STATISTICS RELATING TO SECURITY l.fARKETS

A~D CORPORATIONS* * * * * * * * *

P~per cead by Paul P. Gourrioh,Director of Research ~ivision

Securities and Exchan~e Commission,

at the9?th Annual Hee t Lng of the

American Statistic~l Association ,;~ew York City

December 30, 1935

If T al~ not grossly to excE~d the tlme allotted me for the Jiscussionof the n~w sta~istical material which has become &vailable to the publicthrough the medium of the 3~curities and Exch~nge Commission, my remarksmust necessarily be confined to a bare enume ra t of r-La collectedwi th a few comrien t s 011 the nature and limi t.ations of the more importQnt 'series of this data. .

.:'he SEC, as you know, is a young a~encJ'. The; fundamental desire ofthe. Com!lliss~on is .to nakc available to the p ub t I.c st atLs t.Lc aI date of gen-eral Ln t e r-es t as rQ.pidly as is cons Ls t.erit ....ith their nature ana it couldhardly oe otherwise, for full publicity is one of the surest m~ans ofachieving the major objec~iv~s set up by Congress. Jut since practicallyall of our series were started from scratch Within the past y~ar, we arestill accun.ulat Lng a considerable body of lr...tterie:lwiden ha s not been madepUblic because we wis~ to test i t s consistency anJ reliability before doing sc

Other consequences of our short sp~n of existence are that Wv h~venot ye~ been able to utilize to the fullest a.ll of the Material which ismade available to the Commission in the discharge of its administrativeduties, and that there art; still wide fields which we had to leave untouchedbecause we necessarily must devote our attention first to those problemsmost essential to the current. adm.in Ls t-r atdon of the Conunission. },'ehope,thel'efore, .that we will be able to report a year hence almost as l~r~e areservoir of new s~atistical i~formatiort as we dre reporting today •.

Since the adroiLis~ration of the public Utility Act of 1935 is stilltoo much in its inf~ncy to w~rr~t discussion ~t the present, I shall con-sider only those statistics which have reSUlted from the administrationof the Securities Act of 193~ and th~ Securities Exchange Act of 1934.

The statistical materials will be di~cuss~d in the following ord~r:

1. Published l",aterial.

II. Haterial Not Yet. published.

III. ~iscellaneous Data. 4260/

Lon raa t-e Ls

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Published Naterial

A. Honthly Summary of Issues Re~istered under theSecurities jct of 193i

This series -- the backbone of the sta~istical work in the field ofnew issues of securities -- is released about the 29th of each montn andcovers 311 publicly offered, non-exempt issues of ~100.000 or more, forwhich a registration state~eht became effecti~e during the preceding ~ntn.!1Up to November 30, 1935, 1.329 statements had been filed witn the'Commissioncovering new issues totaling $4.085.819.000; G13 of these statements,cover-in~ new issues totalin~ '33.509. 727.e'JOO, became effect.ive under the Act andare contained in this series.

Total effective registrations are 1ivide.j into two ~roups: (1) thetotal for all issues intended in whole or in part 'for cash sale, and (2) thetotal for issues to'be offered in connection ....itn r~or~anizatibns, extensionof mat~ities, and in connection with voting trust arrangements. rne totalsare broken down to show the distribution according tp type of issue (commonstock, preferred stoc~, debeutures, etc.) and type of issuer (industryclassification). For the'first ~roup only, e~penses expected to be incurredin distribution (as estimated by the registrants) and the proposed uses of theproceeds are also given. This last item is of great importance, as it servesto indicate just when and by what amoun~s corporations raise new capital tobe used for expansion of their plant and equip='1ent.gl

In connection with the use of this series it should be borne in mindthat all statistics derl~ed from eff~ctive re~istration statements refer to"registered intentions" to sell securities, and do not neces'sar-f Ly representsecurities actually offered for sale or solj; and that they re~resent tneregistrants' estimates of expected proceeds and contemplated u~es of thefunds, rather than actual receipts and expenditur8So The importance of thislimitation is lllustr~ted by the fact that a sample fOllOW-Up coyering issues

1:/ Securities' issued by.a common carrier subject to the provisions of Section20a of the Interstate COlllmerceAct, baaz issues, securities sold ex-clusively to persons resi9ing within t~e state of or~anization of theissuer, seourities placed ~rivately, securities i~su~d in certain typesor'exchange~, etc. a~e e~empt under the 1933.Acto

This release incorporates only a portion of the regularly ~:1bulatedmaterial obtained from th,eregistration statements. .1'r'ithinthe Commis-sion, the above data, and ~um3rous other items of statistical ~nterest,are .tabulated into approximately 00 industrial and finar~ial ~roups,.according to the standard classification used by the Research Di~isionin other studies.

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whIch had become effective in a single month (November, 1933) disclosedthat only a relatively small proportion of the tota~ amount of securitiesregistered had been sold within 16 months after registration. Althoughthere are ~ood reasons for believing that the discrepancy is very muchsmaller durin~ the present refundin~ market. a warning must be soundedagainst using regis~ration statistics indiscriminatelY to represent ormeasure the actual volume of new issues absorbed by investors. 1/

a. Hoothly 'Summary of TraJine on l~xchan~es !lee~stet"ed under the1914 4ct.

About the 25th of each month, the Commission makes public, for eachregistered securities exch~n~e in the United States, the follOWing data forthe preceding month:

1. The number of shlres sold, includin~ odd-lots and stopped-stock:2. the market value of such shares;3. the par value of bonds sold, including stoppeJ-bonds;4. the market value of such bonds. and5. the market value of all securities sold.

rhese data are reported by the members to ~he respective exch~nges andby the exchanges to toe Commission in order to provide a basis for the pay-ment of the tax of 1/500 of 11 on the v31ue of turnover, introduced bySection 31 of the Securi~ies Exchange Act, and cover the period from October1934. ?oJ

1hese monthly totals are of interest 'statistically because they embraceall sales and are, therefore. more comprehensive then "total reported sales"__ the figure ordinarily given by newsp3pers 3nd financial services.

Another limitation is that the statistics pf re~lstr.3tions from July,1933. to A~ust 1934. inclusive. were compiled by the Federal Trade Com-mission {predegessor to the SEC in the administration. of the' SecuritiesA~t of 1933l. and are not comparable with the statistics for later monthsin all details,' Upon taking over th~ work. tne SEC enlarged the scopeof the tabulations and changed the method of ~roupin~ the proposed usesto be male of the funas. Althou~h this change was made in September 1931,the releases of the' Commission were kept on the old basis to the end of1934.

$imil~r data for exempt exchan~es are also available, but. have not thusfar been released.

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- 4 -C. rfonthly Summarv of transactions by Officers, lri rec to rs, l.nd

Princip~l )t~ckholde,.s

Under Section 18 (a) of the Securities ~xchange Act, officers, directors,and principal stockholders (i.e., per~ons owning beneficially more than 10~of an issue of e'-!uitysecurities;' of corporations with e'luity secur LtLe s listedon a national securities exchange are req4ired to report to thp. Securities and£xchan~e Co~nission every month e3CU transaction in all the e~uity securitiesof sucn issuers.

In addition ~o reports on transactions, taese persons are required toreport their holdings (on Form 5) when tne corporation becomes permanentlyregistered on a national securities exchange (this happened for the majorityof listed corporations en July 1, 1035); ~nd (on Worm 3) when they beco~e ~nofficer, director, or princi?31 stockholler of the corporation. fhey mustagain report "their holdings on F'or-m 1 after every ch:lntiein SUC~l nold in~s.The transactions anl the holdings reported on ~orms 3 and 3 (witn ~he excep-tion of the approximCltely 15,000 reports on !"orm 5 received in July 1935)have been published regularly since "1arch 1933 in the "Official Summ3.ry"issued twice a month. fllthough this material lends itself t'aa..1ilyto tabu-lation. statistical difficulties, some of which are mentioned in tne follow-ing footnote. have thus far prevented ~he'Commission from maKing ?ublica€gre~ate figures derived from these reports. 1/

1/ On the average, reports for 3bout 1,7~0 transactions are received everymonth by the Commission. Phe reports not only 3t~te the date of tne'transaction ~nd tne a~ount of securities dis?osed of by the reportingperson, but moreover giv~ some indication 35 to th~ relationsh~p of thereporting person to the corporation, the form of ownership and __ whatis more important -- the type of ac,-!uisitionor dispositio~ repor~ed.'Pbe characterization of the type of t r-ans act Lon by the J.'eportingpersonsis. however, not always as clear as one tni~ht wish it to be and it is,therefore. sometimes impossible to distingUish with ccrt3.inty betweenmarket transactions (i.e., purchases anJ sales on an exchange, on theover-the-counter market or througn priv3.te deals) and transactions in-volving no cash consideration such as gifts. exch3.nges. li~uidating divi-dends and the like. Another diffiCUlty is presented by the fact that anumber of transactions are reporteJ bi more than one person; this is thecase, for instance, with acqUisitions or dispositions by a partnershipreported by every partnero Therefore, in order to arrive at correcttotals it is necessary to eliminate these duplications; but inasmuch asthe indications given in the report are no~ always unambiguous, suchtotals contain another, althou~h probably not a.very serious, source oferror.As for holdings, the SEC is now engaged in the preparation of :l "Census ofholdings" which will bring together all the reports on B'orms 1, 5, and 6,eliminating all but the most recent reports. I'rie "census" will then givea picture of principal stockholders', officers'; and directors' holdingsin corporations with e~uity securities on a na~lonal securities exchangeas of December 31, 1935. Later on we intend to make appropriatedeductions for the self-ownership of American corporations (reacquiredstock) as well as for inter-company holdings with a view of getting anapproximate estimate of the net amount of securities outstanding.

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II

NateriaL Not Yet Published

A. Comprehensive Seri~s,of All Aew Security Issues.

Statistics derived from registration statements cover only a part, al-though a relatively large and importGnt one, of ~ll new issues offered inthis country. \'t'ef'ound the' currently available series which purport tocove~ this field ra~her incomplete and unsatisfacto~y for our purposes, andconsequ~ntlY it w~s felt necessary to construct a comprehensive monthlyseries of our own for .all issues of new securities. The series differs fromthose currontly available particularly in that it (1) includes issues bythe p. S. l'reasury and its .agencies; {2} attempts to include .all privatepl~cing5; (3) tries to distinguish sharply between issues offered for cashand issu~s offered for exchange or for other. consideration; and (4) groupsthe total net proceeds in several brodd categories .according to their use,such as purcqase of securities, purchas~ of other assets, expenditures onPlant and equipment, rep&YMen~ of funded debt, repayment of other indebted-ness and increase of working capital. 1/

B. Data ~elattn~ to Investment Bankine.

An analysis of registration statements also provides us with informa-tion on the relation of investMent ~~nking to new security issues. Amongthe da~a derived are: (1) the type and extent of the bankin~ commitment;(2) the cost of financing .~nd the gross compensation of the underwriters;(3) the extent of the employment of and the ccmpens atLcn to de a.Ler-s inselling the new issues; (4) the a~ounts of issues originated by or partici-p'ated in by individu~l banking houses tabulated on a more .accurate basis thanthat available in the past when participants were credited with the wholeof any issue rather than with their respective shares.

c. Statistics Relating to Corporation Finance.

The regist~ation statements filed under the 1~14 Act by companiesdesi!in~ to list securities on a registere~ securiti~s exchange .afford aninvaluable source of information about, cor-por-at Lon finance. These st.atements.are a~ai~~b~e to the public ~t the Commission's office, and .at the excqan~eson which the securities are regis~ered. Am~ng o~her things the registz:ant .1s ~equi~ed to give 4ata on the fpl~ow$ng subjects:

1/ A variety of sources is utilized in stcuring these data. The qata .onpri~ate placinf,s ard baSEd chi~fly on questionnaires; those on issues ofrailroad securities are taken from the dockets -of' t ae ICC, and those onU.' S. Govt:rnmt:nt s~curities are supplied by the Treasury. For state andmunicipal issues we have to be content with the series commonly ~vailable.Wi th respect to registered issues., only those are included for whichthere ~s a record of dn ~ctual public offering. This is.a necessaryst,atistical "deflation", result'ili'gin the omission of small issues and~ales of securities of investment trustQ of the open-end type. However,tnese omissions 'are pro~ably not so 6reat as to .affect the to~als to .anysignfficant extent •.

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1. Its sales of all securities within three. years of tbe date ofregistration to any persons other than employees. The required informationincludes the title of the issue, the date-of sale~ the aggregate net pro-ceeds, and the names of the unjerwriters, if any.

2. Information concerning options to which any of the registrant'ssecurities are subject. The prices, expiration dates, and'other materialcondiUons relat1ng to the exercise of these options must be ~escribed.Names and addresses of persons holding substantial interests in the totaloption must be given. The consideration for any option granted in thethree years prior to registra~l.n must be speciried.

3. From the majority of'the rorms for registration under the'Securi-ties Exchange Act we have, for the firs~ time, picture of the completeinterest dYrectors, officers, and principal stockholders have in theirrespective companies since,' unlike reports under, Section'le, they have toreport not onlY'their holdings of equity securities, but all other securi-ties in registered companies of which they act as officers or directors orin which they own more than 10 percent of any cl~ss of equity securities.

4. Some other subjects on which the registrant is required to fileinformation are: (a) officers' remuneration and remuneration to employeeswho received over $20,000 in the past fiscal year; (b) material bonus andprofit-sharin~ agreements in effect at the time of registra~ion; (c) generaleff~ct of all material management and general supervisory contracts in form iprOViding ror management of or services to the registrant or any of its sub-sidiaries, information which is of partiCUlar value in connection with pub-lic utilities and holding companies; (d) important. details of material con-tracts with underwriters, dir.t:ators,officers,' or principal stockholders;{e) details of substantial changes in the registrants' or its subsidiaries'capitalization such as revaluations, adjustments of reserve accounts, re-statements of capital stock, transfers to and from surplUS and write-ofrs;(f) balance sheets and income accounts. . .

The financial statements attached to the forms for registration underthe Securities Exchange Act of 1934 and the financial statements which willbe attached to the corresponding forms for annual reports just rel~ased ornow in preparation furnish an almost unlimited field for the student ofcorporation finance, a field which the Securities and Exchange Commissioni\8el!'has not as yet been able to explore, partl¥ for lack of funds. Afirst attempt at tabulation and analysis of the annual reports ~or the fis-cal lear 1934 is about to be undertak~n within the framework of a t~A pTO-ject--"Census of Listed American Corporations"--which is soheduled to becompleted at ~bo~t the middle of 1936. 1/

J:/ It is the hope of the Commission to make a regUlar feature of tlie tabula-tion of the annual financial statements, which although still far frombeing completely. standardized, will be decidedl¥ more ~menable' to com-parison than the statements made public hitherto b¥ the corporations.This would prOVide the investor and the student of corporation financewith detailed and extensive, material, supplementing the stat~stics ofthe Bureau of Internal Revenue which, however, are set up with differentpurposes in view and therefore are not strictly comparable.

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At t.Le present time, the only regular statistics worthy of mentionDlaint~in'3d by the COInnlissioll relating to corporation finance other thanthose arising out of the Acts are the quarterly earnings of about ~00 reg-istered corr-panies, cl~ssified according to the industrial grouping previ-ous l y merrtLoned, This classi f'Lc at i on has been carefully work~d out \'Ii th aview to s,~curing a homogeneou.s functional grouping.

D. Tabu l atn on of Securities Traded on a l?el1stered Exc hang e,

There is now ip process a tabulation of all securities listed (and/oradmitted to unlisted tra~in~ privile~es) on all registered pxchanb€:s, Itis int",nded that these lists will be reviewed once every three months, giv-ing us a quarterly census of issues, by exctanges, by size, and by indus-tries (and possibly also their total market price).

]rI

11scellaneous Data

The staff of tre Comrr-ission is ccntinuously engaged in ma~ing more orless compr-c hensI v e s t.ud.ies or. v rr-Lo us technical studies which involve theuse of r.ew statistics, der Lved r'rom field lrlvestig:>tiorl or, in some cases,our own statistics. Amongt hese we Play nc t e the following: (1) the studyof r-eo r-g anLzs t Lon commrt.t ees , headed b;,' P'r of'es aor- I:ou~las; (2) the relation-ship of pt:rg.l.n@ arid stabilizin6 'to overp r Lct ng; (3) opt Lons ; (4) brokers'solvency; (5) OVt: r-the-counter nar-ke t s , e t c,

In connec t.Lon .litt these and ot.hor- studies, several interesting sta-t Lst LoaL series 113ve been made avaI l abl e to the Si:C. The .iew York Stock=::xch'angereports confidentially the total short position in each stocklis"ed on the exchange as of the end of tl.e 1'.ont.h.1./ These data have beenmade ava Ll aeLe to us since July, 1!":l33. "['he Conmi s sLon has el so r ece i.vedvarious forms from the NewYork Stock Exchange rind the :~ewYork Curb Exchangeanalyzing pur cha.ses and sa.les \.li t h respect vo the principals involved andthe type of transaction. Since the immediate purpose cf these reports hasbeen S~~i3fied, they have iecently been discontlnu~d, but we shall probablyreceive some permane nt, informatlon of this type in t he future.

In ad~i~ion to the a~ovc, there are ot~er matters, in conn~ction withwhich we ar-e cO:'ll:ili.ng Lnfor-ma t Lon, e i t.ht~r for event.ual, pubLfca t Ior,, or foruse Within t ae Gor..missio'.'l.' i-or t.he most, part. r.hese studies are being con-duct-ed with d. view to m..kir:.g re~1,i.latiol:s ....5 ca.lLed for b;,' the s t et.ut es,

~'ihile t he s e dat a have been p roc uc ed an vhe p r-oc es s of admill.ist.ed.ng theActs, :nt.rtj cu:ar~y in connect.a o.: wi th t he dra,,:iHg up of regu13tion;.., theireconomic o;;:-r>l"odu.ct:oar e muLtI t ucLnous , '1'0 ,Iive a few illustratioI.s: astUdy 01 salaries will enable U5 to ge:t an idea as to the rel ation betweenthe payment for managerial talent and t.ot al, asset.s or gross revenues in var-1.0US Lndu.s t.rLes , 3tock owner-eh tp data should shed light on the question ofthe ext-ent of Lnt.er-es t, by officers in their own companies. Data showingtrading pr~ctices will lift the veil of mystery frorr. the trading process.In connection with proxies (3~ction 14 of the 1004 ~ct), we shall have d3ta

1/ Both excharrge s make PV~llc t.he total short position in all stocks ontheir respective exchar.ges as of the end of each flonth.

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showing to some :legree the ext ent, of harmony or dLsuar-aony in .c or por-at elife, as well as the extent of ownership of "groups intending to brln~ abouta change ;n management , I'he pee LodLc r epor t-s (WorluK-IO, anJ allied forms)will give us for the' first ti''le a concLusIve picture of tile perio1ic changesin' American ind1is:try'which will lend t,~emselV'es to broad indexin~. since ourstatistical material will 'be' .nor e or less homogene-ous ,

IV

Cl o s i ng' Re nark s

In closing, I should like to empnasLze the importance of s tat Lst acs ofthis sort. I'ne information now avai LabLe , W~1enpr-oper-Ly studied, shoulJenable us to advance a 1on,1 way in sheJdil1g lignt on our cor pcr-at e li:e andin making the f LnancLaL process 'less ",asT,eful, more baLanced, mor-e responsible,and more orderly. ~s you know, one of the cornerstones of the 1013 and the1931 Acts is disclosure. 9y Lmprov-Lng and increasing the fund of statistical.knowledge available to the investor, we are progressing towards a fairerf'LnancLa.l, process; are encour-ag Lng the formation of opinion bas ed on f ac t sand not on hunches, and are doing wnit we caa to raise financial standardsfor the benefit of tne investor.

---000---'.

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This background of experienceand professional standing

GIVES AUTHORITYto Mr. Rautenstrauch's statements

Fellow oj New }'ork Academy of Science. Fellow o] American Association for the

Advanceme11t oj Science ..• MemberAmerican Society of Mechanical Engineers(Chrmn. Finance Comm.} • • . MemberUnited Engineerhlg Trustees. . PresidentSociety oj Industrial Engineers. . ProfessorIndustrial Engineering, Columbia Univer-sity. . Formerly Professor of MechanicalEngineering, Columbia Unio.; Ass't. Prof. ojMachin/1 Design, Cornell University .Author oj Machine Elements in Mecha'nicalEngineers Handbook.

MR. WALTER RAUTENSTRAUCH,one of America's foremost

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MONEY The Puhlic Utility Act of 193;j .By JOHN BAUER

PAGE

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•MONTHLY

Amer icau Economic Thouf!:ht-Simon .\. Pa ttvn 152By RICHARD T. ELY

Inflation, Prices and Profits . 155By WilLIAM E. DUNKMAN

• Tomorrow's -'loney .. 15S

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March-April, 1936

BYJOHN BAUER

Director. American PublicUtilities Bureau

149

The Public Utility Act of 1935Control of Power in the Public Interest

THE Public Utility Act of 1935 has apparentlycreated more emotion of opposition and sup'

port than any major legislation within a decade.Personally, I think that there has been muchwasted heat. While, of course, the proponentshave been thoroughly sincere, they are probablymistaken as to public benefits that will be at-tained. And the tremble of the opposition overexpected destruction of private property is hardly~ased on realistic probabilities. Nothing much is

/

likelY to happen either for positive advance ofpublic interest, or for serious detriment of privatecapital.

First of all, this act represents about the best of..) '~egislative workmanship in complicated corporate

.fuatters. It is clear in conception both as to pur-pose and methods. It was drawn up by personswho evidently knew well the complexities andramifications of the industries concerned and wereaware of the corporate, financial and legal obsta-cles that would be encountered. At least it willserve to raise once more and put to practical testthe challenging question whether public regula-tion of extensive, powerful and resistent business,privately organized and managed, can be success-fully established to carry out public objectives.Regulatory history is replete with failure and fu-tility.

I thoroughly agree with its general perspectiveand objective, but I have dealt at close quarterswith regulation for many years and I am distinctly

/ skeptical of the effectiveness of the present act.~hile I hope fervently that it will be a huge sue-"-. cess, I doubt whether it can be administered so

as to carry out satisfactorily i~ declared purposesof public interest. This is the crucial question,which should be intelligently considered by every-body interested in clear and effective public policy.

The act is presented under two major parts:

"Title I-Control of Public Utility Holding Com-panies" and Title II-Amendments to FederalWater Power Act." The first is cited as the"public utility holding company act of 1935," andis placed under the jurisdiction of the Securitiesand Exchange Commission. The second is termedthe "federal power act" and is administered by theFederal Power Commission. I shall be concernedprincipally with the first, and with its primaryaim to bring about simplification of the corporateand financial structure of the holding company sys-tems and to effect reorganization so as to leave ineach system only properties which are well inte-grated within a territory suited for proper andeconomical service.

The Key ObjectiveEvery holding company with interstate actrvi-

ties and relations is required to register with theCommission, and none is permitted directly or in-directly to carryon its normal activities otherwise.After such registration, and after filing requiredinformation as to corporate structures, securitiesoutstanding, balance sheets, income statements,and other data, no company may issue or sell anyof its securities or acquire securities and assets ofothers, or effect readjustments of corporate organ-ization and holdings, without approval by theCommission. Furthermore, all intercorporate serv-ices and activities are brought under the Commis-sion's control, and each system must furnish suchreports and adopt such accounting and recordingas the Commission may prescribe.

The crucial part of the act is Section II. Thisdirects the Commission to examine the corporatestructure of every registered holding company andits subsidiaries for the purpose of determining theextent that simplification of corporate structureand integration of properties may be desirable,and, it imposes the duty upon the Commission, as

150

soon as practicable after January 1, 1938, to re-quire each holding company to limit its operationsto a single integrated system, with exceptions forparticular reasons and where additional units can.not be operated independently without substantialloss of economies. It forbids particularly the con.tinuance of more than two tiers of holding com-panies in the same system. Any registered com-pany may submit a plan of readjustment to com-ply with the act.

There is no doubt but that most holding com.pany systems have little justification from thestandpoint of economical organization and man-agement, and they confuse investors and the publicat large as to underlying activities and realities. Ifthere is advantage in large scale organization, itcomes from integrated territory which permitsall the properties and services to be operated asa coherent unit. To a large extent present systemsare disconnected, widely scattered, and diffused;their organization is confusing and inefficient.They have served much more the private interestsof the small groups in ultimate control than theinvestors at large and the consuming public.

The holding company act is distinctly designedto promote public interest, and especially to pro-tect investors and consumers. While I am thor-oughly in accord with these objectives, I questionwhether they will be satisfactorily realized be-cause of inexact duties and standards, adminis-trative difficulties, company opposition, and reostriction imposed through judicial procedure.

No Exact Duties and StandardsThe present systems are huge, far-flung and

vastly complicated in corporate and financial struc-ture. Each involves numerous interests which aremore or less in conflict with each other. The legalrights are various, and the conditions between sys-tems, and between the numerous parts of each,differ enormously. There are multitudes of gradesof ~curities outstanding, each with its own rightsand equities, and there are over-Iappings of secur-ities, with interdependent rights and equities.

Under such complications the act could not pos-sibly lay down exact duties and standards for theCommission. Large discretion has therefore beenprovided. The Commission is directed only withrespect to very general objectives and methods. Noprecise program and procedure are established.This inevitable indefiniteness will be the chief ob-stacle to the desired reorganization. It will tend

THE PEOPLE'S MONEY

tremendously toward deadlock in dealing with theentrenched and varying interests, without infringe-ment upon constitutional property rights.

The essence of the plan is for the Commissionto bring about such corporate readjustments andreallocation of physical properties between sys-tems so as to leave in each well integrated facilitiescapable of furnishing service on the most econom-ical basis. Concretely, this will involve exchangeof securities and properties between different sys-tems. To be effective, it will require underlyingwillingness and ability of the systems to bringabout such coherent regrouping on an equitablebasis of exchange. If the underlying willingnessor ability is lacking, the Commission will face ~m-pulsion and, therefore, the gravest of difficultiesto bring about reallocation on reasonable terms.

Terms of ReallocationIf there should be willingness in individual in-

stances to bring about exchanges for integratedsystems, the terms must naturally be agreeable tqthe principal interests in the groups effecting th~.exchange and are thus likely to involve propert~valuations and security issues which can hardly beapproved by the Commission without future ob-struction to public interest. If, however, theCommission attempts rigorously to keep property:valuations and security issues to proper levels, con- -,sistent with underlying considerations for ratemaking, the interested groups will lose their wil-Iingness or ability to agree and will proceed withobstruction. Deadlock appears as the most likelyoutcome.

To bring about reallocation on reasonable valu-ations and proper capital structure will requirevery clear seeing and most emphatic determina-tion on the part of the Commission. It may pre-sumably order such reallocation as it will deemdesirable and fix proper terms, subject to judicialreview. All this, however, requires enormous zealexerted and maintained over vast territories, nu-merous systems, and greatly varying conditions,-and subject to uncertain judicial restraints. Ifone is acquainted with regulatory processes andprivate capacity for obstruction of public PUllposes, he can hardly visualize coherent readjustments on terms reasonable from the public stand:point.

Character of IntegrationThe compauies themselves are authorized to sub-

mit plans of simplification and integration. Along "-

March-April, 1936

this line I have in mind a step already taken inthe state of New Jersey. This state, fortunately,has a wide area of integration, but there are im-portant gaps, and the entire state forms a singleregion for suitable consolidation. As reported inthe press, the New Jersey Power and Light Com-pany, an Associated Gas subsidiary, which has aloosely flung system from the middle central to thewestern part of the state, is to take over the JerseyCentral Power and Light properties, formerly In-sull controlled, which extend along the easternshore and have interconnection to the central part.If this proposal should meet with approval by theCommission, it would certainly leave the situationin New Jersey but little improved, and wouldprobably render more difficult the ultimate prob-lem or desirable unification.

The heart of the situation is that proposals ofintegration as made by the various holding com-pany groups will probably not promote materiallythe public interest. On the other hand, compul-sory measures will certainly be resisted by theprivate interests and to a large extent will prob-ably be defeated in litigation. This probabilityis partcularly advanced by the judicial aspectsof procedure and administration.

Judicial RestrictionsThe act provides for twofold judicial interjec-

tion in bringing about the desired reorganization.First, the Commission must grant hearings to thecompanies concerned, and second, the companieshave the right to court review of orders made bythe Commission. Such provisions, of course, wereunavoidable or the act would quite obviously fallon constitutional grounds; no arbitrary and con-fiscatory order could be carried out. But theycreate tremendous difficulties, which in state pub-lic utility regulation have produced administra-tive deadlock and failure to promote actively thepublic interest.

Look at the situation realistically. On any pro-posed plan, hearings must be granted and a recordmade which will stand review in the courts. To

I this end, the companies must be allowed oppor--I~ty to present practica~y everything that they,- 'desire from every standpomt that can be made to

appear Important, All this will take time, andwill create conflicts of view to be argued outin minutia; and the companies will not be in ahurry. The proceedings will be cumbersome,1\' time consuming and costly. The official record

151

will largely preclude the Commission from issu-ing orders on the basis of really desirable simpli-fication, unification and proper security issues,consistent with underlying property valuation forpurposes of ultimate rate control.

Assume, however, that the Commission has zealand determination not to let its hearings stop rea-sonable action, and that it does issue orders tocarry out the purposes of the act, then the com-panies will have inunediate recourse to the courts,which will review the underlying rights, contractsand equities involved. This review will lead par-ticularly to consideration of relative valuation ofproperties allocated between systems, amounts ofsecurities allowed, division of securities betweenjoint interests, and change in voting rights. Thecourts naturally will be concerned less with thepolicy set out in the act than with the privaterights to be protected under the Constitution. Thisvery judicial situation has been the bane in statepublic utility regulation, and its importance shouldbe realized before one becomes over-enthusiasticabout the national act.

The Commission's Dual ResponsibilityThe judicial process leads also to the special

difficulty that the Commission must act both as acourt and as an interested party. This is rather aconflicting responsibility that tends to reduce pub-lic zeal.

