Читать книгу Economics and the Public Welfare - Benjamin M. Anderson - Страница 18
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The crisis came with extraordinary suddenness. I symbolized it at the time in these terms. We have been stretching a rubber band. Europe holds one end, we hold the other. The tension in the rubber band represents the high prices of commodities. The tension has been growing. Suddenly Europe turns loose her end. Commodity prices drop in thirteen months from 248 to 141!
Europe turned loose her end, not because she did not continue to desire commodities, but because of the growing doubt all over the world as to her ability to pay, and also because of a growing exhaustion of the credit resources of those who wished to sell to her on credit.
Wholesale and Retail Prices. One of the first episodes, anticipating the general fall in raw materials and in the general average of wholesale commodity prices, was a cut of twenty percent in retail prices at John Wanamaker’s in New York on May 3, 1920. Wanamaker, moving first, cleaned out his inventory at high prices, and put himself in a strong financial position. Some other retailers followed. But the first general break was not in retail prices. Wanamaker’s acted in response to what was called a “buyers’ strike.” Public resistance to rising prices became a general subject of discussion, though it was probably more talked about than real.
Wholesale Prices Break from 248 to 141. The decline in commodity prices at wholesale was extraordinarily rapid. A peak had been reached in May 1920 at 248 percent of the 1913 prices according to the contemporary Bureau of Labor Statistics Index. By August 1921 this index had dropped to 141. In a single year, August 1920 to August 1921, the drop was one hundred points. American industry met this shock amazingly well. American agriculture suffered a great deal because of it. Agriculture in outlying countries, like Cuba and South America, was prostrated by it. Twenty-five-cent sugar ruined Cuba. Two-and-a-half-dollar wheat did grave damage to American agriculture. But the boom and the high prices and the
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great collapse left the general industrial situation in the United States pretty well intact.
Industry Stands Shock—Agriculture Badly Shaken—Different Financial Techniques. The explanation is to be found in the difference in financial technique between industry and agriculture. Industry rather generally was distrustful of the boom during the war and to a considerable extent even after the war. Industry used the boom as an opportunity to accumulate additional capital funds and to increase liquidity. The United States Steel Corporation, for example, increased its cash in banks, increased its holdings of marketable securities, and reduced its debt during the war, as well as increased its surplus and undivided profits very greatly out of earnings. It did not pay out all of its profits in dividends. The United States Steel Corporation was stronger in the summer of 1921 after the grand smash than it had been in the summer of 1914 before the war began.
Agriculture, on the other hand, to a great extent, had used the extraordinary wartime earnings as a foundation for rising prices of agricultural lands and increased mortgage debt on agricultural lands. This in part grew out of the conservative wisdom of agricultural communities. A wise investor will ordinarily buy the kind of thing that he knows and understands. The farmers knew land. With windfall profits they bought more land. Ultraconservatism in agricultural communities, on the part of old farmers who did not wish to expand, consisted in taking a first mortgage on some other man’s land where he knew the land and could watch it. Ordinarily such practices had proved wholesome and sound, but when widely practiced for several years of high profits, they inevitably made for a great rise in land values and a great growth in debt based on land values.
Land Speculation—Iowa. The center of the boom in agricultural lands was Iowa. Land values had long been unduly high in Iowa as compared with land in other states with the same earning power. In 1919 and 1920 they soared extravagantly.1
Temporarily Embarrassed Businesses. A great many industries were temporarily very hard hit and embarrassed. Inventory shriveled in value. A great many accounts and bills receivable proved to be difficult to collect. Industry itself, however, had accounts and bills payable, including notes due at the banks, which were maturing. Liquidity decreased with great rapidity. The banker giving credit is accustomed to attach high importance to the “current ratio,” that is to say, the ratio between quick assets and quick liabilities. Quick assets are cash in bank, accounts and bills receivable,
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and inventory. Quick liabilities are accounts and bills payable. The ratio required in different industries will vary with the general liquidity of the business and special circumstances connected with the business, but in general the banker likes to have a current ratio of 2 or 3 to 1. Current ratios declined with startling rapidity. One important company had a current ratio of 5 to 1 on December 31, 1919, and only 1 to 1 on December 31, 1920. Under such circumstances it became necessary for the banker to “look below the line,” that is to say, to consider the fixed assets and the fixed liabilities of the corporation as well as its quick assets and quick liabilities; to consider whether, taking all assets and all liabilities into account, the concern was solvent even though it might be temporarily frozen. Credit policy came to be centered on the question of solvency. Business policy for a great many corporations ceased to be concerned primarily with profits and came to be concerned primarily with solvency.
