a very substantial element of insurance in interest rates. The banks could stand a substantial loss on some of their loans in view of the general interest rates prevailing.
Moderate Decline in Wages. Wages declined, although nothing like so much as commodity prices. The following table compares wages and wholesale prices for the years 1914-22 inclusive:
INDEX NUMBERS OF WAGES PER HOUR AND WHOLESALE PRICES IN THE UNITED STATES*
| Year | Wages per hour (Exclusive of agriculture) | Wholesale prices (All commodities) |
| 1914 | 100 | 100.0 |
| 1915 | 101 | 102.1 |
| 1916 | 109 | 125.6 |
| 1917 | 125 | 172.5 |
| 1918 | 159 | 192.8 |
| 1919 | 180 | 203.5 |
| 1920 | 229 | 226.7 |
| 1921 | 214 | 143.3 |
| 1922 | 204 | 142.0 |
* United States Bureau of Labor Statistics—bases changed.
The year 1921 shows a drop in wage rates per hour of a very moderate sort. The figure was 229 in 1920 and 214 in 1921. Wholesale prices, on the other hand, dropped from a 1920 average of 226.7 to a 1921 average of 143.3. Wages had lagged behind wholesale prices in the years 1916-19
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inclusive. They had passed above wholesale prices in 1920. They dropped very moderately in 1921, when wholesale prices made a violent drop.
The decline in wages, however, was a very unequal one. In the hardest pressed industries they dropped very much more, and in their dropping facilitated industrial revival.
Because of Immigration Decline. The basic explanation of the failure of wages in the United States to decline with wholesale prices is to be found in a change that had taken place in our labor supply in the years following 1914. Prior to 1915 we had had an immense immigration, running over one million a year frequently and in two years running between 1.2 and 1.3 million. Of the immigrants that came in, moreover, a very high percentage were young men and women ready for work. This had imposed a drag on the rise of wages in the United States. Wages had risen with the growth of capital and with technological progress year by year. But wages had not risen nearly as rapidly as would have been the case had immigration been shut off and had we been dependent solely on our own internal population growth.
The coming of the war immediately shut off immigration from Europe, and legislation following the war sharply restricted immigration.
The effect of the cessation of immigration was particularly marked in the city of New York. Wages of maidservants, for example, had been $3.50 a week in 1913, with the maid’s living provided by the employer. There was a steady stream of young German and Irish women coming into the city, as well as a good many Negro girls coming up from the South. Beginning very early in the war these wages began to mount, and the wages of maidservants reached $18 a week in 1918. After the slump in 1921 they remained at $14 to $15.
We could have had this rise of wages in the United States at any time before the war had we been willing to restrict immigration. The experience of the war itself led us to restrict immigration. We found to our surprise that we had admitted so many new Europeans that it had endangered the national unity. We found our country less homogeneous than seemed safe in wartime, and we restricted immigration.
The failure of wages to decline toward prewar levels, therefore, as commodity prices were declining toward prewar levels, was a legitimate supply-and-demand phenomenon. Men had become scarcer, and therefore dear in relation to the capital and natural resources of the country. A radical permanent rise in wages was therefore explained on economic grounds.
Artificially High Wages in Postwar England Create Chronic Unemployment in 1920s. It is noteworthy that the same phenomenon occurred in England without the same explanation. Wages rose with commodity prices during the war and postwar boom. When commodity prices slumped in England in 1920 and 1921, wages slumped very much less and remained high above prewar levels. In England, however, the explanation was not a
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change in the supply-and-demand situation affecting labor, but was rather the power of labor unions in maintaining artificially high wage rates. The result of this for England was chronic unemployment throughout the 1920s on a very heavy scale, while in the United States with the revival of 1921-23 we regained full employment at high wages which were economically justified.
Our Unit Bank System Compels Full Liquidation—Contrast with England. A further factor in the United States making for a much fuller and completer readjustment in 1920 than that which England had, was to be found in our system of independent unit banks as contrasted with the great British branch bank system. England had five great banks which dominated the picture, with branches all over the British Isles and over many parts of the world outside. We had 20,000 independent banks, every one of which was under obligation to meet its cash engagements at the clearing-house every day. It was possible for us, with the aid of the Federal Reserve System, to make our credit readjustment in the crisis orderly, but we had to make it thorough. It was not possible for us to maintain stale and hopeless situations by means of bank credit. Each bank had to clean up in order to keep itself solvent. Certain of the great British banks, as late as 1925, had still uncollected loans to the cotton industry in Manchester, carried over from 1920, and other commitments of similar sort stale and frozen. The forbearance of the British banks had not saved these industries. It had, on the other hand, prevented their passing into stronger hands and into the hands of more alert and flexible management. It had prevented their freeing themselves through bankruptcy from impossible financial burdens. It had prevented their becoming effective again.
Many Worse Things Than Great Break in Prices. A collapse of commodity prices of one hundred points in a single year is not a pleasant thing. It is not a pleasant thing to see well-meaning but relatively ineffective men lose their capital and lose control of their companies and see their companies put into stronger hands through bankruptcy or informal reorganization. And it was certainly not a pleasant thing to see 4,754,000 workmen unemployed, as was the case in 1921. But there are many worse things.
Worse Was Far Heavier Unemployment, 1931-39. One worse thing was the much heavier volume of unemployment which we had in the United States from late 1931 to 1939, despite (or, as later chapters will show, because of) all the well-meaning efforts of the New Deal government to make employment by an outpouring of federal funds, by NRA, and by other unsound devices.
Japanese Stagnation, 1920-27. And a worse thing took place in Japan where, early in 1920, the great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan
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endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year’s production, Japan lost seven years, only to incur greatly exaggerated losses at the end. The New Deal began in Japan in early 1920—a planned economy