Popular Science Monthly/Volume 81/December 1912/Rising Prices and the Public
|RISING PRICES AND THE PUBLIC
By Professor JOHN BAUER
THE increasing cost of living, or more properly rising prices, has been the subject of much recent discussion. The causes have been explained and reexplained; everybody knows about increased gold production, also about the trusts, the tariff, labor unions, etc., in their joint and several relations to the subject. But the evils, especially in their broad social relations, have been less definitely analyzed and stated. It is true that the ordinary consumer has paid more money month by month to the grocer, the landlord and others, and that he is complaining rather vigorously about it. Neverthless, for the most part he has imagined and has been taught to believe that the higher prices have meant public prosperity—i. e., larger profits and more business.
Rising prices usually do mean more profits, but not necessarily more real business. The profits usually go to the grocer, the landlord and others, while the ordinary consumer pays them and is so much the poorer. Unluckily the losses and gains, both unwarranted and unearned, have not stopped simply with making the consumers poorer and the dealers richer. They have not been individual matters. The broad effects have permeated our entire social structure, operating through devious ways, working mischief upon the public.
The evils complained of are not due to high, but to rising prices. Either high or low prices in themselves signify nothing, if the incomes are adjusted accordingly. If the prices are simply high, not rising, then wages, salaries and other money incomes will be correspondingly high; all exchanges will simply be based upon a high level. Likewise, if prices are low throughout, not falling, then again wages and other money incomes will be correspondingly low and exchanges will be carried on at a low level. It is the shifting from low to high, or from high to low, that produces mischief. Various mal-adjustments in economic relations follow. All prices and values do not change at the same rate. The normal forces of supply and demand are upset. Some incomes are unduly diminished while others are correspondingly inflated. There are undue losses and undue gains; both are unearned and both are detrimental to the public welfare.
In 1910 general prices in the United States were 47 per cent. higher than the low level in 1897. This is according to the figures of the United States Bureau of Labor. According to Bradstreets's the increase was 52 per cent. For our present purposes let us take roughly 50 per cent. Now observe the increase in the different classes of commodities: farm products advanced 110 per cent.; lumber and building materials 69 per cent.; food 54 per cent.; metals and implements 48 per cent.; clothing, fuel and lighting 35 per cent; drugs and chemicals 33 per cent.; house furnishings 24 per cent.; miscellaneous items 45 per cent.
We should note that the articles entering into the food and shelter of the ordinary consumer have advanced most, also that these items, i. e., food and shelter, require about two thirds of the ordinary family expenditures—among the working classes as much as three fourths. Therefore, allowing for this fact, our estimate of 50 per cent, is clearly a conservative statement of the higher prices paid by the consumer now compared with 1897.
Our proposition is that as a result of this increase some classes of incomes have been unduly diminished and others correspondingly inflated, all to the detriment of the public. The following points should make this proposition clear.
1. Wages have lagged behind in the upward movement of exchange values and have brought consequent losses to the working classes. Money wages have advanced only about 40 per cent, compared with 50 per cent, in prices. Consequently, while the ordinary laborer receives now more dollars than in 1897, he receives considerably less purchasing power, less comforts for himself and his family, less real income.
But, why this loss? Merely because changing conditions in supply and demand reveal themselves more readily in prices than in wages. In a shifting exchange level, unless special forces intervene, wages move behind prices, advancing and likewise receding more slowly. Consequently, in an upward swing the wage-earning classes lose in real income, while in a downward swing they gain correspondingly. The explanation is that wages are controlled more by custom and social standards than are prices. When real conditions of supply and demand change, prices usually respond readily enough, still not without the retarding influence of custom. But with wages, custom is a heavy break upon change, allowing proper readjustment only after a considerable period.
The writer believes that under normal conditions of exchange real wages should have advanced in recent years. Disregard price: look at the improvements in all lines of industry, and at the actual increase in the production of commodities! Is there any doubt of increased productivity? If not, then under normal economic law, part of the increase should have gone as an addition to the real wages of labor. If this assumption is correct, the working classes should have gained in comfort and well-being, while as a matter of fact they have lost. Do you wonder at the discontent and unrest in labor circles?
