Page images

The figures show for 1923 that the producer of materials got 109, the laborer 120, and the salaried workers and owners 118; while in 1929 the three parallel figures are 99, 111, and 126. Thirdly, the net profits of corporations of 114 billion dollars in 1923 increased to $2,650,000,000 in 1929. This showed an increase of 14 percent per unit of product. And, fourthly, between 1922 and 1929 the average rate of increase per year in the real earnings of all employed workers was 2.2 percent, but for the dividend disbursements as drawn from the internal revenue figures 12.3 percent, while the dividends of industrials alone showed annual average rates of increase of 21.3 percent. When in addition to these figures it is remembered that all this happened at a time of great increase in productivity, during which the true need was for rapid increase in consuming power rather than investing power, we can show, I think, one peculiarly powerful set of stresses and strains which were being set up to meet the simple cyclical fall of 1929 and intensify it.

In this review of seven underlying factors, there are many unfavorable conditions; yet before blaming their aggregation for present conditions we must remember that in 1924 and 1927 when commercial and industrial factors underwent, also, the true typical cylical recession, most of these underlying conditions were there and some were worse. There must be something more, then, to look for if we are to account for the immensely greater severity of the recession of 1929 over the two previous ones.

That this missing factor cannot be found in the nature of the commercial and industrial rise and fall itself seems to me to be clear from the fact that its rise was only 18 months long, whereas the average period of rise between 1871 and 1896 was 23 months, a period which experienced, also, a fall in the general price level. In extent the rise of commercial and industrial factors was less than average. In 102 out of 113 series which represent the operating end of business, they were less than average, and in only 10 were they more. Yet when the recession got fully under way 70 of these series showed more than the average decline; 18 up to the middle of 1931 had made all-time records; and only 40 showed less than average; many of these by this time must have shown more.

There seem to have been no important commodity price inflation. Wholesale prices, in fact, dropped from a basis of 100 in 1925 year by year to 97, 92, 94, and 93 in 1929. Retail prices from 100 in 1925 through 100, 98, 97, to 97 in 1929. That certain rather extraordinary projects in valorization of prices held up individual cases is admitted, but in view of the general fall during this period it is pretty hard to see how valorization can be credited or debited very heavily with the severity of the recession.

That there was no abnormal activity in industry, of the sort that is rather loosely called overproduction, seems to be indicated when the inventories of 253 corporations, upon which records can be gotten are compared. In 1927 these inventories taken at 100 against sales at 100 showed in the end of 1928 inventories of 104 against sales of 112; at the end of 1929 inventories of 117 against sales of 122. Inventories, of course, can be expected to move with sales, and if they move at a less rapid rate it is hard to see where the case of general overproduction can find its basis. In the great raw materials there are only a few cases of heavy increases until December of 1929, at which time the recession had already well set in.

The volume of production increased from 1922 to 1929 at the average rate of 3.8 percent per year as against 3.2 percent for the years 1901 to 1913. On a per-capita-of-population basis these figures are 2.3 percent for the later period against 1.3 percent for the earlier. If in any given community general purchasing power were to be reasonably maintained, it would be difficult to believe that the rate of 2.3 percent per year was too high to be assimilated by a rising standard of living; but even if it is somewhat too high, it is difficult indeed to believe that it is so excessively high as to have had any considerable share in causing the tremendous collapse and readjustment which has occurred since 1929.

On no way of figuring it can it seem reasonable that general overproduction occurred to any such extent as to be given any large share of the blame for the intensity of the recent depression. It may well be judged to have brought about its beginning in the usual way in which recessions in business have so many times in the past begun. But all figures seem to indicate that if this were the principal factor in the situation the recession would have been mild and not very long lived.


It is difficult indeed to get any facts upon which to examine the questiina as to whether our capacity to produce has been built up to an excessive deres There is much to substantiate the belief that in a progressing and competitive system the theoretical capacity is always very largely in excess of production In many lines the figures that are given of percentage utilization of capacity seldom exceed 70 percent, even at the best of times. As to the increase in production capacity during the past 6 or 7 years the figures are slight and not every reliable. The sales of the machinery trades in the years 1923, 195 1927, and 1929, run in index figures: 91, 100, 106, and 123; against productive figures of 96, 100, 107, and 121, which are the figures for total production of the country. But the figures for industrial building do show a tremendous increase in 1929. For the 4 years mentioned, they run : 99, 100, 117, and 16)

The construction industry as a whole shows rather odd behavior with rels tion to the other industries. It was very high before the cycle began ano ran high through the depression of 1924 and 1927, but it dropped early is 1928, showed a slight spurt at the most active time of 1929, and then a very heavy drop. It is residential building which is the chief factor in these figures; the others show rather more usual behavior, except, of course, for the great increase in industrial building in 1929. The heavy drop in the construction industry is, of course, an intensifier of depression as it is alwar but the lack of any rise in the total construction in 1928 and 1929 is a somewbar modifying factor against inflationary activity. On the whole, the constructii industry must be judged, I think, as an effect rather than a cause, althougt. the minute the recession began it greatly intensified the difficulties.

