Economics and The Public Welfare
74: Alternative Explanations of the Great Depression of 1930-1939
Chapter 74
Alternative Explanations of the Great Depression of 1930-1939
Preceding chapters have explained the great depression of 1930-1939 as due to the efforts of the governments, and very especially of the Government of the United States, to play God.
The trouble has come as governmental action has interfered with the markets. High tariffs following the first World War, when we had changed from a debtor to a creditor nation, and when only a low tariff policy could give us a sound and normal export trade in adequate volume, made the beginning of the trouble. They created a grave disequilibrium between our export industries, notably agriculture, and the rest of our industries. Artificially cheap money, partly designed to offset this, gave us for a time a great export trade, but also created a vast fabric of debt, internal and international. As the volume of this debt grew, its quality deteriorated. The increased tariffs in 1930 further impaired the quality of the international credits, and precipitated rising tariffs and other trade restrictions all over the world, which made it almost impossible for debtor countries to pay their debts with goods. The period 1931 down to March of 1933 saw the progressive collapse of the unsound portions of this vast fabric of debt. The efforts of the Government in 1929 and 1930 to hold farm prices artificially high, and to hold up wages and prices generally, intensified the difficulties.
Finally the failure to get out of the depression in the years 1933 to 1939 has been explained as due to the great multiplicity of New Deal “remedies,” all tending to impair the freedom and efficiency of the markets, to frighten venture capital, and to create frictions and uncertainties, and impediments to individual and corporate initiative.
But there have been alternative explanations offered, which have sought to find the explanation of the great depression, not in the blunders of Government, but in defects of industry and finance themselves, and which assert that there have been “structural changes” in industry and finance which came in the 1920’s and 1930’s which have made it impossible for the old free enterprise system, as we knew it before the first World War, to function again. These theories come from writers who are in general hostile to the free enterprise system and who believe that the Government, far from retiring from the role of God, must play God yet more vigorously. What follows will deal with certain of these alternative interpretations.
Berle’s Sudden Intensification of the “Instinct for Liquidity.” One theory is that offered by Adolph Berle in his book Liquid Claims and National Wealth, written in 1934. Berle is much impressed with the great expansion of “liquid claims” in the form of security issues, bank deposits, cash surrender value of life insurance policies, and rapidly rising security prices which took place between 1922 and 1929, moving much more rapidly than national wealth moved—and we may add, moving much more rapidly than national income from production rose. But Berle does not explain this as have the foregoing chapters. He does not see the origin of it in the unsound policy of the Federal Reserve banks, and particularly in their great purchases of Government securities. He does not really know what caused it. Thus he says on page 69 of his book, “Something happened whose cause we may only vaguely attempt to assign.” On page 81 he says, “Plainly, the instinct to have ready cash, either to satisfy desire or to allay fear, became in that decade an instinct requiring the satisfaction beyond all measure; and the need was considered as a necessity of life rather than the luxury of the former seeker after treasure trove, or the monopoly of the small mercantile class which really carried the load of American finance and American capitalism.” The superficiality of this doctrine—which has had wide vogue—is pretty obvious. No psychologist or biologist would accept the notion of a sudden intensification of an instinct, or the existence of an instinct of holding ready cash. The cause of the evils and abuses to which Berle refers is the excessive volume of bank credit created by Federal Reserve policy, which made a very healthy and sound financial organism go wrong.1
The Tendency toward Corporate Consolidation. Karl Marx long since contended that there was an inevitable tendency toward monopoly with the elimination of small and moderate-sized businesses. The Revisionist Socialist, Bernstein, long ago gave effective answer to this contention, but the doctrine has been revived on the basis of the phenomena of the period of the 1920’s. Between 1924 and 1929 there were a great many consolidations, with a sudden cessation of consolidations after the stock market crash.
This happened once before in our history on a great scale, namely, in the years 1899 to 1902. There have been only two great periods of rapid consolidation in our history. Both of these periods were periods of cheap money and excited stock markets. The first “new era” came when, following the settlement of the gold standard question in the election of 1896, we began to gain gold on a great scale from the outside world, and, on the basis of the gold, made an expansion of bank credit in excess of the needs of trade. The surplus spilled over into the securities market and we had a big consolidation movement, as it was very easy for a holding company to put out new securities to the public and use the proceeds in purchasing the securities of individual companies which the holding company wished to dominate and consolidate. It was the period of the formation of the United States Steel Corporation and of the International Mercantile Marine. In the period 1924 to 1929 we had a good many similar things, consolidations not for industrial reasons but for stock market reasons, consolidations that would not have taken place if money had not been excessive.
Such movements are harmful and should be prevented, but they are not inherent in the nature of industry itself. The Government should be alert with Sherman Law prosecutions when phenomena of this sort manifest themselves, and the Federal Reserve System should prevent them from manifesting themselves by refusing to expand credit to finance a stock market boom.
For the figures with respect to financial consolidations in the United States, showing the heavy concentration of such consolidations in the two periods, 1899-1902 and 1924-1929, the reader may consult Big Business, issued by the Twentieth Century Fund, Incorporated.2
The Fallacious Theory that Reduced Rate of Growth of the Population Narrows Investment Opportunities and Should Be Offset by Government Spending. The theory was presented by Professor Alvin H. Hansen 3 that we had a new thing in the period of the 30’s, a structural change which greatly narrowed investment opportunities. The growth of population suddenly slowed down. The population of the United States increased by 16 million from 1920 to 1930, but the rate of growth between 1930 and 1938 was perhaps half of that. The estimate is that the growth of the population in the last half of the nineteenth century was “responsible” for perhaps 60% of the “capital formation” in the United States. The meaning apparently is that approximately 60% of the capital invested in the United States in that period was devoted to the kind of production that would supply the wants of an expanding rather than a stationary population. From this supposed decline in the opportunities for private investment, the conclusion is drawn that the Government must spend greater or less amounts, depending on the state of business and the volume of the national income, for the purpose of making good the deficiencies of private investment.
There has been a long-run trend toward a higher average age in the population and toward a slower percentage growth in the population due (a) to an increasing diffusion of knowledge of birth control, (b) to progress in medical knowledge which makes for a greater length of life, and (c) for the United States, to our restrictions on immigration. But when the startling contrast is made between the 1920’s and the 1930’s with respect to this point, and when it is asserted that “in this shift must be sought a basic cause of not a few of the developments in our changing economy,” we must raise very definitely the question as to what is cause and what is effect.
It seems clear as daylight that the sharp decline in the rate of population growth in the 1930’s was effect rather than cause. The 1920’s were prosperous years. Despite our restrictions, immigrants came in large numbers. Our boys could easily get jobs. Girls were happy to give up jobs and get married. Young couples had confidence in the future and had children when they wanted them. In contrast, the 1930’s were years of depression, uncertainty, and fear. Immigration of aliens for several years was exceeded by emigration of aliens. Marriages were delayed. Many girls at work held their jobs after marriage. They were afraid to have children.
Taking the years 1922-1928 as our base, or 100%, we find the number of marriages in leading cities of the United States dropping to 80% in 1930, to 70% in 1931, and to 63% in the gloom of 1932. But we find it also mounting rapidly again in the following years to 88% in 1937—only to drop sharply again to 75% in the acute depression of 1938.
In 1938 and 1939 we had very heavy unemployment. The average for the year 1938 was 10,099,000, or 19% of the working force, and the average for 1939 was 9,080,000, or 17% of the labor force. But with the improvement in economic opportunities which 1940 brought, marriages and babies began to increase and in 1941 both came in great volume. With our own participation in the war, following Pearl Harbor at the very end of 1941, a new factor was added to the factor of economic opportunity—youth clinging to life and wishing to propagate more life. Young women who saw their husbands destined for foreign service wanted babies. Young men going to the front wanted to leave babies behind them.
Marriages jumped from 1,319,000 in 1938 to 1,565,000 in 1940, to 1,679,000 in 1941, and to 1,758,000 in 1942. The marriage rate, which stood at 10.20 per 1000 population in 1938, rose to 12.60% in 1941, and to 13.10 in 1942.
Births in 1939 were 2,265,000 and the birth rate was 17.3 per thousand. In 1940 births rose to 2,360,000, or 17.9. In 1941 births rose to 2,513,000 and the birth rate to 18.9. In 1942 births rose to 2,809,000 and the birth rate to 20.9 per thousand. In 1943 births rose to 2,935,000 and the birth rate to 21.5. This birth rate for 1943 may be compared with 18.8 for 1929 and with 16.7 for 1936. The boys and girls still want to get married, and they still want babies. When they find economic opportunity, when they have even temporary good times, they quickly make an absurdity of this sudden great “structural change.” The reduced growth of population in the 1930’s was not the cause of depression; it was the effect of depression.
But how significant would it be from the standpoint of investment opportunity if it were true we had here a permanent change? What difference would it make? Assume that for the future we are to have less young children and more older people, and that the population is to grow more slowly. What bearing has this on the question of investment opportunities—except as any violent shift in the economic situation creates for a time a problem of adaptation? That it would mean a change in the direction of demand is quite clear. A slowly growing population with more adults and fewer children would demand less playgrounds and more golf courses. It would demand less milk and more whisky.
Would it demand less automobiles? A young couple with three or four children will usually be a one-car family. A young couple with no children is more likely to be a two-car family, and the probabilities are high that they will turn in their used cars for new cars more frequently than will the one-car family with three or four children.
Will the population with fewer children and more adults and slow population growth make more or less demands for housing? The point is debatable. They won’t need so rapid an increase in the number of separate dwellings, obviously. But if they are prosperous and have growing incomes, they will call for qualitative improvements in housing and for progressively more space per person. The young couple which is putting its increased income into more babies will be much less concerned about the newest gadgets in dwelling facilities and equipment than will the young couple with one or two children or no children. Older people, moreover, stand the stress and strain of crowding far less than younger people and children, whose nerves are quieter. They want more room, more quiet.
There is no reason at all to suppose that such a population, whose income is growing through technological progress, capital accumulation, and increased efficiency, would not offer just as great an opportunity for investment as a population which is rapidly increasing and where there are many children. The rapidly growing population would want more things of the same kind. A more slowly growing population would want better things, qualitative improvements, and a greater variety of things. It is not necessary to examine the statistical basis of the proposition that 60% of our capital formation in the last half of the nineteenth century was due to growth of population. Since population was growing rapidly in that period, obviously the direction of demand would be toward the kind of commodities needed in that kind of population; and capital, seeing its best opportunities for investment, would flow in that direction. If a more slowly growing population called for qualitative improvement and a greater variety in the goods it was consuming, capital investment, wisely directed, would adapt itself to that.
Related to this fallacy of Hansen’s is the further fallacy that savings are excessive, that savings exceed investment opportunities, or at all events, exceed investments, and that government spending must offset uninvested private saving. This fallacy is dealt with in the chapter concerned with the undistributed profits tax of 1936, and in the “Digression on Keynes.”
The Fallacy that Technological Progress is Itself a Cause of Depression and General Unemployment. Economists generally agree 4 in rejecting the fallacy that technological progress is a cause of general unemployment and depression. The doctrine, of course, is old and has appeared many times, but there is rather widespread belief that a sudden intensification of technological progress in the 1920’s was responsible for the breakdown in the 1930’s. Part of the vogue of this fallacy has been due to the activities of the so-called “Technocrats,” who have given us some very extraordinary figures. In the matter of electric light bulb production, for example, it has been asserted that a man with a machine could produce nine thousand times as many electric light bulbs in 1929 as could be produced in 1914. The actual increase was impressive enough, but it was in fact only thirty fold.5
We had in the nineteenth century much more impressive increases in efficiency per man in agriculture, notably with the invention of the reaper and binder, and other agricultural machinery.
The fear of technological unemployment has had many manifestations in labor policy. Thus we saw the Luddites during the Industrial Revolution in England destroying the new machines. We have seen British Trade Union policy and managerial policy resisting new methods both before and after the first World War—which is a very important factor in explaining Great Britain’s economic decline.
We have seen Sismondi, one of the precursors of Karl Marx, writing in the first half of the nineteenth century, holding that the state should attempt to curb production and put “a drag upon the too rapid multiplication of inventions.” 6
Now the contention has been advanced that the period 1920 to 1930 saw a very sudden intensification in the rate of technological progress, and that the troubles of the 1930’s grew out of this. The following figures, used earlier in connection with the industrial revival, 1921-1923, show that there was indeed a very sharp spurt in technological efficiency between 1921 and 1923. We had not had time, under the pressure of the war years, to introduce new methods. There was a great accumulation of unused technological ideas, including the new technology of war, which was waiting for a peacetime application. In the years 1921 and 1922 entrepreneurs had both time and incentive to apply the new technology, with the result shown in the following table.
| Growth of Manufacturing Production in the United States, 1914-1923 * | |||
|---|---|---|---|
| Index Numbers of Physical Volume of Production, Number of Wage-Earners, and per Capita Output | |||
| Year | Physical volume of production | Number of wage-earners | Output per wage-earner |
| 1914 | 100.0 | 100.0 | 100.0 |
| 1919 | 127.7 | 124.5 | 102.6 |
| 1921 | 105.7 | 100.1 | 105.6 |
| 1923 | 156.3 | 130.3 | 120.0 |
* F. C. Mills, Economic Tendencies in the United States, p. 192.
There was a great spurt in technological progress and production in the two years, 1921 to 1923. The great spurt in production itself generated new purchasing power which cleared the markets of products. Production in one place gives rise to demand for products in other places.
Be it observed that the rapid spurt in technological progress came, not at the end of the great boom 1921 to 1929, but rather at the beginning of that great boom.
And be it observed that both the increase in total production and the increase in production per man that followed from 1923 to 1929 were at a decidedly slower pace.
Three different sets of figures reveal this. Mills’s figures would show, as indicated above, an increase in the two-year period in manufacturing production per wage earner of 13.6% or an annual average increase of 6.8%. For the six following years, 1924 to 1929, inclusive, Mills’s figures show an annual average rate of increase of 3.3% in production per wage earner.7
The Census of Manufactures of 1931 gives the following table:
| Indexes for Wage-earners and Production, 1921 to 1929* | |||
|---|---|---|---|
| Census year | Wage-earners | Production (quantity) | Production per Wage-earner |
| 1921 | 100 | 100 | 100 |
| 1923 | 127 | 154 | 121 |
| 1925 | 121 | 158 | 130 |
| 1927 | 120 | 160 | 133 |
| 1929 | 128 | 179 | 140 |
* Biennial Census of Manufactures, 1931, p. 18, with bases changed to 1921.
This shows an annual average rate of increase in production per wage earner of 10.5% from 1921 to 1923, and of 1.9% from 1925 to 1929.
Finally, the study of Paul Douglas, which narrows the problem to production per man-hour in manufacturing, shows a high rate of increase between 1921 and 1923, with a drop to approximately 3.5% annual increase from 1923 to 1925, inclusive, which is lower than the 4% prevailing in the period 1900 to 1906, inclusive.8
Douglas’s figures show that there was no increase in production per man-hour from 1915 to 1921, and the sudden spurt from 1921 to 1923 he looks upon as the making up of arrearages. He adds that “had the pre-war rate of increase been maintained during the years 1913-21, when hourly output was, on the whole, stationary, the relative production per man-hour would have been approximately the same for 1925 as it was in fact.” He concludes: “. . . the above data should compel those who have written about the uniqueness of the expansion of production during the last seven years to reconsider their position.” 9 Professor Douglas’s figures end with 1925. The other two sets of figures, coming down through 1929, strengthen the case.
We need not here go into the theory of technological unemployment. It is well-established economic doctrine, which the reader will find in the textbooks, that new inventions give rise to increasing demand for labor and that over the decades and over the centuries the standard of life for the great mass of the people with growing population has been immeasurably lifted.10 This discussion is not concerned with the general theory of technological unemployment, but rather with the question of whether something new and startling in the application of technology to industry came in the decade of the 1920’s, which would explain the depression of the 1930’s. The answer, on the basis of the foregoing figures, is that nothing of the sort occurred.
Two “New Eras” Compared—1921-1929 and 1896-1903. Some of the more serious and thoughtful adherents of the view that new and strange forces were at work in the period 1922-1929 have drawn statistical materials to support this view from the elaborately worked out and careful study by Professor Frederick C. Mills called Economic Tendencies in the United States, in which a large number of comparisons are made between the prewar period 1901-1913, inclusive, and the postwar period 1922-1929, inclusive. It is due Professor Mills, since his book in referred to in this connection, to call attention to his own warning in his introduction against drawing confident conclusions from his figures: “A new cosmology is not a necessary accompaniment of every new set of observations.” 11
Moreover, as Professor Mills makes his comparisons, he is careful to make his conclusions very tentative. But some who have read the book and employed the figures it contains have gone far beyond Professor Mills’s own guarded and tentative deductions. The figures for the period 1901-1913 do show in many respects a slower pace than the figures for 1922-1929. Certain of these contrasts are summarized by Mills himself in the following table:
| Average Annual Rate of Change * | ||
|---|---|---|
| 1901-1913 (per cent) | 1922-1929 (per cent) | |
| Population of the United States | + 2.0 | + 1.4 |
| Physical volume of production | + 3.1 | + 3.8 |
| Volume of production per capita of the population | + 1.1 | + 2.4 |
| Prices, wholesale | + 1.8 | - 0.5 |
| Volume of employment, manufacturing industries | + 2.7 | + 1.0 |
| Per capita real earnings, manufacturing workers | - 0.1 | + 1.4 |
| Prices of industrial common stocks | + 2.8 | + 19.4 |
* Ibid., p. xvii.
If one be content to use Professor Mills’s study as a mine of valuable and carefully worked out facts, the book is of immense value. If, however, the book is to be taken as presenting an adequate contrast between prewar and postwar tendencies (and Professor Mills makes no such claim for it), then an obvious difficulty presents itself at once. The two periods chosen, 1922 to 1929, inclusive, and 1901 to 1913, inclusive, are unlike periods. The later period starts with a great depression and moves with hardly any interruption to the culmination of a great boom. The period 1901-1913, on the other hand, starts in the middle of a great boom, goes through a 45% break in the stock market in 1903 and the major crisis in 1907, into the quieter years that followed 1909. Obviously this comparison will give us no proof that new and strange things were at work in the later period.
In early 1929, while the “new era” philosophy still held its hypnotic power, the Chase Economic Bulletin instituted a comparison between the period we were then living in and an earlier “new era,” namely, that from 1896 to 1903,12 a period which, like the later period, started with a great depression and carried through into the culmination of a great boom. The earlier “new era” exhibited virtually everything to be found in the later “new era,” namely, rapidly increasing physical volume of production, rapidly rising stock market prices, rapidly rising dividends, far outrunning the increases in wages, and so on. The first “new era” was even more brilliant on the side of physical increase in production, and spectacular enough in the matter of financial phenomena, though the palm should be ceded to the second “new era” in the matter of financial folly.
The Common Cause of the Two “New Eras.” Moreover, a common cause was at work in both of these “new eras.” In both “new eras” there was an immense flow of gold to the United States, with rapidly increasing bank reserves, with bank credit expanding beyond the needs of commerce, and with excess credit available for capital uses and for speculation. “Cheap money” characterized both “new eras,” and cheap money is the most dangerous intoxicant known to economic life, especially if it be prolonged through many years.
But the first “new era” was one in which the whole world was sharing in the increase in gold, in which gold was sinking in real value, and in which, as a consequence, commodity prices throughout the world were rising, whereas the second “new era” was one in which the United States alone had excessive gold. The first “new era” was a time when trade among the nations moved easily without excessive trade barriers. The second “new era” was one in which trade barriers were very excessive and in which the great creditor nations, and very especially the United States, could get out a large volume of exports only by giving an ever increasing volume of credit.
The reactions from the excesses of the first “new era” were short. The overextended credits could be liquidated as debtors sold goods at concessions in price to pay debts. As the second “new era” came to a close, however, debtor countries found rapidly rising trade barriers as they tried to sell goods and to pay debts.
The first “new era,” like the second “new era,” was characterized by an immense increase in the issues of stocks and bonds and by a growing proportion of stocks to bonds.
The first “new era” showed a very rapid rise in security prices, as did the second “new era.” And the prices of Stock Exchange seats rose rapidly in both periods.
Much has been made of the figures in Mills’s book which show a much more rapid growth of dividends than of wages between 1922 and 1929, even though wages were advancing rapidly. It has been thought that we had here something new and startling in the postwar period, destructive of the stability of economic life and requiring a radically new social policy.
Of course dividends increase more rapidly than wages from the bottom of a depression to the top of a boom, just as dividends drop much more rapidly than wages from the top of a boom to the bottom of a depression. The stockholder is the risk bearer, the residuary claimant on the earnings of industry. He takes what is left. But the notion that this is a new development, peculiar to the 1922-1929 period, is surely negatived by the following table comparing railway wages and railway dividends in the earlier “new era.”
| Index Numbers of Railway Wages and Dividends | |||||
|---|---|---|---|---|---|
| Average Daily Compensation of Railway Employees * (Simple Average of Ten Territorial Groups) | |||||
| Years ending June 30 | Enginemen | Firemen | Machinists | Section foremen | Dividends on common stocks paid by interstate railways † |
| 1894 | 100 | 100 | 100 | 100 | 100 |
| 1895 | |||||
| 1896 | |||||
| 1897 | 99.9 | 100.3 | 99.4 | 99.8 | 95.4 |
| 1898 | 102.3 | 102.5 | 101.2 | 99.1 | 99.6 |
| 1899 | 102.3 | 103.2 | 101.5 | 99.0 | 107.1 |
| 1900 | 103.0 | 105.0 | 101.4 | 99.1 | 139.9 |
| 1901 | 104.0 | 106.0 | 102.5 | 100.6 | 153.7 |
| 1902 | 105.4 | 107.2 | 103.3 | 101.2 | 188.7 |
| 1903 | 109.1 | 110.7 | 109.1 | 103.6 | 203.5 |
| 1904 | 111.6 | 114.2 | 113.3 | 104.3 | 235.3 |
| 1905 | 112.7 | 115.5 | 116.0 | 104.8 | 252.3 |
| 1906 | 111.9 | 116.8 | 117.0 | 105.6 | 295.8 |
| 1907 | 116.3 | 122.2 | 125.3 | 111.1 | 345.6 |
* Based on Seventeenth Annual Report of the Interstate Commerce Commission on the Statistics of Railways in the United States, pp. 44-48, and Twenty-first Annual Report, pp. 48-52.
† Based on W. C. Mitchell, Business Cycles, Berkeley, Calif., 1913, p. 200.
Labor’s Share in The National Income. Certain doctrines currently held respecting the decade of the 1920’s as compared with previous periods are, on their face, wrong. Thus, the notion that labor was getting a progressively smaller share of the total national dividend and, consequently, was progressively unable to buy an adequate amount of goods to prevent underconsumption, must be upset by the figures on page 507:
Over the decades, the interests of labor are bound up with three major factors: (1) a retardation in the growth of population through voluntary limitation on the size of families and through immigration restriction, holding down the supply of labor; (2) the accumulation of capital, increasing the demand for labor; and (3) the progress of technology. These things are overwhelmingly more important than all that labor legislation can do and all that labor unions can do. If men are scarce and dear, and capital, natural resources, technological equipment, and technological ideas are abundant, wages will be high, men will be in demand, and the worker’s share in the total product of industry will be relatively great.
| Relative Shares of Major Claimants in Income from Current Production of Goods and Services, 1909-1929* | ||||
|---|---|---|---|---|
| (As percentage of total income produced) | ||||
| Individual enterprisers, investors and property holders, business savings | Employees † | |||
| Year | Wages | Salaries | Total ‡ | |
| 1909 | 45.6 | 38.0 | 15.6 | 54.4 |
| 1910 | 44.2 | 38.8 | 16.0 | 55.8 |
| 1911 | 43.2 | 39.0 | 16.9 | 56.8 |
| 1912 | 44.4 | 38.3 | 16.5 | 55.6 |
| 1913 | 43.5 | 39.1 | 16.5 | 56.5 |
| 1914 | 42.6 | 38.4 | 18.0 | 57.4 |
| 1915 | 45.0 | 37.3 | 16.8 | 55.0 |
| 1916 | 48.7 | 35.7 | 14.5 | 51.3 |
| 1917 | 49.7 | 34.6 | 14.9 | 50.3 |
| 1918 | 43.1 | 36.0 | 19.8 | 56.9 |
| 1919 | 44.6 | 36.1 | 18.1 | 55.4 |
| 1920 | 37.2 | 43.9 | 17.4 | 62.8 |
| 1921 | 31.3 | 44.3 | 22.5 | 68.7 |
| 1922 | 36.7 | 41.2 | 20.2 | 63.3 |
| 1923 | 37.3 | 42.0 | 19.2 | 62.7 |
| 1924 | 36.4 | 41.5 | 20.3 | 63.6 |
| 1925 | 38.3 | 40.5 | 19.8 | 61.7 |
| 1926 | 36.2 | 41.8 | 20.5 | 63.8 |
| 1927 | 35.4 | 41.3 | 21.7 | 64.6 |
| 1928 | 36.5 | 40.0 | 22.1 | 63.5 |
| 1929 | 34.9 | 42.1 | 21.7 | 65.1 |
* Based on the table on p. 158 of Leven, Moulton, and Warburton, America’s Capacity to Consume, Washington, The Brookings Institution, 1934.
† “Salaries” in this table were received in 1929 by 11,500,000 persons. The average salary was $1,608 a year.
‡ The totals include pensions, workmen’s compensation, etc.
One Big Postwar Change—Reduced Immigration. We had, in fact, in the period following the first war, one new factor to which, strangely enough, the new economics 13 has made very little reference, namely, our radical change in immigration policy. This, in itself, accounts for not a few of the puzzling phenomena that postwar statistics reveal.
The effect of the cessation of immigration during the war and the legal restriction of immigration in the period that followed the war upon the wages of American labor is impressive. Wages shot up with great rapidity during the war, moving upward, with a lag, as prices rose, and catching up with wholesale prices in 1920. When prices fell in 1920-1921, wages reacted, but not nearly so much as prices; and then, though commodity prices stayed down, wages rose again until, by 1929, they were once more at the 1920 peak.
| Index Numbers of Wages Per Hour and Wholesale Prices, 1914-1929 * | ||
|---|---|---|
| Year | Wages per hour (exclusive of agriculture) | Wholesale prices (all commodities) |
| 1914 | 100 | 100 |
| 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 |
| 1923 | 213 | 147.7 |
| 1924 | 219 | 144.1 |
| 1925 | 222 | 152.0 |
| 1926 | 225 | 146.8 |
| 1927 | 226 | 140.1 |
| 1928 | 227 | 143.5 |
| 1929 | 228 | 141.7 |
* U. S. Bureau of Labor Statistics, bases changed.
In the period before the war, on the other hand, when, in a good year, we would bring in a million immigrants, including a very high percentage of young men and women ready to work, the wage advance was much slower. In the three boom years, 1905-1907, inclusive, 3,401,000 immigrants came. In the three boom years, 1927-1929, inclusive, 911,000 immigrants came.
| Index Numbers of Wages Per Hour and Wholesale Prices, 1896-1914* | ||
|---|---|---|
| Year | Wages per hour | Wholesale prices |
| 1896 | 100 | 100 |
| 1900 | 106 | 120.7 |
| 1905 | 119 | 129.2 |
| 1910 | 135 | 151.3 |
| 1914 | 148 | 147.1 |
* U. S. Bureau of Labor Statistics, with bases changed.
With the accustomed immigration supply cut off, expanding industry in the United States in the 1920’s could add to its labor supply only at the expense of other industries, once the point of approximately full employment was reached. For the United States, this meant particularly that agriculture lost labor to the cities. The farm population declined, not because it was driven out of agriculture, but because it was lured into other activities by rising wages. One consequence was increased difficulties, through higher labor costs, for farm proprietors. Agriculture and bituminous coal mining lost workers.14 Manufacturing, itself, for a period of four years, had an actual decline in the number of workers, as shown by the following table, although this tendency was reversed between 1927 and 1929.
| Wage-earners in Manufacturing Industries, 1923-1929* | |
|---|---|
| Year | Wage-earners (average for the year) |
| 1923 | 8,778,156 |
| 1925 | 8,384,261 |
| 1927 | 8,349,755 |
| 1929 | 8,838,742 |
* Biennial Census of Manufacturers, 1931, p. 20.
Pushed Out or Pulled Out? This decline in the number of manufacturing workers during these four years has been seized upon by certain writers as evidence of technological unemployment. Were workers forced out of manufacturing, or were they lured out, pulled out by other expanding occupations? Where did they go? The answer is very clear. Through the whole of this period wages rose, year by year, in manufacturing and in the general field of labor. This, in a labor market as flexible and as competitive as our labor market then was, is absolutely incompatible with growing unemployment. If the factories had excess labor that they were dismissing, they would not have been raising wages.
Where did the workers go? The answer is to be found in many things, and first in the great increase in the service industries. Our people wanted garages and filling stations. They wanted new roads built. Our women, including the working women themselves, on a great and growing scale wanted beauty parlors. Concern for the esthetic side of life spread amazingly throughout the whole of our working population in the period that followed 1914, and, very especially, the period that followed 1923. We saw it in the development of a demand for silk stockings on the part of working women during World War I, in the widespread use of beauty parlors, in the demand for graceful lines in cheap automobiles, which culminated in the embarrassment of the Ford company when it too long resisted the popular demand for more than utility in its cars.
It manifested itself also in an immense demand for education, and one of the major places to which our people went from factory labor and farm labor was to school. The growth of the school population from 1920 to 1930 is a very striking development.
| School and College Enrollments in the United States, 1900-1930 * | |||
|---|---|---|---|
| Year | Kindergarten and elementary | Secondary | College and normal |
| 1900 | 16,224,784 | 695,903 | 237,592 |
| 1910 | 18,449,828 | 1,111,393 | 355,215 |
| 1920 | 20,894,171 | 2,494,676 | 597,682 |
| 1930 | 23,588,479 | 4,799,867 | 1,085,799 |
* Statistical Abstract, U. S. Dept, of Commerce, 1935, p. 108.
The restriction on immigration, slowing down the growth of population, led to a great increase in the wages of the individual man, and this, in turn, led to a further restriction of the labor supply, because it made possible for his children more years in school and less years in industry.
Hours of Labor. The growing economic surplus which the accumulation of capital and the improvement of technology made through the whole of the period since 1900 manifested itself in many gains for labor. Hours of labor declined from 57.3 a week in 1900 to 49.8 a week in 1926.15
Child Labor. Child labor, apart from agriculture, had become virtually a disappearing problem by 1930, partly through State legislation, but even more through the increased family incomes which made it unnecessary.
| Number of Children Over 10 and Under 16 Years of Age Gainfully Employed in the United States, 1910-1930, by Occupation* | |||
|---|---|---|---|
| Occupation | 1930 | 1920 | 1910 |
| All Occupations | 667,118 | 1,060,858 | 1,990,225 |
| Agriculture | 469,497 | 644,174 | 1,427,580 |
| Manufacturing and Mechanical Industries | 68,266 | 185,652 | 262,123 |
| Trade | 49,615 | 63,724 | 70,789 |
| Domestic and Personal Service | 46,145 | 54,006 | 112,155 |
| Clerical | 16,802 | 79,784 | 70,912 |
| All Others | 16,793 | 33,518 | 46,666 |
* Figures from the Fifteenth Census of the United States: 1930, Vol. V., p. 346
For children under fifteen in 1930 the figures, apart from agriculture, are very small indeed: manufacturing, 19,145; trade, 26,625; domestic and personal service, 18,676; clerical, 3,558; all others,16 5,727.
Recent Changes In the Work of Women. The position of women engaged in making a living improved greatly from 1910 to 1930. The percentage of women in the harder occupations tended to diminish. The number of women, for example, doing agricultural labor decreased from a total of 1,806,624 in 1910 to 909,939 in 1930. Women were relatively less important in manufacturing in 1930 than they were in 1910. In 1930, only 17% of the total of women workers were in mechanical and manufacturing industries, while in 1910 22% were so occupied.
At the same time, the growth in the number of women in the lighter, more interesting, and better paid occupations was very rapid. Office workers, such as stenographers and typists, increased from 263,315 to 775,140; telephone operators from 88,262 to 235,259. In the fields of domestic and personal service, there was a marked shift from the heavier to the lighter occupations; laundresses, for example, decreased from 520,004 to 336,468; while laundry operatives increased from 76,355 to 160,475. Women cooks increased only 11.3% in these twenty years. The most pronounced increases were in the professional and semiprofessional field. To mention only a few, trained nurses increased from 76,508 to 288,737; women authors, editors, and reporters increased from 6,239 to 17,371; women bankers, brokers, and money lenders, from 2,634 to 9,192; women in public service, from 4,836 to 17,583; and women lawyers and judges, from 558 to 3,385.17
Summary. There were new things in the 1920’s, of course, but they were not new things in principle and they were not new things in the structure of industry. The ominous things in the 1920’s have been discussed elaborately in preceding chapters. They were, first, the great expansion of credit, which meant the great expansion of debt; and, second, the strangling tariff policy of the Government, which prevented the payment of international debts. The great expansion of credit with its accompanying phenomena we had had before, not once but many times, and notably in the period 1896 to 1903. But the expansion of international credit accompanied by high and rising trade barriers was the unique folly of the decade, 1921-1930. We have paid for it dearly.
- 1This point will be discussed at length in Chap. 34.
- 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
- 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
- 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
- 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.
- 6War Industries Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, p. 550.
- 7Mr. Herbert Hoover, in particular, did a superb job in bringing the grain and milling interests into the service of the country. I shall later find occasion to criticize his policies as President, but I wish to pay high tribute to his work in feeding the Belgians before we entered the war, to his work in food control at home during the war, to his postwar work in feeding stricken countries, and to his work under President Truman along similar lines after World War II.
- 8See my “Value and Price Theory in Relation to Price-fixing and War Finance,” an address before the American Economic Association, printed in papers and proceedings, American Economic Review Supplement, March, 1918. Reprinted in the Economic Bulletin issued by the Capital Research Company of Los Angeles, Vol. II, No. 2, Dec. 6, 1940, and reprinted in the hearings of the Senate Committee on Banking and Currency on the Price Control Bill Dec. 16, 1941. See also my testimony of Dec. 16, 1941, before this Committee.
- 9“An Index Number of Production,” American Economic Association, Dec., 1920, published in Papers and Proceedings the following March.
- 10See Federal Reserve Charts on Bank Credit, Money Rates and Business, Feb., 1941, p. 32.
- 11See Federal Reserve Charts on Bank Credit, Money Rates and Business, Nov., 1941, p. 34.
- 12James W. Angell, Investment and Business Cycles, New York, 1941, pp. 190-191.
- 13Business Cycles, University of California Press, 1913, pp. 453-454.
- 14General Theory, etc., p. 75.
- 15Ibid., pp. 61-65.
- 16Paul H. Douglas, The Theory of Wages, New York, 1934, pp. 113-158 and 501-502.
- 17See the figures showing the wide disparities of wage reductions as among different groups, in 1931, in the Chase Economic Bulletin, Vol. XI, No. 3.