The companies will have no such dual duties;they will act most consistently in what they con-ceive to be their own Interest, On the public sidethere will be lack of corresponding drive for spe-cific objective, without the feeling of judicialrestraint,

While the act does provide for other appear-ances on the public side, but there is no respon-sibility placed anywhere to represent exclusivelythe public interest. Any other active and system-atic public appearance is quite unlikely. Never-theless, for more positive and effective public rep-resentation, I suggest appearance by individualstates to bring about within each state coherentunification of generating and transmission facili-ties and to provide for proper distribution in thedifferent communities. I have advocated repeat-edly statewide integration of power facilities, withprovision for autonomy in local distribution. Ifnow the individual states were to adopt statewideplans and would appear actively before the Com-

(Please turn to page 191)

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152

BYRICHARD T. ELYPresident, Institute for

Economic Research

INthinking about Simon Patten and his positionin the History of American Economic Thought,

it has occurred to me that he, along with HenryC. Carey, stands out among the economists of thiscountry as preeminently American. The late Pro-fessor Henry R. Seager, who had been one ofPatten's students, has said this of Simon Patten:

"Simon Nelson Patten was the most original and sugges.tive economist that America has yet (1924) produced.His active and fertile mind was never satisfied withsuperficial explanations of social phenomena. He wasalways seeking for the secret springs of human conductand the hidden links which connect events with the ele-mental facts of human and physical nature."Is this too high an estimate of Patten's position

in the History of American Economic Thought?It is perhaps too soon to answer such a question;but without fear of exaggeration we may charact-erize him as an independent-minded Americaneconomist, eager in the pursuit of truth, and littleinclined to accept the conclusions of the EnglishClassical School, or of any other School.

Simon Patten was himself expressing his father'ssentiments when he wrote, in the sociological novelhe published before his death in 1922:

"The waving fields of com bring a smile of victory tothe western farmer's face. Every inch of that soil he hastransformed, beaten into shape, forced to express his wish.The swamp he drained, the ridge he lowered. the soil hemanured--all is self-expression."The fruits of the rich soil of the Corn Belt re-

warded the pioneer farmer for his pains, andafforded a considerable surplus over and above thecost of production. In the light of Simon Patten'searly environment, it is not surprising that the twoconcepts, "surplus" and "real costs" should havebeen the corner-stones of his economic philosophy.The latter concept will need a word of explanationhere. The real cost of production, or what Pattencalled the cost to society "subjectively estimated"represented, in Patten's mind, "the sum of painswhich producers must endure while engaged inproduction."

Patten's Early EducationSimon Patten's early education was that of all

the farm boys of the Middle West during the '40's.In the district school he wrestled-unsuccessfully-with English grammar and spelling, and thor-

THE PEOPLE'S MONEY

American Economic ThoughtI. Simon Nelson PaHen

oughly mastered the game known as "mental arith-metic," which consisted of giving quick answersto such questions as: "Six times nine is three-eighths of what number?" His second educationalventure took place in 1869, the year when the firstpassengers were carried by rail from Chicago tothe far West. In this year Patten, whose fatherwished him to be trained for the law, went toJennings Seminary in Aurora, lllinois, where hestudied mathematics, moral philosophy and an.cient languages. He graduated from JenningsSeminary in the Spring of 1874 and spent the fol-lowing year on the farm at Sandwich, Illinois. Inthe Autumn of 1875 he entered Northwestern Uni-versity, where he was chiefly earmarked as a gawky,rural-mannered freshman, with the peculiar idea(in the eyes of his fellow students) of taking hisown mental development seriously. His cravingfor intellectual stimulus, which had been left un-satisfied by the type of instruction in vogue atJennings Seminary, was not appeased at North-:western, and he had long since decided that hewas not fitted for a lawyer's career.

A school friend of Patten-Joseph French John-son-had meanwhile sailed for Germany and wasstudying at the University of Halle in companywith Edmund J. James. "Joe" Johnson's_enthusi-astic accounts of student life in Germany firedSimon Patten's ambition. He was especially at-tracted by Johnson's account of the stress laidupon philosophy by German teachers and students.Finally he persuaded his father to allow him tojoin his friend at the University of Halle, wherehe began his studies afresh under ProfessorJohannes Conrad. It was at Halle that I madePatten's acquaintance. He was then the connect-ing link in Halle between myself and Dr. E. J.James, who had left for the United States when Iarrived. My first impression of Simon Patten w? .that of a man overflowing with kindness. He wn'7"" eager to help, and lowed a great deal to him atEditor', Note: "What I have planned is something far more thAD. hillory

of academic economies. It is a Itory of these rorce. and Ideal tbat inlhit country have thaped our thought ••• from the time of BoujamiDFranklin on and the jouma1isu like Horace Greely who h..... done 10much toward controlling the economic ideal of our country. And wbatHenry Ford and hi. automobile have done to our country ••• "'-Fromthe address OD uFoundinK and Early Hiltory of tbe AmeriC8ll EconomicAssociationU delivered b} Dr. Ely in celebrating ita fiftieth aDDiver.ary.December Iast in Nfl". '\:ark.

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March-April, 1936

this time of my life. He introduced me into thecultured family of Frau Pastor Lange, whose

" daughter Margarethe had become engaged to Dr.James. Mrs. Lange's father had had a career asprofessor in the University; and the family hadexcellent connections. It was our good fortune tolive in this family.

Frau Pastor Lange's daughter afterwards cameto this country and became a helpful wife to Dr.J ames in all his career. At this point you mustallow me to digress for a moment from my descrip-tion of Patten's early background in order to saythat, while I was at Halle, some of the Germansin the city used to predict that Dr. James wouldnever come back to fetch his fiancee, or even sendfor her. However, Dr. James did come back, andafter his wife's death he put up a tablet to hermemory with this beautiful inscription:

"To the fair memory of Anna Margarethe Lange, wife ofEdmund Janes James, seventh president of NorthwesternUniversity, her husband dedicates this tablet, thankfulfor his happiness, sorrowing for his loss, hoping stead-fastly through God's mercy to meet her again when thenight is past, in the perfect and unending day.""Her life was a new version of an ancient story. Shetoo, like Ruth of old, left home and kindred and jour.neyed into a far country. She made this people herpeople and this country her country, and though standingamid the alien corn she sometimes paused to gaze withtear-filled eyes and longing heart to her own home be.yond the seas, it was only to gather new strength for thetasks before her. She too came to honor in the heart ofher husband, in the love of her children, in the esteemof her countless friends. A gracious spirit she movedthrough life a joyous, strong and helpful presence, asource of power and inspiration to all who knew her,giving joy to the joyless, strength to the weak, and com.fort to the sorrowing; a loving and devoted daughter ofher adopted country, the land in which her children andher children's children will rise up and call her blessed."

Beginnings of Patten's Career As An EconomistSimon Patten was twenty-six years old when he

returned from Germany. He had been awardeda doctor's degree and had written a thesis entitled:"Das Finanzwesen den Staaten und Stadte derNordamerikanischen Union," which was publishedat Jena in 1878. Of his stay in Germany he oncewrote to me in these terms:

"I had little definite notion of what I was to get in Ger.many when I went, but I had very definite notions whenI returned ••• It was a craving for a broader view thatlured me to Germany, and while there I learned to basemy thought on the world's experience instead of conuen-tional English ideas. The study of history did even morefor me than that of economics. I came back in openrevolt against the traditional concepts of our race andfound the narrow, self.satisfied attitude of the Americanvery trying."

153

A question may perhaps have arisen in theminds of those who read Patten's description ofhis feeling of revolt against the traditional con-cepts of his own country. How then can we saythat Patten was preeminently an American eco-nomist, since he was so greatly influenced by hiscontact with Germany? Patten came back fromGermany imbued with the idea that the ClassicalEnglish political economy gave no adequate ex-planation of American economic phenomena. Hewas prepared to re-examine the premises and con.elusions of the English economists in the light ofAmerican conditions. He did not overestimatethe importance, in his own intellectual develop-ment, of what he had learned during his schooldays in Germany. As he said in a letter writtento me in 1910, those who gathered together atSaratoga in 1885 to form the American EconomicAssociation were "not German students, but Amer-ican thinkers," and in the same letter he empha-sized the fact that he was never ready to acceptall the teachings of the "historical school or anyother mode of thought we inherited from ourschool days."

In Germany Patten discovered that the Germansdeveloped their economics out of German life. TheGerman professors were part of this life. Theywere nationally minded. Many of them occupiedpublic and administrative positions and contrib-uted in this way to the development of thebest features of the German Empire. In GermanyPatten learned a good deal about the administra-tion of public affairs. He was particularly impressedwith the German use of land, by the numerouspublic parks and playgrounds, and by the way inwhich the Germans made a little wealth go a longway. The emphasis he always laid on the carefulconsumption and economical use of wealth, in-deed, can be traced in part to the influence of hisGerman school days. While in Heidelberg I waslearning from Professor Knies about the economicsof forestry and the principle of conservation,(ideas which were many years later brought for-ward in this country as something new), Pattenwas also coming to realize the importance of man'scontrol over Nature and also to emphasize thenecessity of social control over the distribution ofproduced wealth. Thus Patten came back to thiscountry filled with the notion that sound eco-nomics in this country had to be an outcome ofAmerican life, and had to contribute to the pros-perity of the American people.

154

Simon Patten's teacher in Germany, ProfessorConrad, once remarked that he had learned morefrom Patten than from anyone man; but severalyears elapsed, after his return from Germany in1878, before Dr. Patten's brilliant gifts of mindwere generally recognized in his own country. Oneof the reasons for this was that Patten, in hisyouth, lacked the gift of exposition. The firstdraft of his earliest publication: "The Premisesof Political Economy," which he dedicated to hisGerman teacher, was described, by "Joe" Johnsonas "unbelievably awful in grammar, spelling andgeneral construction." The opening sentence ofthe manuscript covered nearly fifteen pages; "andin the whole work there were not a score of punc-tuation marks." Simon Patten had many difficul-ties to contend with in his early career as aneconomist. From November, 1878 until Septemberof 1879 he remained on his father's farm, "workingin the fields and stables with the other men," andtrying in vain to find a position for himself. Bythe Autumn of 1879 he had made up his mind todefer to his father's wish that he should becomea lawyer and he entered a Chicago law school.After six weeks study his eyes failed him. "Painand the bitterness of thwarted hopes were his hardportion until in May, 1882, he visited his friendEdmund James in Philadelphia and through himwas introduced to an oculist who diagnosed histrouble correctly and by means of glasses restoredhis vision." In this way he was enabled to resumehis economic studies, and to take the only positionopen to him, that of an elementary school teacher.His first book, "The Premises of Political Eco-nomy" was written under these adverse conditions.

Patten Challenges Ricardian DoctrineIn spite of its involved phrasing, the work at-

tracted considerable attention on account of thepenetrating criticisms directed against orthodoxEnglish economics in general, and the Ricardiandoctrine of rent in particular. Patten tried todisprove one of the assumptions on which theRicardian theory of rent is based, namely, the ideathat the price of wheat is determined by the costof producing that portion of the crop which israised under the most disadvantageous conditions.The orthodox assumption had been accepted hyFrancis A. Walker who had asserted that, if thecost of producing wheat on the least fertile soilswere not covered by the selling price, wheat wouldnot continue to be grown on these soils.

Patten, the son of a practical farmer, knew that

THE PEOPLE'S MONEY

when capital had once been sunk in the land, inthe form of permanent improvements, the farmerwould not readily withdraw his land from eultiva-tion, even if the selling price of the product fellconsiderably below that required to cover the totalcost of production, including the interest on thecapital expended. Patten's contention that, ''whathas been expended on bringing the land into eulti-vation cannot be withdrawn, nor will the land bewithdrawn from cultivation because no return isobtained from this expenditure" has been borneout by the history of American farming during thefirst three decades of the twentieth century. Inthe fifth volume of the "Wheat Studies of the FoodResearch Institute" of Leland Stanford Universitywe find the following significant statement:

"A survey of the expense of raising wheat in the differentregions indicates that a considerable but variable portionof the crop is raised at exceedingly heavy costs, rangingbeyond possible prices."Ricardo's followers had nearly always assumed

that the market demand for wheat would inevit-ably tend to exceed the supply. Patten, on theother hand, living in a country from which over132,000,000 bushels of wheat were exported in theyear 1884, readily assumed the possibility of a sur-plus which would bring about a fall in the priceof wheat but not necessarily a corresponding re-duction of the acreage devoted to the productionof wheat. We may contrast the following passagefrom his "Premises of Political Economy," pub.lished in 1884, with the striking words uttered byan Englishman, Sir William Crookes, fourteenyears later. Patten wrote:

"During modem times the rapid increase in the demandfor food has kept its price steadily at the upper limit.There are, however, at the present time many indicationsthat this will not be true in the future."Sir William Crookes, on the other hand, held a

most pessimistic view of the future production ofwheat, as compared with the demand for it. In1898 he chose, as the subject of his presidentialaddress to the British Association, "The WheatProblem." Population, he said, was increasingvery rapidly, and especially the world's bread-eat-ing population, and this meant a demand for moreand more land. He did not know where the wheatwas to be found to supply hungry mouths withbread. He said: "It is clear we are confrontedwith a colossal problem that must tax the wits ofthe wisest." He, too, ventured a prediction; buthis idea was that we had to face an increasingdeficit of wheat: (Please turn to page 181)

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March-April, 1936

BYWILLIAM E. DUNKMAN

Department of EconomicsUniversity of Rochester

155

Inflation. Prices and ProfitsObjections to Printing Press Money

INFLATION is the expansion of money at amore rapid rate than the production of salable

goods. TQ many people this means that the gov-ernment prints paper money to pay its expenses.This, however, is only the most obvious form of in-flation. In modern times, inflation has occurredmost frequently through the creation of bankdeposit money. When the banks are increasingtheir deposits through loans on real estate or se-curities, or buying securities themselves, or increas-ing their loans on larger and larger stock of unsoldcommodities, they are increasing money more ra-pidly than goods. illustrations of these types ofinflation are to be found in the experience of thelast fifteen years in the United States. In 1920there came to an end an inflation based on loanson commodities. In 1929 there ended an inflationbased on securities. And during the 20's Floridaand the middle west had an inflation based onland. We need but recall these periods to judgethe effects of inflation.

Federal Borrowing Creates DepositsAt the present time we are repeating a form of

inflation experienced during the world war bothat home and abroad. Bank deposits are beingcreated as a result of an increasing amount of gov-ernment bonds held by the banks. This can bestbe illustrated by a few figures.

At the end of February 1933 the governmentdebt outstanding was $20,685 millions. At the end

,1*...: December 1935 it was $30,557 millions. Ony:ovember 1, 1935 the banks which are members

of the federal reserve system held about twelvebillion dollars worth of United States governmentbonds or bonds wholly guaranteed by the UnitedStates. This is about 60% more than they heldtwo years earlier and about three and one half as

(t many as they held in 1929. These banks have

about 65% of all the banking resources in thecountry. This increase in the government debt hasmade possible the "new-deal" spending. And theincreased holdings of government bonds by thebanks have financed these expenditures. As suchit is one type of inflation.

Investments and Loans Build Bank DepositsTo understand why this is so, we must appreci-

ate a fundamental principle of banking. This isthat the more assets the banks have, the more de-posits they have. Most people think of this theother way around. They think that the more de-posits the banks have the more assets they can buy.To clear this up we need but consider what hap-pens when a bank makes a loan. It takes the bor-rower's promissory note which it includes amongits assets, and in exchange writes a deposit on hisaccount. It does not take anything from anyother deposit. The new deposit may he drawnagainst by check. This may go to another bankor come back to the same bank. In either eventthe deposit is used as money and remains in exist-ence until the borrower repays the loan. At thattime the reverse of the lending process takes place.The bank reduces the borrowers account by theamount of the loan and returns his note to him.When it makes the subtraction from his account itadds nothing to any other account. That depositis gone-liquidated we say.

In this way the deposits of the banks increaseand decrease as the banks increase and decreasetheir assets through their lending and investingpolicies. Therefore when the banks increase theirholdings of government bonds by such largeamounts, they are creating additional deposits, andthese deposits circulate in the country as money.This is inflation. It is the creation of money morerapidly than the production of salable goods. The

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same thing may happen in other ways but is al-ways followed by disaster.

Objections to Printing Government MoneySome people object to this form of inflationary

government finance because they feel it was wrongto give the banks a mortgage on the future in thisway. If the government needs money, they say,why not print their own rather than expand bankdeposits and thus save the interest on the bonds.Unfortunately, the question is not so simple. Print-ing government money to finance the deficit wouldcreate a worse inflation than depositing bonds inthe banks. The money which the governmentprints would be deposited in the banks becauseAmerican habits indicate that people prefer aboutnine times out of ten to use a bank deposit insteadof paper money. In the banks the paper moneywould be a reserve. Such a result might be calledinflation of bank reserves. It is one degree worsethan the inflation of bank deposits. For the bankswould then be able to expand their deposits bypurchases of other securities. But they would ex-pand them several times more than the currencythey received. They could do this because theyare required to keep reserves which are roughlyand on the average about 10% of their deposits.They might not expand up to the full limit butit would certainly be something greater than theamount of currency they received. Unfortunately,many people have suggested that the governmentpay for its expenditures in this way and still moreunfortunately some of those people are in Con-gress. Such a proposal, instead of depriving banksof earnings, would increase them. Furthermore,we have the word of the Governor of the FederalReserve Board before a congressional committeethat it is cheaper for the government to issuebonds than to print paper money.

Although it has not paid its expenses by print.ing paper money, the government has alreadydone many things which either have or may laterresult in the inflation of bank reserves. It has re-duced the gold content of the dollar thus makingpossible the issue of a larger number of paper dol-lars on the same amount of gold. It has authorizedthe addition of silver to bank reserves, and has theunused power to print three billions of paper dol.lars. In addition, the federal reserve banks havesupplied the banking system with about two bil-lion dollars of reserves which they are not usingthrough the purchase of government bonds. Print.

THE PEOPLE'S MONEY

ing paper money to pay for the deficit would bethe worst thing that could be done.

Inflation Alternative to Taxation

Inflation in any of its forms, when used by thegovernment is one method of financing. It is analternative to taxation or the sale of bonds to thepeople who have savings. Selling bonds to thepublic differs from selling them to the banks inthat when sold to individuals, they must first havemoney or bank deposits which they transfer to thegovernment. Therefore when we read that thegovernment is selling bonds, we must always de-termine whether these bonds are being bought bythe public or whether they are being bought bynew bank deposits. Inflation and government bor-rowing are thus separate questions. One is themethod of financing, the other the advisability ofgovernment borrowing. The latter must be an.swered in terms of the effectiveness of governmentspending to relieve the depression. It involvesthe further question of the relative effectiveness ofdifferent forms of spending. This is a large ques.tion in itself which cannot he discussed in thisarticle. We are concerned only with the methodof financing.

Whenever the government engages in large -:spending operations to relieve a depression orfight a war this question of the method of finan-cing arises. No matter how the financing is done,some groups will have to pay the bill. The gov-ernment is simply the representative of its citizensand if they, through the government, decide tomake large expenditures some of those citizenswill have less to spend. If the financing is doneby taxation, it is perfectly clear that those who aretaxed turn over to the government the money itspends. They have less to spend and the govern-ment has more. If bonds are sold to the public,those who buy them turn over some of their in-come to the government to spend. In return forthis assistance they receive compensation in theform of interest. But when inflation is resortedto, it is not so clear who pays the bill. It neednot he, however, for the effects of inflationary fi- 11nancing during the world war should still be fresh J'&in the memories of many. During the war anduntil 1920 prices rose about two and one haHtimes. Such a rise in prices has different effectson different people. Those who have fixed orrelatively fixed incomes notice the rise most. Ifyou were living on a pension, or the income from

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March-April, 1936

a life insurance policy, or an annuity, or an incomefrom bonds, you would gradually notice that thatincome was purchasing less and less. And by thetime prices had reached their highest point yourstandard of living would be about 40% of its for-mer level. If you are living on a salary, it mightbe increased, but only after some time and prob-ably not by as much as the cost of living. If youare working for a daily or weekly wage, you mightfind your income increasing more rapidly than thesalaries but not as rapidly as the cost of living. Allof these people are paying for the inflation be-cause their incomes buy progressively less. In ad-dition, the interest on the bonds as well as theprincipal must eventually be paid.

Not many are well enough informed to blamethe financial policies but usually criticize "profit-eers" or "middle men." Newspapers and maga-zines carry cartoons about the high cost of living,popularly labelled, "BCL". And BCL is alreadybecoming a member of the government's alphabet-ical group for it is beginning to appear in thecartoons with ever increasing frequency. It is inthis way that the government expenditures arepaid for. The issue of inflation is tberefore thequestion whether this is the best way of financingthe government. Are these the groups whichshould pay the bill?

Rising Prices Create Profits

There is another side to inflation. Rising pricesalso create profits. Since wages and interest risemore slowly than prices those engaged in businessfind that their costs do not rise as rapidly as pricesand hence profits increase. It is true that individ-ual businesses must consider the cost of materialsand in some cases these may rise as fast or fasterthan selling prices. But taking business as a wholethe odds are in favor of profits. Speculation isparticularly facilitated for while buying and sell.ing the same thing the mere passage of time cre-ates a profit.

Another group may gain from the inflation. Thisis the debtors. It is primarily for their benefitthat many desire inflation. Rising prices decrease

debt burden in-so-far as the debtor is able to sellhis products at higher prices for he receives moremoney for a given amount of goods while his debtin dollars remains the same. Inflation to thisgroup is an alternative to scaling down debts orinterest payments. The plight of many debtors is

(f and has been very unfortunate. Some of them

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have benefited by the rise in prices which hasalready occurred and may benefit still further fromsubsequent inflation. Others have not. If thepeople of the country, through their governmentfeel that something should be done for those whoare in debt the alternative to inflation-dealing di-rectly with the debts-should be seriously consid-ered. Absorption of part of the losses whichdebtors will incur by other members of the com-munity may be a desirable thing because of thesocial uurest which it may relieve. It is undoubt-edly true that the total cost to those who willhave to bear the burden would be less in the longrun for it would be limited to the losses of thosewho are most hopelessly burdened with debt andprobably only a part of these. Inflation on theother hand creates a gift for all debtors whetherthey are able to meet their debts or not and handsa net profit to many stockholders, business menand speculators who are not in debt. All of thisis paid for in higher prices.

Development of Financial Policy

For these reasons it is important to follow thedevelopment of financial policy. We must decidehow large and for what purposes government debtsare to be incurred. We must consider carefullythe methods of financing those debts. An infla-tionary policy will increase the costs of govern-ment spending to the community and the burdenwill fall on those groups least able to bear it. Asan aftermath there will be a new distortion ofproduction and prices, a collapse of prices, busi-ness failures and bank failures such as has fol-lowed every other inflation.

IN THE MAY ISSUE

AND LATER

Needed Banking Reform by Walter F. Mc Caleb

American Economic Thought II by Richard T. Ely

Soviet Money Paradoxes by Eugene Lyons

Adequate Purchasing Power by B. M. Fullerton

Money and the Constitution by Linn Bradley

More Money: Will It Help Us? by Julius Hyman

Is Communism a Menace? by Michael B. Scheler

Money and Men by James P. Fitzgerald

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158

BYPAUL HAMPDEN.

To Alfred Richard Drage, brilliant editor ofthe Guild Socialist New Age, in whose pages

before the war could be traced the early develop-ment of the principle of the Corporate State, therecame in 1918 a Major C. H. Douglas, assistant wartime production chief and costing expert in theBritish aviation industry. Major Douglas had a"little idea." A year later Drage had embracedthe idea and split the English Guild Socialistmovement wide open. Today, Major Douglas's an-alysis of the modern economic problem and theproposal he advances are the doctrine of the SocialCredit movement, which has spread to every partof the British Empire, counts half a million ad-herents in Australia, has a minority in the NewZealand parliament, and has lately become anobject of political speculation in the Canadianprovince of Alberta.

What was Major Douglas's "little idea?" Wemay sum it up in his own words, from his book,Credit, Power and Democracy, first published in1921.

"Credit, convertible into money, is a correct es-timate of the capacity of society with its plant,culture, organization, and moral, to deliver goodsand services desired by individuals. Whateverunit we adopt for it, the number of these unitsheld by the individuals who collectively composesociety must be such that by surrendering theseunits they will receive in exchange all the goodsand services which society can possibly deliver.As society's capacity to deliver goods and servicesis increased by the use of plant and still more byscientific progress, and decreased by the produc-tion, maintenance or depreciation of it, we canissue credit, in costs, at a greater rate than the rateat which we take it back through prices of ultimateproducts, if capacity to supply individuals exceedsdesire. This it can always be made to do, byensuring that the production of capital goods issecondary to a sufficient production of ultimateproducts, and their delivery to individuals."

The Productive CapacityThus it is Douglas's conception that credit, or

society's ability to serve its own economic needs

THE PEOPLE'S MONEY

Tomorrow's MoneyA Discussion of Social Credit

and desires, is based upon capacity to produce, andthat the money system as the vehicle of that creditshould be adjusted to the use which society choosesto make of its capacity. Major Douglas is notalone, of course, in maintaining that the moneysystem is very far from serving the use to whichsociety would like to put its capacity to produce.However, his reasons for believing so are basedupon quite different factors than those presentedby the majority of currency and credit reformers,and lead him to reject not only the concept thatcredit must inevitably be balanced by debt whenproductive power exceeds actual production, butto reject also the Marxist assumption that profitsderived from individual ownership of the meansof production are the root cause of economic woe.Douglas is essentially a "profit and loss" man, noless than an "abundance" man, and his analysisof the causes of under-consumption provokes a to-tally different connotation for the phrase, "pro-duction for use," than that usually implied.

In outlining the analytical portion of his workwe may begin by reviewing two factors, the inter-play of which causes an inherent shortage of pur-chasing power with respect to the collective priceof ultimate products, if all properly accountedcosts are to be recovered.

Contraction and Expansion of Bank MoneyOne factor is the present method of issuance

and cancellation of money by the banks. Bankcreated money, or credit, is based upon a currencysupply which has no direct relation to the generalproduction of wealth. Thus, even as a purelytheoretical proposition, the upper limit of produc-tion and consumption is fixed, not' by the naturalfactors of capacity and real demand, but by thepurely arbitrary factors governing the amount ofcurrency that is issued. Of very much greater im-portance in the Douglas analysis, however, than'the fact that credit is limited by the currency .supply, which can be rendered flexible enough, isthe fact that credit is never extended without set-ting up a counter debt claim which can only be

Eduor'J Note: The author i. the lOB of the emment American ador,Walter Hampden. Bolh falher and Ion are actin In the Soelal Creditmovement. Paul Hampden hal contributed article. to a Dumber 01American puhUcalionl.

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March-April, 1936

retired by recovering the equivalent from the pub.lie either in prices or by taxation'

The second factor bearing on the Douglas anal.ysis is price creation. Three elements, exclusiveof profits, go to make up price:

(1) Debt claims arising from the creation ofmoney by the banks;

(2) Debt claims arising from the investment ofsavings;

(3) The claim of fixed capital to reproduce it-self.

The necessary existence of an element in pricewhich is not countered by a distribution of moneyappears self evident when we examine the processof investment. The national income over any givenperiod is already represented in the cost of goodson their way to market. H any portion of thatincome is "saved" and invested in further produc-tion it forms the minimum price which the newgoods will bear when they come to market. Butno more money is created in the process. Themoney saved and invested is paid out again in thecourse of the new production, and insofar as thissecond series of payments is for wages, salaries,and dividends, the same money can now be usedto buy the original ultimate commodities whichthe investor has not or will not be able to buybecause of his saving. Having completed its"double circuit" through the productive systemthe money will now be cancelled out of existencein repaying a bank loan just as if it had neverbeen invested in the meantime.

Prices and Investments

But the money value of the investment must nowbe recovered in prices for future consumers' goods.Actually more than the original sum invested mustbe charged into future prices. Take the case of aman who buys a bond, issued, let us say, to financethe building of a factory. Not only is the bond.holder guaranteed his principal back after a cer-tain number of years,. he is guaranteed a returnon the investment in the meantime, and as the

fl!jfactory wears out depreciation charges must be,~collected. All these items, plus the payments for

raw materials, wages, and salaries made after thefactory is built and is in operation, will enter intothe price of the goods produced in that factory.The wages, salaries and raw materials will be paidwith bank loans, which will create money equal

(t to that portion of the price of the product." But

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the repayment of principal, plus return on theinvestment, plus depreciation still remains.

We may put it down as axiomatic therefore thatany investment out of income increases the totalof costs to be recovered in prices without puttingan equivalent amount of purchasing power in cir-culation. It may be noted here that all figuresfor the value of production, or "income produced,"include capital goods, while those for the nationalincome, or "income paid out," include savings andpurchases of new securities by the public. Butthese savings and investments have been paid outagain in producing the capital goods included inthe figures for production. Thus these sums arenecessarily counted twice--once as income beforeinvestment and once again as income after invest-ment-in arriving at figures for "income paid out."What we might call net national income, or thetotal sum of money available to liquidate the costsrepresented by the figures for production, is less,by the amount of net savings and public invest.ment, than the figures for "income paid out."

Prosperity StatisticsIn this connection it may be pointed out that

the value of all retail sales in 1929 was 50 billiondollars, and that at a time when production wasvalued at 81 billions while the meaningless if notmisleading figure for national income was 79 bil-lions. Net savings and purchases of new securitiesby the public are estimated to have been closeto fifteen billions, which would put the net incomefigure at about 64 billions. Apart from retail salesapproximately the only remaining cost cancellingexpenditures of the public were for personal rent(where dwelling services were supplied by realtycorporations), passenger transportation, personalconsumption of public utility services, and resi-dential building. The money cancelled in meetingpersonal loans and mortgages held by banks canprobably be disregarded, in that year, as off-set bynew credits for the same purposes, although a smallpercentage of gross income was still being can.celled in retiring the public debt. The value ofour remaining unconsumed production-in round

lWhile bank purebasee of aecurities ~creale the volume of m~D.e1 withoutnecessarily selling up Dew debt claIm., bank lale. of lecnnllel desir07money.

