The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
RECONSTRUCTING ECONOMIC THINKING (Address given by M. S. Eccles before U. E. A. on October 27th, 1933» at Salt Lake) I realize that I am assuming great responsibility in speaking before an assemblage of this size, representing the educational leaders of our State. The subject upon -which I have been asked to address you, "Reconstructing Economic Thinking", suggests a new field of thought and action, and, therefore, adds greatly to the responsibility of anyone under taking to talk upon such a subject. I do not profess to be an economist. The views which I here express are the result of personal observations and study made in the field of active business and financial life. I think up until the time of the depression I was fully as orthodox in my economic and financial con ceptions as ary of the most conservative bankers and business leaders. This for the reason that I had been so absorbed by the fascination of the financial and business game that I had not stopped to consider the funda mental and underlying purpose of it all. I had not answered for myself the question, "What is an economic system for?" With the development of the past four years I have been forced to greatly change most of my former conceptions which I had grown up with due to the numerous paradoxes which I have been confronted with on every hand. Up until a very short time ago the great majority of our finan cial and political leaders and some few of our economists believed this depression to be another of a series of depressions which have occurred periodically in the history of the modern industrial capitalistic system. On the other hand, many of our economists and comparatively few of our financial and political leaders have felt that this depression very likely was a phase of transition from the existing system of uncontrolled private capitalism to some form of economic organization, which we can not foretell at the present time. It is my view that in the present situation there are many cir cumstances which indicate that this is not an ordinary cyclical depression, but that it is a phase which marks the nearing of the end of an organiza tion, both economic and political, which has existed about 150 years the world over. I believe that after four years of the most devastating de flation in all history that we should be willing at least to entertain such an idea in studying this depression. I desire in my discussion to develop a line of thought which at least differs greatly from the orthodox consideration of this problem. In the past the usual way out of depressions has been through a revival of new investments by the expenditure of private capital. The pycles of depressions and booms have followed each other in sequence since -2 - the beginning of the industrial revolution. During the periods of booms there was excessive investments brought about first by the in vestment of surplus funds and then through the inflation of credit. During those periods there were a great many unwise investments and then there would be a crash and a long period of falling prices. Gradually, as wages and prices fell, investments would eventually start up again. Our orthodox economic thinkers assume that this will repeat itself and they advocate being quiet and waiting, assuming that the financial processes will take us out of the depression, while at the same time our banks hold hundreds of millions of cash reserves suf ficient to expand credit by eight to ten billion of dollars on a basis of our present gold reserve without requiring any change in the gold value of our dollar. With this capacity for almost unlimited credit expansion our financial institutions continue the contraction of credit and new investments are almost at the zero point. Financial fuel is piled up — the Government, and not the bankers, must apply the match. Motives of public welfare must lead us out of the present depression as greed and war have lead the world out of past depressions. The profits resulting from a rapid opening up of new continents constituted a mighty force in past recoveries. Another factor has been the incomplete transi tion from a feudal and agricultural econoBy to modern industrialism. Today these factors are lacking. There is no more immigration of capital or people, and as a consequence there are no more fields for large-scale profit-yielding investment. This is a very significant fact which is be ing overlooked by those who believe in a spontaneous recovery. From the time of the Napoleonic wars up to the present time we had a continent, to conquer. We required great amounts of capital, and there were numerous fields of profitable investments not only in this country but throughout the world — the building of our railroads, the conquering of the West, the development of our abundant natural resources, the building of factories, commercial buildings and facilities of all kinds so that during periods of depression capital which accumulated through liquidation and deflation soon found a profitable field for investment. The assumption of spontaneous revival through new investment has always rested on the fallacious belief that people and banks will not indefinitely hold money in idleness. This is a false idea, as this de pression is beginning to prove. The question is not how bankers and those who have idle money and credit can bring about recovery, but why they should do so, so long as there is no incentive offered in any field for profitable investment. Our banking system as a whole is not responsible for the depression any more than any other branch of our capitalistic economy of individualism. Our banking system expands and contracts busi ness in order to meet the demands of the times. They adapt themselves to the conditions of our economic life and they must do that. In times of war, through the leadership of the Federal Reserve Banks, they provide the money required for that purpose by purchasing government bonds. In