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Karl Kautsky

High Cost of Living

Translator’s Introduction

THE following is Kautsky’s chief contribution to a much discussed matter. The whole question of prices is very vexed, for, as Kautsky says: “It is no mere academic question, since anticipations as to the continuance of the rise in prices, as well as the operation of their causes, are very evidently dependent upon the point of view as to the reason of the rise in prices.”

We find everywhere, moreover, approximately the same differences of opinion which causes Kautsky to attack the conclusions of Varga. In England, for example, Professor Hobson has recently published a work entitled Gold, Prices and Wages. His thesis is that the recent increase in the supply of gold is not the main reason of the rise in prices; in fact, he is doubtful if it is a contributory reason. He attacks the idea that gold is the basis of credit and industry that asserts that credit is not based upon gold but upon goods. Professor Hobson incidentally makes an attack upon Professor Ashley’s statement that “the most direct and immediate way in which an influx of gold affects trade is by causing the banks to make advances on easier terms, so stimulating enterprise and causing an increase in the demand for commodities and services, and consequently a rise in prices.”

The work of Professor Hobson was subjected to a very clever and searching criticism in the New Age (London), May 15, 1913, from which we take the following extracts as being clearly to the point in this controversy. It will be noted that they tend very strongly to support the position taken by Kautsky:

If Professor Hobson had been at all familiar with banking methods he would have known that bills and vendible goods are accepted as banking security only because they are believed to be readily exchangeable for gold. Everyone knows that bankers grade collateral, from what are known as ‘gilt-edge’ securities, downwards, depending upon their convertibility; and bills and goods not readily convertible are ruled out.

“Sir Edward Holden probably knows as much about bank credit as any living man. In his address to the Liverpool Bankers’ Institute in 1907 he said: ‘You here see the direct connection between trade on the one hand and gold on the other, and that it is not so much the production of gold, as the amount of gold, which can be obtained for the purpose of increasing bankers’ reserves. I venture to think that the above explanation will enable you to come to the conclusion that if the gold base of the triangle cannot be increased, then the danger spot is the loan.

“‘I want you to remember that the banking system based on country has its triangle, and that the principles enunciated above exist in every triangle of every banking system based on gold in the world. That being so, it is clear, generally speaking, that the business of the world is carried on by means of loans, that loans create credits, that the stand-by for the protection of the credits is gold, and that therefore gold controls trade.’

“What has recently happened is this. The great increase in the gold supplies has enabled bankers to give credit facilities to a much larger class than heretofore, and to accept securities which formerly were inadmissible. It is not merely an increase in the bank reserves which enables them to do this, but the knowledge that there exists a much greater volume of gold which would be forthcoming, if these securities had to be sold. The more gold there is available the more readily can goods and securities be exchanged, and hence the safer they become as banking security for loans.

“Professor Ashley’s statement is quite correct. If I can now borrow on goods which formerly were regarded as insecure, it is correct to say that credit can now be obtained on ‘easier’ terms.”

It is quite safe to say that, but for the great increase in the gold supplies, there would have been no such increase in credit facilities as we have witnessed, and hence no corresponding advance in prices.

Irving Fisher, Professor of Political Economy at Yale, in the Review of Reviews for February, 1910, says:

“Have not short crops, inventions, labor unions, trusts, and numerous other conditions some effect, not only on particular prices, but on the general level of prices? To this question an affirmative answer may be made without surrendering the proposition, that the only influences affecting the price level are three: Currency, its velocity and business volume, for all other causes produce their effects through these three. Short crops will decrease and inventions increase the volume of business. Inventions affording more rapid transportation and communication tend to increase the velocity of circulation of money and checks. Inventions in metallurgy tend to increase the volume of credit substitutes for money. The substitution of corporations for partnerships, by increasing the volume of stocks and bonds which can be used as collateral securities for loans, likewise tend to increase bank deposits based on these loans; and bank deposits are the chief substitute for money.

