Thomas Tooke

Archive for the ‘Inflationary Period of 1913-1920’ Category

How did wages progress during the 1913-1920 period.

In Inflationary Period of 1913-1920 on May 12, 2012 at 12:28 am


Now a bit of information about the level of wage inflation during the same period.

As Kemmerer wrote:


The industrial survey recently conducted by the United States Bureau of Labor Statistics covered eight industries. For these eight industries respectively the average percentage wage increases were as follows:

Cigars, 52, men´s clothing, 71; furniture 53, hosiery and underwear, 84; iron and steel, 121; lumber, 94; mill work, 51; silk goods, 91. If the cost of living increase for the same period is taken as 83.1 per cent, it will be seen that the average rate of wage increase in three of the eight industries was greater than the increase in the cost of living; in four of them less, and in one of them practically the same.




In Baltimore, for example, the rate for boilermakers increased from 30.6 cents per hour in 1913 to 80 cents in 1919, an increase of 161%; while in Charlestown , S.C.,  the rate for bricklayers increased from 40 cents per hour in 1913 to 75 cents in 1919, an increase of 88%. On the other hand, the rate for boilermakers in Chicago which was 40 cents an hour in 1913, was only 42 cents in 1917, 52 cents in 1918, and 60 cents in 1919. The rate for bricklayers in Jacksonville, Florida, was 62.5 cents from 1913 to 1918 and then rose to 75 cents in 1919.

The average rate for boilermakers in the twenty-five cities was 39.5 cents per hour in 1913, and 72 cents per hour in 1919 (the latest date in the year for which figures are available being taken for the year), representing an average increase of 82%, or just about enough to meet the estimated increase in the cost of living. The average rate for bricklayers in the forty cities in 1913 was 67.1 cents per hour, and in 1919 it was 90.2 cents per hour, representing an average increase of 34.4 per cent, or probably much less than half enough to compensate for the increase in the cost of living.








Inflation by group of products during the 1913-1920 period.

In Commodities, Inflationary Period of 1913-1920 on May 11, 2012 at 11:49 pm

During the first world war period, the inflationary pressure was distributed in the following manner.

As Kemmerer wrote in 1920:


Wholesale prices, we have seen, have increased on an average 165% from 1913% to April, 1920. Government figures show that the group of food commodities increased for the same period 170%; that the commodity group of “cloths and clothing” increased only 95% per cent. The Government figures for the retail prices of 12 important articles of food show an average increase for the same period of 111%. Retail prices, as exemplified in the budgets of 12,000 laboring men´s families in 92 localities, covering food, clothing, fuel, light, and house furnishings, show an average increase from 1913 to October, 1919, of 83.1%, and to December, 1818 of 99%, as compared with a general wholesale price increase to December, 1919, of 138%, and an increase in the retail prices of food of 97%.


The place not to invest into: Utilities.


Another group of price maladjustments resulting in large part from inflation is that relating to railroads and other public utilities, the prices of railroads and other public utilities, the prices of whose services and products are prevented by government regulations from moving upward with the general price level under the stimulus of inflation, but whose costs for materials, equipment and wages, continually advance under that stimulus.




Inflation in 1913-1920. The obvious mistake of blending all prices together.

In Commodities, Inflationary Period of 1913-1920 on April 30, 2012 at 11:43 pm

Kemmerer seems to be writing as of 2012 not 1920. This is why I abundantly cite his books back from those days. In this post and the next few posts, we examine the result of the reduction in reserves, Gold embargo, re-hypothecation of War bonds by the Fed, liberal 0 reserve requirements for Government bonds, propaganda to elicit the public into buying war bonds that we have described before. Here is the result on commodities prices. Here is what Kemmerer writes:


