immediate change in taxes. So long as heavy expenditures must be made for past and future wars, the first essential is to reduce drastically payments to veterans other than those disabled in actual service; the restoration of revenue tariffs on imports in contrast with the present prohibitory tariffs, which merely keep the cost of living too high; the imposition of a general sales tax for a limited period. While the present crisis lasts the Federal Budget can not be fully balanced, but flotation of long-term securities should be initiated, as the prospect of it is a serious deterrent to stability in the general bond market. Furthermore, measures should be taken to remove the present provisions for exemption of Government securities from surtaxes. Congress must recognize that taxes can not be reduced and the Budget balanced at the same time, and as long as the Budget is unbalanced through continued borrowing the banking system and financial enterprises are threatened. (7) Railroads must be permitted to readjust their excessive capital structures rather than artificially protected from reorganizations. The requirements of the country for economical and efficient transportation supersede the demands of the investment bankers and the holders of railroad bonds. At the same time the modernization of railroads should be promoted; Federal aid to waterways, highways, and other competing transportation systems should be abandoned; railroads should' be encouraged to lower their rate structure in order to restore traffic; and plans for consolidation into larger systems rapidly carried forward. The recapture clause should be repealed. (8) Economies in Government.-Economizing in Federal expenditures is impossible so long as large appropriations are necessary for war purposes. By contracting the advances of government through the Reconstruction Finance Corporation, through consolidation of departments, and through reduction in compensation to all public officials, savings can be made which will find their justification in the example they present to municipal and State authorities. I am convinced that with concerted effort along these lines there will develop a natural recuperative tendency which would remove the threat of dangerous experiments and unsound stiumlants, such as monetary inflation, devaluation of the dollar, vast programs of unproductive public works, bonus plans for farmers, and a broad extension of public ownership and bureaucracy. If the legislative and administrative forces of the country can be concentrated along the foregoing lines, and efforts focused upon a consistent program rather than frittered away upon haphazard plans and petty palliatives, the country will have demonstrated its ability to make the courageous decisions which originally made it great. (A letter received from Herman Waldeck is here printed in full as follows:) CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO., Hon. REED SMOOT, United States Senate Committee on Finance, Washington, D. C. DEAR SENATOR: Referring to your communication of the 8th instant; I beg to submit the following: The causes of the depression are so well known that to re-state them here seems unnecessary and futile. As for the remedial measures to be adopted to overcome the crisis, I venture to suggest the following: Restoration of confidence to be achieved by (a) A sincere and determined effort to balance the Budget. (b) The early enactment of banking legislation calculated to supply the country with a banking system that will at once serve its purpose and command the confidence of the public. (c) A prompt settlement of the war-debt question on a practical and realistic basis. These, to my mind, are the problems, the solution of which would automically solve most of the other problems with which the country is afflicted to-day. Trusting that the foregoing suggestions may prove of some service to your committee, I remain, Respectfully yours, H. WALDECK. (Letter and statement submitted by Mr. W. F. Gephart, St. Louis, Mo., is here printed in full as follows:) Hon. REED SMOOT, FIRST NATIONAL BANK, St. Louis, Mo., February 25, 1933. Chairman of the Senate Finance Committee, United States Senate, Washington, D. C. MY DEAR SENATOR SMOOT: Some time ago I accepted your invitation to appear before the Finance Committee to give testimony with respect to the present industrial and financial condition. Owing to the seriousness of the general banking situation, I hesitate to leave my office, and in addition it has occurred to me that perhaps the members of your committee would be served quite as well if I sent to you a brief statement. I am, therefore, sending to you a number of copies which I should be very glad to have you give to the members of the committee. Needless to state, I should be very much pleased if you could find time to run through this 5-page statement. Yours very truly, W. F. GEPHART. A STATEMENT BY REQUEST TO THE FINANCE COMMITTEE OF THE UNITED STATES SENATE ON AGRICULTURE AND ON PRICES, DOMESTIC DEBTS, AND INFLATION BY W. F. GEPHART, VICE PRESIDENT, FIRST NATIONAL BANK IN ST. LOUIS INTRODUCTION There are many explanations of the causes for the present world industrial depression, but after making all allowance for minor causes, the fundamental ones are to be found in the enormous destruction of capital occasioned by the war, the misdirected capital investment during and following the war, and finally the speculation engendered by the war. War is one of the few ways that saved capital