does nothing of the kind, hence the argument is illustrated by pointing out that the individual would soon come to grief if his outgo continued for a long time to exceed his income. "A man whose expenses exceed his salary," the argument runs, "has two alternatives. He can get a higher salary, or he can cut his expenses to a point where his salary will cover them." Since this example has a familiar ring to the ordinary citizen, and since particularly in hard times he finds it difficult to increase his salary, he may be convinced that both business and Government should do as he would be forced to, and cut expenses. In this case, however, the alternative has been clear, and the general public recognizes the result of curtailment of spending. Economies were installed in 1932, and the downward spiral gathered speed. They were instituted again in 1937, and the recovery suddenly col lapsed into a depression. People generally would rather spend the money than take a chance on another recession.

The theory of "compensatory spending" which has been advocated by the administration, has gained many adherents in the country, not so much as a theory of which they wholeheartedly approve as it is a method of handling a problem which they see no other means of meeting. The efforts of businessmen to break down the acceptance of the theory have been largely based on their insistence that if the Government stopped spending, business could take over, and they have been generally unsuccessful. Apparently, a large segment of the people adheres to the view that Government was not spending in 1930, 1931, and 1932, and business did not take up the slack. They seem to prefer to see some diminution in the number of unemployed before they begin to trust business to hire them in private industry. The advocates of the "compensatory spending" program, as distinguished from those who merely vote for its continuance as a practical necessity, argue that its function is to compensate for the noninvestment of funds by business; that when business investment declines, government must take up the slack. When business finds it profitable to invest, it will do so, but until that time Government must assume the responsibility.

The general public has grown to accept the idea that the Government must apply correctives to "redress the unbalance that exists between business and the rest of the country." They seem convinced that the economic system does not operate adequately without Government intervention of some kind, but feel that Government intervention should be confined to an effort to correct minor maladjustments in the system, rather than to reorganize the system.

In the beginning business was bitterly opposed to the establishment of the Securities and Exchange Commission, the Wages and Hours Administration, the National Labor Relations Board, the Social Security Board, and many others, as it had been to the Federal Trade Commission earlier. Later it tried to amend the acts setting up these agencies, or, failing that, emasculate them by cutting their appropriations. In the election campaign of 1940, the spokesmen of business upheld regulation of the securities and commodities markets, collective bargaining by an agency of the workers' choice, social security, and other New Deal objectives. They refrained, however, from advocating the specific agencies which are charged with these functions, as

well as from saying how they would deal with the problems if they were in power.

Defense expenditures.

The attitude of the business community to Government expenditures has changed considerably since the shift of emphasis to national defense. Where industrialists and manufacturers formerly opposed Federal expenditures, they now regard them as of immediate importance, and feel that they should be expanded even more rapidly.

It seems unlikely that this change is entirely due to the need of national defense. The earlier New Deal expenditures were also defended on the basis of their emergency character and the welfare of the country as a whole. But these earlier expenditures, while they poured billions of dollars into the business channels of the country, were not directed from the Treasury immediately into the hands of business. Defense expenditures are paid to business, and are distributed thence according to the will of business. The conflict between the New Deal and business as regards Federal expenditures, therefore, springs not so much from the amount of funds spent, as from the situs of the power produced by the expenditures. In the earlier welfare expenditures, the power was lodged in the Government; under the defense program it is to a much greater extent lodged in business.

FISCAL POLICY DOMINATED BY BUSINESS

Learning from business groups, and observing their success in the manipulation of financial policy, other economic groups, such as agriculture, labor, the unemployed, municipalities, etc., now seek legislation in their own behalf. The formation of these pressure groups has to some extent weakened the control of business over such policies, although the business community has still the greatest resources and the widest experience in dealing with legislation and administration of laws affecting it.

The uniting of agriculture in the National Grange and the Farm Bureau Federation has enormously increased the pressure potentialities of the farm States. They have put their strength behind numerous objectives, some of them regulatory, like the Interstate Commerce Commission, some of them, like the tariff, more closely connected with farm policy. Many of the victories of organized farmers have proved unsatisfactory, again like the tariff, but they do indicate a tremendous potential strength if it is effectively awakened to its own real interest.

The unemployed banded together, briefly, at the bottom of the depression, and secured, first, Federal assumption of the relief problem, then the Civil Works Administration, the Federal Emergency Relief Administration, the Works Progress Administration, the Public Works Administration, and the Civilian Conservation Corps. As the country began to come out of the funk which overwhelmed it during the worst years of depression, however, the business community found it easier and easier to split the supporters of unemployment relief and public works. They pointed out that the unemployed would be better off in private industry doing "honest work," and that if business were freed from the shackles of Government interference it could reemploy most of the unemployed. They objected both to the cost and the up

keep of the public works program, and were in many cases successful in convincing the public of their viewpoint.

The pressures that have been exerted upon the legislative branch since. the founding of the Republic have been diverse in both their source and effect. The laws enacted, however, particularly those dealing directly with the Nation's pocketbook, have generally tended to follow the viewpoint expressed by business, rather than that of less powerful groups. This is the natural result of the long experience which business has acquired with the subject, the tremendous resources of publicity at its command, and the relatively small size and compactness of its organizations.

