Commodity Prices and Their Influence

by C. T. REVERE

IN his address last May before the International Chamber of Commerce in Washington, Secretary Mellon outlined the chief prerequisite to economic recovery. ‘Prices,’ he said, ‘must be revised and costs of production and output must be brought down to a point where the demand will again be stimulated and goods move into consumption.’ All this involves the restoration of balanced relationships between various industries; consequently it is necessary to understand how this dislocation occurred and to determine the steps by which readjustment may be effected.

First, it is essential to understand that we are passing through what many of us hope are the concluding stages of post-war deflation. Most of us have thought this took place in 1921, whereas really all that happened then was a credit smash following war-time speculation. This did not last long, because world necessities for raw materials and finished goods made it. imperative that the production and distribution of these commodities be financed.

In the last ten years, therefore, the world has been bending its efforts toward a replenishment of its supplies of raw materials and manufactured goods. Misled, perhaps, by war-time and post-war demand, in addition to attractive price levels, it looks as if we had overdone production in certain lines. We might take the case of sugar as an example. In pre-war days, Central Europe and Russia, by the planting of sugar beets, used to produce half the sugar required by the world. While the war was on, this production was lost, and Cuba and Java speeded up their output of cane sugar until they could take care of practically the entire world’s requirements. When the European beet sugar industry revived, the world found itself confronted with an annual production 50 per cent in excess of its requirements. The same thing has happened in other fields. In response to early post-war demand that seemed insatiable, productive effort was speeded up in rubber, silk, coffee, copper, steel, and in almost every line of manufactured goods.

Then speculation came along. It started first in the farm lands of the West, where buyers bought farms based ou profits accruing from three-dollar wheat and other agricultural prices in proportion. Later it shifted to Florida, and when the West Indian hurricane blew that boom away, it was transferred to real estate in practically every large city of the country. Then it spread to the stock market, and this was the final phase.

All the time this was going on, we were increasing our production of raw materials, the demand for which appeared unlimited. Disconcerting indications that the world had outdone itself in this particular were furnished by various schemes to sustain prices in the face of supply and demand. Brazil tried valorization in coffee; the British tried restriction in rubber; Cuba attempted to control the sugar market; and Congress wrestled with the export debenture plan and the equalization fee, and finally adopted the Farm Board programme.

All these were warnings of the impending excess supply in commodities.

Finally the decline set in. It is not necessary to go into the question of who lighted the fuse in that long train of exploding circumstances. It is vital only to know that in spite of copper combine’s, valorization, restriction, and farm boards, prices of commodities collapsed throughout the world. Taking the high prices of 1929 for leading commodities and comparing them with the low prices of 1930-31, we find that deflation has proceeded in the most cruel fashion in history for the same length of time. Rubber has declined 77.7 per cent; coffee, 70 per cent; hides, 66 per cent; sugar, 60 per cent; cocoa, 60 per cent; silk, 60 per cent, ami cotton 53.3 per cent. Copper has broken from the stabilized price of eighteen cents to eight cents.

When we look at these prices, — rubber six cents per pound, against twenty-seven cents in 1929 and more than a dollar about five years ago; sugar at one cent per pound and Rio coffee at 4.35 cents, against sixteen cents in 1929; silk at $2.13 per pound, against $5.25 two years ago,—it is only natural for most of us who regard prices largely from the standpoint of relativity to think that the worst has been discounted and that purchases of these raw materials around current levels entail minimum risk.

This probably is true. The bugaboo of the merchant and the manufacturer is inventory losses, particularly in raw materials. After rubber broke from above one dollar a pound to twenty-seven cents, the average tire manufacturer saw very little hazard in purchases at twenty-seven cents. Yet prices have broken twenty-one cents per pound from that point. Now, with rubber only a little above six cents, there is hesitation about buying, although the probable extreme of decline from now on would not be more than a cent or a cent and a half.