times of business prosperity banks furnish the credit required based upon exist ing values tinder such conditions. In times of depression, when prices -3- break, banks are forced to contract credit as rapidly as possible in order to protect depositors. When we had expanded our capital produc tive facilities to a point where new investments were no longer profit able and the American people, with funds to invest, were no longer will ing to invest them in foreign securities in order to supply them with credit to continue their purchase of American goods and when the point of saturation had been reached in consumer credit market a continuation of prosperity, which depends upon private investment or lending for profit, was no longer possible and the depression was inevitable. From 1922 to 1929 the American people with investment capital desired to iiwest in the expansion of our own country and foreign coun tries as evidenced by foreign securities which were purchased. Everyone was motivated for gain and not for public welfare. Banks, meeting the demand of their customers, facilitated such profit seeking investments and expansion. However, wage payments made and total money spent has been rapidly declining since 1929. This has been concurrent with the rapid decline in new investments. The decision on the part of American people to invest less in new profit-seeking properties was a; logical conclusion where profit must be the only motive for investment. However the decline in spending and investment could have been prevented by action of the Government which is the only agency which could continue spending money without regard for profit. It could have kept up spending and consumption with regard only for the willingness and capacity of the people to pro duce and consume. In the past the governments have recognized the necessity for spending great sums of money for the purpose of avoiding the terrific loss and waste through unemployment. Many of the churches, palaces, galleries and possibly the pyramids were created to make work for the people and none of these ventures were motivated for profit. Since the depression has started, the American people have spent less because their total income has declined rapidly. This could not be otherwise when one considers that labor is the source of wealth and the reduction in total income is a direct result of unemployment and part time work and measures our loss in current wealth production, which at the present time is more than two billion dollars per month. The re duction in total income has forced the banks to contract credit, until today, due to that contraction, there is possibly $15 ,000,000,000 less bank money in circulation. Add to this credit contraction that deposit money tied up in closed banks and you have a tremendous contraction of our total money supply. But this is not all. The velocity of money, meaning the turnover or activity as shown by checks drawn against individ ual accounts, has declined far more in proportion than the total deposit money. Whereas our total deposit money has declined about 30% of its 1929 volume, our velocity of money, representing the turnover of bank de posits, has declined from over 70 billion dollars per month in 1929 to less than 30 billion dollars per month at the present time, or a turnover of from about fourteen times per year as compared with the present rate of about seven times per year. Although there is about 30% less deposit money there is nearly 60% less spending of this deposit money, or the drawing of checks. Bank money represents about 90% of the money with which purchases are made and currency represents about 10%. Contrary to the view of many people there is no shortage of currency in circulation at the present time as the volume of currency outstanding now is sub stantially more than it was in 1929. This is due to the amount of cur rency which is hoarded and the lack of velocity of existing currency. The present volume of bank deposits at the same rate of turnover which existed in 1929 are of sufficient amount to double the present volume of business at present prices, or to sustain a much greater volume of busi ness at the present time even on a basis of pre-depression prices. In ny opinion, the reason why there is not a more rapid turnover of bank de posits is because the majority of them are owned by a comparatively few and they are unwilling to invest them because of the lack of a profitable investment field as I have shown. As a result, the banking system as a whole has a great excess of idle funds for which they are unable to find eligible borrowers. The recent figures of the Statistical Department of the Federal Reserve Bank, in making an analysis of the accounts in Federal Reserve member banks, show the following startling facts: Reserve banks’statisticians find that 99% of their deposi tors stop at $ 10,000, but accounts over $ 50,000 hold 45% of their deposits; also that the smaller borrower doesn't benefit from an "easy money" polity. Brand-new figures from the Federal Reserve's statistical laboratories provide an interesting post-mortem on the bankers' battle against the deposit insurance provisions of the Glass-Steagall Act and write a persuasive obituary for some of the theory that has flourished in banking classrooms. Beginning July 1, 1934-, the Glass-Steagall Act will require 100% insurance protection for the first $10,000 of every deposit. The figures show that this means complete coverage of 99.3% of all accounts in Reserve member banks (30.3 millions out of 30.5 millions), but that these depositors whose bankbooks can boast less than $10,000 hold less than 4-0% of total deposits ($9.3 billions out of $23.5 billions). Accounts running from $10,000 to $50,000, on which the increment above $10,000 will get 75% insurance protection under the act, make up 0 .6% of the customers, contain 15 .8% of total deposits. Those topping $50,000, giving the bankers something to worry about in the provision calling for 50% insurance on everything in excess of that amount, total only 4-6,870 and make up only 0 .1% of all accounts. But they contain $10.5 billions, which is 44.