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with blaming the Federal Reserve authorities for not restricting credit sharply even sooner than they did—and this notwithstanding the fact that commodity prices were not rising? If a slump in the stock market for any reason whatever should tend to decrease bank credit, such effect should be immediately counteracted by low rediscount rates and a policy of open-market purchases on the part of the Federal Reserve banks. But if each seemingly unjustifiable rise in stock-exchange prices is to be the signal for a sharp and persistent country-wide restriction of credit by the Federal Reserve banks, then we may well begin to wonder whether the country can ever hope to enjoy any considerable period of sustained prosperity.

I should like to take this opportunity to express my dissent from the proposal that in order to raise agricultural prices the Government pay a rent for the holding of land out of use. This suggestion recalls recent attempts in some of our States to maintain the price of gasoline by compelling cessation of production from oil wells. Will we be likewise urged, before long, to attempt a rescue for businesses in cities by paying land speculators to hold city lots out of use?

Every really competent student of economics knows that the more land is withdrawn from production the poorer become the opportunities of the laboring man. The resources to which he may devote his labor are artificially de creased. The area on which labor can be employed is reduced. Greater un employment must result unless and until labor consents to a reduction of wages. A decline of prices consequent on business depression seems to give rise to a variety of schemes to help out the owners of property by increasing the burdens and handicaps of those who own nothing at all.

In England there is a powerful movement, having the support of the majority of Laborites and Liberals, to increase the tax on bare-land values. The fact that such values are produced almost entirely by community development rather than by the individual is not the only argument urged for this policy.

It is contended also that by such a policy land speculation will be discouraged, the area of employment enlarged, and wages increased. “ Idle land", they say, “makes idle men." But at the same time we in America are being urged tu adopt direct Government encouragement for the withholding of land frou production. Because of our interest in owners of farms, oil wells, and, perhans. other property, are we going to overlook completely the needs of propertlyless wage workers and put upon these, who can least afford to bear it, the entire burden of the depression?

A policy of sufficient credit and currency expansion, coupled with success in securing general agreements to reduce barriers to international trade, an! along with these, stern repression of monopoly in the production of goods farmers must buy, ought to make obviously uncalled for any such uneconon. and unfair measure as this of taxing wage earners to raise money that in be used in reducing their opportunities for employment. Let us restore pre perity, and increase of jobs will again draw many workers to the city. L us not try to accomplish this purpose by reducing present opportunities in th country for laborers and, perhaps, for tenant farmers, while paying rent: out of the consumer's dollar to landowners who will cooerate in a policy thu injurious to the laborers. Can it possibly be the case that in this period. distress Congress and the administration will consent to employ only incors quential and harmful specifics and will persist in neglecting the one the: most important?

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It seems unnecessary to suggest measures for the promotion of econor, recovery, since the administration is evidently provided with a sound and aú quate program. The most essential steps may, however, meet with oppositios and the economic principles which make such measures necessary need to be discussed and emphasized at every opportunity.

Three stages of Federal action may be distinguished. The first is that which the Government consolidates its position; the second is the adran. the third will be the stabilization of prosperity.

Before a program of advance could be undertaken it was necessary to : control over the banks and potentially over the securities markets, so t. neither public panic nor financial manipulation can force the closing of t banks. This object has already been accomplished. Financial pressure !

be put directly on the Government either by exporting gold, by forcing liquidation of debts, or by frightening bank depositors into withdrawing their deposits. The Government can quickly establish any regulations necessary to protect its program.

Moreover, the Government has proved its ability to reduce waste and to resist the veterans' lobby. These measures, though directly injurious to business, have lai the foundation for a large increase of Federal expenditure, now that the country knows the money will be carefully and honestly spent. The program of advance must necessarily take the form of very large expenditures for public works and services, outside of the regular operating Budget.

Prosperity depends on a continuous supply of consumer buying power; money which accumulates in large incomes or capital funds must be continuously redistributed to the smaller incomes, or else the market for business necessarily dries up. Previous depressions have ended when this distribution recommenced through a revival of commercial investment which created employment and distributed wages to the building industry, This process is blocked this time by the following facts: (1) The new investments would be new business debts, and business still has left from the last boom an undeflated debt burden greater than it can carry. In previous depressions the mortality of capital was sufficient to make room for a large mass of new investment, but this time the required volume of bankruptcy was more than the country was emotionally able to endure. Measures were taken to prevent the collapse of capital structures. These measures may have prevented serious disorder, but they also blocked the possibility of enough new investment to restore prosperity. (2) The accelerating rate of technological advance renders it impossible to give enough employment on building new machinery to overcome the unemployment caused by the new machinery itself.

