lowest
industrial classes can be effectively protected merely by wage
adjustment. When supplies are short, if their distribution is left to
the free play of the market, the poorest classes must come off badly.

3. There remain for consideration those questions of wage adjustment
which are presented by downward price movements. They are two in number.
Firstly, is there any reason why wages should be reduced during a period
of declining prices? Secondly, if they should be reduced, on what basis
should the reductions be arranged?

In reference to the first question, three different types of situations
may be distinguished on the basis of the analysis of the effects of
price declines given in the preceding chapter. The first type is that
in which the decline in prices is due to some such cause as the progress
of invention or the development of the means of transport. In this case
the fall of prices is brought about by an increase in the quantity of
goods produced, and there is no reason why wages should be decreased.
Indeed, there may even be occasion for an increase.

The second case is that in which the decline in prices marks a period of
reaction from a previous period of price increase and a tendency to
limit production costs and to proceed cautiously, but is not accompanied
by much forced liquidation and is not the result of any urgent necessity
to reduce bank credit. In short, when the business conditions
accompanying the price decline do not warrant apprehensions of a crisis,
serious as they may be temporarily. Price declines of this sort may be
considerable in extent; they will be gradual rather than violent. They
are apt to be characterized by less dispersion than those which are
precipitated by crises. In this case also there would seem to be no good
reason why wages should be reduced. A decline of prices would be
desirable, it is true. The industrial position would be improved thereby
and industrial activity would be put upon a sound financial basis. Some
contraction of credit is to be desired if, as is assumed in this case,
the period of decline was preceded by one of considerable price increase
and credit expansion. But these results may be obtained without any
reduction in wage rates. The cost of labor will fall without any
reduction in wage rates, as the amount of overtime work is lessened, as
employment is concentrated upon the more efficient workers, and as
workmen put more energy into their jobs in or