the rediscount rate on commercial paper is at only three of our reserve banks as high as 5 per cent and in the other ten banks is 4 per cent, while the rate for member banks' fifteen-day collateral notes is only 4 per cent with the exception of Cleveland and Richmond where it is 41 per cent.

EFFECT OF INFLATION UPON PRODUCTION

We are or should be familiar with the effect of all this on the people with small incomes who suffer from the rapidly rising price level. Bondholders whose incomes buy less and less each year as prices rise also are affected though they are less quick to realize it. With With a higher price level too our government must pay more for goods and is then compelled to sell still more bonds. But let us pass to other considerations perhaps even more serious in the midst of a war. What is the effect of this rising price level on our industrial production?

1. When the price level is changing there is much uncertainty attached to business transactions. Doubt as to costs of materials and labor causes hesitation, and commitments for a long period of time are entered into with caution. A large steady volume of production is more difficult to secure.

2. At such times many wages lag behind the prices of many of the commodities which are so large a part of the real wages of the worker. Under these conditions malnutrition and inefficiency occur and lowered productivity results.

3. In so far as wages rise, the result is often to divert laborers from one plant to another and then perhaps back again. The rate of labor turnover is high and a reduction in output occurs. Illustrations of this today are numerous.

4. Increasing expenditures for materials and to some degree also for labor creates serious difficulties for our public utilities. With more or less friction, with weakened credit and delayed improvements they are seeking permission to increase their rates, a step that would have been delayed at least for a considerable period had we avoided inflation.

5. Rising prices contribute to labor unrest. The British Commission on Industrial Unrest which reported last year did its work in eight divisions and the eight were "unanimous in regarding the opinion of the working classes, that they have been exploited by the

rise of food prices, as the universal and most important cause of industrial unrest." In the United States we have no similar report to guide us but the indications are that a like situation exists. In so far as this is true we may say that rising prices encourage industrial friction and strikes, with a lessened output. Other influences are at work but we should not blind ourselves to the seriousness of this one. Prices of commodities as recorded by Bradstreet's index number rose 118 per cent from July 1, 1914 to May 1, 1918, of which 44 per cent has been in the last twelve months. Financial machinery which will increase this advance should be kept under control for the sake of those who always suffer in a period of rapidly rising prices and also for the sake of the successful prosecution of the war.

OUR DUTY IN THE EMERGENCY

Concentration of banking power during war is a most important part of the mobilization of economic resources. Yet it is harmful to ourselves and unfair to our Allies if this be accomplished in a manner that will retard instead of enhance our effectiveness. The problem is most complex, but our duty in several directions is clear: 1. We should not pass legislation that will permit further inflation and thus place upon our treasury officials and our bankers all of the responsibility for the results. Suggestions have already been offered by numerous irresponsible persons that we may secure more "capital" by lowering further our reserve requirements. Serious proposals to that end will probably be made. Such steps should be resisted with all the energy of which we are capable.

2. Heavy governmental and private borrowings encourage inflation and for this reason if for no other much heavier taxes should be imposed at once. Taxes, more taxes, and still more taxes should be the rule. Our fiscal plans to date have been formulated too hurriedly. A scientific analysis of our needs and of the sources of supply for the next ten years or more is needed. This would take into account both governmental and private needs and furnish valuable aid to the capital issues committee, the fuel administration, the railroads, and other governmental bodies which are struggling with questions of priority.

3. In all of our thinking and talking on the subject of war finance the emphasis should be shifted from our financial machinery

to the need for enlarged production of essentials and to the maximum of economy in both public and private expenditures. Financial machinery is, after all, only a means to an end. There are grounds for concern when we view gold and federal reserve notes as "capital" and fancy that by concentrating the one and by issuing the other we are necessarily aiding production. When we laud the achievements of the United States Steel Corporation for having done more dollars' worth of business in 1917 than in 1916, but overlook the serious fact that its output in tons showed an actual decline of about 5 per cent, our judgment is awry. National budgeting is hindered, not helped, if banking machinery is utilized as a means of inflation.

THE FALLACY OF PRICE BIDDING

BY SIMON N. PATTEN, PH.D.,

Philadelphia, Pennsylvania.

