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received an invitation to Bpeak in Boston I accepted
I have always had the feeling, probably quite


unreasonably, that good Bostonians always looked a trifle askance
at anyone who came from any plaao west of the Alleghanies,
particularly Utah. The fact that in a recent magazine article
ay appointment to the Federal Reserve Board was interpreted to
mean that the "Great American Debtor* had cc



could hardly have been reassuring to you» I-had-hoped therefore
that by a personal appearance I might convince you that I am
not a wild man but rather a conservative, that is, one who wishes
to conserve our present economy and our present form of government»
lu ay spceohQt Columbus

"if there is one thing seems clear it is that unless


conscious effort is made to prevent them, booms and collapses
will continue to occur in capitalistic democracies. It also
seems evident to me that neither capitalism nor democracy can
survive another depression of the magnitude of the one from.
which we are just emerging.A . . Therefore It is absolutely


essential to develop agencies which by conscious and deliberate
compensatory action will obviate the necessity of drastic down­
ward or upward adjustments of costs and prices, wages, and

capital structures"* This is & theme I should like to elaborate
more fully tonight.
Let me first clear the ground by emphasizing that our objectives
are the same* I am speaking to you as a capitalist to capitalists,
as a banker to bankers. As a capitalist I wish to preserve (and
conserve) private initiative and private enterprise* Our objectives
therefore do not differ* Our differences, and
many, are solely in the means of achieving our common objectives*
There is one further point I wish to dispose of before I
proceed* I do not wish to preserve capitalism for its own sake*
To me there is nothing sacred or inviolate about the system. It
is merely an economic organization and structure which society has
developed in its quest to satisfy its wants* If I wish to preserve
capitalism it is because I think that a smoothly functioning demo­
cratic capitalistic system offers a better guarantee,- afr teagt for
.•Wdis gaacratton, of what is generally termed the good life than
does a capitalistic dictatorship, or socialism, or communism.

If, then we regard capltalisa^rith its institutions of

private property, private ownership of the means of production,
and prlTate e n te r p r i» .,^ » frrU oiU r economic organisation of
society, our defense of, or attack on, that organization must be
directed toward its efficiency»— its ability to satisfy in an
adequate and equitable fashion the material needs of mankind *

-5 -

If it cannot be defended on these grounds it Is doomed* The
doctrine of the divine right of kings did not save Charles the
s head nor will the doctrine of the sacred rights of
property save capitalism* People «ant and «111 demand concrete
and material results. Private enterprise today is on trial
solely because it is not producing the goods it has the capacity
to produce and because it is not providing a more equitable
distribution of the goods it is producing. I hope that you
will not think that 1 am exaggerating*

society such as ours

is highly unstable^ Over twenty million people, or one-sixth
of the population, are being supported by the Federal Government.
In addition, there are millions more being supported by their
relatives or using up their savings* The important thing from
the point of vie« of the preservation of capitalism is that
these people no longer have any sta]

preserving our present

economy* They have nothing to lose*^If this condition persists
much longer, or if it recurs again in a few years, neither you
nor I «ill have anything to lose*
There are, therefore, two supremely important and related
questions that must be asked and ansvered. Ho« can recovery be
achieved? Ho« can recovery, once achieved, be translated into
a period of enduring and sustained prosperity? ](jr general
answer to both questions is that recovery «ill be achieved and

-4 -

Let me first examine the opposing argument•

It states

quitebalSly that any efforts to ameliorate our condition or
to strive for recovery through governmental action will either
he totally ineffective or actually harmful.

All we need to

do Is to complete the process of liquidation, get wages down,
have no legislation that threatens profits or interferes with
business in any way, and then have faith in America.


recovered from other depressions without governmental aid
and we will recover from this one*
What does completing the process of liquidation really

It can only mean the closing of banks

which have

impaired capital, foreclosing mortgages on much of the real
estate of the country, putting many of the railroads into
bankruptcy, scaling down municipal debts, and so on.
While this process is going on it is expected that incomes
and the demand for goods will continue undiminished.


incomes decrease, however, as they will, further liquidation
will be necessary and the process will continue until we
are all out of debt, —

and starving.