Capital funds must therefore be dissipated by direct spending in sufficient volume to provide business with a market without saddling business with large new debt burdens.

Just as business cannot stand the effects of a recovery depending on large capital investment, so also it cannot stand a recovery based on self-liquidating public work. Self-liquidating works have the same effect as business debt, because they drain off consumer buying power and reduce the buying market. There is no escape from the economic law that sound investment cannot be more than what business can carry, and that all other accumulated funds must be dissipated by spending or they will automatically dissipate themselves by bankruptcies.

This economic law is contrary to what has been believed to be “sound finance. There will therefore be sincere opposition from those who consider it unsound to dissipate capital funds without setting up an equal volume of new debt. This opposition must be overcome or it will emasculate the program by causing the growth of a new debt structure resting on the consumer, thereby leading inevitably to a new collapse of business.

The natural automatic adjustments of society to a high and increasing rate of mechanical productivity have become inadequate, and require to be deliberately fostered by Federal action. Shorter working time, the minimum wage, the restriction of child labor, and a generous old-age pension system are valuable and necessary palliatives. The fundamental adjustment, however, must necessarily lie in a rapid growth and in deliberate conservation of the service markets. The production of mterial goods can never employ more than a small percentage of our available labor. The surplus must necessrily be employed in cultural and quasi-cultural services, most of them generally classed as luxuries. The private luxury market, on which business now so largely depends, is excessively unstable, falling off severely in depression. Until the people are habituated to a high rate of personal spending, the market can be stabilized only if the Government serves as agent for collecting and spending a large percentage of the national income. Moreover, by proper tax exemptions, the Government can and should force a large volume of contributions into semi-public service institutions. For this reason public expenditure and insti. tutional expenditure supported by tax-exempt contributions must greatly increase in the future if there is to be any hope of stabilizing business.

This, too, is contrary to what has been thought to be " sound” finance, and will be sincerely resisted by those who still think in terms of a system of low productivity. The resistance of these financial influences must be overcome, or business can never attain a stable prosperity in this country.

The process of financing an adequate program of public works in advance of the revenues necessary to pay for them involves certain dangers that are not generally recognized. If the bonds issued for this purpose are sold to the public for cash, the effect will be deflationary, and will largely counteract the stimulating effect of the public work itself. Moreover, if after the return of prosperity the bonds held by the public are paid off, the effect will be inflationary, tending to create a dangerous boom in the securities markets On the other hand, if the bonds were to be sold entirely to the Federal Reserve, and paid for by an expansion of credit and currency, no deflationary effect would occur, and the stimulating effect of public works would be wholly operative. Again, when the bonds were paid off in good times, the effect would be deflationary, and would tend to prevent any tendency to a runaway intiatior such as occurred in 1929. If it is necessary for psychological reasons to sell part of the bond issue to the public, the inflation of Federal Reserve credit or notes will no doubt be managed so as to avoid a collapse of the general bond market. The other half of the process, however, is more likely to be misunderstood. In order to prevent the inflation from running away as it did in the last boom, it will be necessary to collect taxes from capital funds while the bonds are being paid, so as to cause no net increase of free capital in the hands of the public due to such payment. Otherwise the inflationary effect of Federal bond payments will be added to the other dangerous currents against which the Federal Reserve is forced to struggle at such a time.

Here, too, the necessary policies are contrary to what has been thought to be sound finance.” Financial opinion will generally favor the minimum of inflation during depression and the minimum of deflation during prosperity. So far as financial influences prevail, there is danger that measures for promoting recovery may be rendered ineffective; and if recovery is obtained, such influences are liable to result in failure to control the inflation.

When prosperity has been restored through a bold program of Federal er penditure it can be preserved only if two permanent policies are adopted. The first is a large and increasing program of nonself-liquidating public services In order to find an adequate outlet for the volume of expenditure required to keep business in sound condition it may be necessary not only to devise new and enlarged forms of public service, but to reduce or abolish many fees and charges now collected by the Government. Federal subsidy of local water supplies and bridges and reduction of postal rates are possible examples.