«6% of all the deposits there are in these banks and they average $224,000 against a general average of $770 for the full 30.5 mil lions of deposits surveyed. All of which is confectionery for -5 - critics of our distribution of wealth. Since the Gl&ss-Steagall Act also sets up a temporary de posit insurance plan for deposits under $2 ,500, to go into effect next Jan. 1, or sooner if the President desires, this survey also pays attention to the small fiy. Depositors whose accounts will have 100% coverage under this program constitute 96.5% of those doing business with the member banks, but only 23.7% of the de posits of these banks and they average just $189. We have as much gold to support our money and credit structure as we had during our period of prosperity. We have more currency in cir culation. We have sufficient deposit money to start a far greater volume of business than exists today and this deposit money would increase with the increase in spending, which would bring about an increase in credit. There are as many people to spend. They have more needs and more wants. We have a larger equipment of productive capital with which to supply all of the things for which people might spend money. Many people blame the bankers for not supplying and putting into circulation, through credit, money needed to help us out of the depression. Nothing would be more agreeable to the bankers than to be able to lend or invest money safely or profitably, which they must do if they are going to protect depositors' money, but a bank can not finance the building of more factories and more rental properties and more homes when half of our productive property is idle for lack of consumption and a large percentage of our business properties are vacant for the want of paying tenants. The Government, however, could spend money because the Government, unlike the bankers, has the power of taxation and power to create money and does not have to depend upon the profit motive. If ny analysis is correct we can not then expect private in vestors to draw their money from the banks and put it into circulation through providing capital for new investment; neither can we expect those who have credit to use that credit for a similar purpose under present conditions. We must then depend upon the Government to save what we have of a price, profit and credit system. The only escape from a depression must be by increased spending. In the absence of new fields for investment in a world already glutted with unsaleable products, the only way to increase spending is for the Government to spend it for non-profit-yielding works for the benefit of all, for the expansion of social services of all kinds, or for war. Keynes, the great British economist, has said for war: Formerly there was no expenditure out of the proceeds of borrowing that it was thought proper for the State to incur ex cept for war. In the past, therefore, we have not infrequently had to wait for a war to terminate a major depression. I hope that in the future we shall not adhere to this purist financial attitude, and that we shall be ready to spend on the enterprises -6 - of peace what the financial maxims of the past would only allow us to spend on the devastations of war. At any rate, I predict with an assured confidence that the only way out is for us to discover some object which is admitted even by the deadheads to be a legitimate excuse for largely increasing the expenditure of someone on something. War certainly is the worst way to provide the means for more spending. It is up to the Government to maintain adequate consumption. To say that the Government can not do it is to deny what governments have done in the past and what our Government has done in every period of war. Mary will say, "Yes, but the war is the cause of the present depression." In ray opinion, the war really temporarily saved us from the depression — it postponed it. The world very likely would have sunk into a deep depression possibly worse than this one had the war not come. As a matter of fact, a tendency toward depression was one of the causes of the world war. The war really came through England and Germany, primarily through economic rivalry. The war really saved us by creating a great demand for consumers goods. It is unfortunate to have to kill people in order to spend enough to consume the goods necessary to keep people employed. The argument is not against consumption, but it is against the bad type of consumption which is constituted by war, and it is in favor of a type of social consumption which hasn’ t the disadvantages of war. If it had not been for the international debt created by the war we could have entirely eliminated the consequences within a few years. I do not blame the war for this depression. I think that the world war really gave a boom, and the misfortune of the world is that we were not able to keep up the boom, but the war certainly did not prevent us from keeping it up. Had we financed consumption by means of distributing income in sufficient amount to pay for the goods as they are currently produced. It is our scheme of distributing our national income which is responsible for the depression and not the break-down of our productive processes. We have solved the problem of production for all present requirements and what is lacking is an adequate distribution. An adequate distribution depends upon an adequate purchasing power in the hands of those people who will spend it and not save and invest it. We have all of the real wealth we had in 1929 and possibly 100 billion more productive capital than we had at the termination of the war. That is not only true in this countiy, but is true that all European countries have a greatly enlarged productive plant. The South American countries and in fact practically eveiy coun try in the world have