1922 Encyclopædia Britannica/Cost of Living
COST OF LIVING. Till recent years the phrase “Cost of Living” was only used loosely by economists when the balance between movements of wages and prices was in question, but from 1914 onwards during the World War the need of a measurement of the rise of prices gradually resulted in making the expression prominent in industrial and statistical discussions. In popular parlance it has since become a recognized economic problem. It has frequently been assumed that the term “Cost of Living” (or “High Cost of Living”—sometimes abbreviated to “H. C. L.”) has a unique and definite meaning, and that accurate measurements can be applied to it, but in fact the meaning is vague and the statistical methods appropriate to it are complex and lead to results whose precision is not of a high order.
The phrase may be regarded as an abbreviation for “the cost in a defined region to persons typical of a defined social or industrial class of goods of a kind usually purchased at frequent intervals, by the consumption of which a certain standard of economic welfare is reached.” We may usefully distinguish four cases: (a) where the standard is a physiological minimum; (b) where some conventional or average budget of expenditure is taken and the cost of the items in it is measured at different times or places; (c) where the items are varied but the whole contents of the budget result in an unchanged standard of welfare; (d) where both the contents of the budget are modified and the standard is raised or lowered. Case (b) is that which has in recent years been the subject of measurement, but case (c) is that which is in reality appropriate to the problem of measuring or adjusting real wages.
Case (a).—Prior to the World War attention was directed by Mr. Seebohm Rowntree (Poverty, A Study of Town Life, 2nd ed. 1902) to the cost of obtaining in York (England) and elsewhere food, clothing, heat, light and shelter sufficient for a family to maintain itself in health and efficiency for work, when all possible economy was practised, subject to the availability of commodities and the legal requirements for housing, decency, etc. The minimum of food was computed in relation to the quantity of calories, carbohydrates and protein calculated by Atwater and others as necessary for maintaining health and vigour under various conditions of life, and dietaries were drawn up which contained the necessary constituents at the minimum aggregate cost; to this cost was added the expenditure on clothing, fuel, cleansing materials, etc., and rent, which was found to be customary among persons in regular work at the lowest rates of wages of adult men. The most natural meaning of the cost of living is perhaps the cost of maintaining the minimum standard thus described. The standard is, however, not scientifically definite; apart from questions as to the validity and applicability of the measurement by calories, it is clear that there must be a great difference between the amount of food necessary for work of low and of high efficiency; the Indian, Chinese and Japanese peasants live on a sparser diet and produce a lower output than the English or Americans; definable points are where efficiency is a maximum (which needs a more liberal diet than that considered by Mr. Rowntree) and where the value of additional efficiency exactly equals the cost of the additional food, etc., necessary (for whose ascertainment there are no observations); and Atwater's standard is in fact conventional (see Bowley, Measurement of Social Phenomena, chap, viii., 1915). If we drop the word “minimum” and speak of Mr. Rowntree's conventional standard for demarcating poverty, we can properly measure the change in the cost of living at this standard (if the facts are ascertainable). The varying cost of the official civilian rations, computed in Germany circa 1919, gave a measurement similar to that described. The cost of Mr. Rowntree's standard, and one modified in the direction of ordinary purchasers by Bowley, was worked out for certain English towns in 1913 (Livelihood and Poverty, 1915). A legal minimum wage could be based on a standard thus defined, but in fact it is generally related to a higher conventional standard.
Case (b).—The usual method of measuring the change of the cost of living during and since the war has been as follows. Detailed statements of expenditure having been obtained from a number of working-class households (in most countries at some date prior to 1914), an average budget is formed showing so many pounds of meat, bread, etc., with the prices and expenditure in considerable detail. The average prices of the same foods are ascertained from time to time, and the expenditure necessary to purchase the former quantities at the new prices is computed. The cost of living (so far as food is concerned) is then taken as having increased or decreased in the same ratio as this standard budget. In many countries a standard of the same kind is established for clothing, fuel, light, rent, cleansing materials and some other articles, and the cost of the aggregate, including food, is computed from time to time. The result obtained (if the process were complete) would be the relative cost of maintaining a defined standard constant in every detail. It is generally expressed as a percentage; thus if the costs were 25s. and 30s. at the two dates, the ratio is 100: 120, the index number at the second date is 120 and the percentage increase 20.
This method cannot be carried out in its entirety for two reasons, namely, lack of information and change of quality of the commodities in the market. In most countries data of expenditure and prices are only obtained for principal commodities (meat, bread, etc.) and not for those on which little is spent (currants, pepper, etc.); unless owing to shortage of supplies there is a run on the articles not included, these omissions cannot affect the result significantly. In some countries expenditure is not known, but only prices, and then the resulting calculation is generally valueless; and in others currency is so variable that the computation is meaningless. In nearly all cases there is no sufficient knowledge of expenditure on clothing either in total or in detail, and it is often difficult to obtain adequate data for fuel and light or for miscellaneous items. The sums included in the calculations, in fact, account for only a part of ordinary household expenditure, but where most care has been given to the question the part is a large proportion of the whole. Classes of expenditure that are not strictly necessary, such as amusements, tobacco, alcohol, etc., are generally omitted, as are occasional expenses (doctors, purchase of furniture, etc.), but in some cases subscriptions to trade unions, etc., insurance payments and travelling to work are included. The miscellaneous expenses omitted become a large proportion of total expenditure as we go up the scale of incomes. The difficulty due to the change of quality of goods which has been so marked since 1914 is even more fundamental. Over any long period the actual constituents and quality of a pound of bread, a cut of meat, a pair of boots, change considerably, but from some points of view these gradual changes are not important. During the war, however, substitution of one commodity or ingredient for another was sudden and common, and the pre-war quality was unobtainable at any price, or if obtainable had a quite altered position in domestic economy. Consequently the prices included in the calculations were frequently not for the same things at different dates and the precision of the measurement was greatly diminished. After the Armistice there was some return to former qualities, but the change has been sufficient to undermine the foundation of the numbers, and a new basis is necessary, as discussed in the following sections.
It should be added that separate budgets ought to be formed (and in some countries have been formed) for different grades of income and for different classes of occupation, and also for single persons and for married persons with dependents.
The structure of the index numbers of the cost of living is shown most clearly by algebraic symbols. If Q₁, Q₂, Q₃ . . . are the number of units of the commodities in the standard budget, and P₁, P₂, P₃ . . . the prices per unit at the date taken as starting point, and we write Q₁×P₁ = E₁, Q₂×P₂ = E₂ . . .. where E₁, E₂, E₃ . . . are the expenditures on the commodities, then E = E₁ + E₂ . . . = Q₁×P₁ + Q₂×P₂ . . . is the whole expenditure at the first date on the standard budget. Let p₁, p₂, p₃ . . . be the prices per unit at a subsequent date; then Q₁×p₁ = e₁, Q₂×p₂ = e₂ . . . are the presumed expenditures, and e = e₁ + e₂ + . . . = Q₁×p₁ + Q₂×p₂ + . . . is the whole expenditure. The ratio of the cost of the standard budget at the second date to that at the first, is eE = Q₁×p₁ + Q₂×p₂ + . . .Q₁×P₁ + Q₂×P₂ + . . . = E₁×r₁ + E₂×r₂ + . . .E₁ + E₂ + . . . where r₁ = p₁/P₁ (the price ratio for the first-named commodity at the two dates), r₂ = p₂/P₂ . . . . The last expression shows that by this method the ratio of the costs of living is a weighted average in which the price ratios are weighted by the expenditures at the first date; hence we only need to know these expenditures and ratios, and not the actual quantities nor prices. In the official measurement in the United Kingdom only the quantities E and r are in fact used; this method is very convenient in dealing with rent (for which there is no natural unit of quantity) and with clothing (for which a general price ratio is obtained without any definition of unit). The general theory of weighted averages shows that a considerable roughness in the estimation of the smaller expenditures is smoothed out in the process of averaging, but that it is important to obtain precision in the case of large items, such as clothing, treated in a single entry, and rent. It is important, however, that the r's should be accurately known when they differ much from one another, and the quality of the commodities that are priced should be the same at both dates.
