Wesley C. (Wesley Clair) Mitchell.

A history of the greenbacks, with special reference to the economic consequences of their issue: 1862-65 online

. (page 32 of 51)
Online LibraryWesley C. (Wesley Clair) MitchellA history of the greenbacks, with special reference to the economic consequences of their issue: 1862-65 → online text (page 32 of 51)
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in our business community in dispensing credits."^ Mr.
McCuUoch in his report as secretary of the treasury, Decem-
ber, 1865, said that '^ it is undoubtedly true that trade is
carried on much more largely for cash than was ever the
case previous to 1861.'' ' In the autunm of the same year
the Commercial and Financial Chronicle made a careful
inquiry into the credits being granted to the South and
West, and reached the following conclusions: '*The great
bulk of jobbing sales now being made are on short time, say
from sixty days to four months Half of the buyers

1 Comiwre HunVa Merchawt8' Ma0azine^\oL XLVn, p. 3S8, and the " Commercial
Chronicle and Beyiew *' of later issues.

3 Ibid., Vol. LU, p. 146. 8 p. n.



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876 HiSTOBT OF THE GbEENBAGKS

pay in cash, and a large portion of the remainder average
less than three months in their credits, while but a very few
obtain six or eight months/' ^

Of coarse, the increase in cash business meant that the
demand for commercial loans was less, and this diminntion
in the qas^tity of commercial paper on the market may not
improbably have offset the great increase in public securities
offered to investors. It must be noticed, however, that in
explaining the cause of the contraction of credit one finds
himself brought back again to men's conscious inability to
foresee the future course of prices as the controlling factor
in the loan market Ordinarily men treat the value of

-money as a constant and ArrRng^ fliAir trftnaApfinna with

little conscious reference to its fluctuations. A paper stand-
ard, however, the valneTof which ^ependsjopra^the varying
credit of a government passing through a serious crisis,
forces upon everyone a realization of the fact that the pur-
chasing power of money is subject to greatjvanations,— But
the realization of this fact is of little practical use in arran-
ging business affairs unless men can foresee the character of
the impending changes. During the Civil War the uncer-
tainty was so great that such foresight was hardly possible.
As a consequence it seems probable from what information
is available that men made their bargains for borrowing and
lending money upon terms not very unlike the terms pre-
vailing in less unquiet times. The chief difference appears
to have been that, so far as possible, everyone refrained from
assuming obligations to receive or to pay money at future
dates, because everyone realized that the sum which he would
be called upon to give or take might well possess much less
purchasing power than the sum which he had received or
given — particularly when the time that would elapse between
the making and repayment of the loan would be considerable.

iVol.I,p.S25.



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Intebest and Loan Capital 377

Lest too strong an impression be given of the losses of
creditors during the war, it is well to call attention to the
fact that against the losses during the period of rising prices,
extending broadly from 1862 to January, 1865, were set
similar gains during the period of falling prices, extending
broadly from January, 1865, to the resumption of specie
paymraits in 1879. If Falkner^s index number of 100
for the latter year can be accepted, it follows that a man
who had kept a sum of money at interest for the whole
period from suspension to resumption would find its pur-
chasing power at the end of the paper-money regime
substantially the same as it had been at the beginning. Li
the meantime, however, he would have suffered a heavy loss
of real income from 1862 to 1865, and on the other hand
would have enjoyed an increase of real income from the
latter date to 1879.

It should also be pointed out that on one important class
of loans capitalists suffered comparatively^ little even during
the war. Interest on many forms of government bonds was
paid in gold. Capitalists who invested their means in these
securities consequently received an inc ome o f unvarying
specie value. But even these investors did not escape all the
evil consequences of the paper-money system; because, as has
been shown, prices rose in the end to a greater height than
the premium upon gold. To illustrate the situation of such
investors, suppose the case of a man who in 1860 had
$10,000 of the fifteen-year 5 per cent, federal bonds of the
loan of 1858. The following table shows what would be his
income in gold and paper money, and how its purchasing
power would fluctuate in consequence of the advance in
prices.

