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It is more or less futile to seek the "causes11 of a depression if
in so doing one expects to be able to discover an effective remedy*
Regardless of what are the immediate precipitating factors in starting
a downswing in business activity and the curtailment of production and
employment, it is not long until a large number of forces combine to
intensify the difficulties with the result that a period of deflation
sets in which tends to cumulatively destroy income, production, and the
value of securities and real property*

Under these circumstances the

former equilibrium soon becomes so far removed that to attempt to
correct the initiating causes of dislocation is worse than useless.
While it is difficult to separate all of the forces which enter
into the process of deflation and to quantitatively assign to each its
part in furthering the process, there can be little doubt but that once
a depression is under way monetary factors assume a dominant role in
determining the intensity of downswing and the lengths to which the depression will be carried*
This situation is particularly true in the United States where we
have a tremendous productive capacity, an efficient labor force, and
great natural resources*

Our domestic market is large and we are not

dependent upon foreign trade for our economic well-being to nearly the
extent that certain other important nations are*

Thus it is little

short of criminal to allow a situation to develop in which millions of
our population are unemployed and living on a scale that barely covers

- 2 the minimum for existence while the factories and resources, to produce the goods that Americans are so anxious and willing to consume, are
closed and unutilized.
Strangely enough under these conditions a naive philosophy has
developed among many economists and business men.

They tell us that we

are paying the penalty for our sins of speculation and recklessness in
the years previous to 1929 and it is only by hard work, abstinence and
saving that we can pull ourselves out of the current difficulties.


a philosophy would have been appropriate in an economy of limited productive power.

If there was a scarcity of capital with which to convert

our natural resources into goods for consumers or if we lacked a skilled
labor supply or sufficient natural resources, then the only way to increase national income would be through new inventions, the placing of
a larger part of current national income into the production of new
capital goods and by greater effort in productive channels by the whole
We are in a situation in which certain monetary factors are present
that create an impasse of business stagnation
be lifted by drastic and sustained action.

from which we can only

This situation is featured

by a low volume of money which is immediately available for expenditure.
Bank deposits are greatly shrunken from what they were in the period of
business activity prior to 1929.

In addition the deposits which are in

existence are not being utilized and remain so far as the economic system
is concerned sterilized by the unwillingness of their owners to use*them
either to purchase goods and services or to place the funds into new investments which would indirectly go into the hands of business men to be

- 3 spent for materials and labor.
This concentration of deposits into a relatively small number of
inactive accounts was rather strikingly brought out in a study made by
the Federal Reserve Board for fey 13, 1933, in anticipation of the
inauguration of the Federal Deposit Insurance Law.

This study showed

that 45% of all deposits in member banks were held in slightly over
V46,000 accounts, or l/lOth of 1% of all deposit accounts.

These figures

include both time and demand deposits and there is no information as to
how demand accounts would appear separately.

However, it is probably a

safe guess to say that demand deposits would show a similar concentration.
Thus the problem at the present time would seem to be chiefly that
of getting an increase in the money supply of the country v/hich would be
available for spending and of increasing velocity of existing deposit

One possible method of attaining these ends would be to have

an increase in the volume of loan expenditures voluntarily made by individuals and banks.

It is with this in mind that certain business men

and economists direct their attack at the policies of the Federal Government.

They maintain that to bring about new investment the Govern-

ment must re-establish confidence on the part of investors by authoritatively ending uncertainty as to the monetary system of the United States,
by relaxing certain restrictions upon business, thereby bringing about
greater hope for business profits in the future, and by halting the
greater expenditure of public funds and balancing the budget*

In other

words the Government should retire to its alleged former position of
simply protecting the nation from external enemies and being the referee
in internal disputes among its citizens in civil and criminal courts.

- 4 Above all, however, do they want the Government to use its power in law to
protect private property and vested interests.
Unquestionably there exists the possibility for a great boom in
so far as the financial set-up is concerned.