Of course even without inflation the prices of those commodities for which the war made most urgent demands, such as munitions, ship building materials, and the like, would have advanced greatly, but these advances would have been compensated for by declines in the prices of other goods. If an individual with a given income spends more for articles A, B, and C, he will, of necessity, spend less for articles A, B, and C, he will, of necessity, spend less for articles D, E and/or F, unless he draws on his capital, in which case someone will have less to spend on these or other articles. A shifting of the country´s economic demand from one kind of goods, say the goods of peace, for another kind, say the goods of war, will force up the prices of the former. If more of the circulating media is used in exchanging the war goods less will be available for exchanging the peace goods, and the demand for them will fall off with a consequent reduction in their prices. The rise in the prices of the one group, however, would be compensated for by the fall in the prices of the other and little or no change in the general price level would result. When, however, this shift of the economic demand from peace commodities to war commodities is accompanied by a large inflation of the media of exchange, no such compensating effect is necessary. There may be an upward movement of practically all prices although of course the price of those commodities upon which the war demand is concentrated will advance most.


A few important points here.

First commodities price rise = inflation in the mind of the author, it is quite a different situation that today´s massaged numbers.

Second, evidently a rise in prices of a set of essential needs with inelastic demand, say food and energy will decrease the income available for other consumption. So there will not be a lot of pricing power from the sellers of 3-D TV while demand for food is quite inelastic if not growing if the population grows.

The conclusion would be that statistical agencies know about this phenomenon perfectly well, and evidently the omission is not “devoid of sense” since it is not an omission in the first place, as it is excluded purposely.

Finally, from an investment point of view, one should select the commodities whose demand increase in period of stress or stay constant. To that respect agricultural commodities have the most inelastic demand features and benefit a lot in period of massive monetary expansions.

Here is below indexes of commodities price computed by different agencies.

Kemmerer continues:


Taking the index numbers of United States Bureau of Labor Statistics as the most comprehensive and most scientifically prepared of the index numbers covering the entire period 1913 to 1919 inclusive, we may way that the wholesale price level increased from 1913 to April, 1920, 165%; in other words, if one calls the dollar of 1913 a 100% dollar in its purchasing power over commodities at the wholesale, the dollar of today is approximately a 38 % dollar.


Patriotism well rewarded!

There is no manipulation of the Gold price! At least not before September 7th 1917. Or before 1873? Patrotism used again as the excuse.

In Inflationary Period of 1913-1920, Uncategorized, Unreserved Banking on April 29, 2012 at 3:19 pm

In the middle of 1830s, Gold was free to leave the Bank of England, and the bullion free to be exported. When over-expansion of paper money would occur, the result would prompt the speculators to lean against the tide by changing their Gold early in the process for Bullion and ship it overseas. This would lead to a contraction and at some point it would become interesting to bring bullion again in the UK.  However on September 7th, 1917 the United States government decided to monopolize money further (after the Fed layered the banking system with war bonds –treasuries–),  and declared an embargo on Gold shipments.

As Kemmerer writes:


The heavy drain of gold which such a condition of affairs would normally have brought about was prevented by the gold embargo, which was in effect from September 7th, 1917, to June 10th, 1919, by the government´s giving wide publicity to the doctrine that hte use of gold coin or gold certificates in circulation was an unpatriotic act, that all gold should be impounded in the federal reserve banks where it would serve the country with maximum efficiency, and by the further fact that most of the leading countries of the world were inflating their currency and bank credit at even more rapid rates than we were.

The result was an expansion of bank loans and, in consequence, of deposit currency such as this country and probably no other country ever saw before in an equal space of time. In the following table the expansion of bank deposits is shown. The figures cover individual and government deposits in commercial banks and government deposits in federal reserve banks.


Here we have within a period of six years an increase in our national bank deposits of approximately 118 per cent, or over seven billion dollars, and an increase of state bank and trust company deposits of over 121 per cent, or over six billion dollars. The two together represent and increase of over 120 per cent of our deposits in commercial banks since 1913, or an increase of over 13 billion dollars. Probably 80 to 85 per cent of the country´s business is concluded through the instrumentality of bank checks. It is through checks that deposits circulate and that the bank´s depositor gives expression to his demand for goods. The war period has been one in which deposits have circulated at a more rapid rate than usual and the doubling of deposits has therefore probably resulted in an even greater increase in the country´s deposit currency circulation.