IIC the investor had bought Block he will nol be guaranteed hi, prindpal,but the corporation will strive to build up a surplus with the lame endeesuh,

BAs.uming production to be continuous in all stagel, one producer'. pay.menta Cor materials produced in a previoul .tage may be laken ..countered by the other producer', .imultaaeolll payment' oC w~ge. aDdlalarie., which will entee into the price of a DOW' lot of matenab. anddividend. to him.etf.

160

numbers still about fifteen billions after deductingour 1929 export surplus--was still to be carriedover into prices for many years to come.

Lack of Purchasing PowerIt is sometimes argued that if all accruals to

surplus, depreciation charges and repayments ofprincipal were reinvested as fast as they were col-lected, there would he sufficient purchasing powerin the hands of the public at all times to meet theprices of ultimate commodities. But this line ofreasoning overlooks two vital factors:

(1) Inorder that these charges may be collectedfrom the public in the first place, in the prices ofconsumers' goods, the volume of bank credit em-ployed in the production of capital and intermed-iate goods must he increasing. It is essential toview the economic process as a flow. Goods aresimultaneously flowing -from all stages of produc-tion into subsequent stages. Prices, for consumers'goods, are constantly flowing off from the finalstage. And wages, salaries, and dividends are be-ing released in all stages to meet those prices. Butthe prices are made up not only of the wages,salaries, and dividends hut of all fixed charges aswell.

(2) The reinvestment of money which has beendistributed with respect to goods not yet at marketextinguishes purchasing power without extinguish-ing cost. This is because some portion of themoney invested must go to pay for materials, andwill he cancelled out of existence as the producerof those materials repays his bank loan. Speci-fically, a sum equivalent to all the wages, salaries,dividends and capital charges already included inthe price of those materials, some of which mayhave been through many stages of production, willhe cancelled' (except for the actual profit andplacements to reserves of the last producer), whilethe equivalent in costs, for ultimate recovery inthe price of consumers' goods, will simply bespread out over a longer period. Costs which be-fore the investment were represented in the pricesof raw materials and intermediate products des-tined to become capital goods, are translated, afterinvestment, into further capital charges which willhave to be recovered in the prices of futureproducts.

Given an initial discrepancy between the rate ofgeneration of prices and the rate of distributionof purchasing power, any further saving and in-vestment will increase the disproportion between

THE PEOPLE'S MONEY

the two rates. Nor will the situation he greatlyaltered if the new capital charges are never re-covered in prices, and the investor loses his money,as well he may. Total units of unrecovered costand total units of purchasing power, as hoth quan-tities stood immediately before the investment,will have been reduced, immediately after the in-vestment, in equal amounts. And if two unequalquantities are reduced in equal amount, the per-centage of difference hetween them is increased.

Obviously, unless goods can be exported in con-tinually increasing amounts without an equivalentof imports heing taken in return, the only way inwhich all costs may be recovered is hy a constantlyaccelerating rate of expansion of bank credit fornew production, an increasing proportion of whichmust he capital goods." But even this process--the logical result of which, and one already notentirely unnoticeable, is the diversion of humanenergy and natural resources to create capitalvalues for which there may he no real use value-is disallowed hy the modus operandi of thebanking system. And when at the end of a periodof expanding bank credit the process halts, theoccasion is marked by wholesale hankruptcies ac-companied hy the transfer to the hanks of thepledged assets of their borrowers.

Banks Create MoneyThis state of affairs, says Douglas, springs from

the fact that money enters the economic systemonly by the medium of hank loans, and is con-stantly heing cancelled out of existence, as theloans are repaid, hefore the equivalent financialvalue in real wealth which has been created iswritten off. In other words the community's finan-cial credit, or ability to deliver money for desiredgoods at the prices it cost to produce them, is nota true reflection of its real credit, or ability todeliver those goods. The point at issue is whetherthe price creating mechanism or the money creat-ing mechanism is at fault.

Our examination of the Douglas analysis has ledus to the conclusion that the present loan-creditand production cycle is not self-liquidating. PrOOfduction does not automatically finance consump-

fAny portion oC bank income with respect to the loans made in theleprevious atagea DC production, which was put at the time to bankreserves. will already have decreased the total oC purchasing power withrespect to these coals. But ihia is a minor (ad or.

'Harold G. Moulton of the Brookings Institution ia authority for thestatement that over 50% of all loaos and investment, made by nationalbanks have, in the past, been directed to capital goods productiont withthe percentage running even higher in the eaae or state banb and up to68.2 in the case of t ruet companfea, The Formation 01 Capital, PalO 55.

(Please turn to page 182)

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BYWILLIAM ENGLISH WALLING

Ec:onomist end Public:ist

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Protection for AgricultureWhat About Labor?

He is the author of many books on labor andsociology, and co-author with both, Matthew W011and the late Mr. Gompers of two books. His lasttwo volumes published are, "The Next Step," withMatthew Woll, and "American Labor and AmericanDemocracy,"

William English, his grandfather, was the Demo-cratic nominee for Vice-President with Hancockin 1880. Mr. Walling is one of the founders of theIntercollegiate Socialist Society (now the Leaguefor Industrial Democracy), of the Woman's TradeUnion League, and of the National Association forthe Advancement of Colored People.

William English Walling, economist and writeron foreign affairs, has had a long career of activeand distinguished collaboration with Americanlabor. At the suggestion of the late SamuelGompers he was originally named by PresidentWilson as one of the Envoys of the United Statesto Russia in 1917. Again, in 1919 during the PeaceNegotiations and at the Foundation of theInternational Federation of Trades Unions, atAmsterdam, he accompanied the American labordelegations to Europe, also at the request of Mr.Gompers.

IsPresident Roosevelt abandoning labor whilecontinuing to support agriculture? If so, how

can he hope to be re-elected?When the N. R. A. and A. A. A. were both in

force the protective policies embodied in the lawswere the same for labor and for agriculture.Clauses in both laws pro-vided for increased tariffsin proportion as govern-mental measures raised theAmerican standard of liv-ing in industry and inagriculture.

Yet in the new reciproc-ity treaties which arefrankly avowed by Roose-velt supporters as an in-direct means of an all-round tariff reduction ashigh as 50 per cent-labor:t is completely sacrificedwhile agriculture is pro-tected by the specificclause in the Canadiantreaty by which either na-tion may restore the tarifffor agriculture productswhenever "governmentalmeasures" limit home pro-duction and raise homeprices, that is, raise thestandard of living of agri-culturists. But no such pro-tection is afforded wheregovernmental or other measures attempt to raisethe standard of living of our industrial labor byraising wages or shortening hours. On the con-trary every reciprocity treaty opens the door tothe competition of cheap foreign labor and of slave

tlTllabor both in the home market and in the worldmarket.

President Forgets LaborAnd now, in his defense of a proposed substitute

for the A. A. A., Mr. Roosevelt goes still farther inthe protection of agriculture without taking a<J single step to protect labor.

The President proposes to curtail the acreage de-voted to basic agricultural crops in order to de-crease the surplus (which is the surplus availablefor export) and so to keep up domestic agricul-tural prices. He opposes governmental encourage-ment of agricultural exports because that would

mean increased produc-tion, lower prices at homeand abroad and an unsuc-cessful and an unprofitableeffort to increase exports.Such increase as might behad, he points out, wouldbe profitable only to trad-ers and middlemen:

"Those who are for itmostly are the transpor-tation companies, for itmeans more business forthem. The steamshiplines are for it becauseit means more agricul-tural freight for them. Itis reasonable that thewarehouse people wantit because it means morecrops to them in theirwarehouses. The com-mission merchants wantbigger c r 0 p s because

handling them means big-ger commisions, The com-modity exchanges wantbigger crops because the

bigger the crops the bigger the commissions."Nor is this all. There would be comparatively

few new markets abroad. For foreign nations areabsolutely refusing to receive these exports.

In response to a question put to him whethersubsidizing of agricultural exports might not con-stitute dumping and therefore cause foreign gov-ernments to restrict imports of American productsthe President cited the fact that most foreign gov-ernments already had quotas established for suchimports.

He referred reporters to the State Department

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162

for substantiation of this statement, and investiga-tion there showed that only Great Britain, Norwayand Sweden have not invoked the quota systemagainst American agricultural products.

Export Policy Means Lower StandardsNow every word of all this reasoning applies to

labor as well as to agriculture. If America be-comes more and more dependent on industrial ex-ports to be sold at world prices in the world mar-ket, American wages and hours will be draggedsteadily down to the standards of other countries.If we encourage industrial exports by reciprocitytreaties we shall not only lower American stand-ards through increased cheap labor and slavelabor imports, we shall be making an unsuccessfuland unprofitable effort to capture foreign markets.Unsuccessful because quotas are applied and willbe applied against our industrial products pre-cisely as much as against our agricultural products.And unprofitable because such gains as are madewill be at the cost of lowering American wages andlengthening hours towards the European level.

And who would gain? As Mr. Roosevelt himselfanswers (in connection with agriculture) "Trans-portation companies", "steamship lines", "mer-chants", "exchanges". In the case of increasedtrade in industrial products encouraged by the"governmental measures" of reciprocity treatiesthe encouragement will be two-fold, both of im-porting and of exporting transportation compan-ies, steamship lines, merchants and exchanges--and all these bodies would be largely "inter-national", that is, a considerable part of theseprofits will not only be drawn from labor but willbe expended abroad.

Labor's AttitudeMr. Roosevelt is very strangely misinformed if

he imagines labor does not realize this discrimina-tion against it. It is difficult to believe he will notrealize it. If he does, how does he expect to retainthe vote of labor in the great manufacturing statesthat make a solid belt across the country fromHlinois and Missouri to Pennsylvania and NewYork? And can he hope to be elected without thesolid support of labor in these states?

Mr. Roosevelt has some ground for abandoningthe N. R. A. while searching for a substitute forthe A. A. A.-in view of the powerful SupremeCourt minority favoring the constitutionality of theA. A. A. and the unanimous opinion against theN. R. A. But this is all the more reason why he

THE PEOPLE'S MONEY

should at least seek to protect labor as well as agri.culture from foreign competition at home orabroad.

Policy Dictated by PoliticsIt may be that these shrewd political tactics of

"conservatism in the East and radicalism in theWest" may have been urged upon him by Farleyand other party advisers as promising victory. Butthis crafty calculation assumes that labor is soblind as not to see the manoeuver and so timid asnot to take action to defeat it. True, labor 'stronglyfavors Roosevelt's home labor policies.Leventhough they show fearfully little concrete gain asto wages and hours since the overthrow of theN. R. A. But labor is non-partisan politically andnot tied to Roosevelt or to any other candidate.And now, if labor is threatened with a wholesaleindirect lowering of industrial tariffs and encour-agement of industrial exports to compete withpauper and slave labor abroad, such limited gainas has been made will be far more than offset. Notonly will Roosevelt's administration probably showa net loss in the American worker's standard ofliving, but America may in a few years becomepermanently dependant on foreign markets--andlabor in the United States may be permanentlyreduced to the hopeless status of British labor.

American labor unions are fully informed andalive as to this situation and, Mr. Roosevelt shouldrealize it, so that he may act accordingly before itis too late. That is, unless he can give them somereassurance as to the future, a very large part ofthe organized workers in our manufacturing indus-tries will vote against him in the coming election-quite enough to defeat hin:l.

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BYHANS R. L. COHRSSEN

163

Gold: Symbol of French PowerObstacles to World Economic Recovery

France Defends Gold StandardFrance, or more properly the Bank of France is

the driving force behind the agitation for the re-storation of international gold stability. GovernorJean Tannery, on the occasion of the annual meet.ing of the Bank on January 30, 1936stoutly main-tained that "Definite stabilization of the principalcurrencies remains, in our eyes, the final aim ofall monetary policies." He added that France couldeffectively defend her position until the UnitedStates and Great Britain were ready to accept anaccord. In other words, France is determined todefend the gold standard until America and thesterling countries are ready to return to it.

r. The question may be asked, Why should not.:,1France follow the crowd, and adopt a managed'" currency herself? Why should she not adopt her

currency to the changed parities of the pound anddollar? Why does she not restore her own pros-perity by the monetary adjustment which has been80 effectivein the sterling countries during the past

h four years, and more recently in Belgium? Such,,'

.: ALTHOUGH New York has surrendered worldfinancial leadership to London, America is

still holding the balance of power between thesterling bloc on the one side, and the gold bloc onthe other. Our decision to adopt a managed papercurrency may force the few remaining gold nationsoff the gold standard; and our decision to returnto a full gold standard may be instrumental inrestoring gold to at least temporary reign in manycountries.

The spectacular recovery in the sterling nationsas compared with persistent deflation, unemploy-ment and social insecurity in the gold nationswould seem to he sufficientreason for us to followthe example of the former. The argument of thegold nations 'is however, that international tradewhich is indispensable for world recovery, cannotbe attained except by an universal return to theinternational gold standard. In fact, the belief onthe part of many American financiers and theireconomist friends in this doctrine has 80 far pre.vented us from adopting a managed paper cur-rency.

a step would at once clarify the internationalmonetary situation. It could easily lead to theestablishment of an international money systeminwhich gold would be used primarily for the settle.ment of balances between countries; no longerto interfere with the stability of the money systemitself.

If France could only take this step! But there areproblems of domestic and international politics,social and economic problems, as well as a fright.ful lack of popular understanding of money-typoically French problems all-which prevent sucha solution. Thus France herself is in the way ofearly international stabilization, and all the whileshe blames the rest of the world, particularlyAmerica and England, for not stabilizing to suitthe French situation.

During the past two years the American Stahil-ization Fund has been instrumental in helping tokeep France on gold. Not long ago the U. S.Treasury earned the public appreciation of theBank of France for this help, although it was adistinct disservice to the French people in that ithelped to perpetuate the gold standard depressionfrom which they suffer.There is, however,no ques-tion, that the lack of a consistentAmericanmoneypolicy is a most serious handicap to world recov-ery. Sooner or later we will have to decidewhatour money policy shall be. Are we going to reoturn to the gold standard, as the Bank of Francepredicts? Before making this decision,let us seewhy the French are so anxious to have us do this.

France's Financial ProblemsThe basis of France's economic difficultiesis

monetary. The adherence to the gold standardcaused the well known depression of trade, in-dustry and agriculture which comes as the resultof falling prices and incomes. Wholesale pricesdeclined from 100 in 1929to an average of 53 in1935-a decline of 47 per cent. In this period thecost of living declined only about 16per cent. Theconsequent gap between wholesaleprices and thecost of living which, as in the other gold countries,

Editor'. Note: Mr. Cohruen is 8uislant to Pro(ollor IniDS F"uher andfrequent contributor 10 The People'. Mone,..

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164

rendered production increasingly unprofitable. Inother words, French industry and agriculture suf-fered reduced incomes, while their expenses re-mained comparatively fixed. Industrial productiondeclined about 35 per cent; imports and exportsfell about 70 per cent during the past six years.The number of unemployed receiving benefits wasaround 450,000 during 1935. The number of thosenot on the dole, including foreign labor that hadbeen dismissed or deported is about 1 millionwhich brings up the total loss of employment toabout 1,500,000 men. This may seem little incomparison to American unemployment figures,and the French authorities frequently point toit in attempting to show that the severity of theeconomic crisis is greatly exaggerated.

The decline of prices and incomes did, however,seriously affect the Government budget. The bud-getary deficits during the past six years were asfollows:

1930.31 2,6 billion francs1931.32 5,5" "1~3 7" "1934 5,6" "1935 5,5" "1936 5*" " '* (Estimated)

The trouble with the budget is, of course, thatrevenues declined continuously, while expendi-tures remained almost unchanged. Not until sum-mer 1935 when Laval attempted to put throughrigorous reductions of Government expenditureswas a real effort at a balance made. In fact, therehad not been an official attempt to even investigatethe cause of any remedies for the economic difficul-ties. One of the first acts of Laval was to appointa Committee which was to report to him on con-ditions and propose measures of economic revival.

Mr. Laval's Committee recommended: (1) Tobalance the budget by cutting about 10,8 billionfrancs off current expenditures. (2) To abandonthe present quota system of import restrictions infavor of a tariff, in order to be able to enforce thelowering of too high industrial and agriculturalprices. (3) The policy of the Bank of Franceshould be directed towards credit expansion andthe maintenance of easy money conditions. Sucha policy should cause an increase in confidence, in.duce the conversion of loans, and promote eco-nomic expansion. These measures were considerednecessary to prevent devaluation to which theFrench people are opposed. But the very people

THE PEOPLE'S MONEY

who are opposed to devaluation are also opposedto the deflation of costs and prices which is neces-sary to avoid devaluation.

Stability of French Price LevelThe greatest difficulty in forcing through defla-

tion is the rigidity of the French price structure.For years France has pursued a protectionist pol-icy which permitted her industrialists to maintainhigh prices by keeping cheap imports out. In ad.dition, the taxes which were a consequence of thispolicy had to be paid by industry, and as theywere added to the cost of production, they furtherincreased prices. Prices for many important in-dustrial products, such as iron, glass, building maoterials, have changed very little since 1928, mainlythrough the action of trusts or trade organizations,known under the name of "cartels". Prices forfarm products were likewise kept high by theprotectionist policy. French farming is generallyold-fashioned, inefficient and expensive. Quite oh-vionsly the farmers, who are politically very in-fluential resisted the import of cheap food stuffswhich would have meant bankruptcy to them.

To these basic factors must be added the impos-sibility to reduce wages, salaries, rents, interestsand similar fixed costs to anywhere near the levelof wholesale prices and incomes. Wages and sal.aries were reduced 10 per cent on the average, andthis caused so much resentment that no Govern-ment would dare to enforce further cuts.

Any Government trying to carry out a consistentpolicy of deflation would therefore have to bestrong enough to: (1) break the power of thetrusts in order to reduce industrial prices; (2)cause the farmers to fundamentally change theirmethods of production to reduce agriculturalprices; (3) obtain the consent of the rentiers toaccept considerably lower incomes; (4) haveworkers and employees agree to drastic reductionsof wages and salaries. Which Government couldattempt to undertake such a task? General defla-tion is an unsurpassable road to economic equi-librium.

Effects of Deflation I-Under these circumstances, the various deflation ."

attempts of the several French Governments did not .help, but rather did harm; for they spread thepsychological effects of deflation. In anticipationof lower prices business stagnates--no one has thecourage to buy or invest. People "save" theirmoney, which in France frequently means the

,

March-April, 1936

holding on to physical bank notes and gold. Uni-versal hoarding is an outstanding characteristic ofthis situation. It is estimated that of the total cir-culation of 80 billions, 25 to 30 billions of papermoney is hoarded. To this must be added the 10billions of gold which have been withdrawn fromthe Bank of France for hoarding purposes. Hoard-ing is not only due to the expectation of lowerprices, but also to the lack of confidence in thepolitical situation. Distrust increases with eachchange of Government. Nor is there confidencethat a Government which tries to lower wages andsalaries will be able to stay in power. The dissatis-faction of the farmers further aggravates politicaluncertainty: Their incomes have in many in-stances fallen below their costs of production, andso far Government policies have not promised anyrelief.

Why then, does not France cut the GordianKnot by devaluation? Public opinion is over-whelmingly against it. Intensive propaganda keepsalive the memory of the devaluation of the yearsago when millions of small savers and rentiers lost4/5 of the value of their money. France is a nationof rentiers, of persons who live on annuities fromsavings or investments. Devaluation, it is argued,would be unfair to them. It would be equal toconfiscation, to "equalization of wealth", and thusbe a first step towards socialism and communism.Moreover, it is said, if France should devalue, whatcertainty would there be that England and Amer-ica would not in tum devalue again, thus bringingrenewed deflationary pressure upon France, or forceher to join a race for devaluation leading to chaos?None of the political parties therefore wants totake the responsibility for devaluation. Even theSocialists and Communists who are known to favorit, do not want to do it themselves for fear of los-ing the support of the masses. Laval rather ac-cepted defeat than to devalue, although he un-questionably knew it would have solved the eco-nomic problem. It is believed that the presentSarraut Government will likewise try by all meansto avoid devaluation, at least until the May elec-tions will be over.

Bank of France Defends the Franc

With its supreme power over credit and money,the Bank of France holds the key to the Frenchproblem. A liberal credit policy, helped by openmarket operations could long ago have revivedtrade and industry. Low money rates would have

165

improved the Govemment bond market, makingpossible the conversion of loans with consequentsavings in interest charges. Unfortunately the pol-icy of the Bank of France has been limited to butone purpose: the maintenance of the gold stand-ard In order to stay on gold, the Bank was forcedto raise discount rates to 6% twice during 1935.Credit had to be restricted as a consequence ofthe withdrawal of 17 billions of gold (20% of thetotal reserve) during the past 12 months. Lack ofconfidence was only one cause of this gold flight.The policies of other central banks, in particularthe American silver purchases of last summer hadtheir reaction in the withdrawal of gold fromFrance. The recent weakening of the dollar hashad the same effect. The Bank of France thusacted strictly according to the rules of the goldstandard, causing tight money and high discountrates. With these weapons the Bank has "de-fended" the franc-not only during 1935, but forthe past five years.

It is a question of the gold standard versusFrance. The needs of trade, industry and agri-culture, the dangers of a social revolution, every-thing has become subordinated to the supremepurpose of maintaining the gold standard. Neitherthe recovery in the sterling nations, nor the reliefexperienced in Belgium from devaluation have ap-parently been able to convince the Bank that itspolicy is disastrous and must be revised. FrenchGovemments have followed each other in rapidsuccession, each one experiencing the futility offighting depression by deflation, each one appar-ently afraid to force the Bank to change its policy.

Symbol of France's PowerThe Bank is unwilling to risk a liberal policy

that might deplete France of gold and force theabandonment of the gold standard. To the Bankof France, to the financiers and industrialists whoown it, gold is not merely an international unit ofexchange, an out-moded standard of value. Goldis the symbol of French power, and the Bank ofFrance is the fortress which must defend it. Notonly would the abandonment of the gold standardmean the surrender of Paris as a money center toLondon. It would rob the country of its most po-tent power of international importance, the powerto grant gold credits to other nations in exchangefor a promise of help in a possible conflict withGermany. With gold credits France has chainedto herself a number of nations on whose support

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166

BYJAMES LEE RANDOLPH

Anti-RooseveltI don't deny the fact that we have been facedwith an acute emergencyof world wide pro-portion which necessitated energetic treat-ment.

Pro-RooseveltOr, in other words, extraordinary conditionsdemanded extraordinary measures; preciselymy position.

NeutralThat's why I say there's fundamentally nodifference between you as to the nature ofthe economic malady; you disagree only asto specific adjustments undertaken by theRoosevelt administration.

P. R.-Don't you agree that the emergency hasbeen rather pressing?

A. R.-And don't you agree that the Rooseveltat-tempts have been haphazard, inconsistentandinjurious?

N.-Gentlemen, you are way ahead of me. I amstill at the point of trying to find out wherethe trouble lay or lies.

Facing an EmergencyP. R.-Aren't you rather splitting hairs? Havewe,

or have we not, been facing an emergency?N.-It depends what you mean by "emergency."

If you mean an unusual, perhaps unprece-dented, set of circumstances,then the emer-gencywasand still is here. If youmean a tem-porary deviation from a "normal" to befollowed back to "normalcy" again, then Idon't believe it an emergency at all.

P. R.-That's speculation, perhaps economicphil-osophy; it has no bearing upon the questionwhether measures taken to improveconditionsare proper or not.

N.-It's not abstract speculation or philosophy, asyou call it; and it has everything to do withthe practical question whether the attemptsat recovery have been proper. Painstakingdiagnosis is the major difference betweenquackery and scientifictherapeutics.

A. R.-We can agree at least that since the latter

THE PEOPLE'S MONEY

Straws in the WindII. TImely Political Chats

part of 1929 the economic machine in thiscountry has been out of kelter.

Depression. Started before 1929N.-Not at all. We were sick economically long

before the market crash. The pressure ex-isted a full decade before it was registeredby the securities barometer.

P. R.-Of course,securityspeculationwent to madextremes. That's another fault R. has reme-died by creating the SEC.

A. R.-I suppose the Securities and ExchangeCommission,if its functions are finally de-clared constitutional, will station a cop inevery broker's officeand a division of marineson the Stock Exchange to stop speculation.

P. R.-You have a fanciful conception of SECduties. However,beautifully engraved paperwith no assets behind it can no more be is-sued

A. R.-No, and companies with plenty of assetshave the devil of a time complying with allthe SEC red tape regulations, and capital canno more be promptly raised although badlyneeded to launch enterprises that would re-move workers from relief rolls.

P. R.-I suppose that's what you fellowsmean byopposing government interference with busi-ness. You would prefer to see pretty paperspeddled once more under high pressure sales-manship, resulting again in a resoundingcrash within a few years.

Laissez-Faire DoctrineA. R.-Those that refuse to benefit from past ex-

perience deserve to lose; they won't be pro-tected from buying goldbricks no matter whatthe governmentdoes. It's only legitimate en-terprise that is hindered by a new bureau-cracy. It's a nuisance, increases costs of rais-ing capital and is an additional burden uponthe taxpayer. .

N.-To the extent that the objective of SEC isconceived to be the elimination of a factorcontributing to the economic debacle, it'swithin the bounds of our discussion. Other-wise, it's purely a reform, and not a recovery

r1

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March.April, 1936

factor, and, for the present at least, we mayleave it out of consideration.

A. R.-Aren't you dodging the issue? Isn't thisthe very question we were discussing?

N.-I merely wish to point to your SEC discussionas a concrete illustration of our completefloundering unless we first have some sortof explanation, or hypothesis if you will, forour economic trouble.

P. R.-You seem to run around in a circle, al-ways returning to the same point.

N.-But you gentlemen run around in many cir-cles and never reach any point. Don't yourealize that in order to determine whether agiven Roosevelt step is appropriate, we musthave some sort of gauge or standard by whichto measure its true value?

P. R.-Certainly; common sense and everyday ex-perience supply us with a gauge.

N.-Both of you have knocked about a good deal,have had experience in various fields, and cer-tainly possess common sense. Nevertheless,you always succeed in forming diametricallyopposite convictions as to Roosevelt measures.

A. R.-Thanks for the compliments. But is therea way by which I can make our Rooseveltapologist here see the error of his position?

P. R.-Or vice versa?N.-Not necessarily as to conclusions. But at least

you may find a common approach to the prob-lems, whereas now you touch only upon tan-gents. You don't lock horns, so to speak.

The B. C. EraA. R.-All right, let us return to the B. C. (be-

fore crash) era. Aside from the overspecu-lation mania with which we were assailed thelatter part of the period, prosperity was cer-tainly pronounced in the years of say 1925 to1929. Business was flourishing and the gov-ernment, at least the federal part, was runefficiently and economically.

N.-In other words, things were running the wayyou'd like to see them run again?

A. R.-Well, yes. Here and there we could seeroom for improvement. State and local gov-ernments were too profligate and running intodebt for frills we could hardly afford. Wewere far from the millenium, of course. Butthe standard of living was high, and condi-tions in general were rather favorable.

N.-Good. If that were so, why did we make a

167

turnabout face toward the end of 1929, andin spite of the continuance of the conserva-tive Hoover policies, prosperity still persistedto remain away around the corner for overthree years? Why the crash and the result-ing deep and wide depression?

A. R.-A depression is not a new phenomenon.We have had depressions, other countrieshave had depressions, lasting several years ata time. They are, in a sense, correctivesto overexpansion and overenthusiasm, Ofcourse, this depression reflected not only eco-nomic but also political mistakes of the warand post war periods. England, for example,was sorely stricken a few years before us. Butby persistent rejection of radical nostrumspulled out finally and is in rather fair shapeat present. Had Roosevelt not appeared withhis experiments, we should have been well onthe road to complete recovery. I don't doubtit for a moment.

The Bank FailuresN.-Have you by any chance an idea how many

bank failures occurred in the happy days of1925-1929?

A. R.-Oh, I should say about 50, although I don'tactually know.

N.-You mean during the entire period?A. R.-I suppose so; as I say, I am not acquainted

with the figures, but we heard very little ofbank failures in those years.

N.-Would you be surprised to hear that therewere more than ten times that number ofbank failures in each of the years 1925 to1929?

A. R.-Do you mean to say that in each of thoseyears there were more than 500 bank failures?

N.-Chapter and verse, my friend. The actualfigures were: 1925, 601; 1926, 656; 1927,1,021; 1928,520; 1929, 589-an average of 677bank failures a year during that prosperousand government conservative period. Some ofthese reopened later.

A. R.-The figures are surprising. But the factthat we didn't hear much about those failureswould indicate that they were small, unim-portant banks; probably the vast majority instates where very little capital is required toopen a bank.

N.-Even if these failures were confined entirelyto small banks, one could hardly consider

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THEPEOPLE'SMONEY A JOURNAL OF PROGRESSIVE ECONOMIC STATESMANSHIP

March-April, 1936

•EDITORIAL

Functionsof Money

Stabilizationof Value

Supply andDemand

quently, values are expressed in terms of money. Thevalue of each kind of article is expressed in terms of"price" which is the ratio of the value of the moneyunit to the value of the particular kind of unit whosevalue is specifically expressed through the standardof value.

The same force which applies to allcommodities within the reach of valua-tion operates also with respect to money.

of the monetary unit depends upon the

We shall not elaborate the processesthrough which individual values areestablished through the exchange

operations, and how any detailed prices emerge inrelation to the standard of value. For the presentpurpose the long recognized law of supply and de-mand in its general conception will be sufficient, with-out detailed analysis of valuation force and determina-tion of value. As a general conception, the importanceof any particular kind of goods and services, in termsof a single unit, depends upon the quantity of suchthings that enter into the exchange operations. If thequantity is large the importance of each unit as estab-lished through exchange is small. If the quantity issmall, the importance of each unit is large. The im-portance in each instance depends upon the concertedjudgment as expressed through exchange. As theimportance of the unit is determined, it fixes the valuefor the entire supply within the scope of potential ex-change. If the quantity increases, the value of theunit diminishes. This is the essence of the law ofsupply and demand.