far greater productive facilities today than they had at the termination of the war. The population of the world is also increased so that there is a replacement of man power destroyed by the war. We can not, therefore, blame the war for our present lack of pro duction and consumption and unemployment. It is only our credit and money structure and the failure of our government to act in the interest of bringing about the spending necessary to enable the proper use of our economic wealth ty all the people that is responsible for a continuation of this depression. To fail to meet this need is to fail to govern and a people which will not support a program of government spending ade quate to their needs must come to grief. The question is, "Where will the Government get the money?" Money is not wealth — it is simply our media of exchange, and as I have shown previously we have a sufficient amount of gold in this country in the hands of the Government and in the Federal Reserve Banks to support at least 8 to 10 billion dollars additional credit without changing the gold content of the dollar. This entire amount can be used by Government, if need be, without any currency inflation whatever. As a matter of fact, if the Government would rapidly spend this amount of money the present volume of our currency in circulation would very likely decline. One of the reasons the Government does not spend more money is because maty of our orthodox financial business and political leaders think that this will destroy the government credit and will make our money unsound and, therefore, today we have the great conflict between the sound money theorists and the inflationists. I have been unable to determine just what sound money is as no one has yet devised a standard of determining the future value of cur rency, bank money, gold, real estate, securities, or commodities or any thing else for that matter. What is sound money in the opinion of one is felt to be unsound money by another, depending upon what their ideas of the value of money should be at any given time. It seems to me that sound money is merely money which maintains or increases in its purchas ing power. Unsound money is money which continues to decline in its purchasing power. The goodness or the badness is the extent of the appreciation or depreciation after the money is issued. As I have shown, most of our money is bank money and is created simply by the bookkeeping entry. It has nothing more back of it than the value of its assets, which must consist largely of commodities, secu rities and real estate, representing the real wealth of the nation. When a banker issues credit money he can not tell with certainty whether the goods or properties can be sold at a price to cover the costs or even sold at all. After all, the only security of any issue of money is a right course of future events measured by sufficient spending to maintain a price structure in relation to the value of money when it was created. Believers in sound money are deluded when they think they have ways of foretelling its future value. For the past two years or more we have had the painfully sound dollar measured by the largeness of its purchasing power in terms of goods and services. The sounder it got the further prices fell and the more unemployment increased. Had the policy of economy and budget balancing on the part of the Government continued, it would have soon been so sound that all of our credit institutions would have been closed, there would have been no bank money and all of the people would have been starving to death with an abundance of everything for everybody, or at least the willingness and power to produce it. -8 - A bond is a sound investment when it pays the expected re turn and can be sold for what it costs. The bonds of all European governments prior to the war were considered among the most sound in vestments. Today they are considered 'unsound. Mary of the bonds and mortgage loans sold during the period of prosperity were considered sound investments for insurance companies, trusts and most conservative bankers, which today would be considered unsound. Most of the South American governments' securities were considered sound at the time the loans were made. The fact is that there is no rule to determine whether money is going to be sound or unsound. The soundness of money or credit de pends upon the total production and consumption and the State of trade which follows, and not by the amount of gold back of the dollar or by the amount of currency in circulation, or by the total amount of bank deposits. I do not believe that anyone has a standard for pronouncing money sound. We have in 1933 more wealth than we had in 1929 with pos sibly not more than half of its exchange or money value. Much of this wealth has no money value today because it can not be used. The reason it is not being used is that those who desire to use it do not receive the money income to buy the products of the idle factories and prostrate farms. The need is not for more money but for more spending. Our sound money friends seem to be terrified lest the Government unbalance its budget and spend enough money to give the shivering and under nourished millions of unemployed unsound money in return for productive labor so that the great quantities of now unsaleable goods and unrentable housing might be bought and utilized. The sound money people say that the credit to build factories, which are now idle, and credit to foreign governments, which they can now only pay in goods, was sound a few years ago, but money created by Government financing and spent by it for relief, public works, housing, and slum clearance, would not now be sound because not self-liquidating and profit-yielding. All wars have been financed by the use of Government credit and that spending has brought a great increase in prices which we have called inflation. Such inflation could have been largely avoided had the Gov ernment exercised its right of