Notwithstanding these many apparently adverse factors, all of them regarded by one authority or another as prime causes of our present depression, 1929 saw this country reach what was perhaps the highest peak of prosperity any nation ever attained. We can measure this by either of two yardsticks: By the mass product of our Nation's activity or by the real income from laborthe return in services and commodities.

It is doubtful whether many of us appreciate the enormous steady growth of our industrial output in the decades 1909-29.' The census figures on this are fairly staggering. Moreover, the last 10 years of the period also saw a decidedly downward trend in prices and in the so-called "price indices." This meant not only we were producing vastly greater quantities of goods than ever before, but that these were available at lower prices. Although our city dwellers and factory workers as a rule enjoyed greater prosperity at this time than did the farmers, peak figures for national production and consumption showed a tremendous general prosperity. Years of advancing stock-market quotations had inspired the country as a whole with the greatest confidence. The wheels of industry were revolving at full speed. Material plenty for our people was at hand.

Just what happened to alter these prospects? We know business in the United States reached its peak prosperity in July, 1929. Then it began very slightly to taper off. But it was from October 1929 on the entire picture was to change with our stock-market collapse. Probably a sales movement on the part of our big trust companies gave the first real downward impetus to the stock market. Or, as others may have it, European investors, viewing the spec tacle from without, felt the time was ripe for profit-taking on their American investments. It is also likely some of our very rich, returning to desks from protracted vacations in the fall of 1929, felt it no longer paid to "hold everything." Probably all three factors were operative. But with the market crash of October 1929 a general decline in securities began, and along with this declining market industrial and economic activity tapered off to the recent low level of prostration.

Many as have been the causes advanced for our present depression-tariffs overproduction, whatnot-the simple theory that the collapse of a nation-wide speculative bubble alone can bring with it the collapse of a nation's prosperity has scarcely been more than suggested. Long prior to the debacle of recent years, the belief had come to be generally accepted that stock market action "predict" the course of a nation's prosperity. This point of view was shared by the leading economists of our great universities and the statisticians of our business forecasting services. Reading the economic history of the United States for decade back, the fact clearly show changes in business prosperity corresponding to the tone of the stock market. However, this admitted synchronism was not held to show cause and effect. That this cause-and-effect relation does exist can be determined in the opinion of the writer by a careful examination of the complex processes by which commodities and services are distributed in a highly organized society such as ours, and by a full appreciation of the part confidence plays in our Nation's prosperity.

In modern economic life, only a very small portion of commodities produced by a nation pass directly from producer to consumer. Even those commodities used in the raw state must be brokered, wholesaled, and retailed before going into consumption, whereas manufactured goods pass from the raw state through one or more manufacturing stages before being jobbed and/or retailed. All of this means that our necessities of life are bought and sold, and bought and sold over again, often several times, before coming to our door, our wardrobe, our table. In other words, the judgment of man intervenes time and time again between us and our commodities. As compared with the mass of our people, the intervening agents are few in number. In this respect our commerce and industry resemble a flask with a small mouth. Only that gets into the flask which passes the mouth, the latter representing those business heads who plan. purchase, manufacture, and distribute for the Nation.

In formulating the policy of our business men, in shaping their judgment of future values, nothing begins to compare in impotrance with our security markets. For decades and long before the advent of popular statistical serv ices, shrewd business has regarded the stock market, consciously or uncon

1 Bureau of the Census, Manufactures, 1929, Industry Series.

2 U.S. Department of Labor, Bureau of Labor Statistics, Bulletin No. 521.

sciously, as the barometer whereby a policy of action or watchful waiting has to be gaged. When stocks rise, even on minor flurries such as the Hoover campaign boom of last summer, business is accelerated. When stock prices crasheven if this be for no other reason than that a number of persons believe further advances are out of the question-a cycle of reduced industrial activity is immediately initiated. Orders to the producer-units for commodities and services promptly shrink in number and in size because, confidence in values having been shaken, the Nation's business heads begin to restrict their purchasing policies even in advance of purchase restrictions by the consuming public. The unfortunate cycle so started grows and extends over months and months. The decreased demand which constricts production in one plant affects many another plant supplying it. A wage cut to reduce expenses under curtailed plant operation constricts the purchasing power of labor. Transportation activities become curtailed in keeping with the decreased production of commodities. By the time such phenomena have extended through a nation's economic structure and have been repeated two or three times, things reach the pass where we find them today.

