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7 3 0 FIFTH A V E N U E October 13, 1950 Mr. Marriner S. Eccles Federal Reserve Board Federal Reserve Banks Washington, D. C. Dear Mr. Eccles: I read in the papers abstracts of your speech in Chicago. It sounds very interesting, and I shall appreciate it if you will send me a copy. It is very gratifying and encouraging that men like yourself should be so outspoken, and I also admire the stand taken by the Federal Reserve Board. I can't say as much about the American Bankers Association. You may be interested in the following material which please consider confidential: 1. My letters to Earl Bunting of the N.A.M. and Charles Wilson of General Motors regarding the General Motors contract. 2. An exchange of correspondence with Mr. J. Howard Pew. 3. A letter to Earl Bunting dated October 3rd. 4-. A letter I addressed today to Mr. George Terborgh. Any comments on your part will be greatly appreciated. Philip Cortney ; if Ends. October 20, 1950. Hr. Philip Cortney, 730 Fifth Avenue, New York, New York. Dear Mr. Cortney* It was thoughtful of you to write me on October 13, relative to my recent speech in Chicago before. The Coopera tive League of the United States. I am always glad to re ceive comments on my addresses or other public utterances. I like to know what the reaction is. I am glad you approve of my outspoken recommendations to those attending the League*s Biennial Conference Banquet. Ity speech was extemporaneous, but I did issue a press release on it, which covers most of the points X brought out in my address with the exception of taxing cooperatives (on that I simply took advantage of the opening remarks of Mr. Voorhis who introduced me). Thinking you may be inter ested in seeing it I am enclosing a copy of that release. I have written an article entitled "In Defense Of The Dollar", which is to appear in the November issue of Fortune magazine. As I believe you will find it interesting, I will have a copy sent to you as soon as it is published. I am trying to get my desk cleared prior to leaving for a trip West and, therefore, have not had an opportunity to go over the material you enclosed in your letter. I do not expect to return to Washington until the latter part of November. I am asking one of our Research men to go over the material and let me have his comments. Sincerely yours, M. S. Eccles. Enclosure VEsdls COPY June 1, 1950 Mr. Earl Bunting National Association of Manufacturers 14 West 49th Street New York CityDear Earl: This is an unpleasant letter for me to write, but as you know, I have dedicated my life to the defense of the individual competitive system which is, in my humble opinion, the only possible basis of human liberty. Besides, the first spiritual rule in my life is to be intellectually honest. Drt Nourse, who resigned as Chairman of the Council of Economic Advisers mainly because he could not accept "inflation as a way of life”, made, on Friday, May 25th* the following statement in a speech before the Tanners’ Council of America, regarding the most recent General Motors union contract: (X am quoting the "Herald-Tribune ") \ "’When a multi-million dollar corporation makes a five-year 1 contract calling for annual pay raises and Including an | escalator clause which paves the way for further increases if inflation pushes the cost of living still higher', he said, *1 think it is obvious that still another inflationary force has been introduced.*" I happen to have heard Dr. Nourse because I was myself a speaker on the same program. He also said that General Motors thinks it bought peace, but it only bought appeasement. Dave Boone, in his column in the "World-Telegram and Sun" of May 26th, 3aya the following: "Here’s the big question: How can a small businessman keep an auto and meet the scale set by General Motors?" *** Before I proceed, I wish to make clear why I am writing this letter. General Motors is a pace-maker and by its very size what it does or doesn't do is bound to influence our economy in more than one way. Therefore it has a great social responsibility, both toward our entire society, and particularly toward the business community. While I am willing to admit that I may be wrong, I shall state immediately that in my opinion General Motors did something very damageable to our economy. But as I Just said, I am willing to admit that I may be wrong. What I therefore propose is that the economists of the N.A.M., the U.S. Chamber of Commerce, and the National Conference Board, together with General Motors economists and others, if necessary, should examine the entire issue with objectivity. Should they confirm my strictures and apprehensions (already voiced publicly by Dr. Nourse), then it will be our duty to organize a meeting of businessmen in order to decide how to face the situation, because what is at stake is neither more nor less than our free enterprise system. - 2 - Everyone agrees that the present demand for automobiles is not normal. In other words, it is not a result of normal market processes. The great demand for automobiles is due to a considerable backlog of demand because of the war, and to a redistribution of income also because of the war (which resulted, accord ing to Mr. Alfred Sloan, to about 35$ more people than in 1939 able to buy new automobiles). On top of that, we have an additional demand for automobiles due to the relaxation of conditions for purchase on credit. -<» ** ** As I already said, X share the view that General Motors has special social responsibilities because of the influence of its policies cm the rest of the economy, and particularly on the relationship between management and labor in our "laboriatic economy". While this responsibility is theirs at all times, it seems to me that poet-war conditions have made this responsibility still heavier. (This holds true of other large companies enjoying abnormally favorable conditions due to the backlog of demand accumulated during the war). If the expression "business statesmanship" has any meaning (and I believe it has), this was the occasion to give unmlstakeable evidence of it. I am afraid, however, that General Motors has taken the decision without weighing the consequences on: (1) (2) the economy. The consumer. The balance of the economy. It has added to the instability of (3) It has added to the stress and strain between management and labor in the great number of small and medium size corporations, particularly in indus tries making soft goods and providing services. I wonder whether the General Motors officials realize the pressures and worries created for the management of these corporations as a result of their last labor contract? General Motors may be able to increase its productivity and wages every year, but what about the great majority of corporations where these increases in productivity are impossible, for one reason or another, and who cannot pass on to the consumer rises in costs because of competition? (10 As Dr. Nourse said, "it has added a new inflationary force in the economy." M Wu I submit the above remarks in all earnestness, and trust that we shall give to the situation created by the General Motors contract all the attention that it deserves. As you know, I am for fighting the government or unions when they do things detrimental to our economy or to the survival of the free enter* prise system, but I submit that self-discipline begins at home. Yours most sincerely, Philip Cortney : if COPY October 3> 1950 Mr. Earl Bunting National Association of Manufacturers 14 West 49th Street New York City Dear Earl: "The Wall Street Journal" of September 25th carried an editorial under the title "Secretary Tobin Advises Labor" wherein it is stated: ".....that the worker must be compensated in full for whatever rise in the cost of living has occurred since bis last previous wage adjustment would be a questionable demand under any conditions. Under existing conditions - actual war going on in several corners of ahe world and our own country preparing itself against the contingency of a third world war - it is an impossible demand". As "The Wall Street Journal" says, a contract tying up wage rates and cost of living would be questionable under any conditions. A contract like the one of General Motors is even more questionable because it grants an annual increase in wages for Increase in productivity without any certainty that ^here t?£X1 be each increase in produoti'srity. If, under the pressure of labor unions, all the employers granted their workers the same contract as General Motors (and why not, with such an example in front of them?) can there be any doubt that we would create a great pressure for inflation, the more so as the prices of farm products are tied up, by the parity formula, with the industrial prices. It seems to me we ought to come out with a recommendation that all labor contracts tying up wage rates to the increase in the cost of living be suspended, at least as long as dangers of inflation due to our rearmament are with us. We should also recommend the cessation of the farm-prices support and loans on grains. Sincerely, Philip Cortney : if This article is protected by copyright and has been removed. The citation for the original is: Mills, Frederick C. “Technological Gains and Their Uses: A Review of Some Recent Economic Changes.” Science, February 28, 1947, pp. 220-223. COPY - CONFIDENTIAL June 26, 1950 Mr. Charles Wilson, President General Motors Corporation General Motors Building Detroit, Michigan Dear Mr. Wilson: Your letter of June 9th reached my desk while I was in Paris attend ing the meetings of the I„C,C. where, among other matters, we discussed the question of cartels and monopoly. When France was ruled by a noble cast they accepted the maxim "Noblesse Oblige". I wish to think that those in our society who wield "big power will accept the obligation which such power entails. Otherwise I am afraid that not only will it become an Immoral society but