“Similarly labor unions and trusts, if they actually restrain trade in the aggregate, will tend to increase the price level. This effect, however, is of quite a different kind from a direct raising of particular prices. From no point of view can the conclusion be justified that the main cause of the present rise in cost of living is due to labor unions. This rise in cost is world-wide, being felt in Europe and India, where American lobar unions and labor leaders cannot, by the utmost stretch of imagination, be supposed to dominate the situation. Moreover, so far as American statistics show, such as those of Bradstreet and the Department of Commerce and Labor, wages have risen only about half as fast as the cost of living. If it were true that the increasing demands of labor unions, by increasing the cost of producing commodities, had resulted in a general increase of prices, these would surely have risen more slowly than wages. The facts, however, show that the cost of living has increased about twice as fast as wages, and this seems to be approximately the rule during any period of rising prices. In other words, during rising prices the laborer is the loser. In fact, his strikes and insistent demands for higher wages represent a belated attempt to overtake the advancing cost of living. Labor disputes and demands are thus an almost invariable accompaniment of rising prices, but they are effects of rising prices, not causes.”

The interesting point in all the above is that the much abused and ridiculed Marxian labor theory of value is again forcing itself upon the notice of the professional economists.

Alexander Noyes, writing in the Atlantic Monthly of October, 1907, says:

“If, however, inflation of prices in every market, absorption of capital on a scale of unthinking recklessness, the use of ill-secured credit to make good deficiencies in the supply of ready capital, are resumed on the scale of the past few years, it is highly probable that not even constantly increasing gold production will save the markets which have indulged in such excess from a complete and prolonged collapse. The strain upon capital and credit may be eased sufficiently to restore equilibrium in financial and commercial markets; but if the strain continues beyond a certain point, a breakdown of credit follows, and with it forced liquidation of the whole position on which the existing level of prices was built up. This was the history of the periods immediately preceding 1857 and 1873.”

It will be noted that there is much similarity between the conclusions here set forth and those of Kautsky, the latter maintaining that to keep the ball rolling, more and even greater quantities of gold must be produced, not only actually but relatively to the volume of trade. Unless these quantities are produced the movement slows down, credits break, the inevitable crash takes place.

In the present instance, as Kautsky points out, recovery is bound to be harder, and the effects upon the working class more severe, because of the high prices reached by agricultural products, etc. The secondary factors tending to a rise in prices make themselves more conspicuously felt. Under these circumstances, as Kautsky says, the rise in prices completely changes its character. “As long as the influence of increased production brought with it increased demand it was welcomed as an accompanying phenomenon of growing prosperity. Since the flow of increased gold production has receded and the other factors of increase in prices are still existent and all together have not had the effect of increasing demand but of diminishing supply, this increase takes on a more disturbing character. From a phenomenon accompanying prosperity it becomes a tense of growing misery, and no longer of mere social relative misery, increased exploitation, but of absolute physical misery.”

And that prices do rise and continue to rise we have undoubted proof

The Bulletin of the U.S. Bureau of Labor Statistics No.174, dated April 4th, 1913, says, in the general summary with which it introduces the volume

“Wholesale prices in 1912 advanced sharply during the first five months, and a strong upward tendency was maintained to the end of the year. The most important features in the movement of prices during the year was the marked increase in the great groups of farm products, food, fuel and lighting, metal and implements.

“The average of wholesale prices in 1912, as measured by the prices of 255 commodities, was 3.4 per cent higher than the average for 1911, and with this advance the level was 1.5 per cent above the high average of 1910 prices. Wholesale prices during 1912 were 18.3 per cent higher than in 1890; 20.9 per cent higher than in 1900; 48.9 per cent higher than in 1897, the year of lowest prices in the 23-year period from 1890 to 1912; and 83.6 per cent higher than the average price for the 10 years 1890 to 1899.