The banks are loaded with

excess reserves and there is the possibility that Governmental and Federal
Reserve action can increase these reserves to an appreciable additional

Also it is true that once you have a revival of business acti-

vity the process tends to become cumulative and that as business profits
increase there might be a great increase in the need of working capital
by industry and a greater demand for much delayed repairs and improvements. .It might be that much of this need would be met by the use of
corporation cash balances which tend to increase during a period of depression, and this would mean that there is an actual increase in the
effective income velocity of money for the funds have been in effect
sterilized before revival came about.
Although it is theoretically conceivable that the process of recovery might well start and work out along these lines there are many
indications in the present situation which lead one to believe that the
start will be hesitant and that there will be many set-backs and that
these delays will cause greater liquidation and losses of confidence
before any marked improvement in business will be noticed.

It is

difficult indeed to know exactly what is meant by "confidence".


is a term that is used continually in conversation and in periodicals
and business journals.

Certainly different people in the country have

different ideas about what the word irieans. What increases the confidence of one individual might very well .decrease the confidence of

So far as business men are concerned, and they are the ones

- 5 who will have to actually take the responsibility of putting funds out
into the hands of spenders, they become confident whenever there has
developed a substantial volume of business»

Certainly such an expansion

would have to already take place or at least be definitely in the offing
before they would increase their commitments for goods and labor to take
care of enlarged production and distribution of goods.

Certainly it is

necessary to increase spending from one source or another before such
an expansion of business activity can take place and business men will
regain confidence.

What confidence means to bankers is a question which

is somewhat difficult to analyze, but it seems to me that fundamentally
bankers exhibit confidence when business is making profits and therefore bankers are willing to make commitments if there appears good
prospect of loan repayments.

Here again it is only after business acti-

vity has picked up, that confidence is developed and bankers are willing
to put out funds which will increase the loan expenditure of business
and therefore increase the amount of funds which go into the hands of
individuals who will spend them.

Consumers who might increase their

indebtedness to purchase goods and services likewise have confidence

when there is an increase in either their current incomes or when there
is an appreciation in the value of securities and property which they

The problem appears to be almost insoluble when you come to con-

sider various individuals who are looking at the situation from what,
of necessity, must be a narrow point of view.
However, the situation appears quite different when the Government
looks at it*

The Government can realize that it is the economic process

as a whole which is important and that the only way to increase the gen

- 6 eral income of the country as a whole is to increase spending*


manfs expenditure becomes another's income and for the community as a
whole to curtail expenditure is fatal from the standpoint of developing economic prosperity*

The Government may have many choices as to

how their funds shall be spent, but certainly there appears to be no
choice at all as to whether or not the Government should spend money
in one way or another which will increase the income velocity of money
for society as a whole.

This money put out by the Government will be

actually new money if the financing operations are handled properly
and an expenditure of a given amount will tend to turnover two to
three times in the course of a year in working through the economic
system and thus national income will be increased to that extent.


such an increase takes place then it seems to me there is a possibility
that private business profits will be increased and that there will be
an increasing demand for loans on the part of business enterprises or
at least business enterprises will start spending part of their cash
balances to increase their volume of sales.

In other words, it is at

the later stages of a period of revival that private business will
come forward with large demands for accommodations and only in such
periods will there be any pressure against the loaning limits of the
banking system and hence a general tightening of money rates in lieu
of possible Federal Reserve action or other developments which would lead
to a contraction of member bank reserves.
If it is agreed upon that a spending program is both desirable and
necessary it should be embarked on on a large enough scale so that there
will be a rapid and cumulative effect felt by the economic system.


with initial expenditures of say 5 or 6 hundred million dollars a
month if sustained long enough, the secondary movement of these funds
into "business channels would raise the general level of income for
the expenditures,
the nation as a whole by 3 or 4 time?/ and as the process cumulative the necessity of large expenditures would be decreased as labor
would be drawn into private business fields.

