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Deflation, Why and How? By PROFESSOR L W. KEMMERER Princeton University An Address together with a Discussion, delivered at the Annual Meeting of The Robert Morris Associates Atlantic City, N. J. June 3rd, 1920 ISSUED BY The Robert Morris Associates (A National Organization of Bank Credit Men) SECRETARY’S OFFICE AT LANSDOWNE, PENNSYLVANIA https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DEFLATION—WHY AND HOW? BY Prof. E. W. Kemmerer Princeton University The subject, “Deflation, Why and How?” is a live one and it is one that a person would be rash to try to state any very positive opinions concerning. The more I dig into the subject, the less positive I am in my opinions and I am changing those opinions every day, so I would like to say at the beginning that any opinions I express today are like the railroad time tables, subject to change without notice. The first point in any discussion of this subject is the question of inflation itself, for before we deflate we must inflate and we need to consider very briefly what is meant by the term inflation and a few facts concerning inflation itself. Now, the term inflation is used in a great variety of meanings, and I want to make my own meaning clear at the beginning. To my mind inflation occurs in any country when the currency and circulating credit, bank notes and bank deposits, circulating by checks, increase more rapidly than the physical vol ume of business to be carried on. When the media of exchange increases more rapidly than the physical vol ume of trade which they are used in effecting, then you have inflation. Inflation involves depreciation. It is nothing more nor less than the old, old principle of the law of demand and supply. When your circulating medium increases more rapidly than the demand made upon it, as expressed in the volume of goods to be exchanged, when your supply of money increases more rapidly than the demand at the old price level, then your money depreciates, and when your money depreciates, prices go up. Rising prices is another method of say ing that the dollar is depreciating. . Depreciation is of two kinds. The first we may call specific depreciation. This takes place when the money in the country—ordinarily it is paper money— depreciates in terms of the standard money. In this https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis country, during the Civil War, the paper money de preciated in terms of gold, greenbacks at one time going as low as 35 cents on the dollar. The paper money of most of the belligerent countries of Europe today has greatly depreciated in terms of gold. That is specific depreciation. We are not concerned with that in this country. We haven’t it, fortunately. The other kind of depreciation is general depre ciation, and that takes place when your standard unit, your monetary unit itself, depreciates. Our standard unit in this country is the gold dollar, and when the gold dollar with which all of our other kinds of money are at par depreciates in its relation to goods, then you have general depreciation of the gold dollar itself, and it is that type of depreciation that we have today in the United States. A few words in regard to the facts of inflation before we consider deflation. I have made some stud ies to try to get some line as to the extent of the growth of business in this country since 1913, forgetting dol lars and thinking in terms of physical volume, tons of freight carried, bushels of different kinds of grain produced, pounds, yards, gallons, and so on. I have taken quite a number of items that are representative of large groups of industries. In each case I have called the physical production or physical trade in 1913 100 and then expressed the year’s growth of each suc ceeding year in terms of percentages or index num bers, as we call them. These I have combined into a general index number of the physical volume of busi ness, and I find that there has been very little growth in business since 1913, much less than a normal growth, not over a fifth or sixth as much as the growth for the same length of time in ordinary times of peace. If you call the physical volume of business in 1913 100, the physical volume of business in 1918 was 113, and the physical volume of business in 1919 was 109.6, a decline of 3 per cent, last year. While we have been having this slight increase in the physical volume of business, we have been expand ing at a tremendous rate the circulating media by which we carry on this business. The money in cir https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis dilation in this country—and I am deducting the re serves against Federal Reserve notes because I am counting the notes as in circulation—the money in cir culation in this country increased during the same time 71 per cent. About 80 to 85 per cent, of the business of the coun try is done by means of deposits circulating through bank checks, and the bank deposits of commercial banks increased during the same time 120 per cent. The average percentage of ultimate legal reserve of national banks under the Federal Reserve system, ul timate cash, wherever it is, has been cut down to about one-fifth what it was in 1913. I can’t go into that, but you can easily see how it would work out. Take a national bank, well say in New York City, Chicago or St. Louis, a central reserve city. Before 1914 such a bank was required to keep 25 per cent cash reserve in bank, now 13 per cent, all of which is on deposit with the Federal Reserve Bank. The Federal Reserve Bank has to keep against that deposited reserve a legal reserve of 35 per cent; 35 per cent of 13 per cent is 4.55 per cent, which is less than one-fifth of the original 25 per cent. When you make allowances for the reduction of reserve requirements against time deposits, which are only 3 per cent now, and for different methods of counting the redemption fund against notes, etc., you will find there has been a reduction in legal reserve requirements to about one-fifth what they were before, and we have released this tremendous amount of money. Meanwhile, we were exporting very heavily sup plies of all kinds to belligerent Europe, and we were taking our pay in substantial quantities in gold, and so we brought into this country during the war some thing like a billion dollars of gold. We piled up the gold in the country; we put an embargo on it, prevent ing its going out; we reduced our legal reserve require ments, and then we expanded and expanded, and so we have had this 120 per cent increase in deposit cur rency, and 71 per cent increase in money, while the physical volume of business has increased less than 10 per cent. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Well, it isn’t at all surprising that prices simply leaped upwards. There is no use going into those fig ures, they are familiar to all of you. The Bureau of Labor’s figures show wholesale prices on the average increasing 153 per cent since 1913, and retail prices of food about 100 per cent. The U. S. Government’s investigation of the cost of living, including rents and all sorts of expenses, of laboring men’s families, a study covering 12,000 families in 90 odd cities, showed up to November, 1919, an increase in their budgets of 83 per cent and it will probably run larger now. The recent investigation of the Massachussetts Commission on the Necessaries of Life showed for Massachusetts an increase to January of this year of 92 per cent. So the cost of living has been practically doubled, and wholesale prices have been increased even at a higher rate. Just a' word in regard to wages. The striking thing in regard to wages is the unevenness of the in crease. I picked up a short time ago a copy of the Labor Review of the Bureau of Labor Statistics, and there were some figures concerning union rates of wages in different lines of industry, and they started alphabetically, and one of the first pages gave brick layers and boilermakers. They were given side by side. They both began with “B”—that was the only reason they were put side by side. I want to just cite this as a typical illustration of what has been taking place. These are union rates of wages per hour, first for boilermakers in manufacturing and jobbing shops in 25 widely-scattered American cities, and the others are the same figures for bricklayers in 40 cities. In a few cities the men in these trades received wage in creases since 1913 more than sufficient to meet the in crease in the cost of living. In Baltimore, for example, the rate for boiler makers increased 161 per cent, and in Charleston