There were many strong corporations which rode serenely through this trouble without needing to call upon their banks for anything but routine loans, and some, like the United States Steel Corporation, which needed no loans at all. But most businesses needed to go to their bankers, and many of them came in fear and trembling.
Banking Policy, 1920-21. The main lines of bank credit policy pursued in this great crisis were admirable and very clean-cut. The banks themselves had taken advantage of the unusual profits of the war and the postwar boom to add to surplus and even to capital on a great scale. And they had, for the first time in a great crisis, the Federal Reserve banks to lean upon.
The trouble came, in general, to concerns which could give the banks commercial paper eligible for rediscount at the Federal Reserve banks. The Federal Reserve banks were in a strong position and extended credit, at a steep rate, to enable the bankers to meet borrowing demands. The first point in bank policy was that it was the business of the banks to extend credit to enable solvent customers to protect their solvency, but that if the customer were really insolvent, there was no use in throwing good money after bad. The second main point was that if the customer was to be helped at all he was to be helped adequately. If $50,000 was needed to save him he should receive a loan of $50,000 or else nothing at all. He should not be given an inadequate $30,000 loan. There was always the qualification in cases of this sort that if the customer were accustomed to borrowing from several banks he should not expect any one of the several to give him all that he needed, but should expect the banks rather to get together and divide up the burden, but in such a way that he would have adequate funds to protect his solvency. It was the business of the banks to enable their customers to mobilize their slow assets to meet their quick liabilities. It was no part of the duty of the bankers to validate the unsound assets of a really insolvent business.
Bank Creditor Committees. Solvency in many cases was a question of
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degree and a question of opinion. The bank credit men amassed in an extraordinarily short time all relevant information regarding virtually every business in the United States. And through the interchange of credit information this was available to all interested bankers. It became clear that there were many cases of well-managed businesses which, caught in the great disorder, would not be saved by temporary loans, but needed long-time help and would need it for an indefinite period. In some of these cases it could be seen that given time and unusual consideration, the business would finally pay out. In other cases it seemed probable that the business could never pay in full, but might in time work out at ninety or eighty or seventy-five percent. What was to be done?
The banks in this crisis developed a new technique designed to avoid the slow and wasteful process of the bankruptcy courts with the liquidation of “going businesses.” Bank creditor committees were formed. The businesses put themselves in the hands of the banks informally. Creditor banks agreed with one another to defer collection of the loans, insisting, as they did so, upon drastic economies in the debtor businesses. In cases where management was good, the banks knew very well that the management was one of the great assets of the business and that the management could handle things for the banks much better than the banks themselves could. In cases where the management was of doubtful integrity or had proved itself incompetent, the credit committees would insist on a change of management as a condition for extending the loans. Sometimes the banks would scale down the loans so as to put the businesses in a position to get new credits from purveyors of raw material. Sometimes the banks would even advance some new money to keep a business functioning, knowing very well that a functioning business might pay out ultimately, while a business that had ceased to function would rapidly disintegrate and dissipate what assets it had. It was a superb piece of credit work.
New York Aid to Rural Banks. Banking policy had many angles, and banking policy in the great financial centers had to overlook the whole country. The great New York banks had correspondent banks in every part of the nation which turned to them for help and to which they gave help, lending against whatever assets the local banks had, including the small receivables of their local customers. In the portfolio of the Chase National Bank of New York there was a note for $104, signed by John Wilhite and Lizzie his wife, secured by a chattel mortgage on Mollie—Mollie being a mare mule sixteen hands high, five years old, and broken to single and double harness—resident in the state of North Carolina. This note had come as part of the collateral to a loan for $100,000 made to a North Carolina banker.