taxation to take back into its Treasuiy all profits created during the war. When the price level desired is reached by Government spending, inflation could be largely controlled through the imposition of sufficiently high income and inheritance taxes. Certainly it can be controlled as well as deflation has been controlled and with an assurance of far less serious results to the great majority of our people than has accompanied deflation. The great struggle in America today is between the people who believe what they call sound money and the people who believe in the right to eat and the right to work. Sound money arguments are appealing to those selfish and economically ignorant people who have money and feel sure of getting more while millions grow poorer. Such arguments have no appeal to those government employees who were thrown out of work so that the Government could balance its budget in order to keep the dollar sound. It has no appeal to the farmer and the home-owner who are burdened with debt and taxes and are about to be foreclosed. There is no security for anyone except in a steady produc tion, a balanced distribution and a responsible humane government. There can be no security for the thrifty or the worker who allows pro duction to become paralyzed and millions of men to go without work. In such a state, sound money is not only a travesty but a tragedy. Even if we grant that the sound dollar comes before welfare, or that a sound dollar is the best way to assure welfare, there is no evidence that any one can tell us how to maintain a sound dollar or that the recommenda tions of the sound dollar advocates can be carried out. As we have seen in the present depression, the sound dollar people really wish to reduce costs and expenses to a point where the savings of the people who have money will evidently be put into circula tion through new investments, but after four years we should be con vinced that that is not going to happen without the profit incentive and the profit incentive will continue to be absent until spending in creases, consumption increases, and people get back to work. The fundamental economic plans, when they are finally estab lished, will of necessity center in the distribution of purchasing power and in the allocation of income between investment and expenditure. So long as money is used as the means of distribution and of allocation, the fundamental economic plans will be plans for determining the flow of money. These plans will involve public and semi-public expenditure on an expanding scale for cultural and quasi-cultural services. They will in volve relief of taxation that rests on the consumer} the reduction of sales taxes, of real estate taxes, of tariffs, and of public service charges. They will involve the establishment of heavy income taxes especially in upper brackets. They will involve heavy taxation of un distributed corporate surplus, to force corporation income into divi dends and wages. These plans for determining the flow of money are fundamental, without them or their equivalent no permanent adjustment can be attained. The obvious equivalent is the establishment of a communist„ state. Communism is one way of providing for the necessaiy distribution and allocation of income. The control of the flow of money by the tax system is the other way of providing for the necessary distribution and allocation of income. At the present time the American people are not willing to try communism. Whether communism is adapted to the American temperament is very doubtful. The immediate alternative is the re organization of our tax structure, and the extension of our public and semi-public spending program. So far, public opinion is in only the first stages of its -1 0 - education. The public has learned by experience that local taxes spent for relief give money to consumers only by taking money from consumers. They add nothing to the total market for business. Hav ing observed that the so-called self help was not restoring pros perity, the public has hastily concluded that spending tax money of any kind is the road to ruin. But Federal taxes may be so imposed that they will not rest on consumers, but will rest on surplus income. The public has still to learn that prosperity can come and remain only through the continuous spending of public funds that come out of sur plus income. No matter how luxurious the services this kind of spending money may provide for the people, it cannot justly be called extravagant. The more surplus income is spent, the more market there will be for business, the more men will be actively employed, the more wealth will be created, and the larger will be the national income. The creation of wealth, whether it be shoes or education or just the widespread feeling of economic security, is not extravagance. If it is necessary that the Federal Government shall collect billions of dollars every year and spend them on beautifying the country so that, as a by-product, mechanical in dustry may be running full time and producing wealth for the whole population to enjoy, then those billions will surely be money well spent. If and when society shall again obtain to a state of high pro ductivity it will be found that the educational and cultural activities of life occupy the central place. Slum districts will be eliminatedj parks and play-grounds will be increased; public health services will be extended; our entire population will enjoy the benefits of modern housing; and we will have learned to treat criminals and mentally defectives more scientifically. We will have more and better schools; education for children and adults will grow in quality and extent; there will be a growing demand for the cultural things of life; the art of living, the art of using leisure time, will be developed beyond our capacity now to fore see. In all of these developments, our educational system must serve as a leader in the development of public opinion toward sound standards of values.
@FedFRASER