the rate for bricklayers increased 88 per cent. Now both of those increases were probably larger than the cost of living. On the other hand, the rate for boilermakers in Chicago was 40 cents an hour in 1913, it had only gone https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to 60 cents in 1919, and here was a rate considerably' less than the increase in the cost of living. The average rate for boilermakers in 25 cities in creased 82 per cent, which was just about enough to make up for the cost of living. The average rate for bricklayers in the 40 cities increased only 34.4 per cent, which was not half enough to make up for the increase in the cost of living. Of course, the building trade wasn’t developing very much during the war, whereas, there was a big war demand for men in lines like boilermaking. The striking thing, if you look over the figures in different lines, as to the wage increase, is its great unevenness. In some lines, the increase has been very large, much more than enough to make up for the rise in the cost of living. In other lines, it’s been pitifully small, and even in any particular line you may find in some sections of the country the increase ample, and in other sections anything but ample. The Government has made a very careful study of eight industries as far as wages is concerned; the cigar industry, men’s clothing, furniture, hosiery, iron and steel, lumber, silk goods, and so on, and these indus tries showed increases as compared with 1913, as fol lows : The first-named, 52 per cent increase; next, 71 per cent; next, 54 per cent; 84 per cent; 121 per cent; 94 per cent; 51 per cent; 91 per cent. In other words, four increased more than the cost of living and four didn’t increase as much as the cost of living. One of the big problems of deflation, which we come to later, is an evening-out here. Some lines must be leveled up and other lines must be leveled down. The whole thing is out of equilibrium, and that prob ably means, I am sorry to say, a great many labor troubles in bringing about the readjustment. Then, another big factor in this inflation situation and in the deflation problem confronting us is in the relations between debtor and creditor. Money, you will all appreciate, is good for what it will buy, no more and no less. That is what we want it for. The purchasing power of the dollar over the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis things we buy has been just about cut in half since 1913. Think what that means as regards the distribu tion of wealth in this country! I think this is one of the most striking facts in the whole situation. It means that wealth in the hands of a great many peo ple has been literally cut in half. Think what it means as regards contractual obligations and debts in va rious forms! Their value has been practically cut in half. This applies to bonds that you had in 1913 and are holding to this day; if they are maturing now, they are maturing in dollars of just about half the purchas ing power that you paid for them. It applies to large quantities of preferred stock; it applies to real estate mortgages, to savings deposits. A person who had a savings account in 1913 and accumulated interest dur ing the whole time has much less purchasing power to day than he had then. It applies to the paid-up value of insurance as of 1913. If you were carrying, say $20,000 insurance in 1913, because you felt that that amount of money was necessary to keep the wolf from the door, you need $40,000 now to do the same thing. Your $20,000 has been cut in half. It applies to pensions and all sorts of things of that kind. Now this fifty per cent debasement or re duction in the value of funded incomes or income rights, has taken place whether the owner was a highlyprosperous individual, a money-making corporation, an endowed university, library or charitable institu tion or a widow living upon a pension or fixed income derived from insurance or other invested funds. This was fundamentally not a destruction of wealth at all, but just a transfer of wealth and a transfer of wealth to the amount of billions and tens of billions of dollars. It has taken prop erty from some and given it to others. In gen eral, it has taken from the creditor and given to the debtor. Specifically, it has taken from the bondholder and given to the stockholder. Practically all excess profits and all accretions to the value of the plant aris ing from inflated prices have gone to the stockholder, while the bondholder has been entitled to only a fixed amount of a rapidly depreciating dollar. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Inflation has taken from the mortgagee and. given to the mortgagor. It has taken from the recipient of military pensions and given to the Government and the taxpayer. It has taken from the savings bank depos itor and given to the savings bank borrower, who may be paying off his mortgage in dollars of half the value that he borrowed. It has taken from our insti tutions of learning and given to the students’ parents, through cutting in half tuition charges. It has also given to the debtors—stockholders, or governmental units—who are obligors on the bonds in which univer sityendowments are invested. Of that that has been given to the debtor in this period of upheaval in the relations between debtor and creditor, much has been taken by the Government in war taxes. That which has been taken from the holder of railroad bonds and the bonds of other public utilities, the rates for whose services have been unduly held down by Government action while expenses have been rising, has not to any extent been given to the stockholders, but has been given to the shippers, the merchants, and the ultimate con sumer in varying degrees. Now another point I want to emphasize in this connection is this: Much that has been given to the pub lic has been used in extravagant living, because the money has been taken away largely from the thrifty capital-saving and capital-investing classes, and, to a considerable extent been given to people who have not formed such habits of thrift, the new-rich, the people who have not yet learned the lessons of saving and in vestment. So I want to summarize this particular point in these words: Inflation has been a tremendous engine of wealth redistribution. It has acted powerfully, but it has acted blindly. It has been no respecter of per sons or of individuals. It has benefited some and it has cruelly and unjustly penalized others. Well, now, what are we going to do about it 1 Our prices are away up here in the seventh heaven, and they are unstable and uncertain, and the program that is generally suggested is deflation, the reverse of infla tion. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ■ Deflation, however' necessary it may be, is a pain ful process. It causes evils of its own and evils that are to a large extent the reverse of the evils we have been having during inflation. Deflation means falling .prices, falling prices mean an increasingly. valuable dollar. This means that the debtor who has been bor rowing money during this period of high and rising prices and who is going to pay, in the next few years or in many years to come, will be paying his debts in an increasingly valuable dollar, more valuable than the one he borrowed. Deflation burdens the debtor, and benefits the creditor. It was the evils of a long period of declining prices, as you recall, from 1873 to 1895 and 1896 that led to the great bimetallic controversy. The evils featured by bimetallists in that controversy were the appreciating currency and the burdens on the debtor classes of falling prices and an increasingly valuable dollar, the necessity of the farmer and others paying their mortgages off in a dollar of a greater pur chasing power than the ones they borrowed, while the' prices of the things they had to sell were declining. If we have deflation, we must have this reversion of the situation. During this period of inflation, we have floated in this country and in Europe the greatest Governmental debts the world has ever seen. If these billions and tens of billions of dollars, francs and pounds which the governments have borrowed in cheap money are to be paid back in increasingly valuable money, and if the taxpayers are to provide the funds, yoil will see you have a serious situation. Then, too, falling prices depress business. It is perfectly obvious that the minute the general business public makes up its mind that prices are going down, every one holds off for the fall. People don’t want to capitalize these high prices in extending their equip ment or in building. They don’t want to buy raw ma terials at these high prices if the prices are going to be lower later. Retailers don’t want to stock up; they want to unload before prices fall. They don’t want to employ labor, and so the minute your prices begin to go down you have depressing influence on business, for everyone holds off and waits for the decline. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis That means as it has meant in the past—a ten dency to increasing unemployment. I don’t believe that organized labor is going to yield if it can help it on the wage situation. They’re going to try to clinch what they have. In a great many cases they haven’t received enough to meet the increase in the cost of liv ing. But if they don’t yield there will be an increasing amount of unemployment and, of course, the increasing amount of unemployment will tend in itself to weaken the unions. So, if we proceed with a program of deflation, we must anticipate, I am afraid, a period of depression and readjustment. I don’t want to be pessimistic, but we must view the facts as they are, and both theory and the experience of the past in this country during the greenback period and in Europe at other times, bear out the conclusion that a period of deflation is likely to be a period of a considerable amount of busi ness depression; none the less, deflation is necessary. If we continue to inflate, we simply continue this process of progressive injustice to the creditor classes and to the people whose wages lag way behind prices on the increase. And sooner or later, if we continue to inflate, the bubble is going to burst; there is nothing else. Then, again, we simply cannot maintain prices on this high level, in my judgment, because we have not, and the world has not, an adequate gold base to sup port the credit structure that we now have. Most of the leading countries of Europe are oft the gold stand ard. Their gold reserves are reduced to very small percentages of what they were in pre-war times, and their paper is depreciated and inconvertible. In order to bring their gold reserves up to a point that can maintain their currencies at par, maintain the solvency of their credit, there will have to be a very great contraction of the circulating credit that is out, bank-deposits and bank-note. I don’t want to bore you with details in that, but let me give you just a few selected figures that will be suggested. The bank notes outstanding from the Issue De https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis partment of the Bank of England in May, 1914, just before the war, had a gold reserve backing of 65 per cent. Since the war, England has issued a large amount of currency notes in addition to her bank notes, and at the present time the gold reserve back of the Bank of England notes and the currency notes com bined (this is the figure of March 31) was 32 per cent. —less than half what it was in pre-war times—and there was a feeling of uneasiness in 1913 and 1914 that the reserves then were inadequate, and there was quite an agitation in England to increase them. On May 20,1914, the Bank of England was carry ing a reserve of about 44 per cent against its deposits, and that was fairly normal, although there was some criticism there that it wasn’t adequate. On May 19th of this year that 44 per cent had been reduced to 16% per cent. The Bank of France just before the war was car rying reserves against its notes and deposits of 64 per cent, and on May 20th of this year, of 9.2 per cent, less than one-fifth. For the Bank of Italy, the reduction was from 71 per cent, to about 11 per cent.; for the National Bank of Belgium, from 32 per cent, to 5 per cent.; the Bank of Japan, which was supposed to have gotten lots of gold and to be in a very strong position before this recent trouble, showed a reduction from 43 per cent, to about 36 per cent., and then when you come, of course, to Germany and Austria and Russia, you have a terrible situation as regards the reserves. The metallic reserve of the German Reichs bank decreased from 48 to 1.8 per cent; of the Bank of Austria-Hun gary from 74 per cent to .43 of 1 per cent; and for Russia, well, we haven’t any figures, and if we did they would require so many zeroes in expressing the decimal that it would be difficult to read. Some of the neutral countries have increased their reserves a little, but many of them have greatly re duced them, and the neutral countries on the whole are of secondary importance. Taken as a whole, the figures show Europe’s gold supply wholly inadequate for the present credit struc https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ture, and Europe can never get back to a gold basis without a tremendous contraction. In the United States, it is difficult to give figures that are entirely reliable, because we have changed our methods of computing reserves since the war and be cause the Government no longer gives in its publica tions, official or otherwise, the amount of gold held in the vaults of the banks themselves, aside from the Fed eral Reserve banks; but we can get some little hint. Briefly summarized, the situation is this: On July 1,1914, our stock of gold coins and bullion in the country, in circulation and in the Treasury, was 55.3 per cent of our total monetary circulation, and on May 1,1920, it was 44 per cent; but that is only a small part of the story because most of our business in this country is done by checks and deposits. Our great ex pansion was in deposits. Confining ourselves to na tional banks, for we haven’t satisfactory figures for State institutions, we find that the average ratio of our gold stock to deposits, exclusive of bankers’ balances and after making proper deductions for Federal Re serve notes, just before the war, was 29.7 per cent, and that now it is 13 per cent. Our gold position then, is far below that of pre-war time, and we have been losing gold on net balances continually since May, 1919. Our net loss since January is nearly four hundred millions. To us, however, more than to any other country, belligerent Europe ultimately will look for the replen ishment of her gold in order to return to a specie basis, and while this is going on, the world’s gold production has been falling off. The production in 1919 was about 20 per cent less than the year before the war. So, whether we like it or not, there is not enough gold in this country or enough gold in the world to maintain under stable conditions a credit structure that is anything like as large as that we now have. A second reason for deflation, although one that grows weaker, as time goes on, I am merely mention ing it parenthetically, consists in the fact that infla tion’s work has not yet been completed, and that, there fore, some of the otherwise evil results of inflation would be mitigated or avoided if we should deflate. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There are still outstanding in this country many billions of dollars of long-time obligations which date from the pre-war period, have still some years to run before maturity, and which continue in the hands of their pre-war owners. If they were to be paid today, they would be paid in depreciated dollars. If they were to be sold today they would be sold for a dollar of half the value that was paid for them; but if we have defla tion, those people who hang on to these pre-war securi ties, will be paid back, at least in a more valuable dol lar than we have today. Another reason for deflation is the influence on business men, the psychological influence on business men, of the present unstable situation. There is great uncertainty in the business world today. I needn’t tell you that. Everybody is uneasy. People don’t know what is coming; they are very anxious as to what will come. There is a fear of panic on every side. They don’t publish it much in the papers, but business men everywhere are talking about it, at their clubs and in their social circles. There is unwillingness to make commitments for long-time obligations in the future; everyone is afraid to capitalize present prices. Now, with this lack of confidence, this uneasiness, this expectancy of trouble and of decline in prices, you can’t go ahead very fast. Business is too uncertain, and people are not willing to go ahead on any substan tial scale, and I don’t believe they will be as long as they believe that this gold basis is so inadequate, and the future is so uncertain. . In other words, we must deflate and get back on a firm basis before people will be willing to go ahead, and go ahead in a business-like way. So the