The index number for the second date is eE×100, and the percentage increase is (eE−1)×100.
Case (c). It must be granted that when the cost of living is compared at two places or at two dates we ought not to assume that precisely the same quantities of the same commodities are purchasable in both cases, and in order to make a strict numerical comparison we need a test of equality of standard if not a means of comparing two standards. The problem so stated has not yet been completely solved. A measurement could be made on a strictly nutritive basis and the cost of purchasing in the most economic way the amount of calories (including the necessary protein) considered proper to health and efficiency could be ascertained in both countries or at both periods; but this would only give a theoretic solution, since it ignores the influence of custom and taste in diet, and, in fact, in developed countries relatively few people have been compelled to purchase their nutriment in the cheapest possible way. The actual practical question in England in 1921 was what was the cost of maintaining the pre-war standard of living in nutritive power and satisfaction or pleasure derived from food and clothing, allowance being made for changes in prices and available qualities. This statement introduces the vague word satisfaction, which it is not practicable to define exactly, though some mathematical methods based on economic principles have been suggested for ascertaining its equality in two cases.
It has been suggested (Bowley, “Measurement of Cost of Living,” Journal of the Royal Statistical Society, May 1919, p. 354, and “Cost of Living and Wage Determination,” Economic Journal, March 1920, p. 117) that an approximation could be reached by devising “a diet, based on available supplies, as nutritious, digestible and not less attractive than the pre-war diet, and estimate at what price it could now be obtained,” or “to frame a new budget of goods obtainable, and, in fact, purchased, by housekeepers with the same skill of adjusting purchases to desires as in the case of the earlier budgets. Instead of measuring satisfaction by formula, we may recognize that it is subjective and a matter of opinion, and obtain from representative working-class women a budget which in their opinion would now give the same variety and pleasure as a selected budget of 1914, care being taken that the energy value is the same. The result would give a new conventional budget, the ratio of whose cost to (that of) the pre-war budget would give a rough measure of the change of . . . the cost of living.” It should be added that this solution would only be definite if the “satisfaction” was obtained as cheaply as possible, it being assumed that before the war given sums of money were laid out to the best advantage. This method would only be satisfactory if fairly close agreement was obtained as to the equality of the new with the old standard.
Another method has been used in the case of comparison of the cost of living in two places. In 1905 the Labour Department of the Board of Trade (United Kingdom) initiated inquiries about the cost of living in the United Kingdom, United States, France, Belgium and Germany, and obtained budgets of expenditure in each country; the results are published in the official papers Cd.3864, Cd.5609, Cd.4512, Cd.5065 and Cd.4032. A comparison was made between the cost of living in the United Kingdom and in each other country on a double basis, as follows:—it was found that an English housewife purchasing in 1909 in the United States a week's supply of food as customary in England would have spent 38% more in the first-named country, the ratio of the costs of living being on this basis 100:138; on the other hand, an American housewife purchasing in England a week's supply of food as customary in America would have found her expenses reduced in the ratio 125:100 (Cd.5609, pp. lxvi., lxvii.). If these ratios had been reciprocate, either would measure the difference in the cost of living (so far as food is concerned); as it is, their divergence illustrates the want of definiteness in the problem. Now it is quite possible to obtain in any country a current budget to be compared with a pre-war budget and the method just described can be applied. Thus, in the Journal of the Royal Statistical Society, May 1919, p. 344, details are given of the standard pre-war British budget and of the average of budgets collected by an official committee on the cost of living in the last year of the war, in which the standard of living had been modified and had fallen somewhat. A housewife purchasing in 1918 the same qualities and quantities of food as in 1914 would have increased her expenditure in the ratio 100:212, while if she had purchased in 1914 the same qualities and quantities as in 1918 the ratio of the earlier to the later expenditure would have been 100:202. Both these are possible measurements (the first being identical with case a above), and where the difference between them is so moderate an intermediate number, such as the arithmetic or geometric mean (which are nearly coincident), 100:207 makes a plausible measurement of the change.
Another method, allied to that just described, gives perhaps the most practical solution, though its adequacy can hardly be proved from theoretic conditions. Obtain typical budgets of expenditure at two dates; compile a new or mean standard of quantities which item by item are the averages of the entries in the budgets; thus, if in one the consumption of 33 lb. of bread is stated, in the other 35 lb., enter 34 lb. in the mean standard; now find the cost of the mean standard at each date and take the ratio of these costs as the measurement of the change in the cost of living. In the example just used this ratio was found to be 100:204. (On the methods formerly used for this problem, see Palgrave's Dictionary of Political Economy, vol. iii., article “Wages, Nominal and Real,” p. 640.)
If all prices rose in the same ratio the methods now described would necessarily yield the same result; the need for choice arises from inequalities of increase, including the case where the goods are no longer in the market as one where the price is indefinitely great. Now if at one date purchases are made so as to maximize the satisfaction in the outlay of the week's housekeeping allowance, as we may reasonably assume, and prices rise irregularly, it is evident that somewhat less will be bought of the commodities which have risen most and more of those which have risen least if a maximum is still obtained, and that consequently the increase in the expenditure necessary to obtain the same satisfaction as before is less than the increase if exactly the same quantities had been purchased. For example, if oranges are doubled in price and bananas increased only by one-half, more bananas and fewer oranges will be purchased.
If with the notation used above we also write q₁, q₂, q₃ . . . for the quantities purchased at the second date, the measurement obtained by using these quantities is q₁p₁ + q₂p₂ + . . .q₁P₁ + q₂P₂ + . . . = 1100I₂ (say) instead of Q₁p₁ + Q₂p₂ + . . .Q₁P₁ + Q₂P₂ + . . . (as above) = 1100I₁ (say). If the small letters refer to a second place (instead of date), then as between England and America I₁ = 138 in the illustration I₂ = 125. For two dates the method illustrated from expenditure on food in England gives I₁ = 212 and I₂ = 202, and the suggested index number is I₃ = 12(I₁ + I₂) = 207. The other method recommended is to take I₄ = 12(Q₁+q₁)p₁ + 12(Q₂+q₂)p₂ + . . .12(Q₁+q₁)P₁ + 12(Q₂+q₂)P₂ + . . . × 100. It is easily shown that I₄ is always intermediate between I₁ and I₂, and by a more troublesome analysis that I₄ is less than I₁ when prices in general are rising and quantities consumed of individual goods have increased or diminished according as their prices have risen more or less than the average as measured by I₁; in fact
I₁ − I₄ = 100 (p₁−rP₁)(Q₁−q₁) + (p₂−rP₂)(Q₂−q₂) + . . .(Q₁+q₁)P₁ + (Q₂+q₂)P₂ + . . .
where 100r = I₁, and the factors in each term of the numerator are both positive or both negative under the conditions named. Hence, I₄ satisfies many of the fundamental conditions of the measurement required. Bowley (Stat. Journal, loc. cit., p. 351) suggests as a measurement of the loss of satisfaction in the case of a falling standard the expression
{(Q₁ − q₁)P₁ + (Q₂ − q₂)P₂ + . . .}/{Q₁P₁ + Q₂P₂ + . . .}
the ratio of the cost of the decrease in quantity to that of the quantities at the first date, both valued at the prices of the first date; this method leads to I₂ as the index of the increase of cost of living, but it is not of general application for it does not give equal importance to the distribution of expenditure at both dates since I₂ does not involve Q₁, Q₂ . . . .
