered. 4 See p. 237, infra. |