While persons who had purchased bonds as an investment
before the war suffered no great loss of income, persons who
had sufficient faith in the stability of the federal government



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378



HiSTOBY OF THE GbEENBAOKS



TABLE LX

MOITBT AND KBAI* ZNOOMB TIELJ>ED BT $10,000 OV BOMBS OW LOAH OP 1858



Year


Income in
Gold Coin


Averase

Value of

$100 of

Gold Coin

Currency


l^Sof"
Gold In-
come in
Currency


Relative

Prices at

Retail


Purohas-
Income


RelatiTe


1860

1861

1862

1863

1864

1865


$500
500
500
500
500
500


$100.0
100.0
113.3
145.2
203.3
157.3


$500.0
500.0
566.5
726.0

1,016.5
786.5


100
103
115
144
172
181


500
485
493
504
591
435


100

97

99

101

138

87



to purchase its securities at the low prices that prevailed
during the war realized a very high rate of interest. By
way of rough illustration, consider the case of a foreigner
who sent $1,000 in gold to New York every January and
directed his broker to purchase 6 per cent, twenty-year
bonds of the loan of 1861. The following table shows the
amount of bonds which this sum would buy and the interest
which the investment would yield:

TABLE LXI

XMTEBBST TZSLDBD BT AM INVHSTMSNT OF $1,000 IN GOLD IN UNITBD STATES BIXBB
OF 1881, MADB IN JANUARY OF EACH TEAR FROM 1862 TO 1806



Date


Averaae

Value m

Currency

of $1,000 in

G^ld


! Ayerage
Price of

U.S.O'sof
1881


Amount of
Which

Would Buy


Gold

Interest at

6 per cent.

on Bonds

Bought


Rate of
Interest
Bealiaed


1862, January

1863, January

1864, January

1865, January


$1,025
1,451
1,555
2,162


89.6

95.4

105.5

110.9


$1,143
1,521
1,474
1,950


$68.58
91.26
88.44

117.00


Q.9i
9.1
8.8
11.7



If the person who made these investments were an
American, he would be able to sell his gold-interest money
at a high preminm, but he would also have to pay corre>



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Intbbest and Loan Capital 379

spondingly high prices for commodities, so that upon the
whole his position would not be greatly different from that
of the foreign investor. That such opportunities for invest-
ment as these securities offered should exist when men were
most of the time loaning money for short terms at 7 per
cent or less, is perhaps the most emphatic proof that could
be offered of the inability of the public to foresee what the
future had in store. Had men been able to make clearer
forecasts, the rate of interest would have risen much more
than it did, and had they not feared for the solvency of the
federal government, its bonds would not have fallen so low.
But, for that matter, this same distrust of the government's
solvency, arising from the darkness of the future, may be
said to have been fundamentally responsible for all the
economic disturbances of the war times, because to it was
due the varying depreciation of the greenbacks. \



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CHAPTER VIII

PROFITS

I. Profits as a Share tn the Distribution of the Produet:

Use of the Terms ''Profits" and ''Residual Claimants **— Gains of
Residual Claimants at the Expense of Laborers, Landlords, and
Lending Capitalists— Other Things being equal, Profits Varied
Inversely as Average Wages Paid to Employees and Directly as the
Complexity of Business Organization.

II. Profits in Different Industries:

Dependence of Profits on Relative Advance in Prices of Different
Products — Profits of Farmers as an Illustration.
III. Statistical Evidence Regarding Profits:

Meagemees of the Evidence — Statistics of Failures.

L PB0FIT8 AS A 8HABE IN THE DISTBIBUTION OF THB FBODUOT

In the three preceding chapters an attempt has been
made to show in what manner the depreciation of the paper
standard affected the real incomes of laborers, landlords,
and lending capitalists. These classes are all alike in that
the amount of the remuneration received by them for the
aid which they render_ to production is cpmmonly^xed in
advance by agreement, and is not immediately affected by
the profitableness or unprofitableness of the undertaking.
It remains to examine the economic fortunes of those men
whose money incomes are made up by the sums left over
in any business after all the stipulated expenses have been
met.