Value ofMoneyThe value

The traditional analysis of money pre-sents three major functions: (1)standard of value, (2) medium of

exchange, and (3) storehouse for saving. Each ofthese will be briefly considered from the standpointof national requirements. While each of these func-tions must be considered separately, all are closelyinter-related and interdependent. Each involves allthe others. Separation is really arbitrary, except thatit serves for clarity of conception and consideration ofobjectives.

First of all, money serves as thestandard of value with relation toother goods and services. The

relative values of all other things which come withinthe realm of valuation are measured by the value ofthe monetary unit.

Value is the importance that is collectively attachedto any particular thing which comes within the realmof valuation. It relates to specific goods and services,and is not a general or abstract quantity in and ofitself as often vaguely conceived. It is a market cat-egory and is established through the process of ex-change, either actually or potentially, according to thecombined and concerted weight of judgments expressedby sellers and purchasers of the particular goods.

Money, as the standard of values, is merely a spe-cific commodity whose collective importance throughthe process of exchange is established in the samemanner as are all other important things. The valueof each kind of object is separately determined throughthe force of exchange. This is applicable to moneyas well as other things whose relative importance ismeasured by the value of the money article. Conse-

March-April, 1936 169

Standard ofMeasure

The third function, as commonlydescribed, pertains particularly tothe inert status of money when itactively as a flow into exchange

Storehouseof Value

determined through exchange. At any particular timeand under particular circumstances, however, the rela-tive importance of various kinds of goods and servicesare determined with exactness, or substantial accuracy,so that relative measurements are made in terms ofthe monetary unit. The importance attached to wheatunder particular circumstances not only can be, but is,expressed in terms of the importance of the monetaryunit under particular circumstances. The same is trueof the relative importance of all other things in theirrelation to the monetary unit. At every particularjuncture, when a price is expressed, there is a definitequantitative relationship between the value of themoney and the thing whose price has been determined.

does not enteroperations .

Money has always been used more or less as ameans of special saving. In this separate function,when money is received it is stored away and re-served particularly for future purposes. It is usuallythought of as stable in value and is thus considered atrustworthy vehicle through which immediate pur-

(Please turn to page 176)

Medium of The second function of money asE h traditionally presented is to furnish

xc ange the medium of exchange. This, how-ever, is manifestly involved in the standard of valueand represents merely the application of the standardin exchange, as distinguished from the processesthrough which the standard in itself is determined.The standard of value is determined through exchangeprocess. It must, however, be specifically consideredfrom the standpoint of exchange requirement. Itsvital function as a standard is really to effect ex-change. Considered merely as a standard, it wouldhave no significance. Its real function is to providea medium through which goods and services are ex-changed, through which production and distributionare systematically carried on, through which peopleengaged in the industrial processes receive their in-come for their own contribution, and in turn incurexpenditures for goods and services for their own per-sonal purposes, through which, in fact, all economicrelationships are effected in the far flung and special-ized system of production and distribution.

quantity of money which enters into the exchange pro-cesses. If the quantity is large, the importance of theunit is small; if the quantity is small, the importanceof the unit is large. Monetary valuation is deter-mined by the law of supply and demand exactly as areall other valuations established through exchangeoperations.

As already stated, the value of the monetary unit istaken as the standard for expressing the value of allother kinds of units. Consequently, all the relativevalues are expressed in terms of price in the monetarystandard. The price of any thing is merely the ex-pression of its relation to the importance of the mon-etary unit. If wheat is one dollar a bushel, its im-portance as determined through exchange is expressedas one bushel being equal to one dollar of the mon-etary unit. If the price rises, and reaches two dollarsper bushel, the relative importance of the wheat isequal to the value of two dollars. Likewise, thechanges are throughout expressed in terms of themoney unit as determined through processes ofexchange.

Since there are great multitudes of different kindsof things that enter continuously into exchange, andsince the great bulk of industrial activities is involvedin these processes, they may be collectively referredto as the "price system". All the extensive and inter-connected relationships are carried out through thestandard of value as represented by the monetary unit.This involves throughout the underlying importanceof the unit as compared with the relative importanceof all other matters that enter into the operation ofexchange.

The standard of measure is thevalue of the monetary unit underthe conditions of the total monetary

supply in its relation to the demands for exchange.Some times the criticism is made that there is nomeasure of value,-that value is an intangible andessentially meaningless thing which cannot be meas-ured. The difliculty with this criticism is that it isbased upon the conception of measurement in an al-together different kind of quantities. Value is pre-

I" sented in analogy with weight, bulk, distance or other.~hYSiCal qualities which are measured by the approp-

riate standards as widely adopted through custom orgovernmental determination. This conception of meas-urement cannot be applied to values for these are notphysical quantities subject to physical types ofmeasurement. On the contrary, they are subjective

(I' quantities and depend upon collective judgment as

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170

EGOTISM OF PRECEDENTIn our new epoch it is not helpful to complain of un-

alterable facts, and declare that we cannot deal with thembecause the old methods do not fit them. New circumstancesrequire new laws. There is nothing so narrow as the ego.tism of precedent, (Albert J. Beveridge)

* * *FORM OF CONSTITUTION

The Constitution of the United States has not beenwritten in complete form; it never will be. It is in.finitely more than our fathers were able to agree upon,or to anticipate and formulate in a written document ahundred years ago. (Andrew S. Draper)

* * *MORAL DEVELOPMENT

The politics and religion which a man inherits withoutthinking and without effort, count little toward his politicaland his spiritual development. (Henry S. Pritchett)

* * *RECOVERY UNCERTAIN

There is a dangerous habit among statisticians to assumethat because last year was better than the year before, andthis year is better than last year, it follows inevitably thatnext year is going to be better than this year. It is easyand pleasant to overlook new factors which, at one timerelatively insignificant, are growing into factors of real im-portance. It is worth while at this time to see conditionsas nearly as possible in their true Iight, We must knowwhether we are building with rotten timbers upon a foun-dation of quicksand.

* * *Anarchy is always a revolt against unjust and unequal

laws. (Lyman Abbott)* * *

Use the educated thought of the country for shaping bestits course now, instead of chiefly finding fault with itshistory. (Whitelaw Reid)

* * *A GUIDING SPIRIT

No improvements in organization can insure us a puredemocratic government, unless we have an enlightened pub-lic opinion and a patriotic spirit guiding and sustaining itin all its life. (James B. Angell)

* * *NEED OF SOCIAL VISION

There are other things besides material successwith whichwe must supply our generation. We must quicken thesocial understanding of our citizens, and give them thevision of those who know their just relations to their fellowmen. (Woodrow Wilson)

* * *THE PASSING SHOW

There is a possible education that will make menmore than well ordered puppets in the passing showtrained to make gestures, with no sense of the signifi-

THE PEOPLE'S MONEY

cance of the human drama and with no reflection be-yond problems of material advantage.

(Everett 'Dean Martin)* * *

11 opuuon be widespread and positive it wiU in the endbe realized in government.

* * *TOWARD SOCIAL HARMONY

Nothing can give the citizens of a nation a keener senseof their own intrinsic worth and their responsibilities thansharing directly and justly in the operation of their owngovernment. Furthermore, there seems to be a sustainingand even a beneficent feature in the very operation of agenuine democracy, in that such operation of itseH con-tinually lifts the citizens to higher levels of ethics andmorality and stimulates devotion to larger and more humanepurposes-thereby creating the very agencies which will Im-prove and perpetuate the system. Our own democracy canbe perpetuated as the most desirable fonn of governmentonly if it is operated on those lofty principles under whichit began. Its guardianship and its destiny are in our hands.It remains for us to decide whether we shall wander aim.lessly in a wilderness of uncertainty, poverty and perpetualstrife, or harken back to the spirit which gave birth to ourgovernment, and open wide the gates to genuine democracyin education, business and government-thereby advancinganother step toward that goal of social hannony, to whichthe sages and the seers of all times and all lands havepointed as humanity's just and most precious heritage.

* * * (Willett L. Hardin)

HOW LONG OH LORD?When will Europe rid herself of the wicked customs

of her primal progenitors and realise that the earthhappiness of every living being is the only reasonablepurpose of life? From the beginning our proud "Aryan"way has been a base, barbarous way, a way definitelyopposed to every lofty conception of civilization. It isfor this reason that Hitler's followers cry down Goetheand bandy about dangerous words like Honour andPatriotism. The Germans have consciously reverted tothe mental state of our horse-pasturing, horse-thief an-cestors. All that is charming and imaginative in thesociety of their great country is now suppressed. Theirpresent theories of Government were discarded by su-perior men hundreds of years ago.

The last end of the State is not to dominate men, norto restrain them by fear; rather it is to free each manfrom fear that he may live and act with full securityand without injury to himself or his neighbor.

(Llewellyn Powys)

PUBLISHER'S ANNOUNCEMENTThe present issue of The People's Money isVolume 2, Number 4. To facilitate a wider distri-bution of the Journal, and in order to have thepublication appear at the same time at distributionpoints, this issue follows the February number andis dated MARCH-APRIL instead of March forpurposes of convenience.

Subscribers will receive the lull twelve issues.

-

March-April, 1936

BYM. E. KRIEGEL

"We cannot keep out of a war and at the sametime enforce the freedom of the seas-that is, thefreedom to make profits out of countries in a deathstruggle.

If a war arises we must therefore choose betweentwo courses: between the great profits, with graverisks of war on the one hand; or smaller profitsand less risk on the other.

To resist the political pressure for protection insuch a trade would be a difficult job for any Pres-ident.

And the' time to decide is now, while we canthink calmly and clearly, before war propagandagets in its deadly work . . .

It is a choice of profits or peace. Our countrymust remain at peace."

Admiral William S. Sims

PROFITS or peace? The challenge presented( by one who fought the Great War for Amer-,i" ica on the high seas leads us to analyze the organ-

ized efforts for peace since that war.Wilson's Fourteen Points announced January

1918 were to be the basis of the Paris Peacenegotiations the following January. These were:Open covenants openly arrived at; Freedom of theseas; Removal of high tariff barriers; Reductionof armaments; Impartial adjustment of colonialclaims; Evacuation of Russian territories occupiedby Central Powers; Evacuation and reconstruc-tion of Belgium; Restoration of Alsace-Lorraine toFrance; Readjustment of Italy's frontiers; Self-government for Austria and Hungary; Evacuationof Serbia, Rumania, and Montenegro; Self-deter-mination for races ruled over by Turkey; Creationof an independent Poland, with access to the sea;

I Organization of the League of Nations.

A Reaction to Old World Diplomacy:v While Wilson triumphantly toured England,

France and Italy, his opponents in the Senate,headed by Henry Cabot Lodge, 'Chairman of theSenate Foreign Relations Committee, objected tothe fourteen points and the proposed League. They

','~ claimed equal power in treatymaking, demanded[II

171

Armaments Assail AmericaIII. Peace Plans, Proposals and Pacts.

disarmament of Germany, a large reparations billand the non-intervention of America in Europeanaffairs, ("entangling alliances"). The intricaciesof old world diplomacy, manoeuvered by such vet-erans as Lloyd George, Clemenceau and Orlandoon the Council 'of Four, behind closed doors, be-fuddled Wilson. He had waged a single-handedbattle to keep the allied powers from appropriat-ing territories indiscriminately, without regard totheir inhabitants.

From Lodge's December 21, 1918 declarationuntil July 10, 1919, when Wilson presented thetreaty to the Senate, opposition increased. OnNovember 19, 1919 the Senate defeated the Treaty.A resolution passed both Houses for a separatepeace with Germany, which was vetoed by Wilsonas "an ineffaceable stain upon the gallantry andhonor of the United States." A similar resolutionwas signed by President Harding. On August 25,1921 a treaty was signed with Germany at Berlin;on the preceding day with Austria at Vienna andon August 29th with Hungary at Budapest; thestate of war was declared to have been terminatedon the second of the previous month.

The Pact of London had provided secretly in1915 for the division of the territorial spoils, inthe 'event of an allied victory. Territorial gainswere promised Italy the same year as an induce-ment to join the Allies; the following year, Ru-mania was drawn in under similar conditions.

The Secret TreatiesOn May 8, 1915, Ambassador Walter Hines Page,

cabled President Wilson regarding existing secrettreaties; Colonel House sent similar information.In April 1917, Arthur J. Balfour on a visit toWashington, as a member of the Allied Commis-sion, discussed them with Wilson and House; onthe 28th, the latter discussed these agreements withBalfour. Two day later, the three-Wilson, House,Balfour-dined and talked of the treaties. Balfourreferred to these conferences in the House of Com-

Editor's Note: Thil is th'" third io the 8f'1ril'll or artidf'l' on ArmamenU a.an economic problem. Tho author is an international Lecturer. ~OdO~.ist and radio Commentator. There will be a temporary break 10 lhi.series next month to make room for Mr. Krieger. aoalysi. of Stale-Social Security legislation. The AnnaD1t1nlJ series will be resumed iD.the June issue of The People", Money.

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mons on March 4, 1918, stating that he had dis-closed the secrets of allied diplomacy to Wilsonduring his visit to America the previous year. Inreply to Baker in 1922, he said, "I was absolutelyopen with President Wilson about the Secret Trea-ties."

Allied leaders had felt that the fourteen pointswere meant to counteract and substitute for thesetreaties. On November 17, 1917, they were madepublic by the new Russian government.

On August 19, 1919 the Senate Foreign RelationsCommittee called on the President and inquired asto his knowledge of these treaties, prior to hissailing to the Paris conference. He denied havinghad any information with regard to them. Thesedenials were the basis of the Ray Stannard Baker-Walter Lippmann and Carter Glass-Gerald P.Nye controversies, the latter affecting the SenateMunitions Investigation Committee activities.

Separate treaties were signed under the ParisPeace Settlement with the five defeated nations:The Treaty of Versailles, June 28, 1919 (with Ger-many); the Treaty of St. Germain, September 10,1919 (with Austria) ; the Treaty of Trianon, June4, 1920 (with Hungary); the Treaty of Neuilly,November 27, 1919 (with Bulgaria); and theTreaty of Sevres, August 10, 1920 (with Turkey).In the main, they followed the provisions of thesecret treaties.

The settlement agreed upon unsettled Europe'smajor problems.

The Versailles TreatyVersailles returned Alsace-Lorraine to France;

rounded the Belgian frontier by granting two bor-der districts; Posen, West Prussia and part of up-per Silesia were given to Poland. At the end offifteen years a plebescite was to be held in the Saar-this territory overwhelmingly voted to be re-turned to Germany, which was done on March 1,1935.

The treaty limited the German army to a max-imum of one hundred thousand men recruited fora period of twelve years, forbade the manufactureof tanks, military airplanes, big guns, poison gas,and submarines; it abolished conscription. Hernavy was limited to six battleships, six lightcruisers and some smaller vessels which were to bemanned by not more than 15,000 officersand men.

Some of the provisions such as the trial of theex-Kaiser, who reached 77 this year, and the pun-ishment of the "War-criminals" were never execu-

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ted. In 1930 the Rhine ~as evacuated-five yearsbefore the time set by the treaty. In 1932 theLausanne Conference restricted reparation pay-ments.

In the St. Germain and Trianon Treaties, theHapsburg Empire was severed-the former pro-hibited the union of Germany and Austria (An-schluss) and the latter created the independentstate of Hungary.

The treaties of Neuilly and Sevres ceded Bul-garian and Turkish territories to the Allied Powers.

The Non-Aggression CompactsIn May 1922, at Genoa, thirty nations adopted

a resolution not to commit aggressions upon oneanother. The original purpose was to bring formerenemy countries into harmony, including Russia.Russia's refusal to satisfy claims of countries thatinsisted upon indemnities to their nationals, whoseproperty had been confiscated, resulted in failureof the negotiations.

The League of Nations Assembly adopted a pro-tocol at Geneva in September 1924, which boundthe members to substitute arbitration in interna-tional disputes. Great Britain's refusal to subscribeto the principle of mutual assistance lapsed it.

Under the Genoa and Cannes non-aggressioncompacts, France had been requested to reduce hernaval strength. Briand's efforts in that directionresulted in his resignation. On his subsequent re-tum to power, he paved the way for Locarno, withStresemann and Austen Chamberlain.

France, Belgium and Germany signed a pact atLocarno in 1925, to settle their controversies byarbitration and never to make war upon eachother.

On the tenth anniversary of the United Statesentry into the war, Briand proposed that theUnited States and France outlaw war. On August 27,1928 the Paris Peace Pact, which was extended hySecretary of State Kellogg to include fifteen na-tions, was signed in the same hall where the morepompous presentation of the League of Nationshad been made a decade before.

On February 27, 1928, Kellogg wrote the Frenc'Ambassador, "From the broad standpoint of hmanity and civilization, all war is an assault upon

. human existence and should be suppressed in thecommon interest."

The pact has been ratified by sixty-three nations.It is symbolic as the first formal renunciation of

March-April, 1936

war and outlaws resort to conflict, as an instrumentof national policy.

) It is the law of the land-our country solemnlysubscribed to it and proclaimed it a bindingagreement on July 24, 1929 at Washington. Soldiersas well as civilians are affected by its enforcement.InU. S. vs, Carr the court said, "A soldier is boundto obey only the lawful orders of his superiors. Ifhe receives an order to do an unlawful act, he isbound neither by his duty nor his oath to do it.So far from such an order being a justification, itmakes the party giving the order an accomplice inthe crime. For instance, an order from an officerto a soldier to shoot another for disrespectfulwords merely would, if obeyed, be murder by theofficer and soldier."

The violation of the Pact by any signatory is anintemational crime. Officers or soldiers defying itare equally responsible for murder, by legal def-inition.

The infringement by one nation does not absolveanother from the guilt of its binding promise.

There have been flagrant violations in the con.I flict of Russia and China in 1929, Japan and China

in 1931-1933, Bolivia and Paraguay in 1932.1935and the Italo-Ethiopian continuing fracas.

filii. The Chaco warfare came to an end, with atwelve day truce signed by Bolivia and Paraguayon June 12th of last year at Buenos Aires, threeyears after beginning of hostilities. This truce wasthe result of negotiations initiated by Argentineand Chile, supported by Brazil, Peru, Uruguay andthe United States. The failure of the League toend the dispute resulted in Paraguay's resignationas a member. On January 21st of this year a peacepact was signed ending the swamp and jungle war.fare and diplomatic relations were resumed, withthe tuming of the six months truce into an ac-ceptahle agreement.

The Italian-Ethiopian AffairA skirmish between Itialian troops and a native

Ethiopian border patrol resulted in the killing ofseveral combatants on January 29 of last year. This

Awas followed by the tran~porting of lar~e ~umhers',.of Italian troops to Africa, The Ethiopian Em-

peror offered to submit the issue to arbitration.He appealed to the League of Nations and to theUnited States; both countries were members ofthe League and signatories of the Paris PeacePact. A conciliation commission appointed by the

(It League found both sides free of guilt. The League

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Council appointed a Committee of Five to inves-tigate the dispute on September 4. Its findingswere rejected by Italy; fighting continued withincreased intensity.

Great Britain secured from Mediterranean coun-tries, first France, then Greece, Turkey and Jugo-slavia, promise of cooperation for defense, underLeague Covenant Article 16, in the event Italyundertook military measures in retaliation to ap.plication of sanctions. The Balkan states agreedabout December 8 on a consideration of specificrewards, should sanctions lead to a successful waron Italy. Greece was promised several of the sixfortified Dodeoanese Islands and Turkey the re-mainder, in addition to Cyprus, which belongs toEngland, Jugoslavia manifested anxiety in protect-ing the Dalmatian coast against Italy.

The Hoare-Laval peace proposal was announcedat Geneva on December 13. Four days previously,Foreign Secretary Hoare cabled the British Min-ister in Addis Ababa ; "You should use your ut-most influence to induce the Emperor to give care-ful and favorable consideration to these proposalsand on no account lightly to reject them." Atthe same time he informed the Ambassador toRome: "M. Laval and I are anxious to take accountof the Italian aspirations in so far as these canbe made compatible with the principles of thecovenant of the League of Nations and with re-spect for Ethiopa's sovereignty. We are convincedthat arrangements should be drawn up under thedirection of the Committee of Five." The Star,British liberal daily, described the Foreign OfficeWhite Paper, as the "Diary of the Great Ethiopia'Betrayal' ."

The Ethiopian Emperor rejected the plan, re-sisted the pressure brought to bear by the BritishForeign Office to surrender two-thirds of his coun-try to Italy and asked the League to call a specialmeeting of the assembly, which was refused.

On December 19th Hoare resigned as ForeignSecretary, stating his conscience was clear, despitethe humiliation of his outrageous proposal; Lavalwas forced to resign the following month. Thedisgust with which the world met the Anglo.French blunders, serves as an indication of thedesire of large sections of the peoples of the worldfor a just peace to terminate the destruction ofhuman lives, in the imperialist adventures of Mus-solini.

(Please turn to page 186)

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BYDANIEL F. GUINANPresident, Merchants Banking

Trust Company, Mahanoy City, Pe,

NEWSPAPER stories provide ample evidenceof the fact that industrial conditions are far

from satisfactory and that we are still very muchin the depression.

Frank Walker, of the Federal Emergency ReliefAdministration, stated that the government mustsoon transfer the care of the needy to the Statesand Municipalities, and that private industry mustfurnish employment for the jobless. Big Business,with its program for future governmental policy,asks for discontinuance of expenditures frr publicworks. I am in thorough disagreement with thedemands of Big Business. There is still no log-ical program in sight by which business and in-dustry can maintain itself through individual en-terprise and Iaissez-faire.

There is no personal liberty, nor economic free-dom, where the opportunities for employment areso diminished that the army of jobless has noother choice than to compete for employment atthe barest means of subsistence. Work, withoutspending money, is not economic freedom for theindustries whose market depends upon the pur-chasing power of the workers.

Ilnderconsumption Real Cause of DepressionPrivate business cannot pick up the idle men

and put them on payrolls until there is a demandcreated for, or anticipated by, industry. Industriesfind markets in consumption of goods. Productionspeeds up to meet the wants created by consump-tion. It is under-consumption which has stoppedthe work of mines, mills, farms and factories.

Underconsumption springs from lack of pur-chasing power on the part of those suffering fromenforced idleness, and from those who do withoutgoods and services because of fear of probable lossof employment. Any logical solution must .recog-nize fundamental causes, and the remedy mustprevent a recurrence of the causes. In this waywe can obtain lasting and permanent prosperity.Believing it possible to have permanent prosper-ity, I criticise freely those measures which seekonly to place a poultice on sore spots to ease thepain. I find fault with half-way measures adop-ted as compromise between conflicting opinion.

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,Steps to RecoveryA Program for 1936

One reads of government spending for direct-relief and work-relief, and that billions have beendirected into these channels for the purpose of re-lieving distress. We find some men, in high sta-tions of life, weighing the merit of these two plansand basing their conclusions only on what the costwill be to the gow-mment, Some say that direct-relief will be less burdensome to the tax payer and,therefore, oppose work-relief.

We are led to believe that in the future the fed-eral government will shift the burden of relief tothe States and their political subdivisions, in orderto lessen the cost to the federal government. Thevarious States, municipalities and counties arepowerless to increase their revenues by additionaltaxes. This is not the time to shift the burden.But it is the time to seek a true solution of theeconomic problem.

The Malthusian DoctrineThere are those in our own times who reason

like Malthus, the English political economist(1766-1834), who when faced with the poverty andmisery of his day offered the following explanationof such conditions by pointing out that the in-crease of population advances at a geometrical,the increase of the means of life at an arithmeticalratio; that this renders the condition of the poormore and more hopeless; that unless famine andwar interfere to diminish population, the meansof life will eventually prove inadequate.

The explanation of poverty given by Malthus inhis day must be held absurd by those who nowseek to lessen production of the farm and mineto insure profit in business. It is the abundanceof nature, not the scarcity, that perplexes theSecretary of Agriculture. The fault is not in theniggardliness of nature as written by Malthus. Theremedy is not in piling up big fortunes for the,few in this age of abundance in order to makeI'the struggle for existence more intense for themasses. Is want and fear a stimulant for materialprogress?

After College-What?It has been estimated that one-sixth of those

on direct and work-relief-approximately 2,600,-

March.April, 1936

OOo-are between the ages of sixteen and twenty.. five. The graduates of our schools and colleges_l' are compelled, by necessity, to seek relief. These

graduates left their schools with high hopes ofmaking good. They were fired with the ambitionand determination to become leaders. They readof Andrew Jackson, Andrew Johnson, AbrahamLincoln and U. S. Grant, men who worked theirway up from the Mud-Sifla of Society to thehighest positions of usefulness.

Today, with the strain of competing for thebarest means of subsistence and yet finding noemployment; with ambition thus deadened, hopesfor the future vanishing, the temptation to turntalents to criminal pursuits is fed by insecurity,and the fear of want.

It is the fault of Society in not finding or creat-ing opportunities for employment for young menand women after they leave our schools andcolleges. Such beggarly offers of $20.00 to $25.00a month for youths under twenty-five can comeouly from those who are imbued with the falsephilosophy of Malthus.

The Home Owners' Loan ActThe most praiseworthy endeavor of the present

federal Administration is the Home Owners' LoanAct. Yet, no legislation is more badly adminis-tered. The purpose of the Act was to aid delin-quent debtors and save homes from foreclosure.The delinquencies were not the fault of the homeowners but of industrial conditions in the countryat large.

Lack of employment, and its consequences, putthe home owner in a class of sufficient delinquencyand distress to warrant the Home Owners' LoanCorporation taking over the loan and holding themortgage as an asset. There can be no economicloss in the government taking over the loans ofall home owners in distress through lack of em-ployment and holding such loans until industrialrecovery makes repayment possible. The arbitraryand capricious methods in appraisals and grant-ing loans will not stand Congressional investiga-tion. Long-distance appraisals by men sitting in

]1lWashington to determine real estate values in'Mahanoy City (Pa.), showed a lamentable lack

of knowledge of real estate conditions. The recentannouncement of 2,963 foreclosures inevitablytends to depress real estate values and are"making opportunities in real estate" for thosewho are waiting for bargains under the Sheriff's

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hammer. These bargains are to the buyers ofreal estate what the purchasing of labor is to -theemployer who finds men offering themselves atany wages in order to live through hard times.

A Job for Every ManThe federal government should father a plan

for worth-while projects, giving work to everyable bodied man seeking employment. "Everyman a job and no one on relief" can be theavowed policy of the Administration. The govern-ment owes no man a living, but for the publicwelfare, it does owe every man a job in orderthat he may continue the pursuit of happiness.

Projects designed for the safety, convenience,health and pleasure of our people could put everyunemployed man to work and thereby createemployment and competition with private indus-try for workers, thus raising wages in private in.dustry. It is the increase in wages that makesspending a sort of revolving fund which keeps inmotion the wheels of industry.

Government spending creates the ignition sparkto start and maintain the train of prosperity. Thereneed be no stoppage of that train. The theory ofcycles of depression finds no place in the mindsof men bent on prosperity and progress.

The unsatisfied wants of human beings theworld over is the market for the produce andproducts of commercial and industrial activity.Man's wants are limitless. His desires increasewith what he feeds on. The more he earns, themore he spends. He continually craves, when pos-sessed of steady income, for something better,something newer, something different. He reoplaces the antiquated with the modern. His tastefor style forbids the use of apparel until wornout. He buys in season.

14 Billions for Public WorksCongress did authorize in January, 1935, the

spending of four billion dollars for public works.Much of this amount has not been spent, and ofthe money expended a great part has been taintedas "work-relief" to make the recipients feel theatmosphere of mendicants. There has been notrue policy of public works promulgated by theAdministration. The Comptroller at Washingtonexercises a review of costs of all projects submittedfrom various parts of the country. This meansdelay in speeding up employment and creatingpurchasing power. The economic loss of idlenessin causing under-consumption is many times the

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penny savings of the Washington Bureau in audit-ing costs of projects Local engineers everywhereare more competent to pass on bids for work tobe done than those in the capitol city.

Accountants can never learn the loss throughidleness, nor learn the economic gain in creatingemployment and making consumption speed upproduction. Even now, accountants only see theNational debt of thirty billion dollars; they donot see the good assets created by the money spent.Paved highways are good assets; replacing narrowwooden bridges are good assets. The mortgagesheld by the H.O.L. Corporation, and the evi-dences of debt held by the R.F.C. are good assets.But the best asset of all is the leverage the moneyspent had on lessening the momentum of a Na-tion's business slipping back-as a means for re-storing the values with industrial recovery.

The people of the United States sent fourteenbillion dollars to Europe between 1919 and 1926to rebuild that continent after the ravages of war.The purchases by Europeans using this money topay our exporters created industrial activity inour own country, and defeated the plans of thosewho sought to bring "deflation" readjustment inthe years 1921-1922. The spending of these billionscounteracted the deflationary schemes advocatedearly in the Harding Administration. The spend-ing of fourteen billion dollars now on worthwhileprojects will prove the best economy.

Let us undertake such projects as slum clear-ance; soil erosion prevention; reforestation; hy-dro-electric developments; bridge and road con-struction; health promotion projects, as well asmany other useful and socially desirable wealthbuilding activities. No false economy should bepermitted to stand in the way. No ear should begiven to the parrot-like talk of "balance the bud-get." The worthwhile public projects are assetsof an enduring character.

A Program for 1936Fourteen billion dollars should be appropriated

by the Congress in 1936, and this money shouldbe issued without any borrowings by the TreasuryDepartment. Nationalize the Federal ReserveBanks and authorize the Secretary of the Treasuryto place a billion dollar note in each Federal Re-serve Bank and check on it as payments for pub-lic works may require. Let those bank officialswho threaten to boycott government securitiesplace their government holdings subject to pay-

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menlo and issue currency to pay them off as fastas they deposit their bonds.

The paper money of the government, withoutcoupons, is just as sound as the bond with interestcoupons, The Treasury Department should freeitself from any dependency upon bankers in theofferings of government securities. An irredeem-able paper money issue, to the extent of fourteen ,billion dollars to finance public works and meetthe demands of maturing obligations should havethe united support of those battling for economicrecovery.