2. While prices have advanced faster than wages, all prices have not moved up at the same rate. As stated in another connection, farm products, building materials and food have led in the upward movement. Other things have advanced less rapidly, some have remained practically stationary, and a few have in fact declined. Not all industries then have benefited alike from the shifting exchange level; some have not gained at all, and a few have lost.
However—and here is the important point—all laborers, whatever the industry in which they are employed, have been affected alike by the higher prices—all pay 50 per cent, more for food and rent than in 1897. Consequently, there is a pressure for increased wages in all industries, whether they have gained from the changing prices or not. Where they have gained, the desired increases may be granted readily enough, to avoid interruption of business. But where they have not gained, higher wages mean diminished profits or even losses. It is particularly in these industries where we find serious labor difficulties. Both employers and employees have lost or are threatened a loss in income. Neither side understands the position of the other and is unduly embittered as a consequence. The shifting price standards have simply deprived these industries of their former relative prosperity, and until normal readjustment takes place, the losses can not be avoided. The question is who shall bear them—employer or employee?
Fundamentally, this is perhaps the trouble in the many threatened railway strikes. Costs of railway operation have steadily advanced, while rates and fares have remained practically stationary. While this point can not be definitely determined, it seems certain that the railroads have not shared in such undue gains as have fallen to other industries through the shifting of prices. Yet they face the same pressure for higher wages; the demands are supported not only by powerful labor organizations, but by the more powerful public opinion. Until proper readjustment takes place, we must expect discontent and mischievous disputes.
Likewise this was probably the real trouble in the recent Lawrence, Massachusetts, strike. The textile mills, especially those of New England, have apparently not shared in the unearned profits which rising prices have brought to other industries. From the workingmen's standpoint, the need for advances in wages is obvious enough. But from the employers' standpoint such advances will probably mean marked reduction in profits.
The public press has pointed to the large profits of the mills and to the fact that the stock of some of the companies is selling at ten times the par value. But these facts signify little; profits were large fifteen years ago and the value of the stock has been high accordingly. The point is, the mills have not made such additional gains in recent years as have other industries; they have been pressed by the increasing cost of production; and have relatively fallen behind in prosperity. Advances in wages will probably mean cut profits and consequently lower stock values. The writer is not defending the mill owners nor yet the operatives; he is merely pointing out a serious mal-adjustment, for which neither side is fundamentally responsible, but from which both are suffering.
3. As in the case of prices, so the wages of different classes of workmen have not advanced proportionally. Those affected pretty directly by the changed conditions of supply and demand advanced first, and those affected remotely, last. Then, if we distinguish broadly between wages and salaries, we find that the latter particularly have responded but little to the shifting exchange level.
Salaries even more than wages are controlled by custom and rigid social standards. Moreover, when they change they do so by jumps, not gradually, as wages. Thus the salary of a clerk is $800 a year, or $1,000, $1,200 or $1,500; an intermediate sum is unlikely; the passage from one to the other is difficult and is painfully resisted by the employer.
So, while wages have advanced gradually about 40 per cent.—not enough to counterbalance the rise in prices—salaries have remained almost unchanged. Again, however, conditions have varied a great deal between different classes; in few cases there have been large advances, in others moderate ones, but in the majority practically none at all. Unfortunately we lack definite statistical data as to salary standards. But, if we can rely upon observation by students of social affairs, we are warranted in holding to the general conclusion stated.
Salaries, then, perhaps more than any other class of incomes have lost through rising prices. In fact, only recently have they clearly begun to move upward. Eventually when a final high level of exchange has been reached, especially if a downward swing sets in, equitable adjustments will undoubtedly be reestablished, or gradually persons of the needed ability will not enter the various important positions. In the meanwhile, however, the masses of salaried men, all more or less especially trained experts, can not escape the unwarranted losses. They can not leave their employment for lack of training to enter another. They have to submit to losses that are unearned, when for the most part they have deserved better of the public.
