The Causes of a Fall in Prices
A reader in Detroit (U.S.A.) sends the following question : —
In the November issue of THE STANDARD it is said :—
“Movements in the value of gold will be accompanied by corresponding changes in the purchasing power of the currency unit. As the value of currency reflects itself in the form of prices this is the same as saying that, under the gold standard, if the value of gold falls, prices will rise, and the amount of commodities which can he purchased with a pound will diminish. Conversely, if the value ot gold rises, prices will fall.”
Please tell me what happens when we have an economic crisis. Between the months of October, 1929, and January, 1930, let us say that no alteration has taken place in the productivity of tailoring. Let us say that the price of a certain type of suit drops from £10 to £5. Let us say that during the same period, without any perceptible change in the socially necessary labour time, the price of commodities in general also sell on an average at a price level of one-half in the month of February from which thev sold in the month of October. Let us say that the same amount of gold is produced in the same socially necessary labour time in the month of October. This being true, how can we reconcile the proposition that price levels would tend to move up or down together in accordance with changes in the value of gold ? I know very well that overproduction is the primary cause of economic depressions, and that, due to the inability of manufacturers and merchants to sell their commodities at a profit, is the cause of the fact that the circulation of money is lessened, but this in no way explains why the prices of commodities should fall when there has been no relative change in the meantime between the socially ncessary labour time required in the production of commodities and gold.
(” H. G.”)
The above question, under various forms, is often asked in periods of a great slump and also great “prosperity.” Great price variations cause endless theories to be advanced as to the cause of the changes in prices.
The question raised here does not involve the changing value of gold. The time taken to produce gold and the total amount produced varied but little during the months mentioned by the questioner. He refers to the period of four months which was practically the beginning of the present period of American depression. If gold did not increase in value in that time, due to more socially necessary labour time being required to produce it, what, then, caused the fall in price of other commodities ?
Price is the money name of the exchange value of articles. Goods express their values in the commodity gold, which becomes a standard of price. Prices, therefore, may vary or fluctuate, due to changes in the values of articles; that is, the reduction or increase of the time necessary to produce under prevailing’ social conditions.
The prices of all articles fall when there is a rise in the value of gold resulting from more labour having to be embodied in gold ; conversely, the price of all articles rises when less labour time is needed to produce a given quantity of gold.
Apart from these causes of price changes, the variations in supply and demand cause fluctuations in the prices of articles.
The sudden and rapidly increasing crisis in America in 1929 caused very violent changes in the price level. Heavy speculation in commodity production and the vast increase of productive power and products caused tremendous over-production. The world economic crisis, due to the anarchy of production, manifested itself on the largest scale in America because there production was highest. Tremendous stocks of goods on hand—supply vastly exceeding demand—manufacturers needing ready money—these factors resulted in a slump in prices—a heavy fall in price within a short period. Ten millions out of work and many more millions on “lower” wages compelled manufacturers not only to sell stocks “low,” but later to produce a cheaper line of goods, using cheaper raw materials and the most intense labour-saving methods. Seventy-five dollar (£15) suits went by the board, and 25 dollar (£5) suits became the type saleable. The accumulation of raw materials—cotton, wool, etc.—caused their price to fall heavily, and thus manufacturers could produce cheaper. Labour power is cheaper with greater competition for jobs, and thus another means of saving the manufacturers’ costs.
Briefly to sum up in reply to the question, the real reason for the heavy fall in prices as pointed out by the questioner is in the relations of supply and demand. When the stocks of goods are exhausted and demand continues, prices will rise, unless means are found of reducing costs of production, or unless cheaper substitutes are used in manufacture. Both the factors of over-production and reduced costs of production enter into an explanation of the present changes of prices of the goods referred to in the question.
A. K.