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Economic Problems


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I wish to thank my wife, Ruth B. Harris, and Miss Dorothy
Westcott, for editorial assistance. M y wife has also kindly read
the proofs.
As editor 1 wish to emphasize that all statements of the con­
tributors are their personal views. They do not speak for any
government agcncy or department with which they may be

February, 1943.

W A S H IX G T O X ,




IN TRODUCTION.....................................................................................................................................


geympur J?. //arrM

I . T H E POSTW AR E C O N O M Y ........................................................................................


Atpm A. Tfotwn
I I . F U L L EMPLOYMENT AFTER THE W A R ..............................................................2 7

Pan/ A. &tyHUfZaoyi




. .




SECULAR S T A G N A T I O N ? .................................................................67

Alan tSweezy



V I . CAPITALISM IN THE POSTW AR W O R L D .............................................................. 1 1 3

JosepA A. ^ScAumpefer

ECONOMIC LIBERALISM IN THE POSTW AR W O R L D ..........................127

AMm P. Lerner

T R A D E AND THE P E A C E .................................................................. 141

Henry C.

ECONOMIC STATISTICS AND POSTW AR P O L IC IE S .............................

TPa*atty Leonttc/






PO STW AR PU BLIC D E B T ................................................................................................1 6 9

iSei/wour E. Rarris
X I.


PROBLEM S OF PLAN NIN G PU BLIC W O R K ............................................187

C lT Y R EPLA N N IN G AND R E B U I L D I N G ...............................................


Gm/ Creer

FISC A L PO LIC Y AT THE STATE AND L O C A L L E V E L S .........................221

#art'e?/ ^S. PerZqy
X IV .

LA B O R AFTER TIIE W A R ........................................................................ 241

;$H77mer R.

PO STW AR SO C IA L S E C U R I T Y ............................................................... 263

F&ptM F.
X V I.

N U TRITIO N , FOOD ATTITUD ES, AND F O O D S U P P L Y ........................... 281

Af. L. W%2so%

AGRICU LTU RAL PR O B LEM S ....................................................................291

Jo/m D.







W O R L D ................................................................................................ 305

Joseph & Daws



. 325

R E M O V A L OF RESTRICTION S ON T R A D E AND C A P I T A L ....................345

#<m?ard /S. EXMa
X X I.


R. B.



X X I I . INTERNATIONAL M O N ETARY S T A B IL IZ A T IO N ...............................................3 7 5

C. P. XtnJMwccr

PRICE CONTROL AFTER THE W A R .............................................................399

Jo/m D. iSuwin^r
I N D E X ..................................................................................................................................................... 4 1 3


Richard Bissell. Associate Professor of Political Economy, Massachusetts
Institute of Technology
John D. Black. Henry Lee Professor of Economics, Harvard University,
and Consultant for U. 8. Department of Agriculture; Author of Parity,
Parity, Parity (Cambridge, Mass., 1942), ^yricu/tura^ Pf/orm in Me L nited
States (New York, 1929), Production Economics (New York, 1926)
R. B. Bryce*

Administrative Branch, Department of Finance, Ottawa,

Joseph S. Davis. Director of Food Research Institute, Stanford University;
Author of On ^lyricutt^raf Poticy, 1926-1938 (Food Research Institute,
Miscellaneous Publications 9, Stanford University, California, 1939),
tfAeat and Me A .4.A . (Washington, D.C., 1935), Essays in Me Earner
Ristory of American Corporations (Cambridge, Mass., 1917)
Howard S. Ellis. Professor of Economics, University of California, Berkeley;
Author of EzcAanpe Control in Centra/ Europe (Cambridge, Mass., 1941),
German Monetary Theory 1905-1933 (Cambridge, Mass , 1934)
Guy Greer. Member Editorial Board Fortune Magazine; Formerly Division
of Research and Statistics, Board of Governors of the Federal Reserve
System; Author of RuAr-Lorraine industrial ProMem (New York, 1925)
Gottfried Haberler. Professor of Economics, Harvard University; Author of
Prosperity and Depression (Geneva, 3 editions, 1938, 1939, 1941), TAe
Theory of /ntemational Trade (London, 1935)
Alvin H. Hansen. Littaucr Professor of Political Economy, Harvard Univer­
sity, and Special Economic Adviser to the Federal Reserve Board; Author
of <A/ter Me ^ ar—f uH EntpJoymeni (National Resources Planning Board,
Washington, D.C., 1942), Fiscal Policy and Business Cycles (New York,
1941), PM# Recovery or Stagnation (New York, 1938)
Seymour E. Harris. Associate Professor of Economics, Harvard University (on
Leave), and Director, OfEce of Import-Export Price Control, OiBce of
Price Administration; Author of The Economics 6/ America at War (New
York, 1943), The Economics qf Sociat Security (New York, 1941), Twenty
Fears of Fetieral Reserve Policy (Cambridge, Mass., 1933)
Benjamin Higgins. Bronfman Professor of Economics, McGill University;
formerly Principal Economist, Federal Works Agency, and Economic
Consultant, Public Work Reserve



Dal Hitchcock. Chief of the Postwar Labor Problems Division, Bureau of
Labor Statistics
C. P. Kindleberger. Principal Economist, OfEce of Strategic Services; Author
of international iSAort-term Capita? Afove?ne7^ts (New York, 1937)
Wassily Leontief. Associate Professor of Economics, Harvard University, and
General Consultant, Postwar Labor Problems Division, Bureau of Labor
Statistics; Author of TAe iStriictitre of tAe Awertcan Fconowy (Cambridge,
Mass., 1941)
Abba P. Lemer.
Harvey S. PerlofE.

Assistant Professor of Economics, Amherst College
Economist, Board of Governors of Federal Reserve System

Paul A. Samuelson. Assistant Professor of Economics, Massachusetts Insti­
tute of Technology
Joseph A. Schumpeter. Professor of Economics, Harvard University; Author
of Business Cydes (New York and London, 1939), The Theory o / Fcono?wic
Deve?op?ne7^ (Leipzig, 1912)
Henry C. Simons. Associate Professor of Economics, The University of
Chicago; Author of Persona? /nconte Taa?ation; The De^nition o / /ncome
as a ProMent of Fiscal Policy (Chicago, 1938), Planned Society (New York,
1937), A Positive Program /or Laissez Foirer <Sowe Proposal /or a Li5era?
Economic PoKcy (Chicago, 1934)
Sumner H. Slichter. Lamont University Professor, Harvard University, and
Chairman of Research Advisory Board of the Committee for Economic
Development; Author of Economic Factors Ajfectiny /ndn3tria% Ee%a%ons
Poticy in ^Vationa? Defense (New York, 1941), %/nion Po/icies and /ndustria?
Afanapement (Washington, D.C., 1941), Afodem j&conomic ^oc^ety (New
York, 1931)
John D. Sumner. Professor of Economics, University of Buffalo (on Leave),
and Price Executive, Non-Ferrous Metals Branch, OiRce of Price Adminis­
tration; Author of iVeM? Yor& #ar#e Cana/ Tra^c (Buffalo, 1929)
Alan Sweezy.

Associate Professor of Economics, Williams College

M. L. Wilson. Director of Extension Work and Assistant Director in Charge
of Nutrition, OfRce of Defense Health and Welfare Services, U.S. Depart­
ment of Agriculture; Author of Farm Relief and Do?nea^M A%o%7nen% P&in
(Minneapolis, 1933), Farming in tAe Montana Trianp/e (1923)
Edwin E. Witte. Professor of Economics, University of Wisconsin; Consultant
to the Social Security Board, Member of the National Railway Labor
Panel, ad Aoc Member of the National War Labor Board, Consultant to
the War Manpower Commission; Author of TAe Preparation of Proposed
Legislative Afeasures &y Administrative Depart?nents (President^ Com­
mittee on Administrative Management, Washington, D C ., 1937), TAe
(?ovem7^ent in Labor Disputes (New York, 1932)

" Win the war Brst" is a sensible slogan. But all agree that if we
do not also win the peace, we shall have lost the war. If we do not
plan for and try to build the "right" kind of postwar world, the
winning of the war will be of little avail and we shall not have won
the peace. It is understandable, then, why almost every govern­
ment agency is devoting some time to the study of the problems of
the postwar world, and why numerous private research organizations
are generously devoting their funds to searching analyses of the
problems that will confront the United Nations in the years follow­
ing the end of the war. Merely to catalogue and describe brie&y
the more important items subsumed under postwar economic
studies has required a small volume, which has been compiled by
the Twentieth Century Fund.*
Our main task today is, indeed, to win the war; toward that end
we must devote our major resources and man power. But that is
not tantamount to saying that unless we devote 100 per
of our
energies to the prosecution of the war—leaving the problems of the
postwar world to brief future consideration and hurried treatment—
we are being foolish and remiss. On the contrary, we would be
remiss in our responsibilities— and stupid—if we failed to consider
postwar problems
victorious peace comes. Our expenditures
in terms of human lives, suRering, and toil, and the hundreds of
billions of dollars of outlay, would be vain if, having achieved
victory, we were not ready and
to take the necessary measures
to mold our world of tomorrow in a manner consistent with the
objectives of our current struggle.
There are some who object to a study of postwar problems on the
grounds that the postwar world will be so different from what we
can envision that any examination of the problem is likely to be
futile* We do not share this view. To be sure, the economist
Some of the views on postwar problems of men in responsible positions in
Washington may be found in toward Vetr Rortzwn;
WorM iwyond iht War
(Office of WM Information, Washington, D. C.).




cannot estimate accurately the size of the postwar public debt, the
price level^ the level of output, the degree of control of economic
activity by the government, and the value of many other variables
at the end of the war. To that extent he is limited in the precision
of his recommendations. He can be certain, however, that the
economic problems will be numerous: employment; the division of
authority and operations between government and private interests;
the distribution of the shares of income; the contributions of govern­
mental and private interests to total spending; the manner of carry­
ing on international trade; social security; reconstruction both at
home and abroad. The study of these problems Mtu, will not be
disadvantageous to the victorious peace yet to come.
Studies of the reconstruction periods following earlier wars sug­
gest problems that will confront us in the next period of adjustment.
Although these studies are valuable, allowance must be made for
departures in the present emergency. Whereas our war expendi­
tures attained roughly 30 per cent of national income in the First
World War, they are likely to attain 70 per cent or more in the
course of the present struggle. Military expenditures for the Rscal
year 1943 are currently estimated at $80 billion; and expenditures at
the rate of over $100 billion have been promised for the 6scal year
1943-44. In no previous war has the United States had to face
a problem of demobilization on the scale envisaged for the period
after the Second World War. Current estimates put the armed
forces at a minimum of 9 million persons: our armed forces would
be much larger if the proportion of the country's population
inducted into the armed services were as high as the corresponding
ratio for Germany. Workers in war industry will number at least
20 million persons, and they may well attain several millions more
by the end of 1944.
Would it be better (as our critics say) Rrst to be confronted with
the numerous postwar problems and then to study them? The con­
tributors to this volume answer "n o." At the least, they suggest
the important problems; at the most, they propose speciRc solutions.
At this point a brief analysis of spending, productivity, and
income in the thirties is presented; and a word is said concerning
their relevance for the postwar period.
In 1932 income was running at the rate of $40 billion annually.
Few would have predicted that the national income, within a period
of 5 years, would rise to $75 billion; and a forecast of an income of



$135 billion, the current estimate for 1943, would have been con­
sidered fantastic and visionary. Many have doubted that deBcit
spending played a significant part in raising national income by
almost 100 per cent in the years 1932-1937. These skeptics pointed
to the concomitant (and fortuitous) variation of public spending
and the emergence of the recuperative powers of capitalism. They
did not follow the President when, in a recent budget speech, he
pointed to concomitant rises of (1) public debt of $30 billion, (2)
annual debt charges of $400 million and (3) national income of $30
billion annually. (The annual rise of income had been 75 times the
increase in the annual cost of servicing debt.)
Whatever the merits of the controversy concerning the years
1933-1940, there will be little doubt concerning the experience
of 1940-1944. The following estimates give a rough idea of the
changes wrought by war. National income will probably have
risen by at least $60 billion annually; Federal spending by $90 to $100
billion annually; deficit spending by $60 to $70 billion; and stimu­
lative deBcit spending (i.e., additional spending out of idle balances or
through the creation of new money), $40 to $50 billion. There are
few who would now deny an association of public spending with the
rise of income or with the attainment of a position of full employ­
ment. Why if, under the impetus of spending for war, we can attain
a position of full employment and (despite the large output for war
purposes) the highest standard of living in the history of the world—
as we have in 1941-1942—can we not achieve them in peacetime?
The depression years witnessed & remarkable advance in output
per man-hour; but our gains were more than nullified by the large
rise of unemployment and the reduction of employment. In more
recent years, not only has unemployment declined to a minimum
figure but the rise of employment (inclusive of the additions to the
armed forces) has been several million more than the reduction of
unemployment. In the 2 years ending June 30, 1942, the rise of
employment and of numbers in the armed forces has been 9 mil­
lion, two-thirds of which are accounted for by a reduction of employ­
ment. Estimates of the numbers in civilian employment and the
armed forces are 48 millions in June, 1940, and 57 millions in June,
1942. If th& numbers attain an expected total of 63 million or
almost 50 per cent of the total population by the end of 1943, a very
large influx into the army and industry from the home and farm will
be required. By the end of 1943, expenditures for war material
and war construction should be at an annual rate of $90 to $100 bil-



Hon or more. Even with a rise of output per worker of 18 per cent
from the end of 1941 to the end of 1943, 5 million new war workers
will be required from the middle of 1942 to the end of 1943 in order to
attain a rate of military expenditures of $85 to $90 billion.
Until quite recently man-hour output has continued to rise but
not at the rapid rate of the years 1930-1935. Further increases
in man-hour output and the maintenance of full employment will
put a national income of $200 billion within our reach. Should our
armed forces and workers rise to 65 millions and 5-10 million
workers be added who ordinarily would not have been available—the
size of our working population would be influenced in the postwar
period. A substantial proportion would remain on the labor mar­
ket. In the light of progress made in the last 50 years, a goal of
$200 billion is not at all visionary. If the public continues to desert
the home for the market place and industry, if productivity con­
tinues to rise even at a rate below that of the last generation, and if
the large investments now going into war are in part shunted to
private industry when they might be used to introduce new econo­
mies in the production process—saving both capital and labor—the
day of an income of $200 billion at current prices is not far off.
A rise of national income to $200 billion in the next generation or
two is easily attainable. The rate of industrial progress might even
be less than it has been in the last 50 years. If the rate of increase in
industrial production since 1919 were projected into the future
(1940 = 100), the figure would be 485 in the year 2000; and the
productivity (1940 = 100), no less than 800 in the year 2000. (We
do not assume that a projection of the percentage gains for the
years 1919-1920 to 1940 is an appropriate procedure.)
It will be necessary to stimulate consumer spending if a high
income level is to be attained and maintained. Provision of security
and an accompanying stimulation of spending; the further spread of
education; an improved distribution of income; community spend­
ing for consumption— all these will be required. That an improved
distribution of income is attainable is proved by the history of the
years 1940-1942. Of a rise of national income of $45 billion, the
largest part has accrued to labor and the farmers: their gains have
exceeded their share of the national income.
aKa, new taxes
which fall especially on the well-to-do and an aggressive labor and
farm policy account for the improved distribution. A continuance
of these policies in peacetimes will assure the country a distribution
of income which will be consistent with the maintenance of demand



and a workable capitalist system. Should deSciencies of demand,
despite the new tax system, continue to jeopardize the attainment of
our objectives, then the alternative of increased investment spending
by the government must be faced.
With the advance of technology, we shall be able to produce the
equivalent of our current income of goods and services with a much
smaller amount of labor than is required now. The way is ours to
choose, whether through a rise of output or an increase in leisure.
The solution desired by the American people may be $150 billion of
income and a 30-hour week; or $200 billion and a 40-hour week; or
one of many other alternatives. It is hoped that a conscious choice
will be made; the more leisure, the easier it will be to keep consump­
tion at a sufRciently high level.
The contributors are all anxious that postwar economic policies
assure the country a high level of employment and income and a fair
distribution of the annual output. Most of the participants—
though not all—have been inHuenced by the writings of Lord Keynes;
they are, therefore, disposed to put much emphasis on the measures
which must be taken to maintain demand, particularly the contribu­
tions to full employment of an improved distribution of income—
and hence a rise of the propensity to consume— and public invest­
ment. These economists are impressed with the failure of the
capitalism of the twenties to provide full employment and are
impatient with economic theory that fails to discuss conditions
of disequilibrium and underemployment. Keynesian influence will
be especially evident in the parts of the volume devoted to the
discussion of full employment and fiscal policies.
Proponents of public investment and policies directed toward
increasing consumption and discouraging private saving in the post­
war period are perhaps in the majority among the contributors.
There are, however, several of the authors who disavow the approach
through artiRcial increases of purchasing power and demand.
Professor Schumpeter, for example, 6nds in the anticapitalist milieu
a large part of the explanation of the attainment of what he calls
"the oxygen-tent stage of capitalism." In his stimulating essay,
deScit spending and the resulting heavy taxation are considered
among the most serious deterrents of free enterprise. Proposing a
destruction of monopolistic forces in our economy, Prof. Simons
argues for a return to nineteenth-century liberalism. And Prof.
Slichter finds in the high-wage policies encouraged by the rapidly



growing trade unionism a possible serious deterrent to private
investment. Finally, the reader will find an able presentation by
Prof. Ellis of the argument that recovery of international trade must
stem from removals of restrictions to trade rather than from
expansionist programs at home.
While differences among the contributors are to be expected,
they must not be exaggerated. In general, the objectives of full
employment, high productivity, equitable distribution of income,
and removal of trade barriers are approved. The authors agree,
well-nigh unanimously, that, if private enterprise does not provide
a high level of employment and a reasonably high standard of liv­
ing, government intervention is imperative. Capitalism is doomed
if the experience of the thirties is repeated. There is general
agreement also that, at least in some stage of the postwar period,
renewal of foreign lendings, extension of our social security program,
and improvement of our tax structure and public works programs of
at least a temporary nature will be required.


o/* F M //




TAe .Need /or FZart&tMy za P^bHc PoHci/.
Important structural changes in the world economic order grew
out of the First World War. It is quite evident now that economic
policy in the decade following that war failed to take adequate
cognizance of these changes. Public policy was based too much on
the assumption that one could act as though the economic order in
its most fundamental aspects had changed not at all. It was a case
of attempting to compress a changing world into the familiar molds
of the prewar period.
Following the present war, it may be suggested, we are less
likely to make this mistake. For one thing, the great depression
has profoundly altered public opinion and no less the views and
judgments of the leaders of public policy throughout the world. All
history shows that the continuance of evolutionary progress in
government requires a high degree of flexibility and adjustment to
changed social forces; and that the effort to compress these forces
into traditional molds produces, sooner or later, social and political
revolution and economic chaos.
The current world conflict is not merely a conflict between
nations. The disastrous experience of France makes crystal clear
the fact that the Western world is passing through a period of high
social tension produced by the tardiness of social and economic
adjustment to change. The capacity of a nation in the modem,
rapidly changing world to survive, without undergoing a revolu­
tion splitting wide open the foundations of the social structure,
depends upon its power of adjustment, its flexibility, and its
adaptability to rapid change. It is the peculiar genius of the
British nation to evolve from old forms and institutions suitable
adaptations to changed conditions. Elsewhere in the major
European countries, it has not proved possible to relieve the



economic stresses and strains and the social tension by evolution­
ary adaptation, hence the revolutionary upheavals which have
been witnessed to date in all the large countries on the European
In the event of a successful war of moderate duration, say 2 to
5 years, there is, it seems to me, solid ground for believing that both
in England and in the United States progress by evolutionary
adaptation to change will continue. The same is probably true of
the smaller countries of northern and western Europe. There is a
growing recognition in these countries that the timid and negative
policies of an outworn tradition are no longer applicable. There is
a growing conviction that inventiveness and bold implementation
are essential elements in any public policy which hopes to cope at
all successfully with the world which will emerge from this war.
FitH a7M%

MiMzatton o / Resources.

The central goal and aim of economic policy are the most efficient
full utilization of economic resources. What ends this e&cient
utilization of economic resources should serve is a question partly of
ethical values and partly of social and political power, and these
have certainly varied from period to period.
In the achievement of this goal the world failed most miserably
in the two decades between the tw o world wars. The great indus­
trial nations which control the bulk of the world's resources failed
to make adequate use of these resources not only in the interest of
their own people, but also (and indeed in large part because of this
failure) in the interest of those peoples less adequately endowed with
natural resources. Out of this failure sprang the breakdown of the
world economy and political security.
Depressions a Daityer to Free
One lesson stands out with great clarity from the experiences of
the last two decades. It is no longer possible to accept the thesis
that cycles of prosperity and depression may be complacently
regarded as a characteristic of a system of free enterprise and private
property. In the m odem world no system can survive which per­
mits the continued recurrence o f serious depressions. Should it
prove true, as some still argue, that periodic depressions are an
inevitable concomitant of private property and free enterprise, then
this system is doomed. I am not able, however, to accept the thesis
that economic fluctuations cannot be controlled. The democratic



countries are committed, with the overwhelming majority view of
their citizens, to the survival of a system of free enterprise. The
successful pursuit of this ideal will be determined by the degree of
success achieved in overcoming depressions and in reaching a sub­
stantial approximation to full employment.
4 ^depression PoKcy.
It is just with respect to this problem of maintaining reasonably
continuous prosperity and full employment that striking advances
in public policy have been made. In the economic area these new
implementations constitute in a significant sense the "arsenal of
democracy." They are the only weapons that have so far been
devised which give any promise of stopping, whatever the outcome
of the war between nations may be, the advancing tide of a totali­
tarian economic order.
The basic political and economic institutions of our country, as
we have known them, will, I think, survive. Yet in a real sense
we are already in the midst of a transition to a new order. The
mechanism remains substantially the same, but we are acquiring a
new attitude with respect to what may be expected from this
mechanism. In the past we have for the most part permitted the
economic order to serve us as best it could on the basis of the auto­
matic functioning of this mechanism. If it gave us good times, we
were thankful. If it gave us bad times, we accepted this as an
inevitable concomitant of a system of free enterprise operating
under the price system. And we allowed the system itself to deter­
mine the distribution of the product and the direction of demand.
Half of the population might be housed inadequately in terms of
minimum standards of sanitation and health. If the automatic
functioning of the mechanism did not create an economic demand
for housing, houses necessary to meet those minimum standards
were simply not built. A large portion of the population might be
quite inadequately fed in terms of minimum nutrition standards.
Yet despite the capacity of the system to supply an adequate
nutrition standard, if the economic demand were not created
through the automatic functioning of the system, nothing was done
about it. We looked to the economic order to satisfy the needs,
desires, and aspirations of human beings as conditioned by the
process of innovation, education, and cultural development. But
if those needs were not adequately satisfied, we accepted the result
with a stem, ascetic fatalism.



Recent trends in economic analysis point to the conclusion that a
more equal distribution of income would somewhat promote full
utilization of productive resources. But we have as yet only the
vaguest ideas about what the ideal distribution of income really
means in concrete terms. W e have perhaps made more progress
with respect to minimum standards of consumption. There is
rapidly emerging out of the experiences of the last two decades a
conviction that we must deliberately set out to achieve new mini­
mum goals. In the first place, we must enable all members of the
community to enjoy the minimum food requirements necessary for
an adequate nutrition standard. Secondly, the whole population
must be supplied with public-health services and with hospital and
medical care adequate to overcome preventable disease. Thirdly,
we must implement ways and means to provide housing for the
entire population adequate to ensure modem sanitation and health
conditions and to afford living quarters commensurate with modem
standards. Finally (and here we encounter an ideal with respect to
which our country led the way a hundred years ago), we must pro­
vide minimum educational standards for our entire population,
whether they happen to live in poor, backward states, or in the
richer, advanced states, and in addition we must provide advanced
educational opportunities for the highly gifted members of the
community, without regard to the income class in which they may
happen to have been bom .

The fact is that many people dread to think of what is coming.
Businessmen, wage earners, white-collar employees, professional
people, farmers— all alike expect and fear a postwar collapse:
demobilization of armies, shutdowns in defense industries, unem­
ployment, deflation, bankruptcy, hard times. Some are hoping
for a postwar boom. W e got that after the First World War. N ot
improbably we may get it again. If the war lasts several years, we
may have at the end of the war sufEcient accumulated shortages in
residential housing, in durable consumers' good such as automo­
biles, and in the plant and equipment required to supply peacetime
consumption demands, to give us a vigorous private investment
boom. Indeed, we need to be on the alert to prevent a possible
postwar inflation. If in fact we do experience a strong postwar
boom, there is, however, the gravest danger that it will lull us to



sleep. Sooner or later such a boom will end in a depression unless
we are prepared. If appropriate action is taken, there is no neces­
sity for a postwar collapse.
Everywhere one hears it said that, when this war is over, all
countries including our own will be impoverished. This view is,
however, not sustained by past experience. No country need be
impoverished if its productive resources (both capital and human)
are intact. The productive resources of this country will be on a
considerably higher plane when this war is over than ever before.
A larger proportion of our population will be trained to perform
skilled and semiskilled jobs. We shall have enormous productive
capacities in all the machine industries. And in special consumers'
durable industries where plant and equipment may have become
deficient by reason of the war, we shall be able very quickly, with
our large basic machine-producing industries, to expand to meet
the peacetime requirements. We shall have, when the war is over,
the technical equipment, the trained and eiBcient labor, and the
natural resources required to produce a substantially higher real
income for civilian needs than any ever achieved before in our his­
tory. Whether or not we shall in fact achieve that level of income
will depend upon our intelligence and capacity for cooperative
We have to make up our minds as a nation that we will not per­
mit a postwar depression to overwhelm us. We do not have to
take economic defeat after the military victory is won. We can,
if we will, maintain business prosperity. We can sustain a con­
tinuing demand for goods. We can keep industry going at high
levels. We can maintain substantially full employment. We can
achieve a society in which everyone able and willing to work
can find an opportunity to earn a living, to make his contribution,
to play his part as a citizen of a progressive, democratic country.
An important gain will, we may hope, be won from the war
program in the struggle to achieve and to maintain full employ­
ment. We have every reason to expect a national income of
around $120 to $125 billion, in terms of 1942 prices. It will be
much easier to muster support for a program to resist a decline from
a high-income level than it has been in recent years to win approval
for an adequate program to raise income to full employment from a
low level. But we must be vigilant lest this gain slip from our
grasp. If we let the income slide from $125 to $90, $80, $70 billion,
we will have to make the old uphill Rght all over again. We must



deliberately set out to hold the new income level and to push it
higher as rapidly as increasing productivity will permit.
If purchasing power is maintained at a high level, we need have
no fears that private manufacturers, retailers, wholesalers, and
farmers will not come forward and supply the market with the goods
demanded by the public— a rich variety of goods at reasonable
prices. Private business can and will do the job of production.
It is the responsibility of government to do its part to ensure a
sustained demand. We know from past experience that private
enterprise has done this for limited periods only. It has not been
able to ensure a continuous and sustained demand. The everincreasing gigantic powers of production of the m odem industrial
system, far exceeding those of any earlier experience in history,
mean that an enormous output has to be reached before full employ­
ment is approached. Private industry and government together
must act to maintain and increase output and income sufRciently
to provide substantially full employment.
When the war is over the government cannot just disband the
army, close down munition factories, stop building ships, and remove
all economic controls. We want an orderly program of demobiliza­
tion and reconstruction. The government cannot escape responsi­
bility. T o fulfill its responsibility it needs the hearty cooperation
of business, labor, farmers, and the professions in the great task of
developing a vigorous, expanding, and prosperous society.
A positive governmental program looking toward full employ­
ment would greatly vitalize and invigorate private enterprise. An
expansionist program would permit private enterprise to operate at
high output levels. There is plenty of work to do. W e need
improved manufacturing equipment to produce more and better
goods at lower prices. We need to carry on extensive research in
the laboratories of our great private corporations, in our universities,
and in government bureaus to create new products and develop new
processes. W e need to rehabilitate and modernize our transporta­
tion system— by land, water, and air. W e need continued advance
in the techniques of production, distribution, and transportation;
in short, in all those elements that enter into a higher standard of
living. W e need to rebuild America— urban redevelopment proj­
ects, rural rehabilitation, low-cost housing, express highways,
terminal facilities, electrification, Rood control, reforestation.
M any public developmental projects open fresh outlets for private
investment. W e need a public-health program, including expan-



sion of hospital facilities. We need a nutrition program. We need
more adequate provision for old age. We need higher educational
standards in large sections of our country. We need a program to
improve and extend our cultural and recreational facilities. We
need an enrichment of the material and spiritual resources of our
American way of life. We have seen how it is possible to mobilize
the productive capacities of the country for war. We can also
mobilize them for peace. Under a program of full employment
new' enterprises would grow up; old enterprises would expand.
Youth would find opportunity and employment.
The notion that we cannot Bnance our own production is quite
without foundation. Every cent expended, private and public,
becomes income for members of our own society. Costs and income
are just opposite sides of the same shield. We can afford as high a
standard of living as we are able to produce. We cannot afford to
waste our resources of men and material. We cannot afford to use
them ineSciently. But we cannot afford idleness. The idleness of
the decade of the thirties was responsible for the loss of $200 billion
of income. The public expenditures required to rebuild America,
to provide needed social services, and to maintain full employment
can be provided for out of the enormous income which the full
utilization of our rich productive resources (material and human)
makes possible. The costs of producing this income are merely
payments to ourselves for the work done. There is not— there can­
not be— any Bnancing problem that is not manageable under a fullemployment income. In 1941 we produced a Bow of Bnal goods
and services (net national income) valued at $95 billion. In 1942
it was about $120 billion. From an income so vast we can raise
large tax revenues—large enough to service any level of debt likely
to be reached and to cover all other government outlays— and still
retain for private expenditures much more than we had left in
former years under a $70 billion income with lower taxes. Taxes
are merely one way of paying for social services and public improve­
ment projects which we need. But it is not necessary or desirable
under all circumstances to finance all public expenditures from taxes.
Whether taxes should equal, fall short of, or exceed expenditures
must be decided according to economic conditions.
Everywhere it is said, and constantly reiterated, that we must
tighten our belts and pay oR our government debt when peace
returns. When is it desirable to pay off part of the debt? Cer­
tainly not when there is danger of an impending depression. Under



certain conditions it would be desirable to do so. Under other
conditions it would be quite unsound policy to retire the debt.
Financial responsibility requires a fiscal policy (including govern­
mental expenditures, loans, and taxes) designed to promote eco­
nomic stability. It would be quite irresponsible to cut expenditures,
increase taxes, and reduce the public debt in a period when the
effect of such a policy would be to cause a drastic fall in the national
income. Equally it would be financially irresponsible to raise
expenditures, lower taxes, and increase the public debt when there
is a tendency toward an inflationary boom.

In the calendar year 1941, expenditures on goods and services
for private consumption amounted to $76 billion, of which about
$11 billion were durable consumers' goods, such as automobiles
and household equipment of all kinds. In 1943, purchases of con­
sumers' durables will be cut to a minimum. Total consumption
purchases for private use may have to fall to $70 or even $65 billion
in order to provide adequate resources of equipment, raw materials,
and man power to produce the $90 billion needed for the war.
Thus the various components of the 1943 national product may be
set down as follows:
1943 G R O S S N A T IO N A L P R O D U C T
(In billions)
Private consumption.................................................................... $ 78
Nonmilitary government services (adjusted).........................
Private capital formation (including replacement)...............
War (including war materiel, outlays for plant, equipment,
and lend-lease)..........................................................................

Total gross national product...................................................... $180
Less business taxes and corporate gross savings................
Net national incom e..................................................................... $135

When the war is over and the $90 billion expenditures for war are
drastically curtailed, we shall be confronted with a gap that has to
be Riled by consumption and capital formation if we are to main­
tain full employment.
We have assumed that consumption expenditures would be
held down to $78 billion for the year 1943. It is not likely that
this could be achieved without (1) the imposition of heavy incom e
and consumption taxes during the war effort, (2) part payment of the
increased wage and salary bill in defense bonds (Keynes's plan),



and (3) large voluntary purchases of defense bonds. If these ends
can be achieved durmp the war period, the postwar release of funds
thus diverted would help greatly to raise postwar consumption and
so RU part of the gap from curtailment of war expenditures.
In the postwar period, the problem is how to 611 the gap left
when war expenditures are curtailed. Let us suppose the following
components of the postwar national product:

(In billions, and at 1942 prices)
Private consumption............................................................... $100
Private capital formation........................................................
Government purchases of goods and services (including the
ordinary services of federal, state, and local governments,
military expenditures, public works, etc.).........................
Total gross national product................................................... $160
Leas business taxes and corporate gross savings..............
Net national income................................................................ $125

This mode! presupposes that private consumption will have
been lifted from about $75 billion in 1943 or 1944 to $100 billion in
the transitional postwar period. In the immediate postwar transi­
tion, the increase in consumption might come (1) partly from the
full cash payment of wages and salaries in lieu of the assumed par*
tial payment of wages and salaries in defense funds during the peak
of the war effort; (2) partly through the conversion of the accumu­
lated defense savings into cash by selling the defense bonds to banks
or to individuals desiring to save and the expenditure of such sums
on durable consumers' goods with respect to which, in all prob­
ability, a large backlog of deficiencies will have accumulated during
the war period; (3) partly through an expansion of consumers'
credit which we may assume will have been reduced to small pro­
portions during the war period; (4) partly through a sharp reduction
of the taxes imposed during the war period on liquor and tobacco,
together with the complete abolition of severely regressive consump­
tion taxes on necessities; (5) partly through a shift (especially in
the middle- and upper-income classes) from the purchase of defense
bonds to enlarged consumption expenditures, especially on durable
goods; and (6) partly through an enlarged program of Federal
expenditures on social welfare, including (a) family allowances,
(b) food-stamp plan and other food subsidies designed to improve
nutrition, including school lunches, (c) greatly enlarged publichealth program, (d) revised and expanded program for old-age



assistance and old-age pensions, and (e) Federal aid to education to
bring up the standards in backward areas.
The mode! further assumes a considerable increase in capital
replacement and a corresponding reduction in business taxes.
Gross private capital formation, including replacement expenditures
and net additions to capital, are estimated at $22 billion. This
includes inventory accumulations and investment in plant and
equipment and in residential buildings. All these areas may have
been starved during the defense and war period, and, accordingly,
large shortages may have accumulated requiring greatly increased
capital outlays. Capital expenditures might well, for some years,
rise to a level above the figure indicated. After the First World
War a tremendous spurt occurred, lasting from the spring of 1919
to the middle of 1920, in investment in manufacturing plant and
Altogether the various factors enumerated above indicate the
great possibilities for the expansion both of consumption and of
private investment during the transitional period. Indeed, the
potentialities for expansion of consumption and private investment
in the immediate postwar period are sufficient to indicate the pos­
sibility of a genuine and fairly prolonged postwar boom. The
Federal government should, however, be prepared to play a bal­
ancing role, checking any temporary tendency toward an excessive
boom, and, on the other hand, be prepared to go forward with large
Federal expenditures on public improvement projects to compensate
for any strong tendency toward deflation and depression.
fotoard a


From the long-run standpoint, a persistently pursued policy to
maintain full employment raises interesting questions with respect
to the effect of such a policy on (1) the distribution of income and
(2) the proportion of a full-employment income which, it may be
expected, would be expended on consumption. In brief, it is
reasonable to suppose that the ratio of consumption to income in a
full-employment economy would automatically tend to be higher
than the ratio of consumption to income at the peak of a boom in a
violently fluctuating economy. A full-employment economy would
tend automatically toward a distribution of income favorable to
high consumption. This affords ground for optimism with respect
to the feasibility of a positive program designed to maintain full
employment. Such a policy, if successfully pursued, tends to



develop repercussions upon the distribution of income which
reinforce the program to maintain full employment.
That this is true can best be seen if we analyze the problem of
corporate proRts in a society continually operating at a full-employment level. Peak prosperity proRts have never in the past been
realized for any considerable period of time. In a highly fluctuating
society such as we have known, normal proRts are some sort of
average of good times and bad times. Thus, for example, in the
period 1925-1940, the net income of corporations fluctuated very
violently in relation to the total national income. In periods of high
prosperity, the ratio of net income of corporations to the total
national income was high, while in periods of depression, despite a
fall in the national income, the ratio of the net corporate income to
the total national income was low. Over the entire 16-year period
from 1925 through 1940, inclusive, the corporate net income aver­
aged only 4.6 per cent of the national income. It should be remem­
bered, moreover, that this 16-year period included many years of
serious depression, so that the average national income was rela­
tively low. In other words, corporate proRts constituted only a low
percentage of a small national income— small in comparison with
the income potentially realizable.
In a highly Ructuating society, corporate proRts are high in
good times and extremely low in bad times, but the average must
be adequate to motivate a proRt economy and ensure its work­
ability. If, however, it were possible to maintain continuously a
full-employment national income, it is obvious that corporate
proRts, representing the same percentage of national income as that
averaged over the cycle in the past, would yield an absolute proRt
Rgure far above the experience of 1925-1940. Yet such a per­
centage continuously maintained would be much lower than the
high ratio of proRts to national income reached in a Ructuating
society in the peak boom years.
In a society operating at continuously full employment, it is not
probable that peak-prosperity proRts (in 1925-1929 approximately
twice the average for the entire period 1925-1940) could indeRnitely
be maintained* In a Ructuating society, such high proRts are
necessary to offset the losses of the depression years, but it is
unreasonable to suppose that proRts of the magnitude of boom
periods would be realized indeRnitely in a full-employment system.
They would almost certainly be eaten into, partly by competitive
price decreases beneRting consumers and partly by the pressure for



higher wages which invariably occurs in industries making large
proRts. Either development would tend toward a more equal dis­
tribution of income than has prevailed in the past ^ boom periods
when full employment was reached. This is true because of the
relative decline in the ratio of business profits to the national income
Yet, if a full-employment income were
continuously maintained, the ratio of business profits to the national
income over the whole cycle would probably be greater than that
experienced in the past, while the
of business proRts
would be considerably greater, owing partly to the higher average
ratio and partly to the higher average national income for the whole
It must be recognized, however, that there are certain limitations
on how far proRts can be encroached upon, either through wage
increases or price decreases, without encountering unfavorable
economic repercussions with respect to the cost-price structure.
Wage increases and price reduction are likely to cut across all Rrms
in an industry, whether they make proRts or n o t; and wage increases
are likely to spread even to industries which are not making abnor­
mally large proRts. Thus, the process of encroachment upon
boom-time proRts through wage increases and price reduction, if
carried too far, may disrupt the appropriate balance in the costprice system.
Redistribution of income through progressive individual and
corporate income taxes is less disruptive of these relations for the
reason that such taxes apply only where the proRts and income
actually emerge. They do not affect the high-cost industries which
make no proRt. As already indicated, there are limitations upon
the process of redistribution of income through the methods of
wage increases and price reduction. These methods are feasible
up to a certain point, but the point is Rxed b y the requirements of
cost-price balance.
Consumption can, nevertheless, be very materially raised
through wage and price adjustments in a society continuously
maintaining full employment. There would still remain, by reason
of continuous capacity output, adequate proRts to sustain and
motivate private enterprises— indeed better proRts than those
experienced on the average in a highly Ructuating society*
Such a shift evolving gradually could add several billions of
dollars per annum to consumption expenditures at fu ll-e m p lo y m e n t
levels. In addition, continuing improvement in labor productivity



as a result of technical progress would make possible progressive
wage increases without encroaching on the necessary profits
required to motivate a private-enterprise economy.
In a later postwar period, following the transitional readjust­
ment, we may assume a gradually increasing national income. In
terms of current prices, $135 billion of national income by 1943 or
1944, as indicated above, is probable. Accordingly, it should not
be unreasonable to suppose that, by reason of (1) increased pro­
ductivity and (2) population growth, the national income might
rise to around $150 billion by 1950.
The components of such a national income, for illustrative pur­
poses, might be set down as shown in the following table:
(In billions)
Private consumption................................................................ $120
Private capital formation........................................................
Government purchases of goods and services.......................
Total gross national product................................................... $185
Less business taxes and corporate gross savings..............
Net national income................................................................ $150



Obviously, the income models set down above can have no
validity as statistical forecasts. They are useful, if at all, only as
aids to analysis and formulation of policy. They suggest certain
First, with respect to the war period, the following policies are
1. High corporate-income and excess-pro6ts taxes.
2. Sharply progressive estate taxes.
3. Broadening of individual income-tax base together with
steeply graduated surtax rates.
4. Sharp increase in excise taxes on commodities competing with
the war program.
5. Part payment of wages and salaries in war bonds.
6. Qualitative shift in the components of consumption.
Second, with respect to the postwar period, the following policies
are suggested:
Retention of progressive (graduated) tax structure and
broadened tax base, with major emphasis on the individual income
tax and less reliance on the corporate income tax.



2. Sharp reduction in war consumption taxes.
3. Adequate plans by private enterprise for private-investment
projects in manufacturing plant and equipment, in railroads, public
utilities, and housing.
4. Adequate program of public-improvement projects, including
a nationwide development of national resources, express highways,
urban redevelopment (involving among other things outlays in
terminal facilities and reorganization of urban transportation), and
a reorganized public housing program (including the setting up of a
Housing Research Laboratory designed to reduce construction costs
and thus enlarge the scope of private housing construction).
5. Expansion of public-welfare expenditures— Federal aid to
education, public health, old-age pensions, and family allowances.
This involves partly an expanded program and partly a means of
reducing state and local property and consumption taxes, thereby
stimulating private consumption expenditures.
6. International collaboration to pursue internal policies
designed to promote active employment; to explore developmental
projects in backward countries; and to implement ways and means
to open outlets for foreign investment, and to promote world trade
and the effective worldwide use of productive resources.

