briefest consideration of some of these policies and, above all, of their cumulative effect is enough to indicate why American capital is timid. The effect of the undistributed-profits tax has been sufficiently dilated upon. The excessive and one-sided capital-gains tax must alone have an effect of the first importance. When men who are asked to put their money into new business ventures stand to lose the entire amount if they fail, but to retain only a minor fraction of their gains if they succeed, the timidity of risk capital cannot be regarded as mysterious. The "emergency" money powers granted to the President and the unbalanced Budget add to the elements of uncertainty. The workings of the Wagner Labor Act and heavy pay-roll taxes add to the difficulties of employers and place serious obstacles in the way of full employment.

*

The President, as his letter to Senator O'Mahoney illustrates, has ignored or underrated these psychological factors. He tends to view "the financial machine" as if the difficulties were purely in "the mechanism." But American capital is idle largely because of understandable timidity, and idle money is certainly one of the major causes for idle men.

Senator Arthur H. Vandenberg also believes that existing taxes are repressive, and argues for tax exemptions and tax rewards as a desirable means for stimulating employment. He terms such exemptions and rewards "incentive taxation," which he would have replace "punitive taxation" as represented by the undistributed profits tax.56 For example, he advocates tax concessions to producers if they increase their output. But Vandenberg does not propose to use the taxing power in the customary manner. He would use it only in the sense that he would progressively grant offsets and reductions in taxes in return for desirable economic behavior. (Evidently, too, Vandenberg has a different definition of "incentive taxation" than the author has.) It has already been brought out that there are many people who believe that a major obstacle to full employment lies in a "financial machine" which inadvertently bestows upon capital the opportunity to hoard, and that these people believe that the privilege should be modified. The parties quoted above, however, tacitly premise that the privilege should be continued in its present magnitude. They tacitly premise that the freedom of private enterprise should include the privilege to withdraw from private enterprise, and that if hoarding is resorted to, concessions should be given to the hoarders to make them change their minds. They would resort to what the author calls "incentive concessions" instead of "incentive taxation" to spur economic activity. Traffic officers deem automobile speeding to be an evil, and try to check it with fines and penalties. The men quoted above, however, even though they recognize the idleness of money to be an evil, would check it, not with penalties, but by reducing as it were the culprit's license fees, property taxes, income taxes, etc., as a reward for behaving as he should behave in the first place.

Just as one could undoubtedly dissolve a general strike of labor by luring the workers back into production by reductions in their property taxes, so one could undoubtedly lure idle capital back into production by systematic reductions in income taxes, corporation taxes,

etc.

If that recourse were resorted to, however, what would one do after compensatory tax concessions had been granted at the beginning of several depressions and the stage had arrived where no taxes remained to be reduced to furnish the necessary incentive to renewed. action? It seems that basically the hoarding privilege should be

See New York Times, October 29, 1937, p. 7, column 2. Cf. his statement in Senate Report No. 610, 76th Cong., 1st sess., on "Survey of Experiences in Profit Sharing and Possibilities of Incentive Taxation," 1939, p. 6.

countered with laws and rules which make hoarding unfeasible, and that to grant tax concessions until the bait overcomes the desirability of hoarding will only lead to accentuated concentrations of income and wealth and to the development of more violent depressions in the future.

If the privilege to hoard is continued as the men mentioned above premise it should be, the quoted sources are probably correct in their view that venture capital will not be forthcoming unless certain legislation is changed. After all, ours is an economy which both relies exclusively on the prospects of profit to induce our savers to invest and simultaneously provides the savers with an island of safety to which to retreat should the profit prospects appear too dim. So long as we provide savers with the alternative of safely withdrawing from production, there is little doubt that new tax policies and new changes in the rules of the game might easily induce capital to remain idle. Our Congress may indicate through its legislation that it desires high income tax rates in the higher brackets, that it favors the existing S. E. C. regulations governing the issuance of new securities, that it supports Government spending for relief purposes, etc., but if its legislation causes money holders to "lose confidence" in the profit possibilities of the future, unemployment will result from its legislation. Today Congress seems to have the choice either of requiring that capital continuously offer itself to the markets for the best price it can get for its services-whatever that price may be (in the same manner as farmers, most workers, and dwelling owners in effect do)—and then of passing legislation which on its merits the community endorses, orif it elects to permit money to withdraw from the channels of trade-of eschewing all legislation which might cause money holders to abstain from spending. If one makes it both moderately safe and profitable for money to shun private activity, one is naturally limited in the degree to which one can decrease the rewards for taking risks, justifiable though such decreases may be on sociological grounds. Businessmen generally contend that the Government must lighten its regulation and control over potential investors until those investors deem it advisable to invest at higher speeds. The logical alternative exists, however, to drive money by a tax on loitering, instead of tempting it into action by the removal of taxes which chill its fervor.