4. Persons and institutions with their capital invested in loans have found themselves gradually worse off as prices have advanced. This proposition is particularly true of long-time loans, made either before or early in the upward swing of prices. Obviously both principal and interest were fixed once for all in the loan contract. Consequently, as prices have gone up, the lender received less and less purchasing power in the form of interest, and at maturity of the loan he had also the principal returned to him in depreciated dollars. Prices having advanced on the average about three per cent, a year, he should properly have received also three per cent, a year additional interest money, and he should get back now, not the number of dollars lent, but 50 per cent, more, to offset the decline in the purchasing power of the dollar.
Specifically, if in 1897 a person lent $1,000 for fifteen years at four per cent, interest, he should have received $41.20 interest for the first year, $42.45 the second, $43.72 the third, and so an increase of about three per cent, a year through the period; likewise now, in getting back the principal, he should receive not $1,000, but $1,500. Obviously he has lost, and the borrower has made the corresponding gain. The point is, loss and gain were unforeseen and were not contemplated in the loan contract.
We have here a large class of losers, including owners of government, municipal, railway and other bonds, mortgage notes, fixed annuities, and similar forms of investments. Among persons, the class includes widows and orphans, people with savings for old age, professional men seeking safe places for their surplus income, and business men retired from active enterprise. Among institutions, there are endowed hospitals, charitable organizations, colleges and universities. In general, the class includes only cautious investors, who, so far as possible, seek to eliminate risk from their incomes. Their caution has been rewarded by losses. A virtue which is not too plentiful among investing classes has received rather discouraging setbacks.
For loans made in recent years, especially for short time periods, there has been some compensation for the loss of purchasing power. Since 1900 interest rates have averaged from one to two per cent, higher than normal. This extra rate has in part, but not altogether, offset the average annual rise in prices. The interest rate is now five or six per cent, on safe loans, compared with about four per cent, fifteen years ago. On $1,000 the lender now receives $50 or $60 interest, compared with $40 fifteen years ago. The higher interest rate has resulted as part adjustment for the advancing prices or the decrease in the value of money. But again, just as in the case of wages, the adjustment has not gone far enough, so that there has been a net loss to the lender.
In general, as a summary of the points that have been made, wage earners, salaried employees and cautious investors have lost, while with few exceptions owners of industry and the more speculative investors have gained. The first class includes all contractual incomes, like wages, salaries and interest, which are fixed by agreement; while the second class includes principally non-contractual incomes, like dividends on stocks, profits on real estate, factories, stores of goods, etc.—incomes not fixed by agreement, but depending upon the success of the business.
Some one remarks that the losses and gains have no particular social significance; some classes merely have lost while others have gained in the scramble for income. The answer is, in part, that whenever undue losses are brought upon large classes in society, resulting in hardships and discontent, the evils communicate themselves even to the classes not so directly affected. No class lives unto itself; discontent in one will work through the whole group. However, there are also evils which are distinctly social, affecting society as such, distinct from individual classes. These evils may be outlined briefly as follows:
1. The advancing prices have introduced an extraordinary risk element into business. Undue gains have been made by some classes and undue losses by others. Gains and losses have been fortuitous; they have not resulted from mere careful or careless management; they could not be definitely foreseen, and therefore planned for or avoided. "Who can tell whether prices in general will rise next year? Or the price of a particular commodity? Or wages? Or salaries? For the individual business, or person, is not a particular advance wholly an accidental matter? If with one class rising prices mean greater profits, then with another class do they not mean greater costs, which, too, are uncertain?
So far as possible, business men and people in general seek to eliminate risk from their daily relations, and they have invented insurance for this purpose. But you can not insure against rising prices, for they do not move by any definitely known law of averages. Economics can tell you why prices change, but it has not the data upon which to predict with reasonable accuracy any particular change. Here is a risk which the business man can not escape; neither can any one else; it affects us all, and, for the most part, in an evil manner.