While we are attracted by the buying opportunities when we look at the prices of various raw materials, we are nevertheless confronted by the fact of unbelievably small consumption, when it would seem that, on price alone, maximum buying and processing activity should be the leading characteristics of the commodity situation. It is interesting, therefore, to examine into this phase.

We have an unbalanced situation that must be corrected before raw materials can pass freely into processing and goods can change hands on a basis of equality that will restore what we call a state of general prosperity. We have this unbalanced condition because the post-war deflation process has been most drastic in raw materials. Here we deal with the question of quantity, of supply exceeding demand. All schemes and plans, whether backed by national treasuries or by the resources of cartels and combines, have been ineffective to avert the stern workings of economic law.

With raw materials around the lowest levels in decades, we find that this post-war deflation has not yet been as severe along other lines. Services, as in transportation and distribution, rents and wages, have resisted the downward movement. This is an unbalanced condition that can be corrected in only one of three ways. First, raw-material prices might advance and thus restore the equilibrium. Second, services, rents, and wages may come down and give us a balanced condition. Third, there may be reciprocal movements that will tend toward the desirable equilibrium. At any rate, it must be obvious to any impartial student that with raw sugar around one cent per pound, rubber around six cents, silk, cocoa, copper, and many other products at their current levels, the producers of these raw materials cannot buy manufactured foods where processing and distribution costs have not declined, owing to the maintenance of wage scales, transportation rates, and rents.

We might take British industry as a case in point. The average price level of British exports in 1930 was 51.3 per cent above the pre-war level, while the average of British imports was only 18 per cent above the prewar level. In other words, the countries that sold Great Britain her raw materials and foodstuffs in 1930 obtained only 18 per cent more than pre-war averages, while they paid 51.3 per cent more for the goods Great Britain manufactured. Herein we find the explanation for the decline in the trade of the United Kingdom and an illustration of what is bound to happen elsewhere under similar conditions.

There has been a general reluctance to reduce wages. This question happily has been fundamentally, although perhaps not politically, removed from class consciousness. The wage problem in this crisis is not an issue between capital and labor, or employer and employee. It far transcends such narrow boundaries. It is now a question between one group and another, chiefly between producers of raw materials on the one hand, and the processors and distributors of manufactured products on the other.

Leaving aside the question of the maintenance of wage scales by the exactions of labor unions and the agitation of politicians, and examining into the efforts of employers to alleviate the position of their workers, we can recognize readily the fundamental futility of all these palliatives. We see the working personnel of a given corporation employed part time with working hours and days staggered in order to distribute the contents of the pay envelope. From a purely humanitarian point of view, this may be commendable, but from an economic point of view it can be readily seen that it delays the readjustment without which balanced relationships never can be restored.

According to the last census of the United States, we had a population 54 per cent urban, and therefore assumed to be industrial, and 46 per cent rural, thereby embracing the element in our population engaged or interested in the production of foodstuffs and raw materials, including products of mines, and so forth. With current prices for farm products and existing levels for other raw materials and foodstuffs, how are the 46 per cent who produce raw materials going to take the products of industry in volume and pay for them?

One of our leading economists recently emphasized tiie fact that the secret of prosperity lay in balanced relationships between industries, for in the last analysis they buy and consume each other’s goods. He pointed out that the purchasing power of every group is in its own products and services, and there is no danger of overproduction as long as they are in balance. There is no limit to the amount of work to be done in the world, or the amount of business to be had.

It should be an inspiration to work for Such a goal. Readjustment may entail intervening hardships, but the rewards will be colossal. Kven now the situation is not without its compensations. We are inclined to get too gloomy a reaction from the prevailing low levels for commodities. There is no magic in twenty-cent cotton and two-dollar wheat if group relationships are out of gear. The contribution of reduced production costs by the various groups would provide reciprocal benefits that should mitigate the rigors of readjustment. With a restoration of the balance between raw materials and finished consumer goods, we are likely to find a more solid basis for mass prosperity on a lower plane of prices than would be possible at higher levels, with disparities interposing obstructions to the free interchange of goods.