national deficit. It is solely a financial middleman's fee, for which there is not one iota of material return.

No better example of the way the credit system extracts not only the profits but the capital from industry is to be found than in a study of the American railways. The Missouri Pacific Railway, which was recently put through the wringer by the Interstate Commerce Commission, is a characteristic example.

On a foundation of $152,000,000 in capital stock, had been erected a debt structure of more than five hundred millions, or a ratio of debt to direct investment of 3% to 1. Now this did not happen overnight. At one time the road was solvent and paid dividends; but a time came when net operating earnings fell below interest charges. The excess of interest had to be paid out of capital. First to go was surplus, followed by depreciation reserves. When replacements became imperative, borrowing had to be resorted to. Borrowing meant more debt, more interest, more deficit, more borrowing. The ever-revolving vicious circle spun faster and faster * until no more loans could be secured and strangulation resulted because of want of operating capital.

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In recent years the road had been making an annual operating profit of $7,000,000, or $8,000,000, but the interest overhead was more than $20,000,000. In simple terms, * $12,000,000 to $18,000,000 of the road's capital had to be added to meet the annual interest bill. When the end came, stocks were "found to have no value, and the holders of those stocks are given no participation in the securities of the new company." In a word, the capital structure had become wholly a debt structure.

Why, it may be inquired, was borrowing continued to such ruinous lengths? Simply because it was the only way working capital could be maintained. The public had become too wise to buy stock in such a set-up, just as today they prefer to hoard rather than to make direct investment in a tottering economy. It is sadly significant that 90 percent of the new security issues of the last 6 years are bonds, and only 10 percent are stocks. In reorganizing the Missouri Pacific the I. C. C. reduced the junior bonds to stocks. The I. C. C. missed an opportunity to make financial history by failing to convert all bonds into stocks. Instead, they issued bonds in sufficient amount to absorb the present earnings of the company, presaging a future wringing process.

If Missouri Pacific had been financed by stocks only, it would have been solvent and paying dividends today. This is mathematically demonstrable from the fiscal records of the company. If I. C. C. had refinanced it with stock issues only, it would certainly survive many roads that are solvent today, but staggering along under a load of debt.

Missouri Pacific presents in miniature a picture of our entire economy. Now, with the nation's wealth mortgaged beyond debtor's power to pay, with investors unable to find well-secured interest-bearing securities, and wisely refusing to take the hazards of direct investment, what hope is there in coaxing or coercing idle capital into high-velocity action?

A conservative plan for the gradual elimination, first of private long-term corporate or business debt (housing loans not included), and then of public long-term debt, is that of Irwin S. Joseph, 132 West Thirty-first Street, New York, in The Debt Problem and Its Effect Upon Our Economy (booklet published by himself), March 1940. (See his revised booklet, Part 4, of this monograph.)

THE DEBT INSTRUMENT AND HOARDING AS EXPROPRIATORY TOOLS

We must realize, however, that it is the wild variation in rate of use of money which is the factor that is mainly responsible for making the debt instrument so effective in its expropriatory role. It is one thing to have creditors inherit what is left of a failing business in periods when the aggregate monetary demand is stable. For at such times poor management is probably the main cause of the failure. But it is quite another matter to maintain rules which permit creditors to inherit defaulting businesses during periods when not poor man

agement but retreat of money from the channels of trade is responsible for the defaults. Even though one may question the social advisability of protecting one group of risk takers at the expense of another even when money flows steadily and continuously, one cannot entirely attribute the seriousness of the convulsions depicted by Stoke to the existence of fixed debt as a business form. There seem to be two questionable arrangements in existence which operate to generate expropriations and distributions like those depicted. It is the combination of fixed debt and the right to hoard which together generate situations like that illustrated by the Missouri Pacific. Recurrent sprees of capital spending and capital hoarding-with the rope of debt hitching the bull of ownership ever closer to its post-can by themselves have tremendous effects upon the distribution of income and the concentration of economic power.