We went a long way

toward this goal from 1929 to 1932*
The next thing we are told to do is to get wages down.
This is definite enough, but you could get wages down only
by strong-arm tactics, and only after prolonged strikes with
resultant depressing effects on business activity.

Incomes or spending

would certainly decline in the process, and wages would have
to be lowered still further, and so on#

The people who tejl us to have no more legislation
that threatens profits or interferes with business are
particularly blind to the spirit that is abroad in the

They would accomplish this, I suppose, by denying

the vote to the majority of the citizens, and bf expecting
the President to veto most bills sent up by Congress, and
pray that his vetoes be sustained.
Let us now examine the basis of the view that
business alone and -unaided will stage its own comeback.
So far as I can discover, this view is based on two

The first is that since it has always come

back in the past it will now.

To m y mind, however, this

is not an ordinary depression, it is a catastrophe.


before have we had so many of our industries operating
at from twenty to sixty percent capacity; never before have
we had such a complete international breakdown; never before
have we had to contend with so many rigidities in our
economic structure; never before have we had such a drastic
percentage of decline in our national income; never before
have we had one-sixth of our population destitute and on
the relief rolls.
break records.

It is said that as a people we like to

We have certainly done ourselves proud in

this respect since 1929.

What right, therefore, have we -to—

-6-& 7


to assume that the same forces which pulled us out of depres­
sions in the past will get us out of this cataclysm?


the people who believe this know the nature of those forces?
Have they been able to show that this depression differs
in no wise from previous ones?

Until they have answered

these questions satisfactorily, I must differ with them*

(A* Digression)

The second argument for natural

recovery is that wear and tear

and obsolescence will call for enormous replacements sooner or

We dp not hear this argument so often today.

I was

reminded of it by the recent statement of one of our former
leaders that replacement requirements would result in a boom
by this coming June.

Experience has given answer to this

We can let our equipment run down indefinitely if

we have not the money or the credit to maintain it or the
business to justify it*


-(Page 6)£I would suggest a digression regarding

England to the effect thatpplsny people have pointed to
England as an example of successful progress toward
recovery without the legislative measures adopted by the United States

English ■unemployment in January was greater

than in any January during the past five years.

About one-fourth

of their population is supported by unemployment insurance
and the dole*

The English Government debt represents 2|r years

of their national income against six months in this country*
At the same time, the credit of England was never better as
evidenced by the extreme low interest rate on government

This in spite of the fact that taxes in England

are much higher than in this coimtry*
Thus, from consideration of the English situation we

prove two things -- 1* The English progress toward recovery
is not inspiring and, 2* The statement that the government
credit is in danger is ridiculous in of the English
tax and debt
credit situation under a government/load many times heavier
than ours.

Having unburdened myself on the laissez faire theory, I propose

now to give my critics a chance by turning to the more constructive
part of my address*
I^m|st begin b y giving you ay diagnosis of U rn ilia off tho lwdy
economic, and thé conditions for its sustained health.

As a first approximation let me put the problem very simply.
We have the man power, the raw materials, the equipment and the
technical knowledge to produce vastly more goods and services than
we are producing. What, then, is holding us up? The $ape*±»erb0
answer is likewise simple.

It is lack of effective money demand.

As a community we want all the goods we can produce, in fact we are
in dire need of them. The difficulty is that the people who need
the goods have not the money income out of which to buy them and
many who have income are unwilling to spend it.
Omitting consideration of the Government for a moment, we have
evidence that the bulk^of^h^ge^ M

deposits today are held by

corporations and perhaps wealthy individuals. The money holdings
of the majority of the people amount to a low figure in the aggregate.
The money holdings of corporations, if spent at all, will be spent
on production, equipment and construction. Moreover, again omitting
consideration of the Government, if new money is to be created it
must be by loans which are mainly for the purpose of production
and construction, and not consumption.

