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Ife#lnF.K.13I
BOARD OF GOVERNORS
o r THE
FEDERAL RESERVE
SYSTEM
Office Correspondence
To
Chairman Eceles
Jm
Date December 2 r 1Q^>
Subjects
Emile Despres
Attached i s a memorandum prepared at Mr. C u r r i e ' s
request, by Mr. Sherrard o f t h i s Section.
The memorandum
reviews and c r i t i c i z e s an a r t i c l e i n the A t l a n t i c Monthly f o r
November by Sumner E. S l i c h t e r .
I have t a k e n steps t o o b t a i n
a copy of S l i c h t e r * s a r t i c l e , and w i l l send i t to you when
i t arrives.
The a r t i c l e was forwarded t o Currie f o r c r i t i c i s m
by an o f f i c i a l of t h e T.N.E. C., who, i n t u r n , had received i t
from Mr. TiT. S. F a r i s h , President of t h e Standard O i l Company
(New J e r s e y ) . Mr. Farish had expressed strong approval o f
the views put forward by S l i c h t e r , and I suspect t h a t t h i s
a r t i c l e , l i k e S l i c h t e r ' s e a r l y a r t i c l e s on inadequate p r o f i t s ,
w i l l be warmly praised by many business executives.
w
November 20, 1939
"Business Looks Ahead"
Professor S l i c h t e r points out ("Business Looks Ahead",
Ktait^VsT.
i n The A t l a n t i c Monthly for towfeear) t h a t the United States could
use a great deal o f new c a p i t a l equipment.
"Never, not even i n
1929, has the n a t i o n a l output per man, woman, and c h i l d reached
#700 a y e a r . "
One way to increase per c a p i t a output i s , of course,
t o provide more productive equipment; that i s , t o use more c a p i t a l .
The amount of c a p i t a l per worker has t r i p l e d since 1800 and may he
expected to Increase f u r t h e r ; t h i s should o f f s e t the f a c t t h a t the
number o f new workers to be provided w i t h "working places, equipment,
and tooled w i l l be only about 500,000 a year i n the immediate f u t u r e ,
as compared w i t h over 700,000 i n the Twenties.
Furthermore, income
per c a p i t a rose 38 percent between 1920 and 1929, w h i l e i t rose
only 12 percent i n the f i r s t decade of the century.
Expenditures
on i n d u s t r i a l research are now seven t i n e s as large as i n 1920.
Technological advance may be expected t o continue a t an accelerated
r a t e i n the f u t u r e .
" T h i s , " the Professor concludes, "does not look
l i k e stagnation."
Professor Slichter i s quite r i g h t .
l i k e stagnation.
This does not look
I t docs sot look l i k e vo&mployment e i t h e r .
No
responsible economist has ever denied~-simoe i t would be absurd to
-2deny—that the United States i s p o t e n t i a l l y w e a l t h i e r now than a t
any time i n the past.
Nor would anyone deny t h a t the n a t i o n a l i n -
come per c a p i t a was s t i l l p i t i f u l l y meager even during the Twenties.
Indeed, Professor S l i c h t e r proves too much.
I f investment opportu-
n i t i e s existed whenever there was a need f o r more goods, we should
always have f u l l employment.
The need f o r goods i s p a r t i c u l a r l y
pressing during a depression, y e t somafcow investment declines.
can t h i s be explained?
answer:
How
Any business man could r e a d i l y give the
Investment o p p o r t u n i t i e s e x i s t only when need i s coupled
w i t h a b i l i t y t o pay and w i t h the desire to purchase.
The problem i s
t o f i n d p r o f i t a b l e o u t l e t s f o r c a p i t a l expenditure; u s e f u l o u t l e t s
are always abundant.
But the existence of p r o f i t a b l e c a p i t a l o u t l e t s
depends, i n the long r u n , upon the development of adequate volumes of
consumer expenditure.
This i s the only u l t i m a t e source of business
income.
I t i s for t h i s reason that the decreasing rate of population growth i s important.
As population increases, i t becomes
profitable to build houses.
Families oust have shelter of some
sort and w i l l spend a l l of t h e i r incomes i f necessary, or even go
into debt or appeal to charity, i n order to provide i t .
