Are We Heading for a Slump?

We’ve been living in a postwar boom—just as in 1920. But the slump signs are out again, too

BRUCE MACKINNON January 1 1947

Are We Heading for a Slump?

We’ve been living in a postwar boom—just as in 1920. But the slump signs are out again, too

BRUCE MACKINNON January 1 1947

Are We Heading for a Slump?


DON'T look now, but, I'm Afraid some of us are going to lose our shirts.

Not all of us, of course, but a lot of the people who have coasted along on easy money. The folks who have started businesses without knowing very much about business and have prospered under the shelter of Government controls and an “unlimited demand.” The people who have bought things t hey couldn’t afford and paid for them out of wartime savings, gratuities or easy money profits.

For seven years we’ve lived in a dream world where the customer was always willing to pay, regardless of price; where then; was always another job to IK; had; where competition and price cutting became forgotten phrases.

Now it’s beginning to look as though the turn has come. it looks as though the boom-and-bust pattern of Postwar I is going to happen all over again.

Let’s check up.

Let’s take a look at what happened after the last war and a look at what happened in 1946.

First, t he history books.

After the last war we had a boom just like the one in 1946. There were customers for everything industry could produce. There wasn’t enough of anything, and, as one big merchant put it, “We felt as though we were trying to fill a vacuum.” Rents were up 30%, wholesale price* had more than doubled, the cost of living nearly doubled since the start of the war.

Then, suddenly it happened. A year and a half after the end of the first world war, stock prices toppled, commodity prices came tumbling after, and before long even the cost of living had been cut


Back in those days they didn’t have good figures

We’ve been living in a postwar boom—just as in 1920. But the slump signs are out again, too

on unemployment, but they did have good figures on business failures, and the number of people who went broke illustrates pretty well the unhappy story.

In 1919 business was still goodonly 755 firms went bust, owing $5.6 millions more than they could pay.

In 1920 it had started and 1,078 firms went to the cleaners, owing $8 millions more than they had assets to cover.

And in 1921 the toll was about twice as heavy— 2,379 businesses went broke, in the hole to the tune of nearly $14 millions.

Of course there was a silver lining. After the cleanout of 1920 to 1921, prices got back in line and it wasn’t long before the country was riding into the biggest boom in its history, a period of prosperity that carried us along until 1930.

But while it lasted the deflation was painful, perhaps more painful than the inflation that went before. And the important thing w'as that it came as a complete surprise.

Here are a few of (he headlines at the end of 1919 and the beginning of 1920.

They exude optimism, with only here and there a faint indication that things were not quite as fine as they appeared:

“Further Advance in Freight Rates a Possibility”. . .“New Records in Canada’s Exports of Pulp and Paper” . . . “No Evidence of Anything Like Sudden Collapse, Says Boston Investment Firm” . . .

“Values of 96 Canadian Stocks Increased $100 millions in 1919.”

Ijet’s turn to January, 1920:

“Canadian Exchanges But Slightly Reflect Depression in New York” (In those days they called it a depression when the stock market sold off a few pointa.) . . . “Building Boom Looked for in Spite of Costs” . . . “Cornell Professor Sees No Chance of Sudden Decline in Cost of Living” . . . “Record Farm Price Land Near Portage Sells at $130 an Acre.”

And this one: “Week of Reaction for the Canadian Stock Exchanges.”

Now let’s go along to April, 1920, and we learn, “Montreal Trammen Asking Double Pay.” We are also told a “Break on Wall Street Affects Local Exchanges,” and “Silver Drops From $1.30 to $1.17.”

Now it’s May, 1920, and some of the boys are beginning to wonder. Listen to Mr. Mackintosh, of the Department of Labor:

“A slight fall in prices in general occurred in the early months of 1919, but the advance began again and has been maintained steadily. A period of extravagance, thoughtlessly entered on in the reaction from the strain of war and financed by increased wages, war profits and gratuities, stimulated the production of nonessentials when there was urgent need for other commodities. Employers combined to maintain the existing level of prices, while the workers resisted any attempts to decrease wages and put forward demands for shorter hours and increased rates of pay.”