T. L. Bennett (“Theory of Measurement of Changes in Cost of Living,” Journal of the Royal Statistical Society, May 1920) carries the argument further by important steps. With the notation already used, he supposes that a housekeeper gradually changes her purchases from quantities Q₁, Q₂ . . . at prices P₁, P₂ . . . to quantities q₁, q₂ . . . at prices p₁, p₂ . . ., the quantity of each commodity bought being related to its price by a law of demand. He then shows that the increase of expenditure, when the final is compared with the initial date. viz. e − E, is algebraically equal to X+L, where X = 12(Q₁ + q₁) (p₁ − P₁) + 12(Q₂ + q₂) (p₂ − P₂) + . . . and L = 12(q₁ − Q₁) (p₁ + P₁) + 12(q₂ − Q₂) (p₂ + P₂) + . . . and he identifies X as measuring the increased expenditure necessary to preserve the former standard of living and L as measuring increased satisfaction from increased consumption (or if L is negative a decrease).
This method gives a useful and simple test of the equivalence (as measured by satisfaction) of two budgets at different dates in the same country, for L should be zero, that is q₁⋅12(p₁ + P₁) + q₂⋅12(p₂ + P₂) + . . . should equal Q₁⋅12(p₁ + P₁) + Q₂⋅12(p₂ + P₂) + . . . . This test should be applied if the suggestion made above of constructing an equivalent budget for comparison is carried out.
If L is negative it would be necessary to add to expenditure e to make it equivalent to the earlier expenditure E, and Bennett, having regard to the changed purchasing power of money, suggests a somewhat complex and indefinite method of ascertaining the necessary amount; the index number for the cost of living may be written approximately 100 × (e+L1√100)/E, where I is chosen as one of the index numbers already written.
Case (d). The problem with which many countries were faced in 1920 and 1921 was in reality not that of preserving a standard of living on the level of 1914, but of adapting themselves to a lower average standard, whatever the fortunes of favoured classes. This may be illustrated by the arrangement of the salaries of civil servants in England in Feb. 1920. At that date the official measurement (on method b) of the increase in the cost of living over 1914 was 130%. The full increase of 130% was awarded to persons with a wage of 35s. weekly (£91 5s. per annum), 60% was added to the residue of salaries up to £200, and 45% to the residue of the salary. Thus a man whose salary was £400 on the pre-war basis received an addition of £273⅞ (130% on £91 5s. = £118⅝, 60% on £108 15s. = £65¼, 45% on £200 = £90), about 68% in all. This increment was increased or decreased by one twenty-sixth part for every complete movement of 5 points in the official index number averaged over certain periods. It appears to have been assumed on the one hand that the expenses of the middle class had not increased so much as indicated by the index number based on working-class expenditure, and on the other that the standard of living must be lowered—the higher the income the greater the fall. A similar scale was adopted at nearly the same date for railway officials. We are thus led to consider a conventional standard of living which changes from time to time. When there is no reference to a physiological minimum, the cost of living may be regarded as the cost of maintaining the standard customary to the social or occupational class concerned at a given time and place. In this sense the cost of living of Chinese labourers is lower than that of the Americans, though they pay the same prices for commodities. When “cost of living” is used in this sense it should always be accompanied by a reference to the standard attained. Thus the British Committee on the Cost of Living in 1918 estimated the average expenditure of working-class families in 1914 and 1918 and at the same time reported on the change of standard. In some of the statistics quoted below a conception of this kind is involved in the figure.
United Kingdom
(a) Cost of Food.—In the United Kingdom the basis of the official measurement of the cost of living is that of finding the cost of a standard budget of expenditure at various dates (see Labour Gazette, March 1920, p. 118, and Report on Working-Class Rents and Retail Prices, Cd.6955 of 1913, pp. 299 seq.). The standard budget was obtained from a collection of 1,944 records of weekly expenditure made in 1904; the average weekly family expenditure was 36s. 10d., of this 22s. 6d. was spent on food, and of the food 18s. 6d. is accounted for in the standard used prior to the war. A somewhat altered basis was taken in 1914. Rice, tapioca, oatmeal, pork, coffee, cocoa, jam, treacle, marmalade, currants and raisins (the expenditure on all of which was about 2s. 1d. in 1904) were omitted and fish and margarine added (an addition equivalent to 6d. in each case). It was assumed that, though prices had increased between 1904 and 1914, the relative expenditure (which alone enters into the computation) on the different commodities was unchanged; this assumption is too rigid but not unreasonable, and the facts otherwise known about price movements and consumption show that the error introduced is insignificant.
Relative importance being determined, the next step was to ascertain the movement of prices. Prior to 1914 the records were obtained exclusively for London, but it was shown (Cd.6955, pp. 299 and 306) that from 1907 to 1912 the average movement was very nearly the same in provincial towns as in London. From Aug. 1914 statements of prices were obtained for 650 towns and villages.
The index numbers of the cost of living, so far as food is concerned, were then obtained by the method b described above; prior to 1914, the year 1900 was taken as base and the prices then equated to 100; from the beginning of the war July 1914 was taken as base.
The index number is in the form 100 × (E₁r₁ + E₂r₂ + . . .) ÷ (E₁ + E₂ + . . . ) where E₁, E₂ . . . are the expenditures on the separate commodities in the standard budget and r₁, r₂ . . . are the ratios of the prices at any particular time to the prices at the basic date. The values actually taken for the E's were as in Table I. , being proportional to the expenditure.
Table I.
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106 | 95 | 28 | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 100 | 105 | 22 | 19 |
Grand totals: before 1914, 360; after, 334.
There are certain weaknesses in the method. It is assumed without explicit evidence that expenditure on meat was in the proportion 2s. on beef to 1s. on mutton, and that British and foreign meat were of equal importance, and the price ratios taken for meat are for four selected joints only; during the period 1915 to 1919, when the relative quantities available varied and relative prices were altered, this assumption affects the index numbers. The weight assigned to margarine is arbitrary. The number of eggs consumed (about 12 per household per week) is based on summer records and is no doubt higher than the average for the year.
The resulting index numbers were as in Table II:—
Table II.
Index numbers of retail food prices in United Kingdom. (London only prior to 1914.) Average for year unless otherwise stated.
| 1903 | 92 |
| 1904 | 92 |
| 1905 | 92 |
| 1906 | 92 |
| 1907 | 94 |
| 1908 | 96 |
| 1909 | 96 |
| 1910 | 98 |
| 1911 | 98 |
| 1912 | 103 |
| 1913 | 103 |
| 1914 (Jan. to July) | 100 |
| 1914 (Aug. to Dec.) | 112 |
| 1915 | 131 |
| 1916 | 160 |
| 1917 | 198 |
| 1918 | 215 |
| 1919 | 219 |
| 1920 | 256 |
| 1921 (Jan. to April) | 257 |
| May | 232 |
| June | 218 |
For the monthly figures from Aug. 1914, see the article Prices.
During the war the validity of these figures was much weakened by the failure of the supplies necessary for the budget to be realized. In 1918 a committee on the cost of living (Cd.6980) collected 1,400 budgets from the urban working-class of a kind comparable with the standard budget already named. Among the differences found were the following (Table III):—
Table III.
