Herbert Hoover Part 12

Upon the solution of industrial peace and good will does the gradual lift of the standard of life of our whole people rest by increase in the material and intellectual output and its proper distribution among all of us. To me the philosophic background of solution lies in rigorous application to economic life of our tried national ideal--the equality of opportunity and the preservation of industrial initiative; that is, the stimulation of every individual by his own effort to take that position in the community to which his abilities and character ent.i.tle him and the protection to him to attain that end. In the earlier days of our democracy, with its simpler economic life, we were concerned more with the application of this ideal in its social and political phases.

It has been so long and firmly established there that it is no longer a matter of discussion. With the growth of greater complexity in our economic life, its practical application to the sharing in the material and intellectual output in proportion to effort, ability, and character, becomes more difficult. It must, nevertheless, be adhered to if the ideal of our democracy is not to be abandoned.

I do not believe we can attain this equality of opportunity or maintain initiative through crystallization of economic cla.s.ses or groups arraigned against each other, exerting their interest by economic and political conflicts, nor can we attain it by transferring to governmental bureaucracies the distribution of material and intellectual products. I do believe that we can attain it by systematic prevention of domination of the few over the many and stimulation of individual effort in the whole ma.s.s.

It is well enough to hold a philosophic view, but the problems of day to day that arise under it are very practical problems that require concrete solution, and the employment relation is one of them.

APPENDIX IV

SOME NOTES ON AGRICULTURAL READJUSTMENT AND THE HIGH COST OF LIVING[2]

BY HERBERT HOOVER

The high cost of living is a temporary economic problem, surrounded by high emotions. The agricultural industry is a permanent economic problem, surrounded by many dangers. We are now entering into our regular four-year period of large promises to sufferers of all kinds.

Except to demagogues and to the fellows who farm the farmer, there are no easy formulas; nevertheless, there are constructive forces that can be put in motion--and these are good times to get them talked about.

As bearing upon some suggestion of constructive solution, I wish to establish and a.n.a.lyze certain propositions. Amongst other things they involve a clear understanding of the bearings of different segments of the total price of food between the different links in the chain of production and distribution. These propositions are:

First: That the high cost of living is due largely to inflation and shortage in world production; speculation is an incident of these forces, not the cause.

Second: That the farmer's prices are fixed by the impact of world wholesale prices; that such prices bear only a remote relation to his costs of production.

Third: That any increase or decrease in the cost of placing the farmer's products into the hands of the wholesaler is a deduction from or addition to the farmer's prices; that is, an expansion or contraction of the margin between the farm and wholesale prices makes an increase or decrease in the farmer's return.

Fourth: That increase or decrease in the cost of distributing food from the wholesaler to the door of the ultimate consumer is a deduction or addition predominantly to the consumer's cost; that is, the margin between the wholesaler and consumer in its increases or decreases is largely an addition or subtraction from the consumer's price.

Fifth: That these two margins in most of our commodities except grain were, before the war, the largest in the world; that they have grown abnormally during the war, except during the year of food control.

Sixth: That a.n.a.lysis of the character of the margin between the farmer and wholesaler will show that decreases in price find immediate reflection on the farmer, while immediate increases in price are absorbed by the trades between and the farmer gets but a lagging increase.

Seventh: That an a.n.a.lysis of these margins will show that they can be constructively diminished but that, regrettable as it is, the prosecution of profiteers will not do it.

Eighth: That the problem must be solved, if our agriculture is to be maintained and if the balance between agriculture and general industry is to be preserved so as to prevent our becoming dependent upon imports for food, with a train of industrial and national dangers.

PRESENT PRICES DUE TO INFLATION AND SHORTAGE IN WORLD PRODUCTION

Our war inflation does not lie so much in our increased gold and currency. Our currency per capita has increased by perhaps 25 or 30 per cent, but, compared to European practice of currency inflations of 200 to 800 per cent, our conduct has been provident indeed. This is not, however, the real area of inflation. It lies in the expansion of our bank credits. If we exclude the savings bank as not being credit inst.i.tutions in the ordinary sense, and if we compile the commercial bank deposits, we still no doubt gather in some real savings, but nevertheless the figures show a considerable color of inflation somewhere. No one need think we have gotten so suddenly rich as the money complexion of these figures might indicate. At the outset it should be emphasized that all figures of this kind are subject to dispute and interpretation; but, after all such deductions, the indication of tendencies remains.