We finally arrive, therefore,

-9 -

at the familiar point that in order to have a full and sustained
recovery there must be large and continuous esroenditures by businesses
on inventories, equipment and p






Why are business men not making larger commitments for plant and
equipment? Shy are individuals and corporations not building more
houses» apartments, hotels and office buildings? Why are municipalities
not spending more on public works?

The business men and bankers had,

at least until recently, the same answer in each case,— lack of con­

But the question immediately presents itself, lack of con­

fidence in what?

Is it not really, in the case of business men and

individuals, lack of confidence that increased investment will prove

If, in other words, the costs of building and operation

were less than the probable returns from a building, would speculative
builders refuse to build? Would a manufacturer refuse to extend his
plant or equipment if he saw a likelihood that orders on a profitable
basis would overtax his present capacity? Would a municipality hes­
itate to extend its public buildings if the incomes and property values
of its residents were rising?
We see, therefore, that lack of confidence means the absence
of belief that new investment will prove profitable.
then becomes, why not?

The question

The proximate answer is in almost every case

the existence of unused productive capacity. While existing plant
will be used if/anything at all/can be earned on it, new capital will
be invested only if it is expected to earn more than the going rate
of interest on new borrowings.

Only two industries in 1953 suffered

-1 0 -

from a shortage of pi

c beverages and

gold mining.

in new equipment.

In bot]

The absence of residential construction, on which in the years
1923-1928 some three billion dollars was spent annually, requires
a special explanation.

The excess capacity in housing is low

relatively to that in office buildings and factories and yet there
has b e m virtually no pick up in this field.
in rents.

The answer is again

The decline in people’
s incomes has brought about a decline
Building costs, however, are almost as high as they

were in 1929.

This is due to the maintenance of wages in the building

trade, and the increase in the cost of building materials, sed-tt*
high coat and/vdifficulty of obtaining mortgage money^, • Consequently,
in the great majority of cases, it is cheaper to rent or buy than
to build.

This condition will continue to prevail until either

rents rise or costs fall.
To return to the question of confidence.

It might be said

that although injractically all industries it is not economical to
provide new equipment to meet existing demands, still it would
be profitable to build now if there were assurance that in, say,
two years such new facilities could be used to capacity.

It is said

that this assurance will be lacking as long as (a) the price of
gold in dollars is not permanently fisifed and (b) the Federal budget
is unbalanced.

If uncertainty on these points were removed construc­

tion and equipment buying of all kinds would get Tinder way.

-11Thls argument may be met in two waysj in the first place we .
may questioi^the--reality ef the economic motivation implied» D
Secondly, we may follow out the economic consequences of the
adoption of these two measures»
Conservatives are opposed to both the present character of
our gold standard and to the unbalanced budget for the same reason,—
the possibility of "inflation* under such conditions»

Inflation is

used in many senses but it appears to connote generally among
business men and bankers a condition of rapidly increasing demand
for goods of all kinds culminating in a rapid rise of prices* A
full gold standard and a balanced budget would lessen the possibility
of such a rise of prices, and would make for greater certainty
that the present level of prices and cost would persist. It is
difficult to see why the less likelihood there is of rising prices,
the more eager industrialists will be to extend plant. Yet this
is what in effect the people who advocate the above proposals are

Certainly, an unquestioned gold standard and a

budgetary surplus in 1929-50 did not prevent a decline in business,
and a gold standard and serious efforts on thepart of the Administra­
tion to balance the gudget in 1951-52 did not prevent a further
decline in business.
Let us now consider the direct possible economic effects
of fixing the gold price permanently and balancing the budget.

Suppose that we fix the price of gold permanently and that
then most of the other countries devalue at such points as to
afford them favorable balances of payments with the United States*
We would lose gold.

It is true that at present we possess such

large stocks of gold that we could lose an enormous amount before
we would have to restrict bank reserves.