Weekly Consumption of a Standard Family.
| 1914 | 1918 | ||
| Bread and flour | lb. | 33.5 | 34.5 |
| Meat | lb. | 6.8 | 4.4 |
| Bacon | lb. | 1.2 | 2.55 |
| Eggs (number) | 13.0 | 9.1 | |
| Cheese | lb. | .84 | .41 |
| Butter | lb. | 1.7 | .79 |
| Margarine | lb. | .42 | .91 |
| Sugar | lb. | 5.9 | 2.83 |
| Potatoes | lb. | 15.6 | 20.0 |
The consumption in 1918 practically exhausted the supply, and the calculation of what the 1914 budget would have cost if the quantities had been available at the prices of 1918 was purely theoretical. The committee found that in fact expenditure on food was 90% higher than in 1914 at a date when the above index number showed an increase of 108%. The committee estimated that the nutritive value (measured in calories) of the 1918 budget was only 3% lower than that of 1914. Similarly a committee on the financial results of the occupation of agricultural land and the cost of living of rural workers (Cmd.76 of 1919) reported (p. 43) that the expenditure on food of agricultural labourers had increased 84% since 1914 at a date when the index numbers showed an increase of 108%, and that the nutritive value had fallen 3% as in the towns. Possible methods of measuring the change of the cost of living under such circumstances have been discussed above; here it is only necessary to say that the official index number is not valid.
After the Armistice supplies tended to return to their pre-war level except in the cases of sugar, eggs, butter and cheese; margarine of an improved quality took the place of butter to a considerable extent. The increase of prices over 1914, however, varied greatly from commodity to commodity; thus in March 1921 British beef and mutton were respectively about 161 and 176%, while imported beef and mutton were only about 109 and 100% above the level of 1914; sugar had risen 310%, butter 145%, eggs 200%, tea only 74% and margarine 67%. With this variation it is certain that an unchanged standard would not be composed of unchanged constituents and that (as argued above) the cost of living had risen less than the index numbers show, unless expensive substitutes had taken the place (e.g.) of sugar. There had been no information obtained, however, as to new arrangement of consumption up to the summer of 1921.
(b) Other Commodities.—Next in importance to food comes rent. The figure included in the index number allows for such increases for rates, repairs, etc., as are legally permissible and is accurate for persons who by remaining in the same house since 1914 have the benefit of the Rents Restriction Acts; the increase for those who have moved must have been very variable and for it no estimate is available.
The cost of clothing, which ranks next to rent in expenditure, is always very difficult to measure owing to the difficulty of defining the garments or stuffs purchased, and of assigning their relative importance in the budget, and also there was great variability in the qualities in the shops during 1914 to 1921. The difficulties can be understood by comparing the estimates and method of the Cost of Living Committee (loc. cit., pp. 21-3) with those of the official index number described in the Labour Gazette, April 1921, pp. 178-9; the former found an increase of 96% between July 1914 and the summer of 1918, the latter reaches increases of 210% in June and 240% in Sept. 1918. The differences are partly attributable to the great variability of the increases among the articles in consequence of which the relative importance given to each has great effect, and in this respect the committee's measurement is the more systematic; and partly due to the difficulty of obtaining quotations for the same qualities of goods or in allowing for substitution. The question is too intricate to discuss here; it can only be suggested that the results have little precision, and that the process of obtaining an estimate based on a new budget in which modifications of custom are allowed for is even more necessary than in the case of food.
Fuel and Light present little difficulty when a general average for the country is in question since the retail prices of coal and of gas are ascertainable. The variation from north to south in price and consumption and that between winter and summer is not very important, since where coal is dear, gas is used for cooking, and in working-class households one fire is necessary throughout the year for cooking and this also provides heat.
The official index number allows only one-twelfth of the weekly expenditure for all items not already included, or about 1s. 6d. per household in 1914. This sum is exhausted by cleansing materials with a very small margin for tobacco, newspapers, household replacements, and fares. Insurance and trade-union subscriptions are not included, nor is alcohol.
The five classes of expenditure now named are combined in the following proportions, stated for clearness on the basis of a pre-war urban weekly expenditure of 37s. 6d. Food 22s. 6d., rent (including rates) 6s., clothing 4s. 6d., fuel and light 3s., sundries 1s. 6d. Here the proportions on food, rent and light rest on good evidence; that on clothing, for which the expenditure varies greatly according to the income and personnel of the family and for which there has never been a satisfactory investigation, is little more than a guess based on vague estimates; that on sundries is the residuum when other expenses are met and is probably too low.
The results are tabulated in Table IV:—
Table IV.
Official Measurement of Cost of Living in the United Kingdom.
| Food | Rent | Clothing | Fuel & Light |
Sundries | All combined | |
| Relative importances |
60 | 16 | 12 | 8 | 4 | 100 |
| July 1914 | 100 | 100 | 100 | 100 | 100 | 100 |
| Dec. 1914 | 116 | * | * | * | * | 110 (approx.) |
| June 1915 | 132 | * | 125 | * | * | 125 |
| Dec. 1915 | 144 | * | 135 | * | * | 135 |
| June 1916 | 159 | * | 155 | * | * | 145 |
| Dec. 1916 | 184 | * | 180 | * | * | 165 |
| June 1917 | 202 | * | 200 | * | * | 180 |
| Dec. 1917 | 205 | * | 240 | * | * | 185 |
| June 1918 | 208 | * | 310 | * | * | 200 |
| Dec. 1918 | 229 | * | 360 | * | * | 220 |
| June 1919 | 204 | 105 | 360 | * | * | 205 |
| Dec. 1919 | 234 | 117 | 370 | 185 | * | 225 |
| June 1920 | 255 | 117 | 325 | 230 | 220 | 250 |
| Dec. 1920 | 282 | 142 | 305 | 240 | 230 | 269 |
| June 1921 | 278 | 145 | 300 | 255 | 210 | 219 |
The statistics are for the beginning of each month.
*Not stated separately at these dates.
The numerical importance of the criticisms indicated may be seen by computing the number for Dec. 1920 with the following alterations: suppose that the modification of diet (margarine instead of butter, decrease of sugar and eggs and increase of other foods) reduces the food index to 260, that the increase in clothing cost is half that shown (as indicated by the Cost of Living Committee for 1918) and the index is 200 instead of 305, and that rent accounts for 20% of all expenditure, food for 50% and sundries for 10%, instead of 16, 60 and 4% respectively, then the index number would be 225 instead of 269. This is, perhaps, an extreme hypothesis, but it has been suggested (Bowley, Prices and Wages in the United Kingdom, 1914-1920, p. 75) that a standard equivalent on the whole to, but modified in detail from, that of 1914 might have been attained throughout by an increase of expenditure equal to four-fifths of that officially stated (100 + 4/5 of 169 = 235 in Dec. 1920).
Other Countries
(a) Cost of Food.—The experience of other countries has been similar to that of the United Kingdom both in the dates of increase and in the difficulties of satisfactory measurement. Table V contains in summary form the index numbers showing the movement of food prices in all the countries which are known to publish official figures based on 1914 prices. Except in Belgium, where the index numbers are the simple average of prices of selected commodities, the measurement is made on the same method as in the United Kingdom and based on the expenditure found from a collection of working-class budgets, though in some countries the number of such budgets is very small. In some cases, noted in the sequel, some changes in commodities are introduced, and in others alternative measurements based on actual expenditure at different dates are given. These numbers are summarized from time to time in the Labour Gazette (London), the Labor Review (Washington), in the International Labour Review (Geneva), and in the Monthly Bulletin of the Supreme Economic Council; they are of course also to be found in the official publications of each country.