It is when we turn from the strictly operating end of the business worl: to the stock market and the financial events associated with it that strikings abnormal conditions appear. The facts are too familiar to need repetitive but one or two contrasts are worth noting.

I said above that 102 out of 113 operating factors rose less than the average to the peak of 1929, but, on the other hand, almost all factors connected wit the stock market rose more than double the average, and the rise in the prices of stock beat all of the Dow Jones records, which run to 1897, and Macauler's partial records which run back to 1857. The rather notable stock-market cycle of 1900 to 1903 showed a rise of 34 on the Dow Jones scale, while this recent cycle showed a rise of 99.

While the wholesale price index was running down from 1925 to 1929 froE 100 to 93, common stock prices went up 100, 111, 132, 167, and 212, while the total value of stock sales ran 100, 113, 149, 251, and 316. And it must be remembered that these figures are averages for the year, not peaks at the high point of the years. And with regard to stock prices it must be remem bered that while in the material commodity market increases in price finali; induce reduction in sales, in the stock market there is a powerful and loca continued influence for increase in prices to induce excessive sales.

Some economists who followed closely the course of prices and quantitie: in the commodity market were puzzled by their relatively moderate increto in the face of the increasing volumes of credit during this prerecession perix The quantity theorists faced growing skepticism. But when a price indes made up not only of commodities but of commodities and common stocks * well, it compares rather curiously with the index of bank credits. The figure of the two from 1925 to 1929 are as follows: For a combination of commodi and stock prices, 100, 101, 102, 110, and 118; and for bank credits, 100, 1 110, 117, and 120. While this correlation may not be very close it is certain's strikingly closer than when commodity prices alone are considered since the receded during this period.

All sorts of evidence, in fact, shows that the increased credit volume ** devoting itself very largely to the securities and real-estate market. As a example, the reports from member banks show between 1922 and 1927, out total increase in loans and investments of 7 billions, 3 in investments, 3 in ma lateral loans, and only 1 in commercial loans. By the end of 1926, 60 perar of the earnings assets of these member banks were engaged directly or indirect. in the capital markets. From 1922 to 1929 the average annual increase commercial credit was 3.2 percent; of credits directly related to the aurin markets. 8.1 percent (and it must be remembered that this is a repeated 2014 increase); and to the urban real-estate markets, 12.5 percent.

The effects of this tremendous inflation in the financial world were wr*** spread. On the purchase of commodities there was created an artificial beIDAS

[ocr errors]

based on non recurrent income, or at times on an imaginary or paper income, which was capable of a swift and sharp retraction. On the development of new productive capacity it offered an immense temptation to overcapitalize, and having capital to build, expand, or to merge high cost producers with their stronger competitors. On the commodity price level there was a slight influence through the tempting ease with which valorization schemes could be financed. On operating management there was a very serious influence by distracting attention from the hourly job of making a company good inside to the playing with its stock on the market outside. It is more than possible that the market inflation was partly if not largely responsible for the diminution in residential building in 1928, for certainly in many cases people withheld from intended building in the hopes of making a lot more money by investing what they had in the market for a rise. And its effects were not least on the international situation, for it has been estimated that of the 1012 billions we lent abroad since the war, 5 billions came back to the stock market directly or indirectly through the call-money market. It is in any case certain that the sharp reductions in lending abroad which occurred in 1928 were not unrelated to the enormously inviting opportunities for gains on money placed nearer home.

To sum up: 1. Almost all the strictly commercial and industrial factors, the so-called * factors of the operating business world”, were moderate in their rise from 1927 to 1929, and the cycle started its recession in June 1929, among these factors, moderately and from no greatly inflated level.

2. But the stock and real-estate market inflaticn itself, and the banking that went with it (and some went a long ways) was of record proportions, at least for the 80 years during which we have records enough even to guess at.