For the purposes of the discussion it is convenient to
call these men *' residual claimants/' and to use the term
"profits" to denote the sums which they receive. It will be
observed that neither of these terms is used in the sense
frequently assigned it in economic treatises. When one is

380



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Pbopits 381

investigating the consequences of monetary depreciation or
appreciation, particularly within a limited period of time,
one finds that the economic functions that men perform in
the process of production are facts of less significance than /
the legal positions in which they stand with reference to the
payment of their incomes. The residual claimant of the
present chapter is likely to be that man in any business
organization whom Marshall would call the undertaker; but
the factor of importance in determining whether the rise of
prices injures or benefits him is not the work that he per-
forms in initiating and superintending operations, but the
fact that, instead of having entered into a contract to accept
a certain sum for his services, he has as his share whatever
funds are left after paying all fixed charges and operating
expenses. The residual claimant in this sense may be either
manager, capitalist, landlord, or laborer, or any two or three,
or all of these persons in one. Which man in any establish-
ment of those who contribute services or property to aid the
process of production is in the legal position of residual
claimant depends upon the organization of the business.
Many cases can be differentiated, varying in complexity
from that of the farmer who works his own land without
assistance of hired labor or borrowed capital, to that of the
great corporation which leases its land, borrows most of its
capital, * hires its laborers, and pays fixed salaries to its
officials. In the last case the residual claimants are the
shareholders among whom the profits are divided in the
form of dividends, and these shareholders may include
among their number persons who are officials, or laborers,
or bondholders, or landlords of the corporation, or who have
no other connection with it than that of owning stock.
But widely different as these residual claimants may be
from other points of view, thay are all alike in that the
amount of their incomes depends upon the difference between



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882 HiSTOBY OF THB GbEENBAOKS

the total receipts of the business and the sums paid to all
the other co-operators in production who have commuted
their claims to share in the product for a stipulated pay-

. ment. The problem of the present chapter is: How did
the depreciation of the greenbacks affect these differences
between total receipts and the total of payments to other
co-operators?

When the problem of profits is conceived of in this
fashion, it becomes clear that a very important part of the
solution has already been contributed by the preceding
studies of wages, rent, and interest. The evidence has been
found to support the conclusion that in almo st all cases the
sums of money wages, r ent, and interest received by labor-
ers, landlords and capitalists increased much less rapidly
than did tte general price level. _ If the wording of tliET
conclusion be reversed — the prices of products rose more
rapidly than wages, rent, or interest — we come at once to
the proposition that as a rule profits must have increased
more rapidly than prices. For, if the sums paid to all the
other co-operating parties were increased in just the same
ratio as the prices of the articles sold, it would follow that
other things remaining the same, money profits also would
increase in the same ratio. But if, while prices doubled, the
payments to laborers, landlords, and capitalists increased in
any ratio less than 100 per cent., the sums of money left for
the resklual claimants must have more than doubled. In other
wordsj^he effect of the depreciation of the paper currency
upon the distribution of wealth may be summed up in the
proposition: The shares of wAgft-ftftmftra^ Inri^j ^wnera, and
lenders in the national dividend yrf^rft diminialif^ and tha

f share of residual claimants was increased.

/ Heal profits were unusually large during the Civil War,

I therefore, but large because* real wages^ renl^ilnd' interest
\were low. > It must not be assumed, however, that the residual



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Profits 883

claimant necessarily gained as much as the other parties in
distribution lost. In the chapter upon wages, for example,
it was suggested that the efficiency of labor probably
decreased somewhat doriAg ihe X3ivil War^ because a large
number of the mosi effiei^it leboFers had ^ilisted in the
armies and their places had to be filled with less skilful
^ "hands. . ^o far as this was the case, the volume of output
must have diminished, and, of course, such diminution would
decrease the difference between total income and total outgo
that figures with us as profits. But if this was an important
consideration, it was one due, not to the paper standard,
but to the fact that the country was involved in a great war.
With regard to the relations between residual-^dafinant
and lending capitalist it must be said that the capital bor-
rowed during the war decreased very mu ch more _jLri fifficiftnfiy
thftTi fhft Ifthnr hired. When prices had doubled, $1,000 of
capital was the equivalent of only $500 on the old level of
prices, and if the borrower had to pay 8 instead of 6 per
cent, interest, he seems to have been worse instead of better
off in consequence of the depreciation of money. And, of
course, the residual claimant is, in fact, worse off because of
even a slight increase in the rate of interest which he has to
pay — unless further depreciation takes place between the
time that he invests the funds lent him and repays them to
the lender. But if such depreciation does take place, he is
likely to make a larger gain at the expense of the lender
than he makes at the expense of the laborer, because the
contract which he makes with the former is likely to run for
a longer time than the contract with the latter, and conse-
quently the person who finds himself injured by the course
of events cannot seek relief so promptly by insisting upon
making new terms. Moreover, the borrower gains not only
by continuing to pay the sam^ money income to the lender
for a considerable period, as he may perhaps do with the