A fatal defect in New Deal spending of the thirties was its handto-mouth character; no one knew where it was going or when it
would end. What is needed in the postwar period is a program
conceived in terms of a decade or more, so that private business can
plan its investment program on a secure basis. The investment
plans of private business are determined in considerable measure
by national income. If businessmen expect a fluctuating national
income or a prolonged depressed income of $60 or $70 billion, their
investment plans will be pitched to this level. However, if a com­
prehensive long-range development program has been prepared
and presented to the public— a program that assures a continued
high level of employment and income— business investment plans
will be pitched on a quite different level. Sporadic public expen­
ditures, no matter how large, will induce little or no private invest­
ment, but a public-development program extending over many
years and designed to open private investment outlets could pro­
foundly influence investment decisions*



Such a program must be conceived in bold terms. A timid
policy that demands the full return of 100 cents on every dollar
invested is quite inadequate. It should be recognized that many
public-development projects are justified from the standpoint of the
economy as a whole, even though they might return directly to
the Treasury only 50 cents on the dollar. The Tennessee Valley
Authority, for example, may not return 100 cents to the Treasury
for every dollar expended; nevertheless, in terms of the increased
productivity in that area and indirectly in the nation as a whole,
it is an immensely profitable venture.
A comprehensive economic development program should be
nothing short of a plan to rebuild America over the next two decades,
to develop her latent resources, to increase her productive power,
and to raise her standard of living and purchasing power. It
requires a planned development in the following six areas:
1. L?rban
Of first importance from the stand­
point of living conditions and in terms of the magnitude of induced
private investment is a program of urban redevelopment. The
need for extensive replanning and rebuilding of American towns and
cities is urgent. Their physical layout no longer meets the require­
ments of modem conditions. Problems of traf&c congestion, trans­
portation terminals, overcrowding of population, slums and
blighted areas, parking space for motor vehicles, and space for
recreation have been met only with piecemeal palliatives. Great
and ever-widening areas around the centers and subcenters have
become blighted. Suburbs have grown in all directions and, con­
sequently, the metropolitan center has lost in taxpaying capacity.
In blighted areas, tax delinquency has become an acute problem.
Redevelopment is prevented by the burden of excessive landacquisition costs.
An adequate program of urban redevelopment is so great an
undertaking that Federal aid would have to be substantial. With
the cooperation of the states, Washington should set about remov­
ing the two chief obstacles in the way of replanning and rebuilding.
These obstacles are legal—the lack of adequate powers of the local
governments to control the use of land— and financial—the frozen
status of high land costs and the fiscal incapacity of the local units
of government.
Each city or group of contiguous cities should be required, after
the states have granted the necessary legal powers, to produce a
satisfactory master plan for the entire metropolitan area. The



Federal government through an appropriate Federal agency would
then be asked to advance a substantial part or all of the funds with
which the real property in the slum and blighted areas would be
acquired. It would be repaid as far as possible out o f subsequent
proceeds from the use of land.
The master plan would indicate the proposed use o f every por­
tion of the acquired area. Use would be determined without regard
to acquisition cost. Part of the land doubtless would be available
for business and industrial use, a part for parking space and for
playgrounds, but the largest part would be set aside for residential
purposes. A part of the new housing thus developed would be
public low-cost housing, but the greater part of it can, if proper
steps are taken, be undertaken b y private enterprise.
A many-sided attack upon the housing problem requires first
a rationalization of the construction industry. A research and
experimental agency endowed with adequate capital, say $50 mil­
lion, should be set up to solve on a full commercial scale the problem
of producing good low-cost dwellings. In addition, private invest­
ment in houses for rent by life insurance companies, savings banks,
trust estates, foundations, and other holders of savings should be
stimulated b y an amendment to the National Housing A ct author­
izing the Federal Housing Administration to ensure recovery of
substantially all the original investment and a minimum annual
return of say 2 per cent for a period of something like 30 years.
Under this program, the entire property would be held b y the
owner, mortgage free. Thus far, only one important life insurance
company has done anything in the way of building large rental
properties on an unencumbered-ownership basis. A minimum
guaranty b y the Federal Housing Administration probably would
induce a much larger development of rental housing properties.
2. River-tmHey
A program of river-basin develop­
ment looking to the best use of our water resources is imperative.
In many river basins, this involves multiple-purpose projects,
including navigation, flood control, the developm ent o f hydro­
electric power, irrigation, drainage, and soil conservation. The
American public finally has accepted with favor the gigantic experi­
ment in the Tennessee Valley. Bills now before Congress call for
somewhat similar developments in the Columbia R iver Basin in
the Pacific Northwest, and in the Arkansas R iver Valley. All told
there are perhaps 20 or 30 river basins throughout the country that
need development, some suitable for multiple-purpose development,



others of a more limited character. A plan of river-valley develop­
ment for the entire country should be made as rapidly as possible,
since adequate blueprinting of the development of our water
resources will require a vast amount of technical research.
3. Rai!road investment Program. Our railroads sadly need
modernization of equipment and integration of organization. The
country's entire railroad system probably ought to be organized
into a few railroad companies, each covering a special region. The
mess of overlapping and conflicting securities needs to be swept
aside. Private operation and management can continue, but the
right of way and terminal facilities should be government-owned.
Under such a program, the Federal government would be able to go
forward in periods of business slump with investment in bridges,
underpasses, terminal improvements, and similar Axed capital
4. Znterrepionat jFftphimys and
Transportation. The Bureau
of Public Roads is making studies of interregional and express high­
ways with appropriate connections through and around the great
metropolitan centers. Improved and modernized road facilities are
especially needed to solve the problem of city street congestion and
to facilitate rapid transportation between major metropolitan areas.
Following the war, we can expect a tremendous acceleration of
air transport. This development undoubtedly will include not
only express and freight transportation but also private 8ying and a
great enlargement of passenger transport. Provision must be made
for adequate airports, terminal buildings, and hangars. Transit
facilities must be provided to permit easy access to the cities so
that the time saved by plane will not be lost at the terminal. An
extension of the airway system will require the establishment of
large milages of beacon lights, markers, and communication equip­
ment. Such public improvements are the necessary basis for the
development of a potentially important industry.
5. RuroZ Devetopment Projects. The Department of Agriculture
has long considered the development of large-scale rural publicinvestment projects. Many of these are already under way, but
expansion of the program is necessary. This involves an accelera­
tion of the program of rural electriBcation, a greatly expanded
program of reforestation and soil conservation, and an adequate
program of rural housing.
6. Federal WcrA Rewrve. The Federal Works Agency is cur­
rently engaged in a nationwide project to build up a large postwar



"shelf" of public work projects. These involve mainly the more
familiar types of public works, including roads and bridges, harbor
development, canals, water-supply and sewerage disposal facilities,
welfare and health institutions, such as hospitals, prisons, and com­
munity recreational centers, schools and government ofRce build­
ings, experiment and research stations, and public low-cost housing.
A program along the various lines indicated above is essential
if we are to face the future with any assurance of the continuance of
substantially full employment and as rapid a rise in real income as
technical progress will permit. We need a new spirit of enterprise
to develop the resources of the country as a whole and of backward
areas in foreign countries. We need boldly and fearlessly to imple­
ment the government as an instrument of economic expansion, as
was done in the early part of our history.
A comprehensive development program does not require the
government to preempt any large segment of the economy. Over
85 per cent of the economy is normally devoted to the production of
consumption goods. Under modern conditions, to be sure, impor­
tant services included in the consumption category are performed
by government, but the proportion to the total consumption of
goods and services is small. Private manufacturers, retailers,
wholesalers, and farmers can supply the market with the goods
consumers want. Moreover, the bulk of investment can be under­
taken by private enterprises. Public investment and development
projects are needed especially in those areas where there is no
assurance that direct returns will bring 100 cents on each dollar
expended, but where from the standpoint of the general economy the
undertaking can be justified. A comprehensive developmental
program would act as a wedge to open private investment outlets.
It would raise employment and national income, and thus indirectly
stimulate the volume of consumption expenditures. It would raise
the standard of living and invigorate private enterprise both in the
consumption and in the investment spheres.*
Much of the material in the foregoing chapter is drawn from the following
previously published writings of the author:
Alvin H. Hansen, "Changes in Economic Structure Arising out of the War
and Their Implications for Public Policy/* Ch. IV, Part III, in PiiMtc FoJtby,
Vol. III, C. J. Friedrich and E. 8. Mason, eds. Cambridge, Mass., 1942.
Alvin H. Hansen,
FmpJoyment, National Resources
Planning Board, 1942.
Alvin H. Hansen, "Our Coming Prosperity," Common S o w , June, 1942.



As this essay is written, America's most important task is that
of winning the present conflict. Therefore, the difficult problems
which our economy must again face when peace is at last reattained
have very properly been pushed into the background. The most
important of these problems is that of providing for
Before the war we had not solved it, and nothing
that has happened since assures that it will not rise again. And
yet it is vitally important that we win victory on this economic front.
Not alone for the tremendous material advantages which full
employment will bring, but also because politically a democracy
cannot flourish under conditions like those of the great depression.
It is necessary to emphasize these simple fundamental facts
because in the years just prior to 1939 there were noticeable signs
of dwindling interest in the problem of unemployment, which took
the form of ostrich-like attempts to "think" away the very fact of
unemployment by recourse to bad arithmetic and doubtful statistical
techniques. And even among professional economists there was
increased emphasis on the recovery of production and income to
1929 levels.
At the present time, there are clear indications of increasing
optimism among our better informed observers concerning the likeli­
hood of a postwar boom of some duration. In this respect, the
experts are far ahead of the business community and the man on the
street; but those who take the pulse of public opinion profess to
detect some signs of increased optimism even among these groups.
The lay reader may find parts of this essay difficult reading. The excellent
summary herein of some aspects of Keynesian economics— which is the basis
of much of the reasoning in this volume and to which Prof. Samuelson has
made contributions—should be read carefully, for without an understanding
of this material one cannot understand the problem of unemployment and its
relation to savings and a rising standard of living.— EDITOR




No doubt this is a healthy corrective against the undue pessimism
concerning the postwar period which characterized public opinion in
the recent past. But it would be unfortunate if we were to build
up an attitude of complacency which might inhibit constructive
policy formation designed to promote effective demand and combat
unemployment should it develop; unless, of course, facts have
become available which show conclusively that a lasting postwar
boom is indeed inevitable. This' essay will be concerned with
weighing the strategic factors and considerations upon which the
validity of this point of view depends. However, it may be said
in the beginning that whether optimism may or may not be justified,
complacency certainly cannot. Precision in forecasting is simply
out of the question. There exists no new facts, secret or otherwise,
which can justify the relaxation of our vigilance or of our conviction
to combat a downward spiral of income and employment.

By this I do not mean to imply that there is a serious prospect
that we shall return to national income levels such as characterized
the deep depression of 1932-1933. Regardless of plans and inten­
tions, any party in power would be forced by the mere sweep of
catastrophic political events to provide suSicient demand to prevent
this from happening. The real danger lies in the possibility that
we shall lag ever farther behind our true productive potential—that
we shall be content with a half loaf instead of insisting upon the
whole loaf which can be ours. The thing to fear is an ever-widening
gap between our attained levels of output and employment and our
true productive potential.
It has taken the heavy wartime expenditure to show us how
big the gap already is. Throughout the thirties productivity
increased tremendously so that we were able to reach the 1929
levels of real income with considerably reduced employment. Until
the defense program, all these gains plus the whole of our population
increase were dissipated in unemployment or shared underemploy­
ment. Any doubts as to the magnitude of this dissipation are
removed by the fact that we are currently producing real national
incomes 50 per cent greater than those of 1929. ^ Given time in
It is not certain but what our current peacetime potential would be
greater than that now attained. For war products must be produced hur­
riedly and in the face of bottlenecks, with shortages of strategic metals and
with equipment not completely adapted to the changed character of produc­
tion. In addition, some millions of able men are taken by the military forces



which to make adaptations of equipment and manpower, it is only
conservative to estimate that by the middle of this decade we shall
be able to produce real national incomes 50 per cent greater than
prewar levels; and by the closing years of the decade, real national
incomes more than 70 per cent greater than prewar levels. In
terms of
<FoMars this means net national incomes of
around $110 billion and $120 billion respectively.*
However, there is no special reason to believe that we shall
necessarily return to prewar price levels. Indeed, despite our best
efforts to control the price level by fiscal and direct measures, he
would be an optimist who did not allow for at least a 25 per cent
increase over the price levels prevailing in the summer of 1942.
Consequently, within little more than the next half-dozen years, we
may witness money national incomes of not much less than $170
billion. ^ Such a 6gure may seem fantastic, but so have all the
estimates of one or two years ago— estimates which have already
proved to be too cautious. Furthermore, our figure is premised
upon the successful maintenance of full employment. And if
events prove the estimate to be excessive, no harm will have been
done since it will simply bring home by exaggeration the qualitative
nature of our problem.
In drawing up fiscal plans for the future we must begin to think
in larger numbers. Out of $170 billion income we shall have more
money to spend on food, clothing, housing, recreation, leisure, edu­
cation, saving, and personal security. We shall also be able to
afford more in the way of public works, urban reconstruction, social
at fractions of their previous incomes. Against these factors must be men­
tioned the increased intensity of work under multiple-shift operations and the
fact that national income figures are swelled by the less prudent expenditure
of funds which the emergency necessitates. The incommensurability of war
output makes it impossible for statistical deflation of money income to remove
the latter source of bias.
These figures are offered with due allowance for apparent productivity
trends and population changes. Needless to say, they imply no forecast
and are introduced only for purposes of exemplification. If anything, they are
probably too low.
' Most of the rudimentary caculations that are presented in this essay are
independent of the price level in terms of which real magnitudes are expressed.
Should the increases in productivity upon which all the above estimates are
based tower prices below the hypothesized levels, only a scale change in the
value of various magnitudes will be required. An exception is provided by
the case of such Rxed-money magnitudes as the national debt. Changes in
the price level will then mean real changes in its "burden."



security, welfare expenditures, etc. And by hypothesis only a
small part of the increase in our total disposable money income will
be offset by the higher prices for which everything will sell.
This is the promise which the future holds for us, provided that
we are lucky or provided that we manage our affairs well. But
bitter experience of the last dozen years, if not of the last century
and a half, shows that there is no invisible hand guaranteeing that
we shall always be lucky. Whether or not we should prefer it that
way, the only alternative is deliberate, purposive, intelligent social
action on whatever scale is necessary to ensure continuing full

Anyone with the slightest knowledge of the existing standard of
living of the various economic groups in our economy, and of the
want patterns characteristic of modern society, cannot doubt that
our Tteeds will not begin to be Riled by a 70 per cent increase in out­
put, nor even by a doubling and quadrupling of output. We may
take it as axiomatic that within the visible range human wants are
insatiable, so that we shall not lack for employment for the reason
that there is nothing useful left to be done.*
Why then can there be any problem of unemployment? A few
of the older economists might even have denied its possibility on
the basis of a discussion of human needs. But these would be in
the minority. Bitter experience has taught us that it is not enough
to be able to produce and to be able to consume. Demand must
become effective if those who are willing to work are to find employ­
ment. At the bottom of the great depression our wants were if
anything greater than before, our abilities to produce no less, and
yet there was no mechanism by which these could be brought
It is not possible to reach full agreement among economists on
any subject, much less on the fundamental reason why the above
paradox should prevail. But increasingly there is a trend toward
a theory of income determination, such as is about to be described.*
* In that dim distant (and probably ever-receding) day when human wants
are satiated, the alternative to work will not be enforced unemployment, but
rather play and leisure, t.e., activity undertaken for its own sake.
* To a first approximation, with given technology and capital, the level of
employment is determined as soon as the level of income is given, increasing
as the latter does. This is not exact because the same level of income can be



It is associated largely with the name of John Maynard Keynes,
although others have aided in its development. While its crystal­
lization can be dated from the appearance of the CetteraZ TAeort/* in
1936, it can be shown to have its roots in the earlier thinking of
Keynes and other economists, and also to represent an amusing
"throwback" to discredited doctrines of earlier days. Although
the appellation "Keynesian" is usually applied to individuals of a
certain viewpoint with respect to monetary and fiscal policy, this
should not be confused with the use of the term as applied to those
economists who use the technique of analysis which is about to be
described. In itself the technique of analysis is neutral on policy
questions, and that is why a majority of modern economists can
continue to employ it while still dissenting vigorously from the
views of the small but growing minority who constitute the inner

We may approach our problem by way of an investigation of
the manner in which an individual family expends an increase in
its income of, say, 10 per cent.s Its expenditure on each item
purchased does not ordinarily go up in the same proportion.
Despite some shifts to better grades of food, its total expenditure
on food will in all probability increase by less than 10 per cent.
On the other hand, its expenditure upon recreation may increase by
more than 10 per cent. But if all consumption items are added
weighted more or less heavily with products requiring much or little labor per
unit. But for the present purpose it will be satisfactory to regard employ­
ment as being determined as soon as income is determined.
* J. M. Keynes, The CerMraZ Theory qf
/nierest, and
(London, 1936).
* Literally thousands of "b u d get" studies have been made of income pat­
terns in different countries and cities.
Faith M. Williams and C. C.
Zimmerman, ^Studies of FamtJy Lwm# tn
17mted iSta^as and Other Countries,
(U. S. Department of Agriculture, Publication 223). The consistency of
results is impressive, suggesting that here we have a fairly stable and funda­
mental relationship. One of the most complete studies ever made for a
country as a whole is outlined in CotMttmers Farpendiiitre tn
1935-36 by the National Resources Committee. This one undertaking
represented the joint work of the above committee, the Bureau of Labor Sta­
tistics of the Labor Department, the Bureau of Home Economics of the Agri­
culture Department, and the Works Progress Administration. Despite
inevitable inadequacies, it has rightly come to be regarded as a basic social



together, it is almost invariably found that they increase in smaller
percentage than income; that those families with higher incomes
devote an increasing percentage of their income to saving, ^.e., to
the purchase of securities, life insurance, or to the accumulation of
saving accounts. Even more certain is the generalization that i#%A
Ai^Aer mcomes, some /ra<%to% of %Ae wcreose groes tw%o saw% so %Aa%
%Ae to%a! of savwp wtcreases abso^^Zy ^ A ^come t^Ae^Aer or ?^o^ ^
does so w !ass or prefer propoWio^.
In view of the relationship between family savings and family
income, it is to be expected that there should be a fairly stable
relationship between the total of all family savings and total
national income; or what is only the other side of the picture,
between total consumption and national income. Examination of
the data provided by the painstaking efforts of Prof. Simon Kuznets
of the National Bureau of Economic Research shows this to be the
case.* For when national income rises, the incomes of most groups
do also, and if not in the same proportions, nevertheless in a pattern
sufficiently regular as to lead to the same result.
To individual and family savings we must add the savings of
business and corporate enterprise. Indeed, it would appear from
statistical examination that although these sources provide only a
fraction of total saving, nevertheless they provide almost the whole
of ea%ra savings made out of additions of national income. Their
prope%st&/ %o sape exceeds that of individuals.
Statistically, theoretically, and institutionally, everything points
toward a consumption-savings-income pattern which is relatively
stable, which is qualitatively predictable, and which changes only
slowly over time. At low levels of national income net savings are
negative; at some intermediate break-even point considerably below
the full-employment level, they are zero; as we approach full
employment, they mount rapidly, increasing more than propor­
tionately with income.
* S. Kuznets, M%nma%
1919-1938, Vols. 1
and 2 (New York, 1941). The interested reader may also refer to the following
statistical investigations: A. H. Hansen, Fiscal PoHcy and BugMMss Cycles (New
York, 1941), Ch. X I and Appendix; M. Ezekiel, "Saving, Consumption, and
Investment," I and II, American -EfcowwMc Ret^etp, March and June, 1942;
O. L. Altman,
a?n% JVa%iowa% ZTMKMne, T.N.E.C. Monograph
37; M. Abramovitz, "Savings and Investment; Profits vs. Prosperity?" .Ameri­
can FCWMMMC Rewew, Supplement, June, 1942, pp. 53-89. R. Bangs, "T h e
Changing Relation of Consumer Income and Expenditure," iSitrvey c / Current
April, 1942, pp. 8-12. For other countries, the reader may consult
C. G. Clark, 77m
of JRxMMWMg Propress (London, 1940).



As a second approximation to bring the picture into greater
conformity with reality, we must modify the above notion of a
stable consumption-savings-income pattern to allow for secular and
cycKcaJ alterations. The first is most easily understood. As real
income increases over time, commodities that were once luxuries
become necessities. Today, modest incomes can buy more than a
king's fortune could command in former times. And yet such
incomes are often not large enough to Snance "absolutely neces­
sary" purchases, so that their possessors cannot break even, much
less save on balance.
What is true for the individual is true for the community.
Whatever the concept of oversaving is supposed to mean, it cer­
tainly does not imply that at the same levels of real income modern
communities consume less than they used to. Rather is the reverse
true. Not only does consumption at the same income levels
increase secularly, but our rudimentary statistical data indicate
that in each decade for the half century prior to 1929 about the
same percentage of national income was saved.* Since national
income was increasing rapidly throughout this period, the most
ptausible explanation of this is to be found in the hypothesis that
our enlarged scale of wants was causing an upward shift in the
consumption function at about the same rate as improvements in
our production potential, yielding a stable relation between per­
centage consumed out of national incomes corresponding to a given
fraction of
Indeed, were it not for this upward shift of consumption, it
would have become increasingly diiEcult to approximate as closely
to full employment as we have in the past. And in the future, the
outlook for employment would be very black if we could not count
upon expanded standards of life. But this is not to imply that
there is any guaranty that the upward shifts of the consumption
schedule will be at a rate rapid enough to keep up with our produc­
tive potential; especiaHy if the war and a prolonged period of depres­
sion keep us from knowing what we are missing in the way of new
good things of life, so that our consumption "requirements"
increase more slowly than our productive potentialities.
*8. Kuznets, "Capital Formation, 1879-1938,"
/yKtuslrtal RetotMWM (Philadelphia, 1941), pp. 53-78.
The customary relation is not to be found in 1941 and 1942 when restrictions
on Rows of consumers' goods and patriotically induced subscriptions to war
bonds stimulated savings.— EnrroB



It is all very well to deal with the amount which would be con­
sumed out of a given income level if that income were maintained
for some time; but, in fact, income oscillates with business
activity. What are the ci/cKca% distortions of the consumption and
savings picture? While income is rising (falling), does consumption
change by more or less than its increase (decrease) from one stable
level to another maintained stable level? This question cannot be
given a definitive answer on a priori grounds, since there are con­
siderations supporting either an affirmative or a negative answer.
On the one hand, it would seem plausible to argue that some time
is required to become adjusted to increased levels of income so
that in the short run consumption increases less with increased
income than it does in the long run, saving taking up the slack.
Moreover, when income drops, consumption is maintained at the
expense of savings. According to this first point of view, the
short-run marginal propensity to consume is less than the long-run
marginal propensity to consume. *
Diametrically opposed to this is the hypothesis that an increase
in income will immediately cause families to make durable-goods
purchases in excess of the increase in income, either through use of
installment credit or out of previously accumulated wealth. This
would imply a "reverse acceleration effect" whereby a positive rate
of change of income would induce consumption expenditure over
and above what would be forthcoming at the same level of income
steadily maintained.
Only the facts can decide between these opposing theories. On
the whole, the statistical data seem most in accord with the first
hypothesis.^ In the short run when income is rising (falling), con­
sumption does not increase (decrease) as much as its change from
one stable level to another. This would be even more true if we
included in .consumption expenditure only the value of consumers'
* By the marginal propensity to consume we mean the slope of the consumption-income schedule, or the fraction of an additional dollar of income
which is spent upon consumption. Since every dollar of income is either
spent upon consumption or goes into saving, the marginal propensity to con­
sume is one minus the marginal propensity to save. The marginal propensity
to consume should not be confused with the propensity to consume which
refers to the whole consumption-income schedule or to some point on it; nor
should it be confused with the average propensity to consume which gives the
percentage of total income which is consumed. Despite the fact that savings
and investment are equal as observables, the reader is warned against iden­
tifying the marginal propensity to save with the marginal propensity to invest.

* Ezekiel, op. c#., p. 33.



durables actually used up in the given period. There is ample
precedent for such a procedure, but the fact that it involves a
difhcult reckoning of the imputed use value of consumers' durables
militates against its adoption.
The accompanying chart summarizes what has been said. The
dark line, 4,4, represents what the static consumption function
would be at any instant of time if income were to be maintained

stable at each given level. As time passes, the consumption sched­
ule shifts upward to the higher dark line, 4 '4 '. Strictly speaking,
under modern conditions these schedules are not observable since
income rarely holds to a plateau of income, but moves cyclically.
This point is indicated in the lighter curve which takes the shape of
ascending spirals; these are counterclockwise in direction because
of the delayed adjustment of consumption to new levels of income.
In this diagram, both the cyclical and secular distortions of the
static pattern have been exaggerated for emphasis. However, in
accord with the statistical findings of the last half century, the spiral



has been drawn so that at each peak of the cycle, assumed for
simplicity to correspond to full employment, about the same per­
centage of total income is consumed. This can be seen from the
fact that the upper right-hand "com er" of each spiral falls almost on
the dotted straight line through the origin.*
I have dwelt at some length on the behavior of consumption
and savings in relation to income because this relationship is crucial
for all business-cycle theories and provides the setting within which
all analysis must take placed At high levels of income correspond­
ing to full employment, billions of dollars will be saved every year.s
These sums are saved each year because people have incomes in
excess of their consumption needs, because of a desire for personal
security, because of power considerations or greed, because of
automatic institutional arrangements, and for a thousand other
reasons. It is irrelevant whether the process is deliberate or uncon­
scious, whether prudence and thrift are involved or greed and lust,
whether or not there is pain and abstinence. The desire to accumu­
late is a social /ac%, to be taken as such. And whatever might or
might not be true of a Robinson Crusoe economy, it is clear that in
modem societies individuals save regardless of the magnitude of
investment outlets. Even if no new securities were Boated,
attempts to save would continue; and if old securities were not avail­
* Some might choose to interpret the dotted line as a very long-run con­
sumption function, although I myself would not. Even if regarded as such,
the fact that it does not show an increased percentage of saving as income
rises does not in any way vitiate the application of the usual saving-investment
analysis. It is necessary to emphasize this because in some quarters Prof.
Kuznets' historical findings are taken as disproving the Hansen-Keynes
long-run analysis.
* My omission of a discussion of the effects of interest rates and of stocks
of wealth upon savings is a reflection of my belief, which cannot be justified
here, that these are relatively minor in importance.
* If the 1935-1936 expenditure patterns and the 1935-1936 reZa/tPe dis­
tribution of income were maintained, real
savmpg expressed in prewar
dollars might be as large as $22 billion. In then current dollars this might be
$28 billion. To this must be added some billions of net corporate saving,
giving total net saving of around $32 billions. If a gross figure is desired, some
further billions of depreciation must be added. Furthermore, in recent
months it has become customary to distinguish between net national product
and the total value of national expenditure valued at final prices. The latter
magnitude exceeds the former by the amount of indirect business taxation.
C/. Milton Gilbert, "W ar Expenditures and National Product," ^Survey of
Current BustTMss, March, 1942, pp. 9-16. A comparable figure for saving
could be derived by blowing up ours by some percentage.



able, it would still be possible to accumulate noninterest-bearing
assets such as cash.
It is important to emphasize the stability of the savings-income
pattern because of the insight it yields into historical income
determination. Yet it is also important to remember that this
pattern can be modiSed by deKbera^e soctal ac^on. This does not
mean that "B u y now" campaigns will end a depression, nor that
exhortations to acquire government bonds will end a wartime infla­
tion. However, by appropriate changes in our personal and
corporate income taxes, we can affect the distribution of 6nal dis­
posable income in terms of which saving decisions are made. But
such action must dig deep, for the institutions and habits relating to
saving lie deep in our economic and political organism.

Aside from deliberate social action modifying the distribution of
income, there docs exist one process which is an effective regulator
of the supply of saving. Precisely because of the stable incomesaving pattern, declines in national income will make the com­
munity so poor that it will not save at all, or will dissave. For upon
one thing all modern economists, of whatever school of thought, are
agreed: %Ae amount w&tcA %Ae
tPtsAes fo save a% /uMeTnpJoyntewt ^cotne %et-e!s 77tMs% soyneAoir be ojfse%, or t^cowe wH /aM
%Ae commMmZy zs so poor a%% tt?re%cAfd as fo be
%o save no
more %Aan can be o^sef. In terms of time-period analysis, the com­
munity must return to the income stream in each period as much as
it received in previous periods, or else there will ensue a cumulative
downward spiral of income and employment.
We arc confronted with the paradox that while no one attempts
to save with any thought of investment outlets or of offsets, yet the
amount which all together succeed in saving is brought into align­
ment by the movements of income and employment. But the
alignment is performed on a cruel Procrustean bed, with employ­
ment and income being lopped off if the desire to save is excessive
in comparison with available offsets, and with an inflationary strain­
ing of demand if investment is excessive.
It is important to understand this process because it throw s light
on countless other paradoxes. It is not that effective demand is
independent of economic law. On the contrary, no view could be
more fallacious than that which regards a depression as simply the
result of a vicious spiral of unfortunate circumstances which, if



once set right, would usher in permanent full employment. Many
times during the thirties we had incipient boomlets; if only optimism
and an upward start were needed, they would never have come to
an end. But today we have come to understand that a system
may be in
underemployment equilibrium. Economic law is
operative but in a non-Euclidean, or rather a non-Ricardian, world
in which the "topsy-turvy" may be right and the plumb line may
be crooked. It is characteristic of such a world that things may not
be what they seem; a country may be in need of capital, its citizens
may be imbued with prudence and thrift, and yet the
save will not only be abortive but through its adverse effects upon
income may lessen the amount actually saved and invested.*
If full employment is to be maintained, all savings that are made
must be offset. Two extreme schools of thought have drawn
opposite conclusions from this. On the one hand, the classical
economists in their formulation of the celebrated *Sa$/'s
simply denied that there ever could arise a problem of
offsetting savings. For them, what was not consumed was auto­
matically invested. The exact elucidation of this doctrine is always
obscure, and it takes on suspiciously many unrelated forms—from
the innocuous assertion that goods exchange against goods and that
all values are relative, to vague notions of conservation of pur­
chasing power and absence of leakages. In other formulations, a
lowered real wage is believed to be effective in expanding demand
along a " general demand curve for labor" drawn up in analogy with
the negative sloping partial equilibrium demand curve for a single
commodity. Or still again, it used to be argued that the interest
rate, if flexible, would somehow equilibrate the demand and supply
of savings and investment, and at the same time in some manner
equilibrate the supply and demand for labor. Finally, in its most
sophisticated form, reference was made to the fact that a general
equilibrium system with flexible prices had for its mathematical and
economic solution the equating of supply and demand in all markets.
In the last analysis, then, only
in prices or costs could
give rise to unemployment.
Much of this had been intuitively realized for a long time. But only
in the last half-dozen years has an unambiguous analytical formulation been
possible. And even today the same facts can be given a favorable interpreta­
tion by the judicious use of the word wpesfmewi or, if the opposite case is to be
made out, by the use of the word savin#. More careful analysis shows that
the intrinsic empirical phenomenon cannot be changed simply by revising our
descriptive vocabulary.



This is not the place to attempt to deal adequately with so com­
plex a doctrine. It can be said, however, that just as those econ­
omists who were free traders have developed the best arguments
for protection, so it is those economists who use the Keynesian
analysis who have been able for the first time to patch together a
reasoned defense of the proposition that price flexibility may have
salutary effects upon employment.* The process can only be
briefly indicated.
Broadly speaking, downwardly flexible wages are supposed to
cause prices to fa!!, thereby to produce redundant money supply
and low interest rates, and hence stimulate investment. Other
favorable effects are supposed to flow from the stimulus to con­
sumption that the increased real value of money stocks will allegedly
All in all this is not an impressive case, involving as it does the
inadequacies of a cheap money policy, plus a dependence upon
favorable expectations* Furthermore, closer investigation shows
that its effects are transient since it depends not on
wages and
prices, but on
ones. In view of the adverse psychological
and real effects upon the marginal efficiency of capital and the
propensity to invest which an ever-falling price and cost level would
entail, it is by no means certain but that even moderate rates of
deflation would be disequilibrating and self-aggravating rather than
favorable to employment and income.
Therefore, I shall not discuss further the now extreme view that
price-wage inflexibility is a necessary condition underlying the
existence of unemployment, and that its removal is a sufficient or
important remedial measure. At the same time the equally doc­
trinaire viewpoint that the existence of saving must necessarily
cause unemployment in all circumstances can be treated only
briefly. Whatever the excesses of some older underconsumption
writers, it is today recognized that there is nothing in the structure
of production itself (value added, depreciation payments, Major
Douglas* 4 and B payments, etc.) which makes impossible the
realization of full employment over any Rnite time period. Pro­
vided that sufEcient new capital outlets exist, any amounts which
(y. Prof. Lange's forthcoming monograph on flexible prices; J. R. Hicks,
Valve and Capita (Oxford, 1939), Ch. 20; A. C. Pigou, FmpJoymeni and FgutHbrtMm (London, 1941); G. Haberler, Proaper%y and Depress^m (3d ed., League
of Nations, 1942), Ch. 13; Gardiner C. Means, r e tir e qf %/M4wMrtcan Fc<?n<mty, Vol. II (National Resources Planning Board, Washington, D. C.), pp. 9-17.



people wish to save can be offset.* It may be bad theology, but it
is sound economics that a
community can cheat
the devil of ineffective demand indefinitely. Thus, the significant
contributions of these earlier writers must be found in their realiza­
tion that unemployment would arise unless very special condi­
tions were met, and perhaps in their belief in the unlikelihood that
these conditions will prevail. ^

It is the upshot of our discussion that the prospects for unem­
ployment and depression cannot be determined on a priori or deduc­
tive grounds. An analysis of income determination can help in
isolating the strategic factors involved and in suggesting the
appropriate questions to ask of our available empirical statistical
data. Specifically, we must answer the question, what are the
processes by which savings can be offset. Broadly speaking, these
can be divided into at least the following categories: (1) private net
capital formation, (2) private losses, (3) foreign investment, (4)
governmental expenditure in excess of tax receipts, (5) govern­
mental fiscal policy aimed at changing the primary distribution of
imputed income into a secondary distribution of net income after
taxes, which is conducive to greater consumption out of the same
total income, (6) increased governmental expenditures matched by
equivalent taxes, (7) an upward shift in the propensity to consume
at each level of income.*
Let us examine briefly each of these in turn. The most widely
recognized is the Srst, private net capital formation. Historically
this has taken the form of new heavy capital goods, primarily of
* This holds even after the output of the newly created capital goods
comes upon the market provided that sufRcient further investment outlets
are forthcoming. 6/. the doctrines of Foster and Catchings, Afowey (Boston,
* It may be appropriate to record the belief that the future historians of
economic doctrines will dispense with the false distinction between under­
consumption and underinvestment or undersavings, and that the under consumptionist writers will attain to a level of respectability hitherto denied them,
if only because their instincts led them to see obscurely the elements upon
which the modem income analysis is based.
* This mode of classification is arbitrary, but useful. Several of these
items could be consolidated, and the careful reader will note that some of the
offsets to savings are ways of preventing savings from arising rather than
neutralizes of performed savings. The sum of these components will not
equal total savings.



durable types. It is to be noted that public utilities, railroads,
and residential construction have throughout our history over­
shadowed manufacturing industry in importance as a source of
investment outlets. Since we exclude replacement expenditures, it
is clear that this offset depends upon discovery of new ways of doing
things, new products, dynamic growth and expansion. In behavior
it is sporadic, volatile, and capricious. Its effective determinants
are almost completely independent of current statical factors (level
of income, etc.).
It is tempting to construct a theory of income determination
analogous to the "Marshallian cross" of supply and demand by
which price in a single market is determined; z.e., to erect schedules
of both saving and investment, at whose intersection income is
determined. However valid this may be formally, it is necessary to
insist that investment in anything but the shortest run cannot be
related to income in the way that savings can. Even in the shortest
run it is not the statical level of income, but its time pattern of
change taken in conjunction with the existing stock of capital equip­
ment, which determines investment. In the present writer's
opinion, this cannot be emphasized too much, particularly in view
of recent statistical attempts to estimate what the level of invest­
ment would be at high levels of national income.* At worst, such
attempts simply indicate what levels of investment are necessary if
income is to be at a high level, since the past coexistence of high
investment and high income may represent causation from the
former to the latter rather than vice versa. At best, they might
hope to give the cyclical pattern of investment peaks which can be
touched for a moment at the top of a boom ; but even this is extremely
doubtful since there is no necessary repetition from cycle to cycle of
the sectors which lead in investment outlay.
While it is customary to think of capital formation as taking the
form of heavy durable capital goods, there is no necessity for this to
Ezekiel, op.
R. BisseH, in this volume and in Fortune, May and June,
1942. Both of these authors attempt, by dealing with split-up components,
to avoid the gross statistical error of deriving two independent schedules
from essentially the same data. I do not believe that they succeed in this
attempt. In any case, the data which both use are consistent with the
alternative hypothesis that the scatter of investment outlay is traced out by
shifts in the investment schedule.
It may be noted that one of these studies comes out with a pessimistic
quantitative estimate of the ability of private investment outlay to lead to
full employment, while the other paints a rosier picture.



be the case. Outlay to the public by private business enterprise in
excess of its consumption sales constitutes income and employment
creating expenditure. It may be for the purpose of building up (via
advertising expenditure) such intangible assets as good will; it may
take the form of a price reduction which only after a considerable
period of time will pay for itself. Most important, such expendi­
ture provides an offset to saving even if no asset, tangible or intangi­
ble, is created for the business enterprise. i?Msmess losses arising
from imprudent or unfortunate expenditure are dollar for dollar as
employment-creating as other private investment and provide
equally potent offsets to savings. Historically such losses have
been extremely important as an offset to savings. Recent trends,
however, suggest that a considerable sector of business enterprise,
particularly large corporations, are learning to adapt themselves to
an unfavorable environment so as to avoid losses. It is quite possi­
ble that many of these could make adjustments so as to stay out of
the red even at levels of national income corresponding to 50 per
cent of full employment. On the whole, this is not necessarily an
undesirable trend, since imprudent and wasteful expenditures are
not the most desirable ways to provide employment. Nevertheless,
this trend must be taken account of in reckoning the prospects for
the maintenance of full employment on the basis of private demand
It is too early to speak with any assurance concerning the future
of foreign lending. On the whole, it seems to be the consensus of
informed opinion that the prospects are not good for any substantial
revival of private Rotations in the form that we have known them
in the past. No doubt we shall forge new quasi-public instrumen­
talities for the purpose of aiding in international reconstruction.
These are best included under a discussion of governmental offsets
to savings. Aside from these it may well turn out to be the case
that the new international responsibilities which are forced upon
the United States by her leading position in world affairs will
require a renunciation of beggar-my-neighbor attempts to
export without importing, so that in the postwar world the foreign
balance may be an unfavorable rather than a favorable offset to
During the last decade we have had to rely heavily upon the
fourth offset to saving, vtz., deficits. A realistic appraisal of the
future would suggest that these can only be wiped out by a sub* Cy. essays in this volume on "International Economic Relations."



stantial strengthening of our tax system. It seems extremely
unlikely that postwar Federal expenditures can shrink to prewar
levels. Nor is it certain that the retention of many parts of our
wartime tax structure will yield enough revenue to balance the
budget. There is the further paradox that the heavy yields of our
tax structure may depend upon high levels of national income,
which levels are premised upon large sustaining deficits. This
inevitably raises the question as to the perils involved in a growing
public d eb t/ If orthodox central banking operations are not
adequate to prevent large increases in debt service charges and
interest rates, careful thought should be given to the alternative of
the controlled issuance of noninterest-bearing debt. It is becoming
increasingly apparent that this would have little or no effect upon
the magnitude of public expenditure and would differ in no signifi­
cant degree from bond sales as a contributing factor to inflation.
Whether or not we embark upon such a policy, it is highly desirable
that the Treasury follow a militant policy of interest rate reduction
except where subsidies are to be granted on the basis of broad social
Because the same fraction is not saved out of the
dollar of a
man's income, the amount which will be saved out of a given volume
of total income depends upon its distribution among individuals.
This distribution is not to be regarded as a fundamental datum, but
can be altered by means of tax collections which have a differential
effect upon the different income classes, and by government expend­
iture which does not go to all classes in the same proportion. Pro­
gressive income taxes are one way of achieving this result, as are
estate and capital taxation. In view of the administrative limits to
steep income taxes,* the corporate tax may be useful in giving us a
tax system with less sag in the middle. On the expenditure side an
expanded welfare program involving public health, old-age pensions
and assistance, unemployment compensation, family allowances,
educational aids, as well as relief for the underprivileged, all con­
tribute toward a distribution of income more favorable to consump­
tion. As yet we do not fully realize how large a fraction of our
welfare expenditures are wet associated with depression and unem­
ployment, but rather with the higher social standards which our
democracy has adopted. Consequently, even continuing full
* See S. E. Harris, on
DeM," in this volume.
* H. C. Simona in his
(Chicago, 1039) indicates
how we may strengthen our progressive tax system.



employment will not cause a shrinkage of welfare expenditure to
predepression levels.*
While substantial gains in consumption can be made by these
distributional methods, it would be well not to expect too much of
them. For the difference between the worgfwaZ propensity to con­
sume of poor and wealthy is by no means so great as between their
average propensities to consume. Consequently really large changes
in the inequality of income distribution are necessary to reduce
savings by even 10 per cent. And at the same time that savings are
being reduced, there is some adverse effect upon the offset to saving
provided by new investment. I cannot do justice to these aspects
here. But it may be said that the modern corporation provides
a mechanism for the pooling of risks so that the government does
share in the risk takers* losses.^ Undoubtedly democratic com­
munities will continue to attach primary importance to the equity
considerations in favor of a more equal distribution of income, let­
ting the favorable effects upon consumption form a secondary
argument for them.s
Only recently have I become convinced that item 6 does provide
a genuine offset to saving—that a budget balanced at a high level,
with "nonprogressive" taxes and expenditure, is nevertheless
employment- and income-creating. A proof cannot be attempted
here. However, if valid, this form may provide an important
method by which our economy can hope to maintain the level of
effective demand.
* The government by nonfiscal policies such as wage regulation, price regu­
lation, trust busting, etc., can hope to offset the primary distribution of income
in a more favorable direction.
* Furthermore, it is the curvature of the tax structure rather than the
steepness of the tax gradient which introduces the unwillingness to invest
because the government pockets winnings without sharing in losses. A care­
ful study of the economic history of the United States and England would
probably show that "venture capital" in the usual sense has not provided an
important fraction of total offsets to savings. Its real importance lies in
their productivity-increasing aspects rather than in their stimulating effects
upon employment. Even here the reluctance to assume risk because of
modem tax systems results in a delay between the discovery of new processes
and their introduction rather than in their total loss. Instead of accumulating
an ever greater pool of unused inventions, we become synchronized some few
years behind our maximum potentialities.
* Space does not permit a discussion of the influence of wartime fiscal
policy upon the distribution of wealth holdings at the end of the war and
upon interest income in the postwar period.



The seventh process by which one generation develops new
consumption wants and needs so as to offset the amount which
would be saved under earlier patterns has been of the greatest
historical importance in sustaining effective demand. In a sense,
the others are only makeshifts. Private investment only puts off
the evil day. It must be followed by more investment in all suc­
ceeding time. Increased consumption standards, on the other hand,
are more or less irreversible. They provide in each period sustaining
Nor is it to be thought that a high consumption economy means
a low investment-savings economy. On the contrary, only where
consumption demand is high are large savings and investment
possible. * A high consumption economy may mean low investment
in percentage terms; but it means higher absolute levels of
As we have seen in earlier sections, the United States seems
historically to have increased its consumption standards at about
the same rate as its productive potentialities. Even if this should
continue to be the case in the future, it is quite possible that the
problem of offsetting savings would become more acute as we grow
more wealthy. For with increasing real income, constant percent­
ages saved means that we must find ever-increasing absolute
volumes of offsets.
Besides, there is no mechanism, no natural law, which guarantees
that these processes will develop in balance during the years ahead.
In the past the country-to-city movement has resulted in higher
propensities to consume, but now this process has decreased in
importance. The war itself has meant a reversion to lower con­
sumption standards and may leave us a generation behind where we
would otherwise have been. Despite our backlog of deferred con­
sumers' durable goods purchase, considerable time may be required
to thaw out frozen consumption habits. Most important of all,
since 1929 we have had a distinct break in trend. The great depres­
sion meant an intensification of the desire to save because of per­
sonal insecurity. Throughout this decade our income ceased to
grow but our productive potential increased steadily. The con­
For completeness it should be pointed out that under exceptional circum­
stances low consumption can lead to a fall in income and interest rates suSicient to stimulate investment more than unfavorable consumption sales
discourage it. See O. Lange, "T h e Optimum Propensity to Consume,"
February, 1938.



sumer did not know what he was missing in the way of new good
things of life and so was not able to develop new tastes at the
same old rate. As in other branches of economic analysis, there is
something of a vicious circle here. Provided we succeed in main­
taining high levels of income, habits are developed which make it
easier to continue to hold to these levels. If once a slump is per­
mitted to develop, the situation may be stabilized at a low level.

With the theory of income determination outlined in the previ­
ous section we are now in a position to evaluate the factors favorable
and unfavorable to high levels of employment in the postwar years.
Those who are optimistic concerning the prospects for a spontaneous
postwar boom of some duration based upon private demand alone
entertain this belief for one or more of the following three reasons:
L They point to the impressive ease with which demobilization
took place after the First World War.
Others attach importance to the fact that as a result of the
current struggle we will necessarily use up our stock of producers'
and consumers' capital equipment in excess of replacement. The
unavailability of goods during the war, taken in conjunction with
high monetary incomes, means that family savings will necessarily
increase, taking the form of government bonds, savings accounts,
and life insurance. Installment debt has already declined greatly,
and by the end of the war the same will be true of mortgage
Once the war program has ceased to accelerate, the same process
of increased liquidity will become true of business enterprise as well,
particularly large business. Depreciation allowances in excess of
gross investment will eventually go into cash, government bonds,
and reduction of liabilities. These gross savings will be swelled by
earnings on war contracts, rapid amortization of war equipment,
and eventually by war end indemnity payments from the govern­
ment to armament-producing firms. Already the tendency toward
greater liquidity is getting under way, as yet unnoticed by observers
who fear that the war will strip corporations of liquidity.
If we add to this the forced saving plans which the future will
certainly bring, as well as postwar tax refunds to corporations, it will
be seen that the rea%bocMoy of deferred
as a result of wartime
depletion of capital will be accompanied by the financial means to
make it effective.



The third group of optimists are those who all along, regard­
less of the war, have thought that prosperity was just around the
corner—or would be if sound governmental policies were adopted.
This group looked forward throughout the great depression to the
imminent appearance of a large block of deferred demand, which
until the war had not yet developed. If the war were to end early,
they would still expect prosperity even though no backlog of war­
time deferred demand had as yet arisen. This is the most difficult
view to substantiate or refute, resting as it does in part upon faith
and in part upon the fulfillment of political conditions other than
those we are likely to face for a considerable time in the future.
Needless to say, the validity of this viewpoint is unaiTected by the
war. It is worth as much or as little as before 1939.
Because it rests upon historical facts, the first viewpoint may be
discussed at greatest length. This is done in the next section.
After a few words on point 2, some sources for pessimism will be

11, 1918

An examination of the popular and learned periodicals issued
during the last war shows almost no preoccupation with problems of
postwar planning. As victory Snally loomed ahead, a number of
programs for "Reconstruction" did emerge, but these were almost
exclusively international. A few cautious souls warned that
temporary problems of glut in the labor market might arise if
soldiers were demobilized too rapidly, and that consequently the
speed of discharges should be regulated with reference to unemploy­
ment. But on the whole, in the radical and in the conservative
press, there was little concern over the problem of achieving or
maintaining full employment.
As soon as the Armistice was signed, a feverish anxiety swept
over the country to return to prewar "normalcy," to "get the boys
out of the trenches by Christmas." Those soldiers who had not
gotten overseas were discharged largely in December, while the
A.E.F. was disbanded rapidly all through the Srst half of 1919. By
one year after the Armistice, about 4 million soldiers, sailors, and
marines had been disbanded, or all but a skeleton force.
On Nov. 12, the long-distance wires were kept busy canceling
war contracts wherever possible. Within a year, 2 billion of these
were settled, with cash payments by the Treasury averaging about



one-eighth of the face values of the contracts.* Price and produc­
tion controls were also removed as soon as possible, many by the end
of 1918. The administrators of the emergency agencies, largely
recruited from private industry for the "duration," were eager to
return to private business.
The picture is clearly that of a planless rush to wind up the war
activities as quickly as possible, without thought of possible adverse
consequences. And all this was done without appreciable dismissal
pay for soldiers, in a system not yet possessing unemployment
insurance, with primitive labor exchanges and placement services,
and with little or no provision for direct or work relief.
The upshot of all this is well known. There was no market crash
or crisis, no great increase in unemployment, no deep cumulative
downward deflationary spiral. Instead, we witnessed the very mild
recession of the winter of 1918-1919. This was followed in the
spring of 1919 by an upturn in prices and activity rising to a
crescendo in the first half of 1920. The 1919-1920 boomlet came to
an end with the collapse of farm prices in the summer of 1920 and
was succeeded by the very sharp, but fairly brief, recession of 1921.
These events are a matter of record. They are interpreted by
many to mean that private industry at the end of the last war was
able by itself to solve the problem of demobilization and postwar
transition. Some will take a further step and ask whether similar
tactics are not feasible when the Second World War comes to an end.
Unfortunately, the argument fails at the first step.
Closer examination of the facts reveals that the picture painted
above of the 1919-1920 boomlet is superficial and seriously distorted.
a prit?ate?g/ waiTttaiwed boom. 7%did %ot rest itpo% bacA2o<ys
of deferred de7na%%. /t did %ot bri?% i#itA % tAe material prosperity
Msua%/ associated tPttA a boow. 1%i#as 7M?t based izpo% stabte, e%d%ri%gf
/oimdatio%s. Afam/ of its characteristic /eatttres are precise!^ tAose
i#AicA ca% be expected %ot to be present at tAe ewd of tAe present i#ar.
The single most important fact to be emphasized is that, however
anxious we were to end the war immediately after Nov. 11, 1918,
this was nevertheless not possible. Economically speaking, the
First World War did not end with the Armistice, but continued until
well into 1920. In the first months after November 11, our war
expenditures were larger than at any previous time. It was these
unprecedented^ high "net income-creating expenditures" of the
Federal government which eased the demobilization of that period.