-------------------------------------- | | Per Cent | Bank Deposits | Change Year | Total | from 1913 -------------------------------------- 1913 | 11,390,918,596 | 100.0 1914 | 11,974,760,593 | 105.1 1915 | 12,282,097,638 | 107.8 1916 | 15,398,090,701 | 135.2 1917 | 18,444,103,496 | 161.9 1918 | 20,425,067,839 | 179.3 1919 | 24,971,784,000 | 219.2 --------------------------------------

It will be accepted at once that the volume of bank deposits must grow with increased commodity production and therefore we may roughly examine into this as well. If we combine the tonnage productivity of agriculture, metals, coal, salt, cement, lumber and the quarries, we shall cover the great bulk of our products. These figures also must be taken as merely indicating the tendencies of the times.

------------------------------------- | | Per Cent | Production | Change Year | in Tons | from 1913 ------------------------------------- 1913 | 1,081,293,417 | 100.0 1914 | 1,019,018,207 | 94.2 1915 | 1,073,472,988 | 99.3 1916 | 1,162,489,530 | 107.5 1917 | 1,241,173,806 | 114.8 1918 | 1,247,787,883 | 115.4 1919 | 1,117,181,233 | 103.3 -------------------------------------

If we attach the index of prices during these periods and compare them with the per cent variation in commodity production and bank deposits, we have the following interesting parallels:

------------------------------------------------------ | | | Department | Per Cent | Per Cent | of Labor | Change in | Change in | Wholesale | Production | Bank Deposits | Index Year | from 1913 | from 1913 | of All | | | Commodities ------------------------------------------------------ 1913 | 100.0 | 100.0 | 100.0 1914 | 94.2 | 105.1 | 99.3 1915 | 99.3 | 107.8 | 100.5 1916 | 107.5 | 135.2 | 120.5 1917 | 114.8 | 161.9 | 175.9 1918 | 115.4 | 179.3 | 196.6 1919 | 103.3 | 219.2 | 214.5 ------------------------------------------------------

Two different extreme schools of economics will interpret these tables differently. One will hold that the increase in credit and money must influence prices in exact ratio. The other will hold the rise of prices as due to shortage in production, either at home or abroad, and that rise in price necessitates an increase in credits and money to carry on commerce. Both are probably right, for short production and inflation probably alternatively serve as cause and effect. The first school has some claims upon the large volume of gold we imported the first three years of the war and multiplied into credits--as the cause prior to our coming into the war. They can also point out that our Treasury and banks deliberately inflated bank credits in order to place war loans and that if this form of credits was removed our expansion would be nothing like its present volume. As necessary as it may have been to use this method in securing quick money at a low rate during the war, there are the strongest objections to it since the armistice was signed. If our post-war finance at least had been secured from savings by offering sufficiently attractive terms, the inflation would be less although the market price of Liberty Bonds might be lower.

That short world production has been one of the causes of rising prices cannot be denied. The warring powers of Europe took 60,000,000 men from production (nearly one third their productive man power) and put it to destruction. They have lived to a great degree by gain of commodities from the United States, and thus brought their shortage to our sh.o.r.es.

They have not yet altogether recovered from the holidays of victory, the gloom of defeat, the persuasive "isms" that would find production without work, the destruction of their economic unity, transportation, credits, and other fundamentals necessary to maintain production. It will be some time before they do recover. In the meantime, they are perforce reducing their consumption--their standard of living--because they have largely exhausted their securities, commodities or credit to continue the borrowing of our commodities for their own short production, as during the war. The exchange barometer is today witness of the end of this procedure of living on borrowed money. In pa.s.sing, it may be mentioned that exchange is no more a cause of their inability to buy from us than is the barometer the cause of blizzards. The storm is that they have mostly exhausted their credits and they have not recovered production so as to offer commodities to us in exchange for ours.