To cap the climax, the concatenation of our banking order with our industrial and financial functions must be borne in mind. With the deflation of security and commodity values reaching deep into the portfolios of our banks, constriction of credit takes place, and the picture of demoralization is complete We need look no farther for explanation of the current depression than this bursting of a Nation-wide speculative bubble. A great many liberalminded persons lay our trouble on the tariff. To such folk the thought of free international trade has the glamour of an ideal, like disarmament. But the facts are our international trade has never been a matter of sufficient moment to affect our national prosperity as a whole. In 1929 the sum total of our business in the United States, other than security trading, probably reached the monstrous figure of $250,000,000,000. At no time have our exports exceeded about 51⁄2 billions a year. Obviously, therefore, with exports amounting only to about 2 percent of our total national business, such concern over the tariff in relation to prosperity as a whole is irrelevant.

Overproduction as a cause of depression likewise fails to stand the test of close scrutiny. The growth in productivity of this Nation in the decades (1909-29) previously referred to was a gradual and orderly development, with the product of the Nation's activity definitely passing into consumption. This situation might have continued indefinitely. The constant trend of modern productivity is to lower the cost of the output. Many commodities are available today at a fraction of their former price as a result of inventiveness and increased efficiency of production. In the case of a self-contained nation such as our own, consumption is only limited by our ability to produce and general overproduction can be regarded as an impossibility, provided our economic life is not radically disturbed.

Having defined the malady, the question of remedy arises. We need two kinds of remedies in this instance.

First. Amelioratives and restoratives for the present stages of the malady. Second. The correction of a tendency toward the malady to prevent recurrence thereof.

My suggestions listed below under the heading of "Rehabilitation" cover the first type of remedy. The subsequent part of my program styled "Valorization", is intended to provide the ultimate safeguards against recurrence.

REHABILITATION

1. The present situation in this country is tantamount to war, or certainly to the after effects of war. Millions of people are distressed. Various forms of attempted aid are not coordinated as well as they should be. The President should appoint a rehabilitation board to function in assisting him much as did the War Industries Board during the war.

2. The rehabilitation board should first seek to limit imports to commodities not produced in this country. Buying at home will put many thousands of people back to work. In times like the present the first thought must be for our own. While the cost to us of domestic products may be somewhat higher initially, the saving in the long run will be considerable through the reemployment of thousands, and the elimination of these thousands from community, State, or Federal support. Every great nation today is endeavoring to limit imports to produce employment for its own people.

For those who raise the hue and cry, "How can our exports be paid for", it should be pointed out that we are compelled to buy a large number of exotic products, tea, coffee, rubber, etc. Our exports can be paid for in credits on the countries sending these necessary imports to us.

3. Direct relief to the unemployed should be standardized and increased if financially possible. If this Nation can borrow three or four billions from abroad for this purpose, the effect would be salutory in more ways than one. Incidentally, money spent for food, clothing, rents, will engage a great many more hands in production than a similar amount spent for producer's goodssteel, cement, etc. If three or four billions were available to distribute to the people of this country on the basis of sheer need, it is possible the distribution of the first two billions would so prime the pump of production and prosperity. that further direct relief could end there. Consumer's goods as a rule require more labor and are bulkier to handle than producer's goods. Not only does a million dollars' worth of shoes or hats require more direct labor to produce it than does a million dollars of steel or cement, but considerable more labor is involved in the transportation and distribution of the former. These facts should be borne in mind in planning relief.

4. Farm relief through the domestic allotment plan, or some equivalent, should be at once inducted.

5. A campaign of public education in economics should be undertaken. The cause of this depression should be definitely and emphatically branded as speculation. People should be made to understand that not the existing economie order is at fault, but our tendency to gamble in that order. The program for eliminating speculation mentioned below, the sure safeguard for the future. should be legislated at once. Such legislation would in itself have an enormous psychological benefit in definitely labelling the cause and principal corrective of present evils. Much of the present demoralization comes from uncertainty as to just what has happened. Explaining the past logically and clearly and setting up safeguards will do much to allay fears for the future.

