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John G. Wright

The Effects of the Commodity Price Slump

(23 February 1948)

From The Militant, Vol. 12 No. 8, 23 February 1948, p. 4.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

The February price break in the commodity markets signalled, in cur opinion, the incipient crisis of American agriculture. It is still far too early to gauge the rate at which this crisis will unfold. But the prospect for the next few months is that, barring crop failures, agriculture will be compelled to absorb sharp cuts in its price structure.

Can such an “adjustment” in agricultural prices take place without affecting the existing price structure as a whole?

The present precarious balance of American industry is much more dependent upon agriculture than was ever the case in the past. Thus during the boom of the Twenties the equilibrium between industry and agriculture – worked out over a long number of years – rested on a ratio of 1 to 16. In other words, out of every 16 dollars of national income, the farmer received one dollar. The agricultural boom of recent years has sharply increased the farmer’s share of the national income. According to Federal Reserve Board figures, he received in 1946 one dollar out of every ten. And last year, even more.

A New Balance

Industry has been operating on the basis of this new proportion, and any sudden shift immediately poses the problem of establishing a new balance. This cannot be done painlessly or in a brief space of time. Because farmers now dispose of a bigger share of the national income, every blow to farm income becomes more quickly translated into blows to other sectors of the home market, in the first instance, retail trade.

To illustrate. Gross farm income last year is estimated at 30 billion dollars. A reduction of 10% in crop prices would lop off at once several hundred million dollars. A 20% slash would amount to more than the first year’s projected “European Aid” program. Slashes of one-third and more would approximate last year’s total foreign trade.

Thus, sizable declines in farm income imply not only profound repercussions in other sectors but drastic readjustments for industry and for the domestic market as a whole.

Weeks before the commodity price break, soft spots began to show up in retail trade reports. This “spottiness” has recently become more marked, especially in rural areas.

Phony Arguments

The argument that retail trade should profit from lower farm prices is obviously phony. Retail food prices, which have scarcely dropped at all, will tend to lag far behind any present or future declines in the commodity markets. As for the prices of manufactured goods, they never fall as fast or as much as do farm prices.

The argument that farmers will be “well off” anyway, even with much lower prices for their, crops also has little bearing here. Traditionally a free spender when his income is on the upgrade, the farmer is no less habituated to “do without” when the specter of lean days stares him in the face.

That is why bankers and industrialists are now keeping one eye cocked on weather reports while the other eye is glued on retail trade reports, especially from rural areas.

In the face of declining retail trade such an argument as the heavy backlog of orders in heavy industry is of little weight. During all booms, especially inflationary booms, imposing backlogs accumulate. But they tend to dissipate rather suddenly, as happened in 1920.

Perhaps the situation might not be so precarious if agriculture alone was involved. The whole trouble is that industry, despite its outward signs of strength, has been fed too long by inflationary fires. This appears most strikingly if we view the economy from the standpoint of the physical volume of production during the last two years. Last year was supposed to be a peak year. But the truth is that over-all production last year was not much bigger than in the previous year, 1946.

Where we do find a whopping increase is in the dollar figures, in particular profits. This is admitted by such conservative bankers as the Guarantee Trust Company, who say in their Jan. 28 monthly letter:

“The year as a whole, however, witnessed no great increase in the physical volume of output. The rather striking gains that were reported in gross national products, income, expenditures and other dollar indices were due for the most part to the advances in prices.”

In other words, virtually the same amount of goods which the country absorbed in 1946 on the basis of a gross national output of 204 billion dollars was dumped on the home market last year with a mark up to 235 billion dollars. The people were forced to buy the same goods as in 1946 while paying out 31 billion dollars more. This orgy of inflation placed an unbearable strain on the purchasing power of the masses.

Large Surplus

The resulting grave discrepancy between mass consumption and the inflated “gross national output” has been, of course, carried over into this year. The home market must absorb in 1948 at least as much as it did in 1947, if the economy is to continue operating at the same levels as before.

But the greater the reduction in farm income, all the lower will be the farmers’ purchasing power? This will leave large quantities of unsold goods overhanging the market.

As for the workers, their wages have lagged so far behind steeply rising prices that they are no longer able to buy what they did last year.

But the workers and farmers constitute the overwhelming majority of the population. If they are unable to buy, where then is an outlet to be found in a peacetime economy for the huge surplus of high priced goods?

Storing more and more unsold goods in warehouses, as was done last year, is obviously risky because inventories already amount to more than 42 billion dollars.

The sole visible outlet is foreign trade, which has been steadily declining since its peak last May.

Must Safeguard Profits

There is a practical solution. It is: to raise the living standards of both the workers and the farmers. There then would be no limits to how much industry and agriculture can produce, or how much the home market can absorb, but this solution is excluded for a capitalist government, whose primary concern is to safeguard the profits of the monopolies.

Whatever immediate measures Washington applies – and from all indications the biggest hopes right now are being pinned on the 5 billion dollar program projected under the Marshall Plan – they are powerless to long sustain an agriculture whose production has risen one and a half times since pre-war and an industry whose productive capacity is twice as big as it ever was.

The Marshall Plan and similar measures can serve to temporarily cushion the shocks to the country’s economy. They cannot avert the downward plunge first of the retail trade and next of industry, which is approaching ever closer.

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