Herbert Hoover Part 13

It is unfortunate that our national statistics do not permit a complete a.n.a.lysis of the distribution of margin between all the various groups in the chain between the farmer and consumer in different commodities. It would be helpful if we could take the farmers, railways, manufacturers, wholesalers and retailers, and determine what proportion each receives.

These margins between farmer and consumer are made up of a necessary chain of charges for transport, storage, manufacture and distribution.

The great majority of citizens who are engaged in the processes that go to make up this portion of food costs are employed in an obviously essential economic function, and they do not approach it in a spirit of criminality, but as a very necessary, proper, and honorable function.

They have, since the European War began, rather over-enjoyed the result of economic forces that were not of their own creation. That a considerable margin is necessary to cover the legitimate costs of, and profits on, distribution is obvious. The only direction of inquiry is how they can be legitimately minimized. These margins, starting from the unduly high expense of a faulty system, have increased not only legitimately, due to increased transportation, labor, rent, taxes, and increased interest upon the large capital required, but they have, except during the period of control, increased unduly beyond these necessities. There are two general characteristics of this margin that are of some interest. In the first instance, all of the transport, storage, manufacture and handling is conducted upon a basis of cost plus either fixed returns or, as is more usually the case, a percentage of profit upon the whole cost of operation. Any distributing agency ceases to operate when it does not secure costs and a profit. Consequently, all those links put up a resistance to a curtailment of the margin which the farmer is unable, except by absolute exhaustion, to put against reduction of his price levels. If rapid falls in food prices occur, the farmer, at least in the first instance, has to stand most of the fall because he cannot quit. The farmer's costs of production relate to a period long prior to the fall. Thus, if wages are due to fall as a result of a fall in food prices, the farmer is always selling on the old basis of his costs. The farmer has but one turn-over in the year. The middleman has several and can thus adjust himself quickly.

Second, the custom of many of these businesses is to operate upon a percentage of profit on the value of the commodities handled, even after deducting all their increased costs, interest or other charges. When we have rising prices, therefore, a doubling of prices, for instance, tends to double profits on the same volume of commodities handled. In a rising market, compet.i.tive pressures are much diminished and the dealer can a.s.sess his own profits to greater degree than usual. While the packers make a profit of, say, two cents on the dollar value of commodities, it represents double the profit per pound over pre-war, even after allowing such items as interest on the larger capital involved.

REDUCTIONS OF THE MARGINS

Aside from the necessary rise in the margin that has grown out of the rise in cost of labor, rent, etc., from inflation and world shortage, there are some causes which have acc.u.mulated to increase the margins between the farmer and the wholesaler and the wholesaler and consumer that could be greatly mitigated.

BETTER TAX DISTRIBUTION

During the war, in order to restrain wild greed and profiteering in the then existing unlimited demand, margins between purchase and sale in the different manufacturing and handling trades were fixed in all the great commodities--iron, steel, cement, lumber, coal and foodstuffs. The first task of the war was to secure production, and the margins were therefore fixed at such breadth as would allow the smaller high cost manufacturer and the smaller dealer to live. Otherwise, the smaller compet.i.tors would have been extinguished, production would have been lost, and, worse yet, the larger low-cost operator would have been left with much inflated monopoly. The excess profits tax was levied as a sequent corrective to this necessary first step, so as to take the undue profits of the large producer back to the public. It was a wise war measure, but the moment restraints on profits were taken off and there was a free and rising market ahead, then the tax was added to prices by all the partic.i.p.ants and pa.s.sed on to the consumer, or deducted from the farmer when world levels crowded his prices down. It should have been repealed at the time the controls were abandoned, but our legislatures have been busy with other things and, in the meanwhile, in food it not only increases the margin between the farmer and the consumer but tends, as stated above, to come out of the farmer to a large degree. It has other vicious results in that it also stimulates dealers and manufacturers to speculate their profits away in unsound business, rather than to pay it to the government. It does sound well to tax the great manufacturers, but to make them the agency to collect taxes from the population is not altogether sound government.

