INDUSTRIAL RELATIONS AND LABOR CONDITIONS.

TH

Recent Changes in the Distribution of Wealth in Germany.

HIS bureau is in receipt of a report from the economist consul in Berlin, dealing with the effect of the inflation of German currency on the economic condition of the various classes in Germany. This report shows that the effect of a rise in prices is to reduce the real income of certain classes and to increase that of others. The rise and fall of prices, the consul explains, is the result of a cyclic movement which brings about, in alternation, periods of so-called prosperity" and of business and industrial depression.

During the period of prosperity there takes place a great inflation of credit, expansion of business enterprise, and increase in the production of commodities. The original stimulus for this expansive movement is usually the scarcity of commodities caused by the reduced production during the preceding period of depression which gives rise inevitably in course of time to a new demand for commodities.

Other factors, however, frequently play a part in stimulating a so-called business boom, such as a war, the exploitation of newly occupied territory or of recently discovered natural resources. The rising prices usually keep ahead of the cost of production and the expansion in business accelerates the turnover for the business enterpriser. Consequently the profits of the managers and owners of business enterprises are augmented. Furthermore, the demand for a greater production of commodities increases the demand for workers and thus tends to raise the scale of wages. On the other hand, salaries and land rents respond much more slowly to the effects of the rise in prices and consequently the real income of salaried persons and landowners diminishes. The interest on long-term bonds does not increase. Consequently bondholders are affected in a similar fashion.

After the period of prosperity has run its course and has resulted in an overproduction of commodities and in an excessive inflation of credit which can no longer sustain itself, there comes the crisis which leads to a deflation of credit, shrinking of business enterprise, and decrease in the production of commodities. During the consequent period of depression, the profits of the managers and owners of business enterprises decrease greatly, the demand for labor diminishes, and results in a lowering of the wage scale and widespread unemployment. On the other hand, inasmuch as the normal income of salaried persons, landowners, and bondholders is influenced to a proportionately small extent, their real income increases owing to the fall in prices.

Effect of Depreciation of Currency.

THE recent rise in the nominal price level in Germany, the consul thinks, is due mainly to the inflation of the currency, and has had a marked effect on the distribution of the wealth of the country.

Generally speaking the effects of currency inflation in Germany have been similar to the effects of the upward movement of prices in the prosperity phase of the trade cycle. But in certain respects these effects have been greatly accentuated by the excessive rise in nominal prices which has not signified a corresponding rise in the real prices. Furthermore, many of the losses experienced by the classes which suffer during such a period will never be compensated for by gains during a period of defia

1 The data on which this consular report is based are from Statistisches Reichsamt, Preussisches Statistisches Landesamt, Berliner Tageblatt, Frankfurter Zeitung, Metallarbeiter Zeitung, Reichsarbeitsblatt, Muenchener Neueste Nachrichten, Acht Uhr Abendblatt, Die Weltbuchne, Vossische Zeitung, and Dié Bank.

tion, thus distinguishing this period from the second phase of the trade cycle, characterized by business and industrial depression.

Effect on Salaried Workers, Bondholders, and Real Estate Owners.

The result of the inflation of the currency has been to reduce the real income or purchasing power of many of the salaried workers, since their incomes have not increased so fast as the cost of living.

Among these may be mentioned the incomes of teachers, some of the professional classes, and many business employees, especially those who are not organized. Inasmuch as these persons belong to the so-called middle class, this class has, on the whole, been impoverished to a considerable extent by currency inflation.

Bondholders have suffered perhaps more than any other class from currency inflation. Even though bondholders are usually entitled to demand payment in gold, they are now receiving interest and repayment on principal in currency which is worth only a comparatively small fraction of the currency with which they purchased their bonds. As a consequence the Government and the corporations which sold these bonds are escaping from a large part of the responsibility of repaying their debts. A considerable portion of the bondholders are of the middle class and many of them more or less dependent upon the revenue from their bonds, so that these losses give rise to much suffering.