This tremendous increase in bank deposits has resulted in a great decline in the average percentage of actual cash reserves held against deposits — namely the ratio of deposits (as above computer) to actual cash held by national banks, state banks, trust companies, and federal reserve banks (exclusive of reserves held against federal reserve notes). This average percentage for the country as a whole has varied as follows since 1913:

The hidden high interests to the government. War as a distorting mechanism to boost demand for capital.

In Inflationary Period of 1913-1920, Unreserved Banking on April 29, 2012 at 2:39 pm

Kemmerer makes an interesting argument that indeed high interests have to be paid one way or the other even if the nominal interest rates are low.


The Fundamental economic law which makes the interest rate the resultant of the interaction of the forces of demand and supply in the capital market was forcing up the real interest rate under the influences of a world wide destruction of capital and an unprecedented demand. “Present goods were at a large and ever-increasing premium over future goods.

The government, it is true, paid lower rates of interest on its bonds, but it was compelled to pay higher prices for the war supplies it bought, and was therefore compelled to float more bonds. It paid lower interest rates by reason of this policy, but it paid an dwill pay more interest.


Here I will interest some remarks. It sounds like the destruction of capital and manufacturing capacity, and probably the restriction of the flow of goods (which also a feature of the Napoleonic wars as noted by Tooke, has the real impact of forcing the demand for capital up. True the soldiers dead by millions reduce demand undeniably, but overall the destruction of capital is larger than the destruction of population.


Because of the observation that the more money and deposit credit an individual has the more goods he can buy, the inference was popularly drawn that the more money and deposit credit the government could get, the more war goods and services it could buy. The forces above described favored loan and deposit expansion. Such expansion was profitable to the banks and profitable to businessmen, while to the banker, the business man, and the ordinary citizen, the acts which were resulting in this expansion appeared to be acts of patriotic duty.

The unique purpose of low interest rates: Fund the government debts, concept of risk free upside down, usurpation of interest rates mechanism

In Inflationary Period of 1913-1920, Unreserved Banking on April 27, 2012 at 2:31 am

As Kemmerer further explains in 1920, the main purpose of low interest rates was to fund the government and it was dearly paid by the citizens of the United States through steep inflation.


In their laudable desire to keep interest rates low on bank loans to essential war industries, and more importantly, to make possible the floatation of large government war loans at excessively low rates of interest, the federal reserve authorities adopted a policy of low discount rates for the federal reserve banks and of preferential rates and great liberality for advances made on the security of government war obligations. Throughout the entire period of our belligerency the loan and discount rates of the federal reserve banks were below the market rates, and “the market was in the federal reserve banks.” Funds received by banks for the government through the sale of liberty bonds and short-time certificates were usually left for a time on deposit with these receiving banks at the low rate of 2 per cent interest and without reserve requirement. This policy greatly expanded deposit credit. When the deposits were called by the government the funds for meeting the calls could readily be obtained by the bank´s borrowing from its federal reserve bank either by the rediscount of war paper, or by a direct loan collateraled by government security; and the rates charged for these loans were usually enough lower than the rates paid to the banks by the customer for his advance used in buying the bonds to yield the bank at least a small net profit. The result was the piling up of many billions of dollars of liberty bonds and certificates of indebtedness in the commercial banks of the country and the federal banks, particularly the latter, in the form of collateral for loans.  Federal reserve banks loans so collateraled provided member banks with a continuously increasing supply of legal reserves for further loan and deposit expansion; and the expansion of federal reserve loans, with resulting increase in federal reserve deposits and issues of federal reserve notes was continually reducing the percentage of reserves held by federal banks. We bough our low interest rates on government paper at the price of very high prices for commodities. We kept interest rates down by a policy that kept pushing the price level up.


I will add a few personal comments here. This paragraph is important because a lot falsehood commonly held as “truth” are revealed here.