psycholog ical situation is such as to demand deflation. . Now, it doesn’t necessarily mean if we are to have deflation that we are to deflate to anything like the pre-war standards. There are two or three reasons for that. I just suggest them. One is that prices have been rising very rapidly before the war. From 1896 to 1913, prices in this country rose about 50 per cent, about 3 per cent a year, so had there been no war, had there been no changes in our currency and banking https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis system, general prices would probably have been at least 20 per cent higher in 1919 than they were in 1913. Then again, the war has brought about some great improvements in our currency and banking system the world over. The establishment of the Federal Reserve system has eliminated much wasteful use of money in this country. Formerly, we had our reserves scattered in 30,000 banks. They weren ’t centralized, they weren ’t mobile, we couldn’t get them when we needed them, and we had to keep much larger reserves than would nor mally be needed to support the same amount of busi ness. ■ Through the centralization of reserves, through the clearing and collection system and the various other improvements we have made in our bank note system, a given amount of gold money will do a great deal more work than it would do before. Furthermore, we have had a banking consolida tion in Europe that didn’t exist before. Our whole currency and banking system is probably more effi cient and then we have probably gotten away from the idea that gold coin will circulate very much from hand to hand. I think the time is past when we shall see very much gold coin in circulation either in this coun try or in Europe. There is an increasing tendency to say that the proper place for the gold—the most effi cient manner of using gold—is to have it gathered in the central banks and to have your money circulating in the form of paper backed by this gold. This means a much more efficient use of gold. If you use gold more efficiently, if you work your money machinery more efficiently, you make each dollar carry a bigger load than it carried before, and that has the same effect on prices; to increase the supply of money. These improvements will have a net effect of per manently holding up the price level to a higher posi tion than before. So it seems to me that while we are bound to have deflation, we needn’t expect deflation back to anything like the pre-war level, at least for many, many years to come. My subject was “Deflation, Why and How?” I have tried to tell you why, namely, because of the in https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis adequacy of our gold supply and of our reserves; be cause we can’t inflate further without bursting; and because of the psychological situation in the business world. . Now, “How?” It’s much easier to say it ought to be done than to tell just how it should be done, and I think we shall have to come back to pretty elemen tary propositions in this field. In general,.! think we must reverse the process by which we inflated. We inflated largely through our system of float ing Government bonds, by unduly encouraging the borrow-and-buy policy, people bought bonds of the Gov ernment, borrowing money of the banks to pay for them; and then the banks turned the bonds over as col lateral by rediscounting the paper, or borrowing on direct 15-day loans to the Federal Reserve banks, the Federal Reserve banks getting the bonds back, and the resulting bank deposits remaining in circulation. The bond borrower too often got his bonds not by his sav ings but by borrowing of the banks. Through a policy of low discount rates, great liberality in lending, through unduly encouraging borrowing and buying (as contrasted with saving and buying), we brought about a great part of this big expansion. The Government kept its discount rate at the Fed eral Reserve banks during the period after we got into the war well below the market rates, so that banks found it profitable to borrow of the Federal Reserve banks. The market, as they say in England, was “in the bank,” and through that process we pumped out this large quantity of circulating media—Federal Re serve notes and bank deposits. I think we must re verse the process. Now that the war is over, this sort of expansion clearly should be stopped, and the Federal Reserve banks are, with the co-operation of the member banks, taking vigorous measures now to stop it. War patriot ism and progressive bank credit expansion can no longer be used to buoy up the prices of billions of dol lars of war securities to artificially high levels, to keep them on the market at interest rates far below the market rate. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The real market rate of interest is now emerging and is dominating the situation. And it is a much higher rate than the nominal rate called for on our Government bonds. To an increasing extent, the market must be outside of the Federal Reserve banks. Banks must stop borrowing of the Federal Reserve banks for permanent funds. The Federal Reserve banks were established for emergency purposes mainly, not to provide permanent capital for member banks, but to provide a ready place of recourse to any bank that needed funds in time of emergency or in time of heavy, seasonal demand, if the bank had the right kind of self-liquidating commercial paper to rediscount. The Federal Reserve bank rate should rule, as it does usually in the Bank of England, higher than the market rate, so that recourse by the banks to the discount and loan facilities of the Federal Reserve banks should be only an emergency recourse. In the future, preference should be shown to short-time loans of a self-liquidating character. Our banks are loaded up with altogether too many capital loans, which are not the proper kind of assets against demand deposits. This was true even before the war and now, upon top of those, we have these billions and billions of dollars of the Government debt in our com mercial banks. To an increasing degree, loans on the security of Government debt should be discriminated against by the Federal Reserve banks both as to discount rates and in the matter of the bank’s discretion as to how much they shall loan and to whom. Gradually but firmly the Government paper should be forced out of the Federal Reserve banks (this is commonplace, but it is important), and out of the commercial member banks and into the strong boxes of the investing public, including the vaults of savings banks and insurance companies and endowed institutions. The recent advance in the interest rate, which sim ply removed the camouflage of an artificial war rate, of course is having its effect. The declining prices of Liberty bonds, although working great hardship to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis many innocent people who bought them in good faith at rates which were artificially low and which were buoyed up by a low discount policy on the part of Fed eral Reserve banks in the interest of helping us win the war, these declining prices, although they are hav ing certain bad effects, are having some very whole some effects. They are giving these securities a good investment yield and tempting them out of the port folios of the bank and into the strongboxes of invest ors. To the end of encouraging this movement, the Federal Reserve banks should follow up, it seems to me, their recent advances in discount rates. I am will ing to take the position of saying that they should go even farther than thev have, until the rates become more effective in forcing contraction. We must have contraction; we must get it cautiously and carefully. We can’t go ahead with our business and make much progress, however, until we get substantial contrac tion. The present low rate on certificates of indebted ness, I think should be discontinued. Other methods need to be taken, first, discrimination against specula tive loans. The Federal Reserve banks do not legally rediscount papers for speculative purposes but many banks which have large speculative accounts are using their commercial paper with the Federal Reserve bank for funds, and there is a very easy shifting of funds. It seems to me the Federal Reserve banks might be decreasingly receptive to applications for loans and rediscounts from banks which they know are lending their own funds heavily in the speculative market. After the armistice, we went through a perfect orgy of speculation, as you know. The number of shares traded in on the New York Stock Exchange in 1913 was eighty-three