THE EFFECT OF PRICE FLUCTUATIONS

ON AGRICULTURE

It is the purpose of this paper to consider the effect of general price fluctuations (1) on the purchasing power of farm products during the last 130 years, (2) on the economic status of the farmer as a property-owner; and finally to survey briefly the outlook in view of the present world situation.

A word as to the meaning of the phrase "purchasing power of farm products." Let us consider first a similar phrase in a different field. We speak, for example, of the purchasing power of wages, by which we mean the ratio of money wages to the retail prices of the commodities and services purchased by the average wage-earner and his family. The retail prices of these goods and services are weighted according to their importance in the workingman's budget, and thus a cost-of-living index is constructed. A purchasing-power wage index thus gives us the changes in the wage-earner's power to purchase consumers' goods.

A similar index for farmers would require (1) an index of changes in the net incomes of farmers, (2) an index of the retail prices of consumers' goods purchased by farmers and their families. Neither of these indices is available except in fragmentary form and for a limited period.

The phrase "purchasing power of farm products" obviously refers to a somewhat different matter. It might be used to mean the ratio of farm-product prices (paid at the farm) to the retail prices of consumers' goods weighted according to the purchases made by the average' farmer and his family. Such a "purchasingpower" index would by no means be identical with a series showing the ratio of the incomes of farmers to the retail prices of consumers' goods purchased by farmers. Obviously the fluctuations

' It may be noted that the "average" farmer, owing to the diversity of regions and products, is an even more fictitious person than the "average" wage-earner. What is really needed is a special index for each farming region.

in net income differ widely from fluctuations in the exchange value of farm products, owing, first, to changes in the farmer's profit margin, and, second, to changes in his volume of production. Such an index would therefore not reflect accurately changes in the real incomes of farmers.

A more reliable index would be a series showing the ratio of farm-product prices (paid at the farm) to the retail prices of all products purchased by farmers (producers' and consumers' goods) weighted according to the importance of each in the farm budget. In such a "purchasing-power" index, cost prices would be taken account of as well as consumption prices, but no account would be taken of changes in output per farmer. Price margins might remain the same, indicating no change in the farmer's economic status, yet his condition might steadily be improving, owing to an increase in production. In actual fact the volume of output per farmer has shown a marked upward trend, particularly during the last sixty years. But it is clear that a purchasing-power index of the type just described would tell an important story with respect to the changing economic status of the farmer.

But the data for the construction of such a purchasing-power index are not available. As a substitute, we have constructed a series from the wholesale prices of farm products and the wholesale prices of general commodities. This "purchasing-power" index represents, therefore, the ratio of farm-product prices at wholesale to general-commodity wholesale prices. It is in this sense that the phrase "purchasing power of farm products" has been widely used in recent years. At best, however, it is only a rough indication of the quantity of products that the farmer is able to buy in exchange for his own products. The index in question is, however, more acceptable if we are thinking of the broad question of the exchange value of farm products in relation to general commodities, and not merely of the special interest of the farmer with respect to what he can buy for his products.

The general-commodity and farm-product price indices used in this article are each composed of several distinct series joined together to cover a period of one hundred and thirty years. The number of commodities used in the several series varies, and the

methods of construction, as explained below, are not identical in all cases. Moreover, splicing the series together necessarily involves the conversion of several of the series to a new base year far removed from the earlier series. All this implies the possibility of a considerable statistical error. The writer does not pretend that the result is any more than a rough approximation, the general outlines of which are believed to be sufficiently accurate to be significant.

Chart I and Table I show the purchasing power of farm products (as defined) for one hundred and thirty years. Two main periods and four shorter periods may be distinguished. From 1790 to 1820, the trend of the purchasing power of farm products remained substantially stationary. From 1820 to 1920, except for the severe setback in the sixties, the general trend has been continuously upward. This long period of a hundred years may be broken up into three subperiods which may be distinguished by changes in the rate of increase in the purchasing power of farm products. From the decade of the twenties to the decade of the fifties, the rate of increase was very great, the uniform rate of increase being 1.6 per cent per annum. Then came a sharp downward break in the trend. Starting from a much lower level, the trend rose slowly from the decade of the sixties to the decade of the nineties at the rate of increase of .4 per cent per annum; while from the first decade of the twentieth century to the decade 1910-19, the rate of increase was 1.1 per cent per annum. In brief, then, the trend of the purchasing power of farm products did not change materially from the time of the Constitution to the decade of the War of 1812; rose rapidly from this period to time of the Civil War; dropped abruptly from 1859 to 1862; moved slightly upward from the Civil War to the Spanish-American War; and then rose with considerable rapidity from the late nineties to the end of the world-war.