Report qf

Secretary of War, 1919, p. 43.



Nobody wished to spend this money; it was not part of a plan, but
simply proceeded from the necessities of the moment. Projects
almost completed could not simply be terminated in mid-air. After
the Armistice we lent $2 billion to the Allies, and spent hundreds of
millions of dollars to feed the continent of Europe. Because of this,
our favorable balance of trade was greater in 1919 than at any time
during the war or during the decade of the twenties. The shipping
shortage operated more to reduce imports than exports, again
contributing artificially to offsets to savings. While not all the
favorable balance of trade was financed by the government, some
substantial fraction being financed by extraordinary short-term
capital lending, there is no indication that the latter phenomenon
will be present when the Second World War comes to an end.
Not knowing the troublesome times ahead, the private business
community greeted peace with optimism. As the spring of 1919
wore on, sales increased in retail lines such as clothing for returning
soldiers, household goods, etc. With the removal of price controls,
the wholesale price index began to rise, in the end soaring from the
final war level of around 200, on a prewar base, to almost 250. This
set off a wave of inventory accumulation, or attempted accumula­
tion, which formed a substantial fraction of total offsets to savings;
and the paper increase in inventory values was considerably greater.
From its nature this was an unhealthy base upon which to erect
a boom. Price increases led to attempted inventory accumulation,
further accentuating the price increases. But it was not enough for
prices to stay at these abnormal levels; once they ceased to rise, or
leveled off, the whole structure had to collapse. It is worth con­
trasting this 1919-1920 boomlet with the longer sustained prosperity
plateau of the twenties. The latter was not at all based upon the
stimulus provided by a temporary upward price and inventory
spiral. In this respect 1919-1920 was more like the incipient boom­
let of 1936-1937. In both cases an unstable price situation was
aggravated by the rather drastic reductions in net Federal spending,
giving rise in one case to the recession of 1938 and in the other to the
1921 recession.
In one important respect the picture of the 1919-1920 boomlet as
simply a paper upswing must be qualiSed. From mid-1919 to the
end of 1920 American industry spent unprecedentedly large sums
upon gross plant and equipment. * The rate of expenditure exceeded
Lowell J. Chawner, "Capital Expenditures for Manufacturing Plant and
Equipment, 1919-1940,"
qf Cwrenl
March, 1941.



that of the late twenties or of any other period until the present war
effort. In view of the deRnitely secondary importance of manufac­
turing as a source of investment outlets, and in view of the MTtpreceAtyA
these outlays are not to be given too much importance as offsets to
saving and as income maintainers in this period. Nor did they
contribute much to the output of that period, which available
indices of production show to have been lower than 1916 levels
despite the alleged boom conditions. ^ But they were undoubtedly
of importance as a tooling up for the mass-production levels of the
golden twenties and for the later economies in the use of labor which
increased productivity per man-hour made possible.
Despite this qualification it remains broadly true that the 19191920 boomlet is nothing to look back upon with pride. It was a
boom without prosperity initiated by the inevitable large govern­
ment expenditures necessary to wind up the war. It continued on
the momentum of these expenditures plus transient speculative
elements of inventory accumulation induced by booming farm and
industrial prices. The bubble necessarily had to burst sometime,
and the fact that the resulting depression was short-lived and was
followed by a period of sustained prosperity must be explained in
terms of a concatenation of fortunate circumstances, of which only a
fraction can be related to private investment outlets or to the war
Furthermore, careful study of the First World War leads to the
conviction that it was utterly different from the present conflict and
that analogies with it are more dangerous than otherwise. It was
not total war as this one is. There was relatively little conversion
of peacetime activity. Most important, our military production,
aside from operations begun in response to Allied orders, literally
never got under way on an appreciable scaled No more illuminat­
ing contrast could be found than in a comparison of the roles of
both the automobile and aircraft industries in this and the last
* 8. Kuznets,
Zncowc cud its
1919-1938, Table 1,
p. 137, and Table 58, p. 322.
* 8. Fabricant,
of AfonM/octMrtn# industries, 1899-1937 (New
York, 1940).
^Apparently the year 1918 was planned to be a year in which we were to
build up our military productive capacity for an all-out struggle in 1919, and
thereafter. The speedy end to the war seems to have come as a surprise to
expert and layman alike.



When this war comes to an end, more than one out of every two
workers will depend directly or indirectly upon military orders* We
shall have some 10 million service men to throw on the labor
market. We shall have to face a difficult reconversion period during
which current goods cannot be produced and layoSs may be great.
Xor will the technical necessity for reconversion necessarily generate
much investment outlay in the critical period under discussion,
whatever its later potentialities. The final conclusion to be drawn
from our experience at the end of the last war is inescapable—were
/Ac war fo
SMdde?t?i/ w^Min Me
6 moiiMs, were we apam p&m?ess&/ to wind tip our war e^ort m Me greatest Aas%e, demoMize OMr
armec? /orces, fa H<7MM%a%e price controls, to
/rom asfro?MH7McaZ
de^ci^ to eren Me ^ar^e de^c^5 of Me Mtrtie^—Me^ Mere woitM be
t^^Aered in Me <yrea%es%period of T/nemp^oyme^ amf ind^5triaZ dig^ocatio^
am/ economy Aa^ ever/aced.
This does not deny that there may be a boom after the war. In
this the experts may still be correct. For the release of controls
upon demand coupled with plentiful amounts of monetary demand
might well give rise to price increase, inventory buying, feverish
speculation and all the superficial earmarks of a boom. But it
would be the antithesis of a prosperity period, constituting instead a
nightmarish combination of the worst features of inflation and defla­
tion. Xor, having spent itself, could it be expected to evolve into
healthier channels. Instead, the final outcome would undoubtedly
be a cumulative hyperdeflation from which, at best, we should lose a
decade of progress and which, at worst, our democracy would not
Of course, this is not intended as a picture of what will in fact
happen. For there is every reason to believe that we shall not be
lulled into a feeling of false security by the last war's experience or by
the half-truth that the end of the war will witness a boom. No
doubt, we shall retain direct controls for a period after the conflict
ends. We shall taper off war production gradually. We shall
undertake income maintenance in the form of dismissal pay for
soldiers, unemployment compensation, direct and work relief
expenditure. It is probable, although less certain, that, in addition,
the Federal government will initiate employment maintenance
measures such as large scale public works, etc. But even these will
not necessarily be adequate to maintain full employment or any
approach to it. In the next section, I shall discuss factors favorable
to employment in the period after the immediate demobilization and



reconversion crisis. It may be said in advance that, however favor­
able these are, they can be completely nonoperative if we do not take
very far-reaching measures to bridge the immediate transition
period—measures much stronger than those envisaged in current

Undoubtedly this factor will be of the greatest importance in the
postwar period. What is needed most of all is a series of detailed
quantitative studies, sector by sector, of the extent to which the war
is depleting consumers' and producers' stocks of capital equipment,
in order that more precise estimates can be made. While such
studies would confirm the importance of this source of demand, they
would also, I believe, provide a healthy corrective to many currently
held inflated expectations.
Until the summer of 1942, no deferred demand on balance had
accumulated. On the contrary, inventories of producers' and con­
sumers' durable and nondurable goods were at an all-time high. In
the two years following 1939 we had added almost one-half as much
manufacturing plant and equipment as we had been able to accumu­
late in all our previous history. Much of this will be convertible
after the war, resulting in some Reids in tremendous reverse backlogs
— surpluses and not deficiencies. No conceivable increase in peace­
time demand could possibly absorb the capacities for aircraft
production and machine-tool production which the war will leave us.
The same is true of many of the metal trades.
Furthermore, implicit in the usual reckoning of deferred demand
is the assumption that there is a fixed total over time which must
necessarily be spent. Given the technological change which the war
will inevitably bring, this is by no means necessarily the case. We
must take care also to avoid double counting. If a man goes with­
out an automobile for 6 years, he does not then have a demand for
six automobiles, nor will he necessarily spend in all subsequent time
upon automobiles an extra amount equal to the 6 years' expenditure
forgone. This means that the backlog will increase with the length
of the war, but not in direct proportion. For nondurable goods
there need be no backlog at all. Consumption forgone today is
gone forever.
Upon even the most optimistic reckoning the magnitude of the
backlog is necessarily Rnite. If bunched into a short enough period,
one can produce as large a boom as is desired, but it will not last. If



spread over a long enough period of time, its contribution to the rate
of employment may be quite small. A last point to be mentioned
is the fact that deferred demand is a fair-weather friend. What has
been postponed can be postponed longer. Even if individuals and
corporations have adequate funds to finance expenditure, they are
unlikely to do so if the bottom is falling out of the market for goods,
and if unemployment is mounting.
All this suggests that deferred demand represents a favorable
reinforcing factor, but not one which in and of itself can be relied
upon to initiate and sustain a lasting prosperity. There is no justi­
fication to envisage a "generation" or decade of prosperity from this
factor. On a fairly libera! estimate of the amount of war bonds
which individuals will accumulate, the stock of unused automobile
miles at the end of the war, the level and potentialities of installment
selling, etc., it is certain that under no circumstances could automo­
bile production after the war require the employment for as long
as 2 years of the 1% million laborers who will be in the automobile
and aircraft industries. In fact, without striving to be pessimistic,
it is possible to derive the estimate that the total backlog of deferred
demand could be made good by our productive capacity at the end
of the war in a period from 18 months to 2 years, and this on the
favorable assumption that we successfully meet the immediate
demobilization crisis. Compared with a deScit of $40 billion per
year, this is not of primary importance.*

All our Sndings lead to the conclusion that there is serious danger
of underestimating the magnitude of the problem of maintaining
continuing full employment in the postwar period. Those who
complacently predict a boom are likely to find their expectations
fulfilled, but not with respect to the employment and real-income
aspects usually associated with a prosperity period.
Even if correct, the realistic appraisal presented here does not
provide grounds for pessimism. We can, and I am confident that
we will, pursue policy measures appropriate to the challenging situa­
tion. The penalties for failing to do so will be serious, but the
rewards for courageous action will be commensurately great.
The reader should compare this view of future private demand (as well
as those given by the other contributors in Part I) with the more optimistic
estimates by Dr. Bissell.— EnrroB




For 3 years we have seen the impact of total war spread until it is
felt in every phase of economic life. We now understand the effort
that wiH be required for victory. Were this a partial war against a
foe of tesser strength, the task of foreseeing the continuing develop­
ment of the economic pattern of war would be more difBcult, but as
matters clearly stand victory will take all our might. We know that
civilian, or nonwar, production must be cut to the bone unless we are
willing to gamble on a windfall victory.
For some months past, basic war-production planning has been
done in terms of the over-all limits of resources, factories, and man
power rather than in terms of the estimated numbers of planes,
tanks, ships, and guns needed to outshoot the Axis. We can outshoot and outbomb Hitter and Hirohito, but to do so will take every­
thing we can put into the war effort. Consequently, we know now
that as the war continues civilian production and services will be cut
to an irreducible minimum while raw materials, power, essentia!
services, and man power are diverted to the war effort. This gives
us one major factor determining the basic pattern of the economic
dislocation already and yet to be produced by total war.
Planning is for not only an all-out war but a long war. Military
and economic strategists are not thinking of a 100-yard dash to
victory that would leave us exhausted at the end of the spurt. Were
we certain that a superefTort could destroy the Axis before the
autumn of 1944, the national belt could be tightened, the civilian
economy could live largely on its fat, and the military production
program could be focused and specialized. There would be no need
Except when otherwise noted, the computations and estimates shown
herein are based on published employment statistics of the U. 8. Bureau of
Labor Statistics, Washington, D. C. Estimates of war*s-end and postwar
levels of employment are the individual responsibility of the author.




to worry about tires for civilian passenger cars in 1945. The keel
for no battleship would be laid unless it could be completed before
the expected end of the war. We could freeze present designs for
cargo planes, bombers, and fighters without concern that they would
become obsolete. War production could be stepped up and the
armed forces expanded far beyond present plans.
The United Nations are not planning to win the war within 2
years because were such a campaign to fail we most certainly should
lose to the Axis within 3 or 4 years. We should be in the position of
a spent runner called upon to continue a race. In the war ahead we
must maintain a carefully integrated and balanced economy whose
war effort, when raised to its peak, can be held there for 2, 4, or
6 years. Through these economic tactics we force the Axis to 6ght
a sustained war in which superior industrial strength spells victory.
The end of the war may come sooner than the strategists dare to
think, but the plan for victory has been laid in terms of economic
adjustments to war that can be sustained indefinitely. This is a
second major factor in the economics of total war.
It is this plan for all-out war and for a sustained war effort which
will determine the industrial and general economic dislocation to be
produced if the war continues through 1944. In event of an earlier
peace the distortion will be less severe, but it is toward this ultimate
pattern of operations that we rapidly are moving.

In the shift to an all-out war effort, one of the most pronounced
and signiRcant changes being achieved is in agriculture. The
nation's war effort will not have reached its peak until the armed
forces, manufacturing industries, and essential services have drawn
away some 2,500,000 of agriculture's average 1940 labor force of
10,500,000 workers. While this is happening, agricultural produc­
tion is being expanded. Marginal lands that produce nothing more
than scanty subsistence for the families living on them produce
nothing for "export" to the rest of the community or to our allies.
Other lands can feed these families after they have been transferred
to productive work in the war effort. Characteristically, 50 per
cent of America's farms produce 85 per cent of her marketable
agricultural output, while the remaining 50 per cent of the farms
yield only 15 per cent of the crop. Already it has been demon­
strated that by concentrating labor on the best lands total produc­
tion can be increased sharply with reduced man power.



This wartime curtailment of the use of marginal lands and the
reduction of the disguised unemployment of the families who have
worked them for subsistence only, sets the stage for a fundamental
postwar attack on the farmer's problem.
With sustained national full employment after the war, there will
be no economic force driving unemployed workers and their families
back to subsistence farms or to low farm wages, whether paid in cash
or kind. In fact, agriculture will compete with industry for its labor
supply rather than being saddled with millions of desperate families
pushed out of the towns and cities by depression and seeking escape
from starvation "back on the land." With the agricultural labor
supply no longer abnormally swollen by nonagricultural unemploy­
ment, farm prices and farm incomes will be relieved of the pressures
that have held them below industrial incomes and prices. Total
war, when we reach an all-out effort, will have cut from the farmer's
neck the depression millstone of an excess labor supply. If at war's
end we are prepared, as we must be, to sustain national full employ­
ment, this constructive by-product of the war can become a perma­
nent gain.
Whereas the ill wind of war has blown good to the farmer, it
blows danger for almost every other worker and businessman. We
think of the war effort in terms of industry, the plants producing
planes, tanks, ships, and guns. The government has turned, per­
force, to the nation's great manufacturing industries for the produc­
tion of the specialized goods of war. Manufacturing corporations
have been converted and distorted until war and prewar resemblance
has become a matter of name only. The economic necessities of
total war, however, call for alterations of the nonmanufacturing
sectors of the economy that will be equally far-reaching.
Had 1942 been a year of peacetime full employment, with some
56,000,000* persons in the active labor force, an average of 2,000,000
would have been unemployed in transit between jobs. Agriculture
would have engaged an average of 10,000,000, and all nonagricul­
tural pursuits 44,000,000. This nonagricultural employment would
have included 5,500,000 proprietors and self-employed persons,
including domestic servants, and 38,500,000 employed workers.
Aside from the manufacturing industries, which would have
* Bureau of the Census,
Force, Fynp%oywMT!i, and t/ntmp&Vmenl in tAt !7fM%ed gioiet (Washington, D. C.).



employed about 13,500,000, governments (Federal, state and local)
with 4,500,000, transportation and public utilities with 3,500,000,
and mining with 900,000, there would have been 16,000,000 people
engaged in construction, services, and trade. During 1942 atten­
tion was focused on the economic dislocation produced by the con­
version of existing manufacturing industry; in 1943 and 1944 we
shall watch the war effort expand manufacturing employment
toward 18,000,000 or 19,000,000 and reduce man power in services,
trade, and construction to a level of 7,000,000 to 9,000,000. We
have accustomed ourselves to doing without new automobiles,
refrigerators, electric fans, and nearly all metal products. Now we
shall leam to get along with practically no new nonmilitary con­
struction, fewer stores, fewer beauty parlors, fewer real estate and
insurance offices, and less delivery service. The men and women of
these trades and industries are needed elsewhere in total war.
The changes being produced by war in agriculture should leave a
residue of good after the conflict. The conversion of heavy manu­
facturing industries will leave a postwar problem of physical read­
justment but their business organizations generally will be left
intact. In the fields of construction, wholesale and retail trade, and
in the areas of personal, financial, and other services, a more critical
postwar problem is being posed. It is in these sectors of the econ­
omy (and in nondurable manufacturing which has been similarly
affected) that the bulk of the country's small and medium-sized
independent enterprises are to be found.
As the transfer of workers from nonessential to essential war
employment takes place, the business organizations which were their
employers in 1942 are passing out of existence. No provision has
yet been made for bringing business 6rms back to life after the war.
Consequently, in these Reids we look ahead to the concentration of
trade, services, and construction into the hands of the larger and
financially stronger firms which will be able to survive for the dura­
tion in a state of semi-suspended animation. Unless this situation
is corrected, the war will result in the extensive elimination of small
and medium-sized independent enterprises in those sectors of the
economy where up to now they have tended to persist with greatest
vigor. Such an institutional change would seem to be highly
undesirable if one of the nation's cardinal war objectives is the
preservation of a dynamic system of free business enterprise. In
the early months following the war, it will be important to expand
employment in construction, services, and trade from a level of less



than 9 million toward 16 million with all possible dispatch. To a
degree, the rate of peacetime expansion will be controlled by the
reconversion of consumers' durable goods and construction supply
industries, but certainly as important as the physical reconversion of
manufacturing plants will be the financial factors controlling the
rebirth of business organizations. The task of reemploying millions
of workers is one of organization. Business organizations cannot
take hold unless they have financial resources with which to work.
The war is dissipating those resources. Reemployment will be
neither rapid nor within the framework of independent enterprise
unless postwar financial factors are remobilized for peace coinciden­
tally with the remobilization of the physical factors of production.

New housing construction will be at a virtual standstill at war's
end. Expansion of the construction industry will depend upon the
general postwar economic setting, but the history of the industry
over the past 20 years indicates what may be expected of it under
even relatively favorable conditions.
Between 1921 and 1922, new housing construction expanded by
61 per cent. From 1922 to 1923, a further expansion of 32 per cent
occurred. From the depths of the depression in 1933 to the first
recovery year of 1934, new housing construction increased 43 per
cent, and 1935 saw a further expansion of 54 per cent from the 1934
level.* Reasoning from the industry's records of the past and
considering the deRciency in housing construction which will have
accumulated, both during the depression and the war, it does not
seem improbable that employment in new housing construction
could expand to 800,000 persons within a few months.
Rapid expansion will not take place, however, without a carefully
formulated reconversion program for the construction supply indus­
tries. Construction materials must flow from manufacturers before
work can start at building sites. At war's end most of the plants of
the construction supply industries will face the problems of recon­
version before they can produce and ship building materials.
Machine tools and other equipment will be needed. Working
inventories of raw materials will have to be accumulated and in
many plants personnel will have to be reorganized. If all this is to
be accomplished with the speed needed to be effective in offsetting a
Comparisons baaed on data covering nonfarm areas of the United States,
U. S. Department of Commerce (Washington, D. C ).



rapid decline of employment in war industries, advance program­
ming will be essential. During the early months of transition from
war to peace, the functions of the Bureau of Priorities of the
War Production Board and the OSice of Price Administration will
change in character but not in importance. Their work must
continue until the economic stresses of war have been eased. As we
have been ruthless in distorting the pattern of manufacturing opera­
tions to meet the needs of total war, we shall have to be realistic in
re-forming that pattern if we are to achieve a transition to peace
with a minimum of dislocation and delay.
It will be important to make a general appraisal of industries in
terms of the speed with which they can be shifted from war to peace,
their relative importance in terms of employment, the nation's
relative needs for their products, and their importance as areas of
opportunity for independent private enterprise. New housing
construction stands out as being important when judged by each of
these criteria. The country needs new housing on a large scale.
Activity can be expanded in terms of local need and available labor
supply. Nationally, the industry will have an ample supply of
skilled labor. Reexpansion will foster the rebirth of small and
medium-sized independent business units.
In many lines of service and trade, postwar reexpansion will be
less dependent on the redevelopment of industries of supply than is
the case in construction, the speed of their expansion depending
almost wholly upon levels of effective demand and the availability
of capital and credit for small and medium-sized business ventures.
It is not unlikely that employment in all branches of service and
trade can expand from the war's-end level of approximately 7,500,000
(6,500,000 to 8,500,000) to 12,000,000 within 1 year, and on toward
13,000,000 or 14,000,000 within 2 years. The branches of service
and trade likely to lag are those dependent upon the production and
sale of automobiles and other consumers' durable goods, which again
are the industries revolutionized by war and which will have to go
through a reverse revolution of production processes during the
early months of the postwar period. Here also the importance of a
programmed transition of manufacturing activity suggests itself.
While less flexible than housing construction, the manufacture, dis­
tribution, and servicing of consumers' durable goods at full employ-*
ment will absorb greater numbers of workers from war industries
and the armed forces. As in the case of construction, general
expansion of employment in trade and services related to con­



sumers' durable goods will depend upon the rate at which the
manufacture of the goods to be distributed can be regenerated.
Along with the construction supply industries, consumers' durable
goods manufacturing industries should have high postwar priority
for materials.
Turning last to the manufacturing, transportation, communi­
cation, and cxtractivc industries, it is possible to subdivide the area
into five scctors, each characterized by particular problems of
First, there are the industries of basic supply and industrial
service. These include the extraction and primary processing of
raw materials, transportation, and communication. In genera!,
the war has not changed their basic technology nor their geographic
distribution. They have been enlarged as a result of the special­
ized demands of war and will have to be brought again into normal
relationship to the rest of the economy. In total, their postwar
employment after a period of readjustment can be expected to
approximate 5 million persons, and their war's end employment
level is not likely to exceed 6 million. As employment in this group
of industries declines by almost 1 million workers, it is to be expected
that activity will tend to concentrate in the more cfHcient units,
some of which are being built to serve the needs of war. In this
group, disturbance to corporate entities will be pronounced but by
no means cataclysmic, as promises to be the case in the trades and
In the second group of manufacturing industries are those whose
production processes have been fundamentally altered by their con­
version to the war effort. In general these are durable goods
industries. They have been so completely revolutionized and so thor­
oughly admixed with new war plants that it is statistically impossi­
ble to compare their wartime employment with that of the prewar
period or with probable postwar levels. However, before the war
they engaged roughly 3,000,000 of the nation's manufacturing
wage earners. The backlog of demand which will have accumu­
lated during the war period may give rise to boom tendencies in
these industries immediately after the war, because the rise of
demand may exceed the new supplies made available. If these
dangers are successfully averted, it can be expected that within a
period of from IS to 18 months following the general curtailment of



war-production contracts, employment in this group of industries
will be stabilized at levels somewhat exceeding those of the relatively
prosperous early months of 1940. A potentially important and as
yet unappraised factor may, however, strongly influence the post­
war development of the consumers' durable goods industries. In
reconverting from war to civilian production an unprecedented
opportunity for technological improvement will present itself.
Production will be reorganized after an extended and complete
shutdown. The adoption of new methods and of changes in product
design may occur on a broad front. If so, reemployment probably
will take place more slowly than would otherwise be expected.
Industries from the nondurable goods sector of the economy
make up the third group. During the war they have been and will
be inHuenced by a shortage of raw materials, transportation facilities,
electric energy, and man power. The years 1941 and 1942 were a
period in which industries needed directly in the war effort, ^.6.,
the durable goods industries, were curtailed and converted to war
production. Late 1942 and 1943 is a period in which nonessen­
tial industries are being curtailed or completely shut down for the
duration, not primarily because their plants are needed or can be
used for war production, but because resources must be diverted
from them to the expanding war effort. Since the plants and equip­
ment of these industries cannot be converted to war, their postwar
rejuvenation will be essentially different and somewhat simpler
than that of the durable goods industries. If raw materials are
made available rapidly after the cessation of hostilities, these indus­
tries should find it possible to return to full-scale peacetime rates of
production with greater speed than the converted durable goods
industries. In the Rrst 6 months of 1940, wage-eamer employment
in the nondurable goods industries averaged 4,400,000. If the war
continues beyond 1943, employment in nondurable
tion will have to be reduced to a level approximating 2,100,000 wage
earners. The reverse movement in nondurable industries as a
whole after the war should be toward a level not far below 5,000,000
wage earners in the presence of full employment.
The fourth and fifth groups of industries include the specialized
war plants and the new industries of continuing economic signifi­
cance which have been brought into being or whose development
has been rapidly accelerated by the war. In the fourth group are
the explosives and ordnance plants, and in the fifth are such indus­
tries as synthetic rubber, synthetic fibers, military aircraft, and



substitutes for critical materials. Wartime employment figures
for these industries are a military secret and hence cannot be dis­
cussed, but the problems of the specialized war plants will range
from complete shutdown and demolition to full conversion for
peacetime production. Since many of these plants, particularly
those producing or handling explosives, have been located outside of
the industrial areas in the country, the "mushroom communities"
surrounding them will constitute a unique postwar problem. It is
to be hoped that the nation's adjustment program will deal with
such communities more effectively than was the case after the
last war.
The sixth group of industries are those which will be directly
affected by the resumption of peacetime international commerce.
The war has completely altered the composition and directions of
flow of world trade, and, if the objectives set forth in the Atlantic
Charter are to be realized, the postwar pattern of international
commerce will be markedly different than that of the 1930's or the
1920's. At the present, statistical summaries describing the over-all
size and characteristics of these industries are not available, primarily
for the reason that as yet the future of international commerce is
not being dealt with in terms that identify the industries which will
be affected. In the immediate period of postwar adjustment and
even prior to the cessation of hostilities, the major developments of
international commerce are likely to be related primarily to pro­
grams for the relief and rehabilitation of reoccupied areas. After
the war it is likely that the export of capital equipment needed in
the development of the resources of other nations will be of impor­
tance in the foreign trade of the United States.

The picture of dislocation and probable direction of postwar
readjustment that has been presented in the foregoing pages deals
primarily with altered and changing relationships between the
functional sectors usually designated when a breakdown of the
economy is needed for analytical purposes. War, however, has
introduced a new function of major significance—the armed serv­
ices. Publicly discussed military plans call for an armed force to
be maintained at a level of at least 10,000,000. These men and
women, amounting to nearly 20 per cent of the nation's labor force,
will be scattered throughout the world at the war's end, but their
distribution cannot be foreseen. We do know, however, that in the



presence of an over-all shortage of war man power large numbers in
the armed forces will not be retained idly within continental United
States. Hence, war's end probably will find not more than 2,500,000
men stationed within the country.
The ending of hostilities will not release all men and women in
the armed forces for immediate reintegration in the national econ­
omy. For some time the military forces of necessity will be engaged
in administrative activities throughout the world, while civilian
administrations are being reestablished in reoccupied nations and
perhaps within the Axis itself. This will be the first task of what
may later become an international police force, to which the United
States would be a large and continuing contributor of personnel.
Qualified observers feel that our postwar military force, including
personnel contributed to an international police force, will be
maintained at a level of approximately 2,500,000 men and women
for a period of several years. The task of economically reintegrating
members of the armed forces will involve the absorption of more
than 7,000,000 persons (from the 2,500,000 who probably will be
within continental United States and the 7,500,000 scattered
throughout the world).
The occupational experience of members of the armed forces in
the Second World War is sharply different than that of previous
wars. Men and women returning to civilian life will have been
using skills many of which after little or no retraining can find direct
application in peacetime occupations. Notable examples of such
skills are those acquired by ground crews in the air forces and by
men who will have been in the large-scale construction projects
attendant to modern warfare. Skilled workers demobilized from
the armed forces should enhance the labor supply needed in the early
months of the postwar period to facilitate the expansion of the
construction industry, but surpluses of the skills needed in manufac­
turing industries will be a by-product of military experience. Post­
war retraining and vocational education programs should be directed
toward the fitting of workers for occupations in services and trade,
for it is in these sectors of the economy that the largest relative
expansions (as contrasted with prewar distribution of employment)
must take place.
In addition to altering the skills of the nation's labor force,
other by-products of the war have significant implications for post­



war readjustment. The geographical distribution of the labor force
is being profoundly altered. Not only are "mushroom communi­
ties" growing up around isolated war plants; workers by the tens of
thousands are being drawn to centers of the heavy fabricating
industries. The employed labor force of the Detroit industrial
area, for example, probably will experience a wartime expansion
of 250,000* workers, carrying industrial employment to 150
per cent of its prewar level. The New York metropolitan area,
with its concentration of nondurable-goods industries, is experienc­
ing a sharp loss of workers. Other areas, such as the center of
aircraft production in San Diego, Calif., have doubled and then
doubled again the manufacturing labor force engaged in war indus­
tries whose products now have no foreseeable postwar demand. A
readjustment of these areas will be marked in part by the move­
ment of industries to new labor markets and in part by the redis­
tribution of excessive local labor supplies to localities offering
employment opportunities. The magnitudes of these readjust­
ments will be such as to demand that they be programmed rather
than left to the unguided processes which were relied upon at the
end of the. First World War.
Still another by-product of the war effort will be a net addition
to the labor force of women who will have entered it during the war
and only a portion of whom will wish to withdraw at war's end. If
the war continues until our full effort has been attained, the women
added to the labor force will reach at least 5 million. Parallel
experience in the First World War (with some marked differences in
attitudes and surrounding conditions) indicate that 3 million may
wish to retain their working status. Offsetting these factors will be
the continued maintenance of a relatively large armed force and the
loss of man power due to wartime casualties.

A summary of the dislocations produced by the war cannot be
concluded without mention of closely related changes in the size
and distribution of the labor force implied in the achievement of
postwar full employment. These implications range from those for
which quantitative definition is impossible to those that are sus­
ceptible of reasonably accurate statistical treatment. Sustained
full employment will mean stabilized income for the family unit.
As confidence in the nation's economic program grows, it is not
* U. 8. Employment Service, Lo6or

^Surrey* (Washington, D. C.).



improbable that "second workers" in many families will voluntarily
withdraw from the labor force. If we are to make the free­
dom from want and the freedom from fear realities, one of the essen­
tial instruments will be an adequate program of security for the
aged. It has been estimated that adequate and universal security
payments to all persons aged sixty-five and over would result in the
voluntary withdrawal of approximately 1 million persons from the
postwar labor force. The broadening of educational opportunity,
both in our public schools and at the college level, is a practically
achievable immediate postwar objective. Truly universal educa­
tional opportunity in the United States would result in an increase
of our school-attending population of 3 million people, aged fourteen
to twenty-one years (some of whom would be serving in the post­
war armed forces), with a corresponding reduction of the labor force.
On the other hand, both the broadening of educational opportunity
and the strengthening of the nation's health services will result in
signiBcant increases in employment opportunities.
Preliminary to the development of a program of transition from
war to peace are the marshaling of the facts and the determination
of the probabilities which describe the magnitudes and directions of
readjustment. It is a dangerous error to think of war and postwar
economic processes as being separate and distinct. Whether this
war is thought of as a phase of the revolutionary process leading
toward the dawn of the "century of the common man," or thought
of as a gigantic and specialized economic effort—a cataclysmic
interlude—the essential continuum of events includes both the
transition from peace to war and the transition from war to peace.
The distortions indicated by the foregoing statistical approxima­
tions define the problems which will come to the fore immediately
upon the cessation of hostilities. The war program will not be
ended—successfully—until it has carried the United States through
to a full restoration of her democratic processes with stabilized full




The theory of secular stagnation is rooted historically in business-cycle analysis. Both are concerned fundamentally with the
problem of business depression and unemployment. But, whereas
business-cycle theory treats depression as a temporary, though
recurring, phenomenon, the theory of secular stagnation brings
out the possibility that depression may become the normal condi­
tion of the economy. Since business-cycle theory assumes that
the general level of employment and output is satisfactory, it is
interested primarily in compensatory policies, t.e., in policies
designed to offset temporary departures from the norm. Stagna­
tion theory, on the other hand, is far more concerned about the
general level of activity itself. The problem of reducing fluctua­
tions is obviously of secondary importance if throughout all of the
variations in production and employment a substantial part of
the community's resources remain unused.
To understand why the secular stagnation theorists are appre­
hensive about the long-run trend of economic activity we must
first review briefly the factors that determine the level of income,
output, and employment in our economy.
Full employment of labor and other productive resources*
depends, in a capitalist economy, on the maintenance of an adequate
flow of investment expenditure. What is adequate depends, in
turn, on the way the community divides its income between saving
and spending on consumption goods. To support a particular
level of income, investment must always be sufEcient to balance
the saving the community chooses to do at that level of income.
There is, of course, no precise standard of what constitutes full employ­
ment. The term as used here means a degree of utilization of available
resources roughly comparable to that which prevailed in past periods of pros­
perity such as 1923-1929, 1897-1907, etc.



If investment falls below this amount, income necessarily declines
to the point where saving is sufficiently reduced to fit the smaller
volume of investment spending.
If, for example, a $100 billion national income was necessary to
provide full employment and if the community saved one-fifth of
its income when it reached that level, then $20 billion a year invest­
ment spending would be necessary to support income at the full
employment level. If investment were less, income would fall,
production would be curtailed, and labor and other resources would
be thrown out of employment.
The decline in income might be accompanied by a fall in prices
as well as in output and employment. But the fall in prices would
not necessarily mitigate the decline in employment and output (real
income). We assumed that the whole process of contraction
started with a reduction in investment expenditure, which reflected,
of course, a lower demand for real capital goods. If the prices of
capital goods fell as income declined, investment expenditure
would be still further reduced. A new equilibrium could be reached
only through the reduction of real saving to equality with the
reduced demand for real capital goods. But real saving is a func­
tion primarily of real income.* Thus adjustment to a reduced rate
of construction of real capital goods requires a reduction in real
income, which is the same thing, of course, as a reduction in output
and employment. Falling prices would help stop the process of
contraction only if they reduced interest rates by making money
relatively more abundant, or if the general decline was accom­
panied by shifts in relative prices of a sort either to stimulate a
larger volume of real investment or increase the community's real
propensity to consumed
* If prices fall in a way that constantly tends to restore real income to its
former level, saving, in real terms, will also tend constantly to rise. This
means that investment tends continually to fall short of the amount the com­
munity tries to save out of its income (which is continually falling in money
terms but also continually tending to regain its former level in real terms).
If nothing else happened to stop it, the decline in income and prices might go on
* The kind of shift that would be likely to stimulate investment would,
unfortunately, be likely at the same time to reduce the propensity to consume,
and vice versa.
Experience of the last decade suggests that interest rates are likely to stop
falling long before they reach zero no matter how great the relative or absolute
increase in the quantity of money, i.e., that at certain positive rates of interest
liquidity preference becomes absolute.

S E C UL A R S T A G N A T I O N ?


An inadequate Bow of investment expenditure thus means
depression, unemployment, wasted productive capacity, poverty,
and insecurity. If the de6ciency in investment should persist over
a long period of time, the economy would be secularly depressed or
A "stagnant" economy in this sense is by no means a static or
unprogressive economy. Stagnation does not imply a cessation of
technical progress, entrepreneurial initiative, or private investment.
Writers of the "stagnation school" have frequently said that they
expect to see a continued rapid rate of technological innovation
accompanied by a continued volume of private investment which in
absolute terms may be large. What they are concerned about is
that it will not be large ewimpA. Private investment might be
running at the rate of $8 or $10 billion a year—a sizable amount in
terms of the power plants, airfields, chemical factories, television
broadcasting equipment, etc., it would build—and yet if the com­
munity's propensity to consume was such that $16 or $20 billion a
year was necessary to maintain full employment, the economy
would be depressed, productive resources would remain idle, and
frustration and insecurity would poison the community's social and
political life.
The thirties provide a striking example of "stagnation" com­
bined with highly dynamic economic and social development. Even
in the best year of the decade the American economy failed by a
wide margin to achieve full employment of available resources.*
And yet technological progress continued at a rapid rate, produc­
tivity rose markedly,* and in the second half of the decade gross
private investment averaged nearly $10 billion a year.' The
trouble again was not that there was no investment, but that
investment was not enough to keep income at a level that would
ful!y use the country's tremendous productive resources.
The theory of secular stagnation differs from the classical theory
of the stationary state in its treatment of the propensity to consume
and the rate of interest. The classical economists thought that
with the continued accumulation of capital the rate of profit would
tend to fall. This tendency might be offset for a considerable
* That some other national economies reached full employment earlier is
attributable largely to the direct or indirect effects of preparation for war.
' Cy. Spurgeon Bell, ProdudtmRy, tfopes, cud Afaitoymi /namM (Washington,
1 9 4 0 ), p p . 2 7 0 - 2 8 0 .

* "Savings and Investment," Hearings before the Temporary National
Economic Committee, Part 9, p. 4122.



period by increase of population, opening of new land, and tech­
nological improvements. But the limits of population growth
would eventually be reached and then the fall would be rapid. If
capitalists kept on accumulating profit would disappear. But long
before that point had been reached, they would probably become
dissatisfied with the low return and would stop saving.* The
result, however, would merely be a shift of expenditure from means
of subsistence and other capital goods to articles of the capitalists'
own consumption. Total demand and total employment of
resources would remain the same. The stationary state would
still be a full employment economy.
The modern theory of secular stagnation also assumes that
capitalists will stop trying to invest their money long before the rate
of return has fallen to zero. But it does not agree that they will, as
a result, increase their consumption by a corresponding amount.
The individual capitalist can both refuse to invest his capital at a
rate of return which he considers unsatisfactory and refuse to shift
from saving to consumption. He can go on accumulating without
acquiring real capital goods. This is possible, of course, because of
the availability of money as an alternative form of (individual)
But although the individual can accumulate wealth without
investing in real capital goods, society as a whole cannot. The
attempt on the part of separate individuals to save more than is
being spent on capital goods necessarily forces income down to the
point where they are collectively enough poorer to be content with
the amount of saving that can be absorbed in real investment.
Thus a fall in the rate of interest below the resistance point pro­
duces, not a quiet transition to the stationary state, but depression,
unemployment, and social instability.
In the discussion of the secular stagnation theory there has been
relatively little criticism of its assumptions with respect to interest
rates and the propensity to consume. There seems to be widespread
agreement both that investors will prefer money to other assets
when interest rates reach certain low levels and that the psycho­
logical and institutional factors governing the propensity to con­
sume, particularly the motives of accumulation and thrift and the
"F or no capital can then yield any profit whatever and no additional
labor can be demanded. . . . Long indeed before this period, the very low
rate of profits will have arrested all accumulation. . . . " — Ricardo,
(Gonner ed., London, 1929), p. 99. See also Ch. X X I, pp. 272-285.

S E C UL A R S T A G N A T I O N ?


distribution of income, are extraordinarily resistant to change.
Critics have, on the contrary, been much more interested in proving
that there is no need for a change in these factors than in trying to
show that they are likely to change of their own accord. Debate
about the stagnation theoiy thus has centered on the problem of
investment demand.
The stagnation theorists believe that there is a persistent
tendency in the modem world for private investment to fall short
of the amount necessary to maintain tolerably full employment.
Their critics, on the other hand, maintain that the opportunities
for profitable investment are, and for a long time to come will be,
quite adequate to support a high level of income and productive

The stagnation school bases its prediction of a long-run defi­
ciency on an analysis of the dynamic determinants of investment.
It points out, to begin with, that a positive rate of net investment
cannot simply be assumed as a "natural," permanent feature of any
economic system. There is nothing in the mere process of produc­
tion and consumption to require net investment. Production and
consumption on the present, or any other already attained scale,
can go on indefinitely without requiring anything but replacement
of existing capital, which can, of course, be financed out of depreci­
ation allowances.
Long-run net investment is a product of change and growth in
the economic system. In the nineteenth century investment was
stimulated both by revolutionary technological changes, many of
which involved huge capital outlays,* and by rapid growth of popula­
tion and territory. Since the turn of the century, however, funda­
mental changes have been in process. The field for territorial
expansion has been narrowing, and population growth has been
slowing down. Meanwhile, new sources of capital accumulation
have been appearing as new areas have reached the stage of indus­
There is a wide range of variation in the amount of capital required to
introduce new techniques, new products, new resources, etc. Some, like the
railroad or electric power, require a large initial investment per dollar's worth
of final product, others, like radio or synthetic yam, a relatively small invest­
ment. Still others, perhaps equally notable achievements from a scientific or
technical point of view, can be introduced merely through the expenditure of
current replacement allowances.



trial maturity. The result has been growing pressure on the
available investment outlets.*
This pressure would probably have produced worldwide depres­
sion even sooner than it did, had it not been for the effects of the
First World War. The war not only created an extraordinary
replacement demand for capital but also weakened the economies of
western Europe sufRciently to remove them for a time from the com­
petitive search for new outlets. This temporarily left the Reid largely
to American capital. Postwar reconstruction, both here and abroad,
and the opportunity to exploit new foreign outlets aided materially
in keeping income in this country at a high level in the twenties.
The basic changes that have been going on since the beginning
of the century are important not only in explaining the unprece­
dented severity and persistence of the depression of the thirties^
but also in appraising the outlook for the future. The reduced
rate of growth, with respect both to population and to territory, is
likely to be permanent. Technological change is still going on at a
rapid rate, and, so far as anyone can see, it is likely to continue for a
long time to come. In the thirties the changes were predominantly
of the sort that requires relatively small investment of new capital.
This, of course, may change. There may be innovations in the future
comparable in their effect on investment to the railroad, the auto­
mobile, or electricity. It is highly unlikely, however, that future
technical changes will be so much more capital using as to make up
for the reduced rate of territorial and population growth. This is
the basis on which the stagnation school predicts a long-run defi­
ciency of investment opportunity.
The de6ciency thesis has been attacked from several different
points of view. To begin with, some writers deny the possibility
of an investment problem.
*See especially Prof. Hansen's presidential address to the American Economic
Association in December, 1938:" Progress and Declining Population/' XnMrtcc*
FcononMc Review, Vol. X X IX (March, 1939), pp. 1-16.
* Some critics have said that the theory of secular stagnation is based on a
narrow view of the peculiar difBculties experienced by this country in the
second half of the thirties. This is not entirely accurate. The idea of secular
stagnation runs through much of Keynes's
which was based on
the whole postwar experience of the capitalist world. American experience,
and particularly the slump of 1937-1938, did, however, focus people's atten­
tion much more sharply on the possibility of a long-run deficiency of investment

S E C UL A R S T A G N A T I O N ?


Professor Henry Simons can be taken as representative of one
group of these. In a recent article he characterizes Prof. Hansen's
formulation of the investment problem as "mysterious," "novel,"
and "preposterous":*
Believing such things, he [Hansen] naturally urges that such a theory of
dynamic development be incorporated into fundamental economic analysis,
as co-ordinate with, or superior to, conventional monetary analysis and
relative-price theory. Finding Hansen's revelations preposterous, I am
strengthened in the conviction that the sooner we quit talking about cycle
theory as a major Reid of inquiry, the better.*

And again:
Being preoccupied with saturation in some mysterious, technical sense,
Hansen. . .
We should be utterly skeptical about novel doctrines which
explain our difBculties without reference to politically unpalatable or
unmentionable facts.'

A brief review of classical literature from Ricardo and Mill to
Taussig would show Prof. Simons, and others who hold the same
view, that there is certainly nothing novel about Prof. Hansen's
analysis and that it is "mysterious" and "preposterous" only in
the sense that the whole classical tradition is mysterious and pre­
posterous. Mill, for instance, says in discussing the effect of
accumulation on proRt:
When a country has long possessed a large net product and a large net
income to make savings from and when therefore the means have long
existed of making a great annual addition to capital (the country not
having like America a large reserve of fertile land unused) the rate of proRt
is habitually within a hand's breadth of the minimum and the country
therefore on the very verge of the stationary state . . . it would require
but a short time to reduce proRts to the minimum if capital continued to
increase at its present rate and no circumstances having a tendency to ratse
occurred in the meantime. The expansion of capital would
soon reach its ultimate boundary if the boundary itself did not continually
open and leave more space.'