It cannot, however, be

doubted that the financial and business community would interpret
a heavy loss of gold bearishly. Moreover, it cannot be doubted that
a rapid and considerable fall in foreign exchanges, or rise in the
value of the dollar in terms of foreign currencies, would affect
adversely the prices of some of our big export crops temporarily.
This, in turn, would mean inventory losses, curtailment of incomes
for large sectors of the community and a generally depressing
psychological effect.

By refusing to commit ourselves on the pric®

of gold before other countries have done so we lessen the possibility
of such eventualities occurring.

It is significant in this respect

that England has not even committed herself to the extent that we
Balancing the budget requires either a curtailment of expendi­
tures or an increase in taxes, or both.

Governmental expenditures

are also individual incomes. A contraction of expenditures, therefore,
means other things remaining unchanged, a contraction of incomes
with a probable contraction of the demand for goods, which in turn
involves further contraction of incomes. With each decline in incomes

-1 3 -

the ability to pay taxes and the yield of taxes and money rates
decline* An increase in taxes, in so far as taxes are paid
out of current income which would otherwise be spent,has a tendency
to decrease current expenditures other than public.

This results

in increased unemployment, business losses and decreased ability
to pay taxes.

People who advocate abalanced budget as a recovery

measure are gambling that a certain reduction ih monetary incomes !U 4 a I>
will be more than offset by the increase in Incomes .which will

result from the increased -e

which is expected to follow an increased certainty that prices will
not rise. Lefe me i eyyal tTOST. rgffggDg~lflio advocaty~g~beiInii«e«U.
hnrtgnt ar n r - r ‘i ^J'•'•1OTf^^TíT* ^r,,•p

in monetary-incomesA will

more taan offset byV the increase in

sd. spending -ei
incomes which will result from -4b®- increased^spending
-ef buainoes
mnw-MWn irifiiTTS-AiwlHj which is expected to follow an increased
certainty that prices will not rise. The Administration can hardly
be blamed for refusing to take part in such a gamble.
In my opinion the real deterrents to building are to be found
in the existence of unutilized„capacity and the rap, between costs ,
7 j>

and rents in the, residential..h£lltsii}g J'ield. /The only effective

_______ _

. #



way to decrease unutilizedproductive Rapacity is to pring'about
a large increase in the demand for go6ds of all 1&nds. Should
consumers1 income and expenditures increase considerably, more and
more industries will be able to approach capacity production and
mnMwg*additions to plant would again become profitable. Similarly,

-1 4 -

if incomes increased the demand for housing accommodation would
increase, rents would rise and it ■would again become profitable
to build.
Federal expenditures in the form of relief cannot increase
incomejsufficiently above the present level to lead to an increased
demand for goods sufficient to result in new building.
payment per family is around $25 per month.

The average

Relief expenditures merely

tend to prevent th6 demand for goods from falling below present
levels. We might drift along for years at the present level while
supporting twenty million people at a bare minimum of subsistence.
Increased expenditures on durable goods not only increase
the demand for the products of industries in which the bulk of
unemployment occurs, but also actually increase incomes. Hence,
from the standpoint of recovery, Federal expenditures which result
in an increase in construction are far superior to expenditures
for relief.
My diagnosis of the present situation rims, therefore, in

terms of a lack of effective monetary demand resulting in unutilized
productive capacity and low rents, which in turn act as deterrents
to business expenditures and residential construction.

My prescrip­

tion is government spending on a scale sufficient to increase
incomes and the demands for goods to absorb much of our unused
capacity and to make it profitable for business to expand. Also
by increasing incomes I would hope to bring about a rise in rents
and thus make it again profitable to build.

-1 5 -

You may object that we have tried this method and that it
has failed.

But have we really given this method a fair trial?

If you have had any experience with priming a pump you will know
that a little trickle of water will not do the trick. You most
prime vigorously if you »ant the pump to start pumping on its own

Our federal pump priming operations may have appeared

large absolutely, but actually they have been little more than a
trickle in relation to the size of the pump.