Table V.
Index Numbers of Retail Prices of Food (based on the official statistics of the various countries).
(In every case the prices used are in the currency of the countries in question.)
| 1914 July |
1915 July |
1916 July |
1917 July |
1918 July |
|
|
1921 Jan. | |||||||||||
| United Kingdom* | 100 | 132 | 161 | 204 | 210 | 230 | 217 | 235 | 262 | 263 | ||||||||
| France (Paris) | 100 | 122 | 132 | 183 | 206 | — | 261 | 290 | 373 | 410 | ||||||||
| France (other towns) | 100 | 123 | 142 | 184 | 244 | 248 | 293 | — | 380* | 429 | ||||||||
| Italy (Rome) | 100 | 95 | 111 | 137 | 203 | 259 | 206 | 275 | 318 | 367 | ||||||||
| Italy (Milan) | 100 | — | — | — | 325 | 309 | 310 | 412 | 445 | 573 | ||||||||
| Switzerland* | 100 | 119 | 141 | 178 | 222 | — | 250 | — | 232 | — | ||||||||
| Belgium | 100* | — | — | — | — | — | — | 396 | 459 | 493 | ||||||||
| Netherlands (Amsterdam) | 100* | 114 | 117 | 146 | 176 | 189 | 204 | 197 | 210* | 199 | ||||||||
| Denmark | 100 | 128 | 146 | 166 | 187 | 186 | 212 | 251 | 253 | 276 | ||||||||
| Sweden | 100 | 124 | 142 | 181 | 268 | 339 | 310 | 298 | 297 | 283 | ||||||||
| Norway | 100 | — | 160 | 214 | 279 | 279 | 289 | 295 | 319 | 334 | ||||||||
| Spain* | 100 | 107 | 114 | 136 | 162 | 168 | 180 | 193 | — | — | ||||||||
| United States | 100 | 98 | 109 | 143 | 165 | 181 | 186 | 197 | 215 | 169 | ||||||||
| Canada | 100 | 105 | 114 | 157 | 175 | 186 | 186 | 206 | 227 | 195 | ||||||||
| British India (Calcutta) | 100 | 108 | 110 | 116 | 121 | — | 155 | 153 | 170 | — | ||||||||
| South Africa | 100* | 106* | 114* | 127* | 129* | 135 | 139 | 177 | 197 | 172 | ||||||||
| Australia | 100 | 131 | 130 | 126 | 132 | 140 | 147 | 160 | 194 | 181 (March) | ||||||||
| New Zealand | 100 | 112 | 119 | 127 | 139 | 145 | 144 | 158 | 171 | 174 (Feb.) | ||||||||
*Notes.—United Kingdom.—The figures relate to the first day of the month following that named.
France, other towns.—The figures include fuel and light; the number 380 relates to June not July 1920.
Switzerland.—The numbers relate to June not July in each year.
Belgium.—The base is April 1914.
Netherlands.—In some accounts 217 is stated for July 1920 instead of 210; the basis in 1914 is the average for the year, not the month of July.
Spain.—The July figures are for the average April to Sept. and the Jan. figures the average Oct. to March each year.
South Africa.—The figures for 1914 to 1918 are the averages for the years, not July only.
Though the movements are by no means uniform, the rise is universal, and, except for a temporary break after the Armistice, continuous in nearly all countries till at least July 1920.
The break in the rise occurred at various dates after June 1920, as shown by figures in Table VI.
Table VI.
Index Numbers of Retail Prices of Food.
(The level of 1914 is taken as 100.)
| 1920 | United States |
Canada | United Kingdom* |
Paris | Switzerland (13 towns) |
Rome | Amsterdam | Norway | Sweden | Australia | South Africa |
| June | 215 | 228 | 258 | 369 | 228 | 325 | 204 | 311 | 294 | 187 | 194 |
| July | 215 | 227 | 262 | 373 | 235 | 318 | 210 | 319 | 297 | 194 | 197 |
| Aug. | 203 | 221 | 267 | 373 | 239 | 322 | 212 | 333 | 308 | 194 | 196 |
| Sept. | 199 | 215 | 270 | 407 | 238 | 324 | 217 | 336 | 307 | 197 | 195 |
| Oct. | 194 | 214 | 291 | 420 | 247 | 341 | 218 | 339 | 306 | 192 | 197 |
| Nov. | 189 | 206 | 282 | 426 | 246 | 220 | 342 | 303 | 186 | 196 | |
| Dec. | 175 | 200 | 278 | 424 | 235 | 375 | 208 | 342 | 294 | 184 | 188 |
| 1921 | |||||||||||
| Jan. | 169 | 195 | 263 | 410 | — | 367 | 199 | 334 | 283 | — | 172 |
| Feb. | 155 | 190 | 249 | 382 | — | 376 | 199 | 308 | 262 | — | 165 |
| March | 153 | 178 | 238 | 359 | — | 386 | 199 | 300 | 253 | 181 | 160 |
| April | 149 | 172 | 232 | 328 | — | 432 | 188 | 300 | 247 | — | 156 |
| May | 142 | 155 | 218 | — | — | — | — | 292 | 237 | — | — |
*Figures for beginning of following month.
The prices are of course strongly affected by the relative value of the currency in the countries, and some indication of the effect may be seen (Table VII) by converting them to a gold basis by means of the exchange on New York. July 1920 is taken as being near the date of maximum prices. Corresponding figures are also given for Jan. 1921.
Table VII.
| July 1920 | Jan. 1921 | |||
| Food index number |
Exchange on New York as percentage of parity |
Deduced index number |
Deduced index number | |
| London | 258 | 76.6 | 198* | 210 |
| Paris | 373 | 39.4 | 146 | 151 |
| Rome | 318 | 27.6 | 88 | 71 |
| Amsterdam | 210 | 85.5 | 180 | 168 |
| Stockholm | 297 | 79* | 235 | 230 |
| Switzerland | 235 | 88* | 207 | 193 |
| Australia | 194 | (approx.) 77 (approx.) | 149 | 142 |
| United States | 215 | 100 | 215 | 169 |
*Obtained by converting through London, thus: 258 × 76.6 ÷ 100 = 198.
Thus if an American had come to London with $198 in July 1920 he could have converted them into as many £ currency as would buy as much food as $100 would have purchased in July 1914. In Rome he would have needed only $88.
It is evident that neither the currency reckoning nor a conversion to a gold basis show the real meaning of the increase of prices; we need also to know the change of income accruing to purchasers, on which some information is given below.
In Germany a calculation of a standard food budget based on official maximum prices in 200 localities was made monthly for the years 1914-9 (Deutscher Reichsanzeiger, Dec. 19 1919). Since the foods could not generally be obtained and there was much evasion of regulations the numbers have hardly even academic interest, and the more important information is that given below under cost of living. The numbers in question yield the following figures (Table VIII):—
Table VIII.
Index Number for Standard German Budget.
| 1914 | 1915 | 1916 | 1917 | 1918 | 1919 | |
| Jan. | 102 | 118 | 161 | 214 | 225 | 253 |
| July | 100 | 152 | 213 | 220 | 231 | 328 |
In Finland (Abo Underrättelser, Feb. 25 1920) it appears that the cost of 1 litre of milk, 5 litres of potatoes and 1 kilo. each of butter, flour, bread, meat, bacon, sugar and coffee rose from 11.68 to 106.23 Finnish marks between 1914 and the beginning of 1920, an increase in the ratio 100:909.