Too much ear is given to those seeking to dis-credit any movement for social reform, be it theNew Deal or anything new which tends to increasecompetition among employers for labor. It willnot do to shout back "parrot-like" against "infla-tion"; against "printing press money"; against"German Marks"; against the "New Deal"; againstany policy of public works. Public Officials musthave the courage to go through to a solution ofthe problems of economic recovery and socialsecurity.

EDITORIAL(Continued from page 169)

chasing power can be stored up for future use andexchange.

This function again depends upon stability in thevalue of the monetary unit. The usual conception,however, is that the money unit in itself is stable, butthat prices changed. Relatively few people realizethat general price changes reflect the shil;t in the monoetary unit and that instability is in the money ratherthan in the value of goods and services in general.Because of this misconception there is frequently, ifnot usually, personal loss from the use of money asa special storehouse of value for future use. If themonetary value declines there is loss, and often theconditions which lead to "hoarding" of money arelikely to produce loss rather than gain to the holders,-though the opposite may be the consequence ofspecial circumstances.

The point of national monetary significance is thathoarding becomes purely a matter of personal advan-tage rather than of national concern. The act o~hoarding withdraws money from circulation and re-duces the volume available for the flow of exchange.This may not be serious if there are provisions forthe maintenance of adequate flow. Usually, however,increased hoarding signifies unstable monetary eondi-tions and dislocation of industrial activity.

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March-Ap~ 1936

TRENDS AND TIDES IN---.;: ~......",---~

GUIDE POST FOR THE INVESTORStatistics Relating to Security Markets and Corporations

By PAUL P. GOURRICHDirector of Research Division.

Securities and Exchange Commission

THE Securities and Exchange Commission is ayoung agency. The fundamental desire of the

.. Commission is to make available to the publicstatistical data of general interest as rapidly as isconsistent with their nature-and it could hardlybe otherwise, for full publicity is one of the surestmeans of achieving the major objectives set up byCongress. But since practically all of our serieswere started from scratch within the past year, weare still accumulating a considerable body of ma-terial which has not been made public because wewish to test its consistency and reliability beforedoing so.

Other consequences of our short span of existenceare that we have not yet been able to utilize to thefullest all of the material which is made availableto the Commission in the discharge of its adminis-trative duties, and that there are stili wide fieldswhich we had to leave untouched because wenecessarily must devote our attention first to those

"itproblems most essential to the current administra-,tion of the Commission. We hope, therefore, that

we will be able to report a year hence almost aslarge a reservoir of new statistical information aswe are reporting today.

Since the administration of the Public UtilityAct of 1935 is stili too much in its infancy to war-rant discussion at the present, I shall consider only~.

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those statistics which have resulted from the ad-ministration of the Securities Act of 1933 and theSecurities Exchange Act of 1934.

The statistical materials will be discussed in thefollowing order:

I. Published Material.

n. Material Not Yet Published.

III. Miscellaneous Data.

IPublished Material

A. Monthly Summary of Issues Registered underthe Securities Act of 1933

This series-the backbone of the statistical workin the field of new issues of securities-is releasedabout the 20th of each month and covers all pub-licly offered, non-exempt issues of $100,000 ormore, for which a registration statement becameeffective during the preceding month.'

Up to November 30, 1935, 1,328 statements badbeen filed with the Commission covering new issuestotaling $4,085,819,000; 913 of these statements,covering new issues totaling $3,508,727,000,becameeffective under the Act and are contained in thisseries.

Total effective registrations are divided into twogroups: (1) the total for all issues intended inwhole or in part for cash sale, and (2) the total for

1 Securities issued by a common carrier subject to the pro-visions of Section 20a of the Interstate Commerce Act,hank issues, securities sold exclusively to persons residingwithin the state of organization of the issuer, securitiesplaced privately, securities issued in certain types of ex-changes, etc. are exempt under the 1933Act.

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Issuee to be offered in connection with reorganiza-tions, extension of maturities, and in connectionwith voting trust arrangements. The totals arebroken down to show the distribution according totype of issue (common stock, preferred stock,debentures, ete.) and type of issuer (industry classi-fication). For the first group only, expenses ex-pected to be incurred in distribution (as estimatedby the registrants) and the proposed uses of theproceeds are also given. This last item is of greatimportance, as it serves to indicate just when andby what amounts corporations raise new capital tobe used for expansion of their plant and equip-ment.!

In connection with the use of this series it shouldbe borne in mind that all statistics derived fromeffective registration statements refer to "registeredintentions" to sell securities, and do not necessarilyrepresent securities actually offered for sale orsold; and that they represent the registrants' esti-mates of expected proceeds and contemplated usesof the funds, rather than actual receipts and expen-ditures. The importance of this limitation isillustrated by the fact that a sample follow-upcovering issues which had become effective in asingle month (November, 1933) disclosed that onlya relatively small proportion of the total amountof securities registered had been sold within 16months after registration. Although there aregood reasons for believing that the discrepancy isvery much smaller during the present refundingmarket, a warning must be sounded against usingregistration statistics Indiscriminately to representor measure the actual volume of new issues ab-sorbed by mvestors.s

B. Monthly Summary of Trading on ExchangesRegistered under the 1934 Act

About the 25th of each month, the Commissionmakes public, for each registered securities ex-

I This release incorporates only a portion of the regularlytabulated material obtained from the registration state-ments. Within the Commission, the above data, and numer-ous other items of statistical interest, are tabulated intoapproximately 90 industrial and financial groups, accordingto the standard classification used by the Research Divisionin other studies.

2 Another limitation is that the statistics of registrations formJuly, 1933, to August 1934, inclusive, were compiled hythe Federal Trade Commission (predecessor to the SECin the administration of the Securities Act of 1933), andare not comparable with the statistics for later months inall details. Upon taking over the work, the SEC enlargedthe scope of the tabulations and changed the method ofgrouping the proposed uses to he made of the funds. Al.though this change was made in September 1934, thereleases of the Commission were kept on the old basis tothe end of 1934.

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THE PEOPLE~S MONEY

change in the United States, the following data forthe preceding month:

1. The number of shares sold, including odd-lots and stopped-stock;

2. the market value of such shares;

3. the par value of bonds sold, including,stopped-honds;

4. the market value of such bonds; and

5. the market value of all securities sold.

These data are reported by the members to therespective exchanges and by the exchanges to theCommission in order to provide a basis for the pay-ment of the tax of 1/500 of 1% on the value ofturnover, introduced by Section 31 of the SecuritiesExchange Act, and cover the period from October1934.1

These monthly totals are of interest statisticallybecause they embrace all sales and are, therefore,more comprehensive than "total reported salcs"-the figure ordinarily given by newspapers andfinancial services.

C. Monthly Summary of Transactions by Officers,Directors, and Principal Stockholders

Under Section 16 (a) of the Securities ExchangeAct, officers, directors, and principal stockholdersI.e., persons owning beneficially more than 10%of an issue of equity securities) of corporationswith equity securities listed on a national securitiesexchange are required to report to the Securitiesand Exchange Commission every month each trans-action in all the equity securities of such Issuers,

In addition to reports on transactions, these per-sons are required to report their holdings (onForm 5) when the corporation pecomes perman-ently registered on a national securities exchange(this happened for the majority of listed corpora-tions on July 1, 1935); and (on Form 6) whenthey become an officer, director, or principal stock-holder of the corporation. They must again reporttheir holdings on Form 4 after every change insuch holdings. The transactions and the holding~'reported on Forms 5 and 6 (with the exception ofthe approximately 15,000 reports on Form 5 re-ceived in July 1935) have been published regularlysince March 1935 in the "Official Summary" issuedtwice a month. Although this material lends itseH

I Similar data for exempt exchanges are also available, buthave not thus far been released.

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March-April, 1936

readily to tabulation, statistical difficulties, someof which are mentioned in the following footnote,have thus far prevented the Commission frommaking public aggregate figures derived from thesereports,'

IIMaterial Not Yet Published

A. Comprehensive Series of All New Security Issues.

Statistics derived from registration statementscover only a part, although a relatively large andimportant one, of all new issues offered in thiscountry. We found the currently available serieswhich purport to cover this field rather incompleteand unsatisfactory for our purposes, and conse-quently it was felt necessary to construct a com-prehensive monthly series of our own for all issuesof new securities. The series differs from thosecurrently available particularly in that it (1) in-cludes issues by the U. S. Treasury and its agencies;(2) attempts to include all private placings; (3)tries to distinguish sharply between issues offeredfor cash and issues offered for exchange or forother consideration; and (4) groups the total netproceeds in several broad categories according totheir use, such as purchase of securities, purchaseof other assets, expenditures on plant and equip-

.. ment, repayment of funded debt, repayment of

1 On the average, reports for about 1,700 transactions arereceived every month by the Commission. The reportsnot only state the date of the transaction and the amountof securities disposed of by the reporting person, but more-over give some indication as to the relationship of thereporting person to the corporation, the form of ownershipand-what is more important-the type of acquisition ordisposition reported. The characterization of the type oftransaction by the reporting persons is, however, not al-ways as clear as one might wish it to be and it is, there-fore, sometimes impossible to distinguish with certaintybetween market transactions (i,e .. purchases and sales onan exchange, on the over-the-counter market or throughprivate deals) and transactions involving no cash con.sideration such as gilts, exchanges, liquidating dividendsand the like. Another difficulty is presented by the factthat a number of transactions are reported by more thanone person; this is the case, for instance, with acquisitionsor dispositions by a partnership reported by every partner.Therefore, in order to arrive at correct totals it is neees-sary to eliminate these duplications; but inasmuch as theindications given in the report are not always unambigu-ous, such totals contain another, although probably not avery serious, source of error.

As for holdings, the SEC is now engaged in the prepare-tion of a "Census of holdings" which will bring togetherall the reports on Forms 4, 5, and 6, eliminating all butthe most recent reports. The "census" will then give apicture of principal stockholders', officers', and directors'holdings in corporations with equity securities on ana.tional securities exchange as of December 31, 1935. Lateron we intend to make appropriate deductions for the self.ownership of American corporations (reacquired stock) aswell as for Inter-company holdings with a view of gettingan approximate estimate of the net amount of securitiesoutstanding.

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other indebtedness and increase of workingcapital.'B. Data Relating to Investment Banking

An analysis of registration statements also pro-vides us with information on the relation of invest-ment banking to new security issues. Among thedata derived are: (1) the type and extent of thebanking commitment; (2) the cost of financingand the gross compensation of the underwriters;(3) the extent of the employment of and the com-pensation to dealers in selling the new issues; (4)the amounts of issues originated by or participatedin by individual banking houses tabulated on amore accurate basis than that available in the pastwhen participants were credited with the whole ofany issue rather than with their respective shares.C. Statistics Relating to Corporation Finance

The registration statements filed under the 1934Act by companies desiring to list securities on aregistered securities exchange afford an invaluablesource of information about corporation finance.These statements are available to the public at theCommission's office, and at the exchanges on whichthe securities are registered. Among other thingsthe registrant is required to give data on the follow-ing subjects:

1. Its sales of all seeuities within three years ofthe date of registration to any persons other thanemployees. The required information includes thetitle of the issue, the date of sale, the aggregate netproceeds, and the names of the underwriters, ifany.

2. Information concerning options to which anyof the registrant's securities are subject. Theprices, expiration dates, and other material condi-tions relating to the exercise of these options mustbe described. Names and addresses of personsholding substantial interests in the total optionmust be given. The consideration for any optiongranted in the three years prior to registrationmust be specified.

3. From the majority of the forms for registra-tion under the Securities Exchange Act we have,

1 A variety of sources is utilized in securing these data. Thedata on private placings are based chiefly on question.naires; those on issues of railroad securities are takenfrom the dockets of the ICC, and those on U. S. Govern.ment securities are supplied by the Treasury. For stateand municipal issues we have to be content with the seriescommonly available. With respect to registered issues,only those are included for which there is a record of anactual public offering. This is a necessary statistical"deflation", resulting in the omission of small issues andsales of securities of investment trusts of the open-endtype. However, these omissions are probably not so greatas to affect the totals to any significant extent.

(Please turn to page 186)

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180

BY

HERBERT HARRIS

THE PEOPLE'S MONEY

The Political PendulumCorruption by Whom?

TURGENEV once remarked that love and pol-itics were the most interesting things in life.

The vitality and vagaries of Eros always havereceived due recognition; but the "interesting"character of politics is just beginning to be real-ized by millions of Americans in this age of tur-bines and trouble. For today politics, usuallydefined as the science of civil government, essen-tially means your bread, your butter and yourbanker. If we count relief workers as employeesof the government and "dole" recipients as itswards, then the economic destiny of some fiftymillion people in this country is directly deter-mined by government. Naturally, this estimateincludes the quite staggering number of personson city, state and Federal civil service payrolls andthe innumerable supervisory bureaus establishedby the Administration's addiction to the alphabet.

Government in BusinessMoreover, in this country at present, the State

power, in one form or another, has ramified outinto manufacturing furniture, processing wheat,marketing dairy products, canned goods, electricalappliances; the operation of employment andhome-loan offices and the financing of agriculture.It also has a good deal to say about the issuanceof securities, the production of oil, the use of in-land waterways and railroads and many cognatethings. Coincident with this ever-increasing irrup-tion of the State into industrial and commercialdomains, is a new and sharpened sense of partic-ipation by the individual in public affairs. Cer-tainly one of the most significant facts of our timeis that we are in the midst of a transition stagein the wayfaring man's attitude towards his gov-ernment, what it should be, what it should do.Instead of tacit devotion to the Paine-Jeffersoniandoctrine that that government is best which governsleast, there is everywhere the growing convictionthat the best government is the kind which most

consistently and scrupulously serves the people,and seeks to translate the constitutional functionof "promoting the general welfare" into some sem-blance of reality. The depression, of course, whichshowed up the moral and mental ineptitude ofmost of our big business leaders, has been primar-ily responsible for this change in political climate.

National ObjectivesIn the dread days of 1933 when the fate of the

nation seemed to hover between chaos and col-lapse, government had to do what private enter-prise was unable to do. Promptly the thoughtsof an entire people were turned towards Washing-ton as the Mohammedan turns towards Meccain his prayer. Moreover, Mr. Roosevelt in hisspeeches, and especially in his "fireside chats," has .tended to dramatize the role of government ineveryday life and to stimulate awareness amongthe electorate that the ballot can be a weapon oflimitless potency; that indeed the suffrage itselfis an instrument for economic survival. When thepresident, for example, broadcasts over a coast-to-coast hook-up the statement that "Among our ob-jectives, I place the security of the men, womenand children of the nation first," he is not onlybeing an extremely astute politician but is alsopaving the way for a more realistic view amongvoters as to the government's relation to their own"life, liberty and the pursuit of happiness."

The so-called "special interests" have been con-stantly on the alert to exploit government aid inaugmenting their own prosperity. And by givinga lot of attention to government they have receiveda lot of attention and countless boons from govern'1.~ment. The most hypocritical aspect of all assaultslupon "government interference in business" is thatbusiness has always wanted government to inter.fere, at least to the extent of granting 99 year fran-chises, raising tariffs, and providing lush subsidiesfor shoes and ships and sealing wax.

(Please turn to page 187)

March-April, 1936

AMERICAN ECONOMIC THOUGHT(Continued from page 154)

"I have no wish to be gloomy and certainly no wish toconsider myself infallible. If at the end of another gen-eration of wasteful culture my forecast is invalidated bythe unforeseen, I cheerfully invite friends and critics tostone me as a false prophet,"

Alas for human fallibility! Even if Sir WilliamCrookes were still alive we should hardly want tostone him as a false prophet; but he has beengathered to his fathers and is safe even from theattacks of malignity. The Western world is nowfacing the problem of an unmarketable surplusof wheat, and Patten's prediction of the difficultyof withdrawing marginal land from cultivation hasproved to be only too accurate.

Patten's "Pleasure and Pain Economy"The "Premises of Political Economy" appeared

in 1885. In the following year Patten publishedan essay in a volume entitled "Science of EconomicDiscussion" to which most of the leaders of the

h 1" f . rib d H'new sc 00 0 econormsts cont ute. IS essaywas entitled "The Effect of the Consumption ofWealth on the Economic Welfare of Society" andin it are found the germs of Patten's theory of con.sumption, which he later developed in his "Con-

';sumption of Wealth" published by the Universityof Pennsylvania in 1889; just one year after Pattenwas appointed to a professorship in Political Econ-omy in that University. Patten's main thesis isthat, with advancing civilization, we tend to passfrom a pain economy to a pleasure economy. Suchprogress is achieved as much through improve-ments in consumption as through improvements inproduction. In his "Theory of Dynamic Econom-ics," published by the University of Pennsylvaniain 1892, Patten propounded what he called a "pri-mary law of social progress." According to thislaw society progresses from a stage where con-sumption is undiversified, where the utilities con-sumed are produced with an immense amount ofreal costs, to a stage where consumption is variedand where the utilities consumed are produced

~th a small amount of real costs.Thus the progress of society is measured by sur-

plus utility, which is the difference between thereal costs and the utilities of goods. Whatever in-creases utilities, other things being equal, increasesthe social surplus. What are some of the causeswhich increase utilities? Variety of consumption

. is one such cause. The consumption of commod-

181

ities which give pleasure as well as merely sustain.ing life is a second factor in increasing the sumtotal of utilities. Besides the general or socialsurplus, Patten stresses the "producer's surplus"which is "what producers receive over the realsubjective cost of their articles." Before Veblenhad coined his famous phrase: "the instinct ofworkmanship," and had insisted that work is it-self a utility, Patten had shown that real costsonly begin to appear when the worker begins tobe fatigued and had insisted that the first hoursof work are usually pleasurable and not painful.Patten said this:

"Every healthy person starts the day with a fund of sur-plus energy, the expenditure of which is pleasing, andmakes work pleasurable while it lasts. Each one can pro-duce a number of goods without any cost •. It wouldseem possible therefore to live and work without pain."

And in his "Consumption of Wealth" he says thatthe "higher classes of men have a love for work:they take a great pleasure in producing a goodarticle, and in viewing the results of their efforts."

Many of Patten's friends regretted that he failedto elaborate the many significant economic ideasoutlined in his early publications. Professor JohnBates Clark once said that Patten, at one time oranother, had anticipated all the later developmentsin economics but had never worked them out. OfPatten's "Theory of Dynamic Economics" J. B.Clark wrote: "This is the beginning of a greatwork . . . It is made up of the beginnings ofstudies that call for completion."

But Patten's interests were so wide and variedthat he could never confine himself to economictheory alone; but worked on the border line ofeconomics, sociology, political science, and evenbiology. One glance at the comprehensive biblio-graphy of his writings, prepared by ProfessorRexford G. Tugwell and published in the Sup-plement to the "Annals of the American Academyof Political and Social Sciences" of May, 1923 willreveal the variety of subjects in which Patten wasinterested. Here we find titles such as "Heredityand Social Progress" (1903); "The New Basis ofCivilization" (1907); "The Social Basis of Re-ligion" (1911). We shall confine our attentionhere to Simon Patten, the economist, and shallnot attempt to deal with his other studies.

Patten's Later Ideas on RentWhile, in his "Premises of Political Economy"

Patten showed himself to be highly critical of theRicardian theory of rent and of its implications, in

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182

his next book, "The Consumption of Wealth" heappears to have accepted a number of the Maltho-Ricardian doctrines in regard to land and its rent.He stressed the idea that the amount of cultivat-able land is strictly limited in relation to the needsof a growingpopulation and tells us that, "As weprogress in civilization, we are obliged to adjustourselves80 that in our eating, drinking, and cloth-ing, we make less demand on land." At this time(1889) Patten believed that the rent of land mighthe lowered if people would cease to "live to eat"and would "eat to live."

"There is plenty 01 [ood which can be obtained at a lowcost 01 production, il the consumer would think 01 loodmerely as a means 01 existence, and not as the leadingsource 01 pleasure."

Patten thought that we should consumemore In-dian com or maize, for the production of whichour country is especiallywell adapted. In this waywe could reduce the rent of land and enjoygreater abundance. In this connection,let me re-late one story connectedwith my own long friend-ship with Dr. Patten.

Shortly, after I wasmarried, Patten made a visitto Baltimore, and was a guest at our home. Mywife had been reading some of his writings, andwas determined that we should do what we couldto increase our national prosperity. As a Virgin-ian, she was familiar with all sorts of ways ofusing Indian corn,-for example, campone, bat-terhread, etc. So, when Patten appeared, she tookpains to give him a diet which seemed to corre-spond with his doctrines of American prosperity.Patten ate cornmeal in many different ways. Theresult was that he was ill during the night and wasobliged to take the train back for Philadelphia.So ended, for-the time being, the efforts of anAmericanbride to bring prosperity to her country!

Copyrighl. 1936. Richard T. Ely

TOMORROW'SMONEY(Continued /rom page 160)

tion. The money created on loan by the bankingsystem may circulate through the production sys-tem several times, each time creating a cost, butwhen finally repaid to the banking systemonly onesuch cost will have been liquidated. Real goods,or the means for their production, and unrecov-ered costswill still be in existence,but the moneyto buy those goods and liquidate those costs willnot.

THE PEOPLE'S MONEY

The National Credit AccountIf all costs are to be recovered in prices, money;(

which is not borrowed from the banks and whicH .does not pass through the production system onits way to the consumer must be distributed tothe public. And if this money is to have real pur-chasing power its distribution must not cause acorresponding rise in prices. To this end SocialCreditors propose that some central monetaryauthority, the Treasury for example, keep a run-ning balance sheet, or "National Credit Account,"to be credited periodically with the money valu-ation of all production, plus capital appreciationand imports, and debited with that of the totalconsumption of ultimate commodities, plus capi-tal depreciation and exports. Whenever over agiven period the account showed a credit balancethe Treasury would be empowered to issue cer-tificates of national credit, to circulate within thebanking system only, as warrants to the banks tocreate additional deposit accounts as directed.The manner in which these deposits would beutilized is unique. They would be issued in partto finance a discount on retail prices and inpart to finance a National Dividend payable di-rectly to all citizens. The Retail Discount, being apercentage figure, would vary inversely with thCjratio of consumption to production. The National-Dividend, pro-rated equally to all citizens, wouldgrow in the same proportion as capacity to pro-duce. In order to prevent producers, whether man-ufacturers, wholesalers, or retailers, from raisingprices unduly above costs, profit margins would becontrolled by limiting the rate of profit on turn-over of all producers sellinl!:either directly or in-directly with benefit of the discount. The rate ofprofit, unlike the discount rate, would vary withdifferent industries.

Paying the National DividendAs an initial discount rate, having regard for the

tremendous margin of unused productive capacitythat now exists throughout all the western world,Douglasproposes the figure of twenty-fiveper cent.As an initial Dividend he proposes one per centthe value of the capital assetsof the area involve"capital assets to be taken as the value of all pro-ductive property at its replacement figure, plus allgoods in process, plus the commercial capitalizedvalue of the population.

The certificates of national credit circulating,

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March-April, 1936

within the banking system would constitute aTreasury obligation to furnish currency to theibanks as deposits created with respect to these cer-tificates were drawn down. That is to say currencywould be furnished against these certificates onlyas checks were cashed, not as balances were trans-ferred between depositors. As a matter of fact the,actual printing of certificates would be unneces-sary, The whole operation could be conductedwith book entries, in approved reserve bankingfashion. In this country the facilities of the Fed.eral Reserve System could be utilized. For exam-ple, the banks would create deposit entries toretailers' accounts for the amounts necessary toreimburse them for the discount. The banks inturn would receive a credit or balance with theFederal Reserve Banks, the credit balance in theNational Credit Account being written down in likeamount. In the same way, the National Dividendwould be paid by checks drawn on banks withwhich the govemment had established credits bysetting up credits to their account with the ReserveBanks against corresponding debits to the NationalCredit Account.

What is Inflation?On first sight the questions immediately arise,

Can it be possible to create credits in this waywithout inflation? and How will these credits beretired?

The answer to the first question involves a fewfacts about inflation and deflation. Inflation is anincrease in the supply of money accompanied bya corresponding rise in prices. Conversely, defla-tion is a decrease in the supply of money accom-panied by a fall in prices. Unfortunately pricescannot fall below costs without bankrupting pro-ducers, although in times of expanding credit forcapital production, when money is reaching con-sumers long before all the final products in whichthat money will be accounted as costs reach themarket, they can and do rise well above costs. Incontrast to this, Major Douglas proposes to raisepurchasing power by lowering prices and Inoreas-

~ing the supply of money simultaneously. As a'hatter of fact, with prices controlled on a cost plus

..7hasis it is simply a matter of expediency whetherdebt-free money (the financial equivalent of thecommunity's unused capacity to produce for itsown needs and desires) shall be issued via the Re-tail Discount or the National Dividend.

As regards retirement, the retirement of these

183

credits would be automatic with respect to eachcost cycle to which they were applied. Part wouldbe automatically cancelled as the country paid itslong term debt to the bankiug system, a debt whichincludes not only all Federal, State and municipalsecurities owned by banks, but all other bonds andmortgages in their portfolios, many of which havebeen written down to less than face value. Therest would go to replace derivative with primarydeposits as the business community built up itsreserves and met maturing privately owned obli-gations.

Balanced Foreign TradeOne other question may fairly be considered;

the effect of this credit on the foreign exchangevalue of the currency and its effect upon the na-tion's foreign trade. It is a classic principle ineconomics that in the long run the money valueof any nation's exports and imports must be equal.The implication, of course, is that collective in-come in the home market will buy the whole ofthe home production, since the money value ofgoods added must be equal to that of goods takenaway. The international gold standard, that quon-dam regulator of international exchanges andinternal price levels, is only workable if thisimplication is valid. Unhappily, under presentconditions no industrialized country can buy thewhole of its own production and therefore musttry to export more than it imports, the so-called"favorable" balance of trade. War eventually be-comes an economic necessity if only to let downthe bars to credit expansion and provide employ-ment in the home area. If however, any nationwere able to purchase the whole of its domesticproduction by such an issue of credits as has beenoutlined, it would then, for the first time since theindustrial revolution, be in a position to exchangeon an amicable and equal basis its real surplus fornecessary and wanted imports. The foreign ex-change value of the monetary unit could safely beleft to find its natural level based on its domesticpurchasing power.

Major Douglas's "little idea" has travelled farsince 1918. By introducing to economics the prin-ciple of the ratio and blueprinting the outlines ofa rational financial system, he has brought to birtha movement of which we are likely to hear more,as relapse follows recovery, and production chasesconsumption down hill to the final balance-atzero.

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184

GOLD: SYMBOL OF FRENCH POWER(Continued from page 165)

she must depend in case of a German attack-andthe fear of such an attack is growing in proportionto Germany's rearmament.

Thus France strives to restore the internationalgold standard to protect her international position.Yet, the men who control the French destiny seemto realize the present precarious position of theBank of France. Prolonged depression may, in theend, cause a radical Government not only to en-force a change in monetary policy, but wrest fromthe Bank its supreme power over the Frenchmoney system. As a consequence it is feared thatin the future England, instead of French industryand finance, would dominate French monetarypolicy and French international politics as well.This is perhaps the weightiest reason why Gov-ernor Tannery hopes that an early "accord" mayhe reached.

Objections to Old Gold StandardConsidering the many implications of the pres-

ent situation, the best way of escape for the Bankof France would indeed be for the United Statesto return to a fixed gold value for the dollar. Thiswould give France an opportunity to "adjust" herexchange rate, that is in effect devalue the francwithout calling it by the right name. This wouldbe a solution to our own money problem, as tothat of France-but a very short-sighted one. Inrestoring the old gold standard with its manyserious shortcomings we would bring back thedanger of another breakdown of international ex-changes. We would tend to perpetuate tariffs,quotas and other impediments to internationaltrade which have been adopted to protect nationalproducers against the dumping of cheap goods bydevalued countries. And finally, in thus failing toprovide a better, sounder, more stable basis ofinternational trade, we would help to perpetuatethe present tendency towards nationalism and thestate of national insecurity which motivatesFrance's policies, causes the competitive arma-ments of the big nations and horrifies the smallones.

Objectives of Future Monetary PolicyNo. A better solution is possible, and it is in

the power of the United States to bring it about.We must concede that monetary policy alone can-not do it. We ought to give a good example in

THE PEOPLE'S MONEY

revising our tariff and take a first bold step in thedirection of free trade. The question of war debtsstill demands an adequate settlement to which weemust give the initiative. Primarily, however, weshould announce the objectives of our future mon-etary policy, namely the maintenance of the do-mestic buying power of the dollar. As the dollaris stable in buying power at home, it will automat ..ically be stable in exchange for all those currenciesthat are themselves stable in buying power athome.

In effect, we would be stable to the twenty oddnations comprising the sterling bloc which for thepast four years have been stable at home, and con-sequently to each other. But we would not "join"the sterling bloc. The sterling bloc stability is atthe mercy of the Bank of England and the BritishTreasury, which have not definitely committedthemselves to maintain it. It seems, on the con-trary, that England has been more interested inconsolidating her trading position within the ster-ling area than in restoring world trade. The goldbloc would not have survived, had it not been forthe encouragement given to it by England that shewould eventually return to it. No close student ofthe problem seriously believes that England in-tends to return to the sort of gold standard whichFrance and the gold bloc have maintained untill_now at terrific sacrifices. Still, so long as the goldnations need all their strength for maintaining thegold standard, they do not interfere with the in-ternational politics of Great Britain. Her vaguestand on the question of monetary policy virtuallyforces France to continue her costly and dangerousgold policy for the sake of national security.

America's announcement of a policy of interna-tional stabilization conditional upon national sta-bility would thus not merely solve our own moneyproblem in the most desirable manner. It wouldsupply the world with an universal sound basis forthe resumption of international trade. Englandand her sterling area would at once be part of thisinternational money system. But there would nolonger be the uncertainty which today prevents thegold bloc the sterling bloc from joining the sterlin.

tnations. In fact, no country would join a "blo,but adopt a national money of its own whichwould automatically bring it into stable relation-ship with the other countries that follow the samenational policy. This is the policy adopted by theScandinavian countries, in particular by Sweden,designed to maintain the internal purchasing I

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March.April, 1936

power of their money in the hands of the con-sumers.

