In extreme cases of deflation, embellished narratives about deflation might develop enough emotional contagion to go viral, and only in that case would buying behavior be significantly reduced; consumers see some vengeful reward in postponing purchases until prices are at fair levels again. The anger depends on the narrative; thus there is not a strong consistent relationship across countries and through long periods of time between deflation and depression.10 The economic narrative of the 1920s created an emotionally rich atmosphere of expectations about falling prices. The narrative was not only that it was smart to postpone purchases, but also that it was moral and responsible to do so.
Profiteering and Fair Wage Narratives
The price increase between the end of the war and 1920 was widely blamed on businesspeople who were labeled with the newly popular word profiteer. None of the words that were used in previous wars to criticize those who profited from the war (harpy, racketeer, exploiter, black marketer, bloodsucker, vampire, pilferer) seem to have the same connotations as profiteer, which suggests wartime fortune building at the expense of war heroes. Profiteer suggested a big operation, a corporation perhaps, with connections in government, rather than a small-time individual opportunist, and it thus suggested more of a need for collective action in the form of a serious boycott. An added benefit of boycotts, from a US perspective then, was their lack of any connections with communism.
The word profiteer during and after World War I appeared in numerous narratives, not just those reported in the business columns. Church sermons began to inveigh against the high price of food during the war, criticizing the selfish behavior of businesspeople who showed little human decency or respect for human suffering.11 Other narratives described lawyers who discovered the names and addresses of US families who had lost a family member in the war. The lawyers would falsely state that families of fallen soldiers needed an attorney to demand government benefits, and they asked the families to sign a contract to pay them 20% of any government support in exchange for their help in navigating the maze of government benefits.12 Such narratives make it easy to understand the extremely emotional reactions to such rapacious profiteering.
The profiteer narratives did not stop with the end of the war in 1918. During the postwar inflation, in 1920 and 1921, narratives spread of customers angry at high prices chastising their milkman and telling their butcher they would stop eating meat altogether to spite them. Economists understood why wartime inflation continued until 1920 (heavily indebted governments faced troubles from a war-disrupted economy and did not want to raise taxes or raise interest rates, which would add to their deficit), but the public at large did not. The public began to view the wartime experience and the immediate postwar experience in terms of a battle between good and evil. The popular author Henry Hazlitt wrote in 1920:
Hence we have self-righteous individuals on every corner denouncing the outrages and robberies committed by a sordid world. The butcher is amazed at the profiteering of the man who sells him shoes; the shoe salesman is astounded at the effrontery of the theatre ticket speculator; the theatre ticket speculator is staggered at the high-handedness of his landlord; the landlord raises his hands to high heaven at the demands of his coal man, and the coal man collapses at the prices of the butcher.13
We might ask: Did these people deserve to be called profiteers? It seems that their only crime was selling at higher prices in an inflationary period. In 1922, Irving Fisher visited Germany, where the post–World War I inflation continued longer and developed into a hyperinflation. He recalls the conversation he had with a “very intelligent” woman who ran a clothing store and who offered him an abnormally low price on a shirt, given the extremely rapid inflation:
Fearing to be thought a profiteer, she said: “That shirt I sold you will cost me just as much to replace as I am charging you.” Before I could ask her why, then, she sold it at so low a price, she continued: “But I have made a profit on that shirt because I bought it for less.”14
Fisher then energetically argued that there was nothing moral or special about prewar prices or the “dollar of 1913.” German complaints against profiteering were similar to those expressed in the United States in 1920, which saw 28% consumer price inflation over the nineteen months between the World War I armistice and June 1920:
Syracuse (N. Y.) June 2—The John A. Roberts Corporation of Utica, dealers in wearing apparel, was today fined $55,000 by Federal Judge Harland B. Howe, following its conviction of profiteering on eleven counts.… The sales, as explained by the government, were: A dress bought for $16.75, sold for $35 … a scarf bought for $6.50 sold for $25.00.15
The massive inflation created an illusion of high profits for this seller of apparel. Economists tried to explain some of the mechanisms at work:
But there is injustice of another kind caused by high prices, and that is the excessive profits which business men of all kinds—manufacturers, jobbers, wholesalers and retailers—are able to reap, indeed almost compelled to take in a period of swiftly rising prices. In these last five years a business man could grow rich by merely keeping his goods on the shelf while the market price continued to rise. This is the real story of “profiteering.” It is not a vicious habit which has suddenly come over the business world and which can be stopped by putting men in jail. It is a symptom of the disease, not the disease itself.16
This argument probably convinced only a few people who hadn’t the faintest idea of inflation’s true impact on corporate profits. Instead, most people were likely caught in the profiteer epidemic that business had developed a “vicious habit” of price gouging. The concern with profiteering began to recede only after consumer prices started to fall, but the concern’s ebb was not exactly coterminous with that fall, for the epidemic of anger had its own internal dynamics.