2. The rising prices have fostered speculation in all lines of industry and investment. Large profits have been made in recent years only by those who have taken large risks, often foolhardy ones. Cautious investors—inelegantly but clearly expressed—have been stung, while the owners of corporation stock, real estate and other speculative properties have made in many cases scandalous profits. Consequently, more and more people have turned to the riskier investments. The additional demand for them then forced their prices still higher, which in turn furnished an incentive for further speculation. Thus in many instances stocks have climbed to heights which, relative to other values, simply can not be permanently maintained. Likewise, in nearly every city of importance in the United States real estate values, particularly land, have reached such ridiculous figures compared with other prices that they simply must collapse (beholding their own monstrosity).
This means a financial panic. Credit operations in recent years have been based too largely upon uncertain and inflated money values. Some time in the reasonably near future, during a period of rather general liquidation, the paper profits of our speculative classes will show what they really are—phantoms which dissolve into nothingness at the touch of business reality.
The panic of 1907 was perhaps principally due to the speculation of the previous period of rising prices. However, except for a temporary halt after the panic, the movement upward has continued unabated. Moreover, it probably will continue many years to come; at least the fundamental cause of the movement—excessive gold production—gives no promise of lessening its operation for a long time. In the meanwhile, before final adjustments are made, before a final high level of prices is reached, or before a downward swing is started, the writer fears that we are doomed to several panics, probably severe ones, bringing disorganization of values, collapse of business, unemployment and general hard times.
Apart from panics, look at the social waste of speculation! For example, the ordinary dabbler on the stock market has no real interest in the corporation whose stocks and bonds he is buying, and he does not create any substantial values. Nor does he buy because he knows that the stock is selling for less than its intrinsic worth. He has a tip or a "hunch" that the price will go up, and he takes a chance at easy money. But win or lose, he neglects any sound business for which he is trained, and so wastes his time for the public.
Likewise, the multitudes of real estate dealers the country over are not bona-fide real estate men, studying the needs of their community, improving run-clown properties, planning and laying out new residence sections where demand is likely to go, and in other ways anticipating the needs of the people. On the contrary, they are merely guessing at changing values, holding property, not to improve it, not to supply any need which they have foreseen or created, but merely hoping for higher prices and handsome profits. Undoubtedly many persons have reaped and many others will reap large rewards by this process; also many have lost and many others will lose by it. But this is the important point: all are neglecting any real industry, so that for the public at large there is a scandalous waste of energy, which should be turned to useful purposes.
3. Finally, rising prices have fostered extravagance. Some one has facetiously remarked that we are suffering less from the high cost of living than from the cost of high living. This is in a large measure true. The point here is that the high living has resulted in a considerable degree from the increasing cost of living.
The ordinary consumer feels clearly enough the greater cost of practically everything he buys compared with fifteen years ago; but he also receives a greater money income, whether in the form of profits, interest, wages or even salaries. On the one hand, he realizes perfectly that money is not worth so much as in 1897, for prices are higher; at the same time he has an ingrained feeling that the value of money never changes. He receives now more actual dollars and he feels almost correspondingly better off and spends according to more lavish standards. Further, after paying for food, rent and other necessaries, although the sums are large, he has now left a larger surplus than in 1897 to be used for other things. It is particularly the value of this surplus that he does not understand; it is only apparently larger, actually it is smaller. And it is particularly the spending of this chimerical sum that has led to extravagance.
We have to do here with a peculiar contradiction in feeling. In one sense people are perfectly aware that the value of the dollar has decreased, for prices are higher; but in another sense they have the ingrained notion that the value of the dollar is a fixed, absolute, unchanging thing. We may call this contradiction, the paradox of the sense of value. This paradox is common even among persons trained in the science of money. It has led many classes of people to adopt unwarranted scales of expenditure, especially in reference to amusements and various forms of display.
For an illustration, suppose that since 1897 prices have increased 50 per cent, and wages 40 per cent. Then a working man who received $600 a year in 1897 and spent $400 for food and rent, receives now $840, and spends $600 for food and rent. Naturally he feels better off than in 1897: he receives now $2.80 a day instead of $2.00, and he has a surplus of $240 a year above food and rent instead of $200 as in 1897. Likewise a clerk or mechanic who in 1897 received $900 and spent $600 for food and rent, receives now $1,260 and spends $900 for these necessaries. He receives now $4.20 instead of $3.00 a day and has a surplus of $360 instead of $300. In spite of the higher prices this additional money makes him feel better off than before; consequently he has enlarged his ways of living according to his feelings, not according to his real income.