and five-tenths millions, and in 1919 three hundred sixteen and eight-tenths millions. That is not the sort of thing we ought to tie up our money in, in time of reconstruction after a great war. It is absurd to permit such a thing. . Then, we must discriminate, it seems to me (and I am glad to say that through the Federal Reserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Board and through the co-operation of the member banks, there is an increasing recognition of this fact), we must discriminate against luxury. Luxury is all right and a certain amount of it is necessary, but, gen tlemen, these are trying times. We have been des troying capital on an unprecedented scale. We haven’t been maintaining our capital equipment in hardly any line, and the world is in sore need of restor ation and reconstruction, and luxuries today are to be looked at in a different way than in normal times. . Now is the time to get down to business and undo some of the evils of the war in an economic sense, to reconstruct and rebuild and get back our capital equip ment to an efficient working basis. The so-called expenditure of luxuries since the war has been a natural one. There is first the psycho logical reaction from the war strain. I think all classes of people have felt it. We talk about it most with laboring men, but all classes have felt it. There was a tremendous strain during the war, and there is a psychological reaction that is natural and normal. Then another factor is this change in the distribu tion of wealth that I mentioned awhile ago. We have taken away the property of the bondholding classes, of the people with savings bank deposits, we have cut them in half, and we have given it to somebody else, and those people with the bonds and the savings banks deposits and with other fixed incomes to a great ex tent were a thrifty, saving class. We’ve given it to another class, the new-rich. No matter how it is made, the man coming into funds quickly without strenuous efforts of his own, is quite likely to be the man who lets it go easily and spends it more or less lavishly till he learns his lesson. To the extent that this wealth has come in the hands of certain laboring classes, they spend it in the form of pleasure—this they find most satisfactory, most pleasing to them—and with people often lacking in culture and education it quite often takes the form of display, of a certain type of luxury that shows up clearly, and that everybody sees; whereas people of education and training spend it in ways that are less https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ostentatious but are none the less luxuries. The situation in regard to the expenditure of money on luxuries is a serious one. The profits in these lines have been great, and I suppose, in general, the profits realized in the manufacture of pleasure au tomobiles, silk shirts, and other typical luxuries, have been much larger than the profits realized in the pro duction of most lines of so-called necessaries. The result is that producers of luxuries are able to pay the higher wages, and they are attracting labor ing men away from the production of necessaries. Farm laborers have been attracted as you know in this country on a great scale away from the farms and into the automobile factories. The United States Department of Agriculture re cently reported that the supply of farm labor in the United States is about 30 per cent below normal. Meanwhile, the surmlv in the automobile industry is, I suppose, away above normal, or what we considered normal in pre-war times. Wages of farm laborers over the country as a whole have apparently not risen any thing like as rapidly as the cost of living. Professor Warren of Cornell University estimates the number of vacant farm houses in New York State alone at 24,000. I was talking only a few days ago with the head of the Department of Agriculture in New Jersey, and he said that hundreds of farmers over the State hadn’t been planting the potatoes this year that they normally would plant because the expenses of fertilizer were so large and the difficulty of getting farm labor was so great. Meanwhile, we have these high wages in the produc tion of luxuries. The Massachusetts Commission on the Necessaries of Life in its report recently published found that seven of the largest retailers in Massachu setts sold in 1914, 186,000 pairs of silk stockings for women, and in 1919, 313,000 pairs. We have had great deterioration in our machinery, and our other capital equipment during the war. We have failed to maintain their production. There was little building. As a result we now have a great need for restoration and reconstruction. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis If we direct our productive energies to ephemeral luxuries, what of the future ? If we take the men off of the farms now and put them into the automobile factories, we may not feel it today, but how about next fall and next winter? The Massachusetts Commission on the Neces saries of Life in its recent report said, “There is a greater profit in the manufacture and sale of luxuries than necessaries with the consequence that the already depleted productive power has been in part diverted from the creation of necessaries to the production of luxuries. The manufacturer of luxuries bids in the labor market against the manufacturer of necessaries, with the result that the cost of labor and the cost of the ultimate product is increased. This Commission has made efforts to encourage a greater production of necessaries but has found very little willingness on the part of manufacturers and retailers to co-operate. Nor does that part of the public which by its increase of wealth and wages is able to indulge its taste in more expensive articles, show greater willingness to curb its extravagance.” Things are improving. The recently announced policy of the Federal Reserve Board and the Federal Reserve banks of encouraging discrimination against loans on luxuries is certainly wholesome. Reports are received on every side that the banks are co-operating, and this is a promising sign. And right here, I want to say, it seems to me, that men in your lines, the Robert Morris Associates, have a great opportunity, and I think also a great public responsibility. You are not only the trustees in the sense of your banks, but you are also trustees of the public interest. We have all recognized for a long time that the bank is affected with a great public in terest, and certainly the credit department of the bank, of all departments, is the one that is affected by the greatest public interest, and I know of no time in the history of the United States when that has been so true as it is now. Such influence, it seems to me, as you gentlemen have, and as you can honestly and fairly exercise, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis should be against credit expansion at the present time, and should be in favor of discriminating against the production of luxuries and for the production of necessaries, and of much-needed capital equipment. A few other suggestions to help this deflation movement I will merely mention in closing. The Federal Reserve banks should discriminate against banks with large rediscount ratios to capital funds. I have been quite surprised, in connection with a study I recently made, at the great increase in the ratio of bank deposits to bank capital surplus and profits dur ing the war. I have a chart here, I don’t know if you can see it across the room, but this is what has been happening. This curve is the ratio of ‘ ‘ capital funds. ’ ’ That is, the funds represented by capital, surplus and profits to deposits in national banks, from 1870 to the present time. The average ratio has gone down from over a hundred in 1870 to less than 20 now. There are a number of banks whose deposits are 20, 25, and in some cases 30 times the capital. There has been a great unevenness there, and during the war the average ratio of capital to deposits has been cut in half in national banks. If you take the bank deposits of the national banks of this country as of 1919, and measure them in terms of a dollar of the purchasing power of 1913, you will find they haven’t increased a bit. I figured it out the other day and was surprised to find that if you call the purchasing power of the deposits of national banks of 1913 100 per cent., the purchasing power of the de posits in national banks in 1919 was 99.8 per cent. Meanwhile, the ratios of capital and of capital funds to deposits have gone away down. It seems to me the Federal Reserve authorities in enforcing the