With a
stationary population, construction p r o f i t s would be less assured.
Replacement building would continue, and geographical shifts of
population would require seme new construction.
I n addition, there
would be a potential daoamd for better or more fashionable housing,
but t h i s would be an unstable, unpredictable e l went—representing
postponable expenditure.
Not only t h i s , but every transfer of
families from old to new quarters (as opposed to the doaand for
-3-
new quarters that arises from population increase) r e s u l t s i n
vacancies somewhere.
These unoccupied dwellings are l i k e l y to
depress the general housing market.
Since i t i s impossible to
foresee accurately the trends of population movement or of t a s t e ,
b u i l d i n g becomes an increasingly speculative business.
Already
houses are being designed f o r t h e i r sales appeal, w i t h emphasis
on shiny gadgets and advertiseable refinements.
Professor S l i c h t e r
h a i l s the prospective increase i n the r e l a t i v e importance o f
l u x u r i e s i n our economys
"Since tastes f o r l u x u r i e s change, there
w i l l be a perpetual demand f o r new plants t o make these goods."
He f o r g e t s that business men are no f o o l s and can u s u a l l y recognize
an ephemeral demand when they see one.
The increased r i s k of
obsolescence w i l l discourage purchase of c o s t l y equipment to supply
an unpredictable l u x u r y market, even though a s i m i l a r volume of
demand f o r staple goods might have c a l l e d f o r t h heavy c a p i t a l
expenditure.
Once again he has confused usefulness w i t h p r o f i t -
ability.
Professor S l i c h t e r * s c l a i m t h a t "slowing population growth
i s l i k e l y to s t i m u l a t e r a t h e r than diminish the demand f o r housing,
the l a r g e s t s i n g l e o u t l e t f o r savings, because only when f a m i l i e s
are small oan they a f f o r d t o l i v e i n houses which they own" seems
t o assume the very p o i n t a t i s s u e .
I t would be p l a u s i b l e only i f
the decreased average size of f a m i l y increased per capita income.
(Even then there would be several q u a l i f 1 c a t i o n s t as we s h a l l see.)
-4-
I f the d e c l i n i n g r a t e of population growth increases unemployment,
the assumption o f a r e s u l t i n g increase i n per c a p i t a income becomes
unreasonable.
P u t t i n g the same p o i n t d i f f e r e n t l y , any employed
worker i s i n a b e t t e r f i n a n c i a l p o s i t i o n the smaller h i s f a m i l y assuming t h a t wages remain unchanged—but i f the demand f o r h i s
output f a l l s o f f as a r e s u l t o f decreases i n other people's f a m i l i e s ,
he may f i n d himself w i t h o u t a j o b .
Furthermore, the fact that families l i v e i n "houses which
they own," as opposed t o rented houses, i s of l i t t l e significance
with respect t o employment opportunities.
The construction of new
housing, whether intended for occupancy by the owner or by tenants,
creates jobs; the purchase of already existing properties does not*
Professor Slichter has bean unnecessarily ingenious i n
searching out a cause for the recent B r i t i s h housing boom.
I t has,
he says, "been based i n part upon the f a c t that families are smaller."
To be sure, families are smaller and there has been a housing boom}
but i t seems over sub t i e , i n view of the f a i r l y wall recognized
explanations of the construction a c t i v i t y , to find a causal connect i o n between thsra.
I n the f i r s t place, Great B r i t a i n had no construc-
t i o n boom comparable to curs i n the Twenties.
Thus part of the Vorld
Var housing shortage remained as a backlog i n t o ths T h i r t i e s .
Secondly,
from 1929 onward the cost of l i v i n g f e l l more rapidly than wags rates—
l a r g e l y because of the importance of imported a g r i c u l t u r a l products,
-5-
tbe prices of which f e l l sharply.
At the same time an increasing
p r o p o r t i o n o f the n a t i o n a l income was absorbed by t a x a t i o n and
expended by the Government on services f o r the lower income groups.
Thus the r e a l income o f employed workers was increased from two
aides.
This f a c t , taken together w i t h the perfected system of
b u i l d i n g and loan s o c i e t i e s , provided the necessary background
f o r the construction boom.