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384 HiSTOBT OF THE GbEENBAOKS

laborer, but also by returning the principal sum lent in dol-
lars of much less purchasing power than the dollars received.
On the other hand, the borrower of capital feels the effect of
a downward turn of prices much more quickly than the
employer of labor. The wage-tables indicate that, though
money wages continued to rise for some time after prices had
begun to fall, they had nevertheless not caught up with
prices by the end of the war. Therefore, while employers
were making less extra gain at the expense of their hands
at the close of 1865 than they had been making in 1863 and
1864, they were nevertheless receiving an extra profit as
compared with the situation before the suspension of specie
payments. The extra gain of the borrower, however, was
turned into a positive loss as soon as the purchasing power
of the dollars in which his obligations were repaid became
greater than the purchasing power of dollars which had been
lent to him.

As for the relations between the tenant and landlord, they
were like those between employer and employee in that
the efficiency of the good transferred was not affected by
monetary conditions, and like those between borrower and
lender in that the contract was likely to run for a con-
siderable term. From the tables of chap, vi which indicate
that money rents increased less rapidly than money wages,
it follows that the gain of the residual claimant at the expense
of his landlord was probably greater in degree than the gain
at the expense of laborers.

Two other general propositions respecting profits are sug-
gested by the results of preceding investigations. First,
other things being equal, profits varied inversely. aaL-thfi_^
average wage per day paid to employees. This conclusion
follows directly from the demonstration in chap, v that the
money wages of men earning $1-$1.49 per day before the
perturbation of prices increased in higher ratio than those



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Pbopits 885

of men earning |1.50-$1.99; that the wages of the latter
class increased more than the wages of men in the next
higher wage class, etc. Second, other thiogg. b^jpg ftq^ift^
profits varied directly as the complexity of the business
organization, ^y this proposition Ts "meant, for example,
that a farmer who paid money rent, used borrowed capital,
and employed hired laborers, made a higher percentage of
profits than a farmer of whom any one of these suppositions
did not hold true. If, as has been argued, the increase of
profits was made at the expense of laborers, landlords, and
capitalists, it follows that that residual claimant fared best
whose contracts enabled him to exploit the largest number
of these other persons.

II. PROFITS IN DIFFBBENT INDUSTBIBS

The effect of monetary depreciation upon profits resulting
from the increase in the sh^re of the residual claimant in the
product at the expense of the shares of laborers, landlords,
and capitalists, was felt more or less alike in all industries.
Of course, the average advance of money wages was not uni-
form in all branches of production: there were probably
similar differences in the increase of the sums paid as rent
for locations of various sorts, and there may have been dif-
ferences in the fluctuation of rates of interest charged to
borrowers in dissimilar lines of business. But, despite
these differences in degree of diminution in the shares of
these three classes of participants in distribution, as compared
with the share of residual claimants, the general character of
this effect of depreciation was substantially the same in all
industries.

There was another and hardly less important effect of
depreciation upon profits, however, that was by no means
uniforiiL In chap, iv emphasis was put upon the dissimi-
larity in the price fluctuations of different commodities*



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386 History op the Gbeenbages

These dissimilarities produced corresponding variations in
the profits realized by producers. The residual claimant
whose profits came from the production of commodities that
advanced in price more rapidly than the majority of other
commodities derived a second gain in addition to the gain
made at the expense of his laborers, landlord, and creditors.
Not only did such a residual claimant have a relatively larger
share in the product, but the money value of that product
was relatively larger as compared with the money value of
other things that he might wish to buy. When the advance
of the product in price was nearly the same as the advance
_ot the articlea which the residual claimant purchased, he
enjoyed no such second gain — the only way in which he
was benefited by the depreciation was through his ability
to satisfy contracts with the proceeds of a smaller portion of
the output. Finally, in the case of products that advanced
in value less than the average the. residual claimant not only
made no second gain, but he even suffered a loss through
the diminshed relative purchasing power of his product — a
loss that might or might not be offset by the gains made at
the expense of the other participants in distribution.