Merely to offset the price changes the workingman of our illustration, to be as well off as in 1897, should receive $3.00 a day instead of $2.80 which he actually gets, and he should have a surplus of $300 over necessaries instead of his actual $240. Likewise our clerk and mechanic should get $4.50 a day instead of his $4.20, and should have a surplus of $450 instead of his actual $360. In fact, both laborer and clerk have been losers and they have erroneously felt themselves gainers in income.
The same paradox appears with classes whose incomes have advanced proportionately with prices or have advanced faster. Everybody has the feeling of having more income than he actually has. The middle-class man who formerly saved $1,000 a year should now according to the same standards save $1,500 to offset the 50 per cent, increase in prices. Everybody to save as before should set aside annually 50 per cent, more dollars. Among social classes throughout, how large a proportion of people are doing this? If not, people are not saving as they think they are. The man who formerly carried $10,000 life insurance for the protection of his family, should now carry $15,000, merely to have his family protected as before. Any one who has not followed this ratio of increase is not protecting his family as he supposes. Further, merely not to be poorer a person with a capital of $100,000 should now have $150,000. Any one whose capital investment has augmented less than this ratio has obviously lost in real financial standing.
All along the line the diminishing dollar has played tricks on our sense of values, making us feel more prosperous than we are. As a consequence too many of the working classes have regularly indulged in Coney Island or in its miniature counterpart, in picture shows, swell clothes, etc. Too many of the middle classes have attempted automobiles, expensive summer vacations and trips abroad. Of the extravagance of the rich, there is no need to speak; it has been so glaring and senseless. Luxurious living is excellent if you can afford it. But insidiously we have been led into extravagances that we can not afford. Too many of us have been living on capital, erroneously thinking it income.
To be sure, the growth of extravagance can easily be exaggerated. It must be admitted that the rising prices have also the effect of leading to certain economies. Many families have undoubtedly made proper adjustments in their expenses and savings all the time as prices have been moving upward. Also, even in the ordinary household, the resentment against constantly climbing charges has unquestionably resulted in many more frugal uses and cheaper food substitutions. For example, now with butter at 40 cents a pound and eggs at 35 cents a dozen, the various cake and other pastry recipes call for little more than half of these ingredients compared with fifteen years ago, when they were bought for less than half their present prices. Now, when desirable cuts of meat cost from 20 to 30 cents or more a pound, people are turning more and more to cereal and vegetable foods—probably with physiological as well as financial advantage. Other similar savings might easily be cited.
But, while such economies have undoubtedly been made, often even painful ones, the paradox which we have been discussing has not been necessarily avoided. Too often these economies are counterbalanced by extravagances in other directions. What is saved on butter and eggs and meat is more-than offset by moving pictures, nifty clothes, an automobile, or what not. Probably very few people have completely escaped the lure of living higher than their real income affords. How impossible, or at least how hard, it is even for the most prudent to know, and all the time to live as if knowing, that the dollar is not always a dollar!
Speculation and extravagance are closely related manias. Their worst feature is that they fasten themselves rather firmly upon the people. We can study their effects and their causes, but we do not know very well how to remove them. They will abide with us probably a long time after prices have reached their high point or have begun to swing downward, or after other causes have subsided. Customs and social standards change slowly.
In conclusion, the writer would admit that many causes have probably contributed to the growth of speculation and extravagance in recent years. He does not believe that the rising prices have been the sole cause. But he is convinced that in the ways pointed out they have been a powerful factor in fostering these social evils.
As a practical matter for the public at large, everything possible should be done to prevent any considerable change in the price level—either upward or downward. So far as possible, the dollar should always be a dollar; its value should be a fixed, absolute, unchanging thing. If not, the evils are bound to appear as they have been stated.
- These calculations are based upon the index numbers of prices published in the Bulletin of the United States Bureau of Labor, March, 1911.