VALORIZATION

The cure for a recurrent illness lies naturally in the correction of a tendency toward that illness. Wide-spread gambling in a nation's tools of production is a comparatively new phenomenon, an outgrowth of the industrial revolution. It arises from the peculiarly fluid form capital has acquired under conditions of highly organized corporate manufacture and commerce, accompanied by the development of wide-spread means of instantaneous communication. Comparatively little social significance has hitherto been attached to the operation of our exchanges and to the wide-spread interest of the public in security trading. Much has been said of the "vice" of stock gambling from the high ground of morality; but the thought that uncontrolled gambling in the proprietorship shares of our tools of production should be ended as a simple guarantee of economic security is a new one.

There are laws in this country prohibiting the sale of narcotics. In the final analysis, is there any difference between the effects of a habit-forming drug and the effects of a notion that a security can be worth 20, 30, or even 40 times its earning power? Mob phychology periodically alters the judgment of our whole people as completely as indulgence in the most powerful of narcotics could do so. Therefore, we are impelled, while not "under the influence", to set up standards for ourselves which will safeguard us against financial auto-narcosis and auto-intoxication.

A program designed to meet this end has been designated by the writer as "valorization." The term is one of convenience rather than definition. The six distinct steps which this program comprises will be dealt with separately. They are

1. Strict supervision of security trading and of the conduct of exchanges should be delegated to a Federal securities commission. This body should put into effect rigid accounting practices in corporations doing interstate business and should operate as a court of jurisdiction on such corporation practices as affect the marketing of securities.

2. The primary function of the Federal commission should be to define price standards based on past earnings, above which standards security-trading on exchanges would be prohibited. Thus it might be decided that industrial shares can safely be traded in up to 10 times their earnings. Whatever the

figure, the earning standards decided on should be fixed and rigid, to supply a brake on trading. This would not prevent advances in securities, but would prevent advances based on speculation, as under this arrangement enhancement in security values could result only from a factual increase in earnings.

3. In order to prevent bootlegging in securities at prices above the safe earning standards set by the commission, and likewise to prevent illicit trading in puts and calls, laws should be enacted making a vendor liable for damages to a purchaser when a security is sold at a price above the safe earning standards set by the Federal commission.

4. The proposed Federal commission should issue frequent bulletins dealing directly with specific security issues, pointing out the various factors in the situations concerned and endeavoring, through the creation of a full and complete understanding on the part of the investing public, to "valorize securities at all times. In the long run, this policy, when coupled with those mentioned above, would replace purely speculative purchases with genuine investment.

5. Taxation can likewise be trained on security trading to wipe out its speculative aspect. A graduated scale of taxes on security sales can be set up whereby quick turnovers are so heavily taxed as to be made practically prohibitive. In this way the scalping of petty traders, a purely parasitic function can be done away with.

6. As a final step in "valorizing" security trading, short selling must be ended once and for all. A necessary supervisory force to this end would be cheap at any price, through the prevention of the easiest method of market demoralization. Every sale of a security should be a legitimate one, a simply normal transaction of some one selling out an interest in a business to some new investor. The stock arguments put forward in defense of short selling are all based on the existence of a highly speculative type of security trading. Once trading is "valorized" through the institution of safe earning standards and the other devices mentioned above, there will be absolutely no need for the so-called "cushions", "buffers ", " technical correctives" and so on, which short selling is supposed to provide.

There is no doubt the volume of security trading would be materially diminished by the legislation and supervision herein set forth. The entire aspect of security trading would be changed, as speculation was replaced by legitimate investment. Unquestionably, a great many persons now employed in brokerage offices and security exchanges would be displaced from their present positions. But the gain to the country as a whole through the introduction of an era of rationalization in finance would be so monumental as to offset, many times over, the loss to these few individuals.

The time element must not be lost sight of, however, in the taking of steps to reform. Any legislation looking to the creation of a Federal commission with supervisory powers as outlined above should take effect not earlier than the year 1935. Such legislation should be put through now, however, so that the necessary adjustments in values, methods, and organization may take place slowly and properly over a period of 20 to 24 months. Incidentally a program of valorization when understood should serve to boost stock prices probably in advance of justifying business conditions. People would buy into our soundest and most promising corporations to avoid any disability to do this later through the induction of earning standards and other elements of the valorization program.