Mr. Mackintosh went on to point out that production had fallen off badly during 1919, and that the “consequent decline in production increased the already existing disproportion between the demand and supply in certain lines, clothing, building materials and dwellings being noteworthy in this respect.”

There wasn’t enough production, so the shortages got worse.

But Mackintosh was just about a year late with his diagnosis. That month of May, 1920, saw the end of the World War I inflation. British wholesale prices took their first dip.

At first nobody could believe the spree was really over. Grain people were still claiming that the price of $2.86 a bushel for wheat “penalized the

farmer for the benefit of the consumer,” and was too far below the export price of $3.40. Others were predicting: “High Price Era Likely to Last for Generation.”

Along about September came some pretty straight talk from Sir Edmund Walker, president of the Bank of Commerce.

Said he about the 1920 slump: “What happened? Everything in the shape of raw material went down —silk first in Japan, hides, wool, sugar, cotton, and now wheat and other things. It is a very curious thing, and one that has not often happened, that the price of a lot of commodities falls at a time when

consumption is not satisfied, and there is not anything like enough power of production to satisfy demand and when consumption has not begun to decrease.” (No, Sir Edmund, it doesn’t happen very often only following a world war. apparently.^

“Why have prices of raw materials fallen under these conditions? They have fallen largely because at one moment, say three or four months ago, almost every middleman was a bull and anxious to have all the stock that he could get. He was willing to put his orders in to the manufacturer, regardless of the price. ‘Take my order; fix the price at a later time.’

“Thousands and thousands of businessmen who were keen buyers are now turned into sellers. The break in the price of raw commodities is due to this change of heart; it is due, of course, also, somewhat to a lesser purchasing power on the part of the people, but mainly it is a psychological change.”

Sir Edmund knew the score all right, and prob-

ably the only change we’d make nowadays woul be to play up that “lesser purchasing power” anglt blame less on the middlemen. After all, the middlt man only passes along the orders he gets from hi customers. He’s strictly a neutral.

If you like, cut out the headlines from the bus: ness papers between June and November, 194( and match them up with the quotations abovt Then shuffle them up and try to sort out the 192 headlines from the 1946.

Ten to one you can’t tell them apart!

What actually happened in 1919 to 1921?

The stock markets were the first to take it. Stoei prices reached their top one year and tv?; months after the end of World War I, the: slid steadily downward for a year an¡ seven months.

Wholesale prices, the prices of woo! wheat, cotton and other raw materials, hi their top a year and five months after tb end of the war. And these prices skidd«! down for another year and five months By the time it was over, wholesale price} had been cut nearly in half. ,

The cost of living also started to slide: year and five months after the end of th>, war, slid for another year and five months and ended up 25% below the peak. ¡

And remember that all this happen«] when there was plenty of money, whe; shortages still seemed to be acute, ant when people were predicting still highe; prices.

Look at the Record

NOW let’s jump a quarter of a.century tí delve into our next topic—the Back ground for a Bust in 1947.

But while we’re at it, don’t forget tí keep that 1919 to 1921 story in mind, and don’t pay too much attention to the people who say history never repeats, or that “we controlled inflation during this war, sc we won’t have a deflation.”

. If you happen to think that inflation has

been controlled, pick up your fall and winter mail-order catalogues for 1939, 1941 and 1946. Don’t pay any attention to the articles that have changed much in appearance or quality, just stick to the things thaj are clearly the same in all three books. Is was in the fall of 1941 that price ceilings were established. Here is the sort of thing you’ll dig up:

Tires that sold for $16.20 apiece in 1939 were hiked to $17.50 in 1941 and now sei! at $21.50. The new ones are synthetic, the old ones were natural rubber.

Ranges, for coal or wood, that sold for $74.50 in 1939, went for $87.50 in 1941 and $133 in 1946.

A standard lamp, with three-speed bulb, that sold for $8.95 in 1939, was boosted to $9.95 and is now $14.95.

An electric seal coat, worth $49.50 in ’39, went up to $79.50 in 1941 and is now


Five-tube mantel radios, of well-known make, were offered for $14.95 in 1939, $22.50 in 1941 and now sell at $38.45.

A four-tube battery radio has gone up from $23.50 to $39.95 and is now $52.75.