The restoration of international trade and con-fidence would in the end be a better protection forFrance and other nations than gold credits andarmaments. Moreover, restored world trade andprosperity would remove most of the economiccauses that today might lead to an armed conflict.The benefits of a sound money system would nolonger be reserved for England as is the case to-day; the entire world would share in it with ulti-mate benefit to everyone. If we only be willing tolead the world to peace ! We could do so muchtoday through a correct money policy.

STRAWS IN THE WIND(Continued from page 167)

them unimportant. Because of the very factthat they were situated in comparativelysmall towns, their closing had a stifling effectupon the entire business of these communi.ties, and had their repercussions over wideareas.

P. H.-Just the point I made in our first discussion.There has been a negligent number of bankclosings since March, 1933, and deposits areguaranteed.

Political Control of BanksA. R.-Deposit insurance had been discussed for

a number of years. It would have been en-acted without Roosevelt. But the Bank Actof 1935 introduces political control, which

renders the entire Reserve System unsafe.N.-From your previous remarks I gather that

you were critical of states that allow the cre-ation of banks with small capital.

A. R.-I think it's scandalous, and should be pro-hibited.

N.-Prohibited by whom? Evidently those stateslegally permit the opening of banks with smallcapital. A bank must have a charter, andlocal politics favors lax requirements. But

.. this you don't call political control. It be-9 comes political only when it is centered in

Washington, where every act is subject toscrutiny by the entire country.

A. R.-I am in favor of giving more power to theFederal Reserve System, and to make specialinducements to state banks that join the Sys-

-. tem, These could then be required to haveJ

185

certain minimum capital in relation to de-posits. But I decidedly oppose control thatultimately vests in the President. Such con.trol becomes unavoidably political, depend-ent upon the fiscal vagaries of the politicalgroup in power.

P.R.- You would rather trust Charley Mitchelthan Eccles and Roosevelt.

A. R.-It isn't a question of persons but of system.I am against a banking system whose policiescan be shaped to political ends.

N.-Now we are getting somewhere. I don't doubtthat the subject of banking will again comeup. I just wish to point out the clearer viewsthat have emerged on this subject due to ourprior recognition of certain conditions exist-ing in banking long before the 1929 crash. Imay find several more flies in the 1925-1929ointment that may lead us to clearer viewson other subjeotsj.

P. R.-Before you start chasing another fly, I'llhave to chase along. Till next time, gentle-men.

(To be continued next month)

M. E. KRIEGEL (LL.B.)International Lecturer Economist

Radio Commentator

Recently returned from Europe andPacific Coast lecture tour.

Available nationally lorlecture and radio engagements.

STATE SOCIAL SECURITY ACTS

OIL AS AN INSTRUMENT OF WAR

KAGAWA AND COOPERATIVES

GOVERNMENT REGULATION ECONOMICS

ARE DEPRESSIONS AND INFLATION CYCLIC?

For arrangements write

Robbins National Educational Bureau

381 Central Park West

New York, N. Y.

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186

ARMAMENTSASSAILAMERICA(Continued from page 173)

The nations of the world have renounced warand it is incumbent upon them to carry out prac-ticable means of renunciation. The Paris PeacePact should and must be enforced as a basic ap-proach. The exceptions foisted upon the Pact bysubsequent interpretations tend to nullify its orig-inal purpose. An examination of the documentitself shows the completenessof the stated objec-tive, should it be honestly followed.

ARTICLE I"The High Contracting Parties solemnly declare

in the names of their respective peoples that theycondemn recourse to tear for the solution of inter-national controversies, and renounce it as an in-strument of national policy in their relations withone another."

ARTICLE II"The High Contracting Parties agree that the

settlement or solution of all disputes or conflictsof whatever nature or of whatever origin theymay be, which may arise between them shallnever be sought except by pacific means."

Briand envisioned the United States of Europe-Mussolini attacks an unsuspecting, defenselesssmaller nation-shall we follow the light of theformer's ideal or the darkness of the latter's in-vasions? To achieve peace--we must will, wageand work for it.

GUIDE POST FOR THE INVESTOR(Continued from page 179)

for the first time, a picture of the completeinterestdirectors, officers,and principal stockholdershavein their respective companies since, unlike reportsunder Section16,they have to report not only theirholdings of equity securities, but all other securi-ties in registered companies of which they act asofficersor directors or in which they own morethan 10 percent of any class of equity securities.

4. Some other subjects on which the registrantis required to file information are: (a) officers'remuneration and remuneration to employeeswhoreceived over $20,000in the past fiscal year; (b)material bonus and profit-sharing agreements ineffect at the time of registration; (c) general effectof all material management and general super-visorycontracts in form providing for managementof or services to the registrant or any of its sub-sidiaries, information which is of particular value

THE PEOPLE'S MONEY

in connection with public utilities and holdingcompanies; (d) important details of material con-tracts with underwriters, directors, officers, or l"principal stockholders; (e) details of substantialchanges in the registrants' or its subsidiaries' capi-talization such as revaluations, adjustments of re-serve accounts, restatements of capital stock,transfers to and from surplus and write-offs; (fj "balance sheets and income accounts.

The financial statements attached to the formsfor registration under the Securities Exchange Actof 1934and the financial statements which will beattached to the corresponding forms for annualreports just released or now in preparation furnishan almost unlimited field for the student of cor-poration finance, a field which the Securities andExchange Commissionitself has not as yet beenable to explore, partly for lack of funds. A firstattempt at tabulation and analysis of the annualreports for the fiscalyear 1934is about to be under-taken within the frameworkof a WPA project- . I

"Censusof Listed American Corporations"-which \is scheduled to be completed at about the middle ,of 1936.1

At the present time, the only regular statisticsworthy of mention maintained by the Commissionrelating to corporation finance other than thosearising out of the Acts are the quarterly earnings"of about 300registered companies,classifiedaccord-ing to the industrial grouping previously men-tioned. This classification has been carefullyworked out with a view to securing a homogeneousfunctional grouping.D. Tabulation of Securities Trade on a Registered

ExchangeThere is now in process a tabulation of all Be-

curitieslisted (and/or admitted to unlisted tradingprivileges) on all registered exchanges. It is in-tended that these lists will be reviewed once everythree months, givingus a quarterly censusof issues,by exchanges, by size, and by industries (andpossiblyalso their total market price).

111Miscellaneous Data

The staff of the Commissionis continuously e_t1 It is the hope of the Commission to make a regular featur.

of the tabulation of the annual financial statements, whichalthough still far from being completely standardized, willbe decidedly more amenable to comparison than the state-ments made public hitherto by the corporations. Thiswould provide the investor and the student of corporationfinance with detailed and extensive material, supplement-ing the statistics of the Bureau of Internal Revenue which,however, are set up with different purposes in view andItherefore are not strictly comparable.

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March-April, 1936

gaged in making more or less comprehensivestudies on various technical studies which involvethe use of new statistics, derived from field mvesti-gation or, in some cases, our own statistics. Among

.these we may note the following: (1) the studyof reorganization committees, headed by ProfessorDouglas; (2) the relationship of pegging andstabilizing to overpricing; (3) options; (4) bro-kers' solvency; (5) over-the-counter markets; etc.

In connection with these and other studies, sev-eral interesting statistical series have heen madeavailable to the SEC. The New York Stock Ex-change reports confidentially the total short posi-tion in each stock listed on the exchange as of theend of the month.l These data have been madeavailable to us since July, 1933. The Commissionhas also received various forms from the New YorkStock Exchange and the New York Curb Exchangeanalyzing purchases and sales with respect to theprincipals involved and the type of transaction.Since the immediate purpose of these reports hasbeen satisfied, they have recently been discon-tinued, hut we shall probably receive some per-manent information of this type in the future.

In addition to the above, there are other matters,in connection with which we are compiling infor-mation, either for eventual publication, or for use

C within the Commission. For the most part, thesestudies are being conducted with a view to makingregulations as called for by the statutes.

While these data have been produced in theprocess of administering the Acts, particularly inconnection with the drawing up of regulations,their economic by-products are multitudinous. Togive a few illustrations: a study of salaries willenable us to get an idea as to the relation betweenthe payment for managerial talent and total assetsor gross revenues in various industries. Stockownership data should shed light on the questionof the extent of interest by officers in their owncompanies. Data showing trading practices willlift the veil of mystery from the trading process.In connection with proxies (Section 14 of the 1934Act), we shall have data showing to some degree

,~the extent of harmony or disharmony in corporate'lfe, as well as the extent of ownership of groups

-Y"mtendingto bring about a change in management.The periodic reports (Form K-I0, and alliedforms) will give us for the first time a conclusivepicture of the periodic changes in American indus-

1 Both exchanges make public the total short position in aUstocks on their respective exchanges as of the end of eachmonth.

187

try which will lend themselves to broad indexing,since our statistical material will be more or lesshomogeneous.

IVSummary

Finally, I should like to emphasize the impor-tance of statistics of this sort. The informationnow available, when properly studied, should en-able us to advance a long way in shedding light onour corporate life and in making the financialprocess less wasteful, more balanced, more respon-sible, and more orderly. One of the cornerstonesof the 1933 and the 1934 Acts is disclosure. Byimproving and increasing the fund of statisticalknowledge available to the investor, we are pro-gressing towards a fairer financial process, are en-couraging the formation of opinion based on factsand not on hunches, and are doing what we can toraise financial standards for the benefit of theinvestor.

THE POLITICAL PENDULUM(Continued from page 180)

Business Ethics and Politica"But politics are so damned dirty" complains

the average executive, and thereupon phones theboss in the back room to see if he can't get theassessments on his property reduced. And thisvery action, so typical, so widespread, should helpexplode the myth about the unique iniquity ofpolitics in the colloquial meaning of the term.The politician is only as good or as had as thebusiness ethics of the society in which he is apart. Under boss rule, which still prevails in mostcommunities throughout the nation, the profes-sional politico is usually a buffer between the prol-etariat and plutocracy; in a sense he is also amiddleman who with favors and "service" buysvotes as cheaply as he can and sells them to thehighest bidder-s-a procedure which, as any success-ful man can tell you, is a first postulate in thephilosophy of "business is business". The tendencyto condemn a Tweed, a Vare, a Pendergast forgraft and corruption may he an excellent emo-tional outlet but falls wide of the mark. Afterall, men are not corrupted in a vacuum. Before apolitician disposes of his commodity, Le, his votesand the influence they give him, he must have amarket. Unfortunately for the state of the union,industrial and commercial tycoons have been notonly willing but eager to purchase such merchan-dise since the very first day of the Republic.

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SOCIAL CREDIT NOT INFLATIONThis is to tell you that I read Edward Acheson's article

on Social Credit, and found it very unpleasant reading.The stand that Social Credit means inflation is so absurd 88

scarcely to merit mentioning. Of course if Acheson prefersto have wealth destroyed rather than purchased his standis dear; but it seems more reasonable to create the purchas-ing power necessary for consuming the goods, in place ordestroying them.

Is it pcesihle that the editor does not discern in Acheson'sarticle the same hypocrisy that characterizes 85% of theorthodox stuff on money? Social Credit is so eminentlysane compared with the present bank racket that a sincereman must be very slow to condemn it.

JAMES P. FITZGER.t\LD,Albany, N. Y.

CREATING DEBTSA Washington dispatch of Jan. 8 states that Father Cough.

lin is entering a suit against the Federal Reserve Act asunconstitutional because only Congress has the right toissue money, and it has no right to transfer that righL Itshould include a test of Clause 2 in Powers of Congresss"To borrow money on the credit of the United States."

This undoubtedly meant money and nothing else. Atthat time American resources of precious metals were almostunknown; a foreign coin (the Spanish milled dollar) wasadopted as our monetary unit, and there was a probabilitythat this country would have to borrow real money abroadto supply the people with a medium of exchange. There isno suggestion of empowering Congress to borrow credit,which is all that the U. S., Canadian, or British Governmentever receives for bonds sold to their own people. Of coursethe people of these countries were led to believe that theywere supplying their governments with money to carry on awar, and some of them paid cash instalments to theirbankers. But no cash reached the Government, whichdidn't want money nor expect it,

The Canadian war bonds were all sold through the banks,and the Finance Minister (Tom White) stated in advancethat he wouldn't draw any money from the banks onaccount of the bonds. W. P. G. Harding, long Chairman orthe F. R. Board, had an article in "System" magazine Dec..1921 or 1922, stating that the U. S. Government received nomoney for its war bonds, which produced "A created eredlt,"

Abe Lincoln believed it a crime for a government to createdebt for internal expenditure. So does Arthur Kitson, mosteminent monetary authority, Mr. Lubbock of the Bank ofEngland, and probably every capable man who takes thetrouble to think about It,

S. P. PANTON,North Bend, Oregon

COMMON DENOMINATOR FOR MONEYThe thousands of books and articles published on the

money question will lead the people still further astray as

THE PEOPLE'S MONEY

long as the vital question of money with a constant valueis ignored.

There is only one way to determine value and that Is byexchange not influenced by monopoly. There is only one'"way to get a sound basis for money, i.e., exchange throughcollective bargaining between all the factors of trade andindustry with 100 minutes of unskilled labor as the comnwndenominator. Then we would have money exactly co-exten-sive with the earning power of the people, a money that,because of this fact, could ~e neither inflated nor deflated~_(~money that would automatically eliminate pure profit andcause a fair distribution of wealth.

LOWE SHEARON,New York, N. Y.

BANK MONEY INFLATIONProfessor James B. Trant's article on "The Fallacy of the

General Price Level Standard" is full of fallacies. He seemsto think that with a lowering of the labor cost per unit,giving increased mass production, then to keep the indexnumber constant will create a dangerous inflation. Now ithappens that from 1898 through 1913, there was a great in.crease in mass production, but due to the fact that 10.33millions of fine ounces of gold were taken out of the eartheach year, the index number rose at the rate of 2.06 pointsper year (see Warren's Prices p, 26), yet so far as I knowno one has claimed that the fifteen years before the war wereanything but prosperous.

Professor Trant, also, seems to deplore any attempt at amanaged buying power entirely forgetting the fact that buy.ing power is bound to be managed, if not centrally for thegood of all, then privately by bankers for their own profit,We must not forget that 50 long as check money circulates,checks affect sales and production quite as much 88 does~gold or national paper money, and check money representsthe major part of our buying power. Now it is bankerswho manage the inflation and deflation of check money,through notes discounted, 50 it is fair to say that sinceHamilton's policies have dominated finance (about 100years) we have had a managed currency always providedyou class check money as currency, which economically istrue so long as check money circulates. Now the questionis, have bankers managed our currency well or ill?

Well, we have had over twenty booms and depressionsin the last hundred years since Hamilton's system got work.Ing, This is inevitable. Check money is not legal tender'it is only a promise to pay legal tender; it is like counterfeitmetal money. So long as people think it can be paid theyaccept it, but the moment they doubt its authenticity troublehegins. But from the nature of credit, its increase makesit more dishonest, since the more of it is issued the lesschance that all of it can be turned into legal tender money.The boom comes because bankers inflate buying power withnotes discounted upon which checks are issued, but this~nflation hri~gs. about its own death, since obviously the.,IS an upper limit to the performance of promises.

A. A. MERRILL,Pasadena, California

THE PEOPLE'S MONEY will order for readers anyhook mentioned or advertised in its columns.

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MONETARY MISCHIEF. By George Buchan Robinson.Published by Columbia University Press. New York.1935. 188 pp. $2.00.

As early as 1927 the author of this volume observed vari-ous kinds of "monetary mischief" which he believed werebuilding up a vast amount of trouble for the nation. As thesituation, from his viewpoint, went from bad to worse from1927 to 1929, he undertook to analyze its manifestations.That he was far ahead of most of the nation in seeing thedanger spots, and that he had the courage to speak out isdemonstrated in several papers which he wrote for theAnnalist and which appeared in 1929. In these, Mr. Robinsontold the story of the inflated credit condition then existent.Now in Monetary Mischief he further develops his studiesof the nation's monetary activities to cover the period of1917.34. Mr. Robinson, who writes with a background oftwenty-five active years in the financial world as well asfrom the viewpoint of the student, finds that our monetarysins are not new. They started with the manipulations usedin financing the war. They continued with the perversionof the intended purposes of the Federal Reserve System andwith the great credit inflation of 1924-29. And they are still,:n existence today with the seat of monetary mischief trans.ferred from Wall Street to Washington.

The author believes in capitalism, but he does not believewe can have all its boons without facing its realities. Capital.ism, he holds, cannot survive if monetary sins continue to becommitted. By analyzing the faults of the past seventeenyears and by pointing out specifically why they are faults,he has given to a financially troubled United States guidelines in its present difficulties and a formidable warning forthe future.

GOVERNMENT FINANCE in the MODERN ECONOMY.Edited by Paul Studenski. The Annals of The Amer-ican Academy of Political and Social Science. January,1936. Philadelphia. 313 pp. $2.00.

Reviewed by MICHAEL B. SCHELER

This volume of The Annals is devoted to a comprehensivediscussion of the growing influence of governments in thepolitical, financial and social activities of civilized mankind,but their role in modern finance is especially emphasized.

In a number of major states in Europe, dictatorships,'--mmunist and fascist, are in full sway, with the central

~ernments exercising full or partial control, over the~M.tancial, political and industrial activities of their peoples.

Banking, credit, finance are subject to rigid regulation andmanipulation in the interests of the dictators and theirtotalitarian parties in control. Even in democratic states thegovernments are looming large in the financial affairs. Sincethe onset of the world-wide depression governments' aid hasbeen invoked toward the relief of the unemployed, the•. tricken farmers, the frozen banks, and the public utilities.

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189

But the government's new responsihtltties and activities didnot end in the application of palliative measures only. Toholster up industrial activity, the government of the U. S.was impelled to engage in activities regarded to be thedomain of private business enterprise. All these new activi-tics called for enormous expenditures of puhlic funds raisedthrough new fonns of revenue and taxation.

How did the governments of the world, including that ofthe United States, react to the world-wide crisis? Howwere the funds acquired to finance their new functions andresponsibilities? How and in what avenues of activity werethose funds invested? What were the nature and the effectsof the increased taxation imposed upon the wealthy and thegeneral consurner ? Were the governments correct in theapplication of their methods and the results effectual? Arenot the new forms of taxation and expenditures a burdenwhich the nations could not bear without eventual collapse?Are there not more reasonable, rational and pravticablemethods available to insure industrial recovery and to pre.vent the recurrence of industrial crises and widespread un-employment? These and other problems are exhaustivelyand ably discussed in some thirty articles by as many author.ities in their respective spheres of thought and activity. Afew names selected at random will indicate their credibility.Professor Studenski, the editor of this volume, wrote thearticle, Modern Fiscal Systems, Their Characteristics andTrends of Development; Alfred G. Buehler, associate pro-fessor of economics at the University of Venuont-The Tax-ation of Business Enterprise-Its Theory and Practice; CarlShoup, assistant professor in the School of Business, Colum-hia L'niversity-The Sales Tax; A. E. Buck of the Instituteof Public Administration, New York City-Firumcial Plan-ning-Its Political and Economic Bases; David CushmanCoyle, of the American Society of Civil Engineers-Fi-nancing of Public Works-an Expansionist Point of View;Abraham Epstein, executive secretary of the American Asso-ciation for Social Security-Financing Social Security. Thereform movement is represented by two able papers: AProposal for Complete Government Ownership of Currencyand Credit, by Irving B. Altman, editor of THE PEOPLE'SMONEY and able writer and lecturer on financial, politicaland economic subjects; and A Defense of the Single TaxPrinciple, by Harry Gunnison Brown, formerly professor ofeconomics at the University of Wisconsin and author ofmany books. Alexander Gourvitch, of the Resettlement Ad-ministration, Washington, D. C. and an authority on Russianaffairs, contributed the brilliant study, Soviet GovernmentFinance and The Economic Plan; and Mabel L. Walker,executive secretary of the Tax Policy League and editor ofTaxbits wrote the eleven-page article, Notes on Books andMaterials in Public Finance, in which she gives the readersan exhaustive list, with explanatory notes, of current bookson subjects treated in the volume.

GUIDE to the MUNICIPAL GOVERNMENT -CITY ofNEW YORK. Compiled by Rebecca B. Rankin.Eagle Library, Inc. Brooklyn, New York. 1936.112 pp. $1.25.

The 1936 edition of the "Guide to the Municipal Govern.ment-City of New York" compiled by the Librarian of theNew York Municipal Reference Library will be welcomedgladly by all who should be informed on civic affairs. Therehas been a dearth of printed material about this greatest ofall municipalities. This uniquely valuahle city govern .

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mental manual fills a long felt need. There has been nothingauthoritative about New York's municipal government sincea former edition of the "Guide" in 1924.

No city in the country has a more complicated piece ofgovernmental machinery and yet for the most part it is asmooth running mechanism. It possesses many featureswhich are pointed to as the most progressive type of moderngovernment; it likewise has relics of some types of localgovernment being generally discarded. Every department,bureau, and commission is described in detail, outlining itsfunctions and its relationship to other portions of the City'sgovernment. The information is complete for all depart.ments.

It is indeed a meaty manual. Typographically the volumeis attractive.

THE RAINBOW. By Donald R. Richberg. Published byDoubleday, Doran and Company, Inc., New York.1936. 319 pp. $2.50.

Donald R. Richberg served the N.R.A. longer in positionsof high responsibility than any other person, and when theSupreme COUll declared unconstitutional the law underwhich it was created, he was acting as its chief. Now hetells his story, with the simplicity of truth and conviction.

It is not a history of the N.R.A., nor a complex treatiseon the technicalities of business, nor yet an essay devotedto reform propaganda. It is a clear, at times deeply mov-ing narrative of the most debated governmental experimentin this generation. The results-lasting or temporary-andthe future, are what concern the author, rather than theIimitless details of the record. His aim has been to achievea measure of popular understanding in the confusion of ourmost complex national puzzle.

THE PROBLEM of INVESTMENT. By F. I. Shaffner. Pub-lished by John WIley and Sons, Inc. New York.1936. 357 pp. $3.00.

There are so many questions to be considered by the in.vestor today that it is difficult for him to decide how hismoney may best be invested. Recent legislation has changedthe market status of many securities; it is, therefore, essen.tial to be familiar with the provisions of these laws and theireffect upon present and future values in the stock marketif you are to interpret correctly to day's security prices andtrends. This book should be of considerable assistance inclarifying the situation.

Although the greater part of the book is concerned witha critical analysis of prevailing corporate practices and in-vestment theories, recommendations have been includedbased upon the assumption that the ordinary investor isunaware of the pitfalls which confront him and is unableto cope successfully with the problem unaided. A readingof this book will familiarize you with the latest data, andwill enable you to answer as authoritatively as possible anyquestion as to the wise investment of your funds.

THE CRISIS of the MIDDLE CLASS. By Lewis Corey.Published by Covici Friede. New York. 1935. 379 pp.$2.50. Reviewed by SHANE TALBOT.

An orthodox Marxian interpretation of the crisis of themiddle class .•. that is the theme of Mr. Corey's book.

This theme b developed from three aspects:1. A history of the emergence of a "middle class" after

each of the successive political and economic revolutionssince the Feudal days.

THE PEOPLE'S MONEY

2. A study of the psychology of these emerging "middleclasses", with the emphasis on why these classes alwaysvacillated in their allegiance, between the co-existent upperand lower classes. I

3. The Marxian solution for the eventual and final dis.solution of the middle class by inaugurating the classlesssociety promised by Communism.

Like most Communist books, this book is written withfire, fervor and zeal; unlike most Communist books, it is.documented with copious facts and illustrations.

Irrespective of one's individual conviction, "The Crisis ofthe Middle Class" by Lewis Corey, is distinctly a worth-whitecontribution to the literature of the subject.

GOVERNMENT IN BUSINESS. By Stuart Chase. Publishedby Macmillan Co., New York. 1935. 296 pp. $2.00.

Reviewed by MORRIS TALBOT

If it were to contain only the chapter, "Six Studies ofCapitalist Decay", this book would merit the attention ofevery thoughtful student of cnrrent economic conditions.

Combining a breezy, readable style, with a keen power ofobservation and profound scholarship, the author presentsso many pregnant facts, that a mere book-review is a whollyinadequate means of presenting to the non-reader the gistof the contents.

Predicated on the observed phenomena of a progressivecapitalist decay, Mr. Chase proves the thesis that "laissez-faire" and "rugged individualism" belong to a passingorder; that the increasing scope of public endeavor on thepart of the Federal Government is not a thing of the future,but rather is with us to-day, and has been with us durinss,the greater part of the twentieth century. '-

All this is done without resorting to the generalities cur-rently used by professional economists or haranguing politi-cians; instead, facts and figures, intriguingly arrayed, are themeans effectively used in presenting the analysis of the con.ditions of the day and the paths that America must travel inthe decades to come.

Far more interesting than a novel, the book is recom-mended to every student and citizen, as a necessary readingin any endeavor to achieve an orientation in the affairs ofthe day.

YOUR INCOME TAX (How to keep it down). By HughSatterlee and I. Herman Sher. Published by Simonand Schuster. New York. 1936. 85 pp. $1.00.

For the five million individuals and firms confronted withthe annual struggle of filing income tax returns some timebetween now and March 15th, Simon and Schuster have justrushed from the presses a new book entitled YOUR INCOMETAX by two experts in the field. Written in clear and simplelanguage, the book aims to remove the dread and head-achefrom the business of filing tax returns by clarifying the t_law and providing explicit and practical guidance.

One of the features of this work is an analysis of wBP.'1constitutes a fair, legitimate report of one's income. Work.ing on the premise that many people over-pay their taxthrough ignorance, the authors explain how to keep it downby a thorough knowledge of each and every deduction towhich one is entitled, and by learning how to prepare in.come tax returns quickly and accurately, thus avoidinafuture assessments, penalties and interest charges. •

March-April, 1936 191

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THE PUBLIC UTILITY ACT OF 1935t Continued from page 151)

rmssion supporting complete statewide unificationand simplification, there would be opportunity forbringing about effective readjustments reallyworth while from the public standpoint.

State Systems of IntegrationI think statewide unification is the necessary

minimum unit of integration, and in each stateshould be brought under a single corporate andfinancial structure, at least so far as generating andtransmission facilities are concerned. If the actis to serve progressively the public interest, I urgestate authorities to consider the opportunityplaced in their hands to bring about sensible re-adjustment of power facilities in their states, reo

flianized and coordinated to serve industry, com-::fI;.rce, agriculture and the homes from the stand.o point of gl>neral welfare.--and, of course, fairdealing with the private equities that are involved.

I emphasize the state aspect of reorganizationbecause finally the real dealing with the compa-nies in relation to consumers and public interest~ppears in the states. Except for the superorgan.

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ization of holding company arrangements, the fa-cilities and services are predominantly intra-stateand local in character. While there are importantinterstate connections in transmission of electricpower and natural gas, in the aggregate they arerelatively negligible and leave the problem of pub-lic dealing essentially with the states and individ-ual communities. All intra-state dealings wouldbe simplified by statewide unification and organi-zation,-though there would still be plenty of dif-ficulties with valuation and rate adjustments.

As already emphasized, I am in agreement withthe broad objectives of the act, but realize theobstacles that will be encountered. In this reali-zation I can hardly see how the private interestsare likely to suffer confiscation, though they willbe curbed somewhat in exploiting activities. Isee no great prospect of public advancement unlessthe states participate actively for the purpose ofestah'lislring individual statewide consolidationsand integration of facilities. If such state re-sponsibility were assumed and actively supported,I can see substantial progress ill sensible organiza-tion and future control of power facilities in thepublic interest.

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192 THE PEOPLE'S MONEY

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Who Answers the Questions?

Special Introductory OfferSIX MONTHS

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Recovery or Crash?War or Peace?

Currency Crisis or Stability?America must know how and when and uiby-« Weare notprophets, We can't predict chaos or recovery. But we cancontmue [0 present authentic, timely, and readable articles in,terprenng the trend of the time-i-gurdrng you through thethickets of confhcnng opmron and pointing the way our.

We present a bnef list of recent features [0 illustrate 1_

scope and vahdrty

Inflation-A Symposium by Seven AuthoritiesLosses to Public Utility InvestorsN.R.A. and The Great ChangeWe Work for Money-What Is It?Social Security Act "Anti-Social"Can We Share Our Wealth?Rural Electrification Under the New DealJenkinism-Chicago's New AilmentGermany and the Ethiopian CrisisGovernmental Manipulation of MoneyDistribution of IncomeHow Our Tax System Should Be ReconstructedRestoring Foreign TradeRegulation of the Holding CompanyPublic We!fare and the Public Debt

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BOOKS RECEIVEDMACHINERY, EMPLOrMENT AND PURCHASING

POWER. National Industrial Conference Board. NewYork. 1935. 103 pp. $2.00

A study of the essential facts regarding the relationof machinery to unemployment, employment, produc-tion, and purchasing power of the American workingpopulation.

THE NEW MONETARY SYSTEM OF THE UNITEDSTATES. National Industrial Conference Board, Inc.New York. 1934. 147 pp. $2.00Is Inflation Inevitable?

THE THIRTY-HOUR WEEK. National Industrial Confer-ence Board, Inc. New York. 1935. 23 pp. $1.00The thirty-hour week would decrease production, re-duce the purchasing power of workers, and lower thestandard of living.

UNEMPLOYMENT INSURANCE. National Industrial Con-ference Board, Inc. New York. 1934. 30 pp. $ .50Lessons from British Experience.

THE PHESIDENTS IN AMERICAN HISTORY. By CharlesA. Beard. Julian Messner. New York. 1935. 157 pp.$2.00

51'ALIN. By Henri Barbusse, Macmillan Company. NewYork. 1935. 315 pp. $3.00A New World Seen Through One Man.

THE MAKING OF MODERN IRAQ. By Henry A. Foster.Univ ersity of Oklahoma Press. :'\orman, Oklahoma.1935. 319 pp. $4.00A land clusely associated with the origins of humanculture.