The second necessary policy is a shifting of tax burdens to the upper brackets of incomes and inheritances and reduction of taxes on business, ou real estate, and on the consumer generally. If this policy is adopted on an adequate scale it will conserve the market for goods and services and will postpone the growth of the capital structure to the point where it can destroy business by the excessive increase of overhead. On the other hand, any attempt to relieve large incomes either by “spreading" the tax burden or by se f. liquidation cannot have any other result than to repeat the events of 1929–33.

Here, again, the policies necessary to preserve prosperity are contrary to the accepted principles of "sound" finance and will be sincerely condemned in many quarters. Unless the resistance from financial sources can be succese fully overcome, it will be impossible to prevent the history of the last decade from repeating itself in more violent form.

Finally the principles involved in the "balanced Budget" need to be fully understood. When the Federal expenditure is very much in excess of its receipts the result is stimulating to business, and tends to cause a large increase of Federal income and the reduction of the deficit. When the expenditures are reduced the tendency is to depress business, reduce receipts, and increase the deficit. It follows that when a Federal deficit appears expenditures should be increased on such a scale as to restore prosperity and wipe out the deficit. The situation resembles war in the fact that a spending program on a scale insufficient to destroy the depression is totally lost and serves only to use up Federal credit. It also follows that when a surplus appears taxes should be largely increased, so as to prevent inflation of the securities markets and the destruc tion of prosperity. The general principle is that in hard times the fiscal policy should aim at a very large deficit and in good times at a very large surplus, arriving at an approximate balance over a complete cycle.

This economic principle is also contrary to what has been believed to be "sound" finance. Financial opinion leans to the policy of reducing taxes in good times and reducing expenditures in hard times, a policy the results of which have been disastrous to business. Business cannot be placed on a sound

basis of stability unless the influence of old-fashioned financial opinion in this respect is successfully resisted.

The foregoing statements of economic law, proved to be correct by the course of events since the war, are offered in the hope that they may be of assistance in buttressing the policies of the present administration which are required for curing the depression and stabilizing the subsequent period of prosperity. They illustrate the fundamental fact that the interests of finance and those of business are incompatible and that if this Government is to succeed it must succeed in protecting business against the influence of finance. In a highly productive economic system, in contrast to one in its pioneer stage," sound finance and sound business cannot exist together. If “sound finance is attempted, the event has shown that business is wrecked and the system is wrecked. There is no way to make the system operate except to give business the right of way and force finance to conform to the needs of business.

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THE CYCLE 1927-32

The study of business cycles is still young and we know as yet too little about their real character to give a full or dependable description of them. Presuming, however, upon the rights and prerogatives of an amateur, I shall attempt a rough and somewhat hypothetical description.

Each cycle has features in which it resembles others, and each has unique combinations of factors. In general it would seem that an increase in almost any part of our economic activity results in freer buying, larger employment, more borrowing, heavier investments. It is as if this activity were reaching for the maximum development which is possible in any given community; in a broad and somewhat charitable mood it might be called the pressure for the advancement of civilization. But the combination of competitive rivalry and a quite imperfect knowledge causes this reaching to turn into an overreaching, which even under perfectly healthy conditions results in a slowing up and holding back, as if in the search for a normal rate of progress. The time lag between cause and effect in economic activity slows up the adjustment of the normal rate and considerably exaggerates the swings and underswings, causing alternating periods of hypernormal and subnormal activity. Part of the time economic, political, and social health is relatively good, this overreaching is relatively mild and its reaction correspondingly so. It would seem from the history of the past as if, left entirely to themselves, these simpler cyclic factors result in a total swing which runs over a period of 40 months. But they are never left wholly to themselves. Some of the time these simpler forces are practically overwhelmed by others.

It is possible to draw a useful picture of the economic forces of the past hundred years if we use the conception of a series of waves overlapping and interacting. It is not, however, a useful picture if the analogy is carried too far; or if it is thought that these various wave series are regular or fixed and established in their character. Such a picture can only pretend to be a rough and inadequate approximation of the truth.