can be destroyed. Not only does it actually disappear but during the time of great wars there arises a great increase in demand for certain products with the resulting over-development of plant capacity in manufacturing lines as well as in the production of certain food and other basic commodities. The prosperity and the rising price level which accompanied the war led to a further increase in plant capacity after the war in the belief that high prices and profits would be a continuing phenomenon. This condition of overdevelopment and speculation affected almost all classes of industries with the result that we now find an ability to produce many kinds of commodities far beyond any present or prospective demand for them. Along with this has been a rapid development of technological progress, represented by improved machines, processes, and scientific discoveries which have culminated during the past quarter of a century, adding to the difficulties growing out of the stimulation to industry occasioned by the war and the succeeding period of speculation. Then too, our commercial banking structure was weakened in the first instance by permitting the creation of commercial bank credit upon the basis of capital assets. In its initial stages, bank credit was expanded to meet governmental needs during the war. After the war its normal contraction was prevented. Additional bank credit was created on the basis of such capital goods as stocks, bonds, and real estate, and the credit so created was not self-liquidating. As capital goods have a longer cycle than consumers' goods they apparently maintained their values for a time in the face of the continually increasing supply of capital goods. Ultimately, however, they had to be subjected to the inevitable test of liquidity as they were supporting a commercial banking structure and when an attempt was made to apply this test the whole structure crumbled. No commercial banking system can have so substantial a portion of its outstanding credit, based on capital goods, as that of the United States, and expect to meet its obligations on demand or within thirty days. That fact probably more than any other single factor is largely responsible for the present plight of American commercial banking. While other countries have suffered even more than we from the effects of war, inflation and capital destruction, none have had a banking debacle comparable to ours, which has consisted of a gradual crumbling of the whole structure for over a decade. This basic defect in our banking structure can not be corrected by means of governmental credit grants without endangering the credit of the government itself. Even the United States Government can not perform a miracle and convert capital goods into self-liquidating commercial bank loans. AGRICULTURE The present plight of agriculture is due basically to the fact that there has been during the past quarter of a century a very marked change in the demand for agricultural commodities without an adjustment on the part of the farming population of the world to these changed conditions. This change consists, first, in an enormous increase in acreage; second, a very decided decrease in the demand for what were originally the basic agricultural commodities; third, the climatic and other natural conditions which are beyond control and very greatly affect the production of agricultural commodities during any one season, and in the fourth place, to the fact that agriculture is such a highly individualized industry. It is an extremely difficult matter to get any co-operation of a wide scale among agricultural producers. Taking 1880 as the basis, statistics show that by 1925 agricultural production in the United States had increased from 100 to 234. Crop land had increased from 100 to 200. (See Table I, appendix.) If the people of the United States had known 50 years ago what the present situation of agriculture was to be, the public land policy of the United States would doubtless have been quite different. Millions of dollars have been spent in bringing new land into cultivation through irrigation and drainage projects which in view of what has occurred should never have been undertaken. Another aspect of the agricultural problem is the decrease in the foreign markets for agricultural commodities. This has resulted in part from our commercial policy but more particularly from the fact that there have been developed new centers of production in the world and many nations have become more self-sufficient in the production of food commodities. Then too, not only because of the individualistic character of agriculture, but also because of the nature of the industry itself, it is difficult to reduce the agricultural population. It is very well to talk about the desirability of eliminating the marginal or submarginal land—that is, the marginal and submarginal farmers, but, as a matter of act, it is just these classes who are likely to continue longest in the industry. They earn no profit, no interest on the investment of the land, and not even good wages, but they persist in living on the land and eking out a bare existence. The population of the United States in 1914 was 97,577,500 and in 1930 it was 122,775,046. This represents an increase in population of 36 per cent between the two dates, 1914 and 1930. Yet, at the same time, agricultural consumption statistics show that with this population increase of 36 per cent, there has been a decrease of 28 per cent in the consumption of corn; 