Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

MAY'S THEORY OF THE DISCREPANCY BETWEEN WAGES AND PRODUCTIVITY

Like Beveridge, May conceives crises to result immediately from the glutting of markets for industrial products. But May offers a quite different analysis of the cause of gluts. The continually growing productivity of industry makes necessary a corresponding growth of the market, if disaster is to be avoided. But to enable producers to sell their growing output promptly prices must be reduced and wages must be raised in proportion as the supply of goods increases. For it is only by combining an increase in the money income of the mass of the population with a decrease in the cost of commodities that a country's home markets can be kept expanding with the progress of industrial methods. Periods of prosperity attended by rising prices necessarily violate this condition of business hygiene and inevitably end by glutting markets. Then come crises, which restore the body politic to health by forcing down prices to the point where consumers can purchase the supplies which are offered. The germ of the trouble, then, is the tendency of prices to rise during periods of increasing productivity. Accordingly, May urges as remedy a legal limitation of the rate of profits, in order that producers may be forced to reduce prices as they increase output.[238]

HOBSON'S THEORY OF OVER-SAVING

A third explanation of how markets come to be glutted periodically is offered by Hobson's theory of over-saving. Hobson holds that at any given time "there is an exact proportion of the current income which, in accordance with existing arts of production and existing foresight, is required to set up new capital so as to make provision for the maximum consumption throughout the near future." Now, if in a period of prosperity the rate of consumption should rise pari passu with the rate of production, there is no inherent reason why the prosperity might not continue indefinitely. But in modern societies, a considerable portion of the wealth produced belongs to a small class. In active times their incomes rise more rapidly than their consumption and the surplus income is perforce saved. There results for the community as a whole a slight deficiency of spending and a corresponding excess of saving. The wealthy class seeks to invest its new savings in productive enterprises—thereby increasing the supply of goods and also increasing the incomes from which further savings will be made. This process runs cumulatively during the years of prosperity until finally the markets become congested with goods which cannot be sold at a profit. Then prices fall, liquidation ensues, capital is written down, and the incomes of the wealthy class are so reduced that savings fall below the proper proportion to spending. During this period of depression the glut of goods weighing upon the market is gradually worked off, and the prospect of profitable investment slowly returns. Saving rises again to the right proportion to spending and good times prevail for a season. But after a while the chronic impulse towards over-saving becomes fully operative once more, and soon or late begets another congestion of the markets and this congestion begets another depression. Proximately, then, the cause of alternating prosperity and depression is the tendency toward over-saving; ultimately it is the existence of the surplus incomes which lead to over-saving.[239]

HULL'S THEORY OF THE CHANGING COSTS OF CONSTRUCTION

An American business man, George H. Hull, has recently drawn from his experience of practical affairs conclusions which resemble those drawn by

In demonstrating the thesis, Hull contends that agriculture, commerce, and finance fluctuate within relatively narrow limits. Agriculture provides the necessities of life, commerce distributes them, and finance adjusts the bills. The volume of all this business is fairly constant, because the demand for necessities is incapable of sudden expansion or contraction. Industry, on the contrary, may expand or contract indefinitely—especially that part of industry devoted to construction work. For the sources of "booms" and depressions, therefore, we must look to the enterprises which build and equip houses, stores, factories, railways, docks, and the like.

Of the huge total of construction, which Hull believes to make over three-quarters of all industrial operations, at least two-thirds, even in the busiest of years, consists of repairs, replacements, and such extensions as are required by the growth of population. This portion of construction is necessary and must be executed every year. But the remaining portion is "optional construction," and is undertaken or not according as investors see a liberal or a meagre profit in providing new equipment.

Now, when the costs of construction fall low enough to arouse "the bargain-counter instinct," many of "the far-seeing ones who hold the purse-strings of the country" let heavy contracts, and their example is followed by the less shrewd. The addition of the resulting new business to the regular volume of "necessity construction" plus the provision of ordinary consumers' goods creates a "boom." But, after a year or two, contractors discover that their order books call for more work than they can get labor and materials to finish on contract time. When this oversold condition of the contracting trades is realized, the prices of labor and of raw materials rise rapidly. The estimated cost of construction on new contracts then becomes excessive. Shrewd investors therefore begin to defer the execution of their plans for extending permanent equipment, and the letting of fresh contracts declines apace. As they gradually complete work on their old contracts, all the enterprises making iron, steel, lumber, cement, brick, stone, etc., then face a serious shrinkage of business. Just as the execution of the large contracts for "optional construction," let in the low-priced period, brought on prosperity, so the smallness of such contracts, let in the high-price period, now brings on depression. Then the prices of construction fall until they arouse "the bargain-counter instinct" of investors once more, and the cycle begins afresh.

While Hull grants that panics are often caused by strictly financial disorders, he holds that all industrial depressions are caused by high prices of construction, and foreshadowed by high prices of iron. Consequently he believes that depressions could be prevented from occurring if the Government would collect and publish monthly "all pertinent information in relation to the existing volume of construction under contract for future months, and all pertinent information in relation to the capacity of the country to produce construction materials to meet the demand thus indicated."[240]