it will not survive. Because I darned to criticize your contract with a big union you call me a classic reactionary, an igaoramus. and by some specious reasoning you throw me together with William Foster as an enemy of our free society, I will confess that I am rather at a loss to explain your cold-blooded •vehemence. If you are right, there is no reason for you to get irritated or angry at my criticisms* If your are wrong, as I believe you are, then no amount of vituperation will stop the march of truth. "Seek and ye shall find". I wish to point out again that while I was taking the position that your contract with the union was detrimental to our economy I was admitting that I may be wrong. Therefore the only thing I requested from the N«A.M. was an objective study to be made by the economists of the N.A.M., the U. S. Chamber of Commerce, the National Conference Board, General Motors, and others, if necessary. If you think you are right why should you object to such an idea rather than wel come it? It was my misfortune that William C. Foster should also attack your contract with the union, on completely different grounds than mine. May I ask, howe-ver, whether you are happy with all the company you got in praise of the contract? It seems to me that if I were Charles Wilson I would prefer the approval and praise of a man like Dr. Nourse rather than that of Keyserling. There is nothing wrong with Dr. Keyserling except that I doubt his knowledge of economics and particularly of monetary problems. Be it said in passing, I will confess at this point my curiosity to know whether Dr. Rufus Tucker is in sympathy with the terns of the General Motors - C.I.O. contract. * * * I keep maintaining that one of the profound reasons for our wrong thinking in economics is the lack of an objective and comprehensive diagnosis of the 1929 depression. It is not, as your surmise^ the classical reactionary -2who loads the grns for the copmunlsts, but the ignoraai in economics and monetary problems, the politicians and some intellectuals, tfafortunately the inadequate diagnosis of the 1929 depression is feeding all present day economic fallacies. It is my conviction that, among others, ve have not yet assessed correctly the various incidences of the automobile on our economy, and particularly on its stability, or rather instability. This is why I Insist that this may be a good occasion to examine the entire question of the policies of the automobile industry and its repercussions on the economy. The president of a great company manufacturing automobile accessories wrote to me recently: "I m s particularly interested in the quotation from Dave Boone: *Beress the big question: How can a small businessman keep an auto and meet the scale set by General Motors? 1 I think both:c; * you and I can agree that there is no such thing as a cheap car in the United States today. My guess is that next yearts cars will cost more and finally the little fellow will find himself on foot or hanging on the back end of a bus." I am also sanding you enclosed a photostatic copy of an article by Professor Frederick C. Mills which appeared in the magazine "SCIENCE" on February 28th, 19V7 under the title "Technological Gains and Their Uses". For the pur-' pose of this latter X shall only quote tlie following abstracts from this article: "....The one prime method o>f transmitting the benefits of in dustrial progress to consumers at large - prompt price reduction conasmensurate vith declines in real costs - has not as yet been adopted as generally or applied as broadly as the necessities of a dynamic industrial system require. Greater advances than those of the last 50 years impend, and a productivity increment of massive proportions is within our grasp, but this increment can be realized to the full only if it is widely shared. The 1920*s and the 1930*s - both periods of great technical improvements - provide illuminating examples of productivity gains restricted too narrowly in their incidence. In widely different ways they represent paths ve must not follow again. One lesson to be drawn from the records of industrial change in the I6iited States in the 20th Gentury, with its peaks of extraordinary achievement and its valleys of depression, is that in a modern industrial system diversion of the fruits of advancing productivity to restricted groups brings them only short-lived benefits and curtails the gains accruing to the economy at large. If ve are to combine economic progress with a greater measure of industrial stability than we have yet achieved, we must learn this lesson and have the wit to apply it.” -3 Professor Frederick Mills* conclusions are in direct opposition to your ideas on the question of wages, productivity and prices as expressed in the speech you have sent me. The increase in productivity of the workers in General Motors is not due merely to the workers in General Motors or not even to the efforts of General Motors alone. Fundamentally the increase in productivity is the result of the efforts of many people in various fields of endeavor. The great problem in a mass-production mass-consumption economy is how to translate the increase in productivity, which is exceptionally great in some highly-mechanized industries, for the "benefit of all the consumers. The answer you provide to the question would cot only hamper the smooth working of our economy, "but would, create monetary problems for which there would he no solution in an international gold standard system (I assume, of course, that you stand for sound money). Your answer to the problem of wages, productivity, prices may perhaps redound to the benefit of General Motors and its workers, but to the detriment of the rest of the economy and the consumers. * * * The automobile is an instrument of necessity, of pleasure, and also a great incentive factor for all those who desire the possession of an automobile. Therefore Ford certainly had the right idea when he was striving for lower and lower prices for his cars, In view of the Importance of the automobile industry in our economy, it raises the following questions, all related to the recent G,M#-C«I,0, contract: 1, The automobile industry, like most others manufacturing durable goods, pays high wages, to both its skilled and unskilled workers, as compared with the wages in other industries. Has this fact any effect on the exchange of goods and services in the United States? In other words, is it not true that a great mass of the lower-paid part of our population are unable to buy the production of the higher-paid workers at all, or on such terns that it heavily mortgages their current income? As I stated before, the people have come to desire an automobile whether they can afford it or not. What is the effect of this structure of wages on our economy? 2 , The increase in productivity is possible mainly in industries who enjoy technological progress. It is my guess that perhaps only ten to fifteen million workers can benefit directly from increases in productivity. The other workers, who are also consumers, can benefit from the increase in productivity in the economy only or mainly by the lowering of prices. What then is the effect of the General Motors contract on the capacity to buy and consume of other people, not working in industries enjoying technological progress and who buy automobiles, whether they can afford them or not? 3 , In view of the desire of people to possess an automobile is it not true that many people are largely mortgaging their income for the purpose of buying an object highly priced by a coalition of big business and big labor? What Is the effect of this mortgaging of Income on the rest of the econonjy? In the •’New York Times" of Tuesday, June 27th, under the title "WageJSarner Seen as 'Overextended1" one can read the following quotation from a recent report of the Federal Ee serve Bank of New York: "Despite these signs of prosperity, however, banters throughout the district are voicing a good deal of concern about the future. There is a feeling that the average wage-earner is over-extended. The rather spotty situation in -retail trade and the decline in soft goods are generally explained on the grounds that many people have committed so large & portion of their income to monthly payments on mortgages and installment loans for the purchase of durable goods that they have little left over for new clothing.*' h. In view of the psychological impact of a labor contract made by a oompany lilse General Motors, what are the other small or medium-sized manu facturers and traders to do, who, by the very nature of their business, do not enjoy the arises in productivity similar to highly-mechanized plants like the ones for automobiles? 5. Is it not true that a great majority of other manufacturers and providers of services could not enter into a contract similar to the one of General Motors even if they wished to? 6. Is it not true that in a really competitive economy in the final analysis it is the consumer who decides the wages and level of employment if there are no monetary or credit abuses? 7. As Dr, Nourse has put it, is it not true that the five-year contract calling for annual pay raises, and including an escalator clause, is another inflationary force in our economy? Is it not encouraging and fostering infla* tionary monetary policies of the government? What monetary problems would be created by the policy advocated by General Motors on the relationship between prices, wages and production, if it were practical at all for the entire economy? 8 . If General Motors does not bet on monetary inflation how does it know that it will be able to live up to the contract? It is true that the great profit margins and profits made at present by General Motors on the abnormal demand for cars which has resulted from the war gives General Motors a great latitude for increasing wages without increasing prices. But barring inflation it is not difficult to imagine circumstances in which the General Motors*s adopted policy may mean unemployment because it would be unable to reduce prices to the point where the market for automobiles could be expanded. Has General Motors warned the workers that the contract may mean unemployment? -5- 9* . What is the effect on our economy of the huge instalment credit on automobiles? 