7 per cent in the consumption of wheat; 25 per cent in the consumption of oats; 30 per cent in the consumption of potatoes, and only 1.1 per cent increase in the consumption of dressed meats. (See Table II, appendix.) Another factor to be considered is the slowing up of the population increase, due to reduced immigration and the decrease in the birth rate. It is not probable that the people of the United States will, in the near future, adopt a more liberal immigration policy no more than is it likely that the birth rate will again be on the old level, and, therefore, the per capita consumption of agricultural products will not increase at the rate it did in the earlier time. The people of the United States are consuming larger quantities of fruits and vegetables and there is no longer the per capita demand for meat, bread, and potatoes. The agricultural industry in America, like many other industries, has for 50 years been geared up on the assumption that there would be annually an increased market. But, with the present slowing down of the population increase and the overdeveloped plant capacity in so many lines, there has come about perhaps the most difficult industrial problem for the next ten years-namely, that of adjusting capital structure and plant capacity to prospective demand for goods. The most pressing immediate problem for American agriculture is that of the mortgage debt. The farm mortgage debt is concentrated largely in the 12 North Central States, which in 1930 carried 59.5 per cent of the total. These States have 33 per cent of the total number of farms and 50 per cent of the value of all land and buildings in farms in the United States. The regional distribution of the remaining 40.5 per cent of the farm mortgage debt is: North Atlantic States, 6.8 per cent; South Atlantic States, 5.5; South Central, 13.7, and the Western States, 14.5. The total farm mortgage debt increased 137 per cent from 1910 to 1920, principally during and immediately after the war years, a period in which the general price level and farm prices were nearly twice the pre-war average. Distressing as the situation is at present, it should be noted that nearly 60 per cent of all farms in the United States are free of mortgage debt. In 1928, the peak year for farm mortgages, the total indebtedness rested on 40 per cent of all farms. Of the total farm mortgage debt in 1930, the last year for which an estimate on this point is available, about 56 per cent was on farms operated by owners, 40 per cent on farms operated by tenants and 4 per cent on farms run by managers. Of all farms in the United States probably about 1 in 4 was mortgaged and operated by owners and about 1 in 7 mortgaged and operated by tenants. The bulk of the present farm mortgage debt was incurred in years when the general price level was about twice, and the level of farm prices nearly four times as high as at the close of 1932. The creditor in most cases, therefore, lent about one-half of the purchasing power now owed him. To pay the debt under present prices, the farmer must part with about four times as many units of farm products. The total mortgages held by each of various classes of creditors has not been definitely determined since January, 1928, when it was as follows: Classes of lenders: Federal land banks.. Active farmers.. Other individuals. Total Per cent 12. 1 7.0 10.8 10. 4 22.9 10.6 3.6 15. 4 7.2 100. 0 This table suggests that the creditors' side of the farm-mortgage problem is by no means simple. The individual creditors, who number nearly 750,000—including active farmers and retired farmers with the savings of a lifetime of toil invested in mortgages as their protection in old age-held in 1928 nearly $3,000,000,000 of farm mortgages, or about 30 per cent of the total. Retired farmers alone held a total volume of farm mortgages about as large as that of all commercial banks and nearly as large as that of the 12 Federal land banks. Dollars were cheap when most of the present debtor-creditor relationship was established, compared with their value now. This is the central source of the farmer's debt problem and the main cause of stress and strain between debtor and creditor. In November, 1932, the buying power of the farmer's product was 51 as compared to 106 in 1910, due to the fact that the price of what he had to sell had decreased from 103 in 1910 to 54 in 1932, and the price of what he had to buy had increased from 98 in 1910 to 106 in 1932. (See Table III, appendix.) For the immediate situation confronting agriculture, there needs to be, first, a refinancing of farm mortgages, and second, a relieving of the market from the surplus of certain basic agricultural commodities. To accomplish the second purpose, it is suggested that the Federal Government lease wheat and cotton land and in addition purchase a sufficient part of the extraordinary surplus cotton and hold it from the market for a period of three years. If relief was brought to the producers of these two basic products, it would largely spread throughout the whole agricultural population. There is not presently or prospectively any such surplus of wheat as there is of cotton and the leasing of the wheat land would bring relief. But in the case of cotton, there needs to be not only the leasing of the cotton land but also the purchase of sufficient cotton to restore a fair price. For the longer term agricultural relief, there must be taken permanently out of cultivation many millions of acres of marginal and