Phelan Act may well say that we will discriminate against banks whose rediscounts are large in proportion to their capital funds. Then, I think, commercial banks should, to an in creasing extent, discriminate against capital loans, no matter in what guise they are made. This is especially true when the banks are loaded up with so much war paper. Capital loans are important, but they are the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis business of other banks than commercial banks whose deposits are largely demand deposits. I needn’t say that one of the most urgent things, if we are going to deflate, is to curb Government extravagance, and right here I am willing to risk saying, despite the combative tendency of these Irishmen, that I think one of the' things to do in this direction is to put a quietus for the present at least to all suggestions of a big war bonus. It seems to me we ought to go the limit to take care of people that suffered during the war, were maimed, or otherwise suffered, but when it comes at this time to floating a big Government loan or to im posing taxes on necessaries for a huge war bonus, I think that would be a movement directly in the line of causing greater inflation. The Government now, of all times, must live on its income and must curb all sorts of extravagant expenditures. . We should turn stolidly away from all suggestions to restrict the outward movement of gold. We have the strongest pull of any country in the world on the world’s gold supply; and we have the largest amount of any country; we are a creditor nation to a larger extent than any other nation. A certain amount of gold goes out, in the normal course of trade, and we should let it go, it seems to me, thereby keeping our dollar on a gold basis, instead of artificially buoying it up by putting an embargo on gold, as some people are now agitating, and thereby ultimately depreciating the dollar and getting ourselves off the gold basis. Our physical volume of business must grow up ward toward the currency just as the circulation is being reduced toward the physical volume of business. We must stimulate production in every way possible while we are contracting the currency. Business must grow up to the currency while the currency is being contracted. It is a trying time for labor because of these mal adjustments; it is a trying time for capital, yet there was never a time when sympathetic co-operation was more needed. Both classes are irritable, and it seems to me that of all times for charity in this direction, now is the time it is needed most. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis And finally, if I were to summarize the rest I have to say in three words, I would say, “Work, Save, and Pay-Up.” (Applause.) The President, Mr. Jos. L. Morris: Gentlemen, Professor Kemmerer as part of the program is not yet ■finished. We are now to have the dessert. Professor Kemmerer has been good enough to con sent to opening the floor to a discussion of the subject that he so ably presented. With his consent, I am able to say that you may feel free to ask any question per tinent to the subject. Will you ask some questions now ^ Mr. Crane, have you anything to say on the sub ject ? I saw you making some notes over there, so I as sumed you were priming yourself for it. Mr. Crane: I haven’t primed myself for any ques tions, but I was wondering if the Professor had in mind any method by which the Federal Reserve banks would discriminate between essential and non-essen tial loans, as to the applying it in various territories and various banks. Professor Kemmerer: I think that is one of the most difficult questions to answer. No one has yet, as far as I know, made a satisfactory definition as to what an essential and a non-essential is. During the war we had a committee of the Amer ican Economic Association on the subject of the pur chasing power of money, and one of the propositions we were asked to consider was the line you could draw between essentials and non-essentials. But we very quickly gave it up. The only thing that was suggested that practically every one admitted was a non-essential in this country was orchids from South America. Someone suggested that the production of certain victrolas or of certain high-grade pianos were non-essen tials, but it was quickly pointed out that they were im portant in the war, from the standpoint of the soldiers’ necessary recreation, and it was also pointed out that a considerable amount of beef that was coming in from Argentine to feed our soldiers was being paid for by pianos sent there from here. So, many of the so-called luxuries were in fact essentials. All I can say is that the member banks themselves, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis while they can’t draw a sharp line, can draw a certain line. The could say for example that the lending of money, in connection with the purchase of pleasure au tomobiles, should at most not be larger than it was before. . I think the Federal Reserve banks can lay down the general principle and leave it to many member banks to carry out, and member banks are showing a spirit of co-operation. Then I think that there can be limitations in regard to the proportion of loans that are made to the capitals of these member banks. I think that any member bank that is found lend ing money very extensively on the production of silks, of pleasure automobiles and of certain other things of that type should be told that there were limits there, and that the Federal Reserve bank would, in granting rediscounts, stand so straight as to lean backwards in the public interest. I don’t know how to lay any definite rule except the rule of reason. I wish I could answer your ques tion, but I can’t. Mr. Herrick (Cleveland) : Do you believe that de flation has commenced? Professor Kemmerer: Yes, but I think it will be very uneven, very irregular, and exceedingly unpopu lar. I am inclined to think that it’s commenced but it hasn’t progressed very far, and I expect to see the price level jumping up and down, but with a downward tendency. Mr. Herrick: You think, then, that it will be dis orderly ? Professor Kemmerer : I think we shall have a per iod of business depression running over considerable time. I am not expecting a panic. I am expecting a period of business depression because of declining prices, anticipation of further declines, and because of a tightening of the money market. Before the Federal Reserve Act was passed, we came up against a stone wall in a time of financial strain. Now with the Federal Reserve system with its more or less elastic reserve requirements, with the pro vision in the act that in times of emergency the Federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Reserve Board can waive any and all reserve require ments, we have a movable screen, and as pressure be comes strong there will be a giving and yielding. The great danger is that they will yield too much. Deflation will be very unpopular politically; it will be very unpopular in business circles, and the pressure to reduce the federal reserve bank discount rates and to permit the banks to borrow at these lower rates and get permanent capital from the Federal Reserve banks in this way will be strong. I am not looking for a crash, however, I am looking for a long period of depression. Mr. Herrick: Do you believe a panic is possible under these conditions'? Professor Kemmerer: Yes, but improbable. I think it is possible, I think that we might have a gen eral strike or there might be a breakdown in Europe or something of the kind, and we might have a panic. I don’t agree with those people who say that with the coming of the Federal Reserve system all possibility of panic is passed. But taking the situation as it is, and in the absence of some catastrophe, a panic is improb able during the rest of this year. Mr. Herrick: May I answer Crane’s question about essential and non-essential industry *? I thought I had discovered three years ago a non-essential—I saw a lady wearing a court-plaster beauty spot, but, upon telling another lady of it, I decided I was entirely wrong. . Mr. Sheart (of Troy, N. Y.) : I’d like to ask if you would advocate the substitution of a sales tax for the excess profits tax in the interest of the economy that you urge. Now I want to qualify that somewhat, in that the sales tax would apply only to articles other than foodstuffs, which, of course, would hit the poor man pretty hard; it would make it unjust. Professor Kemmerer: We are getting over into the field of taxation here. That is a pretty big question. My own judgment is that, contrary