For Japan a correspondent of the London Economist (Aug. 9 1919) gave details showing that the expenditure on food of an ordinary family had doubled in Tokyo between the first quarters of 1916 and 1919.
(b) Other Commodities.—The preceding tables relate (with certain exceptions) to food only. In many countries index numbers of the cost of living including other expenditure are published with more or less regularity. The relative importance given to classes of expenditure in pre-war budgets is as shown in Table IX, each expenditure being expressed as a percentage of that allotted to food:—
Table IX.
| United Kingdom |
United States |
Norway | Sweden | Denmark | Holland | Rome | Milan | Canada | New Zealand |
Uruguay | |
| Food | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
| Rent | 27 | 35 | 33 | 34 | 35 | 35 | 21 | 18 | 66 | 33 | 77 |
| Fuel & Light | 13 | 14 | 9 | 11 | 11 | 14 | 12 | 7 | 19 | 11 | —[3] |
| Clothing | 20 | 43 | 26 | 25 | 28 | 28 | 16 | 19 | — | 26 | 56 |
| Other items | 7 | 69[4] | 40[5] | 58[6] | 36 | 43[7] | 11 | 16 | — | 39[8] | 50 |
It is clear that the methods of establishing the original budgets varied greatly from country to country. Since rent has increased little for those who have not moved and clothing has increased greatly in expense a good deal depends on the relative importance allotted to these items.
The various countries have collected information about the cost of living at different dates in rather sporadic ways. Only the United Kingdom has computed a monthly index from the beginning of the war on a uniform system. No doubt the difficulties of measurement and of obtaining data described above have been experienced in all countries and it would require very detailed criticism to ascertain whether the basis of collection was sufficiently wide and whether the prices were typical. The numbers in Table X must only be regarded as approximate both in respect of amount and of date, but they indicate the periods of increase and show in which countries it has been most rapid. In most countries there has been a shortage of houses and a legal restriction on rent; the figures are based in general on rents which have been hindered from rising. Whether the index number of food exhibited in the previous table or that of the cost of living has increased most depends mainly on a balance between rent and the cost of clothing, and the latter must have been uncertain in all countries.
In general the index numbers show a nearly regular increase from 1914 to the end of 1918, stationariness in 1919 and a rapid rise to a maximum at the end of 1920.
Many of the figures have been given from time to time in the Labour Gazette (London) and the Labor Review (Washington) and in similar publications in other countries. For Table X they have been extracted from the originals in the country to which they re- late as far as possible.
Table X.
Index Numbers of Working-Class Cost of Living at a Fixed Standard
in Various Countries (Food, Rent, Fuel, Clothing, etc.).
| United Kingdom |
United States |
Canada | Norway | Sweden | Amsterdam | Denmark | Rome | Milan | |||||||||
|
100 | 100[9] | 100 | 100 | 100 | 100[10] | 100 | 100 | 100 | ||||||||
| — | 103 | — | — | — | — | — | — | — | |||||||||
| 125 | — | 97 | — | — | — | 116 | — | — | |||||||||
| 135 | 104 | — | — | — | — | — | — | — | |||||||||
| 1916 | |||||||||||||||||
| First quarter | 135 | — | — | — | — | — | — | — | — | ||||||||
| Second quarter | 140 | — | — | — | — | — | — | — | — | ||||||||
| Third quarter | 150 | — | 102 | — | — | — | 136 | — | — | ||||||||
| Fourth quarter | 160 | 118 | — | — | 139 | — | — | — | — | ||||||||
| 1917 | |||||||||||||||||
| First quarter | 165 | — | — | 185 | — | 123 | — | — | — | ||||||||
| Second quarter | 175 | — | — | — | 152 | — | — | — | — | ||||||||
| Third quarter | 180 | — | 130 | — | 166 | 132 | 155 | — | — | ||||||||
| Fourth quarter | 185 | 144 | — | 219 | — | — | — | — | — | ||||||||
| 1918 | |||||||||||||||||
| First quarter | 190 | — | — | 235 | 192 | 153 | 166 | — | — | ||||||||
| Second quarter | 195 | — | — | — | 203 | — | — | — | — | ||||||||
| Third quarter | 210 | — | 146 | 260 | 219 | 170 | 182 | — | 311 | ||||||||
| Fourth quarter | 220 | 174 | — | 264 | 242 | 165 | — | 229 | 346 | ||||||||
| 1919 | |||||||||||||||||
| First quarter | 220 | — | — | 263 | 267 | 171 | 190 | 236 | 352 | ||||||||
| Second quarter | 210 | 177 | — | 262 | 265 | 181 | — | 219 | 309 | ||||||||
| Third quarter | 215 | — | 156 | 258 | 257 | 179 | 211 | 206 | 290 | ||||||||
| Fourth quarter | 225 | 199 | — | 301 | 257 | 191 | — | 238 | 342 | ||||||||
| 1920 | |||||||||||||||||
| First quarter | 230 | — | 177 | 288 | 259 | 199 | 242 | 284 | 378 | ||||||||
| Second quarter | 240 | 217 | — | 295 | 265 | 202 | — | 312 | 426 | ||||||||
| Third quarter | 255 | — | 190 | 331 | 270 | 207 | 262 | 318 | 453 | ||||||||
| Fourth quarter | 270 | 201 | 181 | 341 | 281 | — | — | 365 | 513 | ||||||||
| 1921 | |||||||||||||||||
| First quarter | 250 | — | 176 | 311 | 271 | — | 265 | 379 | 568 | ||||||||
| Second quarter | 249 |
In some other countries there have been occasional calculations on a similar basis. In Uruguay (Boletin de la Oficina Nacional del Trabajo, Montevideo, May-Aug. 1919) the increase in necessary expenditure from 1913 to 1919 is given as 44% for an unmarried and 36 or 37% for a married labourer. In Argentina (Revista de Economia Argentina, May 1920) the increases in food, rent and other expenses are stated as 32, 16 and 165% respectively from 1914 to 1918 and as 45, 50 and 150% from 1914 to 1919. For Hungary (Labour Gazette, April 1921) a statement is quoted that whole family expenditure was in Jan. 1921 47 times as great in currency as before the war; rent had only increased 67%. For Germany an estimate is given (International Financial Conference, Brussels, 1920, Paper vii., statistics of retail prices) that the index number for food, clothing, rent, fuel, etc., in 28 towns was 373 in April 1919 compared with 100 in Jan. 1914, and if 373 is taken for Frankfort-on-Main in April 1919 subsequent numbers for that town are: Sept. 1919 433, Nov. 1919 466, Jan. 1920 630 and March 1920 740.
Change of Standard of Expenditure
In all the tables so far given the index numbers are intended to measure the change in cost of an unchanged and unmodified standard, except that in Denmark there has been a slight change in the relative quantities of butter and other fatty substances. In a few countries, however, the actual change in expenditure (100∑qp÷∑QP in the notation described above, instead of 100∑Qp÷∑QP, the formula for unchanged standard), and in Amsterdam the index number, has also been calculated by using quantities currently bought instead of the original standard (100∑qp÷∑qP).