In the first half of December 1920 the old chief of the Chase National Bank, A. Barton Hepburn, stated that he was getting very disquieting reports from the Panhandle of Texas and from Montana regarding the cattle
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situation. The farmers, under pressure to pay debts, were shipping out their cattle—not merely the fat cattle but also the lean cattle and the she-cattle, breaking up the flocks and herds. And these cattle sold under such stress were obtaining ruinously low prices in the market in Kansas City. Hepburn said, “Now I am going to scurry around and get some money out to the Texas and Montana banks so that they can lend enough to those farmers to keep the flocks and herds together.” But he wished a speech made about it which would outline a general policy that might be useful to the banks in this situation.
The speech was made in Iowa City to the bankers of Iowa late in December. After describing the situation to them, the speaker said, “If you have farmer debtors who have fat cattle which they are holding in the hope of higher prices, call their loans, make them sell. They won’t get the higher prices. If you have farmer debtors who have corn that they are holding for higher prices, call their loans. Make them sell. They won’t get the higher prices. But if you have farmer debtors who have corn and who know how to feed cattle, lend them additional money to enable them to buy these extraordinarily cheap cattle in Kansas City so as to get the lean cattle and the corn together. We must keep agriculture a going concern.”
Privately he told the country bankers individually that the Chase National Bank would make them additional loans to help them in carrying out this policy.
Hepburn’s Stock Market Pool, December 1920. At approximately the same time Hepburn revealed the existence of a pool that had been organized to engage in some operations in the stock market. There have been no references to this pool in print, and the existence of it was not widely known even in Wall Street at the time. It was a closely guarded secret. The stock market had had a boom in 1919 which culminated in a very sharp break late in the autumn. During 1920 it had been left to its own devices, struggling against tight money, liquidating its debts, but holding without violent breaks and gradually sagging until the fourth quarter, when a sharp break came. Brokers’ loans had been $1.75 billion at the end of 1919, and they had been reduced to under $700 million by the end of 1920. Hepburn said that the market was getting discouraged, and that he and a number of other men who felt responsible for the situation had decided that it needed a little support. They were not going to do much. They were going to buy 10,000 shares of United States Steel, and they were going to buy some shares of other pivotal stocks. The point was simply to steady the market. They did not expect to make any money in the pool operations, but they hoped to avoid losses. He said that the pool would begin operation the following morning, namely, December 22, 1920, and that it might be interesting to watch what the market did. The next day the market did turn up, and it continued a gradual rise into the following May, though the pool
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ceased to operate after a few weeks. It was interesting to see the explanations given by the financial writers in the New York papers, none of whom apparently had any suspicion that a pool was operating. The action of the stock market put new heart and courage into the financial community. The term pool is one which suggests a great deal of iniquity, but the present writer is unregenerate enough to believe that this was an act of financial statesmanship,
Organized Commodity Exchanges Met Shock Amazingly Well. The industrial and mercantile community met the shock with extraordinary resourcefulness. The great exchanges, the organized markets in commodities, the New York Cotton Exchange, the Liverpool Cotton Exchange, the Chicago Board of Trade, and others showed extraordinary resourcefulness in diffusing losses. The brokers kept their solvency and paid their debts. On the Liverpool Exchange, Egyptian cotton had been at a very high premium over middling cotton, and middling cotton had been at a very high price. Suddenly the basic price of middling cotton broke violently, and simultaneously the differential for Egyptian cotton practically disappeared. Information at the time was that there were no failures among the Liverpool cotton brokers.