3. Average and normal business recession in June 1929, was the signal for the bursting of the stock-market bubble, and this bursting thereafter has deeply intensified all recessional factors.

This collapse in the economic health of the world occurred at the time when most of the underlying constitution factors were seriously unfavorable. First and most important, it occurred upon a descending long-term trend of prices; second, upon conditions of agricultural stress, both as to prices and capital values; third, upon a structure of international finance which was improving, to be sure, but which was by no means solid; fourth, upon increasing resistances to the flow of commodities through rising tariffs; fifth, it occurred after sveral years during which, in spite of the rising standard of living of the masses, there was a largely increased proportion of the produced wealth going to the well to do and, hence, in considerable proportion into investment channels, and this just at a time when improved technique of all sorts was making our chief need consuming power rather than renewed investments; sixth, as is now clearly evident, it fell upon a banking management far below the high level of fine professional standards with which bankers have been credited and which we have a right to expect that they should assume.

Granting conditions to have been something as I have outlined, is there anything in the world that can be done about it? It must be admitted at once that we know very much too little for any complete answer, but we do know, I think, enough to point out some very definite directions of effort and directions in which further study might result in fairly prompt conclusions.

(a) In the first place there is the problem of the general long-range swings of the price level. There is a strong presumption of its relation to the gold supply or, rather, to the credit currency which so far has been built upon gold. This is clearly an international problem, a problem for which the Bank of International Settlement, or a group of international bankers through the B.I.S. seems the most practical means through which relief could come.

(b) There is the striking fact of sheer and pyramided gambling in stock markets. We may not yet know how to control this, but our recent experience seems to give us grounds to believe that few other measures will be any good at all unless we can invent some devices through which a limiting influence can be exerted upon these markets. They have their proper economic function, as is well known, but through the years previous to 1929 it is not an unfair estimate that their proper economic function exercised about 5 percent of the time and 95 percent was given up to what is no more nor less than a gambling game.

(c) There is obviously the need of international political stability. The close interlocking of nations in economic actuality has made it an absolute

necessity from the economic point of view, as it always was a necessity from the moralistic point of view, to do everything that anybody can do to make war less likely in the future.

(d) We must recognize and make more clearly and widely known the modern need for consumption funds as against investment funds and, hence, the advantages of considerable and larger proportions of the national income turning into the channels through which they are mostly likely to flow smoothly and with maximum regularity into consumption spending. This is the old oversaving theory in a new aspect, and it gives to the high-wago doctrine its fundamental, cool, long-range economic validity, in addition to whatever it may have had of a sentimental, political, or moralistic nature.

(e) Our structure for deposit banking must be strengthened. When some thing like two billions of deposits is tied up by failures, affecting something like 5,000,000 people, it is about time to recognize that the deposit account has by habituation come to be considered currency just as truly as pieces of paper printed in green and bearing Government stamps and signatures. It seems to me inevitable that the day must come when deposit accounts are insured, and the only question is through what steps can this be brought about gradually and most effectively. And it must be recognized that when deposit banking is tackled as a problem, investment banking is related to it.

(f) It is time, also, for a reassessment of all our theories and prejudices relating to tariffs; and from an international angle, not because to be international minded is to be holy, but because economic society, which is now the overwhelming aspect of society in the so-called civilized world, flows over, bg, and through all national boundaries, binding inextricably the economic good of each modern nation into the good of all nations.

(9) It is time, too, for a reappraisal of the good and evil elements of unre stricted competition. Such an elemental analysis will give us factual material upon which to invent ways by which the good in competition can be held and the evil' lessened. We have so far been satisfied with the mere slogan that competition is the life of trade; but this, like most slogans, says little or nottr ing. We know that food is the life of man; and we know, also, that food of the wrong sort, in excess, or in undue proportions, can be the death of man.

These examples of possible fields of action do not, of course, pretend to be complete. They are only suggestive; there are other possibilities in addition to them, in which anyone who is not so deeply discouraged that he will not act at all can find food for thought and opportunities for service.


There has been a great deal of careful thought recently given to the question of establishing some sort of a national economic council to undertake some degree of economic planning. And it has been given not only by theoretical men but by practical men as well. The report of the Senate hearings of Senator La Follette's committee last fall, a recent issue of the Annals, and s short pamphlet byvon Haan, present a very large and varied amount of material on the subject.

