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Potential Production

The combined effects of long-time trends, technological change affecting the manpower required for a given volume of production and sensitivity to depression may be seen in the following chart, XVII. Here the potentialities of 1938 are set forth in contrast to the actualities of 1935, for the major segments of the whole economy. The totals for each segment here shown represent the 1938 distribution of employment which it is estimated would correspond with the full use of manpower, taking into account trends in consumption habits and technological changes. The assumption of no unemployment is unrealistic in view of the fact that at no time since 1920 have there been fewer than one and one-half million unemployed. The figures for no unemployment are used because of the absence of a basis for estimating the minimum feasible unemployment. The black portion of each segment represents the actual employment in 1935, reduced to the equivalent of full-time employment. The size of the difference indicates the areas where the absolute increase in em

ployment which would accompany the full use of resources is greatest. A comparison between the black and gray portions of each segment shows the percentage increase which would correspond with full employment under these conditions. The data for construction are very inadequate and the estimate of potential employment is less reliable for this than for other segments. International Trade

One more major element in the structure of production needs to be considered- international trade. So far only production within the United States has been considered. Actually part of the product of American industry is exported in exchange for commodities and services from abroad. The total volume of exports, including services to foreigners in this country, in 1935 amounted to 2,360 million dollars or approximately 5 percent of the country's total production. The propor

5 This percentage is derived as follows: Total production including services in 1929 dollars for 1935 is 62,849 million dollars (as given by S. Kuznets in Commodity Flow and Capital Formation); total exports including services in 1935 amounted to 2,360 million dollars or 3,159 millions of 1929 dollars (derived from data of the Bureau of Foreign and Domestic Commerce. The ratio is 5 percent.

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1 Bureau of Agricultural Economics, mimeographed release of May 21, 1938. Gross farm income.

2 Bureau of Foreign and Domestic Commerce, total agricultural exports.

3 Bureau of Mines, total value of all minerals produced.

Bureau of Foreign and Domestic Commerce, total value of minerals included in exports of crude materials.

Estimated by applying percentage change in a value index to the 1935 census figures.

All manufactures and semimanufactures.

7 Bureau of Foreign and Domestic Commerce, Finance Division.

8 Value of crude agricultural exports plus value of exports of crude foodstuffs plus estimated value of raw materials contained in exports of manufactured foodstuffs &nd semi-manufactured and manufactured agricultural products.

Estimated by applying ratio of value added to value of product (according to 1935 Census figures) to estimated value of product in 1937.

10 Estimated by applying appropriate ratios to exports of all manufactures.

The total exports (both commodities and tourist expenditures) each year since 1919 are given in chart XVIII in terms of 1929 dollars. Table VII-A shows

CHART XVIII

U.S. IMPORTS AND EXPORTS OF GOODS AND SERVICES

MILLIONS OF 1929 DOLLARS

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1920

1925

1930

1935

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EXPORTS

1930

1935

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Source: Bureau of Foreign and Domestic Commerce. in 1929 dollars.

Chart shows values expressed

the proportion of national production of commodities that has been exported in each census year, without any adjustment for price changes. Total exports show a declining trend both in absolute amounts and as compared with total production. The changing composition of exports is shown in chart XIX. A little more than half the value of total exports is made up of finished manufactures, while raw materials are next in importance. During the depression, more raw materials were exported and correspondingly less finished manufactures; and with recovery, exports of raw materials have fallen sharply in proportion to the total, while exports of finished manufactures, especially machinery and vehicles, have taken their place. Exports of semimanufactured goods have shown a steady, though slight, increasing trend in proportion to the total for the entire period of 1919 to 1937.

TABLE VII-A.-Total production of goods and proportion exported, 1919-37

[Millions of dollars]

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1919.

1921.

1923.

1925

1927.

1929

1931.

1933.

1935

1937.

Year

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Source: Bureau of Foreign and Domestic Commerce, Summary of United States Trade With World, 1937, p. 39.

1 Not yet available.

2 Based on a rough estimate of value of total production.

The primary function of these exports when considered in terms of the whole economy is as an exchange to obtain goods which cannot be produced in this country or which would cost more to produce in this country than other things which might be exported in exchange for them. As has already been indicated, approximately 40 percent of the country's imports (including imports from Hawaii and Puerto Rico, and expenditures of Americans abroad) in 1929 was made up of tropical products and minerals not available in the United States, while another 15 percent was made up of services rendered to Americans abroad as tourists or on business. The remaining 45 percent of imports was made up of things most of which could have been produced in this country but which can be obtained more cheaply by exchange. Thus the country exchanges American produced cotton for Japanese silk, wheat flour and cotton cloth for Cuban sugar, and raw cotton for French brandy and wines. Total imports are

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shown in chart XIX and XX, divided into the different major categories. The presence of tariffs both in this country and abroad tends to reduce this type of desirable exchange but has at the same time the advantage that it somewhat reduces the impact of foreign conditions on particular industries in this country.

In a general way, exports and imports rise and fall together; both have shown great sensitivity to depression, exports dropping in 1932 to 68 percent of their recent predepression trend and imports dropping to 86 percent of their corresponding trend. The composition of imports in terms of the degree of fabrication shows less marked trends of change than that of exports, the proportion of each major category to the whole being shown in chart XX.

While American imports and exports in recent years have tended to be of approximately the same magnitude and offsetting, there are financial transactions in addition as long- or short-term investments are made. or retired between countries or as the profits from investment are realized. Such financial flows and their repercussions on production will be discussed in chapter VI.