Were labor to withdraw from production on such a wholesale scale that millions of men were thrown into unemployment, the withdrawal would be called a "general strike." Our Government might even break up such a withdrawal with its Army and police force in the manner that the French and British Governments did in recent times. But when money capital withdraws from production and idle money generates idle men, the resultant unemployment and liquidation is suffered without public criticism of the laws which permit money capital to withdraw. Even when the Government acts to neutralize the effects of the withdrawal by borrowing the idle money at interest and then spending it for relief and public works, many possessors of idle capital advocate a balanced budget in order to "restore their confidence."

In time of war or in time of national danger, when it is customary to forbid labor to withdraw from the productive process, it is doubtful whether the State can safely continue to give to money savers unlimited liberty in deferring the use of their money claims.

If capital is to be permitted to withdraw from production every time it sees legislation that it does not like, improvement of the social order will probably always be difficult. Under such a set-up a government might always have to tolerate business arrangements— whether harmful or not-that potential investors demand upon the threat of strike.

George Richmond Walker vividly and vigorously designates those with money to invest as a "super-supreme court."

Enact reforms, and they will be declared objectionable. Elect your Congressmen and President, and their efforts will be frustrated. Those with money to invest have power; they are above the Government and above the law; the people may vote but they will rule

*

*. They hold prosperity in their pockets, and they will dispense it when they please * The right to hoard is the power to sabotage. It is the right to sell without buying, to interrupt the processes of trade, and to bring productive industry to a standstill. The money-hoarder, not the Government, is the enemy of business * * *. The privilege of not spending is the power to obstruct. It is a power that is pervasive, subtle, and unseen, for it lies not in acting but in not acting. It holds the Nation in its thralldom at the present time * ** # It blocks the creative energies of the people * and makes mockery of their democratic institutions and their freedom. The power is felt by the people but it is not understood. They blame each other or the Government, while they hope for better times. thinking is entangled in a myth: "A man's money is his own," they suppose, "and you can't force him to spend or invest unless he wants to." This myth is carefully preserved. It is sacred to the theory of capitalism. Bankers, professors of economics, and Government officials are agreed: "You must induce investors to invest; you cannot force them." Very well. But see what this implies:

*

*

*

Their

Investors are induced by profits. No matter how much money they have to invest they have a right to invest it all at a profit or to hold it idle But how is it possible to invest at a profit? Industry is operating at 60 percent. Industry does not need new plants, and therefore it is irrational that new ones should be built. There is no market for the products that new plants would turn out And so we must make up our minds to this fact; investment will not take place on any substantial scale so long as there is excess plant activity. We must wait until excess capacity has dwindled through depreciation, obsolescence, and bankruptcy. The only way to induce investment is to let deflation run its course. Let wages fall, let prices decline, let machinery rust, let produce rot in the fields; it is the way to recovery under capitalism.

The evil power of capitalism lies in the right to hoard money; it does not lie in the private ownership of the means of production. Karl Marx was wrong. The owner of a factory must run it or he will go bankrupt with upkeep and taxes. The worker must work or go hungry. The farmer must sell his crop or else it will spoil. The shopkeeper must go on doing business or he will go broke. But those who have money are not under any compulsion. Money will keep. It costs nothing to hold money idle."

That business would recover vigorously today if legislation disadvantageously affecting the incomes of people in the upper income groups were modified is highly probable. From 1929 to 1933—when industrial activity was contracting even though our currently criticized legislation was not then on the statute books-"confidence instilling" legislation would not have brought on recovery, but in 1940, after decade of factory depreciation and machine obsolescence, it might easily do so. As soon as the present deficiencies and depletions were provided for, however, and the volume of new investment

57 In an article "Set America Free" in the October 1939 issue of Free Economy. See also his article "The Case for Monetary Reform," Dynamic America, November 1939, pp.

went beyond a certain ratio to the purchasing power available for consumers' goods, the prospects of return would again look dim to investors, and capital would once more withdraw from the industrial process. Lightening the social controls over capital might easily make for a short lived boom, just as a rapid injection of billions through a government spending program might do, but the boom would be purchased by diverting additional government benefits to people who probably need them least, and without removing the particular privilege which is probably one of the major obstacles to continuous operation of industry under private enterprise.

