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PRODUCTION AS A REMEDY
FOR INFLATION
BY
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GEORGE E. ROBERTS
Vice-President
THE NATIONAL CITY BANK OF NEW YORK
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An address before a session of The Academy of Political Science
in the City of New York, considering the general subject of
“Increased Production and other Remedies for Inflation.”
APRIL 30, 1920



PRODUCTION AS A REMEDY
FOR INFLATION
HE level of prices and state of bank credit at this time commands
serious attention. The figures for each are about double those
of before the war. The increase of bank loans is related to the
rise of prices, some say as a cause, and some say as an effect.
Undoubtedly the original impulse came from the war. The
war created a practically unlimited demand for labor and materials.
The Government let contracts right and left, and contractors
went into the markets and bid against each other. And the
demands of the regular industries did not fall off, for with the
enormous disbursements of the Government, higher wage and a
full state of employment, there was more trade than ever and more
demand on the industries. The banks, as a matter of patriotic
duty, were called upon to lend freely for the purchase of Liberty
Bonds and also to support business.
So here was a practically unlimited demand for labor and
materials, backed by what for the time being was an unlimited
supply of credits, or purchasing power, and brought to bear upon
a limited Supply of labor and materials. The object was to increase
production, and So long as there was any slack in the industries it
had that effect, but when you have every man busy and every
machine running, that is about all you can do. When you have
reached that point about the only way one employer can increase
his own working force is by hiring labor away from other employers,
and your efforts to drive the industrial organization still harder
expend themselves for the most part in driving up wages and
prices. In short, we have created and used purchasing power in
the form of credit beyond the increase in productive capacity, and
the effect has been to depreciate the purchasing power. The only
way to eliminate this inflation is by reversing the process, gradually
accumulating actual capital to take the place of the credit.
If the inflation had taken place in the form of paper currency,
issued by the Treasury in direct payment of war expenses, prob-
ably most people would be able to see quite clearly that that paper
should be paid off and retired, but they don't see it quite so clearly
P R O D U C T I O N A S A. R. E. M. E. D Y F O R. I N F L A T I O N
when the credit is the form of bank loans to customers. Many
are even confused to the extent of thinking that the great increase
of bank deposits represents new wealth accumulated during the
war. But that is a fallacy. When a bank lends $10,000 and gives
a customer credit for it in his account, its deposits will go up
$10,000, and when the credit is checked out, it will go into other
banks and it will continue to circulate as purchasing power, and
have the same influence upon prices as money, until somebody
checks against $10,000 of actual Savings to extinguish it.
Inflation in the Post-War Period
But the most serious feature of the situation is that we did
not stop the process of inflation at the end of the War. Our bank
loans expanded nearly as much in 1919 as they did in 1918, and
under the same kind of pressure. We are still trying to drive
the industrial machine beyond its capacity. The competition of
employers for labor and materials is still going on. The town
industries are bidding against each other and against the farms
for labor and they are getting it away from the farms. There
are authentic instances of town industries sending agents into
adjacent farming districts to recruit labor from the farm by direct
solicitation and offers. This is like pulling stones out of the founda-
tion to build the super-structure. Official reports indicate that the
country over there is 12 per cent less hired labor on farms than a
year ago. There are 37 per cent more employes in the automobile
industry, 55 per cent more in the clothing industry, I I per cent
more in the paper industry, and from Io to 93 per cent more in
the several branches of the textile industry than a year ago.
Under these conditions there is a great danger that a further
expansion of bank credit will simply finance the competitive struggle
and carry the rising price movement still higher. Money is tight,
goods are scarce, and there is pressure on every bank by its cus-
tomers for credit to enable them to go into the market and buy
the amount of commodities which they think they can sell, and
their competitors are wanting to borrow for the same purpose.
Expansion of Credit Raises Prices
These efforts on the part of merchants to get goods which
they say their trade is wanting, and of manufacturers to hire
labor and buy materials for the purpose of making goods for
P R O D U C T I O N A S A. R. E. M. E. D Y F O R. I N F L A TI O N
which they have orders, appear on the face of things to represent
perfectly legitimate and necessary business, supplying the wants
of the people, and therefore entitled to bank credit. The de-
ceptive thing about it is that the demand for goods in the aggregate
is greater than can be supplied; it exceeds the capacity of the
industries, and under these conditions competition will carry prices
higher and higher and absorb any amount of credit that may be
granted. It is the war situation over again; the only way of
holding down prices is by restricting the expansion of purchasing
power in the form of credit.