It is a very important tax to the Government, bringing as it does over a billion a year, and a place to put this load is not to be found easily.

The income tax does not have so malign an effect, for it comes to a great extent from the individual and not from business. The present method of income tax, however, has some weaknesses. The same levy is made upon earned incomes as upon those that are unearned. The tax on earned incomes tends in certain cases to be pa.s.sed on to the consumer or deducted from the farmer, and, besides, it is not just that a family living by giving productive service to the community should pay the same as a family that contributes nothing by way of effort. A stiff tax on these latter families might send them to work, and certainly would induce economy. Moreover, the earner of income must provide for old age and dependents while the unearned income taxpayer has this provision already. Altogether, it would seem the part of wisdom at least to increase the income tax on the larger unearned income and decrease it on the earners. It is argued that this drives great incomes to evasion by investment in tax-free securities, which is probably true. We need more comparative figures than the Treasury statistics yet show to answer this point. In any event, relief to the earner would free his savings to invest in taxable securities and we need above all things to stimulate the initiative of the saver. Income taxes, except when too high on earned incomes, do not destroy initiative, and every other government has, in taxing, recognized the essential difference between earned and unearned income. This distinction would generally relieve the range of smaller incomes, for they are mostly earned.

The inheritance tax has not been fully exploited as yet. It cannot be deducted from either farmer or consumer, it does not affect the cost of living, it does not destroy initiative in the individual if it leaves large and proper residues for dependents. It does redistribute overswollen fortunes. It does make for equality of opportunity by freeing the dead hand from control of our tools of production. It reduces extravagance in the next generation, and sends them to constructive service. It has a theoretic economic objection of being a dispersal of capital into income in the hands of the government, but so long as the government spends an equal amount on redemption of the debt or productive works, even this argument no longer stands.

We may need to come to some sort of increased consumption taxes in order to lift that part of excess profits and tax on earned incomes that cannot be very properly placed elsewhere. When it comes, it should lie on other commodities than food, except perhaps sugar, one half of which is a luxury consumption. The ideal would be for it to be levied wholly on non-essentials in order that it should be a burden on luxury and not on necessity. There is no doubt difficulty in cla.s.sifying. Jewelry and furs are easy to cla.s.s, but where necessity leaves off and luxury begins in trousers is more difficult to determine.

It requires no lengthy economic or moral argument as a platform for denunciation of all waste and useless expenditure. Some sane medium is needed between comfort and luxury. Failing definition, and objection to blue laws, the theme must be taken into the area of moral virtues and become a proper subject for the spiritual stimulations of the church.

There is a psychology in luxury wherein we all buy high-priced things because they are high-priced, not because they add comfort--and this has contributed also to our high cost of living, for those who do it drive up prices on those who try to avoid it. From an economic point of view, the only recipes are taxation as a device to make it expensive.

More constructive than increasing taxes is to take a holiday on governmental expenditures and relieve the taxpayer generally. If we could stave off a lot of expensive suggestions for a few years and secure more efficiency in what we must spend, then our people could get ahead with the process of earning something to be taxed. This would at least be comforting to the great farming and business community.

BETTER TRANSPORTATION FACILITIES

There is a great weakness in our present railway situation bearing upon the farmer and consumer. Everyone knows of the annual shortage of cars during the crop-moving season. Few people, however, appreciate that this shortage of cars often amounts to a stricture in the free flow of commodities from the farmer to the consumer. The result is that the farmer, in order to sell his produce, often unknown to himself makes a sacrifice in price to local glut. The consumer is compelled at the other end to pay an increased price for foodstuffs due to the shortage in movement. The constant fluctuations in our grain exchanges locally or generally from this cause are matters of public record almost monthly.