While land values will, doubtless, in the end readjust themselves to the new currency standard, owners of land and buildings are temporarily suffering a loss from currency inflation. As pointed out above, during a period of rising prices, rents on real estate tend to rise less rapidly than the price level. But the losses of landowners have been greatly accentuated in Germany by Government regulations of rents, especially in the cities, which has kept rents far below the price level. For example, in Berlin from April 1, 1922, real estate owners were permitted to add 120 per cent to the pre-war rent upon dwellings, and for business buildings 120 per cent upon the prewar rent up to 2,000 marks, 150 per cent up to 5,000 marks, and 180 per cent over 5,000 marks. Furthermore, part of this increase must be paid into a public fund for the construction of new buildings.

Consequently it is pointed out, the incomes of real estate owners have probably not more than doubled since the beginning of the war, and are not at all commensurate with the cost of living.

Statistics of mortgages on real estate in Prussia reported by the Preussische Statistiche Landesamt indicate a great increase of mortgages in 1919 and 1920. Whereas during the war the number of mortgages on real estate decreased, the mortgages registered in 1920 were greater by 4,766,100,000 marks than the mortgages registered in 1919, an increase of over 75 per cent. In the cities the increase was 92.1 per cent, as compared with 56.02 per cent in the rural districts. In the city of Berlin the mortgage indebtedness was 13 times as great as in 1919. Whether or not this increase in mortgage indebtedness is an indication of loss on the part of the real estate owners it is difficult to ascertain. The increase is, doubtless, in part a direct effect of the depreciation of the paper currency which forces the owners to borrow sums which are nominally much higher than in the past. But the great increase in mortgage indebtedness, especially in the cities, may also be an indication of the stringent financial conditions of the real estate owners due to their inability to raise their rents commensurate with their costs. Currency inflation has severely penalized thrift and patriotism. The savings which have been put into insurance policies as a protection against illness or old age, into savings banks, and into such investments as the purchase of bonds, such as Government war loans, and to a smaller degree of real estate, have to a large extent melted away as a result of the depreciation of the unit of the value. The most effective safeguards for the protection of property in normal times become almost valueless during a period of currency inflation. The sufferings caused by the sudden disappearance of the apparently stable safeguards of these property rights can never be measured.

Effect on Owners of Industrial Enterprises.

Owners of business establishments usually gain as a result of currency inflation, because the nominal value of their enterprises and the profits therefrom increase as rapidly as or more rapidly than the currency depreciates in value.

Furthermore, the enterprises with outstanding indebtedness, as for example, in the form of bond issue, are benefited by the fact that these debts can be repaid in a depreciated currency, thus resulting, in effect, in a partial repudiation of the debt.

It is impossible to estimate the profits of the profit-taking class in Germany during the past few years and to compare them with pre-war profits. Statistics of dividends declared have little significance as a measure of profits. They must be interpreted in connection with increases in capitalization, expansion of plants, and reserves laid aside. Furthermore, the desire to dodge heavy taxes on profits doubtless gives rise frequently to devices to hide profits.

The valuation of industrial and business enterprises is revealed in a measure by the prices of the shares and stocks of these enterprises upon the security markets. During the past few years quotations of these shares and stocks have risen greatly, as contrasted with the prices of bonds, inasmuch as bond prices have not risen at all and in many cases have fallen. It is true that few, if any, of these shares and stocks have risen to a degree commensurate with the depreciation in the exchange value of the German currency. But in a study of recent changes in the distribution of wealth within the country, this would not be a correct measure to use. The prices of these securities should be compared rather with the prices of commodities and of land. It is, however, difficult even to make this comparison because the situation has been greatly complicated by the issue of large blocks of capital shares by many of these corporations which have thus watered the stock, so to speak, and neutralized in considerable part the upward tendency caused by currency inflation. Furthermore, the shares of corporations with large outstanding bond issues have usually risen more than the shares of other concerns because these heavily indebted concerns have profited greatly by being relieved in large part from the burden of their debts.