Deducting refinancing

operations, our federal pump priming deficit, that is, the amount
over and ahove our revenue which we spent to increase incomes,
amounted to only about three per cent of the national income of
1932, four per cent in 1933, and probably very little more of the
national income of 1934.
I think that the opposition to the pump priming theory can
be largely attributed not to the fear that it would be ineffective
but that it would be too effective, that in other words it would
lead to inflation, (Sinee)inflation means a state of affairs in
which for a considerable period incomes are increasing much more
rapidly than goods can be produced so that prices are rising sharply*

(ajMU«iaaa^at the present time there is^enormous slack in our
productive system so that increased incomes couldbe met for a
donsiderable time by an increased output of goods^inflation is to
be feared only after we have achieved recovery.
Do pump priming operations by the government really expose us
to the danger of inflation?

I think not.

In the first place,

-1 6 -

priming operations will continue only ao long as the pump needs priming.
They will come to an end considerably before our system is working at
full capacity, ( in , this respect they differ fundamentally from the deficit
incurred in war financing, when the deficit increased steadily long
after we had reached the limits of our productive capacity.] In the
second place, the Reserve Administration can again assume its role of
a compensatory mechanism if total expenditures of the community increase
too rapidly.

There can be no question of

Llity to arrest the

growth in the community* s supply of money. Jknhayc two and a half
billion dolllars of securities which

JU >

can, sell and in this way take

excess reserves away from member banks, jle Save the authority to raise
reserve requirements to any height the situation requires.

In addition,

the Treasury can transfer balances from member banks to the reserve
banks, and in this way deplete member banks’reserves.

There are still

other ways in which expansion can be controlled.
There can be, I think, no question of .¿ar* ability to prevent
recovery from becoming inflation, and I assure you that there is no
question of the Administration’
s desire to promote stability once
recovery has been fully secured. Jfii5«*« not, in other words, like a
driver of a motor car who keeps his foot on the accelerator all the
time. When the grade is iteep we do not hesitate to use the accelerator.
When, however, the car has gained sufficient momentum we shall not
hesitate to apply the brakes.

For my own part I should much prefer a

driver who varies his action according to circumstances than one who
continuously uses the accelerator or one who continuously uses the brakes.

-1 7 -

I find that I have devoted so much time to my
answer of the question, BHow can recovery be achieved?”
that my answer to the question, wHow can recovery,
once achieved, be translated into a period of sustained
prosperity?" must be brief*

Fortunately, I need spend

no time in examining the views of my laissez-faire
friends on this question, since their position is purely

it cannot be done.


private enterprise we will have


may very well he right but I will not concede the val­
idity of their views uhtil we have had a favorable op­
portunity to work for business stability, and have
I believe, however, that there are means by which
we may hope to achieve stabilty.

Since it is the un­

guided profit motive which intensifies upswings and
downswings we must therefore look to agencies which
are not activated by profit considerations and hence
may serve as counteracting or compensatory forces.
Two such agencies are the Government and the Reserve
For the maintenance of stability, which to my
mind is a necessary condition for the maintenance of
capitalism, I should like to present for your con­
sideration a three-point program.

First I suggest use by the government of its
taxing power to lessen the inequalities of income, since I
believe that maldistribution of incomes Increases our sus­
ceptibility to booms and collapses.

Secondly, I think that

the Reserve Administration, if given adequate powers, may,
through its control over the money supply, Influence the rate
of expenditures and thus act as a compensatory agent*


I would look to the Government to counteract big increases or
decreases df expenditures on the part of the coiamunity by
varying its own expenditures*
I went into my philosophy of monetary control at
some length in my address at Columbus, and I shall not devote
more time to it here«

In the course of my talk tonight I

have already discussed variations in government expenditures
as a c ompensatory device*

I shall therefore confine my

remaining remarks to the d eslrabijity of using the taxing
power to lessen the maldistribution of incomes and in this
way to promote economic stability.
I shall begin with the statement that if money
is not being spent it is being hoarded*
this is*

Let us see why

Spending may take place broadly on two main classes


of goods, —

19 -

consumers* and producers*.