10 . General Motors, together with other companies, has enjoyed abnormal profits and abnormal margins of profit due to the huge 'backlog of demand which resulted directly from the -war. Does this privileged position not entail responsibilities for such companies as General Motors in regard to thair policies as to wages and prices vis-a-vis the rest of the business community? I am in principle for the least amount of government intervention, provided "bankers end business, and parti cularly the large buBi'-iesses, exercisa economic statesmanship in the conduct of their affairs. I sincerely hope that General Motors will encourage the ITeA.M. to go ahead and study thoroughly the above questions and any others relating to the automobile industry in its relationship to our economy. Sincerely, Philip Cortney:if Enc. cc: Claude Putnam Berman Steiniraus Ralph Robey Emerson Schmidt Martin Gainsbrugh Robert Wason Morris Sayre Wallace Bennett Alfred Sloan Rufus Tucker John Sinclair Otto Seyforth Earl Bunting September 13, 1950 Mr. J. Howard Pew 1608 Walnut Street' Philadelphia 3, Pennsylvania Dear Mr. Pew: Many thanks for your interesting letter of September 13th. I also appreciate your sending your speech "Progress Depends on Freedom" which I have reserved for careful reading over the weekend. Before I tackle the main subject of this letter, I wish to make a few comments on inflation. Fundamentally you are right* but you know as well as I do that the issue is much more complicated. First of all, to have Inflation the increase in money has to be disproportionate to the production and exchange of goods. At all times we need a certain Increase in the quantity of money if only to take care of the increase in population and increase in the volume of production. Of course inflation manifests Itself in increases in wages and commodities, but this fact does not give the clue to the chain of causation* We know monetary Inflation, credit inflation, and even inflation due to the dishoarding of monetary means under some Influence, like, for instance, in the recent panicky buying of people. Furthermore, money inflation is due to governments issuing paper money or monetizing deficit spending, while credit inflation is due usually to activities of business. You state in your letter that you agree with many of my views as expressed in my letter of August 28th to Earl Bunting "with the exception that I would not condemn General Motors and Chrysler as vigorously as you have done, because I feel very definitely that these increases in wages are but the manifestation of an Inflation”. The subject of causation of inflation Is very Involved, as you know, and it is not my Intention to tackle that subject thoroughly in this letter. However, I am afraid you are minimizing the harm done by the General Motors contract which then forced the other companies like Chrysler, Ford, etc., to follow through. 1) First of all, in a buyer's market wherein credit expansion is possible, wage Increases are causative of inflation* This process was com pounded in the last few years by the huge Increase in automobile Instalment sales. 2) When a company the size of General Motors makes a labor contract, with all the publicity it gets, it is bound to affect other labor negotiations and all other wages and salaries. This is one of the reasons why I stress the responsibility of big business and big management. Big business and big management may close their eyes to tills responsibility, but then I invite them to reread the history of the French Revolution. -2- 3 ) The automobile Industry is one of the industries which "benefits particularly from any technological advance. More than half of the working people benefit from the increase in productivity only by a seeping process, and mainly by a reduction in prices. This Is one of the main reasons vhy it Is so important that the greatest part of the Increase In productivity should be translated mainly Into lover and lover prices. In point of fact, this was the secret of the American prosperity until we wenrtj haywire, particularly after 1929* In this connection a careful rereading of Frederick Mills' article which you will find attached to the letter to Charles Wilson of June 10 th, a copy of which was sent to you, Is certainly important and Interesting. 4) ABOVE ALL, the kind of policies adopted by General Motors, and now by practically all big automobile manufacturers, are incompatible with the restoration of an international gold standard, which you rightfully con* sider "sine a11® no*1" if we are to save our free society. The polioy adopted by General Motors Is In fact the one advocated by Alvin Hansen and Sumner Sliohter, and it is possible only if it is accompanied by monetary inflation, as explained by Hansen In his book "Monetary Theory and Fiscal Policy") and in Slichter’s article In the "New York Times Magazine" oh August 13th, and in the "Yale Bevlew", summer issue. *** This brings me back to my letter of August 28th to Earl Bunting. You state in your letter that "there is no magazine In this country which is exclusively devoted to the objective of developing a sound.economic philosphy". You are right, (except, I think, fOr "American Affairs"). However, I submit again that if a magazine, however well written, could save free society, we would not be in the mess in which we are. I also submit that It Is the duty of all of us to try to understand why, despite all the efforts made by organizations like the N. A. M., the U. S. Chamber of Commerce, the Rational Conference Board, etc., the situation of our free society becomes worse every day that passes. I hold that It Is essential, If we wish to act intelligently, to try to understand why the Ideas stemming from Earl Marx and Keynes have taken such a hold of the majority of the minds of people. It is a fact that before 1929 the great majority of college professors, the newspapers, and most of the magazines were writing articles based mainly on Ideas consonant with what you call a sound economic philosphy. Why then, since 1929; have ve seen a constant and accelerated drift toward economic fallacies and wrong thinking In economics? In my humble opinion the answer is not very complicated. The 1929 depression and the large unemployment which it brought about was the crucial event, economic and social, of our times. It Is because we have been unable to provide a realistic, objective and adequate diagnosis of the 1929 depression (and by the way, also, of the 1937/38 depression) that the field of Ideas has been left open to the specious theories of Keynes and to all sorts of monetary cranks, leaving aside outright socialists and communists. 3In my opinion, any constructive program for the rehabilitation of our thinking has to start with an explanation of the 1929 and the 1937/38 depress ions, which, 2 maintain, if properly done will prove that the free enterprise system as such is not the culprit. In other words, our thankless task, if the free society can possibly still be saved, is twofold: 1) To destroy by ideas the ideas which have their roots particularly in Keynes' theories and many distortions by some of his disciples, all to be traced to spurious or specious explanations of the 1929 depression. 2) To constantly set forth sound economic thinking. But the urgent and most important task Is the first one. If you disagree with me I shall be grateful if you will let me know wherein we differ. Yours very sincerely, Philip Cortney : if J. HOWARD PEW 1608 WALNUT S T R E E T PHILADELPHIA 3 September 13» 1950 Mr. Philip Cortney, 730 Fifth Avenue, New York, N.Y. Dear Mr. Cortney: Far be It from me to belittle Hazlitt's column In Newsweek or the magnificent editorials In the Wall Street Journal which Grimes is writing. There are also many other articles found on occasion in other places which are equally excellent; and certainly most Important of all is the great contribution which the Reader's Digest is making to sound thinking. But there is at the moment no magazine in this country which is exclusively devoted to the objective of developing a sound economic philosophy You have asked me to comment on your letter to Earl Bunting. I am substantially in accord with the many points which you bring out in your letter, with the exception that I would not condemn General Motors and Chrysler as vigorously as you have done, because I feel very definitely that these Increases in wages are but the manifestation of an inflation; and the inflation is some thing for which our Government is wholly responsible. The defini tion for inflation is a very simple one - "The Increase in the quantity of money." Hov else could the manifestation of inflation take place unless by an increase in wages and commodities? It is my view that an increase in wages is but a symptom of the disease, inflation. Mr* Philip Cortney - 2 - September 13, 1950 What we must fight for is a free market, but people too apt to visualize a free market much more narrowly than they should. Sometime ago I evolved a definition of a free market as - the free exchange of goods and services at prices which the public is willing to pay - the free exchange of money with a value convertible Into gold - free Interest rates responsive only to the needs of finance and commeroe - and freedom in the market place from intervention by government or any other outside force. Even this definition may be too closely oiroumsoribed but it does cover most of the field. It is impossible* in my Judgment, to save our economy until we can get onto a gold standard* It is equally impossible to save our eoonomy as long as the Govern ment controls our Interest rates. I have