Our own industrial production, as distinguished from agricultural production, has fallen rapidly since the armistice. Some of the fall is due to war weariness, some to "isms" that have infected us from Europe, some to the natural abandonment of high cost production brought into play during the war, some to strikes and a host of other wastes. Our consumption has greatly increased since the restraints of war. Decrease had not penetrated our agricultural community up to 1919 harvest, nor will such decrease arise from these causes, but as I will set out later, forces are entering that will decrease our agricultural production. Our production in nearly all important food commodities except sugar is in surplus of our own need. It only becomes a shortage affecting prices under the drain of exports. Therefore, it is the world shortage that is affecting our price levels, and not, so far, a deficiency for our needs.

So far as relief from price influence by shortage in production is concerned, it may arise in two ways. First, slowly through gradual recuperation in world production. Second, by compulsory reduction of consumption in Europe through their inability to pay us by commodities, gold or credits. This latter has been very evident through the drop in exchange and engagements for export during the past few weeks.

THE THREE DIVISIONS OF THE PRICE

The cost of food to the consumer is divided among the farmers on one hand and storage, manufacture, jobbers, wholesalers, retailers and transportation on the other. I believe these charges between the farmer and consumer fall into two distinct groups--the charges comprising the margin between the farmer and wholesaler which mainly concern the farmer, and charges between the wholesaler and consumer, which mainly concern the consumer. To establish this division, it is necessary to a.n.a.lyze shortly the datum point by which price is determined.

The diet of the American people from a nutritional (not financial) standpoint comprises the following articles and proportion:

Wheat and Rye 29.5% Pork Products 15.7% Dairy Products 15.3% Beef Products 5.3% Corn Products 7.0% Sugar Products 13.2% Vegetable Oils 3.6% 89.6% All other, including potatoes 10.4%------ 100.0%

The wholesale price of about 90 per cent of our food in normal times is only remotely determined by the cost of production, but mostly by world conditions. We export a surplus of most commodities among the 90 per cent and the prices of exports are determined by compet.i.tion with other world supplies in the European wholesale markets. Those items in this 90 per cent that we do not export are influenced by the same forces, because in normal times we import them on any considerable variation in price and the wholesaler naturally buys in the cheapest market. Even milk is to a considerable degree controlled by b.u.t.ter imports in normal times. When we import b.u.t.ter it releases more milk in compet.i.tion. This cannot be said to such extent of most of the odd 10 per cent, because they are largely perishables that do not stand overseas transport and consequently rise and fall more nearly directly upon local supply and demand. Some economists will at once argue that if prices are unprofitable to the farmer the situation will correct itself by diminished production and, consequently, a general rise in the world level of prices. In the abstract, this is true, but as a matter of fact the surplus which our farmers contribute for export is only a small portion of their total production or of the world pool, yet the total of the world pool operating through this minor segment makes the prices for a large part of the farmers' commodities. Therefore, the effect in normal times of restriction in production in any one country does not affect price so much as theoretic argument would believe. The farmer must plant if he would live, and he must plant long in advance of his knowledge of prices or world production. He can make no contracts in advance of his planting, nor can he cease operations on the day prices fall too low. He is driven on, year after year, in hope and necessity, and will continue over long periods with a standard of return below rightful living because he has no other course--and always has hopes. He will vary fairly rapidly from one commodity to another--from wheat to other grains, for instance--but he mostly raises his maximum of something. In the long run of decreasing prices he would undoubtedly reach so low a standard as to cease production. Then comes a comparatively short period of higher prices in some commodity; production is again stimulated and followed by long intervals of low standards. As shown by the following table, on the whole, the farmer has not been underpaid during the war, but the currents again are turning against him.

It will be seen that the farmer enjoyed prices equivalent to or higher than the general level up to the last six months. He is now, however, falling behind in some important products. Unlike the industrial workers, he is unable to demand an adjustment of his income to the changed index of living.

------------------------------------------------------- | Index of Prices at the | Farm in Princ.i.p.al | Produce States ----------------------------- | A P | | | | | l r | | | W | C Department of Labor | l o | H | C | h | o Wholesale Index of | d | o | o | e | t All Commodities | F u | g | r | a | t | a c | s | n | t | o | r e | | | | n | m | | | | ------------------------------------------------------- Pre-war | 100 | 100 | 100 | 100 | 100 | 100 First Quarter 1918 | 187 | 200 | 213 | 224 | 254 | 246 Last Quarter 1918 | 206 | 204 | 223 | 220 | 258 | 246 First Quarter 1919 | 200 | 202 | 225 | 228 | 264 | 215 Last Quarter 1919 | 230 | 206 | 178 | 216 | 277 | 268 -------------------------------------------------------

For the moment, what I wish to establish is only that the farmer's prices are not based upon any conception of the cost of production, but upon forces in which he has no voice. He can never organize to put his industry in a "cost plus" basis as industrial producers do, and remedy must be found elsewhere.