On one occasion a study was made under my administration into the effect of car shortage in the transportation of potatoes, and we could demonstrate by chart and figures that the margin between the farmer and the consumer broadened 100 per cent in periods of car shortage. Nor did the middleman make this whole margin of profit, because he was subjected to unusual losses and destruction, and took unusual risks in awaiting a market. The same phenomenon was proved in a large way at time of acute shortage of movement in corn and other grains.

The usual remedy for this situation is insistence that the railways shall provide ample rolling stock, trackage and terminals to take care of the annual peakload. We have fallen far behind in the provision of even normal railway equipment during the war and an additional 500,000 cars and locomotives are no doubt needed. Above a certain point, however, this imposes upon the railways a great investment in equipment for use during a comparatively short period of the year when many commodities synchronize to make the peak movement. The railways naturally wish to spread the movement over a longer period. The burden of equipment for short time use will probably prevent their ever being able to take entire care of the annual delays in transport and stricture in market, although it can be greatly minimized.

There is possible help in handling the peak load by improving the waterways from the Great Lakes to the Atlantic seaboard by way of the St. Lawrence River, so as to pa.s.s full seagoing cargoes. It has already been determined that the project is entirely feasible and of comparatively moderate cost. The result would be to place every port on the Great Lakes on the seas. Fifteen states contiguous to the Lakes could find an outlet for a portion of their annual surplus quickly and more cheaply to the overseas markets than through the congested eastern trunk rail lines. It would contribute materially to reduce this effectual stricture in the free flow of the farmer's commodities to the consumers. Of far greater importance, however, is the fact that the costs of transportation from the Lake ports to Europe would be greatly diminished and this diminished cost would go directly into the farmer's pockets. It is my belief that there is a possible saving here of five or six cents a bushel in the transportation of grain. Although a comparatively small proportion of our total grain production flows to Europe, I believe that the economic lift on this minor portion would raise the price of the whole grain production by the amount saved in transportation of this portion of it. The price of export wheat, rye, and barley--sometimes corn--usually hogs--in Chicago at normal times is the Liverpool price, less transportation and other charges, and if we decrease the transport in a free market the farmer should get the difference. Not only should there be great benefits to the agricultural population, but it should be a real benefit to our railways in getting them a better average load without the cost of maintaining the surplus equipment and personnel necessary to manage the peakload during the fall months. It has been computed that the capital saving in rolling stock alone would pay for the entire cost of this waterway improvement over a comparatively few years. The matter also becomes of national importance in finding employment for the great national mercantile fleet that we have created during these years of war.

Another factor in transportation bearing upon the problem of marketing is the control by food manufacturing and marketing concerns of refrigeration and other special types of cars. This special control has grown up largely because, owing to seasonal changes in regional occupation for these cars over different parts of the country, no one railway wished to provide sufficient special cars and service for use that may come its way only part of the year. The result has been to force the building up of a domination by certain concerns who control many of the cars and stifle free compet.i.tion. Much the same results have been attained by special groups in control of stock yards and, in some cases, of elevators. Where such formal or informal monopolies grow up, they are public utilities, and if the farmer is to have a free market they must be replaced by constructive public service.

A FREE MARKET

Every impediment to free marketing in produce either gives special privileges or increases the risks which the farmer must pay for in diminished returns. We have some commodities where manufacture has grown into such units that these units exert such an influence that they consciously or unconsciously affect the price levels of the farmer's produce. When a few concerns have the duty of manufacturing and storing the seasonal reserves in a single commodity they naturally reduce prices during the heavy production season and increase them in the short season as a method of diminishing their risk and increasing profits. Moreover, their tendency is often to sell the minor portion of their product that goes for export at lower than the domestic price in order to dispose of it without depressing local prices. They do not need to conspire, for there can be perfectly coincident action to meet the same economic currents. Such coincidence has much greater possibilities of general influence with a few concerns in the field than if there were many.