The statistical material is not complete enough to make
possible an elaborate investigation of these differences in
the profitableness of industries due to the dissimilar price
fluctuations. But there is one case that merits attention, not
only because of the relative fulness of the statistical record,
but also because of the great importance of the industry. It
will be remembered that thirteen agricultural products are in-
cluded in the tables of relative prices at wholesale. Since
this list comprises all the most important farm products of
the northern states, it affords a fair basis for estimating how
the farmer's money income was affected by price changes in
comparison with that of other producers. Table LXII pre-
sents the data regarding the prices of farm products in two



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Pbopits



887



TABLE LXn

BBLATXV1I WHOLBBAIiB PBIOBB OF FABM PBODUOT8 AND OF OTHEB OOMMODITTBS







MKDIAlf




Thirteen


SoTon


All


Thirteen


Seven


All


Datb


Farm


Farm


Articles


Farm


Farm


Articles




Products-


Products-


Included


Products-


Products-


Included




Simple


Weighted


in


Simple


Weighted


in




Average


Average


Table XIV


Average


Average


Table XIV


1800, Jan...


108


108


102


101


102


100


April..


105


103


102


105


105


100


July..


98


94


100


96


92


100


Oct...


95


95


104


94


97


100


1861,Jan...


92


91


97


94


90


100


April..


94


87


98


90


92


97


July..


74


66


93


66


66


95


Oct...


76


71


100


71


72


100


1802, Jan...


83


78


111


84


79


100


April..


92


81


110


87


85


100


July..


87


77


113


86


74


103


Oct...


97


85


124


96


82


117


18«a,Jan...


119


100


142


100


94


130


April..


144


129


162


130


120


142


July . .


129


110


156


115


103


139


Oct...


133


125


154


127


122


140


1864, Jan...


159


157


176


152


153


161


April..


171


171


194


161


160


175


July . .


189


192


233


185


206


200


Oct...


194


194


234


194


174


208


1865, Jan...


223


216


247


224


212


228


April..


186


177


207


179


169


184


July..


143


129


184


139


117


160


Oct...


166


154


199


149


149


180



ways. The first column gives the simple arithmetic means
of the relative prices of the thirteen agricultural products
included in the general price tables ; the second column gives
a similar average of the relative prices of barley, com, meats^
oats, rye, tobacco, and wheat weighted according to the esti-
mated money value of these products in the northern and
western states in I860;* the third column gives the arith-

1 These weights are as follows in percentagen : Com, 89.4 ; meats, 32.2 ; wheat, 17.4 ;
oats, 6.9 ; rje, 1.1 ; barley, 1.6 ; tobacco, 0.8. They are derived from the table of quan-
tities and values preiwred by the statistician of the Department of A^culture for
Senator Aldrioh*s committee and published in its report. Part I, p. 108. In order to
exclude the south Atlantic and south central states, recourse was had to the census
reports of farm yields in 1860, as ffiven in the Eleventh C^imif, " Report upon Agri-
culture," Table 2.



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888 HlSTOBT OF THB GbBBNBAOKS

metic mean of the relative prices of all articles included in
the wholesale price-tables of chap. iv. A second set of aver-
ages is added in which the median is substituted for the
arithmetic mean.

It seems safe to conclude from these figures that the
farmers of the loyal states were among the unfortunate pro-
ducers who seTprod ucts r ose I n p rice les sTEaifthe^majority of
other articles, and that from this standpoint they were losers
rather than gainers by the paper currency. Of course, it is
possiBTe'thai the farmer^s loss from this inequality of price
fluctuations might be more than offset by his gains at the



Online LibraryWesley C. (Wesley Clair) MitchellA history of the greenbacks, with special reference to the economic consequences of their issue: 1862-65 → online text (page 32 of 51)