The preceding pages represent an effort to indicate the main structural characteristics of production as reflected in the data for the period since the World War. These characteristics are altogether too complex to be summarized in a single paragraph. Yet certain outstanding items can be brought into review. In respect to proportionality the outstanding characteristics which call for note are (1) the greater amount of both manpower and capital employed in agriculture than in manufacturing, yet the very much smaller money value attached to the agricultural contribution to production than to the contribution of manufacturing, a difference which can be partly explained by the low level of agricultural prices; (2) the high proportion of capital invested per worker in the public utility field; and (3) the relatively large contribution to na

tional production made by governmental and financial activities even when the post office and education are excluded. In respect to the changing character of production through time after adjustment for depression influence there are two most striking characteristics. First, there is the tendency for a decline of employment in the extractive segments, agriculture and mining, the lack of any significant post-war trend toward expanding employment in manufacturing and in utilities as a whole, the contraction of railroad employment counterbalancing expansion in other utility activities and the trend of expanding employment in trade, service to the consumer and in the field of government and finance. Second, there is the slight tendency for production to be shifted from nondurable to durable goods. Thus the economy as a whole is undergoing gradual changes in the relative emphasis likely to be placed on different types of productive functions when resources are fully employed.

In respect to depression behavior, the various economic functions show varying degrees of sensitivity to depression forces, the most stable being agriculture and governmental activity while the most sensitive are mining, manufacturing, especially of durable goods, and construction. The greater sensitivity of production in these latter segments is linked with a smaller depression sensitivity of prices. The implication of this will be considered in chapter VIII. Altogether the structure of national production, expanding over a period of years with the increase in the labor force and with improving techniques of production but frequently falling way below the full use of resources, shows a gradually changing proportioning of activity through the years and quite marked differences in the sensitivity of different types of activity to depression. The reasons for the failure of production to be maintained at a level which will fully employ the available resources will be discussed after the financial overlay to production has been considered.

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In the two preceding chapters on the structure of production, attention has been entirely focused on the concrete physical activity of production, its location, and its characteristics. But the bulk of productive activity, apart from home production for home use, is carried on at least in part through the use of money, and the process of production is punctuated by money transactions. It is the purpose of this chapter to indicate the way in which these transactions in combination involve a continuing flow of money overlying production, to show the magnitude of the major money flows and to discuss certain of the factors affecting them.

Money Flows Overlying Production

At frequent and irregularly spaced intervals in the production process money changes hands with respect to some phase of that process. It is successively involved in the long drawn-out activity whereby cotton is raised, ginned, transported to the cotton mill, spun into yarn, woven into cloth, transported to the clothing manufacturer, made into overalls, distributed in bulk to wholesalers, broken into smaller lots and distributed to retailers, and finally distributed, one pair at a time, to the ultimate consumers. A series of money transactions prick out the pattern of production as the farmer pays for seed, rents land, hires cotton pickers, sells his cotton; as the ginning of cotton and its transport are paid for; as the goods change hands in the successive steps toward the consumer; as each producer hires workers, pays for materials and power, pays taxes for the services rendered by government, and pays interest and profits to the holders of financial interests in the enterprise.2

In this manner a long series of money transactions outline the physical process of production with considerable detail, yet all of the separate steps in production are not reflected in money transactions. Within a single enterprise production goes on without money changing hands at each stop. There is no separate money transaction as the cotton is put through each of the separate machines in the textile mill. Only as goods are transferred between economic units, or as factors of production are supplied by individuals or

1 Productive activity is also carried on within other consuming units for consumption within the units as is the case to some extent in children's or old people's homes and army camps.

There is some question whether interest, dividend, and tax payments are properly included as involving transactions. They are clearly part of the circuit flow of money and will be included as transactions in this discussion.

enterprises to other individuals or enterprises, does the productive process involve money transactions.

The more highly integrated an industrial process, the fewer the money transactions as the goods move toward the consumer. The Ford Motor Co. can mine ore and coal, make steel, and fabricate it into automobiles without money transactions intervening between these steps. But even in such a highly integrated process of production, money transactions outline the different stages as wages are paid for the different types of activity, taxes are paid on different properties, and materials have to be bought.

Even in the case of government where most services are rendered to business or ultimate consumers without any specific charge for the specific service the process of rendering services is pricked out in money terms as salaries are paid to school teachers, as the labor and material costs of road building are paid, as judges and police are paid, and as the multitude of other productive activities of government are financed.

Thus, for practically the whole of productive activity, except that carried on in the home, there is a pattern of financial flows overlying the physical flows of production. At intervals the financial flows are attached to the physical flows by money transactions. In the following discussion, the structure and magnitudes of these money flows will be sketched as far as possible. At many points, particularly with respect to saving, there are insufficient data available to show magnitudes; at some points there is so much confusion of understanding that even if data were available there would be disagreement as to how they should be interpreted. In spite of its inadequacies, this sketch of the financial overlay to the productive structure is given because of the fundamental importance of financial factors to the functioning of production. The character of the major money flows will be taken up first and then their magnitudes.

The Major Money Flows

The major financial flows and the main production flows differ both in the direction and in the circularity of flow. Production moves by successive steps towards the consumer while the money flows directly connected with production move in the opposite direction. Production, with rare exceptions, is a straight line flow toward the consumer, ending with the latter. Money flow is in the main a circular flow, the same dollars

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