But the influences for inflation are not all on the side of money
and credit; they are partly on the side of production. Industry
is disorganized and demoralized in Europe. The supplies of food
and raw materials which in times past have come out of Russia
are cut off. The normal amount of construction and development
work for the expansion of industry has not been done anywhere
in the last six years. Moreover, the productive equipment is not
being worked as effectively as before the war. This time of
scarcity has been chosen as a favorable one in which to cut down
the time of operating machinery. The highly automatic machinery
of the textile industry has been reduced in running time from
54 hours per week to 48, and a strike is said to be now pending
to compel a further reduction to 44. In some instances higher
pay has resulted in increased irregularity at labor, and in other
cases the ease with which new employment is found is said to cause
laxness and inefficiency. Perhaps the revulsion from the War
strain is responsible for an involuntary let-down of energy. I heard
the Assistant Director of the United States Census Bureau say in
a public address a few evenings ago that the performance of the
Census force in the tabulation of returns now coming in was notably
below the former experience of the Bureau, and that the employes
had delegated a committee to ask that the minimum requirement
heretofore in force be reduced. This is in Government offices,
with seven hours of work per day.
Hard Work and Economy
If a single family, situated in a somewhat independent position,
as on a farm, should suddenly meet with disastrous losses, sweeping
away its ready capital, crippling its working equipment and in-
P R O D U C T I O N A S A. R. E. M. E. D Y F O R. I N F L A T I O N
volving it heavily in debt, that family would know precisely what
it must do in order to regain a prosperous state. It would expect
to work harder and more efficiently, live more economically, pro-
duce more and save more, until it was back in prosperous condition
again. The same principle holds good in the case of Such a group
of people as a nation. There is a shortage of capital throughout
the world, due to the fact that enormous sums have been wasted in
war. It is impossible that such expenditures should be made
without ill effects reaching all classes of society, and everyone
who understands the situation should wish to alleviate it rather
than to aggravate it.
It seems reasonable as a proposition standing by itself that
wages should increase to correspond to increases in the cost of living.
But nothing is more certain than that a general advance in wages
can not compensate for a shortage of goods. If you were to double
all wages in the United States tonight it would not give you another
bushel of wheat, or pound of Sugar or yard of cloth. It would
simply give everybody the means with which to compete for what
he wants, with the result that prices would rise to absorb the ad-
ditional purchasing power. The only remedy for a scarcity of goods
is more goods.
Limitation of Equipment
One of the fundamental reasons for the inflation is that there
is a shortage of equipment for production and transportation. In
this country there is need to spend billions of dollars upon the rail-
roads. The railroad situation has been critical for many months.
The farming regions of the Middle West have had great difficulty
in moving last year's crop; and country elevators are still filled with
grain; the switch tracks of the East are crowded with cars; the
banks both east and west are congested with loans which normal
exchanges would clear up. Industry in all parts of the country is
embarrassed, industrial costs are higher and the cost of living is
higher because the railway facilities are inadequate. We need to
spend billions for housebuilding to provide shelter to our people.
We ought to raise billions to provide credits for Europe, to enable
the peoples of Europe to purchase in this country the equipment,
materials and foodstuffs which they are needing to sustain life
and to make them self-supporting again. A Pan-American Con-
ference was held at Washington a few weeks ago, attended by dele-
*—t 3—º ºte
P R O D U C T I O N A S A. R. E M E D Y F O R. I N F L A T I O N
gates from every country of Latin-America, and the burden of
their message was a plea for capital for the development of their
resources, in order that they might increase the supply of food-
stuffs and raw materials in the markets of the world.
These are some of the pressing needs for capital, for the good
of the world. Somebody must come forward and supply, it, if
this kind of work is to go on, and it must go on if social progress
is to go on. The gains of Society in the last hundred years have
come mainly by improvements in industry, by the use of power
and machinery, and the gains of the future must be won in the
Same Way.
Spending Too Much on Consumption
This problem of high prices leads over inevitably into the
larger controversy of the time, the question of how much of cur-
rent production should be reserved as capital and how much
should be consumed as we go along. The evidence seems to show
that we are spending too much upon current consumption and
not reserving enough for increasing production.
And yet there are many good people who think we have ac-
cumulated capital too rapidly in the past, that in the division
between labor and capital, labor has been unjustly treated, and
that it is bound to have a larger share in the future. But how
does anyone know that the condition of the wage-earning class
would be better today if more had been distributed in wages and
less had been used for the development of industry in the past?