These periods correspond fairly well with the main periods into which the general wholesale price level may be broken. The first (1790-1820) corresponds roughly with the upward trend of general prices, culminating in 1814-17. The second (1820-60) corresponds with the period of declining general prices culminating in

that the scale had been "accepted-not adopted, as the Chicago Typothetae has a comfortable habit of accepting such suggestions as these, leaving its members free to follow their own judgment." While the cost reports were said to have been used by some firms, and to have proved advantageous to them, they were never generally adopted and put into practice in pricing.12

In 1891, a Code of Ethics was adopted by the United Typothetae of America, stating the printers' duty to themselves, to each other, to workmen, and in regard to prices and estimates. On the vital question of prices, the principles that are still the officially accepted ethics of the industry are laid down unequivocally. The fair price, it is agreed, is one that covers all items of cost plus a profit.

....

Every printing establishment should have a perfect system of ascertaining the actual cost of every job. It is only in this way that the business can hope to be relieved from the deleterious effects of guess prices. . . . . Never under any circumstances should the minimum cost plus a fair profit be departed from. We should feel here a double restraint; in the first place to cut cost is foolish; in the second place it is wrong.18

Any cutting of prices, then, is unethical. This standard was accepted by the Chicago Typothetae. While it has undoubtedly exerted influence by setting up a criterion of conduct, it is evident that the industry in Chicago as elsewhere considers it rather a counsel of perfection than a practical guide to business action. Prices have continued to be cut in the exigencies of business struggles, in spite of universal lip service in the trade press and on convention platforms to the principle that the only fair price is the cost-plus-profit price.

The long depression following the panic of 1893 proved a serious strain on any such ethics. Price-cutting was widespread in the demoralized industry. The Chicago Typothetae, moreover, although it had in its membership many large plants, had little influence among the many medium and small plants. A movement for a broader organization, started by Typothetae members, met enthusiastic response. As a result the Master Printers' Associa

12 Printers' Album and Electrotyper, September, 1892, p. 3; Minutes, Chicago Typothetae, February 4, 1892.

13

" United Typothetae of America, Code of Ethics, Clauses 5, 7, 16.

tion was organized, with plans to establish a minimum scale of prices for composition and press work, to promote knowledge of costs and a uniform system of estimating, and to deal with other business problems.

A committee of the new organization, appointed to investigate the reason for differences in bids, made a report on the actual cost of printing which was a surprise to members. In 1895 a set of minimum prices for various types of work was adopted and widely distributed, in the hope of stabilizing prices. But the depression continued. In the winter of 1894-95, to make matters worse, the newspapers changed from hand to machine composition, thus swelling the number of unemployed compositors. A new flock of little shops sprang up to increase jobwork competition. Control of the members of the association was impossible. Although the price lists may have had some influence, the agreements were violated and price-cutting continued. In 1896 printers took a melancholy pleasure in looking at the price lists that they had hopefully agreed to only the year before. Long before the depression lightened late in the nineties, the Master Printers' Association had disappeared, its efforts at price maintenance a failure. The Typothetae had managed to keep together only a small organization which was perpetually in debt and unable to do effective work.14

When business finally improved, times seemed propitious for the master printers to better their competitive position. As it proved impossible to secure an agreement on prices within the Typothetae, leaders looked for some other practicable plan. The Board of Trade plan, which was proving effective in reducing price-cutting among master printers in a number of cities, offered a solution of the problem. In modified form it was adopted in Chicago in 1899 by eighteen large plants, all but one of which were members of the Typothetae. Through the new organization, the Master Printers' Association, an agreement was made on rates for large commercial work, based on reports of costs, and on a uniform system of estimating. All estimates were checked by the secretary, a full-time, paid officer, to see that specifications "Inland Printer, May, 1894-September, 1896; Minutes, Chicago Typothetae, 1895-99.