Want more? What about a Gladstone bag that brought $18.95 in 1941 and $36.19 today? Or a 32-piece set of cheap china that sold for $3.95 in ’39; $4.98 in 1941 and $7.25 today?

Or a set of silver plate to go with it? The prices, $19.95 for a 40-piece set in 1939; $24.95 for a 42piece set in 1941; $26, plus $6.50 tax—a total of $32.50-—for a set with only 34 pieces in 1946; $12.55 more for a set with six fewer pieces than in 1939.

Remember that these prices are all for goods that are nearly identical in all three years. You can add to the list almost indefinitely if you take inte; account goods that have been changed a little, on use the cheapest type

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offered. Another thing—clearance sales have virtually disappeared.

What about cars?

Let’s keep to the big three, Ford, Chevrolet and Plymouth, and let’s look at the old-timers first. Back in 1939 the average price for what was at that time a 10-year-old car, the 1929 models, was about $65. In 1941 the average was

still close to $65, although there were enough at $70 to $90 to show that inflation was on the way. Today those same 1929 cars, now 17 years old, sell for around $200. Some of them, of course, are such wrecks that they sell for much less than $200, but any that seem in reasonably good condition are being offered for about three times as much as in 1939.

The new car story isn’t quite as bad —a jump of about 40 to 50% seems about average for the big three. Changes in models and equipment

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make it difficult to say exactly what the price increase has been, but few people get “big three” cars for less than $1,500 in Toronto today, although back in 1939 they were advertised at as little as $876, license and taxes extra.

Now let’s turn to the price of food. Let’s not bother with the fancy imported items, let’s concentrate on basic foods. And, for a change, let’s not look at the price on the shop counters, which is often artificially low because of subsidies. Instead we’ll look at the price the farmer gets. That price, plus the distributor’s charge, is the real price. We’re not going to let the subsidized prices fool us.

Milk? The farmer got $1.46 for 100 pounds (about 38 quarts) back in October, 1939. Two years later he was getting $1.88 and in April, 1946, he was getting $2.99,Since then the subsidies on fluid milk have been taken off and the difference, plus a little more, is being paid by the consumer. But the farmer was getting twice as much for his milk before the subsidies went off.

Plenty of Inflation

Those prices are for Ontario, and the prices are different in each province. British Columbia farmers, for example, got $1.69 in 1939, $1.98 in 1941 and $3.58 last April, more than twice what they were paid in 1939. In most of the other provinces the price of fluid milk to farmers is double or nearly double the 1939 figure. There’s pretty much the same story in butterfat and milk for cheese making.

Beef? Ontario farmers got $5.78 per 100 pounds in September, 1939. Two years later they got $7.47 for their cattle, and in September, 1946, they were getting $11.32, just about double the 1939 figure. In every other province except Prince Edward Island the increase was more than double. In Quebec farmers got $10.29 for cattle they had sold at $4.23 in 1939.

There hasn’t been quite such a boom in lambs. The Ontario farmer is getting $13.31 for lambs that sold at $7.62 in September, 1939, and the other provinces are also getting a little less than double the old price. Alberta sheepmen, for example, get $11.27 for lambs that used to bring $5.90.

Hogs, too, are not quite double their 1939 price. In Ontario a hog that sold for $11.03 per 100 pounds now brings $21.10.

That may be enough to show that we’ve had inflation and plenty of it, in spite of price control. It might have been worse, and it hasn’t been as bad as in some countries, but it’s still inflation.

We’d probably have got by with a good deal less inflation if the Government ha.’n’t felt it necessary to adopt some pretty inflationary policies about the middl - of 1945. Whether or not these were good, necessary, or just plain inevitable doesn’t much matter so long as you’re only thinking in terms of inflation and deflation. The point is that they involved more money being pumped into circulation, and that’s inflationary.

First there were the family allowances, that pumped a quarter of a billion dollars a year out of the wealthier taxpayers’ pockets, who might have saved it, into the pockets of poorer people, who would certainly spend it.

Then there was the veterans’ money. About $800 millions of it for 1946 alone.

And foreign loans. Another $800 millions of new buying power—in 1946 alone.