F i n a l l y , the great m i g r a t i o n from n o r t h
and west t o south and east served as a stimulus t o b r i n g the other
forces i n t o p l a y ,
(This migration was i t s e l f based on a develop-
ment of the consumer goods i n d u s t r i e s and the service
trades,
which was i n t u r n due i n d i r e c t l y t o Government p o l i c y and the
decline i n import p r i c e s . )
The southern c i t i e s ,
particularly
London and i t s suburbs, became crowded w h i l e those of the heavy
i n d u s t r i a l areas were r e l i e v e d of pressure.
With the r e v i v a l of
a c t i v i t y i n the l a t t e r areas i n 1936 and 1937, l a r g e l y as a r e s u l t
of armament orders, construction continued as an aspect of general
prosperity.
The Professor draws another lesson fron B r i t i s h experience,
s t a t i n g t h a t "there has been a spectacular drop i n the volume of
saving during the l a s t generation."
Assuming t h i s to be true (and
information on savings i n Great B r i t a i n i s so meager that i t can be
no more than an
enoouraged.
assumption), the tsadency i s one that should be
Professor Slichter points out that i t " I s partly dus
t o s t i f f increases i n taxes", although he had previously stated,
w i t h reference to the United States, t h a t " p l a i n l y , the prospeot of
s o l v i n g the problem of oversaving by t a x i n g away savings i s not
bright,"
The Englishman, i t appears, has many v i r t u e s not vouchsafed
t o Americans: he can s t a r t a housing boom because the size of h i s
f a m i l y has decreased, and responds to t a x a t i o n as a gentleman should.
The other p a r t of Professor S l i c h t e r ' s explanation of the
(assumed) behavior o f savings i s t h a t "people preferred t o spend a
l a r g e r part of t h e i r incomes on durable consumers* goods (automobiles,
r a d i o s , household appliances), r e c r e a t i o n , vacations, education,
and medical c a r e . "
This i s t r u e and important.
I t indicates, i n
f a c t , the d i r e c t i o n t h a t f u t u r e development must take i f an i n s u f f i ciency of investment o u t l e t s i s to be avoided.
Business men w i l l not
make c a p i t a l expenditures unless there i s a reasonable expectation
t h a t t h e i r products can be sold to consumers at a p r o f i t .
Goods
cannot be sold to consumers a t a p r o f i t unless the consumers are
w i l l i n g and able t o buy.
There I s no presumption, however, t h a t a
s u f f i c i e n t volume of consumer expenditure w i l l appear unless i t
fostered by conscious p o l i c y .
is
I t i s not s u f f i c i e n t t h a t people merely
" p r e f e r " t o buy services and durable goods; they must also have incomes
s u f f i c i e n t t o implement the preference*
Thus decreased corporate
Income taxes, as suggested by Professor S l i o h t e r , eould be no s o l u t i o n .
7-
The Professor t e l l s us t h a t money " w i l l not continue to c i r o u l a t e
i f the outlook f o r business i s poor,"
E x a c t l y : and the outlook f o r
business, i n the long run, depends upon the a b i l i t y and w i l l i n g n e s s
of consumers to absorb i t s products.
To believe t h a t f u l l employment of our resources depends
upon the s t i m u l a t i o n of consumer purchases i s not t o accept "a
gloomy p i c t u r e o f the outlook f o r i n d u s t r y i n America."
The problem
i s t o adjust our economic s t r u c t u r e t o the standards o f l i v i n g made
possible by teehnologisal progress and c a p i t a l accumulation.
We
can now a f f o r d a l e v e l of consumption t h a t would have appeared
f a n t a s t i c even f i f t y years ago.
Wo can a f f o r d decent housing, good
h e a l t h , old-age p r o t e c t i o n , higher wages, and more consumer spending.
I n f a c t , our productive equipment cannot be f u l l y u t i l i z e d unless we
do have these t h i n g s .
Without them there w i l l be unemployment and
low profits—-depression a f f e c t i n g business men and wage earners
together.
But the prospect of r i s i n g standards of l i v i n g and i n -
creased consumer spending i s not a gloomy one.
Quite the contrary $
i f the challenge of t r a n s i t i o n i s accepted, the f u t u r e should be one
of increasing harmony and p r o s p e r i t y f o r a l l classes i n the community.
@FedFRASER