TIlE POPULATION PROBLEM AND IVORLD DEPRES-SION. By Louis I. Dublin. Foreign Policy Associa-tion. Inc., New York. 1936. 32 pp. (pamphlet) $ .25Behind the discussion of unemployment, economicrehabilitation, f'oreign trade. peace-looms the popula-tion problem.

WHAT NEXT IN EUROPE? By Sir Arthur Willert. G. P.Putnam's Sons, New York. 1935. 305 pp. 83.00A survey of the European scene and the problemspressing for solution.

FROM FARM BOY TO FINANCIER By Frank A. Vander-lip and Boyden Sparkes. D. Appleton-Century Com-pany. New York. 1935. 312 pp. $3.50The story of the farm boy who became one of thegreatest bankers in the world.

SOCIAL-ECONOMIC SECURITY. By Hans Mayer-Dax-landen. Dorrance and Co. Philadelphia. 1936. 225pp. $2.00The author offers Constitutional means of achievingeconomic as well as social security.

HIWELATIONS CONCERNING IIIOl\El' .JSD BANKING.By Alva R. Hunt. Dorram-e and Co. Philadelphia.1934. 88 pp. $1.00A hrief for the people.

AMERICA'S CAPACITY TO PRODUCE. By Edwin G.Nourse and Associates. The Brookings Institution.W'ashington, D. C. 1934. 608 pp. 83.50This book is the first \ olume in a series of fourstudies dealing with the distribution of wealth andincome in relation to economic progress,

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GOVERNMENTAND

By

DR. PAUL GOURRICHNoted economist and former technical adviser to theSecurities and Exchange Commission in Washington.

Published in and distributed by the Hearst Newspapers inthe interest of a revival of American prosperity and the pre.

seruation. of our democratic principles of government.

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INDEX

PagePreface 3

Introduction 4

I. How the Profit System Works ............................ 5

II. Overtaxation The Reason We Get Nowhere 7

III. A Tax Program ......................................................10

IV. Some Effects of Present Taxation ...................... 14

V. The State of the Nation 16

VI. Capitalism and Democracy 19

VII. The W.P.A 21

VIII. More About W.P.A. 24

IX. Balancing the Budget 26

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In a series of brilliant article~ o~ the relations between Gov-ernment and Business, Dr. Paul Gourrich, noted economist andfor the past five years technic~ fulviser to the Securities andExchange Commission in Washfngton, herewith turns a con-structive, non-partisan spotlig~, ort, America's most pressingproblems. _, '.

Written by a keen observer w"o,.has seen the New Deal inoperation from the inside, Dr•.Gpurri5;h'sanalysis is especially.. ( ,....

illuminating in that it not onl>:~~.~t;dsthe shortsightednessand defects in present governm~":.tf. operations but points outthe road to correcting these abuses in the interest of nationaleconomic recovery.

These articles were contributed :voluntarily to the HearstNewspapers by Dr. Gourrich as .public-spirited move tostimulate a better understanding by the American people ofhow economic conditions in the United States can be improved

'vfor the benefit of all. t!

Dr. Gourrich is one of the foumiprs of the recently organ-ized Institute for Democracy. f(jrm~II by a group of Americaneconomists and business men, whr h'flve come to the realizationthat the future of American der:r.CXlracydepends upon a fullknowledge of the facts and:workings of our economy. Thisgroup seeks to develop ~O!lnd'principles of government andfinance, and bring them int~ the open.

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I have here sketchedquestion of taxation.urge to serve the caupresent my views toabout me there seemsparalyzes our econo

I have long advotion of all the questiodemocratic institutio

I hope that these arpeople to a systemati]principles. .

Neponsit, Long Isla

r of ideas on the vital publicone this out of a patriotic

democratic institutions. Ilie at this time because aller confusion. This conditiondangers our social order.oro ugh practical considera-ed in the preservation of our

y serve to rally the Americane of our precious democratic

Paul Gourrich.

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~\;;\~;,: GOVE:~~.~:~~R:~~INESS

:~\ ,Noted economist and former technical adviser to the'i.~~~~e,?~ritieSand Exchange Comm~ssion in Washington."?~ ,,<;; \,'

>: HOW THE PROFIT SYSTEM WORKSTii'e\o.:&u1ed distribution of wealth and income theory,

in sl~rikkli9wn as the soak-the-rich theory, allied to theso-calle"ijpw:cpasing power theory, which has become thebasis of\ the sp-called "progressive taxation" and whichhad led 'u'&, t~.~re than double our national debt withoutgetting ans~h~~e, is fallacious.

It is based '&)1=-a widespread misunderstanding of theworking of ibi~tofit system, and hence could not get usanywhere, eX'rprfurther away from our goal of reemploy-

-} ment of idle eople and idle resources.Throughou history, when industry has been profitable,

farmers, workers, the government, and everyone else havebeen prosperous, and vice versa. All one needs to do todemonstrate the truth of this is -to look at a chart of in-dustrial profits, employment, wages, farm prices, andtax receipts.

Not only is it easy to find historical corroboration forthis view, but a simple calculation will show that whenindustry is profitable and is permitted to retain a reason-able amount of its profits, the pr~erity of every partici-pant in the economic process is greatly enhanced.

H, for example, a corporation earns $500 and eitherdistributes that amount to its stockholders or ploughsthose profits back into the business, those earnings willnot only be spent by the stockholders or by the corpora-tion, but will form the basis for attracting capital andcredit up to, say, 20 times the face amount, or $10,000.

Thus, $500 of profits create a potential spending powerof $10,500 or 21 times their face amount. When this sumof money is spent on capital assets it will give sustenanceto at least 5 people for one year in the process of produc-

, ing those capital assets.In addition, at least one man will be added to the nation's

PERMANENT industrial payroll (since it takes approxi-mately $7,000 of capital assets, plant, tools and workingt) capital, on an average to set one man up in business in theUnited States) who will generate between $1,500and $2,000t> : of income year in and year out.

It is clear, therefore, that business profits on a scale war-ranting the attraction of new money to industry will, for

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every dollar of such earnings, produce first a multiple ofdollars of sound spending, and, furthermore, each .:'I •.of such earnings will create several dollars of perman, ..spending through adding to the national wealth and c ..tributing to the national income.

On the other hand, if these same $500 of earninwithdrawn from the profit account (thus leaving iprofitless or with insufficient profits) and distrithe form of reduced prices to consumers, or .wages to workers, or increased prices for raw:to farmers and others, or higher taxes to thethey can give one time sustenance to onlysay, 100 or 200 days, taking the sustenanc$2.50 to $5.00.

Indeed, it is possible that even this rnafor the destruction of earnings may injactually create less business activity ratruth of the matter is that the only suprogram" we have ever had is thatthe capitalization of profits in the form ew issues andthe spending of the sums thus raised on plant, tools, andother commodities, which not only increased tax proceeds,but generated employment, confidence, happiness, andpride in our social order.

Itwas the breakdown of the profit system-the inabilityof earning and retaining profits-due primarily to over-taxation as well as an uneconomic taxation that was re-sponsible for the breakdown of private enterprise anddemocracy in some foreign countries.

Ifwelook at what haQPenedthere we find two main rocksstanding out among the reefs on which their democratic-capitalistic-profit economies foundered: 1. An impasse inthe labor situation and an impasse in the capital market,both interrelated and encompassed in a vicious circle; 2. Anunwisely and uneconomically over-taxed economy, result-ing from the pressure to take care of the growing numberof unemployed, (as a result of war dislocations )made costshigh, profits low, and production erratic.

Under such conditions of economic debility the specterof uncertainty of tomorrow's wages caused labor to be-come more aggressive in its demands and forced the gov-ernment to look for ways of supporting the unemployed byextending taxes.

The resulting slow formation of savings.and their stillslower conversion into productive investments on the onehand, the hesitancy of business to move ahead, even toemploy the reduced resources at its disposal on the other,left millions in the street to follow street movements.

The inadequate capital resources and defeated spirit ofprivate enterprise, blighted by endless strife with govern-

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ment and labor, found it impossible to keep the ever-increasing number of people at work in shops and offices.

By bringing about the destruction of investors, capi-talism was defeated in Germany and Russia long beforeNational or Marxian socialists won their battles in thestreet. The enterprising spirit was sterilized, capital ren-dered jobless.

Increasing idleness of capital meant increasing idlenessof people. But this, in turn, meant greater social burdensthrown on the shoulders of government, greater exactionsfrom business under the uneconomic philosophy of "pro-gressive" taxation.

It meant still further sterilization of capital and enter-prise, resulting in further unemployment and so forth.This impasse might have been broken by a change of front;i.e., by deliberately encouraging capital expansion and in-vestment through the only democratic way knownthrough encouragement of profits but the inadequatenatural resources of those countries and the near-sighted-ness of their officials and other public bodies made thatsolution difficult.

The vicious circle was finally broken by a violent changein the state.

If we in the U. S. are to learn the lesson of history, thereis only one insurance policy we can take out to protect oursocial and economic order--democracy and private enter-prise, which, like Siamese twins, cannot live if separated,and that insurance policy is a remedy as old as the world-to rehabilitate and protect legitimate business profits in aneconomy of order, responsibility, and growth, within theframework of private enterprise.

II. OVERTAXATION-WHY WE GOT NOWHEREIn a democratic credit economy like ours, when there

is $1 of profit, it generates up to 20 or more capitalizeddollars of spending power of the type that creates businessemployment opportunities.

These are the almost forgotten or overlooked trulymagic qualities of the profit system in a credit economy,in an economy of private enterprise. In a totalitarian state,whether red, black, or brown, one dollar of earnings hasa spending power of but 100 cents.

In a democratic credit economy, it has a potential spend-ing power of up to TWENTY dollars and besides itradiates confidence, generates business activity, createsemployment, raises demand for farm products, and doesall the rest of it.

It is essential that we understand this in order that wemay evaluate the impact of taxation on our economy.

We, of course, all realize that the power to tax is the7

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power to destroy. But, as I endeavored to show, when youattack the dollar of profit, you destroy not only that dollarbut the TWENTY additional and more dollars that itmay generate and all the rest that goes with it--employ-ment, demand for farm products, the ability of the gov-ernment to collect adequate income, and the very faithin our order.

Suppose you succeed in capturing the dollar of profitin its entirety through taxes: all you will have is just 100cents.

Suppose, on the other hand, you let that dollar generatethe TWENTY additional capitalized dollars, etc., and youcollect only 6 cents in taxes on each of the latter, youwould then not only get 120 cents, but in addition youwould have that much less unemployment, farm surplus,etc., so that your total tax proceeds would be greater andyour social expenditures much smaller.

That is the essence of wise taxation, i.e.; to restrict the ex-pansion of economic activities in the least possible mtmneT.OUTentire history points clearly to the only sound solution 1know of fOT unbalanced budgets, for the insufficiency of newcapital issues, for unemployment, for farm distress, for econ-omic insecurity, for industrial conflicts, even for our llJationaldefense, and for aU the rest of our diseases and problems.'

That solution is the creation of a healthy, busy and pros-perous economy whose maximum power can be generated onlyunder profitable private enterprise.

Possibly I need to illustrate my point still further. Letus assume that some 33 million families in this countrydo an aggregate business, through existing corporations,of 100billion dollars, or, say, $3,000per family.

You know that a great number of our businesses, likegrocery distributors, packers, foods, textiles, work on anet profit of 2% or less. Department stores and many ofthe heavy industries consider themselves fortunate whenthey can average a net of five cents per dollar of sales.So let us assume that the net profit on our 100billion dol-lars of business is 5 billion dollars, a liberal assumption.

Let us now take one corporation in that group doingone million dollars of business, of 1/1000th of 1% of thetotal, which thus offers a livelihood to 333 families at arate of $3,000 each.

Assume that that corporation is owned by one or sev-eral men who are in the 50% or higher tax brackets, thatis to say, the income the owner derives from his corpora-tion plus other taxable property he owns is such that he "pays to the Federal and State governments 50 cents onevery dollar of income. (\\

If that corporation operates on a net margin of 5% ,~_ it yields our owner $50,000,and of this amount the gov-

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ernment gets $25,000. With $25,000 the government canemploy, say 15 government workers, possibly 25 peopleon a WPA project, or maybe keep as many as 40 or 50people on relief.

But if our owner finds out that in two good years heearns from his corporation an aggregate net, after taxes,of $50,000 (before taxes, $100,000) and in two bad yearshe loses an aggregate of $100,000, so that for the fouryears he is out on balance $50,000, he necessarily mustcorne to the conclusion, as so many of them have done,that since in good years one-half goes to the government,whereas in bad years he is left holding the bag for hislosses, he cannot, over a term of years, catch up with thetax collector.

H, as a result of such plain figuring, he withdraws fromactive business, the disappearance of his $1,000,000 ofgross business will cause 400 families that depended onthat business to lose their livelihood, and, of course, thegovernment loses the $25,000 of income which he usedto pay.

The question, then, is whether it is wise for the gov-ernment to take a chance on his remaining in businessand paying in taxes in good years $25,000 per annum withwhich the government can support, roughly, from 15 to50 people, or possibly 5 to 12 families, depending uponthe circumstances. Because if on account of inordinatelyhigh taxes he is discouraged and compelled to withdrawfrom business, 333 families lose their livelihood, at thesame time that the government will, of course, be gettingnothing at all except social burdens; i.e., an increasingnumber of families on relief.

There is bound to be, and there is, a steadily growingprocession of wealthy business men who, on account ofthe arithmetic of taxes as described above, will withdraw,and that goes even for those who love the game of busi-ness, because at some point their money will give out, ifin fact their spirit did not give out before that.

What sense is there, then, in policies which, as in myexample, give a livelihood to 15 (or even 50 people) govern-ment dependents, but which give rise to the chance thatevery time the government does that, 1300 (333 families)mouths may be deprived of food and other necessities?

Furthermore, as I showed in my first article, the $25,000of profit, when left in the income account of the business,instead of going into taxes, can, for example, pay intereston an additional plant, building, and equipment of a valueup to $500,000. An expenditure of $500,000 of this naturewould provide, in the process of construction of the plantand tools, as I demonstrated earlier, a one-time additionalpurchasing power for as many as 200 people, and also give

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PERMANENT employment to some 50 people in main-taining and operating the new plant and equipment.

WHAT SENSE IS THERE, THEN, IN TRYING TOMAKEWORKFOR ONE AND JEOPARDIZINGTHE OP-PORTUNITIES OF 20 ORMOREALREADYEMPLOYED,AND OF MANY MORE THAT MAY BECOME EM-PLOYED WHEN THE PROFITS ARE CAPITALIZEDANDTHE NEW MONEYRAISEDIS SPENT ON BUILD-INGS, TOOLS,AND INVENTORIES, WHICH IN THEIRTURN WILL GENERATE ANNUAL INCOME, WHICHWILL SUPPORT PERMANENTLY TWO OR MOREPEOPLE?

What sense is there in dealing with the relief and farmdistress problem in a fashion that, while care is extendedto the employed at an arithmetic rate, the manner and theeffect of the money raised for such purposes may createthe need for such care, that is, new burdens may be manu-factured, at a geometric rate?

We will never catch up with our problems of unemploy-ment and unbalanced budget; we will be ever farther re-moved from their solution under our present tax system.

Our present tax methods do not make sense; they maketragedy. And the tragedy goes very deep, because democ-racy and the profit system, the system of private enter-prise, are Siamese twins; they cannot live if separated,and it is only as long as we remain a system of privateenterprise that we can remain, I am convinced, a democ-racy, and vice versa.

m. A TAX PROGRAM

A taxation program which says that taxes should beused to raise revenue only and not for other purposes, ishypocritical and idiotic.

It is hypocritical because all tax methods always takeinto consideration in a measure, no matter how small andunenlightened, their impact on the economic life.

It is idiotic because taxation methods that destroy thetaxable income are suicidal, as they kill the goose thatlays the tax egg.

I think our faulty tax system is due to a lack of under-standing of how the profit system works.

If the workings of our profit system are sound, thenwe must stand ready not only to avoid overtaxing capital,but, if necessary, to cajole and subsidize it into employ-ment, so that it will employ idle labor, idle farm aoods,idle credit resources, idle plant, and so that it will thuscreate purchasing power in the hands of consumers who l'

have to be employed before they can become consumers. tand, finally, so that it will support the government and

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preserve our faith and pride in our social order.It is only when our economic order is functioning sound-

ly that we can make advances in social security and inother lines. In a word, it is to the extent that we succeedin widening, deepening, and broadening our economicbase that we can strengthen the State itself.

Under our system of private enterprise and private pro-fits, we developed the greatest material civilization in theworld, which today gives us 35 iron slaves (in terms ofhorsepower) for every man, woman, and child in theUnited States; with its continued free development, wecan easily reach the 100 billion national income goal setby the President.

Nobody can tell the limit of our ultimate possibilities,and while an intelligent tax system one which will pnta premium on the enterprising spirit, particularly in suchindustries where we want the quickest and greatest devel-opment, instead of one which penalizes enterprise isnot the only weapon, it is basic and the main starting pointin any attempt to create an economic renaissance.

In this connection I have urged that the SEC, as a pro-tector of the investor and of the capital resources of thenation (the nation owning no other reproductive capitalresources except the aggregate of all of its investors),and the treasury, which needs prosperous enterprise andprosperous business men to collect adequate revenue, un-dertake to study jointly ways and means to place ourvarious industries on a profitable basis.

We must get rid of that tragic situation in which we,who call ourselves a profit system, even in relatively goodyears, are presented with the astounding situation in whichtwo-thirds of the corporate wealth and an overwhelmingpredominance of corporate units report red figures to theBureau of Internal Revenue.

Now, of course, I realize that the government needsmoney to conduct its business and you may wonder whereit will come from. Such sums must necessarily be large,even after we have carefully scrutinized each $100of gov-ernment expenditure for its utility, wastelessness, andproductivity.

But the first thing we must clearly understand is thatany tax system is doomed to failure, (i.e., will result inIower tax intake than government expenditure) unless itrecognizes the economic axiom that the only way we canemploy people, process farm goods and other raw mat-erlals is to employ tools, as people cannot work withouttools in this country ..

It requires, on the average, about $7,000of capital in-vestment (plant, tools and working capital) to set up oneman in business in the United States.

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Yet our present taxation system, instead of sweepingaside all obstacles in the way of capital going to market,i. e., capital finding a job, has erected ever higher barriers.Tbe inevitable result of our uneconomic taxation has beenthat although we have over half of the world's gold, thehighest deposits on record, and the highest excess reservesin our banks, we have practically no new money issues;we have insignificant commercial loans; the smallest re-covery from the 1932 depression of any country in theworld; microscopic yields on high grade investment paper

a disastrous unemployment of capital and labor un-paralleled by any other country in the world, with a pro-duction volume of only two-thirds of what it was a de-cade ago when we had some nine million people less thanat present.

H we are to approach the problem from the point ofview of using the taxing power to encourage the creationof a powerful economy, then let us forget other considera-tions, as far as possible, that is, let us subordinate all otherconsiderations to one: to conduct our taxation apparatusin such a way as to restrict the least and encourage themost capital going to work. And so the money necessaryto conduct the business of government has to be raisedfrom all of us as a kind of "participation fee."

Such a participation fee may, for example, take the formof:

(1) An increase in the normal tax on individuals byX%, whatever that X may be - 1% or more - and ex-tended to wider strata of income classes by lowering thepresent exemption limits for individuals and families,

(2) An increase in excise taxes. .(3) A low, but possibly more productive in the end,

capital gains tax, say, one of 10% (if, in fact, this tax wasnot preferably completely abolished) with all waiting peri-ods, which viciously substitute tax judgment for businessjudgment, abolished.

(4) A maximum of between 25% and 50% in the sur-tax.

(5) A substantial cut in our inheritance taxes, wouldseem to be wise.

(6) The federal government in cooperation with Stateand local tax authorities, with the help of practical taxexperts, should engage in an immediate study of coordin-ating our hodge-podge tax system with a view of render-ing it the least restrictive to business, to make it fair,simple and economically constructive, and with a view tocoordinating, greatly simplifying, and standardizing themultiplicity of harassing and costly tax reports a greatpaper, ink, and accounting burden on business and whichmust be reduced to an absolute minimum to standardforms.

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(7) While I intend, at another time, to discuss corpora-tion taxes, my main suggestion there will be the repeal ofsubstantially all present corporation taxes with the excep-tion of the normal income tax which should preferably besubstituted in part or in entirety by a simple tax on thevalue added by "manufacture" or "service," etc.; this witha view of increasing the stability of such taxes as revenue,as well as putting them in the class of operating expenses,which they properly are, with a view to penalizing dis-tribution and other controlable expenses and with a viewto eliminating the present tax penalty on successful enter-prise.

Now, I know the usual arguments against the things Isuggest. They are arguments which may and may not bebased on justifiable emotions; they may have ethical merit;they may look socially pretty; but whatever they are, thereis no economic sense to them. We can be interested onlyin a tax system, which will make possible the renaissanceof the broken down profit system and with it give thegreatest employment and income to everybody, andinevitably, also the most revenue and the least burdens tothe government, AS OTHERWISE THE BUDGET WILLNEVER BE BALANCED.

If what we want is an America rebuilt in housing, inrailroad plant, in public utilities, and in more efficient andmodern industrial plants, so that we may retrieve the 25billion dollars now wasted in the form of work not beingdone by our huge army of unemployed workers, then wemust get rid, as far as it is possible to do so, of all the ob-stacles that stand in the way of capital going to work andthus inevitably pulling everybody else along to workwith it.

As a matter of fact, after creating an economically favor-able tax environment, i. e, after having eliminated thenegative and restrictive forces, we will have to do someother constructive and positive things to build, up theprofit dynamo, which drives our economic machine. Butfirst of all, if we want the American enterprising spirit,which is today in the grip of defeatism, to go to work againday and night in every plaee of this land, and to work withenthusiasm, vigor and determination, we must have a taxsystem that will tell the American people, with an under-standing insight of the effect of taxation on our economy,"may the Lord bless your harvest and let you keep mostof it for yourself."

However, if what we want is distribution of wealth andincome, which in reality means distribution of poverty,we have already found the best taxation formula to achievethis. All we have to do is to sit tight, as we could notmiss, all of us, the poor house.

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IV. SOME OF THE EFFECTS OF PRESENTTAXATION

Today, with about 9,000,000more people than a decadeago, we produce only two-thirds of the volume of goodswe produced then.

We used to build America for the future, for our chil-dren and their children. We do not do it any more. Theinheritance faxes took care of this.

As the year end approaches, we begin thinking whatwe can do to legitimately reduce our tax bill. High sur-taxes disrupted our economic processes. We are no moreswayed by our investment or business judgment. Thecapital gains tax drove capital out of the market place,but in doing so it drove out also labor, as we cannot em-ploy labor wtihout tools.

A combination of high surtaxes and capital gains taxforced farm goods and other raw materials to pile up,ruined farmers, as again we need tools at work to processfarm goods and raw materials.

When you have to pay to the Federal and State govern-ments up to 85% of your income in good years and inbad years carry the bag for your losses, you cannot helpsaying, "never mind the business exigencies, or the sound-ness of my business judgment; let me see how do I comeout on my tax bill." THERE HAS BEEN A VICIOUSANDECONOMICALLYDESTRUCTIVE SUBSTITUTION OFTAX EMERGENCY JUDGMENT FOR ECONOMICJUDGMENT.

Our insane tax measures did worse than that; they killedthe enterprising spirit, thus affecting the very heart of oureconomy, and while this was done under the "progressivetheory" or "ability to pay" they betrayed the interests ofthe very people they meant to benefit.

They created victims of unemployment and farm dis-tress faster than the tax receipts make it possible to takecare of them. In a word, we could not have possibly in-vented a tax system which would have defeated every oneof its avowed purposes and so thoroughly destroyed oureconomic order, if we actually set out with the latter pur-pose in view.

The inheritance taxes are in some cases so high thatwhat they really do is to give our heirs a right to buyback their parents' property at, say, 75 cents on the dollar.

This will not be done in many, if not most, of the cases,as recently even in boom years most of the choice equitieshave been selling in the market at less than 75 cents on adollar. ,

So, there is a tendency to use one's money and powerwhile he is alive to fix up his dear ones in comfortable

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positions, even if that implies the breaking up of an econ-omically worthy enterprise.

This conflict between tax emergency and business judg-ment is one of our most important evils that must be doneaway with. It is our present mad taxation system whichis mainly responsible for the 12 millions of people unem-ployed or not fully employed, or not productively em-ployed, creating a loss to our economy of some 25 billiondollars of national income that could be, but is not, pro-duced.

Fortunately for us, our grandparents, (not being be-seiged by what history may well later consider one of themain fatal diseases that struck and destroyed private en-terprise and democracy in many foreign countries-suicidal, emotional, soap-box, political and not economictaxation), built for the future.

Because of them, we are still able to enjoy the fruitsof their labor, even if we are falling behind the times inthe application of modern engineering technique to suchimportant factors as the American railroads. In the lightof up-to-date engineering technique, most of the trainswe ride in are old-fashioned, antiquated and uneconomic.

And so it may be that while we call our grandparentsthe builders of America, our children and grandchildren,to whom we will leave fewer tools, poorer plants, andgreater debts, may well call us the wreckers, or even thegravediggers of America.

Possibly one of the worst effects of our present taxa-tion system is the spirit of defeatism: "What is the use,"say the rich and enterprising ones. "We cannot catch upwith the tax collector." So they withdraw, retreat, fade out.

That means that the heart of our economic body is af-fected, and with the leadership of these men gone, howlong will it take for new unscrupulous leaders to cometo the scene, and as in foreign countries, by offering bread(security) which will become ever rarer, build a new statefor the rabble?

What chance, under the present tax system, would anEdison or a Ford in their early beginnings have? Whowould finance them under present impossible odds of ourtax system? Few today have any margin left after payingtheir tax bills' in the first place, and in the second placethose that still may scrape together such monies have agrave question to answer before they make such commit-ments, as to whether or not there is any chance for themwith taxes in the nature of "heads I lose and tails you win."

Characteristically, two infant industries were caught bythe present crushing taxation. One is air conditioning. Itsdevelopment was thwarted, its growth' stunted, yet onlyless than a generation earlier, under less destructive tax

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policies, another infant industry - radio - with hugeamounts of capital that went into its financing (mo.st ofwhich, by the way, was completely lost) succeeded in re-ducing the price of a radio set from many hundreds ofdollars to a few dollars and made it possible for even apauper to acquire a second-hand set for a dollar or so,thus bringing that industry within the reach of everybody.

Who knows that, were it not for our economically madtaxation, we would not have had today a portable airconditioning set priced to reach every home, and ready toplug in wherever and whenever it is desirable to do so?

And who knows what other inventions might havecome to the market which the well-to-do might havefinanced not only by supplying venturesome capital butalso as the first customers who can afford to pay the highcost of the earlier expensive product?

The other industry is aviation. What a tragic joke it isthat the greatest country of motorized power and the homeof the birth of the aviation industry, in spite of govern-rnent subsidies and government orders, should fall sotragically behind foreign countries. Yet it is an industrypreeminent in national defense.

v. THE STATE OF THE NATIONI have just come back from a trip over the country,

covering about ten thousand miles, mostly by automo-bile, going South and then West to the Pacific coast, andthen to the Middle West, then East and back West again.

For a long time prior to this trip, I had heard so muchabout America "coming of age" (owing to the slowingdown of our population growth and other factors) that Iwas inclined to take those academic theories for granted.

Under the impact of first-hand observation, however,these theories were completely shattered. From what Isaw, I am not so sure that we have even attained our periodof adolescence; and it is possible that we have not yetpassed beyond our early childhood.

But I was grieved and pained to see that the child's devel-opment is stunted that conditions are such that, if leftunchanged he may not grow into manhood. I saw manydarkened theatres (and those that were not dark some-times playing for as little as 5c admission) ; far too manygasoline stations, drug stores, and other distributing out-lets in the few congested areas on the one hand; andhuge land areas left untouched on the other too littleproduction, too much distribution. I saw unpainted andotherwise undermaintained plants and railroad terminals;the tragedy of cotton; and the disaster of the citrus fruitgrowers and vegetable.farmers in the beautiful Rio Grande,Imperial, and other valleys, who have eliminated the

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seasons from our tables, but who have done so only atthe cost of deficits to themselves that accumulate year inand year out. I saw dilapidated, undermaintained, dis-mantled property, and empty and abandoned stores andoffices.

As I recall what I saw eleven years ago when I made asimilar trip and visited many of the same places, I wasstrongly impressed with the fact that just as the humanbody becomes infected with rickets, scurvy, pellagra,beriberi, and anemia when it lacks the proper vitamins,so our economic body, lacking the proper incentive tofunction efficientlyand continuously, through the declineand disappearance of profits, through over-taxation, un-balanced budgets, industrial conflicts, etc., is displayingsuch diseases as loss of the enterprising spirit, lack ofcapital issues for productive purposes, congestion in ourdistributing outlets, arrested development, increased un-employment, and other diseaseswith which all of us havebecome familiar.

In brief, despite the fact that we have more than halfof the world's gold, the largest bank deposits on record,and everything necessary to build the strongest imagin-able economy, I saw a profit system without profits anda capitalistic system without, or with disappearing, capital.This vision followed me throughout my entire trip, inbig places and in small ones.

The spectre of impoverishment of this great countrycaused me untold anguish. "Why," I asked myself, "hasthis happened?" Basically, the answer is not a difficultone.

Here is a teeming humanity approximately nine mil-lion more people than were in existence eleven yearsearlier corralled within and fighting for a business andnational income only about two-thirds as large as formerly.

A national income of not even $2,000per family, noteven $500 per capita there is just not enough to goaround. Earnings are not sufficient to afford a decent in-come either to farmers or to the wage earners in manyindustries.

The distribution spread per unit, say, per gallon of gaso-line, may be adequate, yet the total net income per gaso-line station, for the all too many stations, is not enough toafford a decent income to an individual owner.

Yet with the anti-chain store legislation we make im-possible the reduction of distributing costs and the econ-omic utilization of our working population at decentwages and salaries.