First on the issue of central bank as an independent entity. It appears that without re-discount from a federal system there would have been no demand for war bonds (treasuries), hence the conclusion is that the Federal Reserve was there to facilitate the low borrowing costs of the government.

Second the idea that the Fed must set interest rates is heavily fought by this author in 1920 as we will see later. He actually complains that “the market is in the Federal Reserve banks” instead of being in the real market.

The great fallacy of risk free rate on government bonds has the following origin. In order to maximize the flooding of government bonds in the banking system, the reserve requirements are 0. The legal requirement has nothing to do with the risk.  It is an upside down concept ignoring the agenda of the government.

The Federal System by treating government bonds very liberally without regards to the good bills doctrine but purely by political imperative, results in expansion of credit based on the re-hypothecation of government bonds with artificially low rates.


A convenient way to flood the banking system with government securities.

In Inflationary Period of 1913-1920, Unreserved Banking on April 27, 2012 at 1:55 am

As Kemmerer wrote, patriotism was quite convenient:


Much of this potential loan and deposit expansion appeared in the early years of the war, when the demands of European belligerents for our products assumed tremendous proportions and offered high profits to American producers of materials, so high as to call for a large expansion in the production of these materials. Labor was shifted from “non-essential industries” to “essential industries,” and while many of the former lagged, the latter were greatly stimulated. Here then was a great demand for increasing bank credit at just the time that the establishment of the federal reserve system, the reduced cash reserve requirements of commercial banks, and the heavy imports of Gold from Europe were making a larger loan and deposit expansion possible. The new federal reserve law and the  heavy gold imports created a potential supply of new circulating bank credit, the war stimulated the demand. It was the banker´s financial interest to expand credit, and to the interest of many groups of business men to seek these newly available funds.

As a matter of patriotic duty bankers were expected to expand their loans and deposits. Long before the United State entered the war, the sympathy to the Allies in this country became so pronounced and the conviction that they were fighting our battles became so strong, that production for the Allies and the granting of loans to finance such production were felt to be patriotic acts. After the United States entered the war, the extension of bank credit to the maximum limit consistent with safety to “essential industries,” and to the buyers of libery bonds was looked upon as the paramount duty of banks. “.


My comment here about how the Treasuries (war bonds) were initially inserted into the banking system with the incentive to let people borrow short term at low rates to buy liberty bonds and make a “spread”. Before that, without the generous  discount, it would be very difficult for the bank to have incentives to load up on government war bonds. This is how the Treasuries invade the banking system.

More from Kemmerer´s writings…


The demands of patriotism were looked upon as requiring the public to avail themselves to the limit of the liberal loan facilities made available by the banks. Nearly everywhere the belief prevailed that with the loans thus available, war industries should expand their production and the public should buy bonds to the maximum. “Borrow and buy”was a widely used slogan in the first three liberty loan campaigns, and was strongly, although more quietly, urged upon the public, in the fourth liberty loan and the victory loan campaigns.


Replacement of 100% Gold to 40% of the Gold by the Fed in 1913-1919. Withdrawal of Gold from circulation by the Fed.

In Gold vs monetary base, Inflationary Period of 1913-1920 on April 25, 2012 at 1:52 am

In the previous post we discussed the monetary expansion in the US during the 1913-1919.

As Kemmener wrote:


Two important items in this great increase in the monetary circulation were:

(1) the heavy net imports of Gold from Europe resulting from our large exports of war materials to the belligerent countries, and (2) the policy of the federal reserve authorities of withdrawing gold certificates and gold coin from active circulation, and substituting  therefor so far as possible federal reserve notes, thereby substituting for money representing 100 gold as form of money which required only a legal gold reserve of 40% per cent. The period studied witnessed a very large expansion of federal reserve notes. In 1913 there were no federal reserve notes, and on November 7th, 1919 there were $2.8 billions of federal reserve notes in circulation against which a reserve of 45.3 per cent was held, giving a net circulation of uncovered by gold of $.15 billions. At the present writing (March 26th, 1920) the circulation of federal reserve notes is $3,048 millions against which a reserve of 40.1 per cent is held, giving a circulation uncovered by gold of $1,826. […]

How did the economy fare during the 1913-1919 period? The statistics of physical quantities.