Orthodox economic theory has historically limited itself to studying distribution under "equilibrium conditions"-under conditions where capital spending is unrealistically premised always to the stable. It believes that it can understand distribution without reckoning with those repetitious business-cycle convulsions which expropriate the financially distressed. Consequently even today it does not discuss how existing distribution might be largely the result of "squeezeplays" in times of depression; how they are not simply the result of free bargains struck in the labor, land, and money markets between the contributors to production. An illustration will bring out the joint roles of fixed debt and periodic hoarding on the distribution of the national income.

Suppose that from 1870 to 1940 distribution between the factors of production remained constant; that during the whole period wages received a hypothetical 65 percent of the national income, entrepreneurial return 10 percent; land, 5 percent, and interest and dividends. together, 20 percent. Suppose that while this was going on, the distribution of the income between families was nonetheless changing continually so that instead of, say, the richest 10 percent of the population receiving 25 percent of the national income in 1870, 1 percent of the population comes to receive that 25 percent in 1940. How could this altered distribution-not between the "factors of production" but between real people-occur?

Suppose that during a period of stable business activity prior to a depression, a John Jones earned $200 per month as wages; that his wages constituted a routine 65 percent of the value of the product on which he worked, and that he also owned a $7,000 house on which he annually received a rental return equivalent to his pro rata share of the national income that was currently going to "rent." Under such suppositions Jones is a recipient of both labor and investment return and is holding his own in relation to other workers and owners. Ownership and income are being neither concentrated nor diffused. But suppose investors slow down their rates of spending until the activity of the Nation is cut in two, that as a result Jones along with others receives only $100 per month in wages instead of $200 as before, and that he also receives only one-half as much rent as before. Suppose this reduced income pinches him so that he takes out a $1,000 mortgage on his home. If capital remains idle long enough, Jones might lose his job and be unable to meet his mortgage at maturity. If

his creditors foreclose, Jones' house will pass for $1,000 into the hands of creditors who are better able to survive the hoarding period. (It will not do to say that inasmuch as the "richer creditors" who foreclose on property often consist of savings banks, life insurance com panies, etc., in which the poor also have large equities, that the poor probably gain as much as they lose. Realism forces us to recognize that poor distressed property holders usually liquidate their bank and insurance company equities before they let their homes go at distress prices.)

Note that, if and when Jones' property transfers for $1,000, the creditors receive what was a $7,000 property for what was a $1,000 claim. Now if, after the foreclosure has taken place, the Nation's hoarders resume a rapid rate of spending, they will reflate the value of the house, from perhaps $1,000 to $7,000. Thus, by merely being granted the privilege to hoard and taking advantage of it, creditors who are not themselves driven to liquidate assets, acquire a $7,000 property for $1,000. If big investors go through such hoarding and expropriatory proceedings only occasionally (and keep the courts properly respectful of their contracts), they can make large returns on their capital. To the degree that creditors more than debtors survive depression without living off their property, are creditors benefited relatively by periodic withdrawals of capital from industry.

More of the Nation's income tends to be diverted to the well-fortified creditor after each depression. After each expropriation, for example, creditors naturally receive the house rent which had formerly gone to Jones and his kind. Statisticians may continue to bring out that "rent" is still only 5 percent of the national income, but they usually do not indicate the new strata of income recipients to which the 5 percent now goes. Thus the situation seems statistically reassuring and respectable from one depression to another while unemployed property holders drift into poverty and the concentration of economic power grows. Historically the study of distribution has been dissociated from the study of business cycles (and the study of business cycle theory even dissociated from the fact of hoarding) with the result that the mechanics of the expropriatory squeeze-play has never been given attention in "theories of distribution."

The abolition of debt as a permissible form of contract, as proposed by Stoke, would of course abolish our present form of money, inasmuch as money today consists primarily of certificates of indebtedness. And if it did so, what would we use for money? Goods? Warehouse receipts? Gold? Perhaps with some $18 billion worth of gold already in the country, it might be feasible to use gold certificateswarehouse receipts-in large enough quantities to serve us well as medium of exchange. Or, perhaps, if the state made interest charges uncollectible by law only on those debt obligations which had maturities of over, say, 1 year, then short term debt obligations would still remain with us and these alone could be transmuted into bank deposits to constitute our money.

