Economics and the Public Welfare. Benjamin M. Anderson
shortage, increased factory costs, and led, moreover, to the tying up of goods in transit with a consequent freezing of bank credits and commercial credits based on goods in movement. Freight cars and bank loans were direct competitors. This situation was in evidence in 1919 and became acutely critical in the early part of 1920.
Railroad congestion was complicated by the fact that railroad rates were lower than they should have been. The railroads were not paying their way and the United States Treasury was standing the loss. This meant that more traffic was offered to the railroads than would have been the case had the rates been high enough to enable the railroads to pay their way. Economic abnormalities arise whenever costs and prices get out of proper relation to one another. This is the case almost equally where prices are lower than costs or where prices are higher than costs.
11. Rising costs, and vanishing profits. From many causes, then, costs of production rose with startling rapidity during the second half of 1919 and the first part of 1920. As costs rose businesses which were unable to advance their prices faced declining and vanishing profits. With the decline in profits in a sufficiently important minority of businesses, a boom must come to an end. The businesses facing losses contract their operations to cut their losses. If they fail to do this voluntarily, their creditors force their hands. Credits are based on earning power. As earning power diminishes creditors grow nervous and begin to press for collection, liquidation is forced, and reaction and crisis come.
The heart of the business movement is not money, is not credit, is not commodity prices. The heart of the business situation is the outlook for profits. The heart of the credit situation is the quality of credit and the quality of credit rests on the outlook for profits.
12. Industries. Especially hard hit were those industries where prices were fixed by law or custom or necessity, but where costs nonetheless rose. Typical of these were gold mining, railroading, public utilities, and the
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like. The years 1919 and 1920 saw difficulties multiplying rapidly for all of these industries.
13. Competition. Very commonly in boom times competition functions imperfectly or disappears, and this was strikingly true in 1919-20. The legislation of the Wilson administration in 1913, in the Clayton Act, and administrative policy down to our entrance into the war in 1917 had made substantial progress in restoring competition to American business. During our own participation in the war, however, the government, for war purposes, temporarily reversed this policy and encouraged businessmen in most industries to get together, to pool their resources, and to pool their business secrets.
As a temporary war policy this was necessary and desirable. It was accompanied by price fixing, by rationing of materials and supplies, and by other restraints of an authoritative character which took the place of free competition in regulating prices and production. The end of the war saw the rapid disappearance of price fixing and authoritative controls, but did not see an adequate restoration of competition. One may add that never since the early years of the Wilson administration has there been any consistent effort to enforce antitrust legislation. Of course the whole theory of the NRA was contrary to the spirit of the antitrust laws and, indeed, the antitrust laws were suspended by the National Industrial Recovery Act.
14. Speculation. The great strain in commodity markets and the shortage of goods created by the abnormal growth of our export balance led to rapidly rising prices of commodities. This rise in commodity prices led to and was greatly accentuated by an appalling speculation in commodity prices. This speculation created shortages where shortages would not otherwise have existed. The year 1919 saw also a stock market boom of disquieting proportions, culminating in November. Speculation in farmlands and other real estate went dangerously far in many sections, while there was a great deal of exceedingly ill-informed and dangerous speculation in foreign exchange as well.
15. Conditions abroad. Our great export trade was based, not on revival in Europe, but on the failure of Europe to revive. Industrial revival in complicated modern industry must rest on sound currency and sound public finance. Public finance of the belligerents of continental Europe grew steadily worse. Monetary depreciation in Europe moved rapidly. Europe was buying goods in enormous quantity on credit from every part of the world, and building up throughout the world a fictitious prosperity similar to that which we had in the United States. Reaction and collapse were inevitable. The collapse came first in Japan with a violent break in silk prices early in 1920. Troubles came in India. Collapse came in Cuba as sugar plunged from 22.56¢ a pound in May 1920 to 3.63¢ in December.
16. The Unbalance Among the Industries. Leaving aside the disorder in credits and finance brought about by European troubles, there was a
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fundamental disturbance in the equilibrium of the world’s industries due to the great reduction in Europe’s output of manufactures. The normal functioning of industry and commerce rests upon a proper balancing of various industries. Manufactures, foods, and raw materials must be produced in proper proportion.
We saw such a disequilibrium in the United States in 1893-96—it was not our only problem, for fears regarding our standard of value were very acute then, as a result of the Sherman Silver Act of 1890 and the strong agitation for bimetallism. The production of raw materials and foods due to the rapid exploitation of the Mississippi Valley had outrun the development of manufactures. As a consequence the prices of raw materials and foods fell very low, and the buying power of the producers was cut so much that they could not give full employment even to the relatively scarce manufacturing capacity of the country.
The world as a whole faced a similar problem in 1920. Europe had been the great manufacturing center, drawing in foods and raw materials from all over the world, working up the raw materials, and sending out finished manufactures in payment. The most unmistakable revival in continental Europe following 1918 was in agriculture rather than in manufacturing. City industry calls for good money. Agriculture has far fewer financial problems. There had been a drastic change in our exports and imports from prewar conditions as a consequence of this fact. Before the war only thirty percent or our exports were manufactures ready for consumption. This percentage rose very high during the war, and even as late as November 1920 we were still sending out virtually forty-two percent of our exports in the form of manufactures ready for consumption. Raw materials constituted thirty-four percent of our prewar exports. They averaged only twenty percent of our exports during 1919 and 1920. On the other hand, on the import side there had been a marked diminution during and since the war in the proportion of manufactured goods imported, with a very substantial increase in the proportion of raw materials brought in. We had been trying to take over Europe’s job of supplying the world, including Europe, with manufactured goods, and of buying from the world its surplus raw materials. Our manufacturing capacity was not adequate to carry this work, and the result was so great a collapse in the price of raw materials, with a resultant decline in the purchasing power of the producers of raw materials, that our own factories could not keep active at prevailing prices.
There were many false theories accepted during this extraordinary postwar boom. One of the most remarkable was the theory offered in 1919 that there was a worldwide scarcity of raw materials. This was presented as an argument for extensive American investments in Siberia, South America, and other outlying regions, and served as a foundation for the fantastic commodity speculation in which the world engaged. But the fact
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was that the war had been fought chiefly in manufacturing countries and that, barring Russia, the sources of raw materials had been stimulated, rather than depressed, during the war.
Raw materials broke first and broke violently, and then all prices yielded.
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The crisis came with extraordinary suddenness. I symbolized it at the time in these terms.