bank reserves and made bank credit the cheapest commodity in the country. It was easy to supply all the money and deposit currency required to finance the rapidly swelling volume of business at rapidly mounting prices. That the purchasing power of gold over commodities should decline under such circumstances is easy to understand, though we do not know enough to explain why the decline went just so far as it did and no further.

Then in the spring of 1917 came our own entry into the war. Presently the United States Government was seeking to buy a larger volume of war material than the Allies had bought in America, and at the same time to enlist in the Army and Navy several millions of the men who had been making goods. On the other hand, the Government amended the Federal reserve act by reducing minimum reserves somewhat further, by transferring the entire required reserve to the Federal reserve banks, and by making it easier for State banks and trust companies to join the system. Measures were also adopted to draw as much of the circulating gold as possible into the banks, exports of gold were embargoed, and bank resources were used freely to finance purchases of Liberty bonds.

It was natural that while these policies were in process of adoption prices should take another upward leap as they did between February, when we severed diplomatic relations with Germany, and July. Doubtless this advance would have continued unchecked but for the adoption of price control over many articles. Statistics prove that this policy was successful in large measure. An index number, including 573 commodities brought under price control at various dates during our participation in the war, was reduced from 209 in July, 1917, to 189 in June, 1918. Meanwhile the uncontrolled prices continued to rise, and when the war ended the general price level was almost exactly twice as high as in 1913-14. By November, 1918, gold had lost half of its purchasing power; or, if you like, commodities would buy twice as much gold as before the war.

If the war was primarily responsible for these changes in the relative values of gold and commodities, why did not gold rise promptly in purchasing power as soon as the war ended? Why did not the great fall of prices begin in December, 1918?

Of course the fundamental answer is that the economic disturbances caused by the war did not stop with the fighting. Let us run back over the list of the major factors mentioned in our analysis of the rise of prices and see how matters stood for the first year after the armistice. The foreign and domestic demand for guns, ammunition, new uniforms, and the like disappeared; but there appeared in its stead an enormous increase in the demand for other classes of commodities backed by abundant funds. The demobilized soldiers in Europe and America went home by millions, each man with some cash in his pocket and a wild appetite for the pleasures of ordinary life. In Europe the civilian population had been practicing an enforced economy in consumption-they had been eating war bread, wearing old clothes, buying little furniture, taking little leisure. In the United States the majority of families had been economizing for patriotic reasons if not from necessity. When the victory had been won, we, like the English and French, civilians and demobilized soldiers together, felt that a good time was due us. We had plenty of money, and we spent it royally.

On the financial side the chief changes of 1919 were the lifting of the embargo on gold exports, the "unpegging" of foreign exchange, and the dropping of price controls. Great Government disbursements and great Government borrowings continued. The European nations could not think of resuming gold payments and the process of redistributing the huge stocks of gold which the war had brought us was postponed. Nor were the war-time measures that had increased the amount of credit banks could lend on the basis of given reserves repealed. To meet the eager demand for consumers' commodities supported by abundant funds our machinery for production was in poor condition. Much equipment adapted to the production of war supplies had to be scrapped; much of our other equipment had been allowed to deteriorate. Nor were we as workers in a mood for hard and steady exertion. All in all, the record of 1919 in physical output is one of the lowest, though in point of business profits the year ranks high. After a slight sag in January to March, prices steadied; then in July they shot up again, the prices for consumers' goods taking the lead.

Thus was produced the postwar boom which broke in the spring of 1920. Such booms usually break after a year or two at the most, and when they break in the United States they usually produce a panic. That we did not have a panic in 1920 was due to the strength which the mobilization of reserves by the Federal reserve system had given our banks. But though the banks were able to prevent a panic, nothing could prevent a long and painful liquidation accompanied by a rapid descent of prices toward the prewar level.

Why should gold prices two years after the war recede toward the prewar level? Is it not wiser to ask, Why should they not?