to the general im pression of the financial press and of a great many of my best friends, in times like these the excess profits tax is not, and in the next year or so the excess profits tax is not to any great extent likely to be shifted and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis that a tax on sales would be cumulative, and very in equitable in its incidence. What is finished product for one industry is the raw material for another. A sales tax catches an article at many different stages of its progress toward the final consumer. . If a tax on sales reaches necessities (and almost everything is a necessity under certain circumstances), the people who buy those necessities will pay it, and the tax would be shifted to a great extent to the people who could least afford to pay it. I hope we will have the most rigid economies but I don’t believe in a general sales tax or a general sales tax exclusive of foods. I think in its final instance it would be very burdensome and would ultimately land largely on the shoulders of the people who have al ready stood a good part of the burdens of the war, the people whose incomes have not increased as rap idly as the cost of living. Mr. Snyder (Philadelphia) : Dr. Kemmerer, you have spoken in comparison of the present period of in flation with other periods of inflation. Have other per iods of inflation been accompanied usually by an over production of goods'? Professor Kemmerer: I don’t think there is such a thing as an over-production of goods. You can have an over-production of a particular line of goods in re lation to the market at the time, but I don’t think you can have an over-supply of goods in general, because no one has all the goods he wants and I don’t think that you can. I gave an illustration today in conver sation. We were discussing that very point. The il lustration is a very simple one. . First let me lay down the general principle that price equilibrates demand and supply. You can think of demand on one side and supply on the other, and the price as the fulcrum, moving back and forth, at such a rate that supply and demand are kept in equilibrium. Suppose you go down the Boardwalk and see strawberries at $2.50 a basket, a large supply of them. People would say, “Why, the supply of strawberries is far in excess of the demand.” Nobody is buying them. Suppose there should be a rumor come in that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis there was going to be a good supply of strawberries on the market and that the merchants should get the rumor but the public shouldn’t receive it. The mer chants would want to unload their berries quickly. Take an extreme case. We can often best illustrate by extreme cases. Suppose they’d immediately cut the price of strawberries to 25 cents a basket. Then the demand would be greatly in excess of the supply. Now, the price at which demand and supply are equalized over any considerable period of time is the real market price; it equilibrates demand and supply. You can have, of course, a surplus of goods on the market at the current price or even at the manufac turing price, but if you do, the price tends to go down, the manufacturing falls off and in time there is a re adjustment. You may also have a demand at a cur rent price in excess of the supply at that price. Busi ness men will be unable to fill all their orders. But in a very short time that demand will force up the price un til the price gets to the point where it equilibrates de mand and supply. So if you allow for a reasonable amount of fric tion and a reasonable time of adjustment, I don’t think you can say supply exceeds demand or demand exceeds supply. You can say demand exceeds supply at a given price or supply exceeds demand at a given price, but when you have that situation, you have an unstable situation at which the price tends to move so as to equilibrate. Mr. Snyder : Is it possible to generalize upon the conditions of supplies and demand in these previous periods of depression as compared with the present condition ? Professor Kemmerer: I think it is pretty dan gerous. You can always get lessons from the preced ing conditions and we have a great many, I think, from the conditions succeeding the Civil War. As you per haps realize, prices increased more rapidly during this war than they did during the most trying days of the Civil War. Wholesale prices in the United States rose considerably higher relative to 1913 than the worst greenback prices did during the Civil War, when the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis greenback depreciated to 35 cents on the dollar. It doesn’t make any difference to you or to me as far as buying goods are concerned if the prices of the goods we are buying are doubled, whether they are doubled because the paper money is depreciated in terms of gold or because the gold itself is depreciated. I think we are going to have a period of deflation much like we had after the Civil War. It took from 1863 to 1879 before they got back to a gold basis, and I think we will probably have a period of years before we get deflated and we shall have much the same sort of experience, though perhaps not so long drawn out, and I don’t think wages will lag behind like they did then because we have a stronger organization of trade unions. Mr. Snyder: We have usually been taught that a panic has been preceded by an over-production of goods. I think the opinion of all of us at the present time is that there is a decided under-production of goods and I am wondering whether that will not be one of the cushions in this process of deflation, because factories are all behind in their orders and they can’t produce not luxury goods but goods of necessity at a rapid enough rate to supply the demand. It would seem to me from that that deflation might be cush ioned somewhat as compared to other periods. Professor Kemmerer: I think that is a relative matter. I won’t be surprised at all if you find in the next week or so plenty of signs of over-production of goods. That is, if the buying public begin to make up their mind that prices are going down, as apparently Mr. Wanamaker did a short time ago and some other concerns, then merchants and manufacturers are going to say, “If prices are going down, we want to unload these goods at this price level before they get lower,” and the present so-called scarcity of goods will begin to take the form of a superfluity of goods. They will want to unload before the prices break. There is always an evidence of scarcity of goods when prices are going up because the people are hold ing back goods in anticipation of higher prices, buying low and selling at a continually higher price, but when https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis prices fall, then the opposite takes place, and the su perficial evidence is that there is an oversupply of goods because buyers are holding off for lower prices and sellers are trying to unload before the lower prices come. Mr. Burnett (Richmond) : I want to ask Pro fessor Kemmerer if he has taken into consideration our peculiar method of computing reserves before the establishment of the Federal Reserve Bank. For in stance, he spoke of 25 per cent, of reserves in New York but you all remember we had a sliding scale of reserves, country banks getting 15 per cent. Professor Kemmerer : I will answer that and say that I have been quoting ultimate reserves, and the way I have wTorked this out is this: I have said. Here are three national banks, one a central reserve city bank, one a reserve city bank, and one a country bank. I assume, to get a basis to work on, that each bank had a million two hundred thousand dollars of demand de posits, three hundred thousand dollars of time depos its, and one hundred thousand dollars of bank notes outstanding. Then I ask how much money was re quired, in 1913, to exist somewhere against that. I al low for the deposited reserves, I allow for the fact that the redemption fund was counted as reserve money then and not now, I allow for all these facts you men tion and carry the calculation back to find out just how many dollars must legally exist somewhere in re serve against these liabilities. The amount is about one-fifth now what it was in 1913. Mr. Burnett : What I had in mind was this: In the days before the Federal Reserve Bank, the ulti mate reserve, federal reserve of a country bank was six or six and three-fifths, or something of that sort. Professor Kemmerer: That was fully allowed for. ■ Mr. Wohnseidler (New York) : I would like to ask if you said that you advocated Federal Reserve Banks discriminating