outlined four conditions Vrtjre and each one of the four is Just as Important as the other three* There is another point which from a public relations angle has long seemed to me as vitally Important. Today all of the statements of corporations are developed In terms of a depreciated dollar* I hold that no corporation produoes a profit unless it has as muoh property at the end of an accounting period as it had at the beginning. If all of our corporations took depreciation on the basis of replacement and not on the basis of cost, the earnings of our Amerioan corporations would be reduced to perhaps one-fourth of that which is now reported. I am enclosing you a talk whloh I made on the subjeot and would suggest that you read from the bottom of Page 10. Slncerel; JHPtB Enc. _ J. HOWARD PEW l « 0 « WALNUT S T R E E T PHILADELPHIA 3 September 25, 1950 Mr. Philip Cortney, 730 Fifth Avenue, New York 19, N.Y. Dear Mr. Cortney: I have to acknowledge your two good letters of September 13th and September 22d. Let me say at the outset that I very much regret to learn that both von Mlses and Hazlitt seem to lean to the idea that our capacity to produce and the physical condition of our plants are better than In 19^0. As soon as I can get time, I will go to New York and talk this question over with both of these gentlemen, because a year ago von Mlses certainly was in agreement with me on this point. Now, I have no way of knowing of course, and I doubt If anybody else has any way of determining, Just how much goods our American industrial machine can produce. All I know is that this machine is rapidly wearing out and becoming obsol***. It may be true that we do have a larger capacity to produce than we ever had before because we are utilizing a lot of worn out and obsolete equipment. Sometime ago the NAM released a statement to the effect that Industry can produce at least It did in 19^ 0, 50 P©** cent more goods than and then quoted some figures indicating what Industry had invested during the last ^-1/2 years. back from the west and saw this statement, as follows: When I got I wrote Earl Bunting Mr. Philip Cortney September 25, 1950 -2- "I have found among my papers a release of the NAM to the papers on August 13th, in which an effort was made to indicate that Industry had invested a fabulous amount of money in their plant and equipment during the last ^-1/2 years, which now makes it possible to produce vastly Increased quantities of goods. The effect of this release on my thinking was that the American people will be encouraged to believe that industry's earnings have been exorbitant and therefore should be severely taxed; whereas the truth of the matter is that the real economic worth of our American industrial plant today 18 little if anything more than it was ten or twenty years ago.11 You are entirely right when you make the p o i n t t h a t we are living o f f our c a p i t a l . mortgage that home, lasts. A man who owns his own home can take the money and l i v e high as long as i t There are now about 38 m i l l i o n f a m i l i e s in t h i s c o u n t r y , ^>0 per c e n t of whom a r e now r e c e i v i n g checks from the F e d e r a l Government on some pretext o r o t h e r . The Government i s borrowing the money to make good these c h e c k s . That a l o n e w i l l c r e a t e temporary prosperity. But the most important factor, of c o u r s e , is inflation, because under inflation governments can, secretly and unobserved, confiscate a large o r o o o r t i o n of the s avin g s of people by taxinr j them on profits which were never really effected. therefore, has been doing two things: The Government, borrowing huge sums of money - over $200 billion in the last few years - which they have spent largely in this country; and in addition to this they have collected a vast quantity of income taxes from corporations and individuals which were never earned. Under these conditions hpw could the people help enjoying a temporary period of prosperity? Undoubtedly we have been living off our fat. H r. Philip Cortney -3- September 25, o # 1950 Coming back to the question as to whether Chrysler •noul'1 * <*, criticized for making an increase in wages. In this connec tion you say that in a buyer's market wage Increases are causative of inflation. my book, I cannot agree with this statement. According to Inflation is the Increase in the quantity of money. The reason you have a buyer's market is because of inflation; and the responsibility for inflation can be laid right at the door of When there is a scarcity of labor, thousands of small contractors surreptitiously start paying premiums to their workers in devious ways, and the only way the larger corporations can protect themselves is to openly do what the smaller fellows can hide. Higher wages and higher prices in a free economy have the effect of curing the condition which brought them about, because en prices of goods Increase, fewer people buy them and more people produce them. The Government deliberately took us off the gold standard a number of years ago because they wanted Inflation; and then by selling bonds to the banks they created more money, which is inflation. We must not allow ourselves to get the cause and effect confused. High wages and high prices are merely the effecl I have frequently said that high prices are no more the cause of inflation than wet streets are the cause of rain. My advice is to keep hammering at the cause. Let ue fight for a return to the gold standard and for taxes high enough to balance the budget, worthless. C http://fraser.stlouisfed.org/ _ /Reserve H P : BBank of St. Louis Federal otherwise in a few years our money will be Sincerely yours, copy October 3, 1950 Mr* J. Howard Pew 1608 Walnut Street Philadelphia 3, Pennsylvania CONFIDENTIAL Dear Mr. Pew: Many thanks for your very Interesting letter of September 25th« I Just returned from Chicago where I delivered a few speeches to groups of businessmen and financial writers and economists. There Is no doubt that the contention that we are living on our capital, and that our machinery Is rapidly wearing out and becoming obsolete meets with great skepticism; it is therefore very important that we should do something to clarify this matter for the public, the financial writers and economists. In your letter you raise the question "as to whether Chrysler should be criticized for making an increase in wages". If you will be good enough to reread my letter you will find that I was blaming General Motors, and I believe for good reasons. Once General Motors had Increased its wages the other automobile manufacturers could not do otherwise. (This may not be according to the book but It is a fact). You may have read In the newspapers that when Mr. Randell asked Philip Murray to Justify his request for an Increase in wages, he simply referred to what the automobile Industry had done. On top of all I said before, now that we are in a national emergency, when everyone should be ealled upon to sacrifice something for the good of our country, the workers of the big companies, protected by these contracts, will be able to maintain their standard of living at the expense of everyone else. In an editorial in "The Wall Street Journal" of September 25th entitled "Secretary Tobin Advises Labor", the editor says "....that the worker must be compensated In full for whatever rise in the cost of living has occurred since his last previous wage adjustment would be a questionable demand under any conditions. Under existing conditions * aotual war going on Is several corners of the world and our own country preparing itself against the contingency of a third world war * it Is an impossible demand". I submit to you that labor union contracts like the one granted by General Motors Is inflationary, particularly In a country where faro prices are supported and depend on the level of industrial prices (which means mainly wages). If all the employers, under the pressure of labor unltQS, would accept a contract like the ope of General Motors, is It not true that the inflationary effect would be considerable? If only el segment of the economy grants such contracts, as is the case at present, then it is done to the detriment of 'die consumers and of all the other workers. money. You state again that inflation Is the Increase in the quantity of It is true that abnormal monetary and credit expansion is the fuel -2 which matea Inflation possible. If we have to simplify this complicated Issue of Inflation In one formula then I prefer as a short-cut definition that Inflation In prices occurs vhen too much money is .chasing.too ftew goods. Even this definition doesn't satisfy me completely, but Is has at least the merit of Indicating the dynamics of inflation. There is no doubt, I think, that in a seller's market wage Increases are causative of Inflation if there Is a possibility of expansion of credit. Some countries which depend to a great extent on importation of goods or raw materials (like, for instance, Great Britain), can get inflation of prices by a rise In world prices. To a certain extent this Is the case at present because of the boom In the United States and the huge purchases of raw materials. Furthermore, as you well remember, we had Inflation In the twenties in the United States without a rise In prices. There was then no expansion of money, and after 1926 the expansion in credit by the Federal Deserve Banks was really ’’peanuts" compared with what we are doing since. Yet we had as a sequence the worst world depression we can remember. That Inflation was due not only to the aftermath of war, but also to a combination of credit expansion, high profits, high wages, installment credit and speculation. (I don't know whether you remernber a famous series of artioles written by Arnold G. Dana in the "Commercial and Financial Chronicle" in 1928 and 1929 on this subject and predicting the crash without any "ife" and "buts". I consider that series of eight