The law of supply and demand assumes that a rising price tends to increase supply while falling prices lead to a reduced production. The basis of this generalization is an induction from the action of price changes on particular commodities or on a market of limited range. What our ancestors saw was the immediate effect of price changes. They had no means of estimating world phenomena. To us, however, a world economy is a reality and its fact as easily ascertained as are those of localities. As statistics are compiled it is easier to obtain the data of world industry than of local trade. What the trade of Philadelphia or New York is no one knows with the accuracy with which international figures are compiled. Price changes now affect the whole world or at least several nations. We can, therefore, trace their effects with a precision impossible even a generation ago.

Our fathers bid for commodities and saw as a result a flow of increased goods to their locality. They might know where the articles came from but they did not know what effect the withdrawal of these commodities had on the nations sending them. We now have the facts of both sides of the ledger or, better put, we have the ledger of the receiving and losing nation, On these facts

our opinions should rest and not on theories derived from the imperfect knowledge of the past.

English economic history affords examples of price bidding. The industrial revolution gave her such an advantage in production that she could underbid other nations in selling and overbid them in buying. Commodities fell in price while the price of food rose. The importations were mainly in wheat and the exportation in textile fabrics. Where did the wheat come from and was it an additional production or merely a withdrawal from other markets? The soil of Ireland had been used for the production of food for its own inhabitants of which there were about eight millions. The high price of wheat made it profitable to raise wheat for the English market. The home population was left unfed or forced to migrate. Ireland thus lost three million of her population due to the surplus being transported to England. It is usually said that the migration was due to the failure of the potato crop but this was the immediate not the ultimate cause. Wheat and potatoes cannot be grown in the same field. The profitable crop displaces the less profitable, and the local population must adjust itself to the new situation. The same tendency showed itself earlier in the movement of population from the south to the north of England. The industries of the north outbid the southern industries for the food of England and as a result both food and population moved to the north. When such

a change occurs within a nation the change is not noticed or, if seen, the transformation is accepted as an element in progress. This may be true, but where did the food come from? Was it a new creation due to its higher price or was it a withdrawal which forced a reduction of population of some other regions? The answer in both these cases is the same. The food was a withdrawal, not a fresh creation. The places from which it came lost population to offset the gain of the new markets. Profits rose but not gross production. The gain was thus in net produce which is profitable to both parties making the exchange while the interest of the people in the exporting country is ignored.

These facts are equally patent in the foreign countries from which England's food came. They lost their industries, sank or remained stationary in population. The landowners became local aristocrats who took the greater part of the gain which English commerce brought. We think of the prosperity which England

obtained but overlook the advantage landed aristocrats obtained thereby in other lands. Our southern slaveholders are an illustration of this. The aristocracy of Poland gained their power to oppress by the exportation of wheat just as the southern slaveholder did by the exportation of cotton. The French Revolution had its background in the same cause. England could pay more for wheat than could the French artisans. The food went out and cheap goods came in. French workers were thus subjected to a double strain. They lost their food and employment. The benefited class was the French landlord. Where goes the food there goes population and with population comes wealth. The world is not the better from the change but some place or class may be. High prices and high net industry go together and make a civilization dominated by landlords and profit getting.

America at the present time faces this situation. We cannot draw goods from other nations: they are drawing goods from us. The advantages and detriments of our national policy can thus be measured by their effects at home. More corn or wheat means more home production, or a shift in the use of land from other to these uses. We must, therefore, measure both the gains and losses of crop transfers to ascertain the net results. Our country is not a huge wheat field but a series of belts, each fitted for some crop. We have a cotton belt, two wheat belts, a corn belt and other areas fitted for dairy products, sugar, rice and potatoes. In addition to lands good for these special purposes we have a mass of poor land suited to none of our leading crops.

What is the effect of higher food prices on the good corn, cotton or wheat land; and then what is its effect on the poor land as above described? On good land higher prices have their effect in a higher price of land and in a greater net produce but not in an increase of gross produce When prices go up, rent goes up more than proportionally, leaving the worker in a worse position than before. To say that the acreage is increased by 20 per cent means nothing, therefore, if the new land is poor land. While some new fields come into use many more are going out of cultivation because of soil defects. The limits to our farm produce are thus definitely set until some transformation of our agriculture takes place introducing new crops or new methods of cultivation. Big changes will count but small ones make merely a temporary shifting of crops with no net gain.