If money is saved,

it is expected to be spent on producers* goods.
not so spent, it is hoarded«

If it is

It is not difficult to show

that the decreased spending during the depression has been
primarily on producers' goods.

Money saved, in other words,

instead of exerting a demand f o r producers' goods, had gone in
part into idle balances.

I think it is fairly obvious that

the holding of idle balances by the poor is not quantatively

The decreased spending by the poor ean be attri­

buted to their decreased incomes*

The serious hoarding is by

the wealthy and by large business corporations.

The balances

of these groups are normally spent on durable capital goods and
at the present time, for various reasons, there is a disinclina­
tion to invest in such goods.
It thus becomes evident that the emergence of a lealthy
¿n v is

T p d -u c s a w

class and the rise of large corporations have inereased^in which
incomes were more evently distributed and in which corpora­













would be spent for consumers* goods and a smaller proportion
on durable capital goods, and it has been demonstrated again
and again that the money demand for consumer goods is far more
stable than for capital goods.
The inequality in incomes in this country is not generally

In a recent study by the Brookings* institution,

entitled "America's Capacity to Consume", it is stated that
in 1929 one—tenth of one per cent of the families at the top
received as much as 42 per cent of the families at the bottom
of the scale.

It is obvious that only a small portion of the

incomes of the one-tenth of one per

cent is spent on consumer

It is for the most part saved.

If this saved money is

not spent on producers' goods it is not spent at all. The
consequence is an increase in unemployment and reduction in
There is still another reason why I think it is desirable
to secure a better distribution of income. Tou will remember
that I stated that capitalism will be judged not only by its
ability to satisfy the material needs of mankind, but also by
its ability to satisfy them in an equitable fashion.

Can be

possibly say that a system that in a prosperous year allocates
to one-tenth of one per cent of the people as much income as
it allocates to 42 per cent of the people is an equitable

I do not think so, and I cannot see how the 42 per cent

w i U long continue to think so.

In conclusion let me summarize my views very briefly.
I see nothing in our economic organization to lead me to
believe that business stability will ever come about by itself.
I think that without a fairmea^urQ of stability the system
will not survive.

cu .< 4

w y' k Ju & ty T s

I hope.thatthe inherent instability of
capitalism may be corrected by conscious and deliberate vise

of three compensatory instruments, taxation, varying governmental
expenditures, and monetary control. You as capitalists have
everything to gain and nothing to lose from the successful
developments of such controls.

It is to your own enlightened

self-interest, and I have never spoken with more earnest conviction,
to work for the establishment and success of compensatory controls.
If they are not established or if they are not successful in
achieving economic stability then, as surely as I am standing
here, you will not hpve compensatory but direct controls in every
important sphere of economic activity.
I am not proposing anything novel or completely untried.
As you know, we have had a, degree of monetary control since the
war. We never permitted expansion up to the limits of our gold

We have had a degree of progressive taxation and in­

heritance taxes. We had a big surplus up to 1930 and a deficit
since. What is new in what I am proposing is that these factors
be coordinated and consciously directed toward the end of promoting
business stability.


It is, of course, possible that both my diagnosis and my
prescriptions are mistakes* No economic analysis is capable
of cpnclusive demonstration* .All I can say, in defense of mr views« , *
U + 4 J L . c r\H ^ U > -^ X u ^ ^ v ! (U^J( vkxulA
is that chey represent^iho-hnpdriBt Vlnri of hwrfl
.,~,> I believe

CL. Ka A - t j 4 -C fU U tu * *

I have the right to ask my critics that they also give real thought
to our problems and consideration to the altemativei^onfronting

It should be evident by now that simple maxims and rules of

thumb are not sufficient.

Our society is a living, growing,

changing and complicated organism.

One thing only we can be

certain of and that is the continuance of change. All of us
who have common objectives may hope by intelligent understanding
and action to influence change in the direction we desire.


we fail to recognize our unity of purpose and adopt unintelligent

obstructionist tactics, we will inevitably hasten

the very changes we seek to avoid.