against loans made on Govern ment securities in favor of commercial loans. Professor Kemmerer : Yes, sir. Mr. Wohnseidler: And would you consider it https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis good business to have the Federal Reserve Banks charge a higher rate rediscount on a Liberty Bond than on commercial loan to force the national bank to take up that loan, to borrow it on straight paper without collateral? Professor Kemmerer : No, I think that in organ izing the Federal Reserve Banks there was no idea that the Federal Reserve Banks would lend any con siderable money on Government bonds. The war came on, we were under most strenuous conditions and we adopted a policy of a low rediscount rate, encourag ing borrowing and buying in order to float these bonds. That loaded the banks up so that at one time we had nearly seven billion dollars of Government paper in the banks. That is an anomalous situation. These are commercial banks, the Federal Reserve Banks are supposed to help commercial banks and not to encour age capital loans or Government loans. Now, I think that the place for the Government bonds is in the investors’ strongboxes. I think it was unfortunate that we tried to float those bonds at the artificially low rates we did, buoying them up by these artificially low discounts (applause); but having done so, we must undo the evil as soon as practicable. We can’t have deflation as long as we have this big credit expansion on the basis of these government bonds in the banks. The people who have bought Government bonds by borrowing the money should pay up. If they bought them on installments they should pay up and pay up rapidly and save to do it; and if they bought so much, perhaps foolishly or under patriotic stress or what not, that they have to carry it along indef initely with the bank, I think there is nothing for them to do but to dispose of the bonds and pay up. Let the bonds go into the hands of permanent invest ors. I think it would be a great mistake to continue our high prices, our inflated currency, our unstable sit uation just for the purpose of buoying up Liberty Bonds so that they can be kept at a four and threequarters or four and a quarter per cent basis. We made our mistake when we tried to float, them too low, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis but having made it, we shouldn’t continue it indef initely. There’s a good deal to be said, I think, in favor of a refunding of those bonds at a fair market rate of interest, but I realize a great many of them are not now in the hands of the people that originally bought them, and no matter what the Government should do in the line of refunding there would be a great deal of suffering. Mr. Seed (San Francisco): Dr. Kemmerer, hav ing been so kind so far as to make no adverse refer ence to the products from my own beloved State, I make so bold as to ask him if he would ask the men from Detroit (if they are still alive) whether they are willing to take an order now for a flivver at $50 or wait for an uncertain market, say three weeks, when they have a chance of getting $5,000. (Laughter.) Mr. Meyers (Chicago) : I’d like to ask a question which I think would prove of general interest. Do you think there should be any discriminatory rates against certain lines of industry—say, for example, against lines of industry that are temporarily hard pressed or temporarily need funds, like sometimes the livestock industry, other times industries in agricul tural lines or perhaps sometimes in manufacturing lines ? Professor Kemmerer: Yes, it seems to me that that is clearly true, just as an individual bank must discriminate on the basis of conditions at the time, so the Federal Reserve Banks should. Here is a point I made in another discussion the other day. The Phelan Bill provides for certain progressive rates. That is, if a bank gets a line of rediscount above a certain percentage of its ordinary deposits, why the rate can go up. Now, it seems to me it would be an advisable thing in view of the shortage of capital in the banks, the failure to increase the capital in pro portion to the increase in deposits, to make that ratio which is the determining factor under the Phelan Act, a ratio not to deposits but to capital funds. A bank that was borrowing very heavily in proportion to its capital surplus and undivided profits should have the higher rate charged after it got above a fairly normal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis point, but it wouldn’t do to take a particular month because, for instance, it might be in a potato raising country and at potato time there would need to be very heavy loans. Federal Reserve Banks would need to help. In strawberry time they should make larger advances to banks in the strawberry districts to help there. There are seasonal demands in almost all indus tries, and so I would say, to meet that, this ratio would have to be the ratio not at the particular month but the average ratio for the year. Then I’d make very liberal allowance for special cases of the type you mention. Mr. Wagenfuehr (St. Louis) : Doesn’t it seem to you, Professor, that as we proceed with deflation we will have less and less labor trouble ? Professor Kemmerer: I’m afraid not. I wish I could say it did. The laboring people felt that their wages were low before the war. From 1896 to 1913 the cost of living increased 40 or 50 per cent, and in comparatively few lines did wages go up as rapidly. Now in many lines wages have gone up since the war more rapidly than the cost of living and those fellows say, “Yes, but a considerable part of that is just mak ing up for what we lost during the period from 1896 to 1913.” Furthermore, Mr. Gompers says that this talk that wages should just increase as much as the cost of living is an unreasonable position to take. He says that in the past laboring men didn’t receive their fair share of the national product and that if you say their wages should just increase according to the cost of living, you’re condemning them to a static condition, no improvement at all. If the cost of living doubles, double the wages; if it trebles, treble the wages; etc. The laboring man wouldn’t improve his condition at all. He says that laboring men ought to participate in the improvement society is making, and he would go still further and say that they didn’t have anything like their share of the products in 1913 and they ought to have a larger basic share. I am not going into that but I do think laboring men are going to fight to the limit for the gains they https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis have gotten, and they will not concede, if they can help it, to a reduction in wages. If reductions take place, I think they will come this way: Business de pression causes unemployment. Unemployment tends to break the unions because the men that are out of a job tend to drop away from the union, don’t pay their dues and so on. You have an increasing number of non-trade union men looking for jobs under heavy pressure and they break down the strength of the un ion. It seems to me we will get a decline in wages through unemployment. . Mr. Wagenfuehr: But with that situation you would have less labor trouble; I mean from the stand point of having strikes, if you have more unemploy ment. • \ Professor Kemmerer: The minute any effort is made to reduce the standard wage, you are going to have strikes right and left, but the unions may be weakened somewhat temporarily during that period. I think it would be rash to say that we would have less labor trouble. Mr. Wagenfuehr: We are having a less number of strikes. Professor Kemmerer: But the individual strikes are greater in importance. President Morris : Professor Kemmerer, you have been very kind. We don’t want to abuse our privi lege. You can judge from the questions that have been asked that your discussion has been very closely fol lowed and very much appreciated. I think this is the proper place to applaud Pro fessor Kemmerer. (Applause from audience stand ing.) Professor Kemmerer: I would like to say just one word and that is, you have asked me definite ques tions and I have tried to give in a few words my an swers. Please don’t think that I am posing here as an authority on these questions in giving you an ipse dixit on it. I have the gravest doubts, like all the rest of you, on them. I am just trying to give you my re action in as few words as I can on the big points, and I say it with great hesitation because I don’t feel at all cock sure of these opinions. (Applause.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis