Omens these: In Paterson, the silk city, little third and fourth class shops are flooded with fine silks to be sold at any price; there has been a panic in silk. A year ago a butcher got $1.35 a pound for his raw calf hides and today he is lucky to get 25 cents; the bottom has fallen out of the leather market. The sign of the night rider appears in the South. The farming industry in convention at Washington demands unlimited federal credit to enable the South to sit on its cotton until the price is 40 cents again, and the West to hold its wheat for $3.00 a bushel; else all are ruined. There is a moratorium in Cuba because sugar which our grocers doled out to us a few weeks ago in one-pound favors at 25 cents is suddenly unsaleable. Retailers in New York go on their knees to the wholesalers, begging them not to cut prices any more until, Christmas; after that, anything!
The man who keeps a small haberdashery shop in my village, returning from New York, says: "There will be suicides, my God! Big suicides. Many of them. Millions are lost. You don't know. Garments I paid nine dollars a dozen for last summer,—up there on the shelf—see!—they offer me now for three-fifty."
And this is the beginning of deflation!
All of it has happened before. The bitterness is that it was never to happen again,—not with the government itself in the banking business with an explicit undertaking to save the country's business from the well-known calamity of running out of credit at the top of its game. The Federal Reserve Bank System, which controls the issue of currency dispenses credit to bankers, was created to dominate the nation's banking policy; and the Federal Reserve Board, which governs the System, was to see that credit should become a people's commodity, subject to people's interest. The test is come.
People have awaited it hopefully; bankers anxiously. That the Federal Reserve Bank System financed the war was no test at all. Every combatant country's banking system did that, and all by the same means, namely, inflation. Nothing was easier. There was no doubt ever that as a machine to make credit cheap and abundant the Federal Reserve System would function perfectly. The trial would come afterward.
The banker asked: "Will the Federal Reserve Board have the political hardihood and the moral courage to help us make money dear when the necessity for that does at length appear?"
And the users of credit, especially the agriculturists calling themselves the people, said: "The Federal Reserve System shall make the country banker-panic proof. Never again shall one be ruined for want of credit. Never again shall an honest man with the earth's produce for security be unable to borrow at the bank, on the specious ground that there is no more credit."
One or the other had to be disappointed. So what happened? Prices began to fall.
Why?
"Because what goes up must come down," says Wall Street, and lets it go at that.
"Because the Federal Reserve Board at Washington has deliberately adopted a merciless policy of deflation," say those whose profits have vanished. That is, they say, prices began to fall for want of credit to support them.
The Federal Reserve Board is annoyed: it replies with a statement that between January 2nd and October 1st,—in nine months,—the banks of the country increased their loans for "agricultural, industrial and commercial purposes, by an amount exceeding $1,800,000,000." Therefore it denies the charge that the collapse in prices is owing to a squeeze in credit. The disturbance, it says, is inevitable from circumstances arising out of the world war. Which leaves us where we were, resting upon the reflection that this disturbance is only a little more ominous and likely to be much more disastrous than up-endings of essentially the same character heretofore.
Over all this matter of why prices fall there lies a dimness of insincerity, pretense and passion. While inflation is taking place those who are responsible for it say: "We have nothing to do with it. Besides, there is no such thing. What you call inflation is a legitimate increase of wealth."
The Federal Reserve Board indignantly resented talk of inflation while issuing Federal Reserve currency and Federal Reserve credit in cataracts to the banks of the whole country, not only during the war but for two years thereafter. It particularly denied that we printed money to carry on the war, as all the other countries did; but we did it all the same, issuing first the bonds and then the money the bonds were bought with. So naturally when the process of deflation begins everybody must deny both the fact and the responsibility, since deflation is a sequel to inflation, and inflation was said never to have taken place.
One other difficulty. There is no geometrical pattern, no figure of speech, simply or comprehensively, to represent the process of inflation; and deflation is the undoing of inflation.
Inflation is a whirling pyramid inverted. Its phenomenal duration is governed by two dynamic factors. One is velocity, and the other is growth, both of which must increase progressively; to sustain the action durably they would have to increase progressively to infinity. Both the velocity and the growth are derived from greed; the symbol of this is money. Therefore, the whirling pyramid requires money in progressively greater quantities, and would, if it continued, exhaust the power of all the printing presses in the world. As it spins it grows; as it grows it must spin faster to maintain its equilibrium; the faster it spins the faster it grows, and so on.
Prices began to fall not because credit was shut off,—never, save in war time, was credit expanded more than in the year 1920—but because the demands of inflation had overtaken even the money delusions of John Skelton Williams, Comptroller of the Currency, who still thinks that if you could only print money enough the perfect happiness of mankind would be realized. He desperately says the Federal Reserve System could issue yet two billions more of currency. That is the limit of his hallucination. After that he is bankrupt. But the ogre of inflation, speaking through Senator Smith of South Carolina, says: "If we want to hold cotton for $5 it is none of the [Federal Reserve] Board's business. All the Board has to do is to discount our paper."
If it were none of the Board's business, and it had to lend the cotton grower money with which to hold cotton for his own price, then John Skelton Williams's last two billion would not satisfy that one class of producing people.
Prices began to fall because manufacturers and merchants generally had got into that state of mind. It was nobody's business what they charged. They had the stuff. All the banks had to do was to lend them credit, that is, discount their notes. They would hold their goods on borrowed money until the people had to buy.
As prices rise it is easier for profiteers to borrow money on the goods than for people to find the money to buy goods with. People at length begin to do without; sellers refuse to reduce prices. Then goods begin to accumulate in warehouses. The withholding owners of the goods need more and more credit, and, although credit is increased,— although it was increased more than $1,800,000,000 in nine months,—still it cannot be increased fast enough. The end is coming. The Federal Reserve Board recommends bankers (to insist that somebody shall sell something for what it will bring and once in a while pay off a loan at the bank; the bankers heed the advice, for they have premonitions and are beginning to be uneasy. It is all the easier to do since they may wash their hands and say the Federal Reserve Board says it must be done. Perfect alibi.
Then at last a forestaller in silk is told he cannot renew his loan in full. He must sell a little silk. He does, and there is an international panic in the silk market. A leather dealer is obliged to sell a few pounds of leather, and leather takes a great fall. So in wool, so in sugar, and deflation has begun.
Retailers, seeing the commodity markets giving way and knowing that lower prices are to come, begin to advertise campaigns against the high cost of living and move out a lot of stock at bargain sales. This makes big headlines for the newspapers, and the Federal Reserve Board archly acquires merit in the eyes of the consumer. It says the peak of high prices is passed, and talks of a return to normal conditions.
But what are normal conditions? The planter thinks 40 cents a normal price for cotton, and the farmer thinks $3.00 a normal price for wheat at last; and when, as will happen, agricultural commodities begin to fall along with everything else, a new clamor arises. The farmers move on Washington and have the Federal Reserve Board on the carpet. They are being ruined. The government must issue bonds forthwith and lend them the proceeds for the purpose of holding back their crops; it must lend foreign governments credit with which to buy American produce. Manufacturers and merchants, hitherto silent, now put their cry upon this popular wind. All together they denounce the Federal Reserve Board. It is strangling the country by withholding credit.
The Federal Reserve Board, backed by the Secretary of the Treasury and all the banking sanity of the country, is obdurate. It would not make money cheaper if it could; it will not print wheat money for the farmer, nor cotton money for the planter. Instead, it insists upon an "orderly marketing" of commodities.
Banking wisdom is triumphant! The Federal Reserve Board is safe and sane. It comes to the precipice and stands aside, exhorting people, if they must go over, to do so in an orderly manner. Whatever else happens the System is solvent. Money was cheap and the people hogged it; now money is dear and they must bear it. This is the way both of money and people.
Deflation must proceed to its dismal climax. If betimes there is unemployment and much human distress, well, it cannot be helped. Besides, says the banker, a little unemployment will not be a positive evil. It will help us to liquidate another very dear commodity, namely, labor.
So no doubt we should be philosophically resigned and hearken to the axiom that we are all buyers and sellers together; and we might be resigned save for the sad reflection that our bankers, with all their wisdom, not only neglect the real problem but seem unable to perceive its existence. They play the game of inflation until the boom totters; then they kill it and efficiently assist at the obsequies. They seem to believe that these fantastic swings of prices,—this one differing no wise in character from others,—are sacred phenomena.
For a hundred years economists have discussed a fundamental reform of money to eliminate extreme price fluctuations. I have never known a banker who would hear them seriously. I have almost never known a banker who would interest himself practically in the proposition that the value of commodities in terms of each other is fairly constant. Commodities fluctuate to these extremes not in terms of each other but in terms of money. It is money that fluctuates. Money itself is the fetish.
When money falls in value commodities rise; and the moral sense of the world is sickened by the profiteer. When money rises in value commodities fall; and there is a train of ruin and political evils. But to any proposal that money be made subservient to the human necessity of exchanging wealth, instead of all the conditions of exchange being governed, as now is the case, by the state of money, he is stone deaf. Are people therefore doomed to serve this fetish forever, suffering alternately the abominations of inflation and the miseries of deflation?
We shall see. The case in one aspect is different. Although the technique and obvious consequences of deflation are the same as always before, there are new potentialities. Never before had the banker and creditor together so much to defend. They have to defend the integrity of war debts, internal and international, which surpass in magnitude anything of the kind hitherto imaginable.
How does deflation affect war debts?
Why, precisely as deflation has immemorially affected the relations of debtor and creditor. Prices fall, the value of money rises, and the debtor who has contracted an obligation at high prices is obliged to pay back more than he received.
If prices fall to the pre-war level, as they may, a one-hundred-dollar Liberty bond worth only 44 bushels of wheat when it was issued, with wheat at $2.26 ½, will be worth 120 bushels of wheat, with wheat at 83 cents again. This is to say, one who has loaned the government the equivalent of 44 bushels of wheat during the war would receive back 120 bushels, or nearly three for one, not counting the interest. And people would be paying taxes for that purpose.
The illustration is a round one. It might be only two for one, more or less, in the average of things. But would the people pay?
You may say this is an internal matter, wherein all of us pay and all of us receive back, owing to the fact that the war bonds are so widely distributed. That is not true, and to the extent of its being so it is subject to change; but if it were true, what then of the ten billion debt owing us by foreign governments? Will they pay us back double and interest? Will they discharge in dear dollar prices debts contracted in cheap dollar prices? And would it be fair?
Bankers have no answer to these questions. They say: "The laws of money are universal. We cannot remake the financial structure of the world."
Well, it is for the banker to say whether he can or not. One would think he might better try than defend so much. The financial structure of the world is an enormous moral liability.
This article originally ran in the November 3, 1920, issue of the magazine.