Now that the modern corporate stock certificate as an investment form has been invented to facilitate the diversification of risk the author can see no functional justification for the existence of those forms of long-term debt agreements which seem only to absolve one group of investors from risk at the expense of another. However,

higher price would have to be paid. In fact if-as both Randall and Baker suggest-short-term debts were subject to higher rates of taxation than long-term debts, municipalities, States, and the Federal Government would all be in a position to finance and refinance their debts at lower rates than before.

CONCLUSION

Today, as always, shocks occur to our economic system. Periodically, production in some fields of activity is disrupted. That is unavoidable. A hurricane in New England overexpands our lumber supply. A European war destroys our foreign markets. A court decision terminates an N. R. A. Disruptions are destined always to be with us. Our weakness seems to be that periodically we are not able to prevent production in all fields of activity from declining when a serious miscalculation or disruption of production occurs in any one field. Spiethoff, Hansen, Schumpeter, Cassel, and Robertson all properly point out that investment demand probably always will, because of its heavy dependence on technological change, come by fits and starts. Our problem is to provide a balancing demand for consumer goods when specialized investment demands are disrupted or disappear.

Soon we may be faced with the problem of what to do when the European war is over, war orders stop coming in, and defense preparations are curtailed. People are already speculating on how severe the additional unemployment will be. The unemployment problem may thus become an increasingly urgent one. Weary as we may be of it, we cannot abdicate it. We still have six or seven million unemployed and we cannot feed them retroactively. The problem is, moreover, one which must be solved fairly well-so well in fact that people feel that the goods they receive reflect in a reasonable measure their capacity to produce.

History teaches us that the masses do not necessarily regard their right to vote and other freedoms as a sufficiently valuable stake in democracy to merit their support for the existing forms of government. Elsewhere the right to vote has been used to destroy democracy, and in time it may even here be so used unless a reasonable participation in the benefits of production is provided for the mass of citizens. In our regard for the vested rights of those who oppose change, we should not forget that the industrial stagnation which that regard generates places the rights of the many in abeyance.

We may make rapid scientific advances in technical fields, we may eventually harness the energy of the atom itself, but nonetheless unemployment will assuredly be with us-perhaps in even larger proportions than heretofore-so long as we do not directly insure full-blast exchange of goods and services between specialized producers. So long as we provide laws which permit any factor of production to gain more over an appreciable period of time by withdrawing from production than by accepting the prices which enable it to remain fully and continuously at work, we are probably doomed to lose many of the potential gains of technical progress.

Because it is usually a levy upon income, taxation is commonly thought of as one of the least satisfactory methods of social reform.

For it is usually a remedy applied after the act. Income taxation, for example, may-in lieu of better solutions-be very helpful in rectifying a maldistribution of income which has its roots in exploitation and special privilege. But income taxation does not attack the causes; it does not even aim at the particular rules of the game which make for exploitation and special privilege. Moreover, when States thus participate in the fruits of unfair rules, they may even be tempted to tolerate the evil for the sake of the revenue. This seems currently to be happening in many States in connection with race-track revenue, for example. There are taxes, however, which differ fundamentally from taxes on income in that they attack dirrectly the sources of economic advantage which lie at the root of maldistribution. Such taxes imply no tacit alliance whereby the State tolerates unfair rules in exchange for the privilege of sharing in the ill-gotten fruits.

The growing intricacy of modern life makes the need for planned adjustment continuously more pressing. The task of correlating and coordinating the multitudinous details of our living together seems to outgrow human capacities. To administer properly from a central source the details pertaining to our vital social problems seems ever more unfeasible. In this situation many realistic people are coming to believe that the tool of taxation offers the most promising escape. For the taxing power is a tool with which democracy can destroy special privilege. And if this power is used in a major way to release impellent forces and to remove retarding ones, it may be possible to hold stable or even to reduce the area of detailed governmental regulation to limits within the bounds of human capacity.