The experience gained in the Food Administration on these problems during the war led to the feeling expressed at that time, that such business should be confined to one line of activity, just as we have had to confine our railways, banks and insurance companies. This is useful to prevent reliance being placed upon the profits of alternative products when engaged in stifling of compet.i.tion, through selling below cost on some other item. Even this restriction may not prove to be sufficient protection to free market by free compet.i.tion. I am not a believer in nationalization as the solution to this form of domination, but I am a believer in regulation, if it should prove necessary. If experience proves we have to go to regulation, it is my belief that it should be confined to overswollen units and that the point of departure should not be the amount of capital employed but the proportion of a given commodity that is controlled. The point of departure must depend upon the special commodity and its ratio to the whole. When such a concern obtains such dimensions that it can influence prices or dominate public affairs, either with deliberation or innocence, then it must be placed under regulation and restraint. Our people have long since realized the advantage of large business operation in improving and cheapening the costs of manufacture and distribution, but when these operations have become so enlarged that they are able to dominate the community, it becomes of social necessity that they shall be made responsible to the community. The test that should apply, therefore, is not the size of the inst.i.tution or the volume of capital that it employs, but the proportion of the commodity that it controls in its operations. It is my belief that if this were made the datum point for regulation, and if regulation were made of a rigorous order, this pressure would result in such business keeping below the limit of regulation. Thus the automatic result would be the building up of a proper compet.i.tion, because men in manufacturing would rather conduct a smaller business free of governmental regulation than enjoy large operations subject to governmental control. There are probably only a very few concerns in the United States that would fall into this category, and they should be glad of regulation in order to secure freedom from criticism.

SPECULATION AND PROFITEERING

There are three kinds of speculation and profiteering in the food trades. The first is of the inherent speculative character of foodstuffs due to their seasonal nature. The farmer, more by habit than necessity, usually markets the bulk of his grain in the fall. By necessity he must market his animals at certain seasons for they must be bred at certain seasonal periods, they must be fed at certain seasons, and thus they come to market in waves of production larger than the immediate demand.

In perishables he must market fairly promptly as he cannot himself maintain necessary special types of storage. Thus, the dealer must speculate on carrying the commodities for distribution during the period of short production while the farmer markets in time of surplus production. While full compet.i.tive conditions might reduce the charges for this hazard, there is a possibility of reducing the hazard by better organization and, consequently, the charge for the hazard that is now debited to the farmer. It is worth an exhaustive national investigation to determine whether an extension of a system of central markets would not afford great help. I do not mean the extension of our so-called exchanges dealing in local produce, but the creation of great central exchange markets with responsibilities for service to the entire people.

This help would arise in two ways. The first is the hourly determination of price at great centers that all may know, and thus the farmer protects himself against local variations and manipulation. The second is a system of forward contracts through such a market between farmer and consumer on standardized commodities. Such contracts in effect remove the necessity of a speculative middleman. This system exists in grain and in cotton and in its processes eliminates large part of the hazard and carries the commodity at the lower rate of interest. The present trouble with the system of future contracts is that it lends itself to manipulation, but I believe this could be eliminated.

Take the case of potatoes; here is an unstandardized, seasonal commodity, with no national market and therefore no established daily price as a datum point. A grower in Florida, Maine, or Wisconsin, through a local agent, or through local sale, consigns potatoes to Pittsburgh because a larger price is reported there than in Chicago. The grower can usually make no actual sale to an actual retailer or wholesaler at destination because the buyer has no a.s.surance of quality.

Coincident shipment from many points to a hopeful market almost daily produces a local glut at receiving points somewhere in the country.

Often enough the shipper gets no return but a bill for freight and the perishables sometimes rot in the yards. If potatoes were standardized and sold on contract in national market, protected from manipulation, three things should result. First, there would be a daily national price known to growers. Second, by the sale of a contract for delivery the grower would be a.s.sured of this price. Third, the contract and directions for shipment would flow naturally to the distributor where the potatoes were needed, and thus the present fearfully wasteful system would be mitigated. Potatoes would be a most difficult case to handle; dried beans, peas, even b.u.t.ter and cheese would be easier. I am not advocating widespread dealing in futures, but short contracts giving time for delivery would probably greatly decrease the margin between farmer and local distributor by saving great wastes in transport, in spoilage and in manipulation.