The tariff laws have provided high protection for the benefit of comparatively few businessmen and industrialists, at the same time damaging the interests of the far greater number of farmers and urban consumers. The tax laws, a compromise between opposing groups, have been subject to tremendous pressure from the large masses of citizens, but are less steeply graduated and based less on ability to pay than would have been the case if this pressure had not been offset by the power of business. Government expenditures likewise have been greatly increased as a result of mass pressure, but that pressure has been nullified to a considerable degree by the desires of the much smaller business group.

CHAPTER VIII

BANKING AND INSURANCE

In the fields of banking and insurance, business pressure on government is exerted through individual corporations and important interest groups. The larger banks and insurance companies are an integral part of the business community and are dominated by much the same group of individuals which dominates the business community generally. The two large bankers' organizations, the American Bankers Association and Investment Bankers Association of America, are "extensions" of the corporate community. In speaking of banking and insurance, one speaks not of professions separate from business and industry, but of citizens closely, even organically, related, in philosophy and general attitude, to business and industrial groups.

COMMERCIAL BANKING

Of the 15,000 commercial banks in the United States, more than fourfifths are members of the American Bankers Association. They are widely and evenly scattered over the entire country, more than 60 percent being located west of the Appalachian Mountains. The association is highly organized and draws forth and mobilizes the views of country and metropolitan banker alike. Through a skillfully led set of promotional departments, continuous efforts are made to impress these views on the American people as being "best for the Nation," hence, best for banking.3

Since its founding in 1875, the history of the association has been one of development and growth to conform with the changing and expanding conditions of banking and the country. In recent years, however, the rate of change has not been fast enough to forestall widespread criticism and questioning of the banking structure. The Banking Act of 1935 departed so widely from what the association regarded as basic principles of banking in the United States that the association drew up a statement of its views. They are worth examination. Banking and the Government.

The first of these principles is that the Nation's financial requirements are unrelated to political changes.

"The real conditions that create the necessity for the expansion or contraction of credit arise from the needs of agriculture, industry, and

National Resources Committee, The Structure of the American Economy, Washington, 1939, pp. 160-163.

a Ibid., p. 163.

3 For the most part, the publications of the American Bankers Association itself have been used in preparing this section. The principal ones are: Official Lists, Constitution and By-Laws; the A. B. A., Its Purposes and Activities as an Organization of Service to the Banks and to the Nation; Recommendations of the Special Committee of the A. B. A. on the Proposed Banking Act of 1935: and statement of R. S. Hecht, president, A. B. A., on the same before the Senate Subcommittee on Banking and Currency.

trade themselves, wholly independent of the administrative policies of the party which happens to be in power. We [the association] feel that the financial requirements of the Nation's business constitute a continuing economic process that is not related to political changes. The fundamental principles of sound credit do not vary with variations in public thought."

This statement does not mean that banking, according to the view of A. B. A. membership, should be completely free of governmental contact. The Government may properly exert—

"a certain amount of control over banking operations so far as they affect the Nation's currency and general monetary policy. Nor do we [the association] object to broad powers of supervision over the operation of our banking institu tions because of the semi-public responsibilities they carry."

Beyond these limits, however, the Government should not go. The granting of credit and the making of investments are questions of business policy that should remain in the control of the bankers.

It seems clear that the bankers in the A. B. A. want control over the money supply of the country. They protest vehemently against vesting this function in the hands of the Government. Today, the money supply of the American people takes two forms: (1) Currency, and (2), more important, "check book money," that is, demand deposits in the banks which become current through checks. It is the power to influence the quantity of this deposit money which the bankers feel should be beyond the reach of the Government.

6

This power should, in their opinion, lie in the hands of the bankers themselves, or at the most in the hands of a nonpolitical, though gov ernmentally-appointed, board. Such a board would consist of five persons appointed by the President with the consent of the Senate, holding office for a long term of years, and removable from office only for cause. Together with four additional persons selected by bankers, the board would constitute the "open market committee" in whose hands would rest the actual authority to influence the quantity of deposit money. A credit system so controlled would realize the A. B. A. ideal of a "supreme court of finance." 8

Such a banking mechanism would, according to the bankers, divorce credit control from "politics." "Special care should be taken to keep our credit control and banking mechanism free from any sort of political considerations." "The policies of the [Federal Reserve] Board should have no reference to the politics or the changes in politics of the National administration." 10 The bankers fear that Government will, by the means indicated, add to its multiplying functions the control of the credit system of the Nation.11

Hearings before a subcommittee of the Senate Banking and Currency Committee, 74th Cong., 1st sess., on S. 1617 and H. R. 7617, Washington, 1935, p. 518. Ibid., p. 517.

6 Ibid.

The power is exercised through open market operations (buying and selling of Government bonds by a central board); fixing the discount rate (the price at which "bankers' banks" (Federal Reserve banks) extend credit to their members); and fixing reserve requirements (the backing required for demand deposits).

Ibid., pp. 519, 320.

8 Ibid., p. 520.

Ibid., p. 518.

10 Ibid., p. 519.

11 Although the American Bankers Association suggestions as to the make-up and powers of the Federal Reserve Board were not adopted in the Banking Act of 1935, the act was thought "on the whole" to be "an acceptable piece of legislation." (Letter of transmittal from the Special Committee on the Banking Act of 1935, to the American Bankers Association, accompanying text of Banking Act of 1935, dated August 23, 1935.)