Hedging Protected Millers and Spinners. Cotton spinners and millers normally protect themselves by short sales of the cotton or grain which they buy to work up into cloth or flour—short sales which they cover when the cloth or the flour is ready to market. If the price of wheat goes down, the price of flour will go down. The miller does not care. If the wheat and flour go up, he makes a profit on the wheat he has bought to grind, but he loses on his short sale. If the price of wheat and flour come down, he loses money on the wheat he is grinding, but he makes money on his short sale. He gives his attention to his main business, which is to get a profit out of the differential between the price of wheat and the price of flour, and avoids speculative risks by imposing on some speculator the burden of carrying the risk. But the speculator who has bought wheat for future delivery is not a philanthropist and is not a static person. He may sell the next day, and the man who buys from him may sell a few minutes later. A loss of forty cents a bushel, instead of ruining a miller, may be diffused among fifty to a hundred speculators, each of whom may lose a fraction of a cent. It is rarely necessary to waste tears over the highly organized centers of commodity speculation. They know how to take care of themselves. And they know how to take care of the industries which use them for hedge purposes.
Weak Spots Mapped and Charted by Spring 1921. Businessmen and bankers both did a very thorough job in cleaning up the weak spots and in making readjustments in prices, costs, methods, and the proportions of industrial activity. By early spring 1921 the credit weak spots were mapped and charted. The banks knew what businesses could survive and what
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businesses must go under or at all events have a readjustment of their financial setup. It was clear that the general credit situation was impregnably strong, and that the credit system would survive the shock.
Costs Rapidly Readjusted. Costs were rapidly readjusted. Raw materials, of course, had fallen drastically. Rentals were in many cases readjusted, often by voluntary negotiations. Sometimes a bank creditors’ committee in showing leniency to an embarrassed business would call into the discussion the landlard from whom the business was leasing property and make the general settlement contingent upon the landlord’s reducing the rent—a thing which was to the landlord’s interest under the circumstances. In some cases it was necessary to put a concern into bankruptcy in order to get rid of losses by impossibly high rentals. The stronger businesses, of course, carried out their contracts until the leases expired.
High Interest Rates Provided Insurance Against Losses. Very often the banks in dealing with embarrassed businesses would reduce interest rates or even waive interest for a time. But the year 1921 remained a year of high interest rates. In this was one of the elements of strength in the situation. It was definitely recognized that there was a very substantial element of insurance in interest rates. The banks could stand a substantial loss on some of their loans in view of the general interest rates prevailing.
Moderate Decline in Wages. Wages declined, although nothing like so much as commodity prices. The following table compares wages and wholesale prices for the years 1914-22 inclusive:
INDEX NUMBERS OF WAGES PER HOUR AND WHOLESALE PRICES IN THE UNITED STATES*
| Year | Wages per hour (Exclusive of agriculture) | Wholesale prices (All commodities) |
| 1914 | 100 | 100.0 |
| 1915 | 101 | 102.1 |
| 1916 | 109 | 125.6 |
| 1917 | 125 | 172.5 |
| 1918 | 159 | 192.8 |
| 1919 | 180 | 203.5 |
| 1920 | 229 | 226.7 |
| 1921 | 214 | 143.3 |
| 1922 | 204 | 142.0 |
* United States Bureau of Labor Statistics—bases changed.
The year 1921 shows a drop in wage rates per hour of a very moderate sort. The figure was 229 in 1920 and 214 in 1921. Wholesale prices, on the other hand, dropped from a 1920 average of 226.7 to a 1921 average of 143.3. Wages had lagged behind wholesale prices in the years 1916-19
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inclusive. They had passed above wholesale prices in 1920. They dropped very moderately in 1921, when wholesale prices made a violent drop.
The decline in wages, however, was a very unequal one. In the hardest pressed industries they dropped very much more, and in their dropping facilitated industrial revival.
Because of Immigration Decline. The basic explanation of the failure of wages in the United States to decline with wholesale prices is to be found in a change that had taken place in our labor supply in the years following 1914. Prior to 1915 we had had an immense immigration, running over one million a year frequently and in two years running between 1.2 and 1.3 million. Of the immigrants that came in, moreover, a very high percentage were young men and women ready for work. This had imposed a drag on the rise of wages in the United States. Wages had risen with the growth of capital and with technological progress year by year. But wages had not risen nearly as rapidly as would have been the case had immigration been shut off and had we been dependent solely on our own internal population growth.