Index figures are quoted from the Statistisches Reichsamt, showing that while in February, 1922, the value of these stocks and shares was less than 8 times as much as in 1913, the prices of commodities were nearly 40 times as much as in 1913. The shares of the different business establishments, however, varied greatly, showing that "the intrinsic value of these properties played an important part in determining the market quotations" of their stock. Thus, in February, 1922, the index of the market quotations of the shares of 10 establishments producing foodstuffs was 10 times that of the shares of 40 banks. "Inasmuch as the property of these banks consists of assets to be paid in paper marks, the market quotations of their shares had risen very little.'

It is stated that security prices rose very little during the war, but increased rapidly beginning with the year 1919. In March, 1922, these prices were nearly three times what they were at the beginning of 1921, and over five times what they were at the beginning of 1920, corresponding closely to the increases that had taken place in the price of commodities.

This great rise in security prices during the past two and a quarter years and the violent fluctuations which have accompanied it have affected to a considerable extent the distribution of the ownership of industrial and business concerns represented by these securities. It is not unlikely that, as usually happens during a period of violent speculation, the smaller and weaker shareholders have been shaken out to a large degree. Furthermore, there has been taking place an accumulation of the securities and, in consequence, of the ownership of these industrial and business concerns in the hands of powerful moneyed groups and the transfer of large blocks of these securities to foreign ownership.

Effect on Wage Earners.

The report states that, according to the cost of living index of the Statistisches Reichsamt, the index figure for the cost of living increased from 100 in January, 1920, to 275 in December, 1921.

But this increase represents only food, rent, heating and lighting, and therefore excludes other necessary or more or less necessary commodities, such as clothing, transportation, schooling, medical assistance, etc., the prices of some of which have

doubtless risen considerably more than is represented by this cost-of-living index. The Statistisches, Reichsamt index for wholesale prices rose from 802.5 in December, 1919, and 1,255.7 in January, 1920, to 3,487 in December, 1921. The Frankfurter Zeitung index figure for wholesale prices rose from 100 at the beginning of 1920 to 320 at the beginning of 1922. It is doubtless safe to assume that the cost of living for the great mass of the population increased at least 300 per cent during these two years. It is extremely difficult to secure comprehensive wage statistics for purposes of comparison with these price and cost-of-living statistics. The Frankfurter Zeitung has published wage statistics covering a large number of workers in many different industries, most of whom live in Frankfort. The wage index for these workers rose from 100 at the beginning of 1920 to 355 at the beginning of 1922. The "Deutscher Metallarbeiter Verband," or union of metal workers, the largest German trade-union, including over 1,500,000 workers, has published statistics of the wages of its members in 222 cities. According to these statistics the index for the wages of the skilled laborers rose from 100 at the beginning of 1920 to 360 at the beginning of 1922, and for the wages of the unskilled laborers from 100 at the beginning of 1920 to 378 at the beginning of 1922. These statistics indicate that apparently during the past two years, to say the least, wages have risen as much and perhaps somewhat more than the rise in prices and the cost of living.

The present period of inflation and business expansion has probably benefited the wage workers as well as their employers, though to a smaller degree. The increased demand for commodities, which has stimulated production temporarily, has increased the demand for labor, so that there has been comparatively little unemployment during the past year or two. The figures of unemployment for the large trade-unions in Germany including over 6,500,000 workers indicate that the unemployment among these workers ranged somewhat as follows during the last three calendar years: In 1919 the average for the 12 months was 3.7 per cent, and unemployment was at its highest in January when it was 6.6 per cent, and at its lowest in September at 2.2 per cent. In 1920 it averaged 3.8 per cent, and was at its highest in July at 6 per cent, and at its lowest in March and April at 1.9 per cent. In 1921 it averaged 2.8 per cent, and was at its highest in February at 4.7 per cent, and at its lowest in October at 1.2 per cent. In other words, according to these averages the unemployment in 1921 was about three-fourths of the unemployment in 1920 and 1919.

The following figures give the averages of the monthly averages of unemployment for these trade-unions for each of the past 15 years:

AVERAGE PER CENT OF WORKERS UNEMPLOYED EACH YEAR, 1907 TO 1921.