In the United States, the inflation ended by June 1920, and although consumer prices never got back to 1913 levels, prices dropped rapidly. Until then, emotions ran very high on the matter. One 1920 letter to the editor stated:
Excess profit is just what its name indicates—the fruits of profiteering, usury; and if there is anything in the world that should be taxed it is that very thing. In fact, it should be punishable by prison sentence or even more severely still.17
The government took these emotions seriously. In 1917, during World War I, the United States imposed a 60% excess profits tax on profits above the prewar 1911–13 level. The excess profits tax was not revoked until October 1921, because anger at corporations lingered long after the war was over. The tax contributed to the 1920–21 depression by encouraging companies to postpone profits until after the tax was revoked. Meanwhile, people held off buying, not only because of their anger at selfish profiteers but also because of the perceived opportunity to profit from postponing their purchases during a time of falling prices.
Perhaps the 1920–21 depression is better thought of as the 1920–21 consumer-boycott-induced depression. In January 1920, US senator Arthur Capper said, “Profiteers are more dangerous than Reds,” urging consumers to “boycott the profit hogs by refusing to buy goods offered at extortionate prices.”18 To use another term of that time, perhaps the depression was truly “the 1920–21 buyers’ strike,” as captured by the word boycott.
Also prominent in the depression of 1920–21 was a concern about being paid a “fair wage.” Anger against so-called profiteers was sometimes fueled by some companies cutting their employees’ wages. These companies defended their actions by noting that they could not continue to pay higher wages when the market prices for their final goods were falling. Any rational person should have seen that wage cuts were sometimes necessary, but an explanation of employers’ need to cut wages was not a contagious narrative. Labor union representatives did not have any incentive to explain the employers’ predicament to their members. Rather, they found it in their interests to keep alive a story about evil management.
A plot of uses of the term fair wage follows a pattern remar
kably similar to that of profiteer. However, the growth of fair wage was steeper and more gradual, starting in the late nineteenth century. In books, the peak usage of fair wage was around the time of the 1920–21 depression. In ProQuest News & Newspapers, the peak mention occurred in the Great Depression of the 1930s.
The fair wage-effort hypothesis, as presented by George A. Akerlof and Janet L. Yellen (1990), asserts that workers are inclined to slow down their work in revenge if they feel that they are not being paid a fair wage. Akerlof and Yellen presented their theory as if it applies equally at all times, but it appears that attention to fair wages can be heightened by changing narratives.
Narratives That Suddenly Ended the Sharp 1920–21 Recession
The abrupt end of the 1920–21 depression and attenuation of public concerns about profiteering do not seem to have any obvious explanation. Presumably there were new popular narratives poorly observable today that induced less expectations of falling prices and less anger about high prices.
There was a good harvest in the summer and fall of 1920, and while that may not be a reliable leading indicator, it was taken by many as such:
We raised enormous crops this year and there is a definite relation between big crops and good times. The war didn’t repeal natural laws.19
In late 1920 Sir Edmond Walker, a prominent Canadian banker, offered the theory why prices would not fall to 1913 levels:
This condition [of consumer prices well above prewar levels] may last for another generation, and must last so long as the weight of war indebtedness causes unusually heavy taxes and high rents.20
By April 1921 there were claims that there was “less profiteering going on, as prices settle slowly to peace levels.”21 Many farmers were reportedly already back down to receiving 1913-level prices for much of their produce by 1921.22
So by that time there seemed to be less reason to postpone purchases until prices were lower. Also, business—and wealth—were no longer so evil, so there was no more impulse to boycott. People were becoming more comfortable with spending. Women were said to be wearing more conspicuous jewelry by 1921.23 Children were bringing money to school rather than lunch bags, and they bought expensive lunches for themselves. A “pass it along spirit” was developing by late 1921:
Everyone is taking more comfort—finding more enjoyment in life—than ever before. For proof of this see the roads filled with automobiles. All that means the expenditure of money.24
The sharp recovery in 1921 might be attributed to these new narratives, rather to any active government stimulus to revive the economy.
Contrasting the Depression of 1920–1921 with the Great Depression of the 1930s
Labor historians have found that labor was more acquiescent to wage cuts justified by falling prices in the 1920–21 depression than in the later Great Depression of the 1930s.25 Labor unions were fewer and weaker in the former episode, and thus union propaganda was less viral. Therefore employers had better success in 1920–21 with arguing that they must cut wages because of deflation; they noted that the lower prices they could charge for their products left them with less revenue to pay wages. In The Forgotten Depression (2014), James Grant attributes the relatively rapid end of the 1920–21 depression to such wage flexibility.