For the United Kingdom the Cost of Living Committee of 1918 (Cd.8980) compared the expenditure of a standard artisan family in 1914 and the summer of 1918, and found the increase to be 74% to June 1918 and 80% to Sept. 1918, when the increase on the standard budget was 100 and 110%; the difference was partly due to the methods of treating clothing; for food alone in June 1918 the increase in expenditure was 90% and in the cost of the standard budget 108%. The Ministry of Food also made a computation of the change in the cost of the average quantities of some principal foods consumed in the United Kingdom from time to time, yielding the comparison shown in Table XI:—
Table XI.
| Expenditure on Principal Foods[11] |
Index Number for Standard Budget | |
| July 1914 | 100 | 100 |
| Feb. 1918 | 144 | 208 |
| June 1918 | 181[12] | 208 |
| Sept. 1918 | 197 | 216 |
| March 1919 | 181 | 220 |
| Jan. 1920 | 215 | 236 |
The differences point to important modifications of diet under rationing and control of prices; the Cost of Living Committee found that the nutritive value had fallen very little.
In Switzerland an estimate was made by Dr. Jenny (Journal de Statistique et Revue économique suisse, 1918 fascicule i., pp. 76 seq.) of what he calls the “nominal” and the “effective” increase of cost. The nominal increase, viz. that of an unchanged standard of food, was 92% between 1912 and March 1917; the effective increase, viz. the increase of expenditure when allowance was made for the known or estimated diminution in the consumption of bread, meat and the increase in that of potatoes, was only 56.5%.
In Milan the cost of the food actually consumed has been estimated from time to time, and added to the cost of housing, fuel, clothing, etc., these being taken as an unchanged standard after July 1918. Some of the results are shown in Table XII.
Table XII.
Index Numbers Based on:
| Actual Expenditure |
Cost of pre-war Standard | |||||||||||||||||
|
100 | 100 | ||||||||||||||||
| 162 | — | |||||||||||||||||
| 205 | 286 | |||||||||||||||||
| 259 | 351 | |||||||||||||||||
| 265 | 280 | |||||||||||||||||
| 287 | 352 | |||||||||||||||||
| 376 | 441 | |||||||||||||||||
| 441 | 534 |
In Holland (Amsterdam) a more elaborate method is used, for not only has the expenditure been ascertained at frequent intervals (unfortunately of only a very small number of families) but it has been computed (see Table XIII) what the quantities actually bought would have cost at pre-war prices.
Table XIII.
Index Numbers.
| Actual expenditure on food, rent, clothing, etc., at selected dates |
Cost of actual quantities at pre-war prices |
Cost of pre-war budget at current prices | |||||||||||||||||||||||||||
|
100 | 100 | 100 | ||||||||||||||||||||||||||
| 113 | 128 | 132 | |||||||||||||||||||||||||||
| — | 138 | 142 | |||||||||||||||||||||||||||
| 120 | 146 | 165 | |||||||||||||||||||||||||||
| 135 | 166 | 183 | |||||||||||||||||||||||||||
| 128 | 161½ | 177 | |||||||||||||||||||||||||||
| 136 | 166 | 184 | |||||||||||||||||||||||||||
| 152 | 180 | 195 | |||||||||||||||||||||||||||
| 164 | 183 | 193 | |||||||||||||||||||||||||||
| 173 | 200 | 205 | |||||||||||||||||||||||||||
| 195 | 214 | 214 | |||||||||||||||||||||||||||
| 194 | 215 | 217 | |||||||||||||||||||||||||||
| — | 222 | 223 | |||||||||||||||||||||||||||
Table XIII may be thus explained. Expenditure in 1914 was 5.78 fl. (∑QP) weekly, in Dec. 1919 10.00 fl. (∑qp), an increase of 73% (first column). If the same quantities had been bought in 1919 as in 1914 they would have cost 11.85 fl. (∑Qp), an increase of 105% (third column); but if the 1919 quantities had been bought in 1914 they would have cost 5.00 fl. (∑qP), and the ratio of the actual cost to this is 2, which multiplied by 100 gives the number in the second column. Thus the third column gives the index number 100∑Qp÷∑QP, the usual type, and the second gives 100∑qp÷∑qP (where q is changed at each date). It is argued above that the true measure of the cost of living lies between the numbers in the second and third columns. It can be seen that considerable modifications of diet took place between 1914 and 1918-9, but that either they had been reversed or that their effect on cost was nil by 1920.[13]
(A similar computation of the budgets in 1914 and 1918 in the United Kingdom gives 100∑qp÷∑QP = 185, 100∑qp÷∑qP = 202 and 100∑Qp÷∑QP = 212, for food only, numbers corresponding in order to the three columns just discussed.)
In Sweden an elaborate investigation (involving about 600 household budgets each kept for three periods of four weeks) was made in 1916, 1917, 1918. Besides calculating actual expenditure (∑qp) and the cost of a standard budget (∑Qp) the food value in calories is computed (see Table XIV).
Table XIV.
Index Numbers.
| July | Actual expenditure on food |
Cost of pre-war budget at current prices |
Calories in food consumed |
Cost of 10,000 calories |
| 1914 | 100 | 100 | 100 | 100 |
| 1916 | 124 | 130 | 102 | 121 |
| 1917 | 155 | 173 | 90 | 172 |
| 1918 | 233 | 267 | 86 | 271 |
Expenditure thus increased less than the cost of a standard budget, but whereas in 1916 the nutritive value of the diet had increased, owing to some change from meat to cereals which afford more nourishment for the same price, in 1917 and 1918 the dietary was inferior owing to actual dearth and the cost of equal nourishment rose as rapidly as the food index number on the ordinary basis.
In Egypt it was estimated by its statistical department that the cost of living measured by the standard reached in March 1920 was for clerks 138% and for artisans 149% greater than that of the same standard in 1914 (∑qp : ∑qP). For food, fuel and soap only the increases for artisans and labourers on the same basis were to March, July, Aug., Sept., Oct., and Nov. 1920 respectively 180, 181, 180, 180, 185 and 193% in Cairo; in parts of Egypt there was a fall in Nov. 1920.
Reactions of Prices and Wages
Prior to the war there was in the United Kingdom no direct reaction of retail prices on wages, for wage rates were determined 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 Wages, 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 Wages and on Prices.
Prior to the war the movements are indicated by Table XV.
Table XV.
| General Course of Rates of Wages |
Retail Prices of Food in London | |
| 1902 | 93 | 91 |
| 1903 | 92 | 92 |
| 1904 | 92 | 92 |
| 1905 | 92 | 92 |
| 1906 | 94 | 92 |
| 1907 | 97 | 94 |
| 1908 | 96 | 96 |
| 1909 | 95 | 96 |
| 1910 | 95 | 98 |
| 1911 | 95 | 98 |
| 1912 | 98 | 103 |
| 1913 | 100 | 100 |
| 1914 (Jan. to July) | 100 | 100 |
Both sets of figures in Table XV are computed from the XVIIth Abstract of Labour Statistics, except that the level of wages in 1914 is equated to that in 1913 on the ground of other information as to the absence of any important change. The basis of the computation of wages is not sufficiently wide to ensure minute accuracy, and since it depends only on changes of rates it does not allow for the slow but progressive increase of the average earnings of all workers due to the relative increase of the numbers in the better-paid occupations. The inclusion of fuel among retail prices hardly affects the numbers. Rent, however, is known (Cd.6955, p. xxviii) to have increased on the whole less than food prices between 1905 and 1912. The conclusion is that money wages increased nearly step by step with the cost of living in the 13 years in question.
No official index number of average wages had been published up to 1921 since 1913, but there is enough information to lead to a rough estimate (see Table XVI). It should be realized that the figures have not the necessary precision to allow minute calculations to be based on them (Bowley, Prices and Wages in the United Kingdom 1914-1920, p. 105).
