ices decline. It is in these periods that
chance is afforded of bringing about genuine improvement in the economic
position of the least favorably placed groups of wage earners.

Secondly, the price decline may be a sign of reaction from a previous
period of rapid price increase, and of a general tendency on the part of
entrepreneurs to keep down production costs and to proceed with
circumspection throughout. Nevertheless if little forced liquidation
occurs; if there has been no serious overextension of credit during the
previous period; if the maintenance of the existing price level, or of a
slightly lowered one, would not impose too great a strain upon the
banking system--there would be no good cause to reduce wages. This
judgment rests on the supposition that the facts of the industrial
situation give promise that industrial recovery will take place even if
prices do not drop greatly, and drop gradually rather than sharply.

Thirdly, the price decline may be caused--at the beginning at all
events--by much forced liquidation of a character that is disastrous to
the enterprises compelled to liquidate. It may have been preceded by a
great over-expansion of credit; and the maintenance of the existing
price level might mean a steady source of danger to the banking and
commercial system. Then the soundest policy is to reduce wages as prices
fall. To the extent that the trouble may be due to special causes such
as over-investment in particular directions, this reduction of wages may
be unnecessary. But it will probably be found that the recovery from a
genuine industrial crisis will be facilitated if a heavy price decline
is stimulated by wage reduction.

No wage reductions should be undertaken unless conditions making the
case are clearly present. The central authority could avail itself of
the advice of the Federal Reserve Board. The lowering of wage rates
might be put off until the price decline has reached, say, eight or ten
per cent. And the percentage of the reduction of wages might be smaller
than the percentage of price decline; say, a three per cent. reduction
of wages for every four per cent. reduction in prices. Lastly, when it
is judged that the pressure on the financial system is definitely at an
end, no further reduction in wages should be ordered even though the
price decline continues.[134]

In concluding this discussion one general reflection may be permitted.
That is to the effect that no policy of wage