GOVERNMENTAL INSURANCE OF BUSINESS SOLVENCIES

Two other proposals of more interest, perhaps, than importance— are those suggested to the T. N. E. C. by Joseph Freeling 58 and Joseph Greenberg. 59 Greenberg also desires to spur investment by increasing business confidence, but he proposes to achieve it through a system of insurance. He would have businessmen insure their solvencies with the Government at a premium which would vary in size with the values and time periods involved. Even if an arrangement such as he suggests were feasible, which is highly doubtful, it could at best only even up or distribute the losses from business failure; it could do nothing fundamental toward forestalling the oncoming of business depression itself.

PUBLICITY TO INSTILL CONFIDENCE

Freeling premises that there are many people who both need consumers' goods and have purchasing power and yet defer their buying unduly. He would instill in these people a greater propensity to spend by organizing the radio, the press, the motion pictures, the schools, etc., to present to them "reasons" why they should buy sooner than later. Freeling is undoubtedly correct in believing that in times of depression consumers in the lower-income groups are more tardy in their spending than at other times, but it is very doubtful that such public appeals as he suggests would instill any more confidence in consumers than did the extensive "Buy Now" billboard campaigns which characterized the early years of the 1929 depression. There is good reason to believe that the propensity of consumers to spend swings up and down with the indexes of employment; that it is not in itself a causal force but a variable which fluctuates with variations in the volume of investment spending.

58 Address, 1769 Townsend Avenue, Bronx, N. Y. Address, 110 Belmont Avenue, Newark, N. J.

CHAPTER IV

MONETARY-INSTITUTIONAL REVISION: ABOLISHING OR PENALIZING DEBT AS A FORM OF CONTRACT

INTEREST PAYMENTS MADE UNCOLLECTIBLE

Even granting that means can be devised to reduce interest rates to zero, to reduce the interest burden to nothing, and to prevent falling prices, foreclosures, and disruptive changes in ownership from occurring-that is, even granting that means can be employed largely to forestall the customary ravages of debt, there are those who, like H. F. Stoke1 (in a communication to the T. N. E. C.), raise the profound question, "Why should not the State abolish the debt agreement as such as a permissible form of contract?" His is an unorthodox but valid question which the world largely fails to ask. Despite the fact that for centuries governments have enforced the debt contract as a permissible form of transaction, Stoke suggests that private interest charges should properly be made uncollectible by law. For, in his opinion, enforcement of the debt contract operates in the long run to choke industrial activity.

As brought out on page 17, the making of debt agreements is not only a means by which investors or providers of money are largely able to absolve themselves from the hazards of doing business when they permit their money to be put to use, but also a means by which they assure themselves of the ownership of the business should future levels of industrial activity fall sufficiently below the borrower's expectations. What would happen if the State ceased to enforce contracts which called for fixed-rather than contingent-monetary returns? Nothing but good, says Stoke. To him the State's permission to citizens to enter into debt agreements is-like its earlier permission to citizens to sell themselves into slavery-a basic social evil. Writes Stoke:

In prosperous times debt is incurred in the hope of gain; in bad times because of necessity. But whatever the reason for which debts are incurred, the lowering of the fortunes of the borrower, whether isolated or because of a depression, has the same effect. Rope a wild bull, and snub the rope around a post. The bull may outclass you 10 to 1 in weight and strength, but by taking up slack as he plunges, soon you have him with his head jammed against the post, and in subjection. Interest is like that; it always tightens its hold in the slack period; it gets its man, its age, its civilization. Debt is the mortal enemy of the capitalist system. America has furnished it an ideal hot-bed of peace, order, and favorable law, so its ravages have been more rapid here than any time or place in history. The 50 years since the pioneer period ended see it fully in control of our economy, which it is now destroying. The billion dollars it extracts monthly from the producers of real wealth, and those who render service, accounts for the growing annual

1 Address, 1420 Watts Avenue, Roanoke, Va.