In contrast, narratives in the 1930s described employers’ justification for cutting wages as purely the result of greed and lies. Clergymen were criticized for becoming politicized against business:
Some of the clergymen who think they were ordained with a special power to preach economics instead of religion go into wages and work wholly on emotion. They passionately urge minimum rates and hours on such broad and fine humanitarian grounds that those who oppose regulation on equally fine and broad humanitarian grounds find themselves classed with the sweat-shop employers as enemies of human progress.26
Such talk surely made it hard for employers to cut wages to avoid layoffs and to maintain goodwill with the public. In addition, as noted in chapter 13, the National Industrial Recovery Act of June 1933 regulated against wage cuts, and President Franklin Roosevelt’s policy, even after the Supreme Court declared the act unconstitutional in May 1935, only made it more difficult for firms to cut wages.27 These regulations reflected narratives of the Great Depression years that wage cuts were truly evil. Even without such regulations, firms would have found it difficult to cut wages in response to lower prices.
The “return to normalcy” narrative was not so prominent in the Great Depression of the 1930s, and not so easily disposed of with the passage of time. The perception in the depression of 1920–21 that the depression was a transitional phase back to normalcy after a war and an influenza epidemic was a fundamental framing difference when compared to the Great Depression. The unemployment and falling prices in the Great Depression were instead seen through the lens of other narratives that were of epidemic proportions in the 1930s, the confidence narratives (chapter 10 above), the frugality narrative (chapter 11 above), the technological unemployment narrative (chapter 13 above), and the 1929 stock market crash narrative (chapter 16 above).
Boycotts and Profiteers during the Great Depression of the 1930s
References to the 1920–21 depression began during the October 28–29, 1929, stock market crash.28 The last big crisis always has a special place in people’s minds, especially if it was the biggest crisis ever, because such stories rely on people’s memories to enhance contagion. Though one narrative at the beginning of the Great Depression held that the current situation was essentially a repeat of the 1920–21 event, the larger Great Depression narrative had to differ in some fundamental ways. The narrative of the 1920s emphasized the recent suffering from World War I, but that narrative was less intense a decade later, in the 1930s. However, the deflation observed was much the same. The consumer price declines in 1920–21 looked like the sharpest ever. Because many people after 1929 expected prices to fall, as they had in 1920–21, they chose to delay their purchases until the price decline was complete.
A month or so after the October 28–29, 1929, stock market crash, the news paid much attention to the signs of weakening retail sales during the annual Christmas shopping season in the United States. News articles described Christmas buying as normal, but weak in luxury items. However, buying was normal only because of price cutting, with the changes attributed to “the psychological effects of the stock market crash.”29
Economists expected the contraction to be as short-lived as that of 1920–21, which helps explain why President Hoover and others confidently stated in 1930 that the depression that had started in 1929 would soon be over. But the public didn’t generally believe President Hoover. Near the bottom of the Great Depression in 1932, the narrative persisted that consumer prices would eventually fall to 1913 or 1914 levels, which would have meant another 20% decline in prices beyond what we know was the bottom level of consumer prices, in 1933.30 This narrative justified postponing purchases of consumption goods. Catherine Hackett wrote in 1932:
I have read enough predictions by economists to convince me that my guess is as good as anyone’s on the future trend of prices. A housewife plays the falling commodity market just as an investor plays the falling stock market; she sits tight and waits for prices to settle before buying anything but actual necessities. But I do not need to be an economist to realize that if all the twenty million housewives do that, business recovery will be indefinitely delayed.31
This quote illustrates some important aspects of consumer behavior. Hackett compares consumer behavior to the behavior of stock market speculators, who do not trust experts and who put emotional energy into forming their own personal forecasts for individual stock prices. She also notes the high contagion of narratives about such speculation. Women must have been talking like speculators, telling stories about some smart decisions and some mistakes with their shopping successes and failures among the unpredictable variability of consumer price changes. Even if the average shopper expected some (nonnegat
ive) inflation, the result could be a significant net decrease in consumer spending if there was a higher contagion rate for emotionally laden narratives about likely price declines.
It is curious that economists haven’t looked more at the testimonies of women to understand buying patterns in the depressions of the 1920s and 1930s. Given the sex roles of the era, in which men were likely to play the stock market and women to manage the shopping, women must have been talking extensively about strategizing their shopping based on their hunches. The men who wrote the history attributed everything to important decisions made by male presidents, bankers, and business leaders, but the critical decisions that brought on the depression (that is, the postponement of purchases) may have come more from women. In fact, in 1932, during the depths of the Great Depression, a Mrs. Charles E. Foster reportedly told a women’s group:
One of the most effective weapons in the hands of American women today is their tremendous purchasing power. We are told that they spend eighty-five percent of the incomes of the United States. How could they better create public opinion in favor of spending as usual than by setting the example themselves?32
Meanwhile, like the depression of 1920–21, the Great Depression of the 1930s saw many boycotts: against German and Japanese goods, as well as against goods associated with Jewish people. Germans began boycotting Western goods. All of these boycotts must have had economic effects.
Narrative Economics Page 28