The second cla.s.s of speculation is one largely of the war as a period of rising prices growing out of inflation, and so forth. It lies in the marking up of goods on the shelf to the level of the rising daily market. This marking up has been one of the large factors in increasing the margin during the war. No better example exists than the rise of flour during the 1916-1917 harvest year, referred to elsewhere. We shall have a remedy for this the moment the tide of inflation turns. The farmer and consumer cannot, however, expect that they will get even during such a reverse period for their losses on the rise, because the trades have too great an individual power of resistance against selling goods at a loss. Anyway, the marking up of goods will cease when prices cease to rise--and there is a limit.

The third cla.s.s of speculation is wholly vicious. That is the purchase of foodstuffs, in times of rising economic levels, sheerly for the rise in price or the deliberate manipulation of markets during normal times.

These operations are against the common welfare; they can find no moral or economic justification. They are not to be reached by prosecution; they must be reached by prevention. Our great boards of trade in fine patriotic spirit proved their ability during the war to control deliberate manipulation of grain and other futures.

The two latter types of speculation are an impediment to free markets and they become an unnecessary charge on the margin.

CO-OPERATIVE MARKETING BY THE FARMER

There can be no question of the improvement in position of both farmer and consumer in cases where cooperative marketing can be organized. The high development of cooperative citrus fruit marketing has resulted in lower average prices to consumer, better quality, and better return to the grower. Here is a case of scientific distribution lamentably absent in many other commodities. There are other specialized products to which it could be well extended. To reach its best development it should have parallel cooperative development among consumers as have we discussed elsewhere.

SUNDRY ITEMS

There are many ways of a.s.sisting the agricultural industry not pertinent to this discussion on the cost of distribution. They do demand inquiry, and public illumination; most of them do not demand legislation so much as public education and consideration when legislating on other subjects. Our agricultural interests also need a foreign policy. For instance, during the last month there has been a consolidation of control of buying in world markets by the European Governments. How far it may be extended in its policies is not clear. Nevertheless, a combination of importers in all Europe under government control could determine the prices on every farm in the United States.

THE MARGIN BETWEEN THE WHOLESALER AND CONSUMER

As the datum point of price determination is the wholesaler's market, the accretions of charge for distribution from that point forward, the economy of extravagance in these costs, is of primary interest to the consumer. The same phenomena of marking up goods on the shelf, calculating profits not on commodities but on dollars handled, a minor amount of vicious speculation, and the pa.s.sing on of excess profits tax, are present in those trades during the past years. A much more pertinent phenomenon in unduly increasing their margins is the increasing demands of the consumer as to service. Several deliveries daily, purchases on credit, the abandonment of the market basket in favor of the telephone, mean many costs. One of them much overlooked is that customers must always have "first" quality when they buy over the telephone, and the seconds and thirds of equal food value in many commodities go to waste and are added to the price of the firsts. That there are some people in the United States who want to buy sanely is evidenced by the 400 per cent increase in "cash and carry" shops. There are also too many people in the final stages of distribution. One city in the United States has one meat retailer for every 400 inhabitants; it would be equally well served with one dealer for every 1200. The result is high margin to the retailers and no out-of-the-way income to any of them. There is no very immediate remedy for this. One possibility is an extension of cooperative buying by consumers. It has proved a great success abroad.

It is not socialism, for it arises from voluntary action and initiative among the people themselves.