Mill clearly attaches the same fundamental significance to economic
Henry C. Simona, " Hansen on Fiscal Pblicy," Jowwai qf PoMfMol Fconomy, Vol. L (April, 1043), pp. 161-197.
' 7 M ., p. 163.
' fbM., p. 166.
p. 170.
' John Stuart Mill, PrttMtpi** qf Poft#cai Axwowy (Ashley ed ), p. 731
(italics mine).



development which Prof. Simons 6nds so "n ovel" in Prof. Han­
sen's work.
Professor Simons' conception of "fundamental economic
analysis" is evidently of fairly recent origin. As late as Taussig*
there was no hesitation on the part of the great classical writers
about including a theory of dynamic development in their funda­
mental analysis.
Just why Prof. Simons should want to exclude dynamic develop­
ment is not at all clear. The economy we live in has for at least a
century and a half been dynamic in a high degree. Techniques of
production have been constantly changing, territory expanding,
population growing, new products appearing, location of industry
and population shifting. Leave all this out and you may have a
model which is convenient for certain special purposes but which
certainly has little to do with reality.
Leave dynamic development out, moreover, and the long-run
outlets for new investment disappear. In excluding development,
Prof. Simons is ruling out the problem he proposes to discuss.
From other passages it appears, however, that Prof. Simons does
not really mean to go so far. He does not really deny the relevance
of dynamic development, but merely thinks that there are enough
unexploited opportunities for further development already avail­
able to last for a long time to come, even in the absence of further
innovations.* This is, of course, quite a different story. Unfor­
tunately, he offers not a shred of evidence in support of his "con­
viction" that "investment opportunities are and have been nearly
An entirely different reason for denying the importance of the
dynamic determinants is advanced by Dr. Moulton, Prof. W. I.
King, and others. Dr. Moulton says, for example:
Analysis of the capital and employment requirements for achieving
progressively higher standards of living for the people of the United States
clearly reveals the fallacy involved in the prevailing assumption that there
is no further significant field of opportunity for private capital enterprise.
*<y. particularly "Capital, Interest, and Diminishing Returns,'* Quarterly
Journal of J&xwMMHtcs, May, 1908.
* Simons, op. <?%., p. 170.
*Loc. c%. In this passage his conviction seems to rest on the difficulty
of providing statistical proof of the contrary thesis, at best a weak foundation
for so confident an assertion. Earlier, however, he refers to the "devastating
case" that can be made out against Hansen's underlying theories (p. 162).
Unfortunately the reader is left in the dark as to what the case is!

SE C UL A R S T A G N A T I O N ?


And again:
So long aa there remain vast unfulfilled demands for existing kinds of
goods, new products are not indispensable.*

Certainly no one would deny that there are plenty of opportuni­
ties for expanding the consumption and production of already
familiar articles. Many millions of families, even in periods of
prosperity, need more adequate clothing and food, let alone such
things as washing machines, refrigerators, decent houses, medical
care, recreation, and the like. It seems quite senseless to depend
for full employment of our resources on the opening up of further
continents, the addition of more people to the population, the
substitution of airplanes for automobiles, etc., when there are so
many already familiar things the existing population wants and
needs in greater quantity.
Dr. Moulton's suggestion does, of course, offer a perfectly good
solution for the production and employment problem. But it does
not provide a solution for the investment problem. What the
sharecroppers, textile workers, coal miners, etc., need is not capital
but purchasing power. An insurance company or investment trust
which had a superfluity of investment-seeking funds on its hands
could, of course, turn the funds over to sharecroppers and other
low-income consumers and thus provide them with the additional
purchasing power they need. But this would not be investment.
The insurance company or investment trust would not only receive
no return on its capital, it would lose the principal as well.
Confusion probably arises from the fact that, as a result of an
increase in consumer demand, additional capacity might be required
in the consumer-goods industries. If insurance companies and
other investors turned part of their incoming funds over to share­
croppers, and the sharecroppers spent the money on clothes, the
clothing and textile industries might Snd it necessary to enlarge
their capacity and might have to appeal to investors for funds.
Thus by giving away part of their savings, investors might provide
an investment outlet for the rest. But even this partial outlet
would be only temporary. Once the new capacity had been com* Harold G. Moulton and others, Captla/ Fspanaton,
FcoTMTHtc *Siab%#y (Washington, 1940), pp. 193 and 182* Essentially the
same argument is advanced by W. I. King,
Vol. XLVII (October, 1939), p. 617, and Howard S. Ellis, "Monetary Policy
and Investment," AweWcan FcowimMC Review, Supplement, Vol. X X X (March,



pleted, replacement would be financed out of depreciation allow­
ances. Net investment would again sink to zero. In order to
provide themselves with a further outlet, investors would have to
give away still more of what investment income they had left (the
original gift being repeated of course in each succeeding income
period, otherwise consumer demand would sink back to its original
level). In the absence of dynamic changes, investment would
approach zero. This is surely not what Dr. Moulton, Prof. King,
and others had in mind in proposing increased consumption as a
solution to the investment problem.

Other critics of the stagnation theory fully realize the impor­
tance of economic development for investment opportunity but
coniine their attention to one element in it,
innovation. Professor Schumpeter, for instance, leaves population
growth entirely out of his theory of economic development.*
Professor Slichter talks about both change and growth as determi­
nants of investment, s but when he comes to discuss the depression
of the thirties and the problems of the postwar period, he lets growth
fade into the background and makes technological progress the allimportant factor.' Since Prof. Schumpeter and Prof. Slichter,
and the many others who agree with them, are able to dismiss growth
as of little or no importance, they can conjure up optimistic pictures
of the future prosperity which private investment would produce if
only it were freed from social and political shackles.
Professor Slichter suggests that technological change may be
even more important from an investment point of view in the future
than it has been in the past (p. 11). "M ore important" must
mean relative to society's power to accumulate capital. In other
words, Prof. Slichter expects a continual succession of changes
more revolutionary in their eEects on the economy than the intro­
duction of steam and of the railroad in their day. The history of
the last 150 years points in the opposite direction. As industriali* Joseph A. Schumpeter, Theory qf #cotKWMc Development (Cambridge,
* Sumner H. Slichter, Toward* RiaMRy (New York, 1934).
* "The Conditions of Expansion," American Fconowtc Review, Vol. X X II
(March, 1942), pp. 1-22. Professor Slichter says at one point: "O f course,
it would have helped had there been another Mississippi Valley to develop"
(p. 2). But he apparently does not think that the lack of a Mississippi Valley
to develop could have hindered expansion in any way.

S E C UL A R S T A G N A T I O N ?


zation has proceeded, its effects, relatively speaking, have become
less, not more, revolutionary. There has, in fact, been a general
progression in industrial communities from a deBciency to a surplus
of capital relative to internal requirements.
The relation between growth and investment opportunity has a
certain elusive quality about it which makes satisfactory analysis
difEcult. Perhaps this is one reason it has received relatively little
attention from economists. From one point of view it seems quite
clear; from another extremely obscure. Viewed historically, for
instance, the whole thing seems rather simple. Over the last 150
years there has been a tremendous growth both in the population
and in the territory of the capitalist economies. An enormous
amount of capital has been invested in equipping the additional
people with factories, farms, railroads, houses, power plants, etc.
This investment has not had to wait on the invention of better
machines or new methods of transportation or cheaper houses but
has gone into building more of the already existing types. If there
had not been any increase in population, capital would have had
only the outlets provided by the substitution of new equipment and
new products for the old. The total volume of investment would
have been very much less, perhaps not more than half what it has
If at the same time capital had tended to accumulate as rapidly
as it has, there would have been tremendous pressure on the avail­
able investment outlets and the rate of return would have been
continually sinking to the minimum investors were willing to
accept. This would have meant a chronic tendency to depression
and unemployment, i.e., secular stagnation.
It is probably unrealistic to assume that the (potential) rate of
accumulation would have been as rapid had there never been any
growth of population and territory. But if the growth had gone
on for some time, wealth had accumulated, and the community's
propensity to save become adjusted to a high rate of investment
expenditure, it is not at all unrealistic to assume that the higher
(attempted) rate of saving would have continued for a long time.
The actual rate, of course, would have been kept in check by low
The classical economists thought that population growth would continue
in response to accumulation of capital until both were checked by diminishing
returns from land. But their analysis can also be applied to an autonomous
cessation of growth. Ricardo admitted this in a letter to Malthus:
"Y ou say that you think that I have sometimes conceded that if popular



From the historical point of view the relation of growth and
investment seems clear enough. If there had been less growth there
would have been less investment. But once society has become
geared to a certain rate of investment, it does not easily adapt
itself to a lower rate. Thus a significant slowing down in the rate
of growth is likely to cause serious economic difficulties.
A more detailed analysis of the causal relation between growth
and investment, however, raises difficult theoretical problems.
It seems paradoxical that a lower rate of population growth should
cause unemployment. If more workers will stimulate investment
why will not unemployed workers do the same?
The question becomes even more puzzling when we introduce
wages into the analysis. According to classical theory, population
growth is favorable to investment because it moderates the rise in
wages which would otherwise take place with advancing accumula­
tion. By keeping wages in check it enables accumulation to con­
tinue without a fall in the rate of profit. This leads naturally to
the conclusion that if unemployment fails to stimulate investment
it is because wages are too high. Let unemployment have its
proper effect on wages and investment will be increased, income
and output will rise, and unemployment will disappear.
But even if the reduction in wages encouraged employers to hire
more labor and in the process of hiring more labor to increase invest­
ment outlays, the stimulus to income and hence to employment
would at best be temporary. For as soon as all the unemployed had
been hired and provided with the appropriate capital equipment,
investment in providing the unemployed with capital equipment
would obviously cease. In the absence of an offsetting increase in
the propensity to consume, or in other types of investment, the
result would be a new decline in income and in employment. Hir­
ing the unemployed, even assuming that it was accompanied by a
signiRcant amount of new investment, would thus provide at most
tion were miraculously stopped, while the most fertile land remained uncul­
tivated, profits would fall upon the supposition of an increase of capital still
going on. I concede it now. Profits I think depend on wages—wages depend
on demand and supply of labour, and on the cost of the necessaries on which
wages are expended. . . . In the case you put, wages would have a tendency
to keep stationary as far as the supply of food was concerned, but they would
have a tendency to rise in consequence of the demand for labour increasing,
whilst the supply continued the same. Under such circumstances profits
would of course fall. You must, however, allow that this is an extraordinary
case."— Ricardo, op. c%. p. 98.

S E C UL A R S T A G N A T I O N ?


a temporary cure for unemployment. It would not be a complete
cure even temporarily since the amount of investment required to
outfit the unemployed with new capital equipment would neces­
sarily begin to fall off before full employment had been reached.
Thus we arrive at the paradoxical conclusion that an attempt
on the part of employers to hire all the unemployed will not neces­
sarily eliminate unemployment. The difEculty of Bnding satis­
factory answers to problems such as this has led many economists
to drop population growth from their analysis of the factors influenc­
ing investment and employment. But, while this may seem like
an easy way out, it solves no problems. Progress in understanding
can come only through an acceptance of the theoretical challenge.
Meanwhile, even though we do not have answers to all the theo­
retical questions involved, it seems safe to stick to the commonsense historica! conclusion that population and territorial growth
have had a large influence on investment and that a reduction in
the rate of growth is bound to affect investment adversely.
It has been suggested that population growth may be more a
supporting than an initiating force in relation to investment.*
Continued increase in population in a period of depression and
large-scale unemployment might have little effect beyond increas­
ing still further the number of unemployed. But once expansion
had started, as a result of the introduction of new techniques or the
opening up of new resources, employment would increase and the
expansion would be reinforced by the investment involved in put­
ting the additional people to work. The expansion furthermore
would last longer if population went on increasing than if the sup­
ply of new workers was exhausted with the absorption of the
The concept of secular stagnation does not imply stability at a
fixed, low rate of production. A secularly stagnant economy might
well be characterized by even more violent fluctuations than the
predominantly prosperous economy of the ninteenth century. The
diRerence is in the norm around which the Suctuations would occur.
A stagnant economy would be characterized by long and severe
depressions and brief, anemic recoveries, in contrast to the strong
prosperities and mild depressions of the past.* Even aside from
*This possibility is discussed in my article on "Population Growth and
Investment Opportunity," Quarterly Journal qf FcwMmwc*, VoL LV (November,
1940), pp. 73f .
* Hansen, op. c#., p. 4.



war and reconstruction, a stagnant economy would undoubtedly
experience periods of expansion. The rate of technical innovation
is likely to be quite uneven, and the bunching of new techniques,
new products, etc., would from time to time give rise to enough
investment to carry income and employment to reasonably high
levels. But the expansion, lacking the support of growth, would
tend to give out sooner and to be followed by a longer, more severe
depression than in a rapidly growing economy.
Discussion of growth often suffers from lack of perspective. It
is said, for instance, that territorial expansion cannot have any
relation to the depression of the thirties since the frontier had dis­
appeared as far back as the 1890's. The trouble with this argu­
ment is that it considers the frontier an exclusively American
phenomenon. Actually the frontier is worldwide.
The frontier in the United States disappeared in the 1890's, and,
as a result, exploitation of other "frontiers," Canada, Latin America,
Africa, and Asia, was greatly intensified. English capital, which
had hitherto played an important role in the development of this
country, bore the brunt of the shift.
By the 1920's this country had also developed a surplus of
capital over home requirements and had joined the search for new
outlets abroad. Relatively speaking, the openings in still unde­
veloped parts of the world were much less abundant than they had
been in the ninteenth century. If it had not been for the temporary
weakening of the accumulative power of England, France, and Ger­
many, and the demands of war reconstruction, the discrepancy
between the amount of capital seeking investment abroad and
the available outlets would have showed up even sooner than it
It is possible that the rate of development of economically
"backward" countries, particularly in Asia, will be faster after
this war than after the last and that Western capital will be able to
secure an important role in it. But there is little ground to expect
anything approaching in relative magnitude the outlet English
capital found in America in the nineteenth century.*
i The industrialization of Asia may well follow quite a different pattern
from that of America. Natural resources are probably leas bountiful, rates
^J*Ws^etum are likely to be lower, much broader planning and coordination may
^i^pessary, established social and political institutions may to some extent
- pi'e^n^ obstacles, the nations concerned may be unwilling to have foreign
jOtpitA play a predominant part in their development.

S E C UL A R S T A G N A T I O N ?



The stagnation school is commonly accused by its critics of
neglecting social and political changes which have had an unfavor­
able effect on investment. Higher income and proBt taxes and the
growth of labor organization are usually cited as the most impor­
tant. Actually, writers of this group not only have been aware
of these developments but have also pointed out that they are
likely to aggravate investment difficulties. They are convinced,
however, that political and social changes are manifestations
rather than fundamental causes of the economic crisis of the mod­
em world.
It is particularly important to determine which are causes and
which effects, because the appropriate remedies differ sharply.
If the basic trouble is a lack of sufBcient investment opportunity,
the only basic remedy is an increase in the propensity to consume.
Attempts to stimulate investment would by themselves yield meager
results. It is impossible to stimulate anything beyond the limit of
what is there to be stimulated. With a basic de&ciency of invest­
ment outlets, no amount of social and political "coddling" of
investors will produce enough investment expenditure to keep
income and employment at satisfactory levels for any appreciable
length of time.
Increasing the community's propensity to consume, on the other
handy necessarily involves measures designed to redistribute income
from savers to consumers, increase in the political power of lowincome groups, etc. These, unfortunately, are the very things
about which investors complain so bitterly. Thus, a policy of
increasing the propensity to consume unavoidably conflicts in
considerable measure with a policy of encouraging private invest­
ment. Insofar as the two policies are mutually exclusive, the
choice between them must, of course, rest on which one will con­
tribute more to the long-run effectiveness and stability of the
economic system.
It is often said that the stagnation theory is pessimistic, defeat­
ist. This is true only from the point of view of those who regard
investment as an end in itself. If, on the other hand, we take
seriously what we learned and what we teach in elementary eco­
nomics, viz., that consumption is the final aim of economic activity,
the implications of the stagnation theory are optimistic not pessimis­
tic. If the theory is correct, it means that society can devote a



larger proportion of its resources in the future to satisfying current
consumer wants, including such things as the provision of more
adequate medical care, better housing, wider educational oppor­
tunities, etc. This is certainly anything but a gloomy prospect.
People have trouble in seeing it in its true light only because they
are still thinking in terms appropriate to a scarcity rather than an
abundance of capital.




Since 1932, socialism, under that name, has not been a live
political issue in the United States.* What the radicals of these
latter days have argued is that a system of free enterprise, left to
itself, would not and could not be expected to function with even
tolerable success. In their view, it is not the existence of private
property nor the selfishness of the proBt motive, nor even the unregu­
lated competition of Arms and industries that is the basic cause of
the trouble but, rather, the peculiar instability of the income Hows
in a wholly free economy with a modem monetary system. Their
diagnosis emphasizes the absence of any reliable mechanism for
ensuring that, when a large output of goods and services is produced,
sufBcient markets will be created by the act of production to absorb
the whole output.
What they prescribe is deliberate action by the government to
supplement incomes and thus enlarge the market when it appears to
be too small and (though this received less attention from them until
the war began to make itself felt) to limit or absorb income and thus
cause the market to contract when it is in danger of becoming too
strong. It is the function of the government, in short, to act as a
Bnancial balance wheel in a free-enterprise economy by spending as
much and as continuously as necessary. The budget should not be
balanced; theoretically it should show a surplus or a deficit according
as the economy requires a sedative or a stimulant, but the latter is
what will usually be called for. Whether such a fiscal policy is
sound, whether the government can afford to run a perpetual deficit,
is the public spending issue.
A major argument against public spending is that it may involve
the neglect by the government of other activities that are fully
This essay is based on articles published in FortttfM in May and June,
1942. Permission has been granted by the editor of this magazine to use this



as necessary for the health of a free-enterprise system. The classic
function of the government in a free-enterprise economy is to estab­
lish and maintain the institutional and legal environment in which
economic decisions are made. This does not imply a passive role.
From time to time public and private institutions and policies
develop in such a way that environmental conditions become
unfavorable to economic activity. This may occur through the
growth of monopoly in business or of a structure of labor policies that
hamper innovation. It may occur aa a result of the technological
backwardness and irrational organization of a critical industry,
such as the construction industry. It may take the form of the
slow development of a tax structure which penalizes consumption
and enterprise. Even a rapid increase in public (or private) debt
may play the same part.
Whenever such unfavorable conditions do appear, one way of
stimulating economic activity is through their removal. Yet a
government which is preoccupied with spending and which is
determined to spend whatever sum is necessary to achieve a high
level of economic activity is not, in fact, likely to push fundamental
changes. Though the strongest advocates of public spending agree
readily that economic policy in all other directions shovMbe designed
to minimize the need for it, spending often serves to cover up failure
on other fronts and is used to excuse it. Public spending does not
compete with other economic activities for the use of resources
(unless it is continued after reasonably full employment has been
reached). But a spending poHcg/ does compete with other public
and private poHctes. This is the crux of the issue.
The case for public spending can best be stated (and usually is)
in terms of the Keynesian analysis of income Rows. Keynes's great
"discovery" (as he, himself, claimed) was that decisions to save and
decisions to invest (in the Keynesian sense, t.e., to make capital
expenditures) are made by different sets of people at different times
and for different reasons and often get out of step. The conse­
quences of such a maladjustment can be serious. If the savers
attempt to increase their saving and thereby to save more than
the investors are currently investing, they can do so only by reduc­
ing their expenditures. This means that current receipts in the
whole community decline; saving is cut by the drop in business and
by unexpected reductions in consumers' incomes. The reduction in
consumers' incomes and the decline in sales causes further successive
reductions in spending and in current receipts. This process con­



tinues until the savers are no longer trying to save more than the
investors are prepared to invest. Of course, such a deflation may
also affect the behavior of the latter. If they curtail their capital
expenditures, the reduction in production and in incomes has to go
further before the amount people try to save is so reduced that it
catches up with the shrinking total of capital expenditures. Thus
a high rate of investment sustains a high national income, and the
attempt to save makes its attainment more difRcult.
What is wrong with this line of reasoning is that, as an unre­
stricted generalization, it proves too much. After all, the United
States did get through a century and a quarter of capitalist develop­
ment with a remarkably good record. The weak links in the chain,
then, must be related to the Keynesians' minor premise, t.e., to
their belief that these conclusions have been applicable to the United
States in the decade of the thirties and will again be applicable to
the United States at the end of the war. The Rrst and the most
serious real issue involved, therefore, concerns the nature of the
concrete historical situation in whatever nation and period is under
discussion, specifically, the circumstances that affect investment
incentives and habits of saving.
The second real issue has to do with the effects of policies and of
institutional arrangements upon economic decisions. The critics of
the Keynesian position have consistently argued that the volume
of private capital expenditure in the thirties was not irrevocably
determined by immutable circumstances nor, yet, by the low level
of current income. (AH revivals begin in depressions. The perof depression obviously cannot be accounted for by its
existence to begin with.) They blame policy, public policy mainly,
to be sure, but various sorts of private policy as well. The trouble
may have been, not an excessive rate of saving nor an unalterably
low rate of private investment, but a set of policies that inhibited
7/ there is not going to be enough investment, given our habits
of saving, to sustain a high national income, then thrift causes
poverty, and public spending prevents waste (the waste of resources).
But the "if" leaves two issues open still. First, men disagree in their
appraisal of the objective conditions that must be taken as given,
especially as they relate to saving and to investment opportunities.
Second, they disagree on the part played by policy in determining
the volume of capital expenditures.



Both of these questions arise in any analysis of the thirties. To
the Keynesians the great depression signalized the major break in
American economic development. Prior to that time, they admit
opportunities for private investment had, on the average, been
adequate to maintain reasonably full employment in a reasonably
high level of economic activity with, of course, fairly frequent
depressions that could be explained by special or temporary circum­
stances. But 1929 marked the end of this era. Thereafter we
might expect to suffer from a secular stagnation due to a chronic
deficiency of investment opportunity as well as from the deep
depressions associated with cyclical fluctuations.
A variety of factors were listed as the causes of so momentous
a change. The country is becoming mature; there is no longer any
geographical frontier that has a significant influence on American
economic development. The rate of population growth fell off
sharply after 1929. Changes in technology have been of a pre­
dominantly "capital-saving" character; that is to say, they permit
the maintenance or expansion of output with a smaller plant and
fewer machines, ^.e., smaller capital costs than formerly. Finally,
no major new industry, such as the automobile industry, appeared
after 1929 to sustain investment. It is not easy to appraise all
these issues separately. The changes to which they refer did
actually occur but it is not so certain that they explain the observed
course of events.
The absence of a geographical frontier during the thirties cannot
be denied, but it had pretty largely disappeared 30 years before
the onset of the great depression. The difference between the
twenties and the thirties can hardly be explained on this basis.
The concept itself is somewhat nebulous when closely examined.
A geographical frontier is significant economically because it
implies the existence of unexploited physical resources. If a new
railroad is to be built to permit opening up a new mine, investment
is stimulated. In other words, it is new resources, not just new
areas, that are important. But when this is realized, it becomes
even harder to establish a contrast between the twenties and the
thirties. It was in the latter decade that we at last learned how to
use southern pine as the raw material for paper products on a large
scale. The discovery of new oil reserves proceeded at a far faster
rate during the thirties than during the twenties. And even in the



depressed coal industry, new mines and fields continued to be
opened up. A shortage of new resources will hardly account for
secular stagnation.
The effect of population growth upon investment incentives is
both a complex and a controversial matter. But the arguments
advanced by Hansen, Myrdal, and others are at least open to
serious questions. A mere increase in the size of the population
does not automatically ensure that the market for consumers' goods
is going to be larger in dollar terms and the incentive for capital
expenditure correspondingly greater. A decline in the rate of
population growth may have made people spend a smaller propor­
tion of their incomes (and save a larger) and it may have changed
the direction of demand. But even Hansen now concedes that it
could have made relatively little difference in the amounts people
spent out of given incomes. If the drop in the rate of population
growth had any effect it was via the direction not the absolute size
of demand. In particular, it may have reduced the demand for
houses. But this argument runs into another difficulty, for the
rate of growth in the number of families did not drop significantly
between the middle and late twenties and the middle thirties. The
thirties cannot very easily be explained, therefore, by a reference to
The argument about changes in technology is harder to evaluate
but it is notable that expenditures for equipment recovered remark­
ably well during the thirties in view of the lower level of prices and
the smaller size of the national income. Indeed, when equipment
expenditures are plotted against gross national expenditure (a
measure of the output of goods and services valued at market prices,
analogous to but somewhat larger than the national income) and
when the two are correlated, equipment expenditures do not show a
declining trend through time. The evidence is clear that our failure
to achieve full recovery in 1936-1937 was not due to the small size
of expenditures on equipment.
The stagnation of private investment in the thirties is mainly
attributable to the persistently small volume of construction. In
the most prosperous years between 1930 and 1940, housing remained
below the level of 1921 and never came close to 50 per cent of the
smallest figure for annual construction between 1923 and 1928.
This was in spite of the fact that national income in 1937,1939, and
1940 was close to the level reached in the middle twenties. It would
be tempting to explain the small volume of housing by reference to



the tow rate of population growth were it not for the well-sustained
rate of growth in the number of families referred to above. The
small volume of business construction, especially factories and public
utilities, may reflect the capital saving character of technological
changes. American industrialists learned to produce a substan­
tially larger output on a given floor space and, even where the
capital investment in machinery kept pace with output through the
thirties, the investment in plant did not. But when all due credit
is conceded to the explanations that the Keynesians have advanced,
the stagnation of the thirties remains far from fully explained.

One other type of evidence may be quoted to suggest that the
maturity of the American economy may not have been the major
cause of its wretched performance between 1929 and 1939. Prac­
tically every nation in the world felt the impact of the great depres­
sion in 1930, 1931, and 1932. But it is notable that other nations
with far more maturer economies achieved a far more complete
recovery thereafter. England and Sweden are two of the clearest
To be sure, international comparisons are always dangerous and
Hansen has given an able explanation of England's peculiarly
happy experience. He argues that the fall in the price of imports
and especially .of imported foods, the temporary stimulus to internal
investment provided by newly imposed tariffs, and the private
housing boom (itself partly due to the first two factors) were the
proximate causes of Britain's prosperity until the rearmament
program began.
But perhaps even this record contains certain lessons for us.
It may be, for example, that we would have done better to have safe­
guarded the interests of consumers by managing farm relief in such
a way as not to raise the cost of living. As for Britain's housing
boom, the analysis of it which appeared in the London F<HMM77MS%of
Nov. 10, 1934, conceded that cheap money and relatively low costs
of materials have a good deal to do with it. We did finally achieve
cheap money through the Federal Loan Agencies. But the real
estate credit structure in the United States proved itself far weaker
than the British in the depression and we entered upon the period
of recovery with no wealthy and well-established building societies
to finance private construction. Finally, it is just barely possible
that businessmen were more willing to build new plants in the



automobile industry and the light consumers' goods industries that
sprang up in southern England because the political climate was
more favorable to enterprise. And it is possible, too, that business­
men were relieved of certain fears because Britain already had a
powerful, recognized, stable labor movement.
If, then, the explanations of the Keynesians are, to put it mildly,
incomplete, we may be permitted at least to explore the possibility
that the phenomenon of the thirties can be explained on other
grounds. Certain partial explanations are implicit in the above
comparison between British and American experience. The
process of building up labor organizations and of securing the
acceptance of collective bargaining as the normal method of deter­
mining the employment contract must have been disturbing to
profit expectations. This does not imply, of course, that no attempt
should have been made to promote collective bargaining. There is
no question here of assessing responsibility. Business paid in the
thirties the cost of its previous refusal to deal with unions. But it
was a major misfortune, if not an avoidable one, that the price had
to be paid at that particular time. It is as absurd for the reformers
to argue that such things have no influence upon investment deci­
sions as it is for their opponents to argue that the reforms should
never be made because they will have a depressing effect upon
private investment when they are first instituted. From the
economists' point of view, all that is relevant for the question here
under discussion is that an unfriendly political climate and the
unrest in the labor market may explain in part the failure of long­
term investment to revive.
Both the business community and labor-union leadership share
the responsibility with the government for certain other policy
decisions that may have been important. It is fair to say that the
whole decade was characterized by the effort of organized producers
to raise their incomes at the expenses of the buyers of their products.
A generally lower level of prices and costs might have been healthier
than that which prevailed. But what is more important is the fact
that certain cost-price relationships appear to have been out of line.
As pointed out above, housing was too expensive in relation to other
goods. Labor in certain particular industries, notably the housing
industry throughout the decade and the automobile industry at the
end of the decade, waa probably too costly in relation to labor in
general. These policies may, of course, be regarded as symptoms
of the maturity upon which the Keynesians blame the semidepres­



sion of those years. But their critics have a perfect right to reply
that it is not legitimate to describe certain policies as evidence of a
secular trend and call for public spending instead of for a change in
those policies.
These alternative explanations are not, by themselves, suffi­
cient. Nor do they controvert those offered by the Keynesians.
But they differ from the latter in that they are either inherently
temporary or else directly related to public and private policy and,
therefore, potentially temporary. The housing cycle will not always
be in its low phase, so the low rate of construction in the thirties is
not conclusive evidence of an enduring state of affairs. There is no
inherent necessity for labor policy and price policy to be always
unfavorable to investment. Insofar as the stagnation of the
thirties was due to policy or to temporary factors, it cannot be
blamed upon irresistible and irreversible changes in the economic
environment. In a longer perspective, the thirties may turn out to
be a depressed decade separating two long periods of high investment
Whether they do depends upon what happens in the years after
the war, and, superficially the prospects seem far from favorable.
Yet, neither the precedent of 20 years ago nor reQection on the
economic nature of war lends support to pessimism. True, produc­
tion may be halted abruptly in all war industries at the end of
hostilities. But the war will have the same effect on income (even
after taxes) as a major boom, but the effect upon expenditures and
upon stocks of durable goods as a major depression. Unless there is
a major economic catastrophe, the scene will have been laid, during
the war, for a large, perhaps dangerously inflationary, increase in
civilian buying.
At the end of the First World War, it turned out that the incen­
tives for consumer spending and private investment were (as
everyone had taken for granted that they would be) strong enough
to justify a conservative fiscal policy for 10 years. From the
autumn of 1918 until the spring of 1919 there was an incipient
depression. But throughout the balance of 1919 and the beginning
of 1920, the wartime boom continued with disastrous vigor. The
1921 depression was severe but brief. Significantly, it did not halt
the heavy capital expenditures for plant and equipment that com­
menced soon after the end of the war. By 1922 the great housing
boom of the twenties was under way and the New Era was launched.



Xo doubt, it would be just as dangerous to answer the fundamental
question about the postwar years by pointing to the analogy of the
twenties as to give free rein to the depression psychology of the
thirties. But the experience, Erst, of the 1919-1920 inflation,
second, of the 1922-1929 boom, and, third, of what has happened
since 1929 does suggest that there are not one but three separate
postwar problems.
The first relates to the immediate transition, the year that corre­
sponds to 1919, the sccond to the ensuing 4, 5, or 6 years, and the
third to the more remote and more uncertain future, the long run,
that lies beyond. How the first should be handled, what it will be
possible to achieve in the hectic months of demobilization depends
upon the prospects for the longer run and the objectives the nation
chooses to pursue, even though the events of the transition will
themselves modify the long-run outcome. Therefore, the great
question is whether there can be another huge and long-sustained
recovery, whether the twenties will be repeated.
The third problem is simply what will happen thereafter. Here
we are mainly concerned with the second phase. It presents a
manageable economic problem. Even so, unconditional forecasting
is out of the question. One reason is that prediction is quite impossi­
ble when the course of human events depends so largely upon mili­
tary and political developments. The other and basic economic
reason is that the level of economic activity after the war both
depends upon and determines civilian demand. It depends upon
the market but determines employment, consumer income, and,
thus, investment incentive.
The only way out is to take 6rm hold of one of the horns of this
dilemma. Let us arbitrarily assume that economic activity and,
therefore, consumer income are, in some fashion, maintained close
to their wartime level and inquire whether consumption and capital
expenditures will, given this postulate, be sufEciently large to
provide a market for the output that will be produced.
To ask the question in this form does not involve assuming
away the problem. If the pessimists are correct, the answer will
turn out to be in the negative. Indeed, their whole contention is
that, if we produce a large output, private capital expenditures will
not be large enough to absorb that part of the proceeds from the
sale of output left over in the form of savings after consumers'



Basse Assumptions.
The first step in developing an answer is to put the assumption
of a high national income into specific quantitative terms and to
build, on this foundation, a model of a postwar year. It is obviously
desirable to set up the model in terms of measures of economic
activity, consumption, and capital expenditures and saving which
will make possible comparison with past years. Tables 1 and 2
embody a statistical picture of the structure of the output of goods
and services and of the Row of income in the United States by
calendar years since 1929, projected to cover fiscal 1943 and a post­
war year. Table 1 gives a breakdown of all expenditures for
finished goods and services into government expenditures, capital
expenditures, and consumers' purchases of consumer goods. Table
2 shows the way in which the proceeds of the sale of goods and serv­
ices were disposed of in the form of taxes, savings, and consumer
expenditures. The picture of fiscal 1943, which is in terms of 1941
prices, represents a mixture of assumptions and derived estimates.
The basic assumption is that total production expands and civilian
production contracts sufficiently so that the goals outlined in
the President's original war program are really attained, which
would require a gross national expenditure in the neighborhood of
$132 billion.
This Sgure is worth considering as a benchmark for a postwar
year. There is no doubt that gross national expenditure will rise
higher if the war continues and maximum employment of both
people and other resources is attained. But it is also true that
peacetime prosperity should be predicated on a normal work week
and a normal labor force, which implies an output well below the
war maximum. Therefore, the postulate of a high national income
in the years after the war may appropriately be made concrete by
assuming that gross national expenditure will continue at the rate
of !132 billion per annum.*
What is necessary, next, is to put in concrete form an assumption
as to the scope of government activities, measured by taxes and
public expenditures. Then the problem will be to determine how
the total of $132 billion, viewed as the proceeds derived from the
sale of goods and services, is likely to be disposed of in the form of
taxes (already determined by the assumption about government),
*Cf. the informed guesses of Profa. Hansen and Samuelson in this vol­
ume.— EDITOR.







E X P E N D IT U R E ,











State and local............................................................................. $ 8.3
Federal: Ordinary.......................................................................
2 7
W ar................................................................................


$ 8 .8
2 4

5 2
0 8
2 0
0 7
-0 .3

9 .9

3 6
0 6
0 .2
-1 8
0 .0



Total capital expenditure.....................................................
C cM um ption:

Oroaa national expenditure......................................................


$ 7 8
2 .4

$ 6 5

2 0
0 .4
0 6
0 .6
0 6
0 .2
-2 .2
0 0
$ 6 .4

6 3



0 4
0 4
0 .4
0 5
0 2
-0 7
0 0
$ 2 .2

4 2


$ 9.1

3 4

3 4
0 6
0 5
0 7
0 2
0 3

2 .6
0 5
0 6
0 5
0 5
0 5
-0 7
-0 .1
$ 4 4

$ 2 .9

$ 8 .0
4 6

$ 8 .0
3 9

$ 5 .9

4 .8


4 4
0 .8
0 8
0 7
-0 .1
0 1
$10 0

$ 6 7
5 7

6 .7
52 4




$42 2








$54 6



$70 8



Construction: residential..........................................................
Factory and public utility....................................................
Net foreign balance....................................................................
Net change in inventories.........................................................

0 5
0 .8
3 0
2 4
2 3
0 .6
0 0

$ 8 7
2 .8









TA B L E 1 .---- COMPOSITION OF GROSS N ATIO N A L EXPEN DITU RE, 1 9 2 9 - 1 9 4 1 , FISCAL 1 9 4 3 , AND POSTW AR ESTIM ATES.— (C o f^ M llie d )

3 7 5


* 8 3

* 8.3



5 .5


. ^' ..........................................

3 5


4 6


1 .8

0 8

0 .9

0 .7

0 .8


- 1 3

0 .8

7 .6
54 9

0 .0


* 64 . 5

* 23.0

5 6



9 .0



2 .7

0 .5




1 0


0 .2

3 0


0 .5


3 .9

-1 .5
0 0

$1 1.0

$ 7 .7


*16 3

* 8 .0
7 5

* 7 .0
4 5

* 8.2


$ 19.1

$1 4.6




* 24 . 6

0 .0

7 .1

8 3


3 .0

14 .5

5 2 .5


5 7 .9

65 .5


78 8

$6 2.5




* 75 .8

* 6 4 .0

* 93 . 3

$8 7.7

$8 0.6




*13 2.0



$1 1.6


0 .1

0 .2

Consumers' durable.....................................................
Consumers' nondurable...............................................


*14 .4

Fiscal 1943





* 7 .0

War... ^........................................................











E X P E N D IT U R E ,









$ 5 3

$ 7 .6
1 .4
5 0

0 9
5 9
$ 7 .0

3 0
0 .2
-0 .7

2 .6
0 .2
-0 7

7 0 .8

$ -6 4
0 3
5 2
0 .9
$ 2.4

0 6
5 .6
$ 0 8

$ 2 .5

Disposable income:
Gross personal saving...............................
Consumption expenditure........................

$ -5 8
0 .5
5 .5

$ 0 .0

$ 6 .2

$ 2.1

$ 6 .6

$ 0 .8
5 .5

$ -1 .3
0 .5
4 .7
-0 .5

0 8
6 7

0 .2
- 1 .4

1 .5
7 3
$ 8.1

2 .3
0 .2
-1 .8
$ 0 .6

$ 8 .8
2 9
0 .6
-2 .9

$ 0 .7
6 4
5 2.2

4 .7
48 6

$ 4 .4

$ 3.4

$ 7 .5

$ 0 .0


$ -0 .9
0 .7
4 .9
-0 .3

7 .1

0 .2
-1 5

3 .7
4 2.8


$ 2 .4

$ 11

$ 6.1

$ 0 .7


$ -2 .1
0 4
4 9
- 0 .8

0 6
0 0

0 .2
-1 .3

8 .6
54 2


$ -2 .8
0 3
-1 5

0 .5
5 6

2 .4
0 .2
-1 9

6 4.9


$ 0 .6
8 8
59 1

$82 3

$74 0










$54 0
5 5

4 .8

$63 8

9 .8

13 2


Other business taxes.................................
Total business taxes..............................
Personal taxes:
Personal taxes...........................................

$ -3 .9
0 .7
5 .5
3 .0



(Leas) corporate inventory revaluation...
Gross corporate savings........................
Business taxes:

0 .7
6 3
0 .4








TA B LE 2 . ---- DISPO SITIO N OF GROSS N ATIO N A L EXPE N DITU RE , 1 9 2 9 - 1 9 4 1 , FISCAL 1 9 4 3 , AND POSTW AR E STIM ATES.— (Cow^TMted)

$ -1 5
0 4
4 2
0 .7
$ 4 .0

1 .6
7 .4
Totat busineaa taxea.................................................................
Personal taxes:
Personal taxes................................................................................

$ 3 .8

$ 9 .0

$ 3.1


$ 21.0

4 .0

7 5 .8


9 .1

3 5
6 .5

4 .0
- 2 .7

6 5

$ 11.0

$ 16.0

$ 2.G



9 .5

3 8
2 .6
-2 .4

9 .9
6 6 .2

3 5
0 5
7 .5
-0 5

7 2

5 2

3 .0
2 .2
-2 .6

8 .6
6 2.0




$ 2 .4

Fiscal 1943

2 6
1 .5
5 .7
-2 .6

$ 6 .6

$ 9 6

$ 2 .8



2 .8
9 0

1 .3

2 .9
2 .0
-2 .5

7 .2
5 8.5

1 3
0 .8
4 .8
-0 .3

$ 5 .5

$ 8 .3
3 .3
-2 .4

9 .1
6 2 .5

0 4
0 7
4 6
- 0 .2


$ 10.0
4 .0
4 .0
- 3 .0

$ 11.3
64 .4


5 .0

9 3 .3





$ 90 .7

$ 88 .7







3 5.3

2 3.7



7 1

1 .7
-1 .7



C orporate saving:
N et corporate saving................................................................... $ - 0 . 8
0 .7
4 .7
-0 .6






corporate and personal savings, and consumption. These two
steps will result in figures for government demand and consumer
demand. The last step will be to assess quantitatively the pros­
pects for private investment (under the assumed conditions) and
thus decide whether the total demand for goods and services that
would be generated by a gross national expenditure of !132 billion
would give rise to this volume of spending.
The assumptions about government should be reasonable on the
basis of precedent, yet actual prediction would be of no help, even
if it were possible. The whole purpose of the inquiry is to discover
whether it is going to be possible to maintain economic activity at a
high level in the absence of heavy deficit spending by the govern­
ment. The only proper course, therefore, is to assume arbitrarily
that the government deficit is at least reduced to small proportions
and that total government expenditures are going to revert to some­
thing fairly close to their prewar level.
During the twenties Federal fiscal policy was conservative but
states, municipalities, and other local units of government were
making capital expenditures at a rate that more than offset Mr.
Mellon's surpluses. The excess of all public expenditures (Federal,
state, and local) over receipts averaged close to $500 million per
annum. It would be visionary to hope that with a larger popula­
tion, national income, government structure, and public debt,
public expenditure can be reduced to the prewar level. And even
those who are hoping wistfully that the public debt can be reduced
after the war might be satisfied if the fiscal history of the twenties
could be repeated. Therefore, with an eye on the past we shall
assume state and local expenditures of $8 billion, Federal expendi­
tures of !7.5 billion, corporate income and profit taxes of M billion,
other business taxes of $6 billion, and gross personal taxes of $4 bil­
lion. This leaves the deficit at half a billion.
and Co7t3M7Mp%(w.
Fortunately, fairly reliable information is available on the next
step for investigation, the disposal of income. The observed rela­
tionships between, on the one hand, corporate savings and gross
national expenditure and, on the other, personal saving and dis­
posable income for the period from 1929 through 1940 are suffi­
ciently stable so that they may be simply extrapolated. This is
the procedure used to derive an estimate of personal saving. But it
is not directly applicable to the calculation of corporate saving,

because the wide cyclical fluctuations of this quantity from negative
to large positive figures show nothing about the long-term trend.
A simple extrapolation of the 1929-1940 relationship would yield
too low a figure for an earlier year in which the structure of the
economy was smaller and too large a figure for a postwar year when
corporate management will have neither the opportunity nor the
incentive to retain a larger propor%o% of earnings than in previous
good years.
Kuznets' recent study of national income and capital formation
over the past 60 years reveals a remarkable constancy in the propor­
tion of income saved in each decade as a whole. Hansen grants the
point. * The ratio of gross corporate savings to gross national
expenditure was about 7 per cent at the upper limit of the prewar
business cycle. In accordance with Hansen's suggestion, this,
applied to the assumed postwar expenditure of $132 billion, gives a
figure of $9.1 billion.
It is at least reasonable to expect consumers to save an increas­
ing proportion of income as they become wealthy, even after their
expenditure is adjusted to changes in income. Therefore the rela­
tionship between personal saving and disposable income derived for
the period 1929-1940 was simply extrapolated. The result indi­
cated that personal (strictly speaking, noncorporate) saving would
amount to $16.1 billion and consumer expenditures to $91.8 billion.
It would be misleading to leave out of account the temporary
effects of the forced postponement of purchases during the war.
Two types of evidence throw light on its probable magnitude.
First, on the basis of the anticipated contraction in consumer
credit that will occur, it appears that the volume of consumer
credit outstanding will be some $8 billion below what would be
normal under the conditions postulated for a postwar year. Second,
in a good year like 1939 consumers spend over $7 billion for durable
goods at prewar prices and, with gross national expenditure over
$130 billion throughout the war, they might be expected to spend
at least $10 billion annually. Yet it is estimated that in fiscal 1943
the supply of durables will amount to only $3 billion at 1941 prices
and it will surely not rise higher for the duration.
Thus, a deficiency will accumulate at the rate of $6 to $8 billion
annually. It will mount up to $15 or $20 billion if the scarcity
continues for 2% years before substantial supplies again reach the
market. Some deferred expenditures are already contained,
*Fiscal PoHcy and Business Cycles, p. 237.



by implication, in the "normal" increase in consumer demand to
$91.8 billion, which includes goods purchased on credit. But if
only $8 billion of the total deficiency is spread over 5 years, the
estimate for personal saving should be corrected downward by
$1.5 billion to $14.6 billion per annum and that for consumer
expenditure upward by the same amount to $93.3.