articles so Important for an understanding of many phenomena we are witnessing again at present that I have decided to have them reprinted and circulated). "The Wall Street Journal", In Its editorial of September 27th, "Inflation and the Bankers" says: "....Both bankers recognized that many factors enter Into the price equation....................................... All of this discussion comes down to the fact that credit expansion, so far as it takes place in the commercial banks, is the consequence, not the root cause of rising prices. The major cause, or rather causes, lie in the fiscal policies of the government. The latter Include the management of Its debt and frequent refundings of portions thereof”. You certainly recognize here the famous discussion between the banking and currency school. It is not my intention to discuss the entire subject of inflation, which, as you well know, is very complicated. I even agree that at the present time it may be most Important to put all the emphasis on expansion of money and credit as the cause of Inflation. But you certainly appreciate that In my exchange of letters with you I am not considering what should be done as a matter of "politics" or of Influencing Congress and public opinion. My concern is the future of our free society, which I consider In serious danger, and it may even be too late to do something constructive for its survival. It will require a great deal of unselfishness, Imagination, Intelligence, boldness and courage to do the Job. Unfortunately, many of the big managements, and practically all of the big labor unions are either -3not concerned, or too smug and complacent to worry about the consequences of their actions. I am very puzzled by the statement in your letter that It Is the small corporation vhlch "starts paying premiums to its workers in devious ways, and the only way the larger corporations can protect themselves is to openly do what the smaller fellows can hide". Inasmuch as this assertion conflicts with all my convictions I shall appreciate it if you can tell me where I can get the facts which support your view. "The Wall Street Journal" in its issue of September 26th, carried an editorial "Who Are the Slaves?" in which it states: "What intrigues us is that those whose hearts allegedly beat fortthe small businessman shut their eyes to a situation where they might really be of help. We have in mind the union monopolies. These are very hot in the news now because big union is extracting pay rises from the employers. And how is this done? The union gets an agreement from one of the giant firms of an Industry. Then all other companies I In this industry, including the thousands of small firms, are told “This Is it". The small businessman has no chance to talk about supply and demand for workers, his own sales 1 prospects, the relation of his costs to his prices, or anything else. That so many small businessmen have been able to keep going and even make money in the face of an absolute loss of control over their major cost factor is d.ue to the high level of business the past decade. But there will come a day when prices can't be pushed up to allow for higher wage costs". j Needless to say, I full agree with you oa the gold, standard. When the N- A. M. was that lower prices would follow, which could not be corroborated you were probably the author of it was stated that "wet streets advocating the termination of 0. P. A. stating I remember protesting against this statement, by what was to follow. Now I realize that the N. A. M. ad which I praised so much, wherein are not the cause of rain". If you come to New York maybe you will give me the privilege of your company at luncheon, when we could discuss these questions of mutual concern in greater detail. I doubt that there is much time left for bold, Intelligent, Imaginative and unselfish action on the part of businessmen if we are to save our f*ee society. Yours very sincerely, Philip Cortney.: if J H O W A R D PEW IC O e WALNUT S T R E E T PHILA DEL PHI A ] October 6, 1950 Mr. Philip Cortney, 730 Fifth Avenue, New York, N.Y. Dear Mr. Cortney: Again I have to express ray appreciation for your very excellent letter of Oo+oh^r It seems to me that the principal difference in our thinking has to do with whether the chicken or the egg comes first. As a result of years of study and a lot of research work, which I would be pleased to turn over to you, I have convinced myself that all down through history the real cause of most of the trials and tribulations of humanity can be laid at the door of a desire on the part of one or more individuals in political office of exercising power over the lives and activi ties of their people. In order to accomplish this purpose they reduce the people to dependency by giving more of them lore things. To rpt ~ ->n*y t^ * r ^orar^ 1 ~ ~ u r p o o ?», they resort to inflation, which is nothing but the increase in the quantity of money. If the quantity of money had not been increased, all of the other ills which we complain about could not have been effected. The greatest book ever written on economics, opinion, entitled, is one which was brought out by von Mlses last summer "Human Action11. things up together, Cme, in my and develops the source in a way which, is Incontrovertible. http://fraser.stlouisfed.org/ thor~-r;hly digest Federal Reserve Bank of St. Louis In this book he ties all these to It took me almost 50 hours to it but it was worth the effort.________________ Mr. PEHTIpCort!^ -2l~ October 6, 1950 I am delighted that vou are making some speeches th a view of getting some economic sense into the heads of some of our business friends. Illness at home has prevented me from leaving the city for seven weeks; but Just as soon as possible I will come to New York and w i l l be very happy to sit dovnand talk some of these questions over with you. C i'HP :B October 12, 1950 Hr. George Terborgh, Ke^eerch Director Machinery & Allied *roducts Institute 1236 20th 3t. 1.V* Vashlngton, D. C. Deer Georgei Many thanks for your letter of October 10th. Vithout having such accurate data to support ay conviction I believe that our capacity to produce la larger than ever, and tbit the greatest pert of our equipment la probably la good condition, if not la all oases up to date. 1 think, however, that there la another question as vital and important for our country. The labor organisation* partieult-rly contend that our economy la la better shape than ever, and that the standard of living of everyone Is higher despite the huge increase in the national debt, and despite the wastage of ver. 1 think that the capacity to produce has increased since the war and thst the atandard of living is higher for the largest acpwnt cf the population for the following reasons! a) Ve started to inflate our Monetary naans substantially after 1940 when ve had a great amber of unemployed, and afeea the country .4 till bed lets of unnaed physical resources* Therefore, in this respect, and to that extent, the deficit spending and the concomitant increase la Monetary nean3 has been e help* b) Many defense planta have been built during the war and •mortised in five years, also financed by the increase in the national debt and the printing press* c) the country haa lots of plants, equipment, enortiaed and still in usable condition, contributing toward the notional product* d) Many companies have, since the war, contracted debts, parti cularly with insurance compacted* e) The rents are froeen, and the owners of buildings are cheated, f) Those who had aa increase in their standard of living have had it partially at the expenee of people with fixed dollar incomes, and the depreciation of aaaeta like insurance, etc* f) th. bog* «spu*loa A m * to* -2- Theas points may explain the Incret y* in tae capacity to produce tad *lso why the largest segment of theppppulfction contends th*t it ass a better standard of living than in 1940* X aa wondering, however, wnether there id not beneeth *11 the discussion* around tneae questioni» the follow ing queryt If our country had to produce our present rational product, and we had to build the plants, machinery, everything required to carry on life and economic activity, fend if we had to amortise annually all the plants and equipment et the present replfccement values. Is it not true th&t the present illusion would disapps*r? Are we not in fact living on accumulated fatl If 1 am not mistaken, the amortisation of equipment by corporations now is only about five billion dollars. Ve could never have the gross national product we have now if ve had not plants and equipment built in the past and partially or wholly amortised* 1 wonder whether you e*n tell me whst material exists on this subject which may permit us to give seme more intelligent end pertinent answers to this vital question? Otherwise people conclude thet there is mo harm in inflating the national debt and vesting money on tmament, etc*, etc* In a letter received today from Mr* Few he statesi "According ti my book, it requires in excess of 117,700 million s year to a*intain all United states aonfinancial industries, and 1 sm sure thet this is a conservetive figure*• With warmest regards, I am, lours sincerely, Philip Cortney t if P.S. Martin Gainsbrugh tells me bulletins on capital equipment. I have mo recollection of having will send ae the three bulletins that your Institute has brought out three I remember to have seen one of thea, but seen three. I would appreciate it if you to whjleh Martin is referring. M r .P h il ip Co rtn ey 7 30 F IF T H AVENUE NEW YORK 19 COpy 1 ARE WE SOFT, EASY GOING ©r SIMPLY IGNORANT? August 28, 1950 yfajL*-' Mr. Earl Bunting National Association of Manufacturers 14 West 49th Street New York City Dear Earl: The newspapers announced August 23rd that General Motors is giving a raise to its workers, in accordance with their contract, because of an increase of l.U in the price index of the cost of living. You will remember that General