It will be noted that the unemployment in 1921 was no higher than in three of the seven pre-war years reported.

During the past three years unemployment increased when the German mark appreciated in value and decreased when the mark depreciated in value, in other words, when prices were rising. This influence of the fluctuating exchange value of the mark was so strong as in several instances to counteract normal seasonal influences upon unemployment. This was especially true of the year 1921, during which the mark depreciated rapidly in value and was accompanied by a corresponding decrease in unemployment. These facts are all the more remarkable because during the same period, and especially the past two years, there was an abnormally large amount of unemployment in the countries possessing a more or less stable currency. According to trade-union statistics, which correspond to the above German statistics, during 1921 unemployment rose in Holland to 16 per cent, in England to 23 per cent, and in Sweden to 28 per cent. In other words, currency inflation was causing business and industrial expansion in Germany while in other countries deflation, especially of credit, gave rise to business and industrial depression.

Currency Inflation in Relation to the Trade Cycle.

THE recent expansion in industrial and business activity in Germany has been due, in part, the writer thinks, to the demand for commodities caused by the depletion during the war of the stocks of many necessary and useful commodities, such as buildings, clothing, machinery, tools, vehicles, books, etc.

In this respect this period has resembled the prosperity phase of the trade cycle. But it has been stimulated to an abnormal degree by the rapid rise in the price levels caused by currency inflation. Furthermore, inasmuch as prices have not risen so rapidly as the exchange value of the mark has depreciated, the prices of German commodities have been somewhat favorable for foreign purchasers in spite of the fact that prices for export goods have usually been much above inland prices. Consequently, German exports have increased to a certain extent. Thus, while in May, 1921, the exports amounted to 1,145,000 tons, in December, 1921, they were 1,929,519 tons, and in January, 1922, 2,027,000 tons.

This increase has, however, been a comparatively small factor in the whole situation. The average monthly exports in 1913 were 6,150,000 tons, in 1920, 1,660,000 tons, and for the eight months, May to December, 1921, 1,710,000 tons. In other words, the exports in 1920 and 1921 were barely one-fourth the exports in 1913. These figures are, to be sure, somewhat misleading, because the post-war figures do not include large quantities of coal sent out of the country as reparations payments. However, even if coal is omitted from these figures, the average monthly exports in 1913 were 2,450,000 tons, in 1920, 920,000 tons, and in 1921, about 1,060,000 tons. In other words, exclusive of coal, exports in 1920 and 1921 were less than two-fifths of the exports in 1913. But this period of industrial and business expansion, which resembles the prosperity phase of the trade cycle, can not long continue. Currency inflation can not go on indefinitely, because it leads inevitably to the depreciation of the value of the inflated currency to approximately zero. By that time, if not earlier, must begin the process of deflation.

Inasmuch as currency depreciation results in a great rise in the cost of the raw materials which must be imported to manufacture commodities for exportation, the prices of these commodities inevitably rise before long to such a level as to check exports and a so-called favorable balance of trade. Consequently, when the present demand for commodities, arising largely out of the shortage caused by the war, is more or less adequately supplied, industrial and business activity will shrink, profits will diminish, wages will decrease and unemployment increase. This will probably coincide approximately with the period of business expansion and of prosperity in the countries with more or less stable currencies. In other words, currency inflation reverses the order of the trade cycle in point of time in comparison with the countries which have not experienced currency inflation.

Concentration of and Foreign Investments in German Industry.

PRIOR to the war there was a strong tendency toward concentration and combination in German industry. This tendency, the report states, has continued, and perhaps has become stronger since the termination of the war. Consequently, the ownership and control of many large industrial concerns have been passing into the hands of powerful financial groups.

Furthermore a considerable amount of property has passed into the hands of foreigners as the result of large investments made by them. The desire to offset this and prevent foreign control of German industry has led to the issue, in many cases, of shares possessing manifold voting rights, whose ownership is restricted to Germans.

Summary of Changes in the Distribution of Wealth.

ECONOMIC conditions in Germany are at present characterized by great mobility and therefore instability.