So much for the disposition of income. On the basis of the
estimate of consumption and the assumptions about government
it appears that, with a gross national income of $132 billion, the
gross savings of corporations and individuals together would amount
to $23.7 billion. It will be recalled that Federal, state, and local
governments are assumed to have a consolidated deficit of half a
billion. Therefore, unless depression is to result, other offsetting
items must be found in the amount of $23.2 billion. If there are
prospects for this volume of private investment, then no deficit
spending other than that assumed will be necessary to maintain a
high level of economic activity.
The first and largest item is industrial equipment. Although
construction never revived during the thirties, the correlation
between equipment expenditures and gross national expenditure
was nearly perfect and almost the same as in the twenties. The
reason for the difference in behavior as between equipment pur­
chases and construction is not difHcult to explain. Structures are
very highly durable and, if suitably maintained and modernized
and altered from time to time, they are subject to only slow obso­
lescence. There is little incentive, therefore, for the construction of
new plant and new commercial structures except in periods when
the output of goods and services and consumers' real incomes are
rising above levels previously attained. Much equipment, on the
other hand, has a short useful life and almost all of it is subject to
more rapid obsolescence. Therefore, purchases of equipment are
far less postponable than expenditures for new construction, and
their volume is bound to be more closely tied to the general level of
economic activity.
Nevertheless, a reliable prediction of total equipment purchases,
given gross national expenditure, cannot be made on the basis sim­
ply of the observed relationship between their magnitude and the
level of economic activity. It is not easy to be sure on the basis of
the close correlation between these two variables to what extent



changes in economic activity motivated the buyers of equipment
and to what extent the behavior of the latter caused the changes in
gross national expenditure. But an analysis of the behavior of
components of the total,
of the equipment expenditures of each
major industry separately, furnishes more reliable guidance. A
given observed change in so large a component of total investment
expenditure as total equipment expenditure might be cause rather
than effect of an apparently associated change in the latter. But a
given change in the equipment expenditures of, say, the lumber
industry could not be expected to cause a change of more than
three or four times the same absolute magnitude in gross national
expenditure. When it turns out, therefore, that there is a close
correlation between equipment expenditures in this industry and
gross national expenditure, and that a given change in equipment
expenditures by the lumber industry is normally associated with a
change in gross national expenditure roughly one-eighth as great,
it is apparent that the observed relationship between the two vari­
ables cannot be due simply to the multiplier effect.
A preliminary study of approximately 20 components of total
equipment expenditure reveals that significant relationships of this
type between the components on the one hand and gross national
expenditure on the other exist in all but 5 cases, for most of which
there is a specific explanation. It is reasonable to conclude, there­
fore, that capital expenditures of this type are, to a major extent,
derivative from changes in the level of economic activity. To be
sure, the nature of the relationships will probably be altered perma­
nently by the war. However, an extrapolation of the experience
of the last 10 years furnishes as reasonable a guess as can be made
at the moment. It yields a figure of $10 billion for total expendi­
tures on equipment, including those financed out of current expense.
To be safe, the Sgure has been put at $10.2 billion (including 1.2
charged to current expense).
The other two components of long-term capital expenditures by
business are those for nonresidential, private construction, i.e., for
plant. These do not show any close relationship with gross national
expenditure over the past 20 years, probably for the reasons out­
lined above, and are therefore harder to appraise.
Two major but conflicting factors must be taken into account.
On the one hand, a high figure might be expected because the pro­
duction, sale, and consumption of civilian goods is assumed to be at
a far higher level than has ever been achieved in the past. The



precedents of the twenties should be of greater value than those of
the thirties. On the other hand, there is the war itself. Plant
construction is proceeding at a prodigious rate at the present
moment and an enormous volume of new plant has already been
built in the past 2 years. Many of these facilities (more plant than
equipment) will be convertible to peacetime uses.
Putting the evidence together, $5 billion appears to be a reason­
able figure. This is only 4 per cent above the 1929 figure, although
gross national expenditure is assumed to be 32 per cent higher.
Also the two components would have to be $2.9 and $3.2 billion
respectively, a total of over $6 billion, in order to constitute the
same percentage of gross national expenditure as they averaged
from 1922 through 1930.
The total of plant and equipment expenditures needs, however,
to be corrected to take account of the postponement of purchases
during the war. The experience of the early twenties might give
rise to the expectation of a high rate of investment for a period of 4
to 6 years at least. But it is at least possible that with a more
widely diffused war demand, our stock of capital goods and struc­
tures will be better maintained than it was from 1916 through 1919.
There are fewer purely civilian industries in which capital can be
consumed without war production being retarded.
The only elements of deferred business demand that are at all
measurable are those that arise from the failure to make good depre­
ciation and from the necessity for extensive reconversion after the
war. There is no way to take account of obsolescence. First, as
to depreciation, it would appear as if annual capital consumption
will amount to around $2.5 billion so that, if restrictions on pur­
chases of equipment and on construction continue for 2% years,
the backlog would amount to over $6 billion. Second, as to recon­
version, it is hard to see how the total could run much above $4.5 bil­
lion and $3.5 billion might be a more reasonable figure. Of course,
insofar as the new facilities are converted, the backlog of postpone­
ment replacement purchases will be made up. The two estimates
should be regarded as, in part, alternatives. But since their sum is
between $9.5 and $10.5 billion, it is certainly reasonable to assume
that deferred private capital expenditures will add at least a billion
per year for 5 years to the total investment that would normally
be forthcoming with the gross national expenditure of $132 billion.
Now an estimate of "normal" plant and equipment expenditures
based upon past experience contains already an element of "normal"



cyclical deferred demand because in any peacetime year of high
prosperity, a backlog of demand accumulated during preceding years
of lower national income is in process of being made good. Does
this mean that the $5 billion backlog ($1 billion per year for 5 years)
on top of the high estimate for normal demand yields too high a
figure? On at least two counts, a negative answer is indicated.
First, no account whatever has been taken explicitly of obsolescencc
during the war. Yet it will proceed at an accelerated rate. The
war will leave behind it a heritage of new materials, new methods,
and new products. Machinery that could have been adapted with
small change to 1942 models will be junked when 1945 models are
being launched. Furthermore, plants will have been completely
disarranged, old machinery moved out. The temptation to replace
it with new is going to be much greater because an expensive and
time-consuming reconversion will be necessary anyway.
Second, the backlog contains no allowance for postponed net
additions to the capital stock, only for net capital consumption.
Yet, a rate of production considerably greater than that which has
even yet been achieved in the war is postulated for the postwar
years. It is absolutely essential to keep clearly in mind just what
this means. It means that for every war plant which is retained by
the government as stand-by capacity or that is located in a highcost area and is, therefore, abandoned, a plant that has been idle
during the war would have to be brought back into use or a new
plant would have to be built. It means that all the special purpose
machinery now being used to produce airplanes, tanks, and muni­
tions would have to be replaced by reclaimed or new equipment
designed for civilian production. It means that the railroads would
face the conditions not of 1935 or 1938 but something a good deal
better than 1941 (a year in which their competitors were still going
strong but when gross national expenditure did not approach
$132 billion). When this picture is clearly visualized, it is apparent
that something does have to be added to "normal" boom expendi­
tures in order to yield a reasonable estimate.
The last remaining major component in private capital expendi­
ture is residential construction, which is estimated at $5.2 billion in
a postwar year. The reason for the choice of such a high Sgure is
the inherited housing shortage which will be still further exagger­
ated by the sharp curtailment of construction during the war.
Between 1930 and 1940 a large proportion of the net increase in the
number of families was matched by new construction, the remodel­



ing of single dwellings into multiple dwellings, and a decline in the
number of vacancies. But there was an increase of over 1 million
families in the total number housed in backs of stores, shacks, fruit
sheds, tents, adobe huts, dugouts, caves, and other picturesque, but,
presumably, unsatisfactory types of shelter and doubled up with
others. Clearly, this was a symptom of unemployment and low
income and it must be presumed that these families will swell the
market for housekeeping units after the war, if employment and
income is maintained.
This backlog of potential demand from the thirties is being
built up still further during the war. Both the further accumula­
tion of deferred demand and the normal or current demand that
will make itself felt after the war can be calculated from the expected
increase in the number of families and an estimate of the replace­
ments required to prevent steady depreciation in the condition and
quality of the stock of housing. These components indicate an
annual need for nearly 800,000 nonfarm units. Taking account of
actual construction during 1940 and 1941 and assuming a restricted
rate of construction through the middle of 1944, the accumulated
deficiency will be built up to over 2.5 million units by the earliest
date at which the construction industry could again be geared to
produce residential housing in large volume outside of the defense
centers. Sixty per cent of this backlog (representing effective
demand) spread over a 5-year period and added to the normal or
current demand, indicates that a market could be found for a total
of over 1 million new units annually without any increase in the
vacancy rate above the 1940 level. At 1941 prices, such a building
program would involve an annual expenditure of $5.2 billion.
This makes no allowance whatever for an improvement in the
standard of housing, for accruing obsolescence, or for the effect upon
the quality of housing demanded of a high per capita income. It
makes allowance for the replacement of houses (other than those
destroyed or demolished) at the rate of only 1% per cent per annum.
Finally, it takes no account of the fact that much defense housing
will not be useful after the war.
Two remaining sources of demand have to be looked into in order
to complete the foregoing model. One is the increase in inventories.
The situation in this connection is going to be decidedly curious at
the end of the war. Because of the enormous volume of output, if
for no other reason, the value of goods in process, which means of
goods in inventory, is sure to be already large. But the major

part of goods in process in the war industries are going to be value­
less for civilian purposes. Meanwhile, for reasons indicated above,
stocks of civilian goods will be deeply eaten into. Therefore, it
may well be that an inventory boom, such as occurred in 1919, will
be set off by the removal of wartime restrictions. Heavy inventory
accumulation could certainly proceed for a number of years without
creating an unstable situation. On the basis of past experience a
conservative assumption is that it will proceed at the rate of $1.5 bil­
lion per annum for 4 or 5 years at least. At this rate, inventories
will expand just half as rapidly as they did in 1941, $0.3 billion less
per year than they did in 1940, and only $0.2 billion more than in
The last source of demand requiring consideration is the export
market. Unless the outcome of the war is so unfavorable that the
United States will have to continue its armament program, it will
certainly run a substantial export balance for some years. This will
have to be accompanied by foreign lending, public or private,
because there is no other way in which the rest of the world can pay
for American goods. If it is, there are two directions in which our
exports can Row without exercising a deflationary influence upon the
rest of the world.
First, goods and funds will be needed in large volume to initiate
the rehabilitation and reconstruction of Europe and the Far East.
Although foreign lending for this purpose may be sound in that it
will contribute to a restoration of the productivity of European
nations, it is hard to see how they can assume the burden of interest
charges and rapid repayment without subjecting both the debtor
nations and the United States to excessive strain. A substantial
part of such exports will, therefore, in all probability take the form
of lease-lend assistance. Insofar as they do, the figure for Federal
expenditures and the government dehcit should, perhaps, be larger
and that for the export balance correspondingly smaller.
Second, bona fide foreign investment may be possible in all
those nations which still depend upon Europe and the United States
for a part of their supplies and manufactured goods and especially
of capital equipment. It must be remembered that the replace­
ment of plant and equipment necessary to offset depreciation and
obsolescence and the expansion necessary to keep up with growing
population is going to be deferred during the war in Latin American
countries and the British Dominions as well as in the United States.
The symptoms of this deferment may already be observed in the



strict rationing of exports to the various Latin American nations
and British Dominions. The experience of the years immediately
following the last war give some indication of the magnitude of the
export balance that is to be expected. In 1919 the net foreign
balance was well in excess of $3 billion; in 1920 it exceeded $2 billion,
and in 1921 it still amounted to $1.3 billion. The lowest figure
that is at all realistic for the immediate postwar is $1.5 billion.
The model now, at last, begins to take shape. When allowance
is made for the bulge in consumers' expenditure that reflects deferred
demand and the extra billion of capital expenditures, listed as a
speciat item, it appears that the demand which would be generated
by the sale of $132 billion worth of goods and services would add
up to $133.4 billion of spending. The extra $1.4 billion has to be
deducted from the sum of the various components in order to make
Table 1 balance. For whatever it is worth, the evidence indicates
that, with economic activity maintained at a wartime level and with
government budgets reduced to a modest total, consumers' expendi­
tures and business expenditures would provide an adequate market
for the whole output of the economy.

But it is well, too, to understand what these results do not prove.
To begin with the more pressing matter, they do not ensure that
the transition from war to peacetime production will be successfully
achieved. Two dangers threaten. The first is that with an
unprecedented volume of purchasing power in the hands of con­
sumers and with strong pressure for the release of wartime controls,
the demand for civilian goods will expand far faster than their sup­
ply. This spells the repetition of the postwar inflation of 1919.
The second danger is a deflation of incomes that could forestall
potential prosperity. The root of both difficulties is, of course,
the physical impossibility of reconverting the whole American
economy for civilian production overnight. There is a real possi­
bility that there will be simultaneously a scarcity of civilian goods
and extensive unemployment.
It is essential to avoid economic insecurity and the resulting
deep sense of frustration just at the moment when the war is ended.
The best way to handle the situation, therefore, is to use the spend­
ing power of the government generously but brie&y to maintain
consumers' incomes, and, at the same time, to relax only gradually
wartime controls over civilian spending. There are two moves that



should be avoided at all costs. One is the initiation of a program
of heavy public works. This is probably the worst way to use the
spending power to meet the essentially short-run problem of
the transition. It is notoriously impossible to start heavy public
works without delay and it is enormously wasteful to halt them
once started. Scarcely less unfortunate than a public works pro­
gram would be another expansion of the WPA. Everything should
be avoided that has the effect of tying members of the working force
to particular localities or occupations. And Federal funds should
be paid out through an agency of the government which does not
have and will not acquire a vested interest in perpetuating depres­
sion policies into a boom.
Low# Rim.
The problems of the long run are of a different nature. Mr.
Keynes once dismissed them with the oft-quoted quip that "in the
long run we will all be dead." But too little is known and too much
can be inferred about this particular long run to dismiss it lightly.
The second conclusion that the evidence sets forth above does
prove is that private investment would continue to be adequate
indeSnitely even if gross national expenditure remained stable at a
high level. Is there any hope, then, that it will be possible to main­
tain reasonably full employment for more than a few years through
reliance upon private investment? The question is not a simple one
because the prospects for investment are inextricably tied up with
the need for it; what is possible depends upon what we desire. But,
without inquiring too deeply into the motives and desires of people,
it is safe to say that any rational calculus points to the overwhelm­
ing social need for capital expenditures which have the effect of
increasing productivity. Once this need is clearly recognized, it
makes no sense to say that modem technology demands a low
investment, high consumption economy, and that the great era of
capital accumulation which began, say, toward the end of the
eighteenth century ended in 1929. Neither a moderate present
increase in private consumption nor, still less, an expansion of public
services which do not increase productivity is half so pressing a
need as the resumption of investment on a large scale. The United
States is still a poor nation, and its income cannot grow except
through true investment, public or private.
There is no need to labor the point. But its practical implica­
tion does, unfortunately, need to be emphasized. Public spending,



so long as it is carried on in what is mainly a private-enterprise
system, is bound to go largely for goods that undergo no test of
consumer demand. The test may not be a fair or adequate one,
but when all due credit is granted, it is still true that the deliberately
expanded public expenditures of depression years usually go for
objects that come far down in the citizens' scales of preference and
pass over those that stand near the top. One of the reasons is the
pressure to avoid direct competition with private enterprise.
Another is the failure of most governments in the world to balance
costs against advantages in any systematic or rational fashion.
But whatever the reasons, there is no place in the nation's budget
for submarginal purchases. Before we can well afford any more
post offices or even irrigation projects, we need the houses, factories,
machines, highways, automobiles, power plants, movie theaters,
restaurants, and other paraphernalia that would make possible the
production of goods and the rendering of services consumers desire
to the tune of at least $140, $150, $160 billions a year.
Now public spenders have an answer to this line of argument.
It is that unemployment rather than a high rate of private invest­
ment is the practical alternative to high consumption and public
spending. In other words, they revert to the theme that a high
rate of private investment, however desirable, is not
process of investment, if it increases productivity, has the effect of
enlarging the capacity of the economy to produce goods and serv­
ices. Every burst of investment activity is bound, therefore, to end
eventually with a saturation of investment opportunities unless the
national income grows uninterruptedly and rapidly. And, if the
propor&'cn of the national income that is saved does not decline,
the rate of investment must grow to absorb the expanding volume
of saving. This means that national income must grow at an
mcreagiwy rate. Such a development sounds both frightening and
impossible and it would certainly be difficult to engineer.
But if this picture of a national or world economy expanding at
an accelerating rate seems more like an astronomer's description
of the universe than like a sober economic possibility, it is helpful
to remember that it is a tolerably good representation of what
happened for at least 150 years prior to 1929. If, as Kuznets sug­
gests, a roughly constant proportion of the national income has
gone to investment, it is perfectly apparent that the economy has
grown at a faster rate in
(a more nearly constant per­
centage rate) in each successive decade until the thirties. There is



nothing inherently impossible about a steadily rising absolute rate of
growth or even about a rising percentage rate of growth.
Indeed, there is one special reason for believing that circum­
stances are favorable to the reestablishment of a high rate of growth
of existing industries, even if new major products such as the auto­
mobile do not appear. It may most easily be made clear by con­
fronting the threat of inadequate investment opportunity with the
other great economic threat of our times, technological unemploy­
ment. Throughout the whole of the last 20 years, the rate of
increase of productivity of labor has been unprecedented. It was
scarcely interrupted even by the great depression. The only way
in which the fruits of this process can be gathered in the form of
higher incomes rather than technological unemployment (as all
economists are aware) is by an increase in the over all output of
goods and services so rapid that it will absorb both the increase in
the population and the increase in output per man. Yet, such a
rate of growth of the output of the economy would, as just pointed
out, call for a high rate of investment. Furthermore, it would
"call for" it in the sense of rendering it profitable as the current
war boom indicates.
This does not imply for one moment that the problem can be
left to work itself out without conscious control or direction. The
for a rapid growth in wealth and income made possible
by private investment do exist. But there is no certainty that a
rate of growth sufBcient to make a high rate of investment profitable
in the long run will be gpcniaiMOMsh/
after the war. Nor is
it realistic to hope that the process of growth would not be inter­
rupted in the future as it has repeatedly been in the past and
that such interruptions, left to themselves, might not again degen­
erate into states of chronic stagnation. Growth through private
activities is wholly impossible unless there exists in the business
community a deep-rooted expectation of continued growth. Inter­
ruptions in the process breed depressions and these, in turn, if they
last long enough, undermine and temporarily destroy the expecta­
tion of further growth. Because the process is dynamic and
because it feeds on itself, a rapidly growing high investment econ­
omy is inherently unstable. It must be granted that the necessity
is bound to arise periodically of providing a stimulus and this will
have to be done by public authority. The point is not that a
private enterprise economy can run itself, but, rather, that proper
management might succeed in maintaining a high secular rate of

growth and, consequently, a high rate of private investment.
is the proper objective for policy for decades to come.


qf Po^cg/.

With this preface two general rules may be suggested that should
govern all public policy insofar as it is designed to control the
general level of economic activity. The first is that 6scal policy,
taxation policy, the policies of local, state and Federal regulatory
agencies, the powers of the antitrust division, the activities of public
enterprises (such as the TV A, municipal power plants and water
systems, state highway departments), and even the sacred and
untouchable activities of the Federal government toward labor
relations and agricultural subsidies should be designed to create
conditions favorable to enterprise and investment and thus to
minimize the need for deficit spending by government.
The second general rule is that when direct stimulants are
applied to the economy, they should encourage the use of resources
in the most productive fashion. Future de6cit spending should take
the form either of direct outlays for the creation of productive
assets and for raising productivity or else of direct subsidies to
private investment.
The first heading covers what used to be called liquidating
public works, highway construction, services (especially medical
care, public health, and vocational training) which serve directly to
increase productivity, and even conservation activities, providing,
however, that some effort is made to compare their cost with the
ultimate increase in output they are expected to make possible.
The method of direct subsidies is even more promising, though it
has not been used on a large scale since the days when it played so
large a part in the building up of the American railroad system.
Such a policy has a great deal to recommend it. Every dollar
added to the Federal budget should result in an increment of at
least $3 or $4 of capital expenditure. A minimum of public adminis­
trative machinery would be required; subsidies might well be related
to tax policy. And it would have the supreme advantage of
stimulating those sorts of capital expenditures which, if expectations
turn out well, would raise productivity and promote an increase in
the output of the things consumers wish to buy. Under both head­
ings, the wide opportunity for mixed public and private investment
should be mentioned.



Finally, if all efforts to promote private investment fail, very
serious consideration should be given to the possibility of socializing
a sufBcient part of the economy so that the government could, with­
out competing with private industry and without frittering away
its funds on leaf raking, maintain through its own direct action a
high rate of productive investment.










For the purposes of this essay capitalism will be defined by
three features of industrial society: private ownership of the physical
means of production; private proRts and private responsibility for
losses; and the creation of means of payments—banknotes or
deposits—by private banks. The first two features suffice to define
private enterprise. But no concept of capitalism can be satisfac­
tory without including the set of typically capitalistic phenomena
covered by the third. Where it is absent we might speak of com­
mercial society. By socialism we shall mean an institutional
arrangement that vests the management of the productive process
with some public authority.*
In trying to forecast the role, if any, that capitalism in the sense
defined may be expected to play in the postwar world it is well to
remember that its fate is not a question of the merits or demerits we
may individually see in it. Our judgment about these is a matter of
personal or groupwise preference that depends on interests and
ideals largely determined by our personal or groupwise location in
the social organism. What we mean when we say that we are for
or against capitalism is that we like or dislike a certain civilization
or scheme of life which is historically associated with the three
economic features mentioned. But civilizations are incommensur­
able. Even if we agreed to neglect those cultural aspects which
are what really matters to us, and to make the "desirability" of
retaining or eliminating capitalism turn on some purely economic
It should be noted that this definition of socialism is not only purely
economic but also purely formal. It says nothing about the structure and
character of a socialist society,
whether it is equalitarian or not, warlike
or pacific, democratic or authoritarian. Friends and foes of socialism are in
the habit of endowing their concept of it with additional traits and hence in
general mean by it something much more specific.



criterion—such as comparative productive efBciency—we should
never agree about the result. For even if those extraeconomic and
largely extrarational preferences did not prevent us from admitting
that any criterion could ever tell against the alternative we have
chosen to espouse—which they no doubt would in most cases—we
should immediately challenge a criterion that did. No amount of
honest intention to place oneself on the standpoint of the public
welfare or of the nation's interest avails against that. For the
point is precisely that these words carry different meanings for
different minds. The only thing we can do in something like a
scientific frame of mind is therefore to try to visualize, irrespective
of our wishes, the actual situations which may be expected to
emerge and the relative power of the groups which will be in a posi­
tion to assert their interests and ideals in handling those situations.
Another point should be borne in mind. No social system is ever
pure either in its economic or in its political aspects. As regards the
former, structural principles, such as, in the case of commercial
society, private management of the process of production and free
contracting, are never fully carried to their logical consequences.
People were at no time allowed to do with their own quite as they
pleased, and society at all times limited the range within which they
might freely contract. In the epoch of intact capitalism, law, cus­
tom, public opinion, and public administration enforced a certain
amount of public planning, while in a society that had adopted the
structural principles of socialism there was such a thing as Lenin's
New Economic Policy that left room for a certain amount of &Mssez
/aire. It follows that, public management or planning being never
either absent or complete, our question concerning the immediate
future should not be couched in terms of "capitalism or socialism":
there is a great variety of intermediate possibilities.
Still more important for social diagnosis and prognosis is, as
we shall presently see, the fact that no society is ever homogeneous.
By this I do not merely mean that the political sector of every
society grows out of, and hence reflects, all the different interests and
attitudes of the various groups and classes that the prevailing social
system produces. I mean something much more fundamental:
every society contains, at any given time, elements that are the
products of different social systems. Thus, feudal society har­
bored, besides the lords and peasants and artisans that constituted
the essential elements of its system, also other elements—traders,
for instance, and certain classes of producers—that did not belong



to the feudal organism and dwelt in tpwns which that organism
failed to subjugate or to assimilate. In the capitalist epoch, the
classes that are the products of the capitalist process are hardly ever
found alone. Practically always they exist in symbiosis with an
aristocracy and a peasantry of noncapitalist origin. And this
fact is not only, as one might think, responsible for frictions and
other secondary phenomena. It is of the essence of the social
process. A purely capitalist society—consisting of nothing but
entrepreneurs, capitalists, and proletarian workmen—would work
in ways completely different from those we observe historically, if
% <x%M eatst oM.*

Both in its international and in its domestic aspects, capitalist
economy is adapted to the requirements and habits of a normally
pacific world. "Total war" under modem conditions calls for a
concentration of effort much more stringent than the mechanism of
capitalist markets can achieve. Wartime planning by government
in fact suspends the normal operation of capitalist processes. In
doing so it develops, on the one hand, economic structures and
situations and, on the other hand, new social organs and positions
of power which do not automatically disappear with the emergency
that brought them into existence. They have to be liquidated,
if at all, by a series of distinct measures which naturally meet
resistance. We have seen that the outcome of the ensuing struggle
will not depend on any abstract desirability of a return to prewar
ways but on the political forces marshaled for and against it.
The strength of these forces in turn will depend, first, on the
duration of the war in question and, second, on the vitality of
the capitalist system independently of the war. Thus, in 1919, the
United States emerged from a spell of wartime planning that had
been both mild and short. The various war boards and their
bureaucracies had not had time to get into full working order, let
alone to settle into positions which they would have looked upon as
permanent. The business world and the public in general had not
had the time to get accustomed to their rule and to accept them as
Many readers will feel that while this might apply to European and Asiatic
countries, it could not possibly apply to the United States. But it would be
easy to enumerate the very particular conditions—now rapidly passing—which
explain why a purely bourgeois regime was in this case able to hold its own for
ao considerable a time.



parts of the normal scheme of things. Moreover, all the groups
that counted politically were fully determined to stand for private
enterprise and in fact did not clearly perceive an alternative—which
fact indicates precisely that the vitality of American capitalist
society then was not yet substantially impaired.
This historical instance should not blind us to the possibility
that events such as total war may influence social evolution more
profoundly than words like "catastrophe" and "conflagration"
imply. They may create situations so compelling as to impose
permanent departures from the lines previously followed, and atti­
tudes greatly at variance with any observed before. They may
change the, distribution of political power in unpredictable ways.
The bolshevist regime is obviously of more than passing importance;
yet it could never have established itself without the First World
War and the largely accidental ways in which that war affected
Russia. We may indeed succeed in interpreting the break as the
result of existing tendencies that were merely accelerated by the
war, and thus formally salvage historical determinism as a philoso­
phy. But this does not increase its value as a working hypothesis.
There cannot be any doubt but that, in all countries concerned,
the present war effort will put existing social structures under severe
strain which may result in breakdown or fundamental transforma­
tion. The chances for this to happen are presumably greater in
vanquished countries, but the victor countries are by no means
exempt from this possibility. All the more important is it to raise
the question of what we may term the tensile strength of the social
systems that are being exposed to that strain.
It is a commonplace that capitalist society is, and for some time
has been, in a state of decay. But there is no agreement about the
precise nature of that decay. Differences of opinion on this point
can be conveniently described in terms of two theories.
There is, first, the familiar theory of Vanishing Investment
Opportunity.* It starts from an undeniable truth, more or less
explicit recognition of which constitutes its chief merit. Unlike
other economic systems, the capitalist system is geared to incessant
economic change. Its very nature implies recurrent industrial
revolutions which are the main sources of the profit and interest
incomes of entrepreneurs and capitalists and supply the main
The outstanding exponent of this theory is Prof. Alvin H. Hansen; see,
*.y., his fMcoi Pottcy and Ruttm* Cycb* (New York, 1941), Ch. I, and his
essay in this volume.



opportunities for new investments—such as railroad building or the
construction of electric-power plants—and the main outlets for
new savings* Whereas a stationary feudal economy would still be
a feudal economy, and a stationary socialist economy would still
be a socialist economy, stationary capitalism is a contradiction in
terms. This becomes evident when we survey its most characteris­
tic types, processes, and institutions, all of which would become
atrophic in a stationary world.
Now the theory in question holds that this is happening in our
day. That process of economic conquest is exhausting its possibili­
ties. No very great innovations are in prospect, and those minor
ones that may be said to be in the ofEng fail to stimulate entre­
preneurship and investment either because they are capital-saving
rather than capital-consuming or else because they are more suited
to public than to private management. Moreover the great impe­
tus given to investment in the nineteenth century by the opportunity
of opening up new countries and sources of raw materials has spent
itself. Finally the falling birth rate and the consequent slackening
of the rate of increase in population tend to dry up a source of
particularly calculable investments. For all these reasons the
saving-investment process, which is of obviously vital importance
to capitalist society, works with increasing friction. Thrift,
instead of being the means of expanding the industrial equipment
becomes a cause of falling prices and of unemployment. Hence
the necessity of injecting into an anemic system new purchasing
power: the first and foremost application of this theory was in fact
to provide a rationale for the fiscal policies of the past decade.
Hence also—so we may continue for our purpose—progressive
paralysis of the political organs of capitalist society and reduced
ability to withstand shocks or to defend itself against attack.
This theory cannot be adequately discussed here.* It must
suffice to state that there does not seem to be any good reason for
believing that, except as a temporary effect of the world crisis,
the opportunity for great innovations in the economic process has
been exhausted; that the tendency of innovations to become capital
saving to the required extent has been illustrated by examples but
has not been established convincingly; that the opening up of new
countries, even if we assume it to be completed, was but one of
many opportunities and might be replaced by others—in fact has
* I refer the reader to the discussion in my
Vol. II, Ch. XV.

CycZe* (New York, 1939),



been replaced by others during the twenties; that the falling birth
rate, both through its direct effects on demand and through its
indirect effects on motivation, may become economically signiRcant
in the future but that it could hardly be used in an explanation of
the course of events in the thirties, even if the relation between the
rate of increase in population and economic progress were less com­
plex than it actually is.
The theory of vanishing investment opportunity obviously
invokes the factors mentioned in order to deduce from them a state
of perennial inadequacy of profit expectations or, to use Lord
Keynes's term, of the marginal efficiency of capital. It is only by
this effect on profit expectations that those factors can be held to
account for insufficient investment and, in turn, for underemploy­
ment. But, surely, if proSt expectations are the operative link in
the deduction, it is natural to stress another element the reality of
which cannot be called into question and which acted on profit
expectations much more obviously, viz., the anticapitalist policies
adopted, in most European countries, ever since the First World
War and, in the United States, since 1933. The fact that both
in Europe and in the United States the capitalist process displayed
unmistakable symptoms of strain exactly since the break in the
legislative and administrative attitudes of public authority occurred
may be significant. This element constitutes the pivot of the other
theory.* It also starts from the proposition that capitalism is
essentially a process of economic change and then goes on as follows.
One of the most familiar phenomena of that process of change,
the full importance of which was first recognized by Karl Marx, is
the emergence of large-scale business, which to some extent tends to
compete out of existence—or, to use the Marxian phrase, to " expro­
priate"—small or medium-sized firms. It stands to reason that,
especially under conditions of democratic politics, this process
weakens the political position of the industrial bourgeoisie, for a
numerous stratum of businessmen owning and managing small or
medium-sized firms is obviously much less exposed to political
attack and in a much better position to withstand it than is a small
number of salaried executives and large shareholders,^ gnite irrespec* I have developed it at length in my CapiiaMam,
and De?nocracy
(1942), Part II.
* Here, any adequate exposition of that theory would have to digress into
political sociology in order to show that the behavior of a society toward a
particular interest is primarily determined by the inducement and the opportu­



ttue o/ cowpara^ve
performance or ^service.^ Moreover,
within the big concern the pungent sense of property and the will to
fight for it tooth and nail withers away: the big concern thus not
only "expropriates" some of its competitors but also its own capi­
talist interest. Those executives and shareholders are not only in a
less favorable position to defend their ground than were the ownermanagers of old but they meet attack in a much weaker spirit.
Big business is in fact but a midway house on the road toward
The capitalist process undermines the structure of capitalist
society in many other ways. I shall mention two only. First, it
tends to destroy, economically or socially, the position of what may
be termed the protective strata. The rise of the bourgeoisie ousted
from political leadership the old aristocracies who knew so much bet­
ter how to rule than does the businessman. The factory destroyed
the old crafts and the department or chain store destroys the small
traders who counted at the polls. It also reduced, relatively at
least, the number of farmers and peasants. And so on. Second,
capitalist civilization is a rationalist civilization. It tends to elimi­
nate extra- or hyperrational sanctions and habits of mind without
which no society can exist.
Though the argument cannot be adequately developed, it should
be clear that we have now before us the elements of a more realistic
substitute for, or of a more realistic version of, the theory of vanish­
ing investment opportunity and of the decay of capitalist society.
The capitalist process itself produces, as effectively as it produces
motorcars or refrigerators, a distribution of political power, an
attitude of the public mind, and an orientation of the political sector
that are at variance with its own law of life. It produces anti­
capitalist policies, t.e.y policies that, regardless of individual
intentions, prevent it from functioning according to its logic, the
implications of which increasingly meet moral disapproval. Modem
principles of taxation, although only one among many manifesta­
tions of the disintegration of capitalist society, afford perhaps the
most telling illustration.
It is a nice question, on which it is much easier to differ than to
agree, how far this decay has gone in any given case. Some symp­
nity for attacking it and only to a minor degree by what the observer according
to his own standards may consider justifiable reasons for approving or dis­
approving of it. These reasons, so far as produced by political or intellectual
agents, are simply rationalizations in the psychological sense.



toms showed in Europe before the First World War, but without it
the majority of observers might have taken a long time in becoming
aware of them. In the United States, the first unmistakable
symptom of decay was perhaps the lack of spirit displayed by the
bourgeoisie toward the end of the world crisis when the modal business-man proved that he was no longer up to the tests imposed by
his own order of things. That the decay of capitalist society is very
far advanced by now—everywhere—is not open to doubt. How­
ever much we may approve of some or all of the policies of the New
Deal, we cannot fail to be struck by the absence of any serious
resistance to them. A bourgeois society that meekly accepts the
vast transfer of wealth accomplished in the United States during the
thirties—I am not speaking of war taxation—thereby testifies to
its readiness to surrender, though it may not be ready to surrender
to every type of conqueror. It is in such conditions that events
like world wars may acquire an importance in shaping the history
of institutional patterns which they could never acquire if they
impinged on an intact social system.

We are now in a position to form an idea about the various possi­
bilities concerning the capitalist order's survival in the postwar
world. It is first necessary to visualize the economic and political
situation that will confront the dominant political groups at the
end of the war. In what follows we shall confine ourselves to the
United States and consider no other case but that of complete
Everybody is afraid of a postwar slump, threatening from a
drastic reduction of military expenditure financed by inflationary
methods as well as from mere reorientation of production. The all
but general opinion seems to be that capitalist methods will be
unequal to the task of reconstruction. This opinion in itself will
be a political factor of first-rate importance. AH the more essential
is it to understand its rationale.
Viewed as a purely economic problem, that task might well turn
out to be much easier than most people believe. It may happen
that peace will be preceded by a period of decreasing military
expenditure and of gradually increasing production for civilian
consumption and also that the former will continue, though at a
reduced rate, on a level much beyond that of prewar times. Either
or both of these possibilities would greatly facilitate transition*



But in any case, the wants of impoverished households will be so
urgent and so calculable that any postwar slump that may be
unavoidable would speedily give way to a reconstruction boom.
Capitalist methods have proved equal to much more difEcult tasks.
Nevertheless the opinion that the capitalist solution of the
problem will prove unworkable or, at all events, unsatisfactory,
may well be true. For, like any other system, capitalism cannot be
expected to function efficiently except on its own terms, that is to
say, in a social atmosphere that accepts its responsibilities and
incentives and allows it sufBcient freedom of actibn. As we have
seen, however, such an atmosphere and the corresponding attitude
of public authority have not existed for some time, do not exist
now, and are obviously unlikely to exist in future. Capitalist
management would hence have to solve the problems of reconstruc­
tion at home and abroad in the face of public antagonism, under
burdens which eliminate capitalist motivation and make it impossi­
ble to accumulate venture capital, with risks of borrowing greatly
increased/ without authority in the plant, and under the close
control of a hostile bureaucracy. Deadlock so complete as to
practically impose socialism as the only alternative is not incon­
ceivable, but even conditions far removed from deadlock may
preclude performance comparable to that of the past.
To be sure, a temporary revulsion of public sentiment in favor
of latssez /atre is not unthinkable. I need hardly stay however in
order to show how very improbable it is. The public mind has
renounced allegiance to the capitalist scheme of values. Private
wealth is under a moral ban. All those bars to the effective func­
tioning of capitalism embody what to most of us are cherished
achievements. In particular, reduction of the fiscal burdens
imposed upon the high income brackets and upon large-scale busi­
ness and removal of administrative fetters would be highly unpopu­
lar and could hardly be carried to the requisite extent in a situation
in which high rates of taxes on all incomes will continue to be
necessary. Intellectuals and organized labor will emerge from the
war in a radical frame of mind. Nobody will dare and, what is
more, nobody will care to advocate what would have to be a return
not only to prewar conditions but—substantially—to the condi­
tions of 1929.
High or highly progressive taxation of profits increases the risks of borrow­
ing for purposes of long-run investment, because it absorbs profits the accumu­
lation of which might be counted on to take care of subsequent losses.



Nor will there be a motive for any of the political groups of
significant importance to influence the public mind in a procapital­
ist direction. Any regime that may be established will have to
court the farm group and to present attractive schemes of agricul­
tural "planning." Farmers therefore might not be actively hostile
to partial reversal of anticapitalist policies—especially if their
views about railroads were taken account of—but they will see
little reason why they should go out of their way for the sake of it.
Organized labor will find it impossible to abandon any of the posi­
tions it; has conquered even if some labor leaders should entertain
doubts as to their economic value. The strata of small and medium­
sized business still constitute a factor which no regime can afford to
neglect. But they can be satisfied without making any concessions
to big business which embodies the achievements and the vital
energies of the American economy.
Thus there is a reasonable chance that the bureaucratic appa­
ratus of the Federal administration will hold its own. At the end
of the war it will first of all be in possession. It will have outgrown
initial difficulties and be in something like working order. It will
have consolidated its position and have acquired enormous power.
It will be a factor in its own right and stand ready to deal with the
postwar emergency as it dealt with the war emergency. Political
forces strong enough to liquidate the organs of the war economy as
they were liquidated in 1919 are not in sight. There seems to be
no reason why these organs should not succeed in establishing
themselves as permanent institutions, especially as they will be in a
position to serve the immediate interests of agriculture and of
labor and hence derive support from these quarters. In this case a
sort of
may develop.
The nature, structure, and ideology of this managing class is
not determined as yet. Many mutually exclusive possibilities
exist both as to what it will eventually turn out to be and as to
what it will eventually do. Disregarding all other aspects and
placing ourselves on a purely economic standpoint, we may, how­
ever, out of a mash in full process of fermentation, select a few
typical possibilities each of which corresponds to the views and
interests of some existing subgroup.
The most obvious possibility is that the economic principles
of the period immediately preceding the war will be applied to
postwar problems—being consolidated and developed, revised and
extended, according to circumstances. In this case the policy of



income-generating public expenditure would be continued, first in
order to prevent or mitigate the postwar slump and after that as a
permanent device for regulating the pulse of the nation's economic
life. As the reader knows, this policy commands widespread sup­
port. The fear of the postwar slump may well silence such opposi­
tion as may be said to exist. And groups with completely different
ultimate aims may agree on it because it is the easiest way toward
all of them and carries the further advantage that none of them need
be mentioned in advocating it.
Theorists are in the habit of dealing with this policy in the
abstract. But its nature and consequences depend upon the com­
plementary policies with which it is linked. In the case under
discussion, these are taxation high enough and progressive enough
to prevent private accumulation and in consequence the possibility
that large-scale business should ever again, financially speaking,
stand on its own feet and become independent of government; labor
legislation that shifts questions of wages, hours, and factory disci­
pline to the political sphere; and strict regulation, enforced by the
threat of prompt prosecution, of the behavior of big business in
every respect. Under these conditions, public income generation
will automatically become permanent, quite irrespective of the
factors stressed by the theories framed to prove its necessity from
causes inherent in the saving-investment process of capitalist
^ Such a system will no doubt still be called capitalism. But it
is capitalism in the oxygen tent—kept alive by artificial devices and
paralyzed in all those functions that produced the successes of the
past. The question why it should be kept alive at all is therefore
bound to be put before long. Such concessions about relief from
war rates of taxation and so on as are within practical politics, may
temporarily change details of the picture and postpone the putting
of that question, but cannot be expected to change essentials.
It will therefore be perfectly natural—in fact it may be a
practical necessity—to take further steps toward state management.
To begin with, it is difBcult to see what role will be left for non­
public banking and finance in an economic world thoroughly
dependent on government financing that is itself entirely inde­
pendent of private voluntary saving. Government, to be sure,
still goes through the motions of "borrowing" and "lending,"
pays and receives interest and so on. But the life has gone out of
these forms and an administrative rationalization of what is actu­



ally being done could easily eliminate them. If we assume that
capitalist methods will disappear graduaUy there will be a narrowing
sphere of activity for banks as we know them also in the future.
They may continue to keep accounts and to 61i administrative
functions for an indefinite time. But though this may facilitate
transitions it does not alter the fact that, if we must stick to old
words, government will develop into the sole banker.
Again, government spending as a permanent policy cannot fail
to develop into governmental planning of investment. In fact, its
failure to do so would be quite uneconomical. If government
expenditure is to be the pivot of the economic proccss it stands to
reason that the productive efforts propelled by that expenditure
will in the end have to be directed by public authority. The
government will from time to time have to proclaim a national goal
which its expenditure is to serve—such as housing for the masses,
completion of the electrification of the household, reorganization of
the transport system and of urban life to make them At the condi­
tions created by the airplane—and to define the ways in which and
the extent to which each particular goal is to be approached.
There is still another reason for this. Whatever the outcome of
the war, the postwar world will hardly be a place for privately con­
trolled trade and industrial venture. As to the 6rst, it is not easy
to see how private enterprise could cope with the conditions created
by the immense differences as between countries in monetary and
real cost of production that have developed of late.* From a purely
commercial standpoint, and taking account of ail the "rigidities"
that will prevent adaptation, the United States might well be unaMe
to export at all.* Quite apart from the political considerations
that are bound to complicate the problem still further, international
trade in commodities and services will have to be cut off from its
old background of commercial calculation and have to be managed
by political treaties, bilateral and multilateral. But this implies
domestic public management just as the latter implies the public
management of international economic relations.
As to the second, international industrial venture involving
long-term investment, the need for government leadership, per­
This position is not inconsistent, however, with the theory of comparative
' The roots of this difEculty are in the prewar situation. One of the most
curious contradictions in New Deal policy was its attempt to "liberalise"
foreign trade while erecting a rigid economic structure at home.



haps on lend-lease lines, in an expansion that will inevitably carry
imperialist features, is still more obvious. The spacious possibili­
ties that open up under these heads should be noted not less than
the sources such a system harbors of waste surpassing anything
ever charged to the account of capitalism. It should also be noted
that such a system leaves the managing bureaucracy free to allocate
to private business as much or as little room as may be desired.
Just as the TV A, a national venture, let contracts to private firms,
so a simitar national venture on the Yangtze, though initiated by
government and controlled by it, may parcel out individual jobs to
capitalist firms. Therefore, on the understanding that the essence
of the bourgeois economy will be absent from the picture, we may
call this system Guided Capitalism.
3. Some measures of nationalization will almost inevitably sug­
gest themselves in a system of the type just discussed. Moreover,
other measures—perhaps the nationalization or municipalization
of utilities, of insurance, of mines—will be rendered easy by public
support. It is difHcult to foretell how far this tendency will go.
The term "nationalization" does not sound well to every ear and it
may be that other means of establishing no less complete public
control, even if less rational and fraught with more friction, will be
preferred by the political groups in power. But if the Federal
government should follow this line to a significant extent, and if it
should try to run the nationalized industries according to the
principles of business rationality, Guided Capitalism would shade
off into State Capitalism, a system that may be characterized by
the following features: government ownership and management of
selected industrial positions; complete control of government in
the labor and capital market; government initiative in domestic and
foreign enterprise.
4. It will always be a matter of taste whether a given way of
running the economic engine be called socialist or not. On the one
hand, disgruntled bourgeois spoke of socialism when the first
municipal gas works and the first progressive income taxes put in
appearance; on the other hand, socialist groups that are not "in on
it" will never admit that anything not sanctified by Marxian doc­
trine can possibly be genuine socialism. Moreover, people care so
much more for words than they do for things, that acceptance or
avoidance of the term socialism may be dictated by tactical con­
siderations. In this country, these considerations seem to tell
against rather than for it so long as no violent break is on the cards.



If, however, we agree that advance on any of the lines we have
briefly surveyed comes within the definition of gradual socialization,
the problem narrows down considerably. Any approach to social­
ism other than by continued extension of government control and
expropriation of the upper strata by taxation would no doubt meet
resistance from the farm interest and from small and medium-sized
business. Neither would put up a life-and-death fight in order to
prevent the nationalization of big business—say, the corporations
owning assets amounting to $50 million or more. But they pre­
sumably would fight against anything much more radical than this,
particularly against anything which they recognized as a "revolu­
tion." Barring such a revolution which, while never impossible,
cannot be expected to be successful, an amphibia! state for the
calculable future is certainly the most probable one. From a purely
economic standpoint this may be regrettable. Such a state will
suffer from a lot of frictions and inefficiencies that a return to the
capitalist alternative or a resolute adoption of the socialist one
would save, and it will not command the full motive power of
either. On the other hand, amphibial states conserve many human
values that would perish in others. Thus there may be as little
reason for the fears of some as there is for the hopes of others.