In the first place, there are the usual cyclical waves averaging something like 40 months in length; and by themselves running perhaps 7 or 8 percent in height above and below average. On the surface of these waves there are the short seasonal wavelets, but these for our purposes can be overlooked since the technique of statistical description of the cyclical pattern has been so far developed that it can be shown independently of the seasonal swings. Underrunning these cyclical waves there are a variety of others. There are the waves of agricultural production, which have been variously estimated as of 7., 9., and 11-year lengths. It is certain that there is no confcrmity, or complete causal dependence between these waves and the cyclical waves. Nevertheless, it is upon them, as upon some others to be noted later, that the cyclical waves perform. Secondly, there are the great swings of the wholesale price levels, which since the Napoleonic wars have shown a total swing of about 50 years, running down for approximately 30 and up for 20. We are now upon the third down-swing since the Napoleonic wars; but with so few in the records, and records in any case being so inadequate, with these waves particularly it is unsafe to figure upon any regularity or any inevitability. They can, of course, be taken as the waves of the value of gold as well as the waves of the general wholesale price level. And while the relation between the quantity of gold and the price level is by no means definitely settled as yet, it is sig. nificant to notice that the gold stocks of the world increased 22 percent between 1905 and 1910, 20 percent between 1910 and 1915, 18 percent between 1915 and 1920, 10 percent between 1920 and 1925, and 10 percent between 1925 and 1930. To intensify the unfortunate results of this last small increase it must be borne in mind that something like 30 countries went onto the gold standard between 1922 and 1930.

Thirdly, there is a highly speculative but, nevertheless, quite possible great secular trend centuries in length toward and away from relative security. It is possible that one trough of this wave can be placed prior to the Renaissance, rising steadily upward toward pioneering and insecurity, and reaching its top somewhere toward the end of the last century. The wave character of this movement can very easily be questioned. It is, in fact, very doubtful indeed; but what is less doubtful is that the closing of the most available and most inviting open lands at the end of the nineteenth century (those of the l’nited States) has certainly made a vital difference in the minds of men and to the relative risks and penalties involved in rapid rates of change, in pioneering, and in the logic of laissez-faire.

And, finally, there are the random perturbations in economic affairs such as the plagues and famines of nature, the wars of political units, and other social and political overturns. These might be likened to tidal waves, which certainly as yet seem to show no regularity but which vitally affect and condition the behavior of all the other sorts.

Again you should be warned that this is a mere analogy and that it over simplifies the situation. It is certain that these economic results cannot be simple physical and arithmetical summations of various wave motions, even granting that the wave motions exist. Affairs in the economic world as in the psychological react upon each other in too complex a fashion for any such simple picture. It can be, however, fairly safely assumed fo this picture that the fall of any given wave is seriously affected, if not totally conditioned by its rise; and that it is during the rise that we must expect to take the most effective steps for any cures and mitigations of the evils of the fall. You should be further warned that these movements are all aggregates of a great many separate factors, and that among the separate factors individual cases will run wholly counter to the statistical average of the total.

Granting all the imperfections of this picture, it will, nevertheless, be inter esting to attempt to fit the cycle of 1927-32 into it. What were the ground swells upon which the simple cylical recession, beginning in the middle of 1929, imposed itself. In the first place there was the great tidal wave of war, te ceding, but still affecting the world economic situation. Secondly, there was the receding price curve, which from a trough in 1897 had found its peak in 1920. Thirdly, there was the receding curve of agricultural prosperity, reis tive to the prosperity of commerce and industry. Fourthly, there was an advancing wave of political stability, although from what may be called a ver! low trough in 1923, nevertheless advancing, I think it is safe to say. Fifthly, there was an increasing difficulty growing in international commodity es change, through reparations and noncommercial debts and through the growth and intensifications of tariffs, which thickened the economic streams and lent it a viscosity of rather unusual strength, for modern times at least. Sixthly, there was a very rapid acceleration in the rates of increase in productive efficiency. And seventh, a decided increase in the proportion of the total income of the civilized world which was destined to be devoted to investment channels as against that proportion which was destined to be devoted to the purchase of consumers goods; and this in spite of the widely advertised abso sute increase in per capita consumption spending; in other words, in the staniards of living of the masses.

This last statement is so counter to the belief which gained strong currene up to 1929, and since, that certain figures should be given in support of it

, In the first place there is an analysis of manufacturing costs on the basis o? 1923 as 100 which shows that in 1929 the selling price was 90, cost of material 87, cost of labor 84, overhead and profits 102. Secondly, there are the rewards in the manufacturing world per unit of product taking 1899 as 100.

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