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Rh by the relation of the demand for and supply of labour, the exact rates being settled by the bargaining strength of employers and employed; since, however, real wages (wages expressed in commodities) were believed to be falling in the period 1900 to 1914 the determination of wage-earners to obtain higher money wages was strengthened and supported by a considerable body of public opinion and this no doubt improved their position in negotiations. On the other hand, whatever were the causes that brought about the general rise in prices that began about 1895, under the ordinary play of economic forces the rise, first apparent in wholesale prices, was followed after no long interval by increases in retail prices and in wages, and in general money wages may be expected to change in fairly close accordance with a gradual change in the price level. The immediate effect of rising prices in normal times is to stimulate commercial activity, increase employment (so that earnings rise before wages), and then to increase wage rates.

During the World War a new group of causes had effect. The connexion of currency with gold was broken, new purchasing power was obtained by the sale of securities held abroad, and the British Government was able to increase the amount of currency at will, by ordering goods and issuing new notes with which to pay for them. There was, for example, nothing to prevent the Government paying every week a £1 currency note to every wage-earner who liked to apply for it, and something of this kind was in fact done in the unemployment benefit after the Armistice.

The actual sequence of events appears to have been as follows. The increased demand for labour, due to the simultaneous need for munitions and equipment and the withdrawal of men from civilian occupations, soon resulted in full employment for nearly all persons capable of work; during the first year of the war this complete employment and the patriotic desire not to hinder the successful prosecution of the war (together with the opinion that the disturbance was temporary) deterred wage-earners from pressing for increased rates of wages in spite of the acuteness of the demand for labour. During 1915 it became apparent that retail prices had definitely risen and that there was no immediate prospect of a fall, and that real rates of wages had so far fallen that persons whose hours of work had not increased had suffered a serious fall in the standard of living, and that in the case of unskilled labourers wages were insufficient to purchase necessary food. The ordinary methods of bargaining were to a great extent suspended, partly because the Government was already a very important employer of labour and was provided with a bottomless purse by the printing press.

The first stage was to give a war bonus in many industries, either at a flat rate to all operatives on the ground that all persons required the same minimum ration of food, or on a slightly greater scale to the lowest-paid men on the ground that the better-paid could make more economies. The price of all goods rose to the extent that the wages affected were an element in their cost, with some exceptions, as in the case of railway services, in which the Government bore any loss. Prices of food which depended to a great extent on the world market prices were not directly affected to any great extent, being paid for by the realization of foreign securities, by the export of gold and by loans, but they nevertheless continued to rise.

The second stage was marked by an effort of wage-earners to obtain further increases commensurate with the increased cost of living and in many cases the acuteness of the demand for labour would have resulted in a great rise in wages; but the Government, by its growing importance as a purchaser of goods and its increasing direct control of industries, was in a position to dictate terms in so wide a sphere as to dominate all wages, and it was not strictly bound by the conditions that determined wages before the war. Courts of arbitration were established and by these and other methods wage changes were officially regulated. In determining wages the dominant consideration appears to have been the change in the cost of living

(as determined by the official measurement described above), though the increases awarded were not in strict proportion,—as indeed they could not be.

The series of increases in the middle and latter period of the war had a more direct reaction on retail prices than the earlier changes, for two reasons. The cost of coal rose with miners' wages, and this, together with the increased wage cost of food manufacturing processes and of wholesale and retail distribution and the increase of the farmers' wage bill (especially dairy farmers'), raised the price of many of the commodities ordinarily purchased by the working classes. Secondly, by the end of 1917 the supply of the majority of goods was limited by dearth, control of shipping or rationing, and was no longer sensitive to price; wages tended to be so raised as to command the purchase of nearly the same quantities of goods as in 1914 at the prices of 1917, but when they came to be spent the goods were not available in these quantities and competition raised the prices; in the case of the principal foods and of coal, prices were controlled and the amount purchasable rationed (except that of bread, which was sold at a loss made good by a Government subsidy); the surplus of wages was then expended on less necessary and unrationed goods whose prices rose enormously (eggs and pianos supply instances of this). If prices had not been controlled and wages had moved with the cost-of-living index number, an endless sequence would have been established, in which each increase of wages caused a rise of prices which was followed by a further enhancement of wages, the whole being financed by the issue of paper money, while the quantity of goods purchased was limited throughout to the same total, namely the goods available in the country. Actually the process was checked by the complete control (independent of home cost of production) of many of the foods included in the budget which determined the cost-of-living index number (e.g. of bread, flour, imported meat, cheese, tea, sugar), and by the partial and less successful control of foods influenced by the cost of home labour (potatoes, home-produced meat, fish, milk, butter); of the remaining articles, the supply of bacon of inferior quality was sufficient to make effective control unnecessary, margarine was manufactured by the Government and the price successfully kept low, and eggs (though nominally controlled) rose in price in accordance with the demand for them, coal was both rationed and controlled in price, and rent was restricted. Nearly the full force of the demand accentuated by surplus wages was felt in the price of clothes, and no doubt this had its effect on the increases of the cost of living and of wages during 1917-9 (see, for the “Cost-of-Living Wage”).

After the Armistice, control was progressively relaxed as free supplies became available and the Government's importance as an employer was diminished. The close connexion between wages and the index number of the cost of living was maintained and extended, but the demand of labour was for an increase of wages above the level of 1914 more than proportional to the increase of prices—in fact, for a higher standard of living, and at the same time for a reduction of the hours in a normal week's work. There was a gradual return to pre-war conditions and the freer play of economic forces; wages had to be found by employers without direct reference to the Government's printing press, supplies of most goods became again sensitive to prices, imports had to be paid for by exports and the increased cost of the latter at once reacted (as indicated by the movements of exchange) on the former; so far as cost of labour is a constituent of price, prices of all goods (whether home-produced or imported) rose with that cost. The sequence of prices following wages and wages following prices must have a limit, and this limit appeared to have been reached with the break in prices in 1920 and the unemployment of 1921, but the date and manner of the climax were determined rather by world conditions than by the British labour policy.

How far wages kept pace with prices is shown approximately from the statistics given above and in the separate articles on and on.

Prior to the war the movements are indicated by Table XV.