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Washington, D. C. The committee met at 10 o'clock a. m., pursuant to call, in Room 335 Senate Office Building, Senator Reed Smoot presiding.

Present: Senators Smoot_(chairman), Watson, Reed, Shortridge, Couzens, Keyes, Bingham, La Follette, Thomas of Idaho, Harrison, King, George, Walsh of Massachusetts, Barkley, Connally, Gore, and Costigan.

The CHAIRMAN. The committee will come to order. The committee have met this morning for consideration of S. Res. 315, introduced by Senator Harrison on January 4, 1933. At this point I shall ask that the resolution be placed in the record:

Resolved, That the Committee on Finance, or any duly authorized subcommittee thereof, is authorized and directed to make an investigation and study of the present economic problems of the United States with the particular object of obtaining the views of such economists, financiers, and other persons as in the opinion of the committee may be able to offer constructive suggestions with respect to the solution of such problems.

We have with us as our first witness Hon. B. M. Baruch, of New York. The committee will be pleased to hear Mr. Baruch.


Mr. BARUCH. Mr. Chairman, may I say that I have placed at the disposal of each member of the committee a copy of my remarks, and I should like very much if I would not be interrupted in the midst of the story, but that each member of the committee should mark the place at which he would like to ask questions, and I will be pleased to submit to any examination or questions any member of the committee may feel like asking at the conclusion of my statement.

The CHAIRMAN. That request will be granted.


Mr. BARUCH. The objective in the mind of every thoughtful man is to restore to distressed humanity the opportunity to earn its daily bread—to get people back to work again. "We wish this for the whole world, but our primary duty is to put our own house in order. Our troubles come from four effects of war: Inflation, debt and taxes, national self-containment, and excess productive capacity.

(1) POSTWAR AND WAR INFLATION The war cost the belligerents about $147,000,000,000—but in the purchasing power of 1913, to which level the dollar has about returned,


that cost would have been $46,000,000,000. Thus, more than $100,000,000,000 was pure "inflation," due to the destructive demands of war.

It tripled the terrible aftermath which we now suffer. I have proposed a prevention of future recurrence of this evil which your War Policies Commission has recommended to the Congress.

Inflation did not end with the war. The peak of prices came later and only now, 14 years after the war, wholesale prices are reaching what appears to be a normal or at least a long-time pre-war level. As a result of both the Civil and the Napoleonic Wars similar inflations occurred. It took about 14 years in each case for prices to recede to former levels, which they did as surely as water runs downhill. The wreckage due to these inflationary illusions had to be cleared away before normal processes appeared. It is so with us now and the chief barrier to returning prosperity now is the débris of World Warinflation. We must courageously clear it away and stop our vain attempts to restore or preserve vanished values. That is the first step to recovery.


The bulk of the vast war cost (tripled by inflation) was paid in money borrowed from the people. It left a colossal load of public debt. Government costs rise during inflation and are hard to get down. Both of these causes produced high taxes. No matter what may be said in politics, taxes are paid in the sweat of every man who labors and in no other way. The farmer or the worker may never see a tax collector, but, either by deduction from his receipts or by increase in his expenses, the producer pays the cost of government. Prosperity only exists when all who work can freely and fairly exchange the products of their labor for the products of others. It seems to be agreed that costs of government have risen to about 3343 per cent of national income; in other words, that one-third of what our people now produce goes, not to exchange for the fruits of each other's labor, but to divide with nonproducers and thus to curtail the producing and consuming capacity of the country. That is the second principal cause of continuing distress.

Nearly every time a legislature votes an appropriation, or refuses to vote an economy, it is adding a new brick in the barrier against prosperity. Every debt we forgive to other nations lifts a burden from their distressed business and adds it to our more distressed business, thus doubling our handicap. Surely, it would be a fair rule to refuse relief unless the burden of a debtor's taxes on his income is as heavy as our own. It is a difficult figure to determine and it may be in error but I am told that this test would rule out every present claim on us for debt revision. So much for public debt. Reduction in public expense is indispensable to recovery.

Business is also borne down by private debts contracted at high prices which must be paid in low prices. But the decline in prices of itself is not the trouble. It makes little difference whether prices are high or low if they would only rise and fall together. It is profits, not prices, which make prosperity. The real troubles are that prices do not fall uniformly and that debt and taxes do not seem to fall at all. For example: It is the disparity (not the lowness) of farm prices which almost destroys the consuming power of the agrarian half of our population. And thus, because the burdens of debt and taxes are higher and higher while incomes are cut in half, there is little left to any man to buy the necessaries of life. These disparities are a third cause of continued distress.