However, as this happens

the Government should not withdraw entirely but should keep up expenditures so long as there are an appreciable number of unemployed.


course there are quite obvious difficulties in such a spending program
especially when you attempt to get useful types of public vrork done.
However, it seems to me to be more essential that the money be spent
in large volumes then to worry about how the spending is done for if it
is hesitant and in small volumes the effect upon bringing in private
business will be lost and the money might/as well be thrown away.
The problem immediately arises as to where the funds are coming from.
Particularly is this point brought up in the present situation, and when
the Government bond market is looked at the orthodox will tell us that
it is impossible to push more securities out into the hands of -unwilling

This problem seems to me to be of little importance.


have powers at our dispose! to support the Government securities market,
and more important is the fact that if such a spending program is carried
out we can expect that the Government security market will improve.


has certainly been the history in the immediate past in the United States
for it is when spending is going forward and business activity is consequently improving that the Government bond market becomes stronger.
Likewise, it has been the experience of Australia and England that it is

- 8 increasing business activity that gives strength to the Government bond

Thus we could gamble upon this developing again in view of the

large holdings of excess reserves and additional funds by banks.


ly if business were improving, banks would feel more willing to place
these funds into the Government bond market.

Thus if we start out using

existing Treasury balances to meet the demands of the program and do some
immediate financing in short term obligations the expected improvement in
business would probably assure a revival of the Government bond market
generally so that later financing would almost take care of itself.
As a long run proposition there need be no particular worry about
the meeting of the debt which would be incurred because as national income
is increased as a result of these national spenaings the budget could be
brought into balance and the debt in part retired by the revenue which
would accrue the Government from the existence of a very much increased
national income.
It seems to me that in order for a program of this type to be put
over it must be sold to the country by appropriate publicity. • With this
in view the President might announce that the Administration has been
making a survey of the results of its program, which admittedly was one
of experiment, and has decided in view of experience that the program has
lead to the halting of the downward trend of business activity and national income.

However, the gains have not been as large as had been expected,

mainly because an offset has occurred in private loans and investments
thus curtailing a large enough increase in the monetary supply, end because business activity has not increased rapidly enough to bring in the
unutilized funds which are held by corporations and private individuals.

- 9 The Government is intent upon increasing money incomes of the
country as a whole and it proposes to do this by guaranteeing employment to those who are capable and willing to work.

He could then point

out the effects which are to be expected from governmental spending,
©Jong the lines which Keynes discusses in the pamphlet entitled "The
Means to Prosperity" published in 1933 and pointing out as Keynes1 does
that as national income increases the necessities of further Governmental expenditures can be expected to decrease, while governmental revenue will increase with an enlarged national income.

This promises a

balanced budget in the not distant future and this prospect should allay
the apparent fears that the government will be unable to meet its obligations, a view which is given such wide publicity in conservative journals.
In analysing how the necessary funds are to be obtained the President can point out the nature of money creation by the commercial banks
of the country, and state that Government bonds purchased by commercial
banks provide a sound type of asset upon which to increase deposit liability and hence effective money supply*

He might also point out that the

banks have nothing to fear by such purchases inasmuch as they can obtain
funds on such securities from the Federal Reserve Banks at par and that
therefore Government bonds have in effect the same value as currency
which is at par.
I see no reason why he might not pay lip-service to the effect that
there 'is no intention to destroy legitimate profits and in addition to
say as a matter of policy that if the banks cooperate in this program
there will be no so-called currency inflation, nor is it the intention
of the Government to further devalue the dollar in terms of gold.


- 10 ever, he should say that if there develops attacks upon Government
credit in the future or if certain bankers and other individuals attempt to hamper the Government program by adverse operations in the Government security market, furtive or otherwise, the Government is not
going to permit its program to be obstructed or be dictated to by
private financial interests.

If it appears that such is the case there

is but one course which the Government can take in the interest of the
public as a whole and that is to fully utilize v/hat has always been
recognized as a primary prerogative of Government
the issuance and value of money.


to control

It is only a historical accident that

the money supply of the country has become concentrated in the hands of
private interests through the development of deposit banking, and the
Government is going to see to it that private interests operate this
money system in a fashion which is in the public interest or else take
it out of their control.