Add them up and you get something like one billion 850 million dollars crashing into the Canadian market during one hectic year. If you like, you can add in another hundred millions or so

for the stock market profits, black market profits and profits on real estate that some people were making in 1946. Add in a little more for the war bonds many of us cashed, and you’ll probably find something well over two billions of hot money that came sizzling into the market in 1946.

And all this came atop the normal buying of sobersided customers like you and me.

It hit the country at the worst imaginable time. Industry was still groggy from the switchover from war to peace. Labor disputes made things worse. There wasn’t a chance that production could meet the double load that was put on it.

All of which is pretty much the same thing that Mr. Mackintosh was saying back in 1920, if you remember. The same gratuities and profits to be spent, the same difficulty getting production.

Or so it has seemed. Actually, production luis been a lot better than you’d think. The index has been running 80% above the 1939 average, and if it hadn’t, been for that double load of demand, there would be few shortages.

The turning point comes, of course, when there are more goods on sale than people want to buy, and there aren’t very good figures to show when that time arrives in Canada.

But the United States does have fairly good figures on these “inventories,” and at the end of August the Department of Commerce reported inventories were at the highest level in U. S. history. The report also stated that if goods hadn’t gone into these inventories, there would have been enough output to meet the demand.

That was at t he end of August. Two months later the next phase of the spiral began. Cotton, wheat, rubber, corn, and furs suddenly went down in price. Meanwhile, stock prices had collapsed in the sharpest nose dive since 1931.

Has the same thing been going on in Canada? We don’t know for sure, but it seems probable. We do know that reserve supplies of newsprint were about 35% greater in 1946 than they had been in 1945. Some of the price control boys will tell you that supplies of men’s clothing (though not of good white shirts or worsted suits) started to increase in the fall. And we know that all the important, strikes were cleared up early in October, so that it shouldn’t take too long to bring these goods to market.

There are other straws in the wind in Canada, but not. many hard figures. The figures probably won’t, be along for another six months or more.

So we really haven’t proved that a bust is on the way. All we’ve shown is that there is an amazing resemblance between 1946 and 1919, the year before the last postwar bust.

If we’re really going to prove that a bust is coming, we’ve got to show two things: that you can’t afford to pay today’s prices out of your income; and that goods could be produced more cheaply if things got back to normal.

So let us return to the laboratory, dissect your pay envelope and find out what you can afford to spend.

We’ll take it you were an average factory hand when the war broke out and were earning about $20 a week. The figure’s a bit hazy, because it was computed on an annual basis and Ottawa didn’t get around to collecting good statistics on wages until June, 1941. By that time you were making $25.25 a week, and you’ve had many raises since, until by August, 1946, you were making $32.64 a week.

You have to pay about $2 a week in taxes on that income, plus unemployment insurance, so your take-home is only about $30. At that, it’s a 50%

hike from what you were earning back in 1939, which shows that you, too, are partly to blame for the inflation.

But don’t let anyone tell you that it was your spending that caused the last big splurge in 1946. Your average weekly pay for the first eight months of 1946 was $31.93. In 1945 you averaged six cents more a week—31.99

So if you as a wage earner were only making the same money you did the year before, it stands to reason that you were outbid by someone with more money. Someone with some of that extra $2 billions of buying power, for example.

And if that $2 billions was what pushed prices up in 1946, what’s going to happen when the $2 billions is gone? Why, you and your 30 bucks will be the only customer left. Things will have to be sold at prices you can afford if they’re going to be sold at all. And since you’re only making 50% more than in 1939, you certainly won’t be able to meet prices that are more than 50% above 1939.

If anything, your friends on salary are even less able to pay inflated prices than you are. Up to the end of 1942 average salaries were up eight per cent at a time when wages had already gone up 38%. And since then it’s very doubtful if the nonunion salary earner has been able to do much more than keep pace with the rise in wages. Not ônly that, but that salaried man has come out second best in taxes, cost-ofliving bonuses, and overtime pay. The salaried man can’t be expected to stretch that extra 50%,, like the wage earner.

What about the plutocrats, the people who earn more than $5,000 a year?