There will be no Economic Liberalism in the postwar world
unless the democracies achieve a complete victory over the Fascist
powers. For the all-out effort which alone can win this victory, it
will be necessary to eliminate from power those antidemocratic
elements in the democracies which gave the fascists the oppor­
tunity for their crusade against every kind of liberalism in the
whole world. Consequently, to assume that those who wish to
establish a regime of Economic Liberalism will be in a position to do
so after this war is not much more difBcult than merely to assume
that they will not all be dead or in concentration camps. In this
essay I shall consider a program for victorious believers in Economic
First, it must be emphasized that Economic Liberalism does
not now mean Zatssea /atre. Latssas /atre is only a means for the
achievement of the ends of Economic Liberalism. It works only
in special circumstances and does not always deliver the goods.
Economic Liberalism aims, by setting up the appropriate insti­
tutions, to maximize the freedom of each individual member of
society to satisfy his own desires wherever this does not interfere
with the freedom of other individuals.
Wherever a policy of htssez /cnre, with the government keeping
its hands off all business and industry and merely protecting prop­
erty and enforcing contracts, results in the establishment of perfect
competition throughout the economy, then &MSsas /aire establishes
Economic Liberalism. The price of every article of consumption
is then equal to its marginal cost, and this measures the value of
the alternative article that might have been produced with the
same resources. Every purchaser can choose whatever is more
satisfactory to him, and its production in the place of the alternative
makes no difference to what is available for other purchasers. The



reward for every kind of effort being equal to its marginal product,
all efforts are directed to where their products are greatest (so that
there is the greatest possible efEciency in the allocation of the instru­
ments of production to the different possible products), and each
kind of effort is exerted to exactly the right degree (thus avoiding
the social waste of too great an application, which would mean that
the product is not worth the effort, or too small an application,
which would mean that a potential product, of greater value than
the effort needed, fails to be produced).
The maximization of this freedom is not achieved simply by
passivity on the part of the government. (Something like this,
however, came to be believed by the most ardent advocates of
%aisse%/aire, because at the beginning of the capitalist era the most
important problem facing the economic liberal was to show that
the economy could work without the state regulating every depar­
ture from the feudal way of life.) The individual must be free to
do whatever does not affect others, but the maximization of indi­
vidual freedom involves the hindering of those whose action &MS
interfere too much with the freedom of others. This is the &rst
lesson of a war forced upon the world because of too great a freedom
being given to aggressors, and the principle that positive action
must be taken consciously to maximize the freedom of all is just as
applicable in the economic as in the political sphere and for exactly
the same reasons. With income from inherited property sufBciently
checked by income and inheritance taxes to make equality of oppor­
tunity really effective, freedom of entry for all into every walk of
life would permit competition to equalize earning powers (and
the marginal productivity of different kinds of labor) and thus to
prevent economic inequality from nullifying the political equality
that is essential to every kind of liberalism.
Unfortunately hisses /aire does not always result in perfect
competition. The most efBcient use of resources (from the point of
view of society) and the appropriate price relationships that permit
each individual to choose between different goods without affecting
other individuals only come about if the output of the Arms is not
affected by considerations of the power of the firm, by varying the
extent of its activities, to affect the prices at which it buys or sells.
This power, which does not exist at all in the case of perfect compe­
tition, may arise because the market is small or because, for tech­
nical reasons, the firm has to be large, or because firms combine for
the express purpose of acquiring power over prices.



In aU these cases the objectives of Economic Liberalism cannot
be obtained by
/atre but only by positive action on the part
of the government to establish the conditions where Arms cannot
influence price. Where the departure from perfect competition is
entirely due to the combination of firms for the purpose of restricting
output in order to raise the prices received for the product (or to
lower the prices paid for the materials or other factors of produc­
tion), it may be sometimes sufBcient for the government to take
legal action against such combinations in restraint of trade. But in
most cases this is cumbersome and inadequate.
The appropriate remedy is for the government to destroy the
power of firms to influence prices. This can be done by a very
simple process which may be called
this elimination of monopolistic restriction forced a loss on the
producers, the state would have to cover it in order to permit
production to continued The result of such procedure would be
that if a private enterprise, paying the same prices for the factors
of production as the competing government enterprise, can produce
more efficiently than the government, it will be able to survive
* Government agencies estimate the equilibrium prices of staple goods at
which the supply would be equal to the demand if everybody took prices as
given. This price is then guaranteed by the government to such buyers
as might be restricting their purchases to keep price down, or to such sellers as
might be restricting their output in order to keep the price up. No firm could
hope to compete with the government's financial resources, so that any attempt
to influence price would be abandoned. If the resulting market price was not
equal to the price guaranteed by the government (because of inevitable errors
in the estimate of the equilibrium price) the difference would have to be paid
out of (or be put into) a government fund for that purpose.
* Every Rrm will produce up to the point where the price is equal to the
marginal cost, just as in perfect competition, but now the price will be less than
the average cost in all industries where there is a natural monopoly. Indeed it
is this technical condition that makes it a natural monopoly. The low mar­
ginal cost would result in "cutthroat competition" and would bankrupt all the
firms, so that it is only under a monopoly that the service can continue to be
provided in a capitalistic economy. The ends of Economic Liberalism can be
achieved in all such cases by the state covering the loss forced on the producers
by the elimination (through counterspeculation) of monopolistic restriction.
The government could provide the service itself, charging the public the
marginal cost for the product. To give private enterprise an equal chance, so
that it should prevail wherever it happens to be more efRcient than government
enterprise, the government could subsidize private production by a grant toward
the installation and renewal of plant equal to the deficiency of the marginal
cost (which will be equal to the guaranteed market price of the product) below
the average cost in the moat efRcient government plant.



government competition, and where private enterprise is less effi­
cient than government enterprise it will have to give way to the
This pragmatic decision between private and government
enterprise in each case according to its social merits cuts right
across the false issue between capitalism and collectivism. While
collectivists thought to complete the democracy that was started
by capitalism by removing the economic inequalities that
accompanied private ownership in the means of production, and
capitalists thought to defend not only their privileges but the
democratic gains of capitalism by resisting ait departures from
&M8se% /aire (except those, like tariffs, which were pressed for by
sectional interests), the fascist revolt against all democracy threat­
ened to destroy both. For a long time the collectivists (and some
capitalists who were blinded by fear of the Reds) saw in Fascism
nothing but the capitalists defending their property from demo­
cratic collectivism, and the capitalists (and a few collectivists blinded
by a deification of planning) saw in fascism nothing but the natural
state of a collectivist society. By the time the war is over the
lesson will have been learned that the issue of capitalism versus
collectivism was a minor or even a false issue; that neither private
nor government enterprise must have a monopoly if the democratic
ideals of Economic Liberalism are to prevail; but that both must
be permitted to contribute to the general welfare, each surviving
in the Reids where it proves itself superior and both providing an
important guaranty of the freedom of the citizen by competing with
each other in demanding his labor and in providing him with the
goods and services that he purchases.
Another important lesson that will have to be learned by the
time the war is over is that the most economical way, as well as
the most just way, of overcoming opposition to policies that have
to be undertaken in the public interest is to provide generous
compensation for all who have to make a special sacrifice. The
resistance to this is closely related to the strong feeling against
permitting anyone making money out of the war (as if that were
somehow more wicked than getting rich in peacetime). This
feeling comes from a failure to distinguish between one who makes
money by instigating war or by impeding the war effort and one
who does his best to produce what is needed and in so doing makes
targe profits. A manufacturer of war materials who makes millions
by applying himself to discovering ways of saving materials and



labor is doing a great service to his country. He can be made to
give up some of his claim on society, if that is considered to be
excessive, by taxes on income, on promts, and perhaps even on
capital, but to call him a profiteer and not to let him get am/ of the
gain from such economies only results in discouraging him from
making them and the national effort thereby loses. Patriotism is
not enough. If it were enough to induce everybody to make his
maximum effort in the social interest, we could immediately abolish
private property and move directly into the last idyllic stage of
communism. Very few people believe this to be practical if
applied throughout the economy. It is even less practical to
apply it in times of great emergency to the most vital centers of our
effort, where the patriotism of the key men would be subjected to
the additional strain of observing the quiet enjoyment of fortunes
by men who had made their money out of producing less important
peacetime goods.
This principle of adequate rewards and compensations will be
as useful after the war as in prosecuting it, especially in the course
of elimination of the antiliberal economic barriers to trade. The
benefit to society from the abolition of these barriers is greater than
the loss of the vested interests built up behind them, so that com­
plete compensation to the vested interests would still leave a net
gain to the citizens who will have to make the payment; but if the
existing prejudice against compensation continues, it is likely that
the restrictions will stay and the greater evil of the restrictions will
be kept in place out of too great a concern for the smaller evil of a
compensation being received by people who do not fully merit it.
Behind the objection to large compensations, apart from simple
fallacies about the country not being able to afford them, lies the
feeling that the existing distribution of wealth is somehow more
defensible than the distribution of wealth after the compensatory
payments have been made. This has only to be stated explicitly
for it to be seen that a real benefit to society should not be shelved
because it will cause a switch in the distribution of an increased
national wealth.
The most impressive obstacle to Economic Liberalism in the
postwar world is the need for a formula which will be satisfactory
to both the U. S. A. and the U. S. S. R. One important step in
this direction is the pragmatic resolution of the issue between private
and collective enterprise as merely a matter of relative efficiency,
with both given complete legitimacy, and every country free to



sacrifice the optimum proportion in any degree it wishes according
as it has a bias for private or for collective enterprise. Another
step is the growing recognition of the extent to which the
state is able to redistribute wealth by the processes of taxing income
and inheritance. With everything subject to the fundamental
principle of utilizing the resources of the world in the way that best
satisfies the needs of consumers everywhere, and with the safe­
guards against exploitation to be listed below, it should not be
impossible for an agreement to be reached (with American food for
starving Russia and Europe as an additional argument to bolster
up the logic if necessary).
Economic Liberalism is essentially international in its outlook,
but there is one facet in the internationalism of many economic
liberals which is sentimental rather than practical. This is the
feeling that the first step toward the building of an integrated
world economy must be the establishment of an international
monetary system something like the prewar gold standard.
The first condition for the survival of Economic Liberalism after
winning the war is the permanent elimination of the twin evils of
unemployment and inflation. This can be achieved by making it
the primary
of government finance to keep the level of
monetary demand for goods and services in every country sufBcient
to give employment to all who seek it and yet not more than sufB­
cient—because that would result in inflation. All other consider­
ations or "principles" of government finance must yield to this
principle of "functional finance." The first casualty is the princi­
ple that over any fiscal year the government must spend no more
than it collects in taxes. The second is any international monetary
system that involves the maintenance of 6xed rates of exchange
between the currencies of different countries.
The maintenance of adequate monetary demand could be
reconciled with fixed exchange rates if the domestic prices were
indefinitely flexible. Any change in the international balance of a
country could then be met by adjustments of the domestic price
level. But, unfortunately, domestic prices are not flexible. Severe
and prolonged unemployment is often necessary to bring about a
reduction in domestic prices and wages; and to suffer this is foolish
if the necessary adjustment can easily be provided by the alterna­
tive device of permitting the value of the country's exchange to fall
in the same proportion as the price level would have to be



The objection that this argument would logically develop into a
demand for currency autonomy for every village can be met by
pointing out that the necessary condition for a successful single­
currency area is an effective mobility of labor within it. If any
region within such an area finds its balance of payments upset and
is threatened by a depression created by the resulting credit restric­
tion, a movement of labor out of the depressed region provides the
best solution. But where there is not real mobility of labor, whether
this is due to the law or to sentiment or to ignorance or poverty,
this solution is not available and a depreciation of the currency can
immediately give the relief which would otherwise come only after
a severe depression has succeeded in reducing wages and prices.
Economic Liberalism will, of course, do its utmost to remove
barriers, but wherever it does not succeed in establishing really
effective freedom of movement, fixity of exchanges works unneces­
sary hardship; and where there is real mobility of labor, it will not
be necessary for the exchanges to be fixed by law. There will then
be a natural stability through the movement of labor which equal­
izes wages and costs. Stability of the exchanges is a symptom of
the success of Economic Liberalism in making real mobility of goods
and of labor effective. The condition of good health cannot be
obtained by legislating the symptom. To enforce it where it does
not come about by itself is to sacrifice employment to exchange
stability—to subject the very foundations of Economic Liberalism
to deadly danger for the sake of a pleasing adornment.
Another difBculty that will have to be overcome before freedom
of the exchanges to move is recognized as a part of true Economic
Liberalism is the common feeling that, when a country permits its
exchanges to depreciate, it gains an advantage at the expense of its
rivals—that is a form of economic warfare. This is true in a state
of world depression. Any country that depreciates its exchanges
will thereby increase its employment at the expense of the other
countries. (It is also true then that any country that succeeds in
reducing its wages and costs will increase its employment at the
expense of its neighbors even though it keeps to the purest form of
the international gold standard.)
What is decisive in causing a s%% of employment from other
countries to the country that reduces its exchange rate (or its wage
level) is the access qf its esports over its imports. This is inevitably
accompanied by a deficiency of exports beiou? imports in the other



If a country disregards the foreign value of its currency and
increases effective demand at home (to the level which gives it full
employment), the increased demand for imports by the newly
employed will cause the country's currency to depreciate to the
point where the higher prices of imports and exports (in the depreci­
ated domestic currency) have sufficiently discouraged imports and
encouraged exports to make them equal to each other again. There
is no export balance and the other countries are not harmed. The
depreciated exchange is not the catise of an increase of employment
at the expense of the other countries but a
of an increase in
economic activity that does not affect the other countries. If all
countries completely disregard the effect on their foreign exchanges
and create enough effective demand in their domestic markets to
give full employment at home, they will all gain in employment,
there will be no general depreciation of the exchanges (which
by definition is impossible), and international trade will not be
hampered in any way.
When full employment has been achieved all round, it will not
be possible for any country to gain at the expense of others by
artificially reducing the value of its foreign exchange. A country
could depreciate its exchange by printing currency and using it to
buy foreign exchange which it hoarded. But this would merely
permit the foreign country to get real goods for its printed paper
money. The moment the first country began to spend the foreign
money it had acquired, the foreign value of its currency would
begin to rise again. The value of the currency could only be kept
down permanently (without continuing to present the rest of the
world with real goods in exchange for bits of paper) by permitting a
proportional rise in domestic prices. This would exactly offset the
lowered rate of exchange in its effect on imports and exports, and
everything will be just as if there had been no change in the external
value of the currency. In no case does the country benefit itself
or harm others by depreciating its exchange. The only rule
needed for adequate stability of foreign exchanges is that each
country shall maintain full employment at home.
But although there is no need for an international gold standard,
it will be necessary to have some form of world organization limiting
the sovereignty of the various nations. No nation can be permitted
to build or possess more arms than are necessary to enable it to cope
with burglars and the like. Until this is arranged, the war is not
really over.



The fundamental principle of Economic Liberalism in the rela­
tionship between governments, just as in the relations between
individuals, is that each individual, government or person, shall be
permitted to do anything that does not affect the well-being of
other individuals, but where giving one individual freedom has the
effect of permitting a greater infringement of the freedom of others,
it is the duty of Economic Liberalism to apply the smaller public
compulsion in order to eliminate the greater private compulsion,
thus, by a positive act of compulsion, reducing the total degree of
compulsion in the whole system.
Armaments which threaten to involve other nations in war are
clearly not a purely domestic matter and cannot be permitted to
the nation even though to limit armaments is an infringement on
its sovereignty. National sovereignty has played an important
and progressive role in emancipating society from the institutions
of feudalism. But that time is now past and it must be recognized
that national sovereignty is not an end in itself but an instrument
for the fostering of Economic Liberalism.
There will have to be a minimum list of conditions that every
country must satisfy to be admitted to the world organization. If
any nation refuses to agree on matters which affect the security of
the other nations, the war for democracy will not yet be over, and
the threat will have to be removed by force of arms. But if a nation
merely tries to exact special economic advantages, it will be a sufEcient sanction to cut off economic relations with such a transgressor
of the principles of international society.
The conditions of entry into the democratic world society must
be reduced to a very minimum, each nation, or any group of
people who wish to constitute a nation, having the right to
live their life the way that pleases them best, always provided
they do not thereby harm the rest of society. The minimum
conditions are
1. Freedom of speech, assembly, and publication for all indi­
viduals and groups (except those who constitute a present threat of
violence against the democratic state), free movement of foreign
literature and journals, and freedom to listen to the radio of foreign
2. No discrimination in economic treatment or in economic
opportunities against any individuals on account of race or creed
or place of birth or anything other than their efEciency in the work
they perform.



3. Freedom of movement of nationals and foreigners both within
every country and between countries.
4. No discrimination between domestic production and import­
ing goods or between domestic consumption and exporting goods.
This will mean that every country shall import any goods up to the
point that makes the price of the goods (plus the transport cost) not
less than the marginal cost of domestic production of the goods, and
shall export goods up to the point that makes the price received for
goods (minus the transport cost) not greater than the marginal
cost of domestic production.
There are many other conditions that the economic liberal
would like to see generally established, but these four minimum
requirements would be an adequate safeguard (together with the
control of armaments) against the possibility of anything like
another fascist threat to democratic society, and they would be a
good beginning from which the other virtues of Economic Liberal­
ism could develop. The freedom of movement of people and of
news would mean that there could be real competition between
different institutional arrangements, and people from all the coun­
tries could see them in action, judge between them, and copy the
Most directly relevant to Economic Liberalism Is the fourth
condition. In a completely private-enterprise economy in which
there was perfect competition throughout the economy, this condi­
tion would simply mean /ree trade. In an economy where all or a
great part of the economy was collectivized, the same results of the
most complete international division of labor are brought about by
following this principle of nondiscrimination.
It is possible for any nation to get better terms of trade with
other nations by an appropriate limitation of the goods it imports
or exports. If several or all the nations try to play this game, they
will all lose from the restriction of international trade. To prevent
this from happening and to permit the greatest benefit to all from
international trade, there must be some /M e, objectively set up so
that it cannot be said to have been constructed to favor one nation
at the expense of another. Our fourth condition is such an Objec­
tive Rule because it is completely nondiscriminatory and does permit
the total benefit to all to be the greatest possible. It merely pre*
vents every nation from exploiting any other nation in its trade
and has all the advantages that have been claimed for free



An exception to the third condition would have to be allowed
in the case of immigrants from overcrowded countries whose popu­
lation was regulated only by the Malthusian law of the pressure of
population on subsistence. Unlimited immigration from such
breeding centers would ultimately reduce the whole world to their
own uncomfortable degree of overcrowding without relieving the
original pressure. It would therefore be necessary to have some
sort of quota for such immigrants into the less crowded parts of the
earth, though these quotas could be far more liberal than they have
been in recent times.
The inclusion of money capital among the goods mentioned in
condition 4 would equalize the marginal efBciency of investment
throughout the whole world. Rich countries who save more than
their domestic investment opportunities absorb would invest in
poorer countries where the opportunities for investment at the cur­
rent yield are greater than the domestic saving. This would be
the most efEcient thing to do from the point of view of the best
utilization of resources. It seems, however, to be well established
that such investment leads to ill feeling when the investors collect
the interest on their investments (even where these are genuinely
productive and not merely ingenious manipulations whereby back­
ward populations are bled to pay high interest on loans squandered
by princes or politicians). Because of this it might be better for
the equalization of the marginal efBciency of investment to be
sacrificed to some extent for the sake of maintaining good feelings
between the different nations.
Fundamentally, the dissatisfaction that poor nations feel when
they are paying interest on the money they have hired is based on a
feeling of dissatisfaction with the distribution of the wealth of the
world not only between individuals but between rich and poor
nations. This feeling is genuine even though it has been basely
exploited by the Fascists in their propaganda. To equalize incomes
in the different parts of the world would involve a quite imprac­
ticable reduction in the richer countries. Yet something will have
to be done to diminish the great inequalities of income of the differ­
ent nations as well as between the individuals within the nations.
For this there is needed some sort of rule, too, which must have at
least the appearance of objectivity.
Such a rule might be found in a solemn agreement between the
nations to direct a certain amount of investment toward increasing
the capital wealth and the income of the poorer countries. A good



form of this rule would be the principle of half-and-half. The free
export of capital and consumption goods, in the manner of leaselend or an international Works Progress Administration, from the
richer to the poorer countries so that half of the annual increase in
income per capita for the whole world is directed to increasing the
per capita income in each country by an equal amount, and
the other half is devoted toward raising the per capita income of the
very poorest countries* Of course, there would arise many compli­
cated problems in the management of these funds, but some such
simple fundamental principle will have to be adopted to provide
the world with the justice that it needs for stability.
The establishment of principles like the four conditions for the
admittance of countries to the society of free peoples and the halfand-half principle for the gradual rehabilitation of poor countries,
will make it possible for a real new order of democracy to be estab­
lished because it will permit the
of nations which are
backward in the development of their democracy without giving
even the semblance of
Domination has usually been
accompanied by exploitation, but that is no reason for assuming
that this must always be so. While exploitation is the negation of
Economic Liberalism, domination by leading democratic nations
backward nations, as well as over possible new
eruptions of fascism, is a necessary condition for the successful
establishment of the democratic new order of triumphant Economic
This essay is rather optimistic. This is partly because the
primary assumptions had to be optimistic to permit the question
to be put at all, but partly because at the present crossroads of his­
tory Liberalism, economic and otherwise, cannot stand still but
must either perish or move forward. The very fact that everything
is being upset by the war means that the greatest obstacles to the
establishment of a regime of Economic Liberalism are being removed.
The greatest obstacles are the vested interests of the millions of
workers whose livelihood depends on the maintenance of artificially
protected industries. The war is removing these resistances,
especially to the establishment of the free movement of men and
goods, partly by teaching us to overcome our niggardliness in the
payment of compensation to those who are asked to make special
sacrifices in the general interest, but even more by making it neces­
sary to build the whole world anew. It will be no more difficult to
build it on a rational plan, such has been hastily hinted at here,



than to repeat all the mistakes of the past. But for this we must
be ready to start on the new plan the moment we can stop the
prosecution of the war. Our greatest danger is the cry that is
being raised for a breathing spell after the war before we start
building the peace. If this is to check a hasty vindictiveness it
will be a good thing, but the cure for that danger lies rather in con­
tinuing to remember throughout the war what we are fighting for
and not letting hate take the place of the sane determination to
destroy the threat to democratic civilization. To leave the peace
for later will be to forego the special opportunity to build a better
world. We are building it now even while fighting, and to postpone
the plan till later is to leave the discussion of plans with the archi­
tect until after the house is built.
If we overcome this temptation to procrastinate, we shall not
only be free to build the new world the way it ought to be; but the
knowledge of what we want to build will make it possible for the
Germans and other subject peoples of the Fascists to turn against
their masters when the opportunity arises. Instead of feeling
that they must continue to support their masters because defeat
would mean their utter destruction, they will begin to see a hope for
themselves in a democratic victory.







The genera! pattern of wartime economic policy, like it or not
(and I mainly do not like it), is now determined, at least in the
sense of being now not amenable to much modification by academic
opinion and discussion. Its faults are, I think, largely attributable
to the distorted economic analysis and the prevailing policy per­
suasions of the immediate prewar years. But all that is water over
the dam. In spite of bad 6scal policies and inept economic leader­
ship, we shall muddle through somehow and, I assume, shall attain
the military victories that will enable us to dictate the peace and to
determine the main lines of postwar world reconstruction.
If the unhappy contribution of the academic world to wartime
policies is now a matter of history, the role of our intellectuals with
respect to the peace remains to be determined. The problems of
the peace, however remote in time, are still remote from our national
thinking and from active political debate. Nor is it clear that
political and economic persuasions of the recent past must prevail
and misdirect us after the war. Definitive statement of peace
terms and vigorous debate about national policies in the postwar
period may now be premature and likely to prove divisive. Full
and frank academic discussion in this area, however, is not now
premature but already belated. It is now that disinterested and
politically independent students should strive toward that sound
consensus which, if attained, might enable them actually to deter­
mine the nature of the postwar world. Soon we shall see whether
academic specialists will prove worthy of their responsibilities in
this matter or whether, as usual, they will divide into as many
camps as there are active political factions, offering their knowledge
and rationalizing skills impartially to good causes and to bad.
One great error in the last peace lay in the effort to impose
political organization and integration in the face of economic dis­
organization and separatism. If we could bring about real economic
integration and a close-knit structure of world trade, then political




organization on a supranational scale would be easier to attain in
the measure necessary for peace and necessary in smaller measure
as well. Free trade and free exchange require and permit that
rather minimal government which is compatible with democracy
and large-scale political organization at home. Likewise, on a
world scale, they offer the possibility of enduring peace with that
loose and flexible international organization which requires no large
sacrifice of sovereignty and autonomy on the part of participating
national states, and no large exercise of force by dominant powers.
I am here proposing, as a means to enduring peace, the essential
features of a scheme of policy which I have long espoused domes­
tically. Every crisis induces reformers, committed to their various
nostrums, to present, as solutions of crisis problems, the same
measures which they have espoused in other circumstances and for
other purposes. But such behavior demands no apology, save in
cases where the proposals were ill-conceived all along. Indeed, if
we attain a good peace, it will be built, not from ingenious novel
schemes of bright young men or from the opportunism of politicians,
but by close adherence to broad principles of policy which have little
novelty and which have long been objects of reflection, inquiry, and
disinterested discussion. We shall be surfeited in any case with
ad Aoc contrivances. Our intellectual heritage contains all the
wisdom which is likely to be fundamentally useful, and all the errors
likely to be dangerous, for world reconstruction. Long discussion
of old ideas diminishes the risk of our choosing badly among them.
But novel schemes, however old in substance, may arouse unmerited
enthusiasm and receive unmerited support, just as, at this moment,
the best scheme of rationing is the last one we hear about, ^.e., the
one in which neither reflection nor experience has yet revealed the
crucial shortcomings.
It is my firm conviction that nineteenth-century English
economic liberalism affords the only promising basis, the only sound
principles, for a durable peace. This political philosophy has
largely been repudiated in domestic policy everywhere; and, because
of that repudiation, Western democracies, I think, might well have
been destroyed from within, had they not opportunely been forced
to resist the aggression of antidemocratic powers. That free
internal trade is a necessary condition for political freedom domes­
tically is not a generally accepted view, although erstwhile oppo­
nents have latterly shown signs of growing inner doubts about more
romantic schemes of revolution or reform. Hitler has at least shown



us the seamy side of collectivism and raised intellectual inquiry,
even in radical circles, from sterile contemplation of policy as
choice between an ideal or perfect statism and the inevitably
imperfect institutional system based on individual freedom. But
the appeal of free trade to internationally minded people has never
been wholly lost; and we are now internationally minded as never
before, to the extent at least of being prepared to consider seriously
how we may spare ourselves an early recurrence of global war after
this one is past. If, by wise leadership, political and intellectual,
our people can be persuaded that new foreign and domestic policies
are indispensable for enduring peace, I see now a real possibility
that those policies may be effectuated. Left to our own devices, in
splendid, secure isolation, I fear we should have undermined rapidly
our own heritage of liberty and abundance. Faced now with the
task of creating a tolerable world order, we may both accomplish
that end and likewise save ourselves as a prosperous, united, and
democratic nation in the process.
The principle of free international trade is now recognized
clearly, if not unequivocally, in the Atlantic Charter and the lendlease agreements. I propose to spell out what this principle means
—to consider its implications for action if it is more than a nominal,
tongue-in-cheek commitment.
It is useful, at the outset, to recognize that free trade is a nearly
meaningless conception where collectivism (or totalitarianism) is
present. Try, if you will, to give concrete meaning to free trade
between prewar Russia and Germany, or even to free trade between
totalitarian and nontotalitarian nations. Barter trade is the antith­
esis of free exchange, involving a kind of pure collective bargaining
that is hardly distinguishable from war—a contest for power whose
end is subjugation of the weaker parties. Those buying from a
collectivism face a governmental monopolist as seller; sellers to
collectivisms face a governmental monopsonist as purchaser; and
the monopolist and monopsonist, being one and the same govern­
ment, will act together in forcing the best terms of trade against
outsiders. Small nations, trading with Germany before the war
and not dissatisfied with the immediate terms, recognized a steady
weakening of their bargaining position and a prospect of subjugation
through trade.
Thus, collectivists, facing problems of the peace, are obliged on
principle either to espouse a fantastically centralized world order,
one great collectivism determining all economic relations from the



top, or to face an endless struggle for power by national collectivisms, each striving to advantage and to strengthen itself as a
monopolist against all the rest. Save for those who would rush
headlong into an all-powerful socialist world state, collectivists and
other statists are simply unable to face or to discuss fruitfully the
problems of world order for the future. Here, in plain fact, Hitler
is right. A world of national collectivisms must be dominated by
one nation or face endless disorder. The whole basis for peaceful
economic cooperation through free international exchange is lost
with the disappearance of free internal trade. Many of us have
argued that free external trade is practically necessary for the
preservation of free exchange internally. The converse proposition
is simply axiomatic.
For the world, as for great nations separately, the possible forms
of stable political organization are of two extreme types. There is,
on the one hand, the totalitarian system in which economic and
other policies are simply imposed from above by overwhelming
power and authority. The Germans contemplate such an order
for continental Europe, where military and economic control would
be completely concentrated, non-Germans being subject peoples
and their economies tributary to the German economy at the cen­
ter. Dislike this as we may, it is, I submit, the only possible basis
for peace if collectivism is the coming order. Nor is it extravagant
to impute to its sponsors an objective of world domination. Such
an objective is implicit, not merely in the aspiration of a nation or
its leaders, but in the whole scheme of policy, and in trade policy
especially. Economic and political relations become indistinguish­
able. Foreign trade becomes essentially an instrument of conquest
and exclusion. Access to markets and to raw materials is attainable,
on reasonable terms, only by military domination or confedera­
tion. In such circumstances, as during the last decade, the dis­
tinction between peace and war loses meaning. Order and stability
are possible only on the basis of world domination by one authority,
powerful enough to direct world production and trade to its own
ends. It is apparent to many people that large-scale collectivism
(centralization) means tyranny within nations. It should be more
apparent that, in the larger framework, it means either world
tyranny or endless war.
The alternative world scheme calls simply for a pattern of
governmental or political organization in which organization
becomes looser and more flexible continuously, and governmental



functions narrower and more negative or preventive, as the units
(scale) become larger, until at a world level there exists merely
a loose alliance among nations united in the task of enforcing and
preserving freedom of trade. There can, of course, be no peace
without some exercise of power; and only irresponsible sentimental­
ists will reject all balance-of-power techniques. The important
question is what kind of nations wield decisive power; whether it
is exercised, with their willing cooperation, to protect and strengthen
the small and weak nations, or to subjugate them; whether it is
used to increase liberty everywhere or to promote absolutism and
further concentration of power; whether it seeks to promote world
prosperity or to increase exploitation; whether it is used to promote
world economic integration or economic separatism along regional
or continental lines. The crucial practical question, I submit, is
whether power is used on behalf of free world trade or against it—
to secure special access to markets and materials or to provide such
access freely and equally to all nations. One may talk cynically
about the motives of the English during the nineteenth century;
but one may not now question the good results of English hegemony,
in terms of peace and progress.
Our task for the future is, in large measure, simply that of
recapturing what was good in the nineteenth-century order—its
relatively free trade, its free movement of private capital, its rapid
material progress, its confidence in democracy, its emphasis upon
individual liberty, and its hope for secure world order. If we would
recapture these things, we cannot wisely ignore the political and
economic philosophy of their time, the traditional liberalism which
Howered at the height of world progress and guided or rationalized
the policies on which that progress was founded.
The great issue at the peace will be the issue of individualism
versus syndicalism and collectivism—wholesale economic dis­
armament versus increasing economic armament. In the depres­
sion, we sought escape from afflictions by plunging on toward
collectivism and by fostering an aggressive syndicalism from which
absolutism is the only easy escape. Continuing this line of policy
at the war's end, we shall squander perhaps the last opportunity
for creating a peaceful and prosperous world, writing
to the
brief democratic era of history. We may thus pursue relentlessly
the tragic illusion that more and more positive government will cure
our ills; or we may reject political romanticism and resolutely con­
struct that dualism of competitive and political controls which



minimizes the need for government imposed from above. Taking
the latter route, we may restore throughout the world the rapid
material and moral progress which characterized the ascendancy
of English economic liberalism. Adopting this policy, however, we
must again cherish outmoded political ideas, especially the idea
that good government means minimal government and full exploita­
tion of the possibilities of impersonal, objective control through free,
competitive markets. But, while we must choose between totali­
tarianism and a minimizing of imposed government, what now calls
for emphasis is the necessity of minimizing government on a large
scale—of reversing a trend toward statism via centralization. What
small nations do, or states and provinces, is not critically important.
They may undertake all kinds of experiments— Socialist, Com­
munist, Fascist, what you will—without much endangering thereby
the peace of the world. Such adventures cannot seriously threaten
general security if they are conducted within the framework of a
free-trade system. For small political units have in fact little
power to restrain trade.
The great threat to world order lies in large-scale, centralized
national systems, for such systems are incompatible with that larger
scheme of world organization which is the alternative to absolutism
or chaos on a world scale. Great centralized nations are insuperable
obstacles to world integration, political and economic. It is only
such nations that have large power to restrain trade; and it is pre­
cisely in such political units that it becomes impossible to protect
the common domestic interest in free trade against the special
interests of producer minorities in restraining it. The larger the
area governed by a legislature, the weaker are the defenses of
democracy (or of dictatorship) against special-interest pressure
groups and political logrolling. We must either limit drastically
the positive functions and activities of large governments or accept
both internal disintegration of democracy into syndicalism and
increasing nationalist barriers to world trade and peace.
Centralization, in fact, is, like "planning/' merely a weasel word
for collectivism; and it presents, with minor differences in degree,
the same obstacles to world order. Both, moreover, are the essen­
tial and significant manifestations of those excesses of nationalism
which, whether leading to aggressive conquest or to defensive
withdrawal and isolation, are the great threat to peace. Repudi­
ating the one, we must recognize the need for diminishing the other.
Thus, I seriously suggest that, given a crushing defeat for Germany,



the major obstacle to durable peace will be the United States and
its excessive governmental centralization.*
American economic policy will largely determine the significant
future of the world. We shall decide whether the best potentiali­
ties of the mid-nineteenth century, frustrated by resurgent economic
nationalism and Prussian militarism, will be realized in an again
prosperous, progressive world; or whether the world will quickly
resume a political and economic trend which the defeat of Germany
is intended to reverse. If we do commit the Western world to
increasing concentrations of power, within nations and among
regional blocks (as (?6#poKa%e7*s, German and American, so warmly
recommend!), history will show little return on our prodigious
investment in this war.
The central question is whether America chooses to be of the
world economically or to sustain its economic isolation. If we
had no tariff system; if we had no elaborate structure of Federal
economic control which depends for its existence and effectiveness
on being operated behind a high tariff; if our government had not
fostered labor and other monopolies, and producer pressure groups
generally, and had not become essentially an agency for their exer­
cise of power; then we might easily assume responsibly the burden
of world leadership which our national power imposes upon us.
Political and military isolation we cannot have in any case.
Willingly or otherwise, we shall with our allies police the world and
enforce indefinitely such peace as we and they enjoy. Horror of
still another war may make us resolute and diligent in this task.
But, with all our power, it will be an impossible task unless we
create the kind of world which calls only for minimal exercise of
power and permits its beneBcent exercise on behalf of freedom and
economic progress everywhere.
For the world, as for our own nation, the possibility of minimiz­
ing the task of government lies in maximizing reliance on competi­
tive controls and free-market arrangements. But such controls
cannot operate effectively on a world scale unless we utilize them
also at home, and unless we permit them to work fully upon us from
outside. If we did plunge resolutely in this direction, we might
find the task of policing the world not only feasible and easy but
England, in some respects, has moved further from a free economy than
we— with her extreme centralization, cartelization, and syndicalism; but Eng­
land is less important than our country, and her postwar institutional develop­
ment will largely follow, even be dictated by, our own. The same may be
said of the Dominions and our small-nation allies.



rewarding as well, in terms of both our own prosperity and the
steady growth of good will and cooperation elsewhere.
It should be clearly understood that such action would cost us
far less than nothing in the long view. It is only special interests
that gain by our import restrictions; the common national interest
is all on the other side. One main argument for governmental
decentralization at home is that diminution of Federal powers is
the only feasible protection against their abuse on behalf of special
producer interests and organized, vote-delivering producer minori­
ties. If we are to be of the world economically, however, the neces­
sary steps must be taken against the most bitter opposition of these
entrenched minorities. Their tariff privileges must be wiped out.
Moreover, an enormous structure of internal barriers to trade
(notably those of labor groups and of patent pools) must be swept
away to permit the wholesale transfer of resources which free trade
will necessitate, if we are to reap its benefits or even avoid great
unemployment during our adjustment to it. Many industries and
occupations must share with foreigners the domestic markets now
reserved to domestic sellers; many others must let down their bars,
to permit influx of labor and investment from these areas adversely
affected by freer importation.
However, there was never, and will never again be, such a chance
for reorganizing our economy as the war's end will offer. Cessa­
tion of war production will in any case require wholesale reallocation
of labor and investment. To reorganize as part of a world economy
will be little more difficult or painful than to reorganize for economic
isolation and recurrent war.
The greatest specific barrier to durable peace is the American
tariff and the lesser barriers elsewhere which bold leadership on our
part would suffice to reduce drastically or to eliminate* I need
hardly observe that piecemeal attack on our present duties or mere
continuance of the token policies of the Hull treaties will be utterly
inadequate. The tariff structure must be leveled as a whole. If
we start the logrolling procedure by dealing with duties one at a
time, we shall end up, as usual, with higher rates all around. The
only feasible concession to gradualism would be, say, an initial over­
all reduction of 75 per cent, with promise of continued reduction
afterwards. But even this concession is dangerous. To concede
gradualism here might well be to fail in the whole task at the only
promising or opportune time for action.
But tariffs, while the main problem, are by no means the only
problem of world trade. Durable peace implies extirpation of bar­



ter trade, of quota limitations, and of arbitrary exchange controls.
Moreover, absence of import restrictions is not free trade unless
foreign buyers can deal with competitive sellers, and foreign sellers
with competitive buyers. Free access to materials means free
access to free markets, not the privilege of dealing with monopolies
or cartels. It implies willingness among nations to invoke antimonopoly measures on behalf of foreigners as well as their own
citizens, t.e., a policy opposite to that of our Webb-Pomerene Act.
And the general principle here calls for prevention of labor monopoly
quite as much as enterprise monopoly. Removal of tariff barriers
will go far as an antimonopoly measure in most directions; but
there can be no free access to raw materials unless the nations
possessing them assure competitive prices and competitive labor
costs in their production.
All this may sound impractical and visionary. If so, it is no
more so than durable peace itself. The peace, I repeat, will be
won or lost on the issue of free trade. To be sure, free trade is not
enough; but it is the sme pna non; and it is the only thing that can­
not easily be attained. If we attain it, the rest will be relatively
easy. The trends are favorable in other directions. Monetary
expansion and fiscal cooperation we shall have in any case, perhaps
excessively.* Capital movements will doubtless be promoted by
many devices, also perhaps excessively. ^
* My own predilection is for essentially independent currencies (or currency
blocks), each stabilized in terms of an inclusive domestic price index, and all
traded freely
without intervention by central banks, treasuries, or stabili­
zation funds) on well-organized exchange markets (forward and spot). It is
hard, however, to point an easy or promising course toward such a monetary
world. Trying to attain it after the war might easily result in our attaining
something disastrously different. Moreover, expediency appears to dictate
going along with advocates of a return to gold, since they almost alone are pro­
foundly right about issues as to trade and trade barriers, and supporting a
dollar standard with a gold facade. If we were to stabilize the dollar, in terms
of an index weighted heavily (as it almost inevitably would be) with inter­
national goods, then fixed exchange rates among the important nations (if
satisfactory levels could shortly be determined and agreed upon) might work
out well enough to make the issues here relatively unimportant, at least for
many years. Any successful monetary arrangements, to be sure, will require
continuous consultation and cooperation among the leading nations, especially
as to fiscal or budgetary practices. Radical long-term reform in private
finance and financial institutions seems also imperative.
* Capital export, after the war, will present very hard problems. Much
good can be accomplished by governmental export of food to areas of great need.
I trust we shall act boldly and generously on this score, toward both our allies



The difEculty is, first, that leaders will be defeatist from the
start on tariffs and trade, as they now are generally in Washington
about the American tariff, and abroad becausc of that defeatism
here. This means that we shall have excessive emphasis upon
monetary expansion and governmental export of capital—upon
financial expedients which, while useful parts of a broad, balanced
program, may be merely dangerous by themselves without free
trade and likely to divert attention from that basic requisite. It
means also, in the case of leaders like Wallace and Milo Per­
kins, an effort to use the peace as a means for creating supranational
agricultural cartels and thus for creating more trade restraint, on
the plausible ground that it is politically difficult to create less.
Incidentally, the otherwise laudable current emphasis on the world's
nutrition would sound better if it did not come from leaders of an
already too powerful agricultural block, and if one did not detect
the strongest implications of increased public subsidy to agriculture
in all the fine talk. Mr. Wallace, finding good causes politically
unpromising, can be expected once more to expend his zeal and
power on bad ones. The state department, save for the aging Mr.
and our erstwhile enemies, and that little or no repayment will be asked or
expected. But we should distinguish sharply between humanitarian con­
tributions and foreign investments. I have no stomach for the purchase of
solidarity, hemispheric or other, by governmental loans to governments. Some
governmental lending may be useful, if used cautiously to break the ice and to
start private lending in directions where it may safely and profitably go without
the flag. This means that loans must be confined largely to countries with
stable, democratic governments (including China). On the other hand, we
should be chary indeed about giving financial support to politically backward
nations and their absolutist governments. Foreign lending, especially by
governmental agencies, threatens grave political difHculties in the future, if
made in areas where property generally is insecure and financial (fiscal) respon­
sibility not well established. Hard choices will arise in some cases; some purely
political lending may be advisable; but, in general, policy should aim at pro­
moting free movement of private capital, taking its own political and economic
risks, and should recognize that the areas of such movement cannot be extended
rapidly. Where private funds cannot safely go, government must recognize
grave political dangers. Our close friends and wholly belligerent allies are
clearly the best risks, politically and economically; and Germany's claims, I
suspect, will seem far superior to those of most neutrals and nominal bellig­
erents. Investment in Germany, moreover, will be investment in the recon­
struction of democracy at the crucial point. Much the same may be said of
China. But India and South America, among others, evidently want mainly
to be left alone, to develop democratically or otherwise; and, while opening
our markets to them, I think we should mainly leave them alone investmentwise.



Hull and his small faction, evidently may be trusted to avoid the
tariff issue and to spend its efforts on trivial or dangerous devices of
capital export. The National Resources Board and other planning
enthusiasts will ignore the tariff issue, partly because it is dull and
partly because high tariffs are indispensable for other "planning/'
centralizing schemes.
It is not an attractive picture, if one is looking for sound leader­
ship—for leadership which will challenge the economic isolationism
of Republicans, manufacturers, labor unions, and farmers—for
leaders who will risk their own power and status in espousing broad
principles of policy and in inviting the attack of special pleaders
generally. But I cannot be pessimistic, if only because the outlook
for American economic policy is, to say the least, less bad than it
would have been without the war. No one can honestly hold out
hope for a durable peace without free world trade; and, with proper
public discussion, our people might accept it as the price of peace
and as the only basis on which we can undertake, with hope for the
future, the inescapable responsibilities of world power. That wise
leadership will not appear is not certain. The chances depend in
part on the nature of academic discussion now.
Let me indicate some implications of this general position, 6rst
as regards Germany.
Germany must of course be disarmed and kept militarily impo­
tent for many years. Defeat, however, should, I think, fall short
of the debacle which would deprive her of all defense against her
neighbors or against internal anarchy. And I am not much inter­
ested in reparations issues. What the peace should impose upon
Germany is the kind of political and economic structure which will
enable her eventually to participate with full privileges in a peaceful
and prosperous world order. This means, first of all, drastic
governmental decentralization, without dismemberment, save for
Austria, of the pre-Munich Reich, but with dispersion of power
among the German states and perhaps with dismemberment of
Prussia (certainly with drastic land reform). Germany should
be compelled to reduce her tariffs by 75 per cent and to continue
reduction further, as a condition of acquiring equal trade privileges
in world markets. She should be compelled, not only to abandon
barter trade, quota restrictions, and arbitrary exchange controls,
but also to dismantle her cartels and industrial combines, giving
foreigners access to internally free markets for their exports and
imports. She should also be forced into a pattern of responsible,



representative government. W hen she has met these requirements
and reestablished democratic institutions securely, she should be
admitted to full participation in the League and to equal privileges
in the markets of the world.
Russia presents, of course, a special problem; but I incline toward
the sanguine view that she is not really expansionist and that she
would not prove an obstacle to any scheme of order in the Western
world which promised her real security. Indeed, given a good
peace, I should expect Russia to adapt herself gradually to Western
democracy and to abandon the extremes of collectivism. For the
significant future, however, she would remain a problem as a partici­
pant in an otherwise free-trade world, since, to repeat, there can
be no free trade with a collectivist state. Her allies, however, might
reasonably ask her to eschew barter trade or, at least, to eschew
practices of discriminating monopoly in her dealings with different
nations; and Russia has little to lose, even on a short-sighted view,
by making such concessions.
Germany can hardly expect us to move apace with her in military
disarmament. In economic disarmament, however, she may rea­
sonably expect us to impose upon ourselves all that we ask of her,
both by way of tariff policy and by way of extirpation of monopoly
and monopolistic restraints in all domestic markets which can, even
at the cost of drastic measures, be rendered effectively competitive
and free.
Finally, now, a word about federation among the democracies.
Here is a movement which has recruited the best of internationalist
sentiment in many countries—a movement which has done much
to lay the basis in public attitudes for a good postwar order. As to
interim arrangements, there can be no issue. The Allied nations,
joined in war, must remain virtually federated for many years there­
after, to police the peace and to get some kind of postwar world
working and producing again as a going concern.
While federation with England, the Dominions, the Low Coun­
tries, Norway, and Sweden has for me a deep sentimental appeal,
reflection leaves me little impressed with its merits as a means to
peace, and much impressed with its dangers. There must be a close
alliance among the profoundly democratic nations and with others
who share their interest in the preservation of a territorial
But federation implies more positive, supranational government
than alliance; it leaves wider scope for common, restrictive measures
of economic policy; it sharpens unduly a distinction among our



actual allies, as between those who are of us and those who are
merely with us as a matter of accident or convenience; it is inflexible
and exclusive; and it is fraught with dangers by way of trade
restriction and trade discrimination.
Federation, to me, implies an excessive emphasis upon political
forms, at the expense of the vital issues as to content of policy. It
may be useful (1) for military collaboration, (2) for monetary and
fiscal collaboration, (3) for moderation of immigration restriction,
and (4) for customs union or tariff modification. But military
collaboration can be attained less formally and perhaps just as
effectively without actual federation, and without jeopardizing the
affiliation of friendly powers not eligible for federation. Monetary
and fiscal cooperation seems also attainable in adequate, even
excessive measure without formal political integration. As to
immigration, federation would involve only nominal change, since
our own restrictions are not now important in the case of our close
friends; and, without altering circumstances substantially, it would
further aggravate the feeling of discrimination in an area of policy
where real mitigation of discrimination is neither politically feasible
nor even wise. Thus, in this area, federation would help our close
friends very little and annoy other peoples considerably.
Worst of all is the prospect as to trade policy. One need only
look at American history to see at what price, in terms of restraint
upon external, world trade, one purchases freer trade within a federal
system. Our Federal government, conceived as an agency for
preserving free trade among the states (which never could have
restrained trade seriously in any case), became under the Republi­
cans essentially an agency for preventing trade with the rest of the
world and, more recently, a powerful agency for restraining, and
facilitating restraint of, our internal trade. What can assure us
that larger federalisms will not similarly be abused by the pressures
of producer minorities? Let us not fail to recognize, in this connec­
tion, that customs union between two nations having identical
duties may well make those duties vastly more restrictive of world
trade than they were when levied by the two nations separately.
The desirable policy is not removal of tariffs against our close friends
but drastic general reduction of duties by all Allied nations, and
without discrimination, save possibly as one means of inducing
parallel action by other nations. The objective is not free trade
among regional or linguistic blocks but the freest world trade.