“The upward movement of prices which began July, 1905, reached its highest point in 1907 in October, from which month there was a general decline until August, 1908. Beginning with September, 1908, wholesale prices increased without a break in any month up to March, 1910; from this time to December, 1910, prices declined slightly. Prices in January, 1911, showed p slight declin2 from those of December, 1910, but through the year 1911 the fluctuation from mostly to month was small. During the first months of 1912 prices rose rapidly until May, when slight recessions occurred during June and August. In September and October prices were again higher, reaching the level of May in November, with a loss in December, 1912, of loss than one-fourth of 1 per cent.

“Wholesale prices in May and November, 1913, were higher than at any other time in the 23-year period from 1890 to 1912, being 18.5 per cent, higher than in July, 1905; 3.4 per cent higher than in October, 1907; 11.5 per cent higher than in August, 1908, and 1.8 per cent higher than in March, 1910. Wholesale prices in December, 1912, were 12.8 per cent higher than in December, 1905; 4.6 per cent higher than in December, 1910, and 4.6 per pent. higher than in December, 1911.

“Wholesale prices for 1912, as stated above, were higher than for any other year of the 23-year period, 1890 to 1912, covered by the bureau of Labor Statistics price reports, and they were also higher than for any year since 1883.”

The following table, taken from the same report, shows the Relative Prices of Commodities by Groups (1890-1910), and January to December, 1912:

The Bulletin of the United States Bureau of Labor Statistics, Number 115, April 8th, 1913, is a study of the variations in the retail prices of fifteen staple commodities, as follows:

Sirloin steak; round steak; rib steak; pork chops; bacon, smoked; ham, smoked; lard, pure; flour; wheat; corn meal; eggs, strictly fresh; butter, creamery; potatoes, Irish; sugar, granulated; milk, fresh.

A table giving the relative retail prices of the foregoing articles of food from 1890 to February, 1913, yields the following general results according to the table in question:

“In 1891 prices advanced to 103.4; in 1892 them was a slight decline to 101.6; in 1898 an advance to 104.1. After this there was a gradual decline until the lowest price (95.2) in the 23 years and 2 months covered by this report was reached in 1896. From that time each year showed an advance until 144.1 was reached in 1910. The price (143.0) in 1911 showed a slight decline from 1910, but the price (154.2) in 1912 was far above that of any other year during the 23-year period. The monthly relative price in January, 1911, was 145.0. There was a decline until 135.3 was reached in April; then an advance each month until January, 1912, when the relative price was 153.5; a decline during each of the next two months; then an advance until 154.6 was reached in May; then a slight decline to 154.1 in June, a further decline to 151.8 in July, then an advance each month to 159.5 in November, and then a decline each month to 155.8 in February, 1913.”

A table showing the per cent of increase or decrease in wholesale prices, comparing the average for 1912 with the average for each of the preceding twenty-two years, gives the following general results:

“The greatest advance in any group was in farm products, in which the price in 1912 was 118.8 per cent higher than the 1896 price making the price in 1918 more than twice that in 1896. This group was 5.7 per cent higher than in 1911.. Food, etc., in the year 1912, was 66.5 per cent higher than in 1896, and 6.2 per cent higher than the average price for 1911. The cloths and clothing group in 1912 was 32.5 per cent higher than in 1897, 0.9 per cent higher than in 1911, and 2.4 per cent lower than in 1910.”

No comment is made upon the foregoing figures by the translator because no comment is necessary. They show only, too clearly the actual deterioration in wages as regards purchasing .power. Relatively we have lost ground, and when the time of stress due to what Kautsky regards as the inevitable stagnation comes, the suffering will be all the more intense and the feelings of class antagonism all the more acute.

Kautsky looks optimistically into the future, well satisfied with the work done in the past. He says of the German worker: “He may confidently enter upon the conflict which the new era of capitalism has for us.” Such confidence can only spring from the possession of a strong organisation and widespread education in Socialist theory. Such are the essentials of advance in this country as well as in Germany. Organization and education are still the master words.

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Last updated on 16.6.2004