ILL BALANCE OF AGRICULTURE AND GENERAL INDUSTRY

There is now a tendency to ill balance between the agricultural and general industry. For many years we were large exporters of food and importers of manufactured goods. We gradually imported mouths, manufactured our own goods and just as rapidly diminished our food exports. Up to the point where we consumed our own food and manufactured our own goods it has been a great national development. Our annual exports of food decreased during the past twenty-five years from some 15,000,000 tons to about 6,000,000 just before the European War. In the meantime we increased the import of such commodities as sugar, rice, vegetable oils, until our net exports were about 5,000,000 tons. Of the kinds of food exported this probably represents a decreased export of from twenty-five or thirty per cent of our production down to five per cent of it.

During the war we gave special stimulus to food production and produced greater economies in consumption so that these later years somewhat befog the real current, for our agricultural surplus in normal years is really very small. During the war and since, we have given great stimulus to our manufacturing industries. If we shall continue to build up our manufacturing industries and our export trade without corresponding encouragement to agriculture, we will soon have more mouths in our country than we can feed on our own produce. We shall, like the European States which have devoted themselves to industrial development, ultimately become dependent upon overseas food supplies. If we examine their situation we find the very life of their people is thus dependent upon maintaining open free access to overseas markets.

From this necessity have grown the great naval armaments of the world, and the burden they imply on all sections of the population. Such nations, of necessity, have engaged in fierce compet.i.tion for markets for their industrial products. Thus they built up the background of world conflicts. The t.i.tanic struggles that have resulted have endangered the very lives of their people by starvation. Their war tactics have, in large degree, been directed to strangle food supplies.

One other result of this development is the terrible congestion of populations in manufacturing areas with all the social and human difficulties that this implies.

There is a jeopardy in industrial over-development which has received too little attention because the world has only experienced it during the past eighteen months. In times of industrial depression, or great increase in the cost of living, whether brought about by war or by the ebb and flow of world prosperity, these populations, oppressed with misery, turn to political remedies for matters that are beyond human control. They naturally resent the lowering of their standards of living, and they inevitably resort to industrial strife, to strikes and disorder. Theirs is the breeding ground of radicalism--for all such phenomena belong to the towns and not to the country.

By and large, our industries are now in a high state of prosperity. More favorable hours, more favorable wages, are today offered in industry than in agriculture. The industries are drawing the workers from our farms. If this balance in relative returns is to continue, we face a gradual decrease in our agricultural productivity. If we should develop our industrial side during the next five years as rapidly as we have during the past five years, we shall by that time be faced with the necessity to import foodstuffs to supplement our own food supplies. Some economists will argue, of course, that if we can manufacture goods cheaper than the rest of the world and exchange them for foodstuffs abroad, we should do so. But such arguments again ignore certain fundamental social and broad political questions. These dangers have become more emphasized by experience of the war. From dependence on overseas supplies for food, we will, by the very concern that will grow in public mind as to the safety of these supplies, soon find ourselves discussing the question of dominating the seas. Our international relations will have become infinitely more complex and more difficult.

Unless the League of Nations serves its ideal, we will need to burden ourselves with more taxation, to maintain great naval and military forces. But of far more importance than this is that social stability of our country, the development of our national life, rests in the spirit of our farms and surrounds our villages. These are the sources that have always supplied our country with its true Americanism, its new and fresh minds, its physical and its moral strength. Industry's real market is with the farmer by the constant increase of his standard of living. We want our exports to grow in exchange for commodities we need from abroad, but we want them to grow in tune with our social and political interests, and to do so they must grow in step with our agriculture.

_In conclusion_ we are in a period of high inflation and shortage of world production, and consequent abnormal prices. The tide is likely to turn almost any time. Some of the outrageous margin between the farmer and consumer will be remedied by the turn in the tide itself, for it will eliminate the marking up of goods and the opportunity of vicious speculation. The dangers of the turn are twofold. First, unless we constructively remedy the unnecessary margin between the farmer and the wholesaler the farmer will receive the brunt of the fall long before the supplies he must buy and the labor he must employ will have fallen in step. It will bring to him the greatest suffering in the community.