Federation might well lead us toward the former objective at a
disastrous price in terms of the latter.
Thus, in contrast with alliances, federation is likely to divide the
world dangerously into blocks—trade blocks, migration blocks,
monetary blocks—and to promote a kind of regionalism or conti­
nent alism which bears unduly close resemblance to Nazi blueprints
for the new order. This consideration invites further emphasis
on the issue of collectivism or statism versus individualism. The
statists and collectivists must stress federation, as a means to the
extension of imposed government on a still more intensive and exten­
sive scale. Individualists, in the tradition of nineteenth-century
liberalism, may well look askance at schemes for setting up poten­
tially greater Leviathans, and should themselves urge reliance upon
more flexible, less formal organization and upon return to the League
of Nations, as essentially a forum for discussion of issues and aiding
of grievances, and as a flexible agency for promoting open coopera­
tive action in world affairs.
The good future of the world, if I may use a favorite thesis of
Prof. Viner, is the good future of small nations. Its menace is
great federalisms like Germany and the United States, in which
government from above grows steadily at the expense of government
by states or provinces and by smaller units wherein the processes of
democracy have their origin historically and their only strong
foundations. It is the great nations which really restrain trade;
it is the great nations which give rise to global war. In them
democracy becomes degraded into rule by and for organized minori­
ties; in them we find political romanticism rising to supplant the
older liberalism which nurtured democratic progress and remains
among the important ideologies its only true friend. We must aim,
I repeat, at a total scheme of world order in which political organi­
zation becomes looser and more flexible continuously, and govern­
mental activities narrower and more negative, as the scale of
organization becomes larger.* On this view the function of a world
Nothing in this chapter is intended to argue for weakness in government,
national or international. The phrase /oose
may, for
many purposes, best be interpreted to mean, not weak government, but strong
government with a narrowly limited sphere of action. In world affairs we
should aim at an inclusive and ultimately universal federation, to which
peoples as well as governments would recognize responsibility and allegiance.
If such world organization is to be established effectively and to persist, it must
limit, but not grossly impair, the sovereignty and independence of national
states. Its imposed government or interference with internal affairs must be



state is not so much that of governing the world as that of preventing
great nations from governing it. The ideal world state would thus
be mainly a repository of powers denied to nations (and to monopo­
lies), held not for exercise from above but merely to prevent their
exercise and to assure that systematic dispersion of power which
is the only guaranty of liberty at home and the only hope of enduring
peace for the world.
closely confined to measures necessary to prevent war and (largely as a warprevention measure) to maintain substantial freedom of world trade. While it
should promote and facilitate international cooperation in many phases of
government, the economic-policy framework of all its activities should he
determined principally in the three areas of commcrcial, monetary, and mo­
nopoly policy. Seeking united and cooperative action in these three areas and
in the policing of the peace, it should otherwise do little "governing" (save in
backward colonial areas entrusted to its administration). History may not
encourage advocates of large-scale government with limited delegated powers
and a narrow sphere of action, but the conception must guide and inform any
intelligent planning for an orderly, democratic world.


t S M j & a / VM/(M7H<2^0M






A very close connection exists between the evolution of economic
policies and the development of economic statistics. Mercantilist
protectionism of the seventeenth and eighteenth centuries required
an early recording of national import and export Bgures. The
emergence of systematic central banking and monetary policies in
the nineteenth century gave impetus to the registration and publi­
cation of Bgures pertaining to gold movements and the variation of
interest and exchange rates. Wage statistics originated as a neces­
sary implement of modern social legislation. Every time a new era
of economic activity became the object of public concern, it also
came under the scrutiny of ofBcial statisticians.
With the advent of the New Deal in the United States, the everwidening stream of Bgures swelled until it reached the proportions
of a veritable Rood. Hardly any aspect of the economic life of this
country remained unrecorded or uncharted. We registered the
monthly change in the price of corn as well as the weekly shipments
of oil, the hourly wages of "push press operators" as well as the
annual output of hydrochloric acid. The insatiable curiosity of
ofBcial statisticians has not yet found its limit. On the contrary,
with the introduction of wartime economic controls, it has received
its greatest impetus.

If volume, variety, and accuracy of Bgures were all that were
required of factual information, the responsible directors of our
postwar economy should be well satisBed with the present state of
ofBcial statistics. If, however, integration is added as a necessary
and even primary attribute of good statistics, we must be seriously
concerned over the present state of statistical information. This
lack of integration and coherence is not accidental. It clearly




reflects the fundamental lack of coherence in traditional economic
During the free-trade era of the nineteenth century, positive
measures of governmental intervention in economic processes were
isolated and far apart. Like waves produced by pebbles thrown
from a great distance onto a smooth water surface, the effects of
the economic measures died out before they had a chance to inter­
fere with one another; thus, they could have been studied separately
and in isolation. But the stones of modern economic policies are
thrown in great number, and they fall very close to one another.
Interference is the rule rather than the exception; moreover, some
of the stones produce not small ripples, but rather tidal waves which
reach, in ever-increasing circles, the very limits of the whole eco­
nomic system. Separate effects cease to lead an isolated existence
and must be considered in a totality of mutual interdependence.
Theoretical economists observed long ago the limitations of
what is technically called
aTmZg/szs, and they are now paying
ever-increasing attention to problems of
reasons stated above, however, the statistical information available
to them is totally inadequate for the purposes of this type of analy­
sis. The exigencies of the wartime economy are now rapidly
changing the whole orientation of our economic policies. Although
the old-style approach still dominates the organizational scheme
and the operational procedure of the economic war agencies, the
ever-increasing tendency toward uniformity and coordination of all
the different phases of the economic war management asserts itself
with relentless logic; and the inadequacy of available facts and
figures—until now only the subject of futile academic complaints—
becomes a matter of urgent administrative concern.
There is good reason to believe that at the end of the war we
shall find ourselves not only in possession of a theoretical program
of economic policies and a well-coordinated system of govern­
mental machinery—to put this program to work—but also equipped
with a new and adequate background of integrated quantitative

The economic problem of postwar adjustments is, to a large
extent, a question of an orderly reallocation of national productive
resources—reallocation which should lead to a continuous full
employment of the available labor force. The transition will have



to be realized in such a way as to preserve balanced relations between
all the different branches of our manufacture and agriculture, of
transportation and distribution. At the same time, the Sow of
labor and other services from households to industry must be evenly
matched by a corresponding absorption of finished consumers' goods
by households and of additional investment goods by industries.
Not one of these many balances, only a few of which are mentioned
above, can be considered in isolation. On the contrary, each has to
be treated as part of one large multifarious equilibrium system.
Theoretical economists have tried to report these intricate rela­
tionships in terms of a few strategic variables. Some statisticians
have taken it upon themselves to depict these generalized variables
in terms of indirectly computed aggregative figures. Both these
theories and these figures can be conveniently used as arguments in
justification of some particular types of policies, but neither can
supply a real foundation for a detailed mapping of concrete recom­
mendations or specific actions. The theories require considerably
greater elaboration, the statistics more substance and better
organization. It is the latter purpose—that of organization of
statistical data—which the following scheme of input-output
analysis has been designed to serve.

The output, as well as the use, of each of the different commodi­
ties produced and of services rendered during any given period of
time, say a year, within the borders of our national economy, can
be statistically allocated to some particular entity, such as an indi­
vidual enterprise, household, public body, or a foreign country.
Once the structure of the national economy is described in terms of
some particular classification of such entities, i.e., in terms of
separate industries, households, Federal and local governments, etc.,
the actual process of production and consumption can be reported
in a two-way table showing the origin and the immediate destina­
tion of every type of output.
If the national war economy should consist of only (1) a war
supplies industry predominately devoted to arms production, (2)
a civilian supplies industry engaged in the manufacture of
consumers' goods, (3) households, supplying labor services and
consuming a certain part of finished commodities, and (4) govern­
ment engaged entirely in national defense, Table 1 would ade­
quately represent the basic input-output relationships.



(In millions of dollars)
Govern­ House­
supplies supplies
industry industry
War supplies industry
Civilian supplies industry. . . .


Total outlay










The assumed figures in the top row show that the total output
of the war supplies industry is valued during a given year at $63 mil­
lion, of which $36 million are purchased by the government, $18 mil­
lion are used in civilian production, and $9 million are destined for
household consumption. ^ The second row indicates that, of the
$45 million of civilian-type goods, $9 million are absorbed in war
production and $36 million are purchased by households. The third
output row remains entirely vacant, since government is assumed in
this example not to be engaged in any productive activities.
Households supply labor and other services to the two industries, as
well as to the government; the total value of the labor and other
services, i.e., the national income, equals $90 million. Of these
services $54 million are used in war industries, $27 million in civilian
goods manufacture, and $9 million are employed directly by the
Examining the Rgures entered in the first
we see that the
war supplies industry absorbs $9 million of civilian-type materials
and pays out $54 million for labor and other services supplied by
households. The wage bill of the civilian supplies industry amounts
to $27 million, and this industry uses up $18 million of materials
produced by the war industry. The total governmental expendi­
ture equals $45 million; $36 million go to the purchase of war goods
and $9 million for payment of governmental employees. The last
column shows the distribution of consumers' expenditures; $9 mil­
lion are devoted to the purchase of commodities produced by the
war industries, and $36 million are paid for civilian supplies.
Our assumption is that the war supplies industry produces also some
commodities used in household consumption and in civilian goods production,
while the civilian goods industry supplies some materials for war production.



The total outlays (costs including income paid out) of the war
supplies industry equal the aggregate value of its outuut; the same
is true of the civilian supplies industry. The household outlays,
^.e., the total purchases of consumers' goods, however, amount to
only $45 million, while the national income—the aggregate value of
services supplied by households to industries and government—is
$90 million. The difference of $45 million is transferred to govern­
ment, presumably in the form of taxes and loans, which has no
other source of revenue.
Even more important than these
figures are the under­
lying relationships between the actual
quantities of com­
modities and services produced and used by the two industries, by
households, and by government. The difference between the two
types of figures (physical quantities and values) roughly corre­
sponds to the division between the problems faced by the OfEce of
Price Administration and those of the War Production Board.
Instead of taking some new example, let us utilize the data of
Table 1 to indicate the practical use that can be derived from the
knowledge of physical relationships. Assume that the previously
discussed figures represent, now, not dollar values but physical
quantities—tons of iron, yards of cloth, and millions of labor hours.
In producing the total of 63 million tons of products, the war
supplies industry absorbs 9 million yards of civilian-type supplies
and 54 million man-hours; while the civilian supplies industry takes
27 million man-hours and 18 million tons of goods produced by the
war industry to turn out 45 million yards of cloth. Households
supply the total of 90 million hours, and they consume 36 million
yards of cloth and 9 million tons of commodities produced by the
war industry. Although the total output figures can be inter­
preted as describing the total physical output of each particular
industry, the total outlay figures placed at the bottom of each
column must now, however, be entirely ignored. Tons of iron,
yards of cloth, and man-hours can, obviously, not be added together.
The proportion of the quantity of each different material or of
the labor absorbed in any industry to the size of its total out­
put is not an accidental and easily variable relationship; the bitter
experience of recent years has shown us that. The distribution of
household consumption among the different types of commodities,
as well as the relationship between the national standard of living



and the total supply of labor and other services, is much more
flexible, but, nonetheless, highly significant.

Accurate knowledge of these particular relationships is indis­
pensable for any intelligent mapping of the transition from a war­
time to a peacetime economy. Such transition must satisfy a
number of special conditions. In terms of our simplified example,
the change to a new peacetime system must (a) eliminate the pro­
duction of war materials for the government (some products of this
industry are assumed to be used also in household consumption),
(5) maintain full employment of all available labor forces, and (c)
increase the national standard of living, while providing at the
same time a definite, although changed, proportion between the
quantities of the two different types of commodities available for
household consumption* What is particularly important, all these
changes must be accomplished within the rather rigid limits set by
the technical characteristics of each of the two separate branches of
production; each industry in the peacetime economy has to be pro­
vided with the proper combination of labor, material, and all other
factors of production.
If we assume the prewar ratio between factors used per unit of
output in each separate industry to be unchanged, and anticipate
a new proportion (17:73 instead of 1:4) between the household
demand for war industry products and civilian goods, we can con­
struct a new input-output table of the postwar economy with full
employment, which will satisfy all the foregoing conditions. Omit­
ting the description of the necessary theoretical computations, we
give in Table 2 the final results.

In a Peacetime Economy
(In millions of dollars)
Govern­ House­
supplies supplies
industry industry ment
War supplies industry...........
Civilian supplies industry. . . .
Total outlay......................








Comparison of the new postwar input-output table with that
for the war economy shows that the total employment is the same
in both. In the postwar economy, government purchases are
entirely eliminated; the total national income is spent on consumers'
goods used by households. At the same time, the amount of factors
used per unit of output in each of the two separate industries is the
same as before. The relation between the consumer demand for
civilian goods and for products of the war industry is changed, as
expected, from the 1:4 ratio to that of 17:73. The standard of
living is considerably increased over that of the wartime period.

The oversimplified example discussed above has, obviously, no
material relationship whatsoever to the actual economic world.
It indicates, however, the %ype of analysis upon which any intelligent
and integrated economic policy must necessarily rely.
Instead of two industries shown above, our economic system
consists of many scores of various branches of production, con­
sumption, and distribution; instead of a homogeneous labor force as
indicated above, we have to think and act in terms of many different
professions, skills, and occupations. The transition from one type
of output to another involves not only provision of necessary labor
and materials, but also the construction of additional plant, and the
installation, transfer, or conversion of industrial equipment.
Comparison of the real economic world with the simplified
figures of our tables gives a fair measure of the task that the
governmental statistical services are now facing. They must be
prepared to describe all the relevant, quantitative characteristics of
our national economy, and to present them in a form as integrated
as are the figures in our fictitious example. Large volumes of
heterogeneous statistical figures, however accurate they may be,
obviously cannot 611 the bill; integration and coordination—with
preservation of all details—are of foremost importance. Recent
developments, notably in the field of national income statistics,
seem to indicate considerable progress in the right direction.*
Only when the described task is fairly well accomplished will the
national economic policies actually acquire the necessary scientific
foundation of factual information.
A forthcoming publication of the Postwar Division of the Bureau of Labor
Statistics will present the first large-scale attempt to describe the structure of
the national economy in terms of a single input-output table.







We are all interested in keeping the public debt at a minimum
figure. Yet, despite ail our efforts, the Federal debt may well rise
by $60 to $70 billion annually in the course of the war. When the
war is over, we shall be fortunate indeed if the Federal public debt
is less than $200 billion. It is possible that the accumulation of
debt, which has been growing for 12 years, will cease once the war
ends. If, however, our economy is stagnating and private enter­
prise fails to keep our resources fully employed, debt will continue
to rise. With the likelihood of the reduction of military expendi­
tures from $100 billion annually in wartime to $5 to $10 billion in
the postwar period, there will be need for great efforts by the
government to prevent a debacle.
The object of this essay is to suggest the broad considerations
that will determine debt potential. The conclusion reached is that
those who now cry "w olf" at the prospect of a public debt of
$200 billion are alarmists reminiscent of those who promised disaster
in the thirties when debt was accumulating at the rate of $5 billion
annually. We must not, therefore, be deterred from public invest­
ment by these alarmists, if the postwar situation calls for public
investment. Above all, we should assess the rising public debt
in terms of the economy which must support it. There is no danger
in a rising public debt which provides the income to finance it, or
which grows in a developing economy.
How far we can go in increasing public debt will depend upon
(1) the attitude of the country toward debt repayment; (2) the
nature of the assets acquired against the new debt; (3) the other
burdens imposed on the economy by the government; (4) especially
important, the level of income which largely determines tax capacity
(the income will be determined partly by the policy of public invest­
ment) ; and (5) the tax capacity of the country which, among other
things, will be a function of income and the structure of the tax
system. These determinants will now be examined in turn. In




the present discussion it is assumed that the dollar retains its cur­
rent, i.e., 1942, purchasing power. A crucial issue, the rate of
interest, is skimmed over here. Its importance will be made
clear in the presentation of estimates of costs with and without
interest payments.

Obviously the country can countenance a much larger public
debt if repayment is not required. Until recent years, a funda­
mental principle of public finance had been that large public debts,
which as a rule were incurred in wartimes, should be paid off in the
ensuing periods of peace. In practice, however, repayment has
been the exception rather than the rule. Frequently the economy
grew up to its debt; in other cases, the debt was repudiated openly
or there was disguised repudiation through capital levies, currency
depreciation, or a compulsory scaling down of the interest charge.
The argument against debt repayment today rests largely on
economic grounds; but the charge of breach of faith is also refuted.
In answer to the contention that a permanent debt is a breach of
faith, it is suggested that the obligation of the government is
merely to provide the cash value of the bond on the date of maturity:
the cash required may be obtained through sales of new bonds.
Repayment of debt, moreover, may have deflationary effects; and
the more impressed one is by the theory that our economy tends to
stagnate, the more objectionable is the repayment of debt. Another
point raised against debt repayment—and one obviously not to be
used by stagnationists—is that the country will continue to grow.
A steady rise of income of $1 billion per year (less than 1 per cent of
current income) can easily finance an increase of debt amounting to
$5 billion yearly. In other words, an increase of income of $1 bil­
lion at the present income level can provide Federal taxation of
$200 million or more, which is in excess of the additional annual
debt charge of $125 million, the cost of a debt of $5 billion at an
interest rate of 2^% per cent. (The unfavorable assumption is
made here that the public investment, which accounts for the rise
of debt, does not yield income directly; and no allowance is made
for a further favorable effect of the rise of public investment on
Here is the gist of the matter. Accumulation of debt will not
bring ultimate collapse if the economy continues to grow. Tax
capacity increases with the rise of income; and so long as the rise of



debt charges is kept well within the limits set by a rising trend of
income and capacity to pay taxes, no fears need be felt concerning
a rising public debt. But a continued rise of the cost of the debt
in the face of stable or, even worse, falling incomes will ultimately
bring disaster.

In a discussion of the burden of the public debt, one should
deduct from the debt the capital value of assets yielding net income.*
But governments necessarily invest also in schools, asylums, and
other projects which do not yield money income directly. Expendi­
tures are, of course, restricted by limitations of the national income
and by the income of the various governments. The larger the
national income or (and) public incomes, the more generous expendi­
tures on nonincome-yielding assets may be.
These expenditures come within the province of the capital
budget. Interest on the debt incurred, cost of maintenance, and
amortization over the life of the asset are the annual charges to be
met in connection with any particular project. An important
offset may be savings on relief and favorable effects upon income
and tax yields. Effects on tax yields, however, are not easily
measured; and the long-run effects upon income of better education
and an improvement in health are not easily measured either.
We may be reasonably sure that the higher the level of unemploy­
ment, the more important will be the rise of income and tax
receipts associated with a rise of public investment.
Public investment in self-liquidating projects arouses even
more debate than that in nonincome-yielding assets. By a selfliquidating enterprise, we mean one that pays for itself on a proper
accounting system over the life of the relevant assets; not as a high
administrator in the early New Deal days suggested, one that
improves the health and morale of the American people. Adherents
of our system of free enterprise oppose government investment in
It has been estimated that of $50.7 billion spent by the government in the
years 1931-1938, $14.5 billion had been invested in assets and $2.9 billion of the
assets had been amortized. Furthermore, against a rise of debt of $24.8 billion
of all governments in the years 1931-1938, are to be put net construction ($16.5
billion), proprietary interest of the Federal government ($3.3 billion) and a rise
in the general fund balance ($6.3 billion).
Hearings, pp. 4090-4092,
4149. <y. my EcotMWMcs of
(New York, 1941), pp. 38-40.
These figures are presented for illustrative purposes. It is impossible for the
outsider to attest their accuracy.



self-liquidating projects on the grounds that they contribute to the
building up of a vast bureaucracy, and that, in fact, they are often
not self-liquidating. These opponents will generally concede that
there are certainly special reasons for public investment in restricted
areas. Where capital costs are large, the government's cheap
credit may make possible profitable investment instead of no
investment. Housing is the best example here. Again, when
risks are excessive frequently the government alone is in a position
to undertake the investment. Investment in armaments is a case
in point.
In this connection, a word should be said on a related issue,
the relation of debt and prosperity. Supporters of public
investment have frequently commented on the rise of total debt
in periods of prosperity and its liquidation in periods of depressions.
They have drawn the conclusion from this observation that public
investment and deficit financing should be encouraged in periods of
depression. In taking this position, however, they leave out of
account the fact that, in the process of incurring debt, private
enterprise presumably acquires income-yielding assets. This is not,
of course, always the case. But, in general, private enterprise
would be more likely to acquire income-yielding assets than would
public enterprise. Another inference that might be drawn from
this argument for a rise of debts in periods of prosperity, pia., the
desirability of a large debt structure, would not receive general
acceptance. A rise of debt may contribute to an increase of income
and an improvement of business conditions; but the larger the
Rxed charges, the more harmful would prove the failure to realize

At an income level of $70 billion, the governments (Federal,
state, and local) of the United States were raising $14 billion through

Appendix A of TAg
^ W o r & s
1933-1938 (Washington, D. C., 1940), pp. 112-113. Here it is
shown that total public and private debt rises in prosperity and declines in
depression. "For the public debt as a whole, however, the transfer problem is
the same as for private industry. The pressure of the debt on the tax base
depends on whether there is a continued Row of borrowing, public or private,
and whether, accordingly, incomes are maintained. In the case of both
public and private debt the long-run burden is not a question of absolute
magnitude but of the size of the Row of income from which debt service is
drawn, and as the economic system is organized that income depends on &
steady volume of borrowing and investment."



taxation, te., 20 per cent of national income. Total expenditures
were larger than tax receipts by several billion dollars. In the
postwar world, the cost of government will probably continue to
rise as it has in the prewar world. Undoubtedly, our war plant,
even after the present emergency, will involve us in increased mili­
tary expenditures of at least $5 billion. The increased cost to the
taxpayer of the probable security program may well come to $7 billion
annually, or more. In addition, we should not leave out of account
the demands of veterans (e.p., of the Second World War), farmers,
Townsendites, and other pressure groups. A possible Federal
budget for the postwar period may be the following:
Predefense budget
Increased expenditures for social security, public works, etc. 10
Increased military expenditures
Increased cost of public debt...

Postwar expenditures of all governments may rise to $45 billion,
which at an income of $140 billion would equal a tax burden of 32
per cent of the national income, which may not be excessive. In­
sofar as the debt rises more than $200 billion, additional expendi­
tures for financing the public debt will be even higher. (We discuss
that possibility below.) Income is ultimately likely to exceed
$140 billion. In summary, the vulnerability of the economy to a
large public debt will depend in no small part upon the other
charges on the taxpayer; and the total of fixed charges on industry,
inclusive of taxes, is not an irrelevant consideration. Falling prices,
moreover, would accentuate the dangers.

An increase in population, a continuance of technological and
organizational changes, and the avoidance of long periods of large
amounts of unemployment will assure the country a steady rise of
national income, which is a sine gna 7MWfor the financing of a very
large and growing debt.
The total charges on the economy must not be allowed to grow
to a point where the national income begins to suRer seriously.
Taxation, unfortunately, is a burden even if levied for financing
transfer payments (e.p., for interest on the public debt): a country
with a public debt of $100 billion is not so well off as a debtless
country. It is, therefore, imperative to provide a tax system which



will cause the minimum amount of harm. Other things being equal,
the burden of taxes will be greater the larger the proportion of taxes
put upon costs rather than upon surpluses. Again, excessive con­
sumption taxes tend to depress both consumption and investment
and, therefore, have adverse effects on income. In conditions of full
employment, however, taxation on consumption will not have
adverse effects on income.
Let us discuss more fully the burden of transfer payments.
Assume that the government raises $10 billion annually through
the sale of bonds, because it cannot raise this money through taxa­
tion without adverse effects on the economy. The purchasers of
bonds are more disposed to purchase $10 billion (say) of bonds than
to pay an equal sum now in taxation. And the government can
much more easily raise $250 million by taxes annually for debt
charges—even this amount may be borrowed—than $10 billion by
taxes in one year. Although the lender prefers to lend rather than to
be taxed, actually he may be worse off under a lending than under
a taxing program. Much depends upon who pays the additional
taxes. One possibility is that the additional taxes are put entirely
upon the rentiers: they pay the additional $250 million of taxes and
receive the additional $250 million of interest. In that case, they
have really lost their $10 billion; they might as well have paid it
out in taxes.
It is probable, however, that the banks will purchase a large
part of the new securities; and the taxes will be distributed among
the capitalist classes rather widely. Then, on the assumption that
the additional taxes will be imposed on capitalist shares, transfers
from nonbanking capitalist groups to banks will be required. Sales
to banks raise additional problems, which need be discussed only
briefly here. The monetary expansion, which is likely to accom­
pany sales to banks, induces higher prices and incomes. It is
necessary, therefore, to weigh against the increase of debt charges
the ensuing rise of incomes and tax capacity. We are, however,
interested here primarily in noninSationary sales. (These may
include sales to banks when the level of employment is not
We have seen, then, that the lender may be no better off under
a loan program than if he had been taxed an equal amount. He will
be better off, however, in lending rather than paying out an equal
amount in taxes under some conditions. It is only necessary that
a substantial part of the cost of financing the debt be put upon non­



capitalist income;* or that the recourse to tending accounts for a
significant rise in income. Labor and agriculture will, however,
agitate against a tax system which requires that they finance a
significant part of the public debt.
What is especially important to observe here is that the use of
the tax power to finance interest payments on debt is a real burden
to the taxpayer. He feels the burden whether he is a laborer with­
out bonds or a capitalist holding Federal issues. In the latter case,
the net yield of the bonds is reduced insofar as he is asked to pay for
the financing. For the nation as a whole, however, a billion dollars
raised to pay interest on bonds is not nearly so burdensome as a
billion dollars raised to manufacture munitions soon to be destroyed,
or to build public works of small value, or to pay tribute abroad.
In these last instances, the burden is not limited to the adverse
effects of greater taxation on the economy: in addition, economic
resources are destroyed. (Full employment is assumed here.)
Favorable effects of public investment on the national income in
periods of low employment are another matter. Public investment
gains adherents, moreover, the more useful the objects of expenditure.
Aside from the financial considerations, the announcement
effects of heavy taxes requires comment. The potential victim
thinks that he is better off under a lending than under a tax pro­
gram. Against the disturbances involved in the payment of taxes
under a severe tax program is to be put, however, the depressive
effects of the interest charge in later years. Adverse effects on moti­
vation are reduced under a lending program; but under a tax
program depressive effects in the future are substituted.

The proportion of the economic resources that can be taken by
the government depends upon the country's wealth, income, and
distribution of income; the nature of the society; the quality of the
tax system; the expenditure pattern of the government; and the
attitude of the taxpayers toward the spending program.^
It may well be that there has been excessive concern over tax
capacity. Clearly, much depends upon the source from which the
* Rentiers may, of course, be financed by other capitalist groups, e.p.,
entrepreneurs; and owners of nongovernmental assets may finance the cost of
the public debt.
* On some estimates of the relation of income and taxes, see Secretary of
the Treasury,
Repwt on
qf FtTMZTtcsa, 1940, p. 5, and my EcorMWMcs
of 4tn6T-tca War (New York, 1942), passim.



revenue is obtained, the use to which the money is put, and the
time over which the change in tax structure is consummated.
Assume that the tax collections of the Federal government are to
rise from $5 to $30 billion from 1940 to 1980. (Prices and incomes
are assumed to remain unchanged and we leave the war out of
account.)* Then insofar as the taxes are collected from surplus
incomes and expended in such a manner as to increase the marginal
propensity to consume, the effects may even be favorable. When
the money collected is used for transfer purposes (e.p., public debt
financing or insurance), the adverse effects will not be so great as
when the money is expended for exhaustive effects.^ The time may
come when taxes on surpluses will be inexpedient, for the attainment
of an adequate standard of living may require large additional
savings. At this point, taxes on surpluses will be justified only to
the extent that cash is diverted from consumption or hoards and
will be harmful insofar as real savings are reduced. At such time,
moreover, the allocation of public expenditures for investment
rather than consumption purposes may also be appropriate.

In a recent budget speech, President Roosevelt commented on a
rise of national income of $30 billion above the depression level,
and a rise in the annual cost of debt servicing of only $400 million.
So long as a high level of money income could be maintained, he
was not concerned over the interest charge. There are, of course,
two problems. The first is the relationship between national income
and the additional costs of the public debt; the second is the relation­
ship between national income and the income of the government.
Despite the rise of national income accompanying a spending
program, difficulties may arise in financing the public debt. The
government must intercept a sufficiently large part of the rising
national income to meet the new debt charges.
Let us assume that the wealth of the country at the present
moment is $350 billion. This wealth is not wiped out as debt rises,
* One might assume that output will be much larger in the future and, there­
fore, the problem of finance should not be a cause for concern. (Cy.
Ways and Means Committee, House of Representatives,
1939, p. 1841). Against any rise of output, one should put the increasing
demands that are likely to be made on governments. C/. W. B. Reddaway,
of a Dech'nmp Population (New York, 1939), pp. 195, 207.
* We use the term
as it is used by Prof. A. C. Pigou
PitbMc FiTMZTMM, London, 1929, pp. 19-20).



though a financial or transfer problem is raised. The net effect of
the rise of the public debt will depend upon the value of the assets
created in the process of public investment and net effects on
private investment and national income. The larger the amount
of unemployment, the more likely will be a rise in real wealth, and
not merely a rise in the dollar value of resources.
Assume, however, that the total wealth neither rises nor declines.
Insofar as interest on the public debt becomes a charge on the
income from the $350 billion of wealth, less is left for other purposes.
This income, however, accrues to someone, possibly to the very
people who own the public securities. But, possibly as an unfortu­
nate legacy of the war, the interest on the debt will be financed out
of taxes assessed upon wages and salaries, income which has no
counterpart in capital value.
Let us assume that the debt rises to an amount in excess of the
$350 billion of o(Aer forms of wealth. The transfer problem then
becomes more serious. It is still soluble, however. The required
payments to bondholders may be assessed upon them; or in part
on them and other holders of wealth; or in part on each of these
groups and on labor incomes.
In one sense, there is no limit to the growth of public debt, for,
as debt charges rise, the taxation of holders of this debt may rise at
an equal rate. Assume that the interest charge is $100 billion and
the debt $4,000 billion. National income,
6/ interest on
is assumed to be $100 billion, $70 billion being dis­
tributed in wages, salaries, and farm incomes, and $30 billion in
payments to capitalist shares. On these assumptions, the annual
cost of the public debt would fall largely on the owners of public
securities. Noncapitalist incomes might be asked to pay $20 billion
and capitalist incomes $80 billion, of which total $60 billion would
be contributed by the holders of public debt. Clearly, transfers of
$20 billion from labor and agricultural incomes to rentiers would be
accepted by labor and agriculture only under strong protest. Net
incomes of the investors in public debt (after payment of additional
taxes associated with public debt but exclusive of other tax charges)
would be but $40 billion or 1 per cent on the debt outstanding.
Capitalist interests would react violently if out of an income of $130
billion they were required to transfer $80 billion to the government
for the financing of the debt, in addition to their share of other
public charges of approximately $35 to $40 billion. Effects on
motivation and accumulation would then be serious.



If, in a period of 50 years, we could attain a national incomc of
$200 billion plus the interest on government securities, then a public
debt of $4,000 billion might well be within the realm of possibility.
The rise of productivity need not be so large as we have become
accustomed to in the last 50 years in order to attain this income.*
It is imperative, however, that the country be saved the losses
resulting from long periods of unemployment. Additional relief
might be obtained through a slowly rising price level, a reduction
of the rate of interest to 2 per cent, and the expected increase of
population. 2 The $80 billion required to finance the public debt
would then be a charge on $140 billion of noncapitalist income and
$140 billion ($80 billion interest on public debt plus $60 billion
other) of capitalist incomes.

Two large issues confront the investigator. Can the economy
carry the burden of a large debt without collapse? Is the process
of accumulation likely to induce a breakdown of the capitalist
system? Some attention has been paid above to the first issue, and
further comments will be made later. We now turn to the second
First, it is obvious that if the creation of additional debt of $4,000
billion involves the manufacture of $4,000 billion of additional bank
deposits (^.e., sales of securities to the banks), a great inflation will
threaten. But possibly, in the long run, the public will become
accustomed to holding a much larger proportion of their wealth in
cash; and any ensuing drop in the rate of interest, which might be
associated in part with the creation of money, would stimulate the
movement into cash.
In periods of depression and severe unemployment, the rise of
debt will be accompanied by a rise of deposits of the same order of
magnitude. But under these conditions, the expansion of money is
offset by a rise of output; and the increase of prices should not be
large. As employment rises, however, the stability of prices is
threatened. In war periods, the increase of debt and deposits is
likely to bring a serious advance of prices, for employment is at a
6/. the essay in this volume by Prof. Samuelson. "Consequently, within
little more than the next half-dozen years, we may witness money national
incomes of not much less than $170 billion."
2 The rise of population would be an unfavorable factor in that the income
not taken by the government would have to be shared by more people; but the
burden of the debt falls as population and national income rise.



high level at such times. That, in a strenuous war, the government
takes measures to immobilize the additional cash created tends to
reduce the dangers of inflation.
In the postwar period, the creation of debt should involve
dtl'erstons of income (and its cash counterpart) from the public to
the government. As incomes rise to a higher and higher level, the
proportion of savings to national income increases. If the outlets
for savings are inadequate, then the government may sell securities
for cash saved out of current income, which would otherwise fail
to materialize as investment or consumption. At an income of $200
billion, which is not out of the question 50 years from now, the
government may thus well absorb $25 billion or more of net savings
annually.* If a position of high employment is attained without
public investment, or if at any point it is maintained without further
public investment, then the accumulation of public debt will cease.
As the amount of debt outstanding rises, the rentier class may
increase its ostentatious consumption, which in turn may reduce
the amount of public investment required. In short, public invest­
ment will be required to the extent that private investment and
consumption are not kept at a sufEciently high level. And the
larger part of the public outlays in the postwar period may result
from transfers of cash and savings, not from the manufacture of
new money.
Some light on future income is shed by an extension of recent
figures of industrial production and output per man-hour into the
future (Table 1). Too much reliance should not, however, be
placed on estimates for the future. The rise of output per man-hour
will depend in no small part upon the level of employment. The
losses associated with very high employment will, however, be more
than made up by the greater rise of industrial production as employ­
ment reaches a maximum. It does not follow from the fact that
productivity rose by 100 per cent in the years 1920-1940 that
increases of an equal percentage will occur in each succeeding 20
years. Similarly, the rise of production has resulted in part from
a rise of population and increased accessibility to raw materials
which cannot be assumed for the future. Nevertheless, our past
history suggests new gains; and an extension of past trends into the
future is informative if not prophetic. Furthermore, it should not
A rise of productivity of 1 per cent yearly, an annual increase of prices
of 0.5 per cent, and the anticipated rise of population could easily raise national
income to $200 billion in a generation or two.



be assumed that indices of productivity and output are accurate
guides of income changes. As productivity and output &otA rise,
income should also rise, though not so rapidly as the gain of produc­
tivity and not even so rapidly as output in mining and manufacturing.

Rate of Increase since 1919 Extended into the Future*

Industrial production











from the Decem ber, 1941, Federal Reserve
p. 1263, and on the index of output per manhour from 1919-1938 in S. Bell, ProtfttcitfRy, Wapes
National incom e (W ashington, 1940),
p. 270. The percentage gain for the years 1919-1920 to 1940 are applied t o each succeeding
period of 20 years.

Since our current wealth may roughly be estimated at $350
billion/ our Federal debt approximating $100 billion, and our
currcnt volume of deposits at $75 billion, a Federal debt of $4,000
billion is at first difRcult to visualize. Nevertheless, the Federal
debt may well rise to an amount ten or more times the current dollar
value of all assets. First, an inflation of capital assets may stem
from a large drop in the rate of interest, which affects peculiarly
the price level of capital assets. The $350 billion of assets available
today may well be valued at $600 to $1,000 billion in the year 2000.
It is possible to have a large inSation in this sector of the economy
and yet prices of consumption goods may rise relatively little.
Second, debt rises at an equal rate with the purchase of unpro­
ductive assets by the government. In the present war, for example,
the government may well increase its debt by $50 to $70 billion,
annually. Debt accumulates and the assets are quickly consumed.
The accumulation of debt at the rate of $20 billion plus interest
charges (at the rate of 3 per cent) will produce a debt of $4,000
billion within 63 years. Accumulation at the rate of $30 billion
plus interest charges will produce a debt of $4,000 billion in 53
years. Third, the government will acquire productive assets.
Many of these assets (e.p., schools, laboratories, public roads) will
be productive in the long run. They will contribute to a rise of
income, though possibly the investment will not be repaid in full.
See National Industrial Conference Board, FCWKWMC Record, Oct. 5, 1939,
p. 115.



Assets of this type may not, however, offer an adequate outlet for
the excess savings. Then it would be necessary for the government
to invest heavily in enterprises that compete with private invest­
ment—in housing, public utilities, and other Reids where the low
rate of interest available to the government makes investment
profitable. The marginal net
product may be positive,
whereas similar investments by private enterprise may yield a
negative or inadequate marginal net product.*
The government may take the longer view; and the effects on
income and even well-being are taken into account by the
government, whereas private management must confine its con­
siderations to the profitability of the particular enterprise. Wasted
savings are a crucial matter to the state, but of relative unimpor­
tance to the individual investor. In no small part the final answer
to the question of debt potential will be related to the income yield
of public investments; and any adverse effects on private income
should of course be taken into account.

Having discussed briefly the effects of the process 0 1 accumula­
tion of debt, we return to specific estimates of debt potential. Let
us discuss now a figure which does not seem so fantastic as the
assumed figure of $4,000 billion. A possible situation would be the
following. According to the pattern of distribution of income in
1940, an income of $100 billion would be divided roughly as follows:
$70 billion to wages, salaries, etc.; $18 billion to proBts, rents, etc.;
$12 billion to dividends, interest, etc. Taxes of $20 billion required
to finance a debt of $800 billion (at a rate of interest of 2^% per cent)
might be assessed as follows: $6 billion on wages, etc.; $6 billion on
profits, etc.; and $8 billion on dividends, etc. This distribution of
the burden is determined by the assumed need of reducing adverse
effects on enterprise to a minimum. Is it then possible to carry a
Federal public debt of $800 billion without a serious inflation?
A final answer depends on several other variables. If the non­
debt tax burden is $20 billion, then a tax burden for the financing
of the Federal public debt of $20 billion at a national income of $100
billion seems intolerable. The possibility of raising $40 billion in
Fe&ral taxes out of a national income of $100 billion is slim indeed
even in wartimes. In peacetimes, the outside limit would be much
lower. If the income is assumed to be $100 billion exclusive of the
* Cf. the essay by Prof. Hansen in this volume.



$20 billion of interest on public debt, then the prospects would seem
to be somewhat more hopeful. Yet
taxes would constitute
40 per cent of the national income. A radical revision of our tax
system would increase the possibilities of carrying this burden.
Finally, a rise of national income associated with technological and
organizational change and the increase of population, and all these
possibly associated with public investment, would contribute to the
attainment of a high national debt without disastrous effects on
prices and output. As we can observe below, the crucial factors
are the height of nondebt charges in the budget and the level of
income. If income does not rise and if the burden of other charges
continues to increase, as we assume here, a public debt of $800 bil­
lion will undoubtedly have serious effects.
Hypothetical cases are suggested in Table 2. The reader will
observe that the ultimate size of the public debt will depend in no
small part on the costs of nondebt governmental services. A much
larger public debt is suggested under 1 than under 3 despite the fact
that the total tax burden is much larger under 3 than under 1.
In the latter case, however, tax charges (other than for debt servic­
ing) are but 64 per cent of the charges assumed under 3. The
country may well be able to carry a debt burden of $300 billion with
an income of $100 billion if our tax system is overhauled and other
demands on the Treasury are kept in check; and a fortiori if the

(In billions)




exclusive of
Federal debt

Taxation for
debt financing

Public debt
(assumption of a
2^% per cent
rate of interest)

75 §



$ 480

* Assum ptions: 1. Prices at 1942 level.
2. Rate of interest = 2 % per cent,
t The predefense figure.



national income rises to $120 to $150 billion or more. At an income
of $150 billion, the debt potential rises greatly in response to a
reduction of nondebt charges, an increase of tax capacity and an
allowance for the relative lightness of the burden imposed by trans­
fer taxes.
An estimate of the rise of public debt under various assumptions
(beginning with 1940) is given in my <Eco7M7??Mcs 6/ Socml
If debt should rise by the amount of the interest charge (i.e., at
compound interest and on the assumption of a rate of interest of
3 per cent), it would rise to $130 billion in 1980 and $230 billion in
the year 2000, the respective interest charges then being $3.9 billion
and $7 billion. (These estimates leave out of account the large rise
of debt associated with the war. Professor Shoup had estimated
that as a result of the war, the public debt will rise above $100 billion
by 1943.2) In October, 1942, the anticipated debt for June, 1943,
is $125 billion, and in June, 1944, the debt may well be $190 billion.
We have prepared a number of alternative estimates of the
possible magnitude of the national debt at future dates under two
general hypotheses concerning the behavior of future expenditures
and revenue. Under the first hypothesis we assume that the
expenditure of the Federal government (plus the interest charge)
always exceeds the tax revenue by a constant amount. On the
assumption of a rise of $2 billion annually, the national debt would
rise to almost $120 billion in 1980 and $160 billion in the year 2000.
A second set of estimates is based upon a different type of hypo­
thesis. It is now assumed that total expenditures
of inter­
est charges exceed tax revenues by a constant amount. Expenditures
are in excess of those under the first hypothesis by the amount of
the interest charge. Rough calculations yield the following results
on the assumption that the revenues fall short of the interest
charge plus a constant amount indicated.
* Op. cR. pp. 273-77. C/. B. Higgins and R. A. Musgrave, "Deficit Finance
—The Case Examined," in
PoKcy (ed. C. J. Friedrich and E. S. Mason,
Cambridge, Mass., 1941), pp. 173-176. Their computations reveal that the
rate of interest assumed makes a vast difference. They assume that, aside
from interest costs, the debt will rise by $2.5 billion yearly. In the year 2050,
the public debt would rise to (1) $320, (2) $1,490, and (3) $3,125 billion accord­
ing as the interest charges are (1) tax-financed, (2) loan-financed with the
rate of interest 2 per cent, and (3) loan-financed with a .3 per cent rate.
* Cy. C. Shoup, Federal Finances in
Cominy Decade (New York, 1941),
p. 24.