Objections to beginning such a project seem to classify themselves ander five heads—first, that cycles and crises are inevitable, and that it is not only useless to attempt to deal with them but harmful; second, that governmeu should have less and less to do with business, and that economic planning pren of the most limited sort would constitute, or would invite, intrusion of gore. ment into business affairs; third, that planning requires an intimate knowledse of every detail of economic activity, and a foreknowledge of the future, a well; and that since these are impossible, planning itself is useless or won fourth, the communists' objection that no planning is possible until the whole capitalist system is swept away; and fifth, the opposite objection that laises faire individualism contains within itself an automatic planning superior s the long run to any other.

The first objection, that cyclical catastrophes are inevitable, is inherent u the temperaments of certain men, and especially deeply imbedded if the happen to be in relatively comfortable economic circumstances or are of the

1 As an example and a most important one--the evils arising from the fact the ex competition is now blindfold. The social losses from panicky estimates of what can petitors can do and survive are very large. Open, full, universal, quarterly accoun) would revolutionize while preserving competition.

sort who would gamble upon themselves to win out no matter what happens. It is practically valueless to attempt to argue against such temperaments or such circumstances; but to men of other temper such a fatalistic attitude is of too much of a piece with the earlier attitude toward the great plagues as acts of God. These men will admit that it may turn out to be impossible to do as much as we should like, but will maintain that if business leaders fail to make any attempt whatever they would be left defenseless when some day under great stress an enraged populace will call them to account.

Argument against the second type, that government must keep hands off business, is only a little less useless when addressed to men deeply ingrained with the idea that business and government are two separate or separable seg. ments of the total social structure, notwithstanding the fact that a large majoriy of just these men are eager enough for government interference when they can see it react in their own favor. To men of broader perspective and richer historical knowledge it is more likely to appear that the fields of economics and politics in the last few hundred years have interpenetrated more and more intimately with every step in the development of the industrial system, the credit structure, and the facility of communication; that the fields, in fact, have never been separate or clearly separable, and that they are becoming less and less so with every year that passes. To such men any attempts to keep government out of business at any or all costs are likely to be as fruitless as Canute's edict against the rising tide. To them the crucial problem is the steady and progressive reorganization of governmental structure, so that its necessary influence upon economic life may contain less of harm and more of good.

The third objection, that men are not wise enough to plan, arises from a very common confusion of planning with a plan, and, moreover, with an interpretation even of the word plan, in terms of those plans which are most widely known to us, to wit, plans for a house or specifications for a machine. But as a matter of fact even finished plans are not necessarily thus rigid and specific. Only in those sectors of the engineering sciences where the objective can be clearly known and where all intermediate factors and materials are likewise known, can plans be so fixed. In most of the other fields of life they run in gradual steps away from this rigidity into the extremes of vagueness and flexibility. And planning is necessarily more flexible than the plans it may succeed in making. For planning must first explore its field of knowledge and determine the extent to which any given plan can be made specific before it attempts to draw up and plan at all.

The objection of the loyal Russian is partly an expression of his loyalty. But it, too, interprets the word planning so as to exclude any but complete and all-inclusive plans. When we plan for railroads so that they may operate more effectively, it is to the soviet devotee no plan at all, since it makes no plan for busses, trucks, or coastwise steamers. Obviously, however, his objections to planning as such is of little real import to him; his deeper conviction is that the ills of capitalism are of the essence of capitalism, not to be overcome by evolutionary methods, but only by the revolutionary overthrow of capitalism itself. In this conviction he rejoices when we wallow in all the ills of individualism and thus bring closer the “ blessed day of revolution."

But granting him the benefit of every doubt in his reading of the evidence of history, there still remains upon his main contention a doubt too vital to allow any American lover of mankind to fold his hands for what in this country may be 2 generations, or 5, or 10.

The fifth objection, that of the Lazy Fairies, will detain us here a short time only. To give their automatic-planning system a test we must first have a system of laissez faire, and that, moreover, in a modern world where frontiers of pioneer settlement are no longer wide open. We must, for example, eliminate virtually all tariffs at home and abroad, abolish the I.C.C. and the Federal Reserve Board, reduce to insignificance the economic efforts of taxation and of the issuance and retirement of Government bonds, and make other minor alterations. Putter once with a delicate automatic system and it becomes more delicate, and no longer automatic.

Planning is no new or mysterious process in our lives. We are always planning, whether it is to go to work tomorrow morning or take some kind of vacation next year. Plans can be for a long time ahead or for the next few moments; they can be specific, or vague; they can be written on paper or

« PreviousContinue »