By 1920 the edge had been taken off the demand for consumers' commodities. We had had our fling, we had bought our most necessary supplies. On the other hand, we were getting down to work again and increasing the output of goods. In Europe men were going back to the soil and raising food. There were ships in superabundance to bring supplies from Australia and the Argentine, as well as from the nearer ports of America. Government disbursements declined; the money paid to demobilized soldiers and war contractors was spent or invested. Gold began coming to us again in great quantities, but under the stress of liquidation our bank reserves were none too abundant. We had temporary use for the gold. Most of the forces that produced the great war-time rise of prices had spent themselves. Was it not natural that the price level should fall in the United States? What is there in the world situation that can give commodities a vastly greater purchasing power over gold in 1922 than they had in 1913?

This sketch of the processes by which prices were first raised from 100 to 250 and then reduced from 250 to 150 is, as I said, oversimple. It deals only with outstanding factors; it does not discriminate between the fluctuations of different classes of commodities; it is stated without qualifications; it is not accompanied by supporting statistics. But I think it does present the question why prices fell after the war in the form most helpful to this conference.

Let me add three reflections suggested by this way of stating the question.

First, the war-time rise in the purchasing power of commodities over gold and the postwar fall in this purchasing power are world phenomena, not American phenomena; they are due to world causes, not to American causes. While the changes in our price level have been violent they have been less violent than the changes in countries that suspended specie payments. While we have suffered and are suffering grievously from these changes, our sufferings are less than those of any other large nation. When we come to consider remedies we must remember that we have not merely domestic but world-wide conditions to contend with and world-wide processes to shape.

Second, in planning for the future is it not more reasonable to expect that the purchasing power of gold will return nearer to prewar levels than to expect that, in a world at peace, prices will mount again toward the level attained when the world was at war? Presumably the nations of Europe will seek within the next five or ten years to reestablish gold standards on some basis. Presumably_the production of gold from the mines will not increase greatly. Presumably the production of other kinds of commodities will climb to new world records. What is there in prospect to keep commodities worth one and a half times as much gold as they were worth before the war? Doubtless prices will take an upward turn during seasons of marked business activity, but is not the long-period trend within the span of time we can foresee more likely to be downward than upward?

Third, while I have laid emphasis as in conscience bound on worldwide economic processes, I don't cherish the delusion that we are helpless victims of inexorable economic laws which control our fates. For economic laws are after all merely generalizations concerning our own economic behavior. The relative values of gold and commodities are the values that we ourselves establish. The price fluctuations which trouble us are the net resultants of changes in our own valuations. It is possible to alter our economic behavior-though it is not easy. But to make changes for the better it is necessary to be circumspect, to consider carefully how a modification of one process in our complex economic life will affect other processes. To discuss concrete programs of action is not part of my task. But may I not close with a plea for basing the recommendations of the conference on a careful study of the facts which constitute our problem, the facts of human nature as well as the physical facts, the facts relating to other countries as well as the facts relating to the United States.

FUNDAMENTALS OF COOPERATIVE MARKETING.

By G. HAROLD POWELL, of California.

America is an open forum for the discussion of the financing, distribution, and marketing of the Nation's farm crops. An almost complete collapse in the machinery of distribution and marketing occurred in 1921. Vast surpluses of staple crops are still left on the farm unmarketed, or else have been sold at prices far below the cost of production, while the prices of the articles the farmer

buys have remained so high proportionally as to strike a staggering blow at his prosperity. Because of its interrelationship with agriculture, the social and economic structure of America has been vitally involved. This condition is the result of many complex factors that are inherent in the readjustment that has been taking place since the close of the World War. Most important of all, it is a result of the unpreparedness of the American farmer to handle through collective action the problems which he, as an individual, has been powerless to solve or even to influence.