Table XVI.
| General Course of Rates of Wages |
Official Cost-of-Living Index Number | |
| 1914 July | 100 | 100 |
| 1915 July | 105 to 110 | 125 |
| 1916 July | 115 to 120 | 145 |
| 1917 July | 135 to 140 | 180 |
| 1918 July | 175 to 180 | 205 |
| 1919 July | 210 to 215 | 210 |
| 1920 July | 260 | 250 |
The wage figures depend throughout on wages for a normal week (reduced in 1918 and 1919) or on changes in piece rates. During the war-years earnings increased so much more rapidly than wages, owing to various facilities for making additional money, that it is probable that an index number for earnings would show as high figures as those in the second column except in 1917. If, however, we pay attention only to rates for nominally the same work, it is seen that prices rose before wages from 1914 for at least three years. If the view is accepted, as argued above, that the official index number tends to show too great a rate of increase, then by July 1918 wages had caught up with prices, and, while in 1919 and 1920 they had slightly passed the official measurement of prices, in fact real wages increased in these years. In 1921 it was too early to trace the effect on wages of the fall of prices that began in the winter of 1920-1; apart from those cases where wages were bound to the cost-of-living figures by a formula, the first influence was felt in unemployment and consequently diminished average earnings, not on rates of wages.
Some examples of the formulae connecting wages with prices are given in the article on Wages, and that governing civil service and salaries is stated above. The general effect was to increase or decrease weekly rates in a lower proportion than prices, but where the proportion was applied to a standard wage higher than that in 1914 the whole increase over that date was at some periods greater than that of prices. Thus the wages arranged in Jan. 1920 for a porter on the lowest scale were as follows:—
| Rate of wages | Money wages in relation to pre-war rate |
Cost-of-living number |
Real wages in relation to pre-war rate | |||||||||||||
|
100 | 100 | 100 | |||||||||||||
| 182 | 145 | 125 | ||||||||||||||
| 209 | 175 | 119 | ||||||||||||||
| 232 | 200 | 116 | ||||||||||||||
| 255 | 225 | 113 | ||||||||||||||
| 277 | 250 | 111 | ||||||||||||||
| 550 | 550 | 100 | ||||||||||||||
If then the cost-of-living index really measures the value of money the porter is better off when prices fall. Where such an arrangement took effect a slight check was put on the circular influence of prices on wages and wages on prices.
So far we have considered the interaction of wages and the prices that enter into working-class expenditure. There is still the question how wages have affected the cost of the unit of output. A bricklayer and his labourer averaged about 14½d. an hour between them in the summer of 1914 and 45d. in the summer of 1920, i.e. three times as much as in 1914; owing to the reduction of hours their weekly rates were only 2½ times the former rate. In industries in general the reduction of hours was rather less, probably about one-tenth on the average, and while the index number for weekly wages was 255 in July 1920 that for hourly wages would be about 285 (July 1914 = 100). There is no certain information by which to connect the change in the cost of an hour's labour with the cost of a unit of output. On the one side it was generally alleged that the pace of work had been more or less intentionally reduced, though this is not substantiated by such figures for piece earnings as are available; and, though in factories there is some diminution of overhead expenses and waste time when the day's work is done in two instead of in three shifts, the general expense of salaries, interest on capital, rents, rates, etc., has to be met out of the diminished hours of work. No doubt the potential energy of the workman per hour is greater in a 48-hour than a 54-hour week, but the increase appears not to have been realized in 1919-20. On the other hand the high cost of labour and of materials (especially coal) stimulates employers to economize their use. In engineering especially many improvements in machinery were made during the war, the use of oil and petrol having replaced in some cases that of coal; in agriculture labour is saved by the use of oil-driven tractors. It is not possible to estimate the net influence of these factors, nor to state numerically in general how far the increase of wages has affected the cost of the product to the purchaser. In the article on Wages are shown the scanty data relating to the general movement of wages in other countries than the United Kingdom, and these can be brought into relation with the index numbers of food and of the cost of living given above.
In Norway wages in the summer of 1918 were about 90% and the cost of living about 160% above the levels of 1914. In April 1919 various rates of wages were from 130 to 210% and the average had probably increased to 180% above 1914, while the cost of living was the same as in the previous year. In spite of reduction of hours weekly wages appear to have gained on the cost of living during the year May 1919 to May 1920.
In Denmark a more detailed table (see Table XVII) can be given:—
Table XVII.
| Hourly earnings | Cost of living | |
| 1914 | 100 | 100 |
| 1918 Aug. | 200 | 182 |
| 1919 Feb. | 224 | 190 |
| Aug. | 338 | 211 |
| 1920 Feb. | 358 | 242 |
| Aug. | 396 | 262 |
Hours were reduced in 1919 till at the end of the year an 8-hour day was usual as compared with 10 hours before the war. Real weekly earnings had evidently increased considerably before 1920, and in April of that year it was agreed that future increases should be proportioned to the cost of living.
In Germany we have the computation shown in Table XVIII. (Labour Overseas, Ministry of Labour, London, Oct.-Jan. 1920, p. 51):—
Table XVIII.
| Date | Average weekly earnings of male adult |
Weekly minimum cost of living (four persons) |
Earnings in proportion to cost of living |
| Marks | Marks | ||
| Aug. 1913 to July 1914 | 35 | 29 | 1.21 |
| Aug. 1919 | 100 | 130 | .77 |
| Feb. 1920 | 170 | 254 | .67 |
| Nov. 1920 | 210 | 316 | .76 |
The Official Year Book of New Zealand (1919) gives figures which are shown in Table XIX.:—
Table XIX.
| Year | Average minimum hourly rates |
Weekly hours |
Weekly rates |
Retail food prices |
| 1911 | 1000 | 1000 | 1000 | 1000 |
| 1912 | 1006 | 1000 | 1006 | 1035 |
| 1913 | 1036 | 998 | 1034 | 1055 |
| 1914 | 1087 | 986 | 1072 | 1102 |
| 1915 | 1094 | 985 | 1078 | 1218 |
| 1916 | 1152 | 983 | 1132 | 1290 |
| 1917 | 1200 | 982 | 1178 | 1384 |
| 1918 | 1258 | 982 | 1135 | 1513 |
| 1919 | 1418 | 979 | 1288 | 1537 |
More than the minimum may have been paid in skilled trades and other items of expenditure may have risen less than food.
Table XX. shows how earnings (as distinguished from rates of wages) moved in New York state in relation to the cost of living:—
Table XX.
| Average weekly earnings in factories in New York state |
Cost of living index number for the United States | |
| 1914 Dec. | 100 | 100 |
| 1915 Dec. | 107 | 101 |
| 1916 Dec. | 123 | 115 |
| 1917 Dec. | 140 | 139 |
| 1918 Dec. | 185 | 170 |
| 1919 Dec. | 209 | 193 |
| 1920 May | 224 | June 210 June |
- ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 Omitted after 1914.
- ↑ 2.0 2.1 Omitted prior to 1914.
- ↑ fuel and light included in other items.
- ↑ including 13 for furniture
- ↑ including 3 for taxes
- ↑ including 14 for taxes
- ↑ including 2 for taxes
- ↑ including 3 for taxes
- ↑ Average for 1913.
- ↑ The original figures for Amsterdam are based on a calculation for 1910-1; it is estimated from other data that prices rose 7% between 1910 and 1914 and the numbers are adjusted on this assumption, but they can only be regarded as approximate when 1914 is compared with other years; for the sequence beginning 1917 the relative numbers are correct.
- ↑ The figures in this column are those stated in the Labour Gazette for two months later, but it is known that the computation was in arrear of the facts, at least at the earlier dates.
- ↑ 190 if all the foods of the standard budget were included.
- ↑ The double estimate is now given up and the index number is now computed on the standard of March 1920.