The coming of the war immediately shut off immigration from Europe, and legislation following the war sharply restricted immigration.
The effect of the cessation of immigration was particularly marked in the city of New York. Wages of maidservants, for example, had been $3.50 a week in 1913, with the maid’s living provided by the employer. There was a steady stream of young German and Irish women coming into the city, as well as a good many Negro girls coming up from the South. Beginning very early in the war these wages began to mount, and the wages of maidservants reached $18 a week in 1918. After the slump in 1921 they remained at $14 to $15.
We could have had this rise of wages in the United States at any time before the war had we been willing to restrict immigration. The experience of the war itself led us to restrict immigration. We found to our surprise that we had admitted so many new Europeans that it had endangered the national unity. We found our country less homogeneous than seemed safe in wartime, and we restricted immigration.
The failure of wages to decline toward prewar levels, therefore, as commodity prices were declining toward prewar levels, was a legitimate supply-and-demand phenomenon. Men had become scarcer, and therefore dear in relation to the capital and natural resources of the country. A radical permanent rise in wages was therefore explained on economic grounds.
Artificially High Wages in Postwar England Create Chronic Unemployment in 1920s. It is noteworthy that the same phenomenon occurred in England without the same explanation. Wages rose with commodity prices during the war and postwar boom. When commodity prices slumped in England in 1920 and 1921, wages slumped very much less and remained high above prewar levels. In England, however, the explanation was not a
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change in the supply-and-demand situation affecting labor, but was rather the power of labor unions in maintaining artificially high wage rates. The result of this for England was chronic unemployment throughout the 1920s on a very heavy scale, while in the United States with the revival of 1921-23 we regained full employment at high wages which were economically justified.
Our Unit Bank System Compels Full Liquidation—Contrast with England. A further factor in the United States making for a much fuller and completer readjustment in 1920 than that which England had, was to be found in our system of independent unit banks as contrasted with the great British branch bank system. England had five great banks which dominated the picture, with branches all over the British Isles and over many parts of the world outside. We had 20,000 independent banks, every one of which was under obligation to meet its cash engagements at the clearing-house every day. It was possible for us, with the aid of the Federal Reserve System, to make our credit readjustment in the crisis orderly, but we had to make it thorough. It was not possible for us to maintain stale and hopeless situations by means of bank credit. Each bank had to clean up in order to keep itself solvent. Certain of the great British banks, as late as 1925, had still uncollected loans to the cotton industry in Manchester, carried over from 1920, and other commitments of similar sort stale and frozen. The forbearance of the British banks had not saved these industries. It had, on the other hand, prevented their passing into stronger hands and into the hands of more alert and flexible management. It had prevented their freeing themselves through bankruptcy from impossible financial burdens. It had prevented their becoming effective again.
Many Worse Things Than Great Break in Prices. A collapse of commodity prices of one hundred points in a single year is not a pleasant thing. It is not a pleasant thing to see well-meaning but relatively ineffective men lose their capital and lose control of their companies and see their companies put into stronger hands through bankruptcy or informal reorganization. And it was certainly not a pleasant thing to see 4,754,000 workmen unemployed, as was the case in 1921. But there are many worse things.
Worse Was Far Heavier Unemployment, 1931-39. One worse thing was the much heavier volume of unemployment which we had in the United States from late 1931 to 1939, despite (or, as later chapters will show, because of) all the well-meaning efforts of the New Deal government to make employment by an outpouring of federal funds, by NRA, and by other unsound devices.
Japanese Stagnation, 1920-27. And a worse thing took place in Japan where, early in 1920, the great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan
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endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year’s production, Japan lost seven years, only to incur greatly exaggerated losses at the end. The New Deal began in Japan in early 1920—a planned economy under government direction designed to prevent natural market forces from operating and, above all, designed to protect the general price level.
In contrast, in 1920-21 we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. By the spring of 1923 we had reached new highs in industrial production and we had labor shortages in many lines.