There are some exceptions to the conditions outlined above, especially among the organized horticultural industries of California, that stand out as a flame of light against the dark background and point the direction toward which the thought of the Government, of the American farmer, the banker, and of all other interested men should be directed. Most of the California growers received prices for their fruit crops in 1921 that returned more than the cost of production. In these fruit industries the farmers are organized to handle the problems of production and the purchase and manufacture of supplies; they are associated, by industries, in marketing agencies through which their crops are standardized and prepared for sale; their fruits are generally distributed and sold through their own representatives to the wholesale trade in the towns and cities where they are to be consumed.

The fruit purchased by the wholesale trade in the various towns and cities is for their immediate requirements and not for future sales, therefore the credit risk of the local banks, which finance the wholesale dealers, is practically eliminated. Not only have these products returned the cost of production to the producers, but the trade also has made fair profits. But the steadily sustained demand by consumers for California fruits is an evidence of the power of continuous, friendly advertising, coupled with sound merchandising methods, in promoting a larger consumption of farm products. These California cooperative growers' organizations, by decreasing the unnecessary speculation that is inherent in the buying, distributing, and selling of most farm crops, are reducing the hazard in providing the necessary credit for their production and for their orderly distribution. When well organized and well directed, they furnish the soundest possible contact between the producer and the institutions that finance the production and distribution of farm crops.

The favorable position of California's horticultural industries at the close of this last year of extraordinary business perplexities is not the result of fortuitous circumstances; it is the fruitage of the foresight of the porducers who through many years have been building up their cooperative marketing organizations, standardizing their products, selling them in enormous volume, cooperating with the trade, creating larger markets and increasing consumption by continuously presenting the desirability and value of the product to the people. Had the California cooperative marketing organizations not enabled the fruit growers to handle their financing, distributing, and selling problems collectively they would have been engulfed, like many other horticultural and agricultural industries, in the backwash of the World War. It is not presumptious, there

fore, to suggest that American agriculture and the public generally would profitably study the factors that have contributed to the welfare of California in the face of general business depression.

Whenever American agriculture is depressed the movement toward cooperative handling of farm problems receives an active impetus. We are passing through such a period now, when clear thinking is needed, when the farmer can achieve notable progress or make colossal blunders unless sound reasoning is brought to bear on the problems of the producer and a procedure is developed that will ultimately be best for the upbuilding of country life. In the course of an experience of 30 years the California fruit industries have found no place for miracles in solving the farmers' complex marketing problems. There are no magic forms of organization or contracts which bind growers together, through which a vital, living spirit can be spontaneously created in men which persuades them that by working together they are better able to solve their individual and common questions. The ultimate success of any cooperative marketing effort depends on the will of the farmer to cooperate, on a spirit of mutual confidence and trust in one another. But it is also dependent on the development of the most adaptable forms of organization and the most efficient management and procedure.

A form of organization may be easily adopted, and business management may be provided, but the will to cooperate develops slowly in the farmer's consciousness, out of his efforts toward actual cooperation. Therefore any cooperative marketing organization that is quickly formed needs most careful watching, because the average farmer is not skilled in the arts of competitive business; he is slow to delegate authority to anyone and reluctant to yield any part of his individual freedom by modifying his own actions to meet his neighbors' needs.

A DEFINITION OF A COOPERATIVE MARKETING ASSOCIATION.

Cooperation among farmers may be defined as an enterprise in which the members form an agency through which they conduct the business for their greater mutual advantage. To be cooperative it must be composed of farmers exclusively and managed by them, and the benefits must be returned to them in proportion to the use or the patronage of each. That part of the capital necessary to create the agency and its facilities, which finds an expression in the management of the association through the voting of the members, should preferably be contributed by them in proportion to the use which each makes of the organization. And it is desirable that the capital of each member should be kept progressively proportional to the individual shipments or purchases or other uses made of the agency as nearly as this may be done. Capital in a cooperative agency, which creates the permanent investment, should be considered as a means of providing the facilities needed by the members; it must not be a fund on which a dividend is paid in excess of a fair rate of interest. Working capital may, of course, be provided in other customary ways. In forming a cooperative marketing association it is fundamental that it be a proper legal entity, with sufficient powers to transact the