(3) NATIONAL SELF-CONTAINMENT Before 1914, nations were content to rely on other countries for things which could be produced better and cheaper abroad. This mutual exchange constituted the commerce of the world. But the World War was an economic war. The Central Powers, ringed by fire and steel, turned perforce to self-containment. England and France, threatened with starvation by the submarine, learned the fear of economic strangulation. It was thus that the world became honeycombed into trade-tight economic compartments. Everywhere nations are now arming, but because of the lessons of the war they now arm on two fronts-military and economic. Tariffs, import quotas, domestic subsidies, and other trade barriers are symptoms of a universal fear of the imminence of war. They are ultramodern bulwarks of national defense, and the quicker we recognize that, the more competent we shall be to deal with them.

National defense is a first duty of government. It rises in direct ratio with the sense of danger. It is difficult for us, in our geographical isolation, to comprehend the thoughts of a nation such as France, which lives athwart a path of conquest like the defile of Verdun and the plains of Picardy, where millions have fallen in a series of struggles that began before history.

As long as the causes of conflict survive, we shall not be able to "buy" these barriers down by debt or any other economic concession. The movement toward national self-containment is defensive and not retaliatory. To the extent that we depend on world trade, it is a continuing cause of our depression. We must recognize its true nature to the end that, even if we can not wholly control it, at least we can shape our own economic policy to avoid deluding ourselves into making further vain sacrifices at the expense of our people.


fewer men.

During the World War we learned to produce more things with

It was as much a war of materials as a war of men, and its capacious maw gaped for all that the nations could produce. Labor-saving machinery was only one of many expedients. We transformed our country into a unitary production machine. The whole of our industry was mobilized. The lessons learned in war were not forgotten in peace and they have changed the essential character of our economics. So engrossed were we on production that we neglected altogether the problems of distribution, especially the maintenance of equally distributed buying power throughout our own population. We must recognize, also, that demoralization of national currencies (whether forced or voluntary) have an effect, just now, to intensify the race for self-containment.

I am not speaking of “overproduction” which is a mere corelative of "underconsumption.” I mean excess productive capacity. I mean the vast plants which, though idle now, sometimes seem to me like masked batteries of machine guns waiting to lay down a new barrage of production whenever buying reappears. We must find






means to control production, especially of farm and mineral output. It is a stupendous development throughout the whole world-sugar, silk, rayon, wheat, rubber, coffee, tin, iron, and copper, I know of no exception.

(5) THE GREAT DELUSION The world seems to be subject to curious brainstorms—the crusades, the Mississippi scheme, and the south sea bubble, are examples. Let me quote from Mackay's Popular Delusions, referring to what he calls the Tulipomania of the seventeenth century:

Everyone imagined that the passion for tulips would last forever. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favored clime of Holland. People of all grades converted their property into cash and invested it in flowers. Foreigners became smitten with the same frenzy and money poured into Holland from all directions.

Holland seemed the very antechamber of Plutus. You will recognize some of these expressions. It seems incredible that so solid a nation as the Dutch should nearly ruin itself on such a thought, but is it any more credible than that we would go into debt to pay thirty times earning power, and even more, for common stocks of the “New Economic Era" on the theory that we also were going to "banish" poverty by selling billions in manufactures to an almost bankrupt world by the expedient of continually lending our customers more money?

We built up a tinsel tower of paper prosperity out of debts and speculative hopes and such other things as dreams are made of. It lies in ruins, but the debts remain. What shall we do? Are we to try to put, or keep, substance in things which had no substance in the beginning, or shall we clear away the wreck? I think our duty is clear, and that in taking it we must remember that delusions swing between extremes, like pendulums. Delusions of grandeur and unending wealth give place to delusions of unending gloom. One is as unreal as the other.


We can not oppose legislation to natural laws. But legislation can aid and hasten and guide their effect. In this crisis, the golden rule should be:

Reject all plans which oppose or postpone the working of natural processes. Aid and accelerate the effect of curative economic influence. It is a simple rule, but it is a right one. We have overlooked simple things too long. The artificialities of the great delusion were plain. We closed our eyes and went on loaning two billion dollars a year to finance sales to “crippled" countries, because we were persuaded to disregard arithmetic. On this artificial expansion of our world trade we built a dream of boundless wealth. Based on that alone, individuals, in seven years increased their debts by 50 per cent, and corporations by 75 per cent—all to build that tinsel structure. Nothing had happened to lift real values to such dizzy heights above the slow sweep of progress. The collapse of 1929 was inevitable. No return to normal living is possible until we clear away the vestiges of that wreck. Natural processes are working to cure every evil, but what have done to aid that cure?

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