Most enterprises, both large and small, have in recentyears succeeded only in going into the red, and theircapital investment is being wasted with every little op-portunity for obtaining new capital.

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For example in 1934,187billion dollars of assets out of301 billions reported to the treasury showed no net in-come. And so my conviction grew that we must. by onemeans or another, do everything possible, to inject intothe economic body the vitamins which are essential to freeit from that pernicious anemia with which it is infectedtoday.

For the good of labor, capital, agriculture, our nationaldefense, and for the purpose of balancing our budget andeverything else that one may think of, we must expandour national wealth and income by going to all reasonablelength, and even leaning over backwards if necessary,to restore profits to private enterprise.

History has often demonstrated that superior civiliza-tions which failed to understand their weaknesses and neg-lected to take steps to remedy them have "gone with thewind."

In our own country, despite a continuous growth inpopulation, partly because of reorganization write-offs andpartly because of dismantlement and depreciation whichwas not made up by additional capital investment, our in-dustrial plant declined from approximately 41 billion dol-lars in 1929 to roughly 32 billion dollars in 1937, while,if we had experienced only a portion of the industrialgrowth of the late '20's, it should have been at least 50billion dollars.

I am saying nothing of the tragedy of railroads whichhave lived for the last few years on undermaintenance.Maintenance expenses dropped nearly a billion dollars perannum as compared with about a decade ago. In otherwords, railroads experienced the most catastrophic des-truction of property, while their numerous investors havebeen thoroughly stripped of income. Without profitsthey cannot attract capital to modernize and regain theirproper place as a beneficiary of, and contributor to, thenational economy.

They ceased to be the large employers of labor they usedto be and they ceased to generously purchase materials andsupplies through sheer lack of money.

Under the I.C.C.their rate structure froze and their mer-chandizing talent was destroyed. Their vital function ofaggressive distributors of goods and builders of the coun-try has thus unfortunately come to an end. Nor is it neces-sary to say much of an industry which was stunted byunwise public policies-electric power.

In this basic and most steadily growing industry, capac-ity of private companies up to 1937-kilowatts per capita,since 1932 showed an actual shrinkage, while consump-tion-kilowatt hours-has been making new high records.

Annual capital expenditures in recent years have been18

about one-third of what they used to be a decade ago inspite of the continuous growth of consumption. That capi-tal expenditure has been less than retirement and depre-ciation charges with the result that the net property ac-count showed a contraction in practically every year since1931.

What this signifies is that we have accumulated a tre-mendous physical shortage of plant facilities-a deficiencywhich consists of an actual decrease in physical plantfacilities and a failure to keep that plant up to modernstandards.

This economic impoverishment of the country is alarm-ing because above all we require a prosperous, efficient,and powerful economy for national harmony and pros-perity, for an adequate national defense, and for the pres-ervation of our faith in our democratic order.

VI. CAPITALISM AND DEMOCRACY

I have frequently emphasized that capitalism and dem-ocracy are like Siamese twins, who cannot live if separated;and that democracy, private enterprise, and the' profitsystem form a trinity in which harm to one means harmto all three .

.Fundamentally, democracy, with its Bill of Rights anddispersion of power (as contradistinguished from themedieval or neo-medieval forms of authoritarian govern-ments, with their concentration of power), has evolvedgradually from the development of private enterprise. Thedispersion and inequality of talent and wealth is the basisof progressive democracy and its scatter of power. Oursystem of private enterprise was not invented, neither wasit due to a freak accident of history.

Itwas evolved as a superior form of social organizationout of the very systems of slavery which strange messiahsare today holding out to the unenlightened and confusedas their great salvation.

It is easy to show that only private enterprise-so-calledcapitalism-and nothing else can support democracy.

A map of the world at any time will show that democ-racy and private enterprise have always gone hand in hand;and one has to be naive indeed to believe that any kind ofdemocracy is possible without free enterprise, or that withthe destruction of democracy private enterprise has evena ghost of a chance to survive.

The refugee capitalists of Russia, Italy and Germany,some of whom are teaching in our universities today cantestify to this .. 'SINCE THERE WILL BE NO PRIVATE ENTERPRISEWITHOUT PROFITS, IT IS OBVIOUSTHAT PROFIT-

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ABLE PRIVATE ENTERPRISE IS ESSENTIAL, NOTONLY FOR AN EFFICIENT AND POWERFUL ECON-OMIC ORDER, BUT IS THE BASIS OF DEMOCRACYITSELF.

Indeed, I will go one step farther and make the boldstatement that basically it was the decline and disappear-ance of profits in recent years in some foreign countriesthat sealed the doom of democracy there.

Before starting my next subject, I would like to makeclear that I do not suggest a hasty, unplanned, and radicalretreat, which may be fatal.

I do not mean to suggest that we should stop relief andfarm subsidies immediately. But what I am ready to sug-gest right away is that all government expenditures, de-partmental and others, should be restudied with a viewof reducing them to the bone. I may have a right to wastemy own money, but waste of the public money on any-thing whose immediate utility cannot be definitely estab-lished must stop. That would require a thorough restudyof all the activities and all personnel engaged in the vari-ous government bureaus and undertakings. All prevent-able waste must be eliminated.

In discussing the coalition principle of government Isuggest that a special inter-party advisory body be createdof party members of the highest calibre. Among otherduties this body should advise the President and Congressof ways and means to keep government expenditure undercontrol, as well as how to improve the quality and efficiencyof government personnel and their activities.

Some activities should be definitely abandoned alto-gether, others consolidated, and still others should be re-analyzed with a view of keeping a minimum personnel.

There is a known tendency in all large administrativebodies, but particularly in the government, to start newthings but never to give them up, even after the reasonfor which they were started disappears.

This inter-party committee should have at its disposalindustrial efficiency engineers who will study the utilityof each person employed. It is generally known that agovernment gets much less than a hundred cents of workdone on each dollar, but such a study may be revealingin that it may show just how many cents on a dollar it gets.

In examining the particular activities of each depart-ment, bureau, etc., specific attention should be paid to themultiplicity of questionnaires, reports, regulation of un-established value, etc., which have been harassing to busi-ness and have acted as a straight-jacket on its enterprisingspirit, aside from its costliness.

These reports, questionnaires, etc., should be discussedwith each trade association whose members are subject

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to such reports and questionnaires, and recommendationas to their abolition or change should be made to thePresident or Congress unless business itself is for theircontinuance, or unless the government, in public hear-ings, can make a pretty good case in showing the practicalnecessity of their continuance against the wishes of busi-ness.

Speed, of course, is an essential thing, particularly ifbusiness is to get early signs that the government meansmore than just preaching cooperation with business viz.,that it means action. My above suggestions may seem bold,but if we really want to unshackle in every way the chainsput on business, and nurse back to life the profit system,some such thing is imminently necessary.

VIT. THE W.P.A.

The W. P. A. mess is merely one illustration of a com-pletely faulty approach to an economic problem.

When we survey some of the things that became in-grained in public policies during the 20th century; if weanalyze the premises underlying our social legislation andpolicies, some of them like the I.C.C. dating more thanhalf a century back, one cannot help gaining the impres-sion of a determined policy-so intransigent, so stubborn,-of placing a premium on foolishness and even madnessand a penalty on common sense.

The idea was to help the weak elements in our socialmake-up, the less fortunate ones, but instead we suc-ceeded in discouraging the strong elements and the strongforces and encouraging the weak ones.

When in a family one bread-earner develops talent andlarge earning capacity the rest of the family makes everyeffort to make his life comfortable and easy so that he canfunction at his best, and carry with his own success thewhole family to higher levels of prosperity.

In public life we do not do so. We have shackled andput weights on the able, the strong, the talented; insteadof allowing the talent to build unperturbedly we makethem "wash dishes." The result of this has been that in-stead of helping the weak we have made more people weakand helpless.

Why did this happen? The answer lies in a wholly fal-lacious theory of pseudo-liberalism. In truth it was theopposite of liberalism, if by liberalism is meant policiesthat further the material and spiritual interests of themasses, their economic well-being and their political free-dom.

While these pseudo-progressive class philosophies origi-nated inEurope, we here-the Noah's Ark of civilization-have partaken in the erroneous philosophies.

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These theories of how to solve the problems of povertycame into being early in the 19th century in-the relativelyover-populated European countries. Although the politicalclass theory has never made much headway in this country,it did enough damage to create an atmosphere of generalsuspicion, distrust and disregard of the public interest.

There is the distrust between capital and labor, betweenthe small stockholder and the large stockholder. There isthe farmer and the small dealer who suspect the largecorporation that it is set to ruin them and there is the con-sumer who is told that the "monopolistic" tendencies ofthe large companies are meant to gouge their customers forall the traffic will bear.

The truth is that the suspicions and distrust are basedon figments of imagination. The truth is that the troublewith the corporations is that they are Iosina and not mak-ing money; that capital is not earning its keep, and hencenot enough capital can afford to employ labor or buy suffi-cient quantities of farm goods so as to create a bettermarket for labor and raw materials.

And now we have the W.P.A. worker who has been (elevated by our social philosophy to a savior of our svstem,as the "spending" agent which creates the "purchasingpower" that keeps the economic machinery going.

ITany and all these ideas were right, in order to makeeverybody happy all we have to do is to tax capital stillfurther or expropriate it altogether; we should pay forour farm goods several times the prices they bring inthe market and thus encourage even greater gluts andfinally we should possibly declare that the W.P.A. mini-mum wage should be equal to the salary of the Presi-dent of the United States. We could do all these things,but we could only do them once, and after that there willbe nothing left to worry about.

A little while ago a treasury expert testified before theHouse Relief Investigation Committee that the W.P.A.Building at the New York World's Fair cost forty-threecents a cubic foot as compared with twenty cents for theFederal Building, which was privately constructed. J.O'Connor Roberts, the House Committee Counsel, withthe consent of the expert, summarizes his testimony asfollows: "Although the W.P.A. Building is of an inferiorgrade, its cost is twice as much as that of the Federal Build-ing." One of the surprising things brought out in the hear-ing was that only 17.7% of the labor employed on theW.P.A. projects came from relief rolls, the remaining »82.3% were non-reliefers.

The W.P.A. philosophy is based on the idea that even fthough relief is cheaper than W.P.A., the latter avoids ,the destructive psychology of a dole, besides creating

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national assets. The philosophy in back of W.P.A. hasbeen reiterated by the President himself in his messageto Congress on April 27, 1939, in which he requested abillion and a half as W.P.A. appropriation for the nextfiscal year.

He said:"It is very important to remember that the fundamental

decision which was made in connection with the problemof providing for the needy able-bodied unemployed waswhether provision should be made through the mediumof work or a dole.

"I have on numerous occasions expressed my convic-tion that the proper solution was work, but I desire totake this opportunity to reaffirm my conviction in thatregard."

The President continued: "It is admitted that the costper individual of a work program is higher than that ofa dole. However, I firmly believe that the advantageswhich accrue from the maintenance of the morale andself-respect of the worker and the creation of permanentpublic assets fully justifies this increased cost, and that theadoption of the dole as the solution of this problemwould be disastrous."

H, as the President suggested, "the proper solution waswork," the criterion of the success and the efficiency ofthe W.P.A. should be measured by results in terms of workdone.

It is not work to pay a mechanic $8.00 a day who, incomparison with private employment does only $5.00worth of work, as in such a case we get $5.00 of work andwe pay a dole of $3.00 while a dole alone might have cost,say, only $2.00 or less.

The true measurement of the success of the work doneby the W.P.A., a standard propounded by the President,may be how many days of work did we get per $100 ofW.P.A. expenditure, in terms of commercial employment(and not in terms of work-dole mixture of the W.P.A.),with due allowance for the quality of such work.

H, for example, per $100 of W.P.A. expenditure we gotwork which is equivalent, in commercial terms, to six daysat say, $8.00 a day, i. e., $48, as seems to have been the casebrought out in the treasury experts' testimony as quotedearlier, the W.P.A. loss or dole was equivalent to $52, aloss of 52%.

There is, of course, another question, and that is, theeconomic utility of the work itself. Thus a leaf raker mayget only $4.00 a day and work very hard at leaf raking,but since that work has no commercial value it is nothingbut a disguised dole, except that the cost to the Federalgovernment is one hundred percent greater per day than a

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straight dole.In plain words, if it is work we want we have to see that

$100 of W.P.A. expenditure should result in at least $100of commercial work value, as otherwise either we have adisguised dole or we merely mix a dole with work.

The allegedly low limit of the W.P.A. monthly wageshas no economic meaning. In the first place some peoplecan bolster up their W.P.A. income by getting some pri-vate work; there is nothing particularly wrong with thatexcept possibly that if there were no W.P.A. they wouldhave made a greater effort to get a more continuous privateincome.

But whether they can or cannot obtain additional privateincome, the question still remains what does the govern-ment get for the money paid in honest work performed?

I have seen young girls on projects, nice kids but com-pletely inexperienced, receiving something under $80 amonth for filing or some other very simple work, working,I think, only thirty hours a week. Many of them under nor-mal business conditions would be lucky to secure positionsrequiring much longer hours and at half the W.P.A. pay.Many would not look for such work and would continueto live with relatives, staying out of the labor market.

VITI. MORE ABOUT W.P.A.

It does not make sense to use public money in a depres-sion when the income of the employed people is none toohigh and overpay those who, if times were good, wouldnot have wanted such jobs and would not work at all.

There is no sense at all for those who have none toomuch themselves to take care of those others who are notready to take jobs with private business.

But even those skilled workers who only work a fewdays a week and, in the large cities, receive their W.P.A.monthly minimum of say $90 or so per month (and whoare in effect prevented from taking on some private worklest they lose their "previous" W.P.A. status), have some-thing to worry about.

They are called to adjust themselves to a lower incomeof the few days of work during the week the governmentassures them.

They thus become ambitionless, possibly lazy and de-velop the very features which it was thought to obviateby having a W.P.A. instead of a dole.

With the abolition of the W.P.A., even they, I fear,would be placed in a difficult position to readjust them-selves to private business, not because of lack of skill butbecause of the undermined stamina. Hence they, too, fearthe day when the W.P.A. will be discontinued.

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Small wonder, then, that W.P.A. employees have triedto organize a strong union: Whenever the economic foun-dation is weak people are apt to seek "protection" throughpolitical machinery.

To my knowledge no study was made to date with a viewof determining how many of the projects that were startedwere left unfinished, or finished in a way that they areworthless.

If we are ever to have a constructive approach there isneed to go over all the experience and results of theW.P.A., and to have licensed and competent appraisersappraise the commercial value of the final product. ascontradistinguished from their dole value. This is to say,that what we need is to estimate what it would have costto produce the things created by the W.P.A. if they weredone by private enterprise, similar to the estimate of theW.P.A. Building at the New York World's Fair made bythe treasury experts and cited earlier.

This may be a telling story, as it would necessarily putat zero all the projects completely wasted as far as resultsare concerned, and, at their proper value, all other projects.The results may well be that as far as honest commercialvalue is concerned the government on all its projects didnot get even the fifty cents on a dollar brought out in thetreasury expert's testimony, and possibly not even twenty-five cents.

Should it be brought out that the government in theover-all picture received only twenty-five cents of workper dollar of expenditure, what it really got is twenty-fivecents of work and paid seventy-five cents in a dole.

If we are really serious about our dislike of the dole,then the above observations bring immediately to mindcertain suggestions.

(A) Since it was proven by treasury experts' testimonythat private people to whom work was contracted out cando it much cheaper than the government, as much of theW.P.A. work as possible should be leased out to privateenterprise. Certain conditions may have to be attachedto such contracts, such e. g., as to employ people fromrelief rolls in at least the same percentage as in the W.P.A.work conducted directly by the government. In additionto getting the work results which the W.P.A. aims at butdoes not always attain, this procedure would also helpprivate enterprise and general confidence. -,

In all government activities we should hope, whereverpossible, for the government's sake itself, to help privatebusiness, without which we can have no government. Itis sincerely hoped that while such contracted out projectswould be much cheaper than W.P.A. projects and hencethat one dollar of W.P.A. appropriation will do two or

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more dollars of work, private business will at the sametime make a profit of such projects, as they should.

As a matter of fact if private contractors could getdouble or more work per dollar of W.P.A. money, asthe facts seem to indicate, and in addition make a profit,we have achieved two good things at the same time, viz.,we have obtained much more work out of the W.P.A.money than if such projects were conducted by the gov-ernment and we have helped the profit system comingback to its feet again so that private enterprise itselfcould employ larger numbers of unemployed.

(B) For the general administration of the W.P.A.work, as regards contracts given out to private businessas well as such projects as may still be continued to beadministered directly by the W.P.A. or projects in liquida-tion, we need capable administrators. One of the requisitesfor such administrators should be practical business ex-perience as large employers of people. Not only the headof the W.P.A. in Washington, but also all regional andlocal administrators should be recruited from the ranks ofbusiness executives. In addition there should be smallbusiness advisory committees which would help the local,the regional and the national administrator to do an effi-cient job.

(C) On such projects as are administered directly bythe W.P.A. salaries and wages should be reduced by 25%from their current levels in private business, in order toinduce the workers to return to private employment whenpossible.

(D) The National Business Advisory Committee assist-ing the National Administrator, as suggested above, shouldimmediately restudy all the W.P.A. projects not yet com-pleted, with a view of determining whether they shouldbe continued or not, and, if they are to be continued, whatchanges should be made in them, which of them shouldbe leased out to private business, with a view of reducingthe waste. The committee should also examine all the con-templated new projects with a view to their commercialutility and their work value.

IX. BALANCING THE BUDGET

It is not so much the volume of taxes that count as therelation of taxes to the total national income, as well as themethods of raising government revenue.

The trouble is not so much that our total tax bill now ismuch higher than it was a decade or so ago-more thandouble-but that it is levied on an income between two-thirds to three-fourths of what it used to be then.

Also. to the extent that the methods of levying such26

taxes have restricted the development of national income,while at the same time increasing the need for govern-ment revenue, mainly to take care of the unemployed-we have been experiencing the paralyzing affects of avicious circle.

Because of high taxes we have restricted business activi-ties and brought about more idleness; because of moreidleness we need more government revenue.

The present total tax bill is almost twenty cents per dollarof national income, taxes are almost equally divided be-tween Federal taxes on the one hand, and State and localon the other.

There can be little question that there is considerablewaste of government expenditure-there always has been-in the way of altogether useless activities or activitieswhich the public wants and which are useful, but whichare very inefficiently administered.

A determined businesslike effort to bring the govern-ment waste to a dead-end would greatly reduce the totaltax bill. A determined effort in this direction by Federal,State and local authorities may readily reduce that bill toconsiderably under ten billion dollars per annum.

H at the same time the methods of collecting taxes arerevised with a view to giving the greatest possible encour-agement to business expansion and capital expenditures,rather than to pay tribute to class theories and pseudo-liberal philosophies of how to solve the problem of poverty-our national income could be brought up to eighty bil-lion dollars and possibly even a hundred billion dollarswithout much difficulty as it would still lie within thetrend of the pre-depression growth.

This would make the total tax bill only twelve and one-half percent, or even only ten percent of the national in-come, or about the same ratio as a decade ago.

On a national income of eighty billion dollars a Federalgovernment average tax of 7lh% to 870, yielding betweensix to six and one-half billion dollars, would give us allthe money we need to conduct our national governmentbusiness, including larger appropriation for defense, anda surplus to be applied for the gradual redemption ofnational debt.

Together with some other measures which I suggestedelsewhere it would give us a true basis for confidence andfor stabilization of our economic and social life. The prob-lem, as already mentioned, is, to raise 7% % or 80/0 ofthe national income in the least painful manner, i. e., onewhich will restrict the least the growth of national income.

Of course, the problem goes a little further as it is simi-larly important to co-ordinate local and State taxation aswell as to standardize them, with a view to making their

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impact on our economy equally painless.Otherwise the constructive features of Federal taxation

may be destroyed by the destructive elements of the Stateand local taxation. .

The present Federal government total annual expendi-tures are between eight and nine billion dollars. In prac-tically every year since 1934, with the sole exception of1938, the deficit was in excess of three billion dollars, and,for the fiscalyear 1939it is estimated at four billion dollars.

To cover the deficits the government has been borrow-ing money from institutional and individual investors.

However, of the total Federal expenditures nearly fourbillion dollars consists of public work relief and agri-cultural subsidies.

For the fiscal year 1939 these three items are estimatedat $4,700,000,000.Hence, if it were possible to greatlyreduce what may be called the "social" burdens of thegovernment, in addition to bringing about substantial sav-ings in other departments, the budget could easily balanceat around six billion dollars after some surplus is left to beapplied to the redemption of national debt.

We have seen in earlier articles that on the average forevery dollar of W.P.A. expenditures the government getsfifty cents, or possibly less, of work. An intelligent aimshould be to make such use of government money aswould create for every dollar of government contributionmultiple dollars of work, even if this would imply intelli-gent and discriminate subsidy of private industry.

But subsidy is not necessary. All that is necessary is toencourage private enterprise in such a way as to make itagain truly enterprising and truly progressive.

For example, suppose we adopt a tax incentive policywhich would give credit, to the extent of, say, ten percentfor capital expenditures of private industry. There will bea determined drive on the part of our industries to makeprofits and thus strengthen the base of our economic order-the profit system.

In the case of a company making a profit of one milliondollars, and having to pay, according to present tax sched-ules, one hundred and eighty thousand dollars in Federaltaxes, the company would save its tax bill in toto, if it canengage in capital expenditures to the extent of one millioneight hundred thousand dollars, i. e., spend in this waythe million dollars of its profits, and eight hundred thou-sand dollars additional drawing on its reserves or byraising that money from security holders or banks if ithas no spare money in its treasury.

What will be the result? Suppose the government ob-taining, as at present, the one hundred eighty thousanddollars, puts it ALL in the W.P.A.; it will then have ere-

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ated a purchasing power of one hundred eighty thousanddollars for W.P.A. beneficiaries; if instead the governmentrelinquished that tax revenue and got the company tospend one million eight hundred thousand dollars oncapital improvements it will have created TEN TIMES asmuch spending power. However, since one dollar of some-body's spending is always one dollar of another person'spurchasing power, it will have created as well TEN TIMESas much purchasing power. This is plain arithmetic.

It can be confidently expected that, if the present Federaltax intake is between five and one-half to six billion dollars,it will be at least that much and probably more after thesuggested changes in taxation.

It would be perfectly proper, in view of the presenttransitory situation, to have two budgets: an ordinary oneand an extraordinary one. The ordinary and recurringrevenues could then be applied to the ordinary and recur-ring expenditures. The extraordinary and non-recurringexpenditures should be taken care of by whatever moneyis left from the surplus of the R.F.C. and similar agenciesand only in exceptional cases further borrowing should beindulged in, and provided that national assets are createdin a ratio of more than one dollar to one dollar of nationaldebt.

I confidently believe that, if the tax program and othersuggestions are carried out, except for unforeseen inter-national developments, after a short lapse of time the twobudgets taken together will leave a substantial surplus totake care of debt redemption, this because revenue will beincreasing and the social burdens of the government willdecrease sharply and will finally disappear altogether.

A completely rounded out, constructive tax programshould have great simplicity. It should also do away withall such items as bring in little revenue, with no otherexcuses for them. Above all, all such taxes as are of a defi-nitely restrictive influence on business must be done awaywith. '

I have suggested that surtaxes be reduced to a maximumof 25% (this as a first step, later, as the program advances,they could be further substantially reduced), and also thecomplete abolition of the capital gains tax. My programalso calls for a lowering of the exemption brackets.

If we are to have any income taxes at all, we shouldaim at a situation where substantially all the people whoearn income should pay income taxes. Today we haveless than three million people paying income taxes, andthat figure should be raised.

Let nobody get excited over the cost of collecting small-bracket income taxes. That cost can be made as low as wewant to make it. Evasion is generally rare and particularly

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so in the class of small taxpayers. The tax inspectors maypick at random one name in every so many thousands forchecking purposes, and all other clerical procedure re-lating to such returns can be greatly simplified, leaving thegovernment a greater net balance than generally expected.

With constructive tax policies, the profit system can bemade to fire on all cylinders and generate an almost in-finite amount of purchasing power. Tax credit on capitalexpenditures could be made to generate ten dollars ofspending power for every one dollar of tax revenue re-linquished by the Treasury. Furthermore, the profits thusretained can be made to generate up to twenty times ofone-time expenditures resulting from capitalizing theseprofits in new money issues or borrowings from banksand others.

The new and additional wealth thus created will gener-ate permanent income of at least several times the facevalue of such profits in the process of maintaining andworking this wealth. The resulting stimulation of confi-dence and the circular effect of such constructively cre-ated spending power, will in turn generate new wealth andincome almost ad infinitum. Furthermore, this should laythe foundation for tackling our other major problem-labor policies.

Enlightened labor policies, based on constructive profitsharing, will make possible the aggressive expansion ofprivate enterprise, thawing out rigidities and enabling allof us to work, under any market conditions.

Constructive tax and labor policies will, in turn, resultin greatly reduced government expenditures and in agreatly increased taxable matter, making it possible tomore than balance the budget and build an economy ofstrength, confidence, stability and security, beyond thepresent dreams of anyone.

, APPENDIX TABLES

In the following tables I present a condensed summary of thebudget: Actual figures for the fiscal year 1938, Treasury estimatesfor the fiscal year 1939, and my own tentative figures based on therevised tax program I have suggested, as well as changes in theW.P.A. and other changes in public policy:

30

-

REVENUE

TentativeOrdinaryRevenue

1.22.3

.7

.5

.2

(In billions of dollars)TreasuryEstimates

FisealYear'39

2.12.2

.7

.3

.2

FiscalYear '38

Income Taxes 2.6Misc. Int. Revenue 2.3Social Security.......................... .8Customs .4Misc. other .2

TOTAL ..Business Tax (on value added)

TOTAL, includingbusiness tax .

6.3

6.3

5.5

5.5

4.91.5

6.4

The sharp reduction in income taxes in the column "Tentative"is due to the elimination of corporate income taxes and onlyslightly to the reduction in surtaxes, as it is expected that the largernormal tax, as well as the increase in the national income willmore than compensate for a sharp reduction or even -eliminationof the capital gains tax and for the reduction of the high-bracketsurtaxes. Further, the total of income taxes and the business tax(which would replace the corporate income tax) in the columnmarked "Tentative" exceeds the income tax collections for thefiscal year 1938.

Miscellaneous Internal Revenue, consisting mainly of tobacco,liquor, gasoline and other excise taxes will show a substantial in-crease; but as against this the elimination of the capital stock taxand the sharp reduction in the Estate and Gift taxes should leavethe total unchanged or somewhat higher.

The Social Security tax includes also taxes upon carriers andtheir employees, and it should be aimed to "freeze" at its presentlevel until it has been thoroughly re-studied.

Larger imports will probably increase Customs Revenue beyondthe five hundred million dollars given in the "Tentative" column.

The "Business Tax," i. e., the tax on "value added by manufac-ture or by service" will probably yield 1.5 billion dollars if it isto be of a flat rate of 1.5% or 2%. Even if it is necessary to raise it to2% or more, it will still be a small amount buried in the total costof doing business. This tax, together with the excise tax, may beconsidered among the most painless. Within reason, the "BusinessTax" can be made as large as desired to yield as much revenue asis necessary.

Assuming on the other hand an attempt to cut all governmentwaste, which may result in some savings under all headings whilestill leaving the totals substantially above the 1929 and 1932 levels,we can construct a condensed summary of expenditures as follows:

EXPENDITURESI. ORDINARY

TentativeExpenditures

.82.01.11.0

(In billions of dollars)TreasuryEstimates

FiscalYear '39

1.11.61.0

.9

FiscalYear '38

Departmental (including other)...... 1.0National Defense & Vet. Adm. 1.6Interest on Public Debt .9Social Security & RR Retir. Acts.... .8

TOTAL ORDINARy 4.3

314.6 4.9

_

EXPENDI!I'URES

u, EXTRAORDINARY

6.1

TentativeExpeDdttures

0.40.2.0.50.1

1.2

9.5

(In blJUoUBof dollars)TreasuryEstimates

'FJsca1Year'39 .

0.71.22.70.3

4.9

FtsCilI 'Year >:l8

Farm, Subsidies ~...... 0.4Industrial Subsidies (P.W.A.) .i...... 0.9Unemployment & Relief 2.0Miscellaneous 0.1

TOTAL EXTRAORDINARy.... 3.4~GRANDTOTAL ..

(Ord. & Extraord.) 7.7

RECAPITULATION OF TENTATIVE BUDGET(In blJUons of dollars)

Total ordinary revenue 6.4Total ordinary expenditures 4.9Excess ordinary receipts over ordinary

expenditures 1.5

1.2

EXTRAORDINARY BUDGETReceiptsExcess of ordinary receipts over

ordinary expenditures 1.5Non-recurring receipts (R.F.C. ete.) :................... .2.

TOTAL 1.7Expe"dituresW:P,ft.. & Unemployment Relief, Indus. Loans

/k. Subsidies 0.7Agr, Subsidies & Misc. 0.5-----

TOTAL Extraordinary Expenditures ........

Excess of extraordinary receipts overextraordinary expenditures . 0.5

Thus five hundred million dollars may be left to be applied todebt redemption which may be accelerated in future years.

It will be noted that all so-called social burdens of the govern-ment, except the Veteran, Railroad Retirement Administration,Government Employee Retirement Fund and Social Security havebeen placed in extraordinary expenditures, which will be greatlyreduced after tax revision, W.P.A. changes and other changes ingovernment policy to encourage private enterprise and the profitsystem. The W:P.A. work may consist mostly of subsidies andloans. The changes in agricultural relief are discussed in my "Cot-ton Plan." Interest on Public Debt is put at t.t'billion dollars be-cause of a temporary deficit which will have to be covered byborrowing. It is expected to decrease as the debt is' gradually re-tired. To the extent that short-term obligations will be.tunded.there will, however, be a corresponding increase in ~eserVice ofthe debt. Social Security and the Railroad Retirement are "frozen"at one billion dollars. . , ..