Motors was trying to defend its contract by saying that it was neither inflationary nor deflationary. You certainly realize that what General Motors just did is bound to influence all the current negotiations between employers and workers, and also provoke demands for cost of living bonuses even when the existing contract does not provide such a stipulation. I am wondering whether Charles Wilson still maintains that their contract has neither inflationary nor deflationary effects? - WWW "The New York Times’’ of August 26th carried the information that Chrysler Corporation has given a voluntary wage increase to its workers in order to "circumvent pirating its employees by other manufacturers". I do not know who exactly is pirating whom. It is evidently a battle of the giants without regard to the consequences to the consumer and small and middle sized businesses. There may be no problem of big business versus all business. It becomes clearer each day, however, that there is a problem of big management plus big labor unions as opposed to consumers plus small management and independent businessmen. Big management may not be aware of this issue op may not care to recognize it. If they choose to disregard this and other vital issues they will have only themselves to blame for the consequences. About two years ago U. S. Steel and General Electric tritd to resist these vicious policies so detrimental to the consumer and to the equilibrium of our economy. Their efforts, however, were frustrated by a queer combination of other big managements, big labor unions and the Whitk House. #■** These few remarks give me the occasion to revert to our previous correspondence regarding the automobile in our econnmy. (See the issues raised in my letter of June 26th to Charles Wilson.) I am having reprints made of the Arnold G. Dana articles written before the 1929 depression because of their relevancy to the questions raised. It seems to me crystal -2clear that our system will not survive unless we recognize its defects and shortcomings, and endeavor to improve its functioning from within. May I remind you on this occasion of my letter of January 16th, 1950, regarding the Economic Report of the President, addressed to Emersen Schmidt, a copy of which was sent to you. Since then, (1) Slichter continues to advocate a controlled and neatly regu lated paper-money inflation (Please refer to Slichter’s article in the Summer issue of "The Yale Review"). I regret that among the economists I had to single out Professor Slichter, for whose intellectual honesty X have a very high esteem. I con sider him the most dangerous Neo-Keynesian because of the confidence he enjoys in business circles. The ideas regarding money that Slichter is defending' lately were propounded before him by Alvin Hansen. My guess is that Slichter went astray simply because he hadn't thought through thoroughly the question of •money” and monetary issues. At a recent dinner at Harvard I have pointed out to the members of the faculty the great responsibility they incur by putting on the market with levity "half-baked" ideas without concern as to their consequences. (2) "LIFE" published an editorial on July 31st praising the accomplishments of our economy in the last ten years. On the other hand, Mr. Ralph Hendershot, Financial Editor of the "SUN” made recently the following comments with respect to a statement by Mr. Sloan Colt, President of the Bankers Trust who was expressing his concern about our unbalanced budgets: "The public may well ask why Mr. Colt is so wcrried over an unbalanced budget. Have we not, as he says, had an imbalanced budget most of the time during the past several years? Yet nothing serious has happened. We are enjoying prosperity today, despite these past unbalanced budgets.................... We have a feeling that Mr. Colt spoke with restraint. Being a very conservative individual, he would be apt to do so. By failing to speak out, however, he may have failed also to put his point across. The man in the street would be inclined to reply that we have had Inflation and we have witnessed a substantial increase in government debt but his wages have been increased and he is about as well off as before". (3) In an article by Slichter published in "The New York Times Magazine Section?' of August 13 th, he states again that our economy is in top shape. As you are probably aware, Slichter keeps maintaining that the cold war is a good thing from the economic standpoint because it increases the -3demand for goods. In his article published in the "New York Times Maga zine Section” he even soys that now that we have the Korean affair, which incites us to large armament expenditures, we don't have to worry any more about cur economy. Strangely enough, I found a similar reference in an article published two or three weeks ago by Babson in the "Commercial and Financial Chronicle”. It seems to me that it is probably the most serious indictment of our free enterprise system if it can live and be prosperous only when fed by cold or hot wars. (4) Is it true, as labor contends, that our country is economically stronger than ever and that the majority of Americans enjoy a higher standard of living thao before the war, despite the war and despite the increase in our national debt from 25 billion dollars in 1939 to approximately 260 billion now? In point of fact, the reasoning of Slichter, Dr. Moulton, and , the "Life" editorial referred to above supports the same view. If this is not true, what is fallacious in the thinking and misleading in appearances? **■* I mpy be wrong, but I think our free society is in great danger. If we can save it it will be oily by a courageous, bold, intelligent and imaginative fight. As I see it, our fight must take essentially three directions, which are in fact inter-related: (1) Clarify our muddled and confused thinking on economic and monetary problems. I strongly hold the view that we shall not be able to clarify our own thinking and have our views accepted by others as long as we shall not have a comprehensive and objective diagnosis of the 1929 depression and of the one of 1937 /38 * I advise you in this respect to read the article by Professor Brockie of the California Institute of Technology in the June issue of "The Economic Journal". (2) We should submit to a critical examination many economic problems which have either not been considered at all or which have been com mented upon only superficially. A case in point is the impact of the auto mobile on our economy. Another study could be: "Should productivity be trans lated into higher wages or lower prices?" Still another one is the problem of wage structure. In particular, what is the effect on our xnass-production mass consumption economy of very high wages in the durable goods industries as compared with those in the soft goods industries or services? There are many other problems which should be examined. I am for instance coaviae»d that an excise tax at the manufacturer's level is dangerous for the equili brium of our economy unless serious precautions are taken as explained in my letter to you of August 11th. Another problem which is paramount is: "Can we have a prosperous economy and sound money, or must we inflate our monetary ’means artificially as suggested by Dr. Slichter?" -1» - You might have seen the "book by Charles E. Lindblom, Professor at Yale (Mid a New Dealer, by the way) on "Unions and Capitalism”. He apologizes for having written the book, but he says he couldn’t help squaring his conscience. His thesis is that unions and capitalism are incompatible because unionism is destroying the competitive price system. If you have not read it it is a "must". I hold the view that not only is unionism as praotioed in the United States destructive of the competitive system, but it is also incompatible with an internatinnal gold standard, and therefore anta gonistic to international trade and international cooperation. What are we doing to clarify this issue, which is one of the major problems of our times? There is a great number of problems to be canvassed or examined thoroughly before we can answer another problem, which is the fundamental one, namely, (3) How can we have a high leval of employment without monetary inflation? There is no doubt that our society will not tolerate again pro longed widespread unemployment like we had between 1929 and 1939* I hold the view that we can, by wise policies,avoid depressions of the kind we had in 1929. However, we shall not be able to avoid recessions, which we probably can only mitigate. To know how to avoid depressions and mitigate recessions without monetary inflation we shall have first to answer the questions under (1) and (2). *** A book just appeared called "Modern Capitalism and Economic Progress" by Thomas Wilson, Professor at Oxford. It is written against socialism, and the author declares that he has written the book in defense of capitalism. The opening chapter of the book begins with the following remarks: "Would you rather have things run in the Russian way and face the labour camp, or in the American way and face the slump: In these words Mr. G. M. Young has propounded the dilemma which, in the opinion of many students of public affairs, confronts Western civilization at the present time. We rust choose, it would appear, between private enterprise and socialism, and whichever way the final vote may go, the loss seems likely to be heavy. The evils of pre-war capitalism are bitterly familiar and a return to the old system with its dismal statistics of unemployed is unthinkable. Everyone is agreed that more state intervention will be needed to remedy these defects in the future; there is no difference of opinion on this point. A large number of people, however, have come to believe that capitalism cannot be made to work satisfactorily at all. What is required, in their view, is the aboliton cf private ownership in the means of production and abandon ment of the price mechanism in favour of planning. All important economic decisions should be taken by the state and -5" the Whole course of economic life centrally planned and determined. It ia held that the nation's economic ills wili be cured only if this ia done...But economic progress is not everything, and here is the rub.'