submarginal land. În addition, there should be no more reclamation projects by the Federal Government. It is suggested that these two measures for emergency and long-term relief will place the agricultural industry of the United States on a reasonable basis of prosperity. Agriculture will need to become more of a business and less of an occupation. The profits of agriculture in the United States, like in any new country, have come about largely from buying and selling land-that is, speculation in land rather than organizing and conducting farming as a business. PRICES, DOMESTIC DEBTS, AND INFLATION Much has been heard about magic recipes for restoring prosperity by governmental action. There are many who think that if we had an enormous inflation of the currency or credit this would correct the situation, because it would increase the price level, and many people believe that prosperity and high prices are synonymous. Inflation has its temporary merits, most of which are obvious. It is the easy way out, but it will exact a price to be paid later. The difficult way out is by acceptance of whatever rigors are required to balance budgets, by further adjustment of debt, by further corporation reorganizations, by further writedowns of fictitious values, all of which involve selective rather than blanket action. The latter course requires more immediate patience and application, but it involves fewer later dangers. It is desirable to look sharp and ponder well before drifting into inflation. All of these inflation schemes are based on the erroneous assumption that there exists in the country a shortage of money and that if in some way more money could be pumped into circulation, prices would rise and thus all of our troubles be over. Money is nothing more than a measure of wealth and services and increasing the units to measure wealth and services does not increase the actual wealth. The yardstick is the unit of linear measurement, but increasing the number of yardsticks in the world would not increase the number of yards of woolen and cotton cloth. Increasing the number of bushel measures in the world would not increase the number of bushels of wheat, and increasing the number of units to measure wealth, whether they are gold dollars, silver dollars, or paper dollars will not increase the actual wealth of the world, which consists of goods and services. As a matter of fact, there is no dearth of money or of money in circulation. There is just one way to increase the amount of money in circulation, and that is by increasing the purchases and sales of goods and services. The average daily stock of gold in the United States was $4,207,000,000 in 1928 and $4,240,000,000 in 1932. Likewise, the average daily circulation of money in the United States in 1928 was $4,782,000,000, while in 1932 it was $5,615,000,000. It is, therefore, erroneous to argue that there is any need for more gold or more money in circulation. There has also been, during and since the war, a concentration of the world gold supply in the central banks and in the hands of the Government so that the gold of the world can be used more effectively as a basis for credit and as a reserve. (See Table IV, appendix.) In assuming that existing low prices are the sole barrier to recovery the proponents of inflationary schemes are viewing only one phase of the problem and are neglecting a number of other important factors. It must always be realized that it is not alone low prices or high prices that necessarily handicap the normal flow of business. In industrial society, as it is at present organized, we have essentially a system based upon the exchange of goods and services for goods and services. As long as approximately the same volume and character of goods and services can be exchanged for a similar volume and character of other goods and services, the price factor is of itself not necessarily a disturbing element. One of the essential difficulties in the present situation is the change in the relationship that has taken place between various elements in the price structure. Prices of themselves are purely relative, and there can exist just as many inequalities and difficulties during a period of high prices as during a period of low prices if long established price relationships are thrown out of their customary relative trading position. This factor is well illustrated at the present time in the Department of Agriculture's calculation of the ratio of prices of farm products to prices of what the farmer can buy. In November of 1932 this index was 51 per cent of the prewar average. In other words, at current prices for farm products the farmer can buy only about 50 per cent of what he could before the war. Thus, in considering inflationary schemes, through tinkering with the money mechanism, it should be realized that a mere general rise in prices as a result of such procedure would not necessarily enable the farmer to purchase any more at the higher price level than he could at the lower price level, unless the existing inequalities in his exchange position were corrected. Any deliberate attempt at inflation would create new and other aggravated dislocations in the general price structure and would prove beneficial solely to certain debtor groups. Finally, the Government can only very indirectly, by act of legislation, help the situation. If it were possible to legislate prosperity and morality, we would soon create a Utopian world. The process of deflation, painful as it is, is progressing. |