In Inflationary Period of 1913-1920 on April 23, 2012 at 1:40 am

As we have now forgotten the simplicity of the statistics of physical quantities, back in 1913-1919 Kemmener used true economics measurement of activity away from distortion. Today we have what is commonly referred by equity analysts as GIGO in their attempt to figure out the fair value of an asset, or “Garbage in, Garbage out”. The economics quantities are measured in currency units and are thereafter redressed by a GDP deflator. Why not just measure the physical quantities and their evolution? That is precisely what Kemmener decided to do:

” In attempting to form a judgement as to the extent to which our circulating media have been inflated since 1913, the first problem is to measure in some way the growth, since that date, of the country´s physical volume of business. Money and circulating credit exist primarily as instruments for exchanging goods and services. This exchange work is their job. To what extent, if any, has the job increased during the last six years? This question cannot be answered with any high degree of accuracy, but a rough approximation can be reached the study of certain business statistics which typify business activity and growth. Obviously the statistics used for this purpose should be statistics of physical quantity and not of value involving prices, since the movements of price level are one of the results of inflation.”

” Among the best items for measuring the movement of business in general, because they are items that enter into so many products, are the production of pig iron, bituminous coal, anthracite coal, petroleum, copper and silver. Other goods indices of general business are the number of tons of freight carried on important railroads and the tonnage of vessels entered and clear in American ports. Representative of agricultural industry is the production of wheat, corn, and cotton; and representative of hte building industry is the number of building permits given in leading cities. Here are the twelve items, an of which is an honest of the growth of American business, but each of which has its own bias. Safer than to trust any one of them is to take the testimony of all, so that in the mouths of many witnesses the truth may be established. If we reduce the figures of these twelve items to a percentage basis, taking 100 the figure of the year 1913, and if we then combine these figures into a simple average, we arrive at the following of index numbers which represent in a rough way the growth of the country´s physical volume of business since 1913. ”

Another Author, Mitchell attempted the same exercise from a broader sample of 90 raw materials during the year. Here is the result.



The year 1919 saw the start of the Federal Reserve Bulletin.  The author selected 13 categories and came up with the following comparison , re-basing to 100 in 1918.

So where is the miraculous growth thanks to the sale of  war supplies to Europe?

We have in total a real growth 9.6 of  percent over a period of 7 years, or 0.92% per year compounded from 1913 to 1919. Dismal performance in real terms but a massive expropriation and redistribution of wealth through inflation as we will see.

Let us now turn from the demand for money and deposit currency to the supply.

Next we will investigate where this money ended up, which asset or commodities got pushed up in prices?

The plight of the people: Inflation 1913-1919

In Inflationary Period of 1913-1920 on April 22, 2012 at 9:18 pm

As Kemmerer, Princeton Economics Professor wrote in 1920:


The true value of savings accounts has been cut in half by the rapidly depreciating dollar, and the same is true of paid-up insurance policies, of fixed incomes from bonds, mortgages, pensions and preferred stocks. Chief among the sufferers have been those who least deserved to be exploited — college universities, benevolent institutions, and the thrifty people who in the past saved capital and put it to some productive use. All these have been penalized, and the newly rich, with extravagant spending tendencies, have watched gold pour into their purses. Teaches, clerks and others with fixed salaries have been hard hit. On the other hand, the facility with which money could be borrowed, owing to the low rate of interest demanded, led to dangerous speculation and shameless extravagance. Widespread discontent and extreme radicalism have resulted.


He further writes :


In connection with the discontent that usually results from inflationary movements, the French have a saying “the guillotine follows the paper money press- the two machines are complementary one to the other “.


The Russian could probably add their experience of 1917 and the Chinese theirs of 1848…