* There is no doubt in my mind that the majority of the people I know, who are favoring our system, think the same way. They will continue to do so until we provide some intelligent answers to the questions they have in their minds. *** Much as I admire the recent efforts of the N. A. M., both in the domestic and the international realm, I don't think that the present strategy can accomplish what is necessary to save our system, which is menaced in its very existence. It seems obvious, to me at least, that all the Resolu tions and policy pronouncements are directed mainly to Congress and to the businessmen. While this work will probably have to be continued we need besides an imaginative strategy directed mainly to the general public. People have many questions in their minds which have to be answered if they are not to be the victims of leftist propaganda and fallacies; besides, we must propose measures to improve the working of our economic system fro® within so as to make possible the maintenance of a high level of employment without monetary inflation. It is obvious that one of the important causes of the disintegra tion of our society is its poor intellectual leadership. The main responsibles for the mess toward which we are drifting are the Intellectuals, the politicians and the labor unions. Whether we like It or not, we business men must face squarely the mischief wrought by these groups. We must also examine our own actions and policies, particularly thope of big companies, which have special responsibilities. Can we do it? Are we perhaps wrong in our own thinking? If we are, let us recognize it bravely and amend our ideas and. positions. What I think intolerable for any intelligent man is the present confused and muddled, situation. We cannot fight in defense of our ideas if we have doubts in their soundness or Validity. I intend to put honestly and. squarely the and other business organizations: "Are we willing with which we are confronted, or are we decided to by default or by lack of a real will to defend our question to the IT.A.M. to face the challenge drift into slavery way of life?” It may not be too late, but it is certainly late. Sincerely, Philip Cortney : if P. S. If every employer accepts, in line with the General Motors contract, to adjust wage rates to the Increase in the cost of living and to give an annual automatic increase without any certainty that productivity will increase, we are bound to have a spiral 6£ Inflation, the more serious as farm prices are tied up with wages and industrial prices by the government policy of "farm price parity". This is particularly true in the present time of emergency and military preparedness when inflationary pressures will in any case be very strong. SPEECH DELT7EEED fK PHILIP C0R3HEY at the UKIOH LEAGUE CLUB of Chicago September 28# 195° Inflation or Freedom? By P H IL IP C O R T N E Y It's Up to Businessmen to Save Free Enterprise, declares finance authority in important address to Economic Forum. O ur times are do ninated by tw o great dangers. One is the danger of w a r ; the second is the dan ger of inflation. If w e do not live up to the difficult problems with which w e are faced, you and I shall have to learn to live under a dictatorship, most probably a dictatorship of labor. W e m a y see it in our lifetim e; w e m ay see it within five years. A new w orldwide shooting w a r would certainly mean an end of our free society. Therefore, this possibility is left out of m y discussion except to state that I do not consider a third world w a r either imminent or unavoidable. One of the blessin gs of the atomic bomb m ay well be that it will help eradi cate w a r as a means of implementing economic or political goals. T h e mere danger of war, the obvious necessity to rearm, will make our task of preven ting inflation more com plex and much more difficult. It becomes im perative that w e should stop squandering our money, domestically and internationally. \ Y e should giv e up the illusion and the false pretension that our physical and financial resources are unlimited. It is m/****" nonsense to think that w e have the means to r a r a ^ th e standard of living of tw o billion A sia tic s advocated 011 the unproven premise that in so doing we shall keep them a w a y from communism. It is absurd, gentlemen, to believe that we are w in ning friends and m aking allies b y supporting socialism in Eu rope. In point of fact, now that the relief stage of our economic and financial help to E u ro p e is over, our m otives for g iv in g a w a y our m oney are sus pected. T h e M arshall Plan m av, in m y ju dgm ent, well now play in the hands of the com m unists w h o seek to undermine psych o log ica lly and m aterially the re arm am ent and will to fight of our E u ro p e an allies. O f course, the com m unists keep s a y in g that the only reason w e had this plan w a s to have the Eu ro p ean s fight 011 our side, which means, translated into E u r o pean language, that they are asked to fight our war. It is supposed to be our war. I don’t kno w w h y . B ut, that is that. W e should also discard the idea that we can use m oney as a substitute for foresight, intelligence, e x perience and wisdom . T h e M arshall Plan funds re cently appropriated b y our C o n g ress should be allo cated to the rearmam ent of our Eu ro p ean allies. It doesn’t make a ny sense to continue the M arshall Plan under its present form, and in m y opinion w e sho,’- ' 4 also scrap the E P U which cannot accomplish v erx ^-iu c h . W e should insist that our allies giv e us unm istak able evidence of their willingness to defend th em selves and to contribute substantially to w a rd s re http://fraser.stlouisfed.org/ arm ament. I f w e cannot get that assurance, then, I Federal Reserve Bank of St. Louis submit, we should rev ise and re-design our plans for our defense. W hen I observe the com placency of the great m a jo rity of people in the face of the dangers which are confronting us, I am w o ndering whether they do not understand where we are g o in g or whether they are too lazy and too indifferent to bother with our fateful destiny. W ho Can Save Our Freedom? W ho can sa ve our freedom, if freedom can still be sa v e d ? W e are collectively com m itting suicide, as free men, as if we were blind or castrated. W e businessmen are too prone to blame the governm ent and the politicians for all of our trouble>. If w e wish to save our freedom, we businessmen shall have to recognize our o w n responsibilities in the present economic fallacies and delusions. T h e ones mainly responsible for the mess to w a rd s which we are drifting a re : ( 1 ) the intellectuals— professors of all kinds, law school, political science, e tc.; (2 ) the politicians, and ( 3 ) the labor unions. T h e intellectuals have espoused theories which, in the final analysis, after you do away with all of the sophistication, boil down to providing e m p lo y ment by m onetary inflation. T h e intellectuals ration alize the theory for the politicians who are h appy to grab these kinds of ideas because it is more a d v a n tageous for them to spend than to raise taxes. A s to the labor unions, they push relentlessly toward higher and higher w a g e s without consider ing w in ther in so doing they are m aking impossible the functioning of our free enterprise sy >tem except with monetary and credit inflation. O u r system , which apparently is still in w o rk in g order, is maintained only because of m onetary and credit inflation. E v e n in circum stances of national em ergency , like the present ones, the unions try to avoid for the workers the inev itable sacrifices if w e are to surv iv e as a free nation. H o w e v e r I hate to say it, but I c a n ’t help being intellectually honest, large companies and in partic ular (Jeneral M otors are as much to blame as the labor unions for hav ing accepted the plan to tie up w a g e rates to the cost of liv ing and to have granted the annual autom atic increase w ithout a ny certainty that the productivity will increase. T h e danger of a w a g e -p ric e inflation spiral is the greater because of the planned expenditures for future rearmam ent as the farm prices are tied to industrial prices b y law. It is a fact that the idea of deficit spendin g has pervaded the thin kin g of a great m an y people in our country and, while the people at large do not like the consequences, particularly the rise of prices, they seem to enjov the deficit spending. Dangerous Delusions A t 1 11 i> point I should like to destroy three d a n g er ous delusions. First, that unbalanced budgets and deficit spending are not pernicious. Second, that our standard of living has im proved despite the w a r and even despite the colossal in crease of our national debt. Th ird, that our capacity to produce goods has in creased b\ 50 per cent as compared to 1^40 no tw ith standing the war, no tw ithstanding the inflation and n otw ithstanding the increase in debt. In other words, that we can eat the cake and have it, too. I mil we counteract this kind of delusion w e are in for serious trouble. It is true that many people, particularly the w o r k ing class and farmers, are better off, enjoy a better standard of living today than before 1040. B u t, I should like to make clear at w hat cost. F’irst of all, regarding the point that our plant is about 50 per cent larger than in 1040. A s you know, part of the monev spent during the w a r served to build new plants. Second, the bare truth is that we are eating up our capital. T h is m ay sound strange, and difficult to believe. H o w ev er, much of the m a chinery and equipment