THE TWO MARGINS

As stated, the margin between the farmer and consumer falls into two divisions--one of which predominantly affects the farmer and the other the consumer. It is really the wholesale prices that govern the farmer, rather than retail prices, for it is in wholesale prices that the farmer competes with the world. As the prices paid by the wholesaler are mostly fixed by overseas trade at the datum point on the Atlantic seaboard or in Europe, then if the margins between the wholesaler and the farmer are unduly large, or increase, it is mostly to the farmer's detriment. For instance, as the price of the farmer's wheat in normal times is made in Liverpool, any increase in handling comes out of the farmer's price.

Likewise, as the wholesale price of b.u.t.ter is made by the import of Danish b.u.t.ter into New York, any increase in the numbers or charges between our farmer and the wholesale buyer comes, to a considerable degree, out of the farmer.

As the datum point of determining prices is at the wholesaler, the accretion by the charges for distribution from that point forward to the consumer's door will not affect the farmer, but will affect the consumer. When compet.i.tion decreases through shortage the consumer pays the added profits of these trades.

Studies of the cost of our distribution system, made by the Food Administration during the war, established two prime conditions. The first is that the margins between our farmers and the wholesaler in commodities other than grain in some instances, are, even in normal times, the highest in any civilized state--fully 25 per cent higher than in most European countries. The expensiveness of our chain of distribution in most commodities in normal times, as compared to Continental countries, is due partly to the wide distances of the producing areas from the dominating consuming areas, but there are other contributing causes that can be remedied. In Europe, the great public markets in the cities bring farmer and consumer closely together in many commodities, but in the United States the bulk of products are too far afield for this. The farmer must market through a long chain of manufacturers, brokers, jobbers and wholesalers with or without their own distribution system, who must establish a clientele of direct retailers; and thus public markets, except in special locations and in comparatively few commodities, have not been successful. Another major factor in our cost of distribution is the increasing demand for expensive service by our consumers. There are many other factors that bear on the problem and the economic results of our system which are discussed, together with some suggestion of remedy, later on.

The second result of these studies was to show the great widening of this margin during the war. During the year of the Food Administration's active restraint on this margin, there was an advance of six points in the wholesale index while the farmer's index moved up 25 points. Both before and after that period the two indexes moved up together. The same can be said of the margins between the wholesaler and the consumer.

Taking the period of the war as a whole, the margin between the farmer and consumer has widened to an extravagant degree.

A good instance of a movement in margins is shown in flour in 1917. The farmer's average return for wheat of the 1916 harvest, as shown by the Department of Agriculture, was about $1.42. As about four and one-half bushels of wheat are required to make a barrel of flour, the farmer's share of the receipts from this harvest was about $6.40 per barrel. In 1917, before the Food Administration came into being, flour rose to $17.50 per barrel to the consumer, or, at that time, a margin of $11.00 per barrel. During the Administration, the farmer received an average of about $2.00 for wheat at the farm, or about $9.00 out of a barrel of flour. The consumer paid $12.50, the margin being about $3.50 per barrel.

This increase in margins shows vividly in the higher priced foods, for instance, pork products. If we take hogs at the railway station over the great hog states contiguous to Chicago as a basis, we find:

------------------------------------------------------ | Price of Hogs | Price of | Margin Six | in Princ.i.p.al | Cured Products | Between Months | States | to Consumer | Farmer and | Per 100 Lbs. | 100 Lbs. Hogs | Consumer ------------------------------------------------------ 1914 | $7.45 | $18.97 | $11.52 1919 | 16.27 | 37.33 | 21.06 1920 | 15.37 | 37.71 | 22.34 ------------------------------------------------------

Thus, while the farmer has gained about $7.92 in his price, the margin has increased by $10.82 to the consumer and, incidentally, during the last year since food control restraints were removed, the consumer has paid $.30 more while the farmer got $.90 less. These instances could be greatly multiplied.