In the old days these people used to be pretty important customers. They were the folks who bought a new car every year, could afford $400 or $500 for the latest type of radio.

In 1939 there were 41,400 people in Canada with incomes of $5,000 a year and over, and after income taxes they were able to spend an average of $9,517 a year.

From the figures available, there seem to be about 65,500 of these “over $5,000” people nowadays. But their average income, after income taxes, is now only $6,519.

From $9,517 to $6,519 is a drop of 31%2% ■ which means that our wealthier citizens will have to see prices drop about one third below 1939 levels if they’re going to buy on the same scale as before the war.

“What’s Going to Happen?”

Are you getting a little punchy from too many figures?

Let’s drop them with one last burst. Here it is: If you’re a wage earner, you can afford to pay 50%. more for things than in 1939. But if you’re on salary, or high wages, you’re already licked. And if you’re in the income brackets above $5,000, you’ve got to see prices come down one third below 1939 before you can afford to go shopping in the good old-fashioned way.

Now go back to some of those prices we picked out of the mail-order catalogues and try to figure out how you’re going to meet some of those 50% to 100%, price boosts.

What’s going to happen? Prices are going to come down, of course. Some factories will have to close down, a lot of businesses will fail. A lot of people will lose their jobs.

It’ll probably start with the customers saying “No, thank-you” to some of the higher-priced lines that they don’t need to buy very urgently. From there it will probably back op through the retailer, the wholesaler

and the manufacturer, a chain reaction of “No, thank-yous” until prices and pocket-books are again in balance.

But you can’t get more definite than that. You can’t say that fur-lined pyjamas must come down to $1.59 a pair by May 1, 1947, or that helicopters must sell for $300 apiece inside of a year. It may be that nobody will buy either of them at all, or it may be that people will still be willing to buy them at any price.

After seven years of shortages, seven years in which businessmen have not had to compete with each other for sales, or workmen compete for jobs, nobody really knows what “normal” is. It’s a fair bet that the consumer is a different animal from what he was in 1939. but he won’t have a chance to express himself until goods are more plentiful.

And the producers learned a lot of new tricks during the war, too.

I’ve a hunch that you will be very pleasantly surprised by what your manufacturers will do for you in the way of quality and value—once things shake themselves out a bit.

Just as an example, let’s take what is probably the most inflated commodity you can find—housing.

The other day some builders and mortgage people in Toronto told one of the local reporters that prices are now double the 1939 level. That may actually be a little conservative. My guess is that you’d pay about double, but not get a garage and extras.

However, a 100% jump in price is probably close enough.

Now, what has happened to costs? Ottawa Reconstruction & Supply Department says they’re up 37%, as far as wage rates and the cost of materials are concerned. Slow and unskilled labor, delays in construction and so on, says Ottawa, have pushed actual costs up as high as 62%, above 1939.

Either of those figures shows that house prices could come down sharply and still be in line with costs. You’re paying $200 for what actually costs $162 and should cost $137 if supplies and labor were back to normal, is the gist of the Ottawa report.

But that’s not all. In 1946 there’s been something new in house building. Called the Integrated Housing Program, it’s simply a large-scale building scheme, under which the builder uses cheap land, builds a lot of houses for a set price and undertakes to restrict his profit. Some 3,000 houses have been started under this plan already, and Ottawa reports that twoand threebedroom houses will cost from $5,500 to $6,500, some $750 less than the cost of individually built homes of the same type. A saving of about 10%, under unfavorable conditions.

That makes it look as though Integrated Housing could give you quite a bargain when conditions get back to normal. Presumably they would have to charge you about $123 for what now costs you $200.

Which would seem to mean that there may be a drop of about 39%, in the value of new houses one of these days, and that a lot of people who have paid the inflated prices for homes are going to lose their shirts.

And that, folks, is where we came in. Bay Street and St. James Street are still covered with the shirts that were lost in the stock market crash of September, 1946. If we’re not careful, they’ll shortly be joined by the shirts of other suckers who bet on inflation after' the inflation was over.

So watch your step, but don’t get panicky. If we’re as quick to settle down to normal as we were after the last postwar boom-and-bust, everything will be running smoothly again about the end of 1947.