used in the m an ufacturing of goods are getting old and becoming obsolete. T h e governm ent has not only borrowed and printed money, but it has taxed money as profits while cor porations hav e not been allowed to depreciate their fixed assets at their replacement value. T h e illusion that the standard of living has in creased despite the destruction of the w a r continues to persist because people do n’t pay the rents they ought to pay. \\ hat w e are doing in fact, again, is to eat up our capital. L e t ’s not forget also that large segm ents of our population have not seen their incomes increase in a m relationship to the increase in cost of living. W h a t is really happening is that we are eating up our capital on one side and. on the other side, we are constantly increasin g our debt, collectively and indi vidually. So m e people are living better at the e x pense of other p e o p le ! W e are simply victim s of de lusions. If we let things go on as they are. we shall sooner or later discover this fact to our great dismay and sorrow. Destructive Forces I f our present domestic and international policies are pursued, with the present levity and persistence, they will certainly bring about either severe inflation or a th orough ly controlled society, both of which w ill be destructive to our freedom. W e were facing the dangers of inflation or dicta torship even before w e started our rearmament pro gram . T h e s e dangers were with us before the K o r e an w a r started. T h e new military expenditures only compound our difficulties and problems. T h e simple truth is that we cannot have freedom without sound m oney and it is m y conviction that we cannot have sound money in a dem o cracy with universal franchise without the discipline of the in ternational gold standard. M an agem en t of m oney without gold is a possibility. 1 w o u ld n ’t deny that. But, not in a dem o cracy where people have to be elected to C o n g re ss or to parliament b y a system of universal franchise. The Paramount Question he paramount question of our time is: A r e w e g o in g to have inflation conducive to dictatorship, or shall we continue to be free m en? W e shall have either inflation or freedom, but w e shall not have both for a long time. Th eo retically, the possibility exists to have m od erate inflation, a high level of em ploym ent and lib erty. at least for a good stretch of time. A lso, theo retically, the possibility exists to have a sound c u r rency, large-scale unemployment and liberty. I <!o not believe that our society will tolerate large-scale unemployment. T h e myth of full e m ployment dominates the thinking and even the feel ings of the great masses and therefore of the politi cians. If inflation is dangerous, if the masses and the politicians will not tolerate large-scale, prolonged unemployment, w hat is the a n s w e r ? It is m y con\ iction that our com petitive free enterprise system will not surv iv e unless w e recognize its defects and shortcom ings, and unless w e endeavor to improve its functionin g from within. I maintain that with proper monetary credit, fiscal and w a g e policies, w e can avoid severe, prolonged depressions like that one we had in 10 20 -33. It is my deep-rooted conviction that it can be done. It is also in\ conviction that we can mitigate recessions and shorten their duration. T h e s e thin gs can be done, prov ided w e go about it in a proper w a y . O u r society is in great danger. It can be saved only by a courageous, bold, intelligent and im aginative fight. It will require hard thin kin g and strong-willed de termination to sa ve our system. T Dangers Ahead F Q ir^t we must destroy the delusion that deficit sp endin g and the increase in debt redounded to the benefit of our co u n try and of our standard of liv ing. If we can ’t demolish that idea, then w e are cooked. N o th in g y o u can do or s a y will save our item if the m asses don’t understand the reasons their increased standard of living and the dangers ahead. \\ e should submit to critical examination m any economic problems which have either not been con sidered at all or which have been commented upon only superficially. A case in point is the im pact of the automobile on our economy. A n o th er necessary stu dy is, should productivity be translated into higher w a g e s or low er w a g e s ? T h is w a s the precise point on wh ich Dr. N o u rs e re signed. It w a s his opinion, and I share it, that w e can have a free society w ithout inflation only if pro d u ctivity is translated into low er and low er prices, not if w e translate it into higher w a g e s according to the new contracts made b y General M oto rs and others. Those contracts are destructive of our soci ety. An o th er problem is the w a g e structure. It is m y contention that there is too great a disparity between what the w o rk ers get in industries like the autom o bile industry, building, steel, and w h a t they get in m any other industries and services. It is due only to the fact that they are v e ry p o w erfu lly organized and cater m ainly to large companies. \\ hat is the effect on our m ass production, mass onsumption econom y of the v e ry high w a g e s in the wrable goods in dustry as compared with the soft goods industry and services? I am convinced that an excise tax at the m an ufactu rer’s level is v e ry bad for the consumer. A n excise tax at the m an ufactu rer’s level is pyram iding prices at the retail level. So, if the m anufacturer p a ys a 10 per cent tax, it is go in g to become 25 or 30 per cent at the retail end. T h a t is not a good w a y to protect the consum er and have a sound economy. C A n o t h e r im portant problem is can w e have a pros perous econom y and sound m oney or must we in flate our m o netary means artificially as suggested b y Hansen and Slichter, w h o advocate a system atic m onetary inflation to keep our econom y g o in g ? A book recently published, strangely enough bv a leftist professor and entitled Unions and Capitalism, argues that unions and capitalism are incompatible because unionism is d estro y in g the competitive price system. I am happy indeed that it should be a professor reputed to be a leftist w h o should have published it because it is absolutely m y conviction that w e shall have to do a w a y with the unions as thev operate in this cou n try or w e shall not have anv free enterprise system . I will go even further and sa y that yo u c a n ’t have an international gold standard system with the kind unions that w e have in this country. T h a t m ight und a bit far-fetched and complicated. W e c an ’t have both, s o ‘it is a question of wrhat w e want. D o http://fraser.stlouisfed.org/ C Federal Reserve Bank of St. Louis w e w a n t a free enterprise system , international trade, or do w e w a n t a regim ented s o cie ty ? T h e r e are m an y other problems w h ic h w e should examine and giv e an an sw er to, because people have questions in their minds and unless w e a n sw e r the questions they have in their minds w e shall not get an y w h e r e in d estro ying the prevalent economic fal lacies and delusions. The Mischief Makers et’s look at the mischief makers. D o yo u realize that w e are living under a sy stem of complete ir responsibility, except for the businessm en? T h e politician is com pletely irresponsible. H e m a y w reck the country. H e m a y bring it to m ilitary defeat. H e m a y destroy the currency. H e m a y do anything. T h e r e is no sanction for him. In point of fact, under the kind of universal suffrage under wh ich w e are living, I shouldn’t be surprised that the more havoc these politicians make, particularly with our money, the surer they are to be elected. A s to the intellectuals, I consider that the most dangerous n eo -K eynesian today is P ro fessor S u m ner Slichter. D o n ’t think that this opinion is a secret to him. I have written it to him. I have also written it to the board of directors of the N A M and to a large gro up of businessmen. H is intellectual hon esty is, in m y opinion, beyond any kind of suspicion. B u t he is dangerous because businessm en have co n fidence in him. P o n ’t forget, gentlemen, he is cod dled and pampered by lots of businessm en, particu larly b y the C E D . I f you ask me h ow do I explain that a man of S lic h te r’s intelligence or S lic h te r’s intellectual in te g rity should push to w ard the destruction of our society, m y opinion is that he doesn’t understand L money. H e sa ys tlvat we are in a laborite econom y and there is nothin g to be done about that. W e shouldn’t try to fight it. L e t ’s inflate money. T h e r e are m an y cockeyed ideas com in g out of the colleges. I do n ’t kno w h o w students can think straight after reading those books published for use in colleges today. O ne book which is v e ry popular begins a chapter by s a y i n g : “ C o n tra r y to a general idea, w e can lift ourselves b y our bootstraps.” W h e n the politicians find professors like Slichter to rationalize fallacies for them, to showr that not only is it not dangerous to have m onetary inflation but that is the only salvation, then how’ can you blame the politicians? Should w e not blame the b u s inessmen for m aintainin g Professor Slichter in his present cap a city as main a dviser to the C E D ? A s to the labor unions, I don’t think they care wheth er they destroy our present economic system , and this is particularly true of the C I O . I believe that all of their important bosses feel that they will become com m issars, so they don't w o r r y v e r y much. Th erefore, as I see it, the only group w h o can do the job are w e businessm en. W e are the only gro up wh ich is not subsidized b y the govern m ent, w h o se income is not guaranteed by the go vern m en t and, w hether w e like it or not, w e shall have to do it or ______ w e shall have to face our doom.
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