Its

It is the writer's belief the elimination of security speculation would create an area of very real economic stability in this country. No other form of gambling would have the same virulence and pernicious potency. Land cannot be quoted on a ticker tape. It is costly to carry and hard to deliver. utility and prospects are pretty definitely limited; its probable value does not overlap all bounds of imagination. However, should real-estate speculation become anything of a national menace upon the elimination of security gambling, taxation as suggested on security sales could be brought to bear as a positive curb.

Based on all the foregoing facts, the sine qua non of any attempt to eliminate the industrial cycle and give the country a normally stabilized prosperity must be the elimination of the Nation's habit of irresponsible gambling in its tools of production. If these tools of production were used legitimately in the United

States of America, there would be not limit to the advance of our national standard of living. We are not subject to plague or famine. Not only can we be regarded economically as a self-contained and self-sufficient Nation, but with our resources and products so infinitely varied our business tone as a whole should always be healthy. A solution must be found for the agrarian problem, and certain industrial reforms are needed. As a Nation, however, we are inconceivably rich when gaged by our productive capacity. With the progress of the arts, and with a normal uninterrupted healthy tone to our business life, a truly golden era might indeed soon be realized in this land of plenty. But the one great perequisite is lacking—a serious concerted procedure to rationalize the business life of our Nation, and to prevent for all time the recurrence of gigantic speculative booms in security values followed by the crash of deflation with its attendant demoralization and suffering.

This prerequisite can be supplied by the program of valorization herein outlined.

STATEMENT BY HARRY GUNNISON BROWN, PROFESSOR OF ECONOMICS AND FINANCE, UNIVERSITY OF MISSOURI

We are suffering from bank credit restriction or deflation, and falling prices, No remedy is adequate that does not provide for rising prices, to be succeeded by a stabilized price level. But rising prices at the expense of curtailed output and further unemployment are purchased too dearly. The rising prices must come from increased demand and purchasing power, not from decreased supply. And if we do not provide the increased purchasing power, this will be because of unwillingness. It will not be because the job is impossible.

In the minds of the uncompromising deflation theorists, the cure for deflation is more deflation. They desire a more complete "liquidation as a basis for recovery. Lower wages, lower prices, and a weeding out of all mortgaged farmers and other debtors who cannot pay their debts at a low price level, who are thus financially "unsound" is, in this view, a "healthy" process. But who is "unsound "? The answer is, Anyone whose debts are about as great as or slightly greater than the sale value of his property. And the farther we reduce prices and property values, the more titular owners there are whose debts exceed or equal such values. Conceivably we might deflate and reduce values so far that anyone who owed anything whatever, even the smallest debt, would be "unsound." Deflation to weed out the "unsound" is as ridiculous logically as it is merciless morally. Deflation makes "unsound" many thousands of debtors whose property, if there were no defiation, would be safely worth far more than their debts. What shall we say to those conservatively minded financiers who defend the policies which led to deflation, yet who think that inflation is necessarily artificial and unjustifiable interference with normal economic processes?

A major cause of the depression-in my opinion the outstanding cause so far as the United States is concerned-is an inept policy of those in charge of our Federal Reserve System. I believe it can be shown conclusively that the policy followed was definitely and unnecessarily deflationary and tended to produce depression. Those in charge of the System give no evidence of understanding the tremendous control they can exercise over our business prosperity. Apparently they are quite capable of doing, innocently and uncompre hendingly, the very things that conduce to the pitiful disasters of depression. The new administration must beware. For these men, through following again such policies as they have followed in recent years, and which they have not admitted to be mistaken despite the resulting widespread ruin, may discredit Mr. Roosevelt just as effectively as the results of their policy have discredited Mr. Hoover, and may lead to Mr. Roosevelt's being repudiated at the polls quite as overwhelmingly. Will Mr. Roosevelt accept the advice of those who support such a policy?

To any self-styled "practical" men who support such a policy, we need only reply that such "practical" men have been permitted to run our economic system for the past several years and, by their "practicality", have ruined many of us and well-nigh ruined most of us.

Suppose we were back in the period of prosperity of 1924-29. Suppose, then, that some mysterious force spirited away a third of every person's money and bank-deposit account. Would not the demand for goods and for labor neces