You cannot eat your eake and have it, too. The industrial devel-
opment of this country has been accomplished mainly by means
of the industrial profits of the past: if the profits had been less,
the development would have been less, the productive capacity
of the industries would be less than it is, and the evils of scarcity
and high prices would be greater than they are.
There is every reason to believe that if you could cut all
profits in two for the coming year, and add one-half of them to
wages, the effect would be to increase the demand for goods in
the stores, raise the prices of goods still higher, and reduce the
amount of capital available for increasing production. And that
statement is not a reflection upon the wage-earning people, be-
cause the amount of increase to each person would be so small
that it would be almost inevitably lost to productive use. It
takes a lot of resolution to save small sums.

P R O HD U C T I O N A S A. R. E M E D Y F O R. I N F L A TI O N
Relation. Between Compensation of Capital and Labor
The truth is that there is a definite relationship between the
compensation of capital and the compensation of labor, deter-
mined by the economic law. There must be a certain amount
of new capital available for investment in order to keep the indus-
tries up to the wants of the population. If these supplies are not
forthcoming, industry will fall behind, improvements will not be
made, production will fall behind, prices will rise and wages in
the long run and on the average will decline in purchasing power,
because wages must be paid out of production.
On the other hand, if too much is reserved to capital and used
for the enlargement of industry and not enough distributed broadly,
the purchasing power of the people will not keep up and you will
have a period of depression profitable to nobody.
Shortage of Capital
At this time there is a shortage of capital. We see the Pennsyl-
vania Railroad Company, with a credit that is above question,
borrowing money for ten years at 7 per cent. This is because
the sources which have heretofore supplied capital for the railroads
are unable to do so as formerly. The present owners of railroad
bonds and stocks are getting no higher returns than before the
war. They are paying much higher taxes and higher expenses
out of their incomes, with the result that they have fewer dollars
for investment, and what they invest will buy less than one-half
as much in the way of railroad equipment and supplies as before.
I have heard it said that an investor who builds a house for
rent now is entitled to rentals which will fairly compensate him
upon the basis of present costs, but that the owner of a house
built before the War is entitled to compensation only upon the
original outlay. But if the return which the latter receives has
less purchasing power than before the war, he will have less savings
for investment and the savings will have less value for building
more houses than before.
It is a common mistake to think of capital accumulations as
of value only to the owners. They are the means by which Society
is carried forward. The man who owns no property, and who
spends his wages as fast as he receives them, is benefited by the
capital expenditures that have doubled the average train-load
on the railroads of this country since 1900.

P R O D U C T I O N A S A. R. E. M. E. D Y F O R. I N F L A T I O N
New capital must be found somewhere. Where is it coming
from? Will it come from wages? Some of it, no doubt. We
hope the time is coming when the wage-earners will supply a large
part of the capital for the industries, but developments of that
kind come by a process of growth and we cannot look for immediate
relief from that source. The bulk of the capital for the develop-
ment of the industries always has come from the industries them-
selves, and the larger the profits the faster the development has
been. Amidst all this denunciation of profiteers, you would be
startled if I should say that the profiteer was the hope of the
country, and I am not going to give him quite So Sweeping an
endorsement as that; but it is the plain truth that the rise of profits
under these conditions represents the natural workings of the
economic law in restoring the equilibrium. There never was such
activity in the development of new sugar plantations as there is
now around the Caribbean. There never was such an amount
of new capital going into cotton goods production as now. The
new projects for mills and extensions in the Southern States, an-
nounced in the first three months of 1920, exceeded in estimated
cost and in weaving and spinning capacity, the new projects for
the entire year 1919. The makers of cotton mill machinery have
their capacity sold up for the next two years. The makers of profits
are reinvesting them, in hopes of making more profits, and in all
haste to increase their production before prices fall.
Fixed Price Apportionment to be Discouraged
There is only one way to prevent people from bidding against
each other, or to prevent prices and profits from rising, in time of
scarcity, and that is by taking possession of the entire Supply and
making an apportionment at a fixed price. That was necessary
during the war when interest was centered upon one immediate
purpose, but it is impracticable as a permanent policy, and it does
nothing to correct the situation. It neither stimulates production
nor provides new capital, and rising prices do both.
We have a riot of spending and it is not the spending of a
favored few, but of millions. If you, the public, will not save, the
profiteer will save for you. It would be better for you to save for
yourself, but if you will not the economic law resorts to him. You
may denounce him, but if he is a producer and using his profits to
increase production, whether the process be rapid or spread over a
longer time, he is doing something that must be somehow accom-
plished before we can have a return to normal conditions.
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