Constant = $2 billion

Constant — $3 billion




Interest charge


Interest charge






It may be a shock to many to learn that a public debt of $4,000
billion mag/ be carried by the economy without a collapse of the
capitalist system, a repudiation of the debt, or a great inflation.
Yet the arithmetic of the problem suggests this conclusion. We
assume a national income of $200 billion in 50 to 60 years plus $80
billion of interest on a public debt of $4,000 billion, the rate of
interest being 2 per cent. These are not unreasonable assumptions.
Avoidance of long periods of unemployment, a slightly rising price
level, the anticipated increase of population, and a continued rate
of technological progress substantially less than what we have
become accustomed to in the last generation will assure the country
an income (exclusive of interest on public debt) of $200 billion.
That the total tax bill will then come to $80 billion plus an esti­
mated $35 billion for nondebt purposes may be a source of anxiety
to many. Taxes would then rise to 40 to 41 per cent of the national
income. Since $80 billion will be for servicing of debt, however,
the real burden is considerably less than is indicated by that figure.
If taxes assessed for transfer are assumed to be one half as burden­
some as taxes for other purposes, the ratio of taxes to income might
be well within the limits of taxable capacity in peacetime. The
charge for nontransfer purposes may be roughly put at $30 billion.
After covering these charges, the nation is still left with $250 billion,
of which $80 billion are taken for debt purposes and promptly
transferred to the rentiers. Then $170 billion of income free of
public charges remain. The real income per capita after taxes
would be at a much higher level than before the Second World War.
We may even be so optimistic as to suggest that the accumulation
of debt may contribute to the attainment of the high income
assumed in this discussion.
Not only the picture 50 years from now but also the transitional
effects need to be considered. In the body of this paper, we have
argued that a rise of debt of these proportions will not necessarily



be accompanied by a galloping inflation. The greatest danger lies
in the war period, when employment is high, inflationary methods
of finance difHcult to avoid, and the level of governmental expendi­
tures very high. In periods of unemployment, the rise of monetary
demand is likely to bring an increase of output though moderate
price rises are not excluded. As the economy approaches full
employment and private outlets do not prove adequate, the accumu­
lation of public debt should be accompanied by diversions of cash
(savings) to the government and the construction and purchase of
valuable assets. The government merely takes a larger part in
investment activity, which in turn becomes of increasing impor­
tance relative to consumption. Public debt accumulates; public
assets rise at an equal rate; and the increase of money is related to
the rise of income, not of public debt.
Many political issues arise, and they cannot be brushed aside
lightly. A large rise of debt brings a powerful rentier class. Other
members of society will resent the payment of taxes to support this
class in idleness and possibly in ostentatious consumption. The
way out is, of course, to put heavy taxes on the holders of bonds,
though the taxation should not be so heavy as to constitute confisca­
tion. If the gross yield on bonds is 2 per cent, they might well be
left net (after taxation) with 0.5 per cent, or possibly somewhat
Others will object to the increased activity of the government
in the investment Reid. The reply to these critics is that public
investment is accepted only because other alternatives fail. A
revival of private enterprise—subject to increased public control—
is a preferable way out. We hope that a public debt of $4,000 bil­
lion or even of $1,000 billion will not be necessary. In any case, the
man in the street worries too much over a public debt of $100 to
$200 billion.





Problems of economic policy do not end with the establishment
of general principles, nor even with the setting up of an organization
for putting these principles into effect. In this essay, we shall be
concerned with economic problems that arose after an agency had
been set up for the express purpose of planning public work for the
postwar period, an agency whose sponsors and members took it for
granted that public work has a large role to play in attaining full
and efRcient use of resources, and a better distribution of the product
of these resources. The tangible product which this agency aimed
to produce was a "shelf" of public work, including all goods and
services paid for by government, in the form of programs for every
state and local government in the country. These programs were
to consist of work scheduled over (say) 6 years, plus a "reserve" of
additional useful projects, based upon careful social and engineering
planning and thorough economic and financial analysis. An
organization was built up with a small central ofBce to serve in an
advisory capacity, and a field staff of over 600 persons to work
directly with state and local governmental ofEcials.*
The agency was the Public Work Reserve, which was organized in the
summer of 1941, and disbanded in the summer of 1942. According to the
ofRcial statement, "The Public Work Reserve—an Introduction," the aims and
objectives of the PWR were as follows:
1. To encourage and assist in listing the needs of each state and municipal
government in the Reids of public service and capital improvement.
2. To promote the policy of long-range planning of useful public services
and of needed capital improvements on state, county, and local levels, so that
programs of worth-while work will be available when needed.
3. To aid and encourage the governmental bodies in wisely programing
for a period of years their services and improvements, on a priority basis of
relative need and expediency.
4. To encourage and possibly assist in expediting the advance preparation



There was even substantial agreement among sponsors and mem­
bers of the organization as to the nature of the economic situation
for which plans were being made. During the war itself, the out­
standing feature of our economic development would be increasing
scarcity of certain types of labor and raw materials. These scarci­
ties would be accompanied by rising money incomes and property
values, which would be re&ected in growing revenues for state and
local governments. This combination of circumstances would lead
to increasing pressure upon state and local governments to eliminate
expenditures which do not contribute to the war effort and to make
reductions in tax rates. After the victory, the most likely sequence
of events would be as follows: in the months immediately following
the armistice, serious excess capacity and unemployment will occur
in some centers. The transition back to a peacetime economy,
however, will be easier than the transition to a war economy has
been, since meanwhile we have built up a larger capacity of our
machine tools and dies industries, and businessmen will be better
prepared for reconversion than they were for conversion. Pro­
vided localized transitional problems arc overcome, the accumulated
backlog of demand for durable consumers' goods, made effective by
release of financial reserves m the form of defense bonds and other
holdings, will provide the basis for a substantial, though temporary,
private boom. As the postponed demand is satisfied, this special
stimulus to private investment will dwindle away. We shall face
of designs, plans, and specifications of such public improvements in order that
they may be ready for accomplishment at the opportune time.
By so doing, to establish on a national scope a known reserve of useful
public work which can be used to stabilize employment during periods of
economic stress such as may be expected at the close of the present defense
The Public Work Reserve operated within the Federal Works Agency, but
with the cosponsorship of the National Resources Planning Board and with
Work Projects Administration funds. This tetrahydrad organization proved
its undoing. A struggle for control developed, in which the agency that estab­
lished jurisdictional rights turned out to be the agency which had no funds to
continue the project. At the time of writing (August, 1942), the National
Resources Planning Board continues to collect 6-year programs of work to be
financed entirely with Federal funds, and the Federal Works Agency is building
up a species of "reserve," consisting of discards from its War Public Works
Needless to say, nothing in this chapter can be construed as a statement of
ofRcial policy of the Public Work Reserve or any existing agency and respon­
sibility for the views presented rests entirely with the author.



again the problem of inadequate investment outlets ensuing from
our attainment of maturity as an economy.*
The formulation of a general public work policy to be followed
by state and local governments is relatively simple. Governments
should cut out all nonessential public work for the duration and
place these items in a postwar "reserve," at the same time that they
maintain tax rates and build up Bnancial reserves, preferably in the
form of defense bonds or cash. Such a policy will not only help us
avoid postwar deBation; it will also contribute to prevention of war­
time inflation. 2
Given the stated objective, the forecast as to the nature of the
economic situation, and the organization to carry out the accepted
policy, it might seem easy to devise a public work program to meet
the objective. Yet—quite apart from administrative, legal, and
political problems—serious difficulties remain to be faced. The
balance of this chapter is devoted to these difficulties, and particu­
larly to those subject to economic analysis.

The first step in planning public work is to estimate the available
supplies of labor and resources of various types, and the national
income that could be achieved by full and efficient use of these
resources. The next step is to estimate the extent of reallocation
of resources and the resulting readjustments in the economy which
will be necessary during and after the war. Third, the possible
increase in private spending must be determined, taking into
* Those readers who are not familiar with the meaning and implications of
"economic maturity" for a nation will find brief discussions in an essay by
Benjamin Higgins and Richard Musgrave, "Deficit Finance—the Case
Examined," PMbHc Policy (ed., C. J. Friedrich and E. S. Mason, Cam­
bridge, Mass., 1941), and in the book An EctmOMMC Program /or American
Dewtocrocy," by seven Harvard and Tufts economists (Cambridge, Mass.,
1938). For a more detailed analysis, see Alvin H. Hansen, FuM Recovery or
(Boston, 1938). [See also the essays by Profs. Hansen, Samuelson,
and Sweezy in this volume.—EDITOR.]
* Such a program has already been adopted by the state of Minnesota and
by a few cities and is being considered by the states of Massachusetts and
Virginia. Other states are considering debt reduction. This latter policy
is acceptable provided it ia regarded as building up a credit reserve for postwar
expansion, and not as a permanent policy of debt liquidation. Consideration
might weU be given to the issuing of special "municipal reserve bonds," which
would be callable and returnable under stated conditions, in order to provide
municipalities with flexible and legal reserves.



account the various types of stimuli to increased private spending
which might be undertaken as part of an over-all economic policy.*
This spending must then be translated into demand for labor and
resources. Once this demand has been determined, the magnitude
and nature of the demand for labor and resources to be provided by
public work, directly or indirectly, can also be determined. Clearly,
some statistical problems of the first order are involved in making
such estimates^ But statistical operation of considerable magni­
tude still remains before the job of planning public work is finished.
The estimated Meed for public work must be compared with the
"shelf" which is being prepared, to see whether the "shelf" is
providing the right volume, type, and location of employment.
Since complete predictability is obviously out of the question, the
determination of the need for public work is rather a matter of
defining the range of sizes and types of public work programs that
may be called for. The "shelf" must be big enough and flexible
enough to meet any eventuality within the realm of reason.
The translation of a "shelf" of public work projects into labor
and materials patterns must of necessity be based on past experi­
ence. Certain agencies, such as the Bureau of Labor Statistics,
U. S. Soil Conservation Service, U. S. Forest Service, and the
Federal Public Housing Agency, have developed "experience
tables" showing the volume of employment provided by (say) $1
million of public work of various sorts. Unfortunately, serious
gaps in these data exist, such as those relevant to airports and air­
ways, parks, equipment purchases, and public services. These
gaps must be Riled. Moreover, in some cases the categories of
work are too broad, as in public buildings, and the breakdown into
labor types is inadequate in nearly all cases.
Even when satisfactory experience tables are available, the
problem remains of obtaining from the Held staff data in a form
suitable for use. In general, this problem consists of assuring
reasonable conformity of the data submitted to the data from which
the labor and materials patterns were derived. Many problems of
* Among such measures are: subsidies or loans to private enterprise for the
purpose of converting plant and equipment to peacetime production; provision
of loan funds at low rates of interest; guaranty of minimum rates of return on
investment in particular Reids; social security payments to unemployed to
maintain purchasing power; wage subsidies; etc.
* For the most part, such estimates were entrusted by PWR to other



definition arise. For example, even so simple a concept as "cost"
of a project needs accurate definition. Should cost be based upon
current wages and prices, or upon expected wages and prices, or
upon wages and prices as they existed at the time when the experi­
ence tables were derived? Do the estimates submitted for "con­
struction costs" run in terms of "force account" or "contract"
methods of accounting?* Should mechanical installation, func­
tional equipment, cost of installation be included in construction
The general criterion which was adopted by the Public Work
Reserve was, naturally, that cost should be defined in such a method
that existing experience tables could be used. Unfortunately, there
is wide variation in the concept of costs employed in experience
tables. Thus, in the case of public buildings, mechanical equipment
only is regarded as part of construction costs, since that was the
practice of the Public Works Administration on such projects. On
the other hand, "costs" for public housing projects must be defined
to include also equipment installed and the cost of land acquisition,
since the experience tables of the Federal Public Housing Agency
are based upon total development costs. In the case of power plants,
"construction costs" include virtually all equipment. The diverg­
ences between definition of costs by different agencies from whom
experience tables must be obtained make instructions to the Reid
staff with respect to the de6nition of cost extremely difficult to
Another problem of definition which had to be tackled by the
Public Work Reserve was the definition of a "unit" of public work.^
A unit might be defined as the smallest job that could be undertaken
from a technical point of view, the smallest size of project which
would be useful, the standard contract unit, or the job which is
likely to be done all at the same time. The Public Work Reserve
finally adopted a hybrid criterion involving all these concepts.
The definition of off-site labor involves a combination of statisti­
cal and conceptual problems. The main question is where to stop.
* The chief differences in the two types of estimates Are as follows:
1. "Force account" costs include no proRts.
2. The figures of the Bureau of Labor Statistics for "contract" costs do not
include "user cost" on old equipment in deriving labor and materials patterns.
'The problem arose in connection with the efforts of one state ofRce to
make a good showing on the number of proposals submitted, by dividing
work into infinitesimal units.



One may stop at the amount of labor required to produce raw
materials used on the site. Or the share of the labor which is used
to produce equipment operated on the site and which can be
allocated to that particular project may be included; if this is done,
the method of apportionment requires consideration. Should total
unit or marginal costs be considered? Should labor employed in
producing the equipment that is used in producing the raw materials
on the site be included? Obviously, unless a clear-cut line is drawn
the entire volume of employment may eventually be regarded as
the off-site employment of any project.* There would be consider­
able advantage in abandoning the concept of off-site employment
and substituting for it the more accurate concept of "leverage.''^
However, the statistical problems of measuring leverage are much
weightier than the statistical measurement of o f f - s i t e employment,
once it has been defined.

Even with the general principle established that public work
should be used to combat postwar depressions, analytical questions
arise. For one thing, analysis of the relation of public work spend­
ing to "full employment" in the transition period will differ radically
from the analysis which was applicable during the thirties, since at
the beginning of the transition period full employment will already
prevail. Accordingly, if government policy is successful in main­
taining full employment, and at the same time avoiding monetary
inflation, it means that "leverage analysis" in the ordinary sense
has no relevance to the determination of what that successful policy
would be; if full employment is maintained at all times, no second*
In the Fco7M>?7Mc Fleets of Federc? PuMic Wor&s .&rpe?MM%i4res (National
Resources Planning Board, 1940), Kenneth Galbraith included only labor used
to produce raw materials used on the site of construction projects. Galbraith
admitted the conceptual deRciencies in this definition, but balked at the diffi­
culties of allocating overhead costs. Public Work Reserve planned to estimate
the volume of employment provided by equipment installed in projects, or
by purchases of new equipment by state and local governments, but abandoned
as hopeless the effort to get patterns for equipment used in construction.
Another problem ignored by Galbraith is the possible negative effects upon
employment of particular projects.
the coefficient relating the total rise in income (or employment)
resulting from public work to the initial rise. For a definition and summary
analysis of this concept, see Higgins and Musgrave, op.
pp. 137-142 and
164-172. For a thorough exposition, see Alvin Hansen,
Policy and
(New York, 1941).



ary effects upon employment can take place.* In a way, this fact
simplifies analysis; the problem is merely one of replacing one form
of spending with another.
The assumption that the economy will not be geared irreparably
to an increasing rate of consumption seems reasonably safe. It is
unlikely that there will be substantial net investment during the
last years of the war. Total consumption, including both military
and civilian consumption, will have been increasing at a slow and
fairly constant rate; for with full employment achieved, and new
investment in isolated sectors of the economy offset by capital con­
sumption elsewhere, total consumption can increase only so fast as
technique improves. Any reactions to a declining rate of increase
in consumption will probably have already taken place, and will
have been offset by the continuation of a high rate of government
spending. The "acceleration principle" proper, and probably the
"relation" as well^ operates only at the stage of an upswing where
there is insufficient excess capacity in the relevant capital goods
industries to meet the anticipated increase in demand for the final
product, but where there is still unemployment of labor and raw
materials. By the end of the war, we shall probably have passed
that point so long ago that adverse effects of failure to maintain a
given ra%e 6/ wtcrease in consumption need no longer be expected, s
Accordingly, the problem of devising a full employment policy will
be a relatively simple one.
The economy will be in the situation of having reached full
employment through government spending, so that any reduction
in government spending, not offset by an equal increase in private
spending, will tend to result in a relapse of national income and
employment to the "starting point." If we can regard 1932 as an
equilibrium starting point, the slightest uncompensated reduction
in government spending could lead to an ultimate reversion of
* There are, of course, "disguised" secondary effects of public spending
even when full employment prevails; i.e., an uncompensated decking in public
spending will lead to a more than equal dec&TM in income and employment;
and an uncompensated TTMrMMg may lead to a cumulative inRation.
* The "acceleration principle" relates increases in investment in a particular
industry to increases in demand for its product. The "relation" covers con­
sequent expansion of investment both in the industry whose demand has
increased and in other industries. C/. Higgins and Musgrave, op. c%., pp. 138141.
' However, the war were to end in the next few months, these adverse
effects might still be quite serious.



national income to the 1932 level, or lower. For just as people do
not increase their consumption by the full amount of an increase
in their incomes, so they do not reduce their
by the full
amount of a decline in their incomes. If the government reduces
its rate of spending by $100 per month, income falls, not just by
MOO, but by $100 plus savings. The ultimate decline, owing to the
process of contraction of consumer spending which results from
reduced government expenditure, will be a multiple of the original
decline. This contraction of consumer spending tends to produce
a secondary fall in private investment, which reduces incomes still
further. Consumer spending again contracts, national income falls
by a multiple of this contraction, investment falls accordingly, etc.
If we assume constant "multiplier" and "relation" coeSicients,
this process tends to "peter out" in the neighborhood of the "start­
ing point." In reality, once the process becomes cumulative,
national income may plunge still lower.
Many people feel that a postwar decline in income is inevitable
if we are to have a "sound recovery." The war must be "paid for"
by depression. We must all pull in our belts and suffer, until the
plant and equipment built up for war purposes has been liquidated,
and we are ready to begin building anew for prosperity. These
people can even find support for such an idea in economic literature.*
However, there is no reason why liquidation of investment in
purely wartime plants cannot be accomplished just as well with a
high national income as with a low one. Provided the general level
of interest rates is prevented from rising too high by appropriate
monetary and fiscal policy, it will be the relative and not the
absolute level of proSts which will determine whether or not any
particular type of plant will be maintained. Purely wartime indus­
tries will be unable to compete for resources with peacetime indus­
Particularly in the trade-cycle theories of Ludwig v. Mises and Friedrich
v. Hayek. According to these economists, a boom consists of a "lengthening
of the period of investment," which develops a capital structure that cannot
be maintained when the artificial stimulus of inflation is removed; and the
downswing is a necessary process of liquidation of this capital structure. Only
after this process is completed, they maintain, can there be a sound recovery.
Although a war period is inflationary in many respects, it probably is not
inflationary in the Hayekian sense; i.e., the proportion of resources devoted
to the production of capital goods, as compared to production of final products,
is unlikely to increase. The problem is rather one of substituting one kind of
final production for another, without any substantial revision in the length of
the period of investment.



tries, once the need for their products is a thing of the past.
Deflation merely to provide for liquidation of capital which proves
"malinvested" in the light of changed conditions represents a quite
unnecessary self-impoverishment. Moreover, there is always the
danger that a downswing will be cumulative, and go beyond the
point of economic and political safety. Professor Hansen has
estimated the cost of underemployment during the thirties at $200
billion; we cannot afford such a mistake again.*
There is a quite different and more formidable danger lurking
in the reconversion process. If American industry is unable to
return to production of peacetime goods as fast as the American
people want to buy them, we may have a serious postwar inflation.
In order to safeguard the economy against this threat, it will
probably be necessary to retain price controls, high tax rates, ration­
ing, and other anti-inHation devices, for some time after peace is
declared. The Mises-Hayek thesis does teach us, however, that
support of the parttct^ar structure of production with which we
end the war may be unwise, since we might thereby prevent or delay
transition to a peacetime economy more in conformity with our
peacetime wants.
One of the most important questions with respect to public work
policy is going to be the desirability of "neutrality" in a public work
program; i.e., the decision must be made whether public work should
be used to prevent a tendency toward migration of industries and
populations, to accelerate such adjustments, or to remain neutral
with respect to them. My own attitude is that public work ought
not to be used to stabilize uneconomic situations. Work relief may
be necessary to meet emergency conditions; it ought not to be used
to "freeze" workers in localities where long-run prospects of
employment are poor. Since the location of defense industries has
not been determined entirely in accordance with the long-run factors
Alvin H. Hanaen, A / E s r the W a r — F t t H F m p Io y w M n i (National Resources
Planning Board, 1942). It might still be asked whether the "Hayekian
paradox " may not arise in the immediate postwar period. May we not have a
high demand for consumption goods, combined with a capital structure which
is inadequate for the production of these goods? At worst, this situation is
serious only if it is allowed to give rise to a cumulative downswing. Any such
tendency can be prevented by government intervention. Moreover, it seems
likely that Prof. Hayek, however rigorous his economic analysis in terms of the
assumptions he makes, is unrealistic in his assumptions with respect to engi­
neering problems. The difEculties of converting existing plant and equipment
to other types of production are probably overestimated in his analysis.



that are operating, a considerable amount of migration is likely to
take place unless specifically prevented by public policy*
At least two types of policy, which might be called public work,
suggest themselves. First, the retraining program should be
retained as a permanent part of a public work program. Retrain­
ing will be necessary not only during the transition period, but
whenever the appearance of new industries makes necessary a shift
of workers from one industry to another, including a shift from
public work into new industry. As new industries reach maturity,
a reverse shift from these industries to public work may be neces­
sary. The need for retraining to meet such changes is a recurrent
one. The occupational mobility which this type of program could
provide should be supplemented by a government program to pro­
vide physical mobility. This plan might take the form of making
available to employment offices information with respect to vacan­
cies in other centers, with provision by the Federal government of
travel vouchers for workers moving from one place to another, to
take bona fide positions which promise some hope of permanency.
Such a program would do much, incidentally, to solve the problems
that will face American railways.
The determination of the proper geographical distribution of
public work clearly requires an enormous amount of economic
analysis. In general, the way in which public work could be used
to stimulate adjustment to economic trends is clear enough. For
example, in decadent communities, such as some of the New Eng­
land textile, shoe, pulp, and paper towns, blighted areas should be
destroyed and converted not into housing projects but into parks
or similar public facilities. New housing projects should be built
in expanding communities. The same plan applies in general to
other types of public work. By distributing public work funds
along these lines, pressure is applied to labor and to capital to over­
come the inertia that prevents migration to localities where pro­
ductivity is high. If a public work policy is combined with policies
making the migration easy, a much more flexible economic system
can be developed.

In the literature on the economics of planning public work,
considerable attention has been devoted to problems of timing.
Difficult as the analytical problems of timing are, the most serious



questions of this sort which confronted the Public Work Reserve
were "operational" ones. Having decided on a conceptual plane
what the proper timing of a public work program would be for the
economic situation faced, one must still Rnd out how the impact of
the projects at his disposal will be distributed through time. If the
time pattern available does not fit the time pattern wanted, some
means of revising or supplementing the programs in the "shelf"
must be found.
Time patterns based on the experience of the Public Works
Administration exist for construction projects, and they may be
applied to comparable cost projects which are submitted to the
reserve. There is always the possibility, of course, that the con­
struction techniques actually used will be different from those used
on PWA; but where differences in techniques are subject to control,
as in the Work Progress Administration regulations, no serious
problem arises. There may be a divergence between "duration"
of a project in the fiscal sense and in the engineering sense. Sur­
veys, construction, and operation, instead of following each other
in neat chronological order, may possibly overlap. For example,
the additional school teachers for a new school may be hired and
used in existing buildings before construction of the new building
actually begins; in this case, maintenance and operations costs start
before construction costs. Estimates of the duration of projects
may be upset by the necessity of drawing on the same pool of labor
for many projects, so that an attempt at simultaneous operation will
reveal scarcities of some types of labor and will result in unexpected
So far as the postwar transition is concerned, what is particu­
larly needed is a reserve of projects of the noncontinuous and nonconstruction type. Such projects are not only easy to start but
are also easy to stop. The volume of public work expenditure in
particular localities immediately after the war may be quite high.
Conceivably, the volume of work needed will exceed the existing
capacity of the construction industry in the localities concerned.
Since the size of the public work program that is needed dwindles
as private enterprise accomplishes its reconversion, programs which
require occupational or geographical shifts of labor and of capital
goods should be undertaken only where the long-run prospects of
private enterprise require a similar shift. We do not want to retrain
men for public work, and then have to retrain them again for private
enterprise after a few months.



Unfortunately, because of the grooves in which state and local
oRicials tend to think about public work, projects of the noncontinuous and nonconstruction type are difRcult to obtain. The great
bulk of projects submitted to PWA fell into a few categories of
construction work—highways, roads and streets, waterworks,
sewers, public buildings, housing, and soil conservation.* More­
over, the amount of employment that can be provided by noncontinuous public service projects seems to be very small. The average
number of employees on such projects, as indicated by the small
number that were submitted to the Public Work Reserve, does not
seem to be much above ten.
Public work projects devised by state and local governments are
for the most part of relatively short duration: the average duration
is less than 6 months, and nearly 90 per cent of the projects seem
to take less than a year to complete. A "sh elf" of such projects
would appear to provide a high degree of flexibility. The difEculty
is, however, that while
may be completed before the
end of the transition period, maintenance and operation costs will
* The percentage distribution by type of the 6rst 18,000 projects submitted
to the Public Work Reserve was as follows:
Selected project
types as percentage
of all projects

Type of project

cost as
Con­ percentage of
total cost
Total struc­
pro­ cost

All projects............................................

100.0 100.0 100.0





Highways, roads and streets..............
Public buildings................................
Water works.................................
Low-cost housing construction...........
Power production...........................
Land conservation and development..
Forest protection and improvement..
Airports and airways......................
All other....................................





continue beyond. The private boom wiil be "damped" by com­
petition for labor and resources from the public sector of the
economy, for the purpose of maintaining and operating capital
improvements* No doubt, in many cases use of resources by the
public sector of the economy will contribute more to economic wel­
fare than any alternative use of the same resources in the private
sector; but we must distinguish between undertaking public work
for its own sake and for the purpose of maintaining employment and
At the beginning of a construction program, maintenance, opera­
tion, and replacement costs seem such small items relative to the
original construction costs that their economic significance might
easily be overlooked. Yet with a constant rate of total expenditure
on capital improvements, the proportion of these continuing costs
to the total will increase until continuing costs absorb the entire
outlay. It is quite conceivable that the economic impact of
expenditures for maintenance and operation, and the distribution of
funds withdrawn for replacement, may in certain periods exceed in
importance the impact of new construction. This situation will
prevail particularly in periods when construction is tapering off and
when continuing costs may still be rising. Thus, for a purely
transitional problem, the public work program should not include
too many projects with heavy continuing costs.
On the other hand, since the private investment boom cannot be
expected to last indefinitely, some "sustaining projects" of a type
that require large-scale government investment should be included
in the reserve, to be executed whenever the need arises. Such
projects for the most part do not originate from state and local
governments; the average cost of the capital improvements project
submitted to the Public Work Reserve was under $250,000. State
and local public work programs, therefore, must be bolstered by
large-scale Federal projects.
One of the most pressing problems connected with timing is
essentially a political one. Over 80 per cent of the projects sub­
mitted to PWR required plans and surveys prior to their execution.
The average time required for these plans and surveys was over 2
months. Failure to make the needed plans and surveys
war period
therefore, may involve disastrous delay in launch­
ing the program. A 2-month lag may be sufBcient to let a cumula­
tive downswing start. All that is required to make these plans
and surveys is a few hundreds of thousands of dollars; let us hope



that Congress will recognize the false economy of failure to provide
the necessary funds*
Other problems of timing arise out of unestimable delays: delays
due to legal complications, difficulties of acquiring sites, etc., are
hard even to foresee, let alone calculate. For this very reason, it is
important that as much as possible of the legal and other pre­
liminaries be completed now.
Planning public work involves the concept of "telescoping"—
concentrating the work of several years into a short period to pro­
vide employment. This process provides problems of its own.
Let us suppose that we have "6-year programs" from all states and
all significant cities, consisting of work for which appropriations
have been made for the next budget year, of work scheduled for the
5 following years, and of a reserve of projects that are desired but
for which funds are not available at the present time. Let us also
assume that these programs are revised annually, so that on the
day of the armistice we have a "shelf" of up-to-date programs.
Finally, we shall assume that the "transition" is expected to last
only 1 "year"* and that all the work is to be done in that time.
How much employment can be provided during that year by using
this "shelf" as a basis for Federally financed public work?
Let the employment provided by public work during the current
fiscal year be %o, employment provided by the work scheduled for
each of the subsequent hscal years in the program taken by itself,
be tti . . .
and the work provided by the "reserve " b e %6. The
net increase in employment which might be provided by the "shelf"
in a single "year" is then N = (n,i +
+ - - - + ^e) — "o - L,
where L is the "leakage" due to the following factors:
1. Some of the projects may take more than 1 "y e a r" to com­
plete and would therefore extend beyond the transition period.
The calculation of the volume of such projects, and their elimination
from the "shelf," is a simple process.
2. Initiation of some projects planned for 1 year may be depend­
ent upon the partial or total completion of projects planned for
previous years. Accordingly, the whole "shelf" may not be avail­
able in 1 "year." Information about this kind of interdependence
is essential if accurate estimates of the impact of the "sh elf" are
to be made.
3. Some of the projects in the "reserve" may be
for projects scheduled. The relegation of these projects to the
* This "year" might be any limited period without changing the argument.



"reserve" may be preferred i/ Federal aid is forthcoming, but
cheaper and less satisfactory projects must be undertaken if the
local government is dependent upon its own resources; ^.e.,
may be substitutable for, but not additional to, parts of "?ti . . .
%&." When such a relation exists, therefore, it should be clearly
4. The undertaking of some projects in the program may re$mre
the undertaking of other projects which, through imperfect plan­
ning, were not programed. With limited funds, such a situation
would require substitution of unprogramed projects for programed
ones. Thus the
of the program may be changed. This
problem can be eliminated by adequate foresight and planning.
5. Costs, and labor and materials patterns which are implicit
in costs, will be functions of the
of operations undertaken at
one time. Thus, even if the existing patterns were applicable for
each year taken by itself, they would be wrong for a "telescoped"
If something less than the total " shelf" is used—as seems proba­
ble—additional problems arise. Not only the dependence of initia­
tion of one project upon total or partial completion of others must
be considered, but also the dependence of the initiation of one
project upon the initiation of others. Some projects must be
executed simultaneously. Here again, accurate analysis of the
impact of the program that will finally be put into operation requires
knowledge of this interdependence.
The question also arises, if only part of the complete "shelf" is
used, whether the scheduled program or the "reserve" should be
"telescoped." The scheduled projects presumably constitute the
preferred projects for the most part, although the "reserve" may
contain projects postponed merely because of their cost or because
the need is not pressing at the moment. On the other hand, the
scheduled projects will presumably be carried through in any case,
so that Federal funds might best be devoted to the "reserve." It
seems clear, however, that in so far as public work is used for the
express purpose of smoothing a transition, an evaluation of prqyec%s
in terms of "process effects," which might be quite different from
evaluation in terms of "product effects," should be available and
used. Precision with respect to the impact of particular projects
cannot be obtained. A ranking of projects in terms of the general
order of magnitude of their "process effects" would sufBce. Each
project might be assigned a priority rating in such terms.



The situation with respect to expansion of public work expendi­
tures by a single city is much like expansion of credit by a single
bank; "leakages" to other cities (or banks) will be high. "M ulti­
plier" effects for a city expanding alone will be reduced by the large
proportion of new income spent on "im ports"; "relation" effects
may be felt entirely outside the community. Yet, as with expan­
sion of credit by all banks, when all cities expand public work
expenditures together, the "leakages" tend to neutralize each other
and an over-all expansion results.
Nevertheless, it is not a matter of indifference for the national
economy as a whole where the reactions from a particular project
will be felt. Some knowledge of the "geographic multiplier," as
someone has called (somewhat loosely) the response in one place to
spending in another, is essential to careful planning of public work.
Given the "materials pattern" for any project or program, plus
knowledge of the location of industries producing these materials
and of the firms from which the city government normally buys,
some approximation to this "geographic multiplier" can be made.
The chief problems on the state and local level are, however,
Bscal. Even where a strong financial position prevails, legal,
political, and psychological barriers against accumulation of
reserves in boom periods and expansion of debt in depression periods
complicate the public work planner's operations. Among the Rrst
complete programs prepared through the PWR, there was almost
an universal acceptance of freedom from debt as the single end of
municipal finance. The idea that state and local governments
have an obligation to avoid, wherever possible, fiscal policies which
run counter to Federal fiscal policy, is quite foreign to most state
and local ofEcials. To teach state and local of&cials that the margin
between anticipated current income and outgo represents, not the
total size of public work programs that can be undertaken, but the
outside limit to the amount that can be safely devoted to servicing
increased debt, is itself a surprisingly difEcult task. To teach them
to regard debt as simply the other side of the balance sheet from
municipal assess is another. A true understanding of the meaning
and significance of governmental debt and of the general principles
of over-all fiscal policy is essential to true "sound Rnance" on the
municipal level.
By no means all states and cities are Bnancially strong. Many
of the older cities are typified by, say, San Antonio, Tex. The



population is still increasing, but the increase is taking place in the
Mexican quarter, where 93 per cent of the people have incomes
under $1,550 annually. Thus the increase in population brings
new expenses but no new revenue. Meanwhile, the wealthier
residents have moved outside the city limits, escaping property
taxes and leaving blighted areas behind them. Other cities are
suffering less from decadence than from past extravagance. Nearly
any city in Florida would serve as an example. In the boom days
of the twenties, state and city alike plunged cheerfully into debt.
The state offered special inducements to residents in the form of low
property tax rates, very high exemptions, and absence of income
and property taxes and thus sadly impaired its revenue-raising
capacities. During the depression, "taxpayers' strikes" left many
cities with no revenues whatsoever, and overdue municipal bonds
selling on the market for, say, $20 were accepted at par in lieu of
taxes. Worried citizens prevailed upon their representatives in the
state legislature to have their neighborhood, consisting sometimes
of less than 100 people, removed from the city limits and separately
incorporated; thus the city's revenue potentialities were reduced
further. Miami, for example, has a sum available for debt service
running currently at about $300,000 annually. This sum would
service safely a permanent debt of $3 or $4 million; the actual debt
is close to $30 million.
Where such conditions prevail, there is only one way in which
an expanded public work program can be undertaken—i.e., through
Federal grants. It is even doubtful whether a contributory system
will permit participation of all communities; but this subject
belongs to another essay.*

In this paper, we have outlined some practical economic problems
of planning public work; "practical," because they arise from an
attempt to apply widely accepted economic principles in the execu­
tion of a stated policy, as distinct from the attempt to develop new
principles or to formulate a new policy. We have limited the discus­
sion to problems associated with the collection and analysis of
a "shelf" of projects to help in meeting difficulties of postwar

Successful operation of such a project requires first of all a
rational limitation of the range of situations which the "shelf" may
See Harvey S. Perloff, "Fiscal Policy at the State and Local Levels,"
in thb volume.



be called upon to meet. We argued that at the war's end we shall
probably have "full employment/' and a relatively stable ratio of
consumption to investment; the job to be done by public work will
consist mainly of replacing war expenditure with useful peacetime
expenditure to the extent that private outlays are inadequate.
However, the "shelf" should be big enough and varied enough to
meet any reasonably possible situation.
During the transition period itself, we contended, there will be
a need for highly flexible projects, which can be quickly started and
quickly completed as the incipient "spontaneous" boom gets under
way. Price controls should be retained at the same time that sup­
port is given by public work spending, since there will exist simul­
taneously a danger of inflation and of deflation. Public work
planning should not be abandoned once prosperity is upon us, for
this prosperity will not last forever unless sustained by proper
economic policy.
As the "shelf" is accumulated and revised, it must be constantly
tested for adequacy of its probable impact upon the economy. Are
the projects of the right type, size, and locality to provide, directly
or indirectly, a demand for labor and materials when, where, and
of the sort required for stabilizing national income at its peak?*
Such a test requires study of the economic geography and
history of the various regions and localities of the country; it requires
the development of labor and materials patterns for converting
dollars to be spent on various kinds of public work into man-hours
of employment and tons of materials; it requires preparation of
instructions for the field staff preparing the project forms which
will guarantee acquisition of necessary data in usable form. In
In less than a year's operations, the Public Work Reserve accumulated a
"shelf" of about 25,000 projects, constituting some $6 billion of public work,
exclusive of New York City. This volume of work would provide approxi­
mately one year's work for 3 million men. However, constant revision is of
the very essence of public work planning; programs developed last year will be
of little use by the end of the war. Also, the geographic coverage was limited,
and not in close accord with probable postwar needs. As pointed out above,
too large a proportion of the dollar value was concentrated in five categories
of capital improvement projects. The number of housing projects fell far
below anticipated postwar needs. A much wider range of projects is needed to
provide a safe degree of flexibility. Six billion dollars' worth of work q/
properly analyzed and translated into plans and specifications, might
possibly suffice for the transition period; but the public investment already
sunk in the Public Work Reserve will be largely wasted unless the job is carried
through to completion.



order to make the " shelf" operable, working plans and speciRcations
should be prepared.*
The most signiRcant "conclusion" of the paper is this: that the
maxim "in time of war, prepare for peace" applies with special
force to planning public work. The development of an adequate
"reserve" of public work for the postwar period is neither a simple
task nor one which can be accomplished quickly after the war is
won. The inevitable lag involved in setting up an organization to
do the job when the need for a public work program is already upon
us may well be disastrous. Either we would be forced to resort once
more to "boondoggling," or we would waste precious months
developing an adequate public work program and run the risk of a
cumulative downswing starting in the meantime. Either alterna­
tive is dangerous. Unless work is adapted to genuine needs, popular
disgust with public work which is clearly of very little direct use
may forestall the execution of a program on the requisite scale.
The social effects of work that commands no respect even from the
person doing it are as bad as, if not worse than, those of a straight­
forward dole. Yet to let a deHation start would be still more
dangerous; its end may well be revolution.
SpeciRc steps that must be taken in the immediate future are
the following:
1. An adequate organization must be set up to plan public work
for the postwar period and provided with enough funds to do the
job thoroughly. A sum equal to the cost to the government of a
price rise of 0.1 per cent would be ample—a small enough insurance
premium for postwar security.
2. This organization must either be empowered to carry out the
program after the war, or it must be an organization that the operat­
ing agency respects; otherwise, the plans will not be utilized and the
work will be wasted.
3. Meanwhile, the necessary statistical research for efRcient
operation of this organization should be continued in those agencies,
such as the Bureau of Labor Statistics, whose function it is.
4. Plans for a Federal grant-in-aid system should be drafted,
and future grants should be attached to adequate planning during
the war period.
The New York City government, which has a keen realization of the impor­
tance of this type of "practical" postwar planning, has appropriated over ten
times as much money for this purpose as was spent by the Public Work Reserve
for the whole country.





Primarily because of the misuse of land, our cities and towns are
menacing the civic health of the nation. Like trees decaying at the
core but spreading their branches wider and wider, they have fallen
into a situation that is becoming intolerable, and their predicament
is becoming progressively worse. Misuse of land, mainly by past
generations, is indeed the underlying cause; but this cannot be
dismissed as merely a case of the sins of the fathers. It is, rather, a
matter of failure to foresee the consequences of eminently respecta­
ble attitudes and business practices projected into an era of rapid
and profound changes in the technology of our society—attitudes
and practices which we ourselves thus far have barely begun to
alter. More speciBcally, the plight of the urban communities has
resulted from the lack of planning and collective control of their
physical development in the public interest. On the fuzzy-minded
but comfortable assumption that, in the use of urban land as well as
in almost everything else, economic action motivated by virtually
unbridled self-interest would always promote the public interest, the
cities and towns have been allowed to drift into their present sorry
There have been, to be sure, warnings. More than 50 years ago
Ebenezer Howard began to cry out against what he saw happening.
And from his day to ours, voices clear and strong have been lifted up,
notably in the writings of the still young and vigorous Lewis Mumford. But for the most part we have closed our ears. To let go of
our fuzzy-minded assumptions has seemed too painful for endurance.
Now, however, along with being forced to reexamine the founda­
tions of the economic community from other points of view, we are
obliged to face up to the consequences of the lack of planning and
control of the use of the land in the towns and cities. And now it is

Reprinted, by permission, from

-EooniMRtca of August, 1942.


s/oi*rng% qf LanJ and .PuM%c



not only the philosophers and poets who are aroused, but the solidest
of the solid men and institutions of business as well. Banks, life
insurance companies, property owners, real estate dealers, not to
mention social scientists and the public officials and others charged
with responsibility for municipal finances, are becoming acutely
aware of what has been going on. They see, among other things,
that the people themselves— gropingly and usually with no more
collective control than before— have been taking advantage of
rapid transit in general and of the automobile in particular, to try to
escape from the overcrowding and congestion of the interior of the
towns. But the escape has been only partial at best, for the people
have to come back into the towns to work; and meanwhile the con­
gestion, if not the overcrowding, is made worse instead of better.
The result is the dismally familiar story of the spread of blighted
areas and slums.
Such areas have grown until in many communities they now
cover from a quarter to half of the land within the city limits. And
they are still growing. Most of them have been overzoned for
business uses, and consequently the valuations placed upon them,
and maintained for purposes of tax assessment, are so high that any
attempt by private enterprise to buy them and redevelop them in
traditional fashion would be fatally handicapped by financial charges
from the start. The cities themselves are helpless, both because of
their precarious fiscal position and on account of their lack of ade­
quate legal powers from the states in which they are located; and
they seem destined to remain so, unless and until their problem is
tackled on a vastly wider scale than anything ever applied to them
heretofore. It is the major thesis of this chapter that their predica­
ment must be dealt with—just as soon as the war emergency will
permit— as a great national problem.

Let us suppose that hereafter the nation will be able to think and
act as would a well-run family estate. This is a big assumption, to
be sure; but we are obliged to start from some such premise, else we
can hardly hope even to survive the war, much less afterward to
organize and maintain the peace. How, then, shall we set about
dealing with the problem of the towns and cities?
In the Brst place, we shall have to undertake an immense job of
economic and social research, preliminary to the job of replanning



and rebuilding. Each urban community, large or small, must of
course replan itself; but it must do so in the light of what is to be
planned for—in relation to its immediate surroundings, to other
communities, to its state or region, and to the country as a whole.
Its future size and importance must be estimated, and manifestly
the assumptions made in this regard will have to be reviewed and
verified by one or more larger units of government—perhaps the
Federal government. Then for each community there must be
gathered and analyzed the facts—not generalizations such as those
in this discussion—about the blighted areas and slums, the land
valuations, the housing conditions, the fiscal position of the town,
the space requirements to relieve overcrowding and trafEc con­
gestion, the space requirements of all the various uses of the land,
and so on and so forth.
When all this is done, the time will have come to begin the job
of replanning. And while each community must make its own
master plan as well as its plans for detailed redevelopment, each
must—if we would avoid the errors of the past—abide by certain
very clear, if only general, principles. These, as expressed by
numerous writers on the subject, I have attempted to formulate in
the language of the social sciences as follows:
1. The towns and cities must be planned and built, or replanned
and rebuilt, for the health and happiness as well as the economic
well-being of those who live and work in them. This is the first
great commandment in city planning; and the second is like unto it.
2. The physical layout and the administration of the govern­
ment, including the location of and the optimum balance among
dwellings, business and industry, public services and facilities, must
be such as to provide for the maximum possible ease in carrying on
the basic activity of the people—making a living.
3. In the interior of the urban community there must be elbow
room—plenty of it—both for the purpose of present living and work­
ing and for the necessary space to adapt the physical layout to the
changes required or desired in the future.
4. Internal transportation must be so organized as to permit
fast and pleasant movement of things and people whenever such
movement is required or desired; but the location of business and
industry, as well as all other points of assembly or contact, must be
so arranged with relation to the dwellings of the people that move­
ment which is required, though not desired, shall be kept at the
lowest possible minimum, not forgetting that within reasonable



limits and in wholesome surroundings, the pleasantest as well as the
healthiest form of movement for people is walking.
5. There must be in, or within easy access of, every urban com­
munity, not only all the public services needful for the physical and
intellectual well-being of the inhabitants, but those required for their
emotional well-being as well: as many of the cultural and spiritual
facilities as the community can afford or the people can be induced
to support—not only the utmost in educational opportunities for
every citizen of every age, but art galleries, theaters, music, recrea­
tion centers, playgrounds, woods and streams for hunting and fish­
ing, etc.
6. The towns and cities must, each in its fashion, be beautiful;
but the beauty of each must be the expression of its own living, not a
thing imposed from without.
What is to prevent us, after the war, from replanning and rebuild­
ing our towns and cities in conformity with these principles? We
shall have the most highly developed productive organization in our
history. Once we have taken up the slack in producing goods for
consumption, and have reconverted our plant and equipment to
peacetime uses and made repairs and replacements, we shall almost
certainly have available the man power and materials to undertake
the rebuilding job. Indeed, if we may judge from the past, large
portions of our resources would be wasted if we did not. Then
why not?
There are certain obstacles in the way, although they are readily
removable if we mean business. The most obvious one has to do
with money and debt, or rather with our traditional notions about
them. I shall give a little attention to them later on. There are
two others, however, which already have been mentioned and will be
discussed here.

First is the lack of adequate legal powers by the local govern­
ments to control the use of the land in the urbanized areas. Mani­
festly such powers will have to be granted them by the states.
Specifically, the government (or governments—since frequently
there are more than one) of the entire metropolitan area should be
given the power:
To define (in agreement with the governments affected) the
area to be planned.



2. To set up planning machinery and provide for the making of
a master plan for the urbanized area, which in addition to the neces­
sary maps and charts shall include a method of systematic procedure
for its own future revision to meet the changing economic and social
needs of the community.
3. To vest the planning agency with all authority necessary to
formulate and keep up to date the master plan.
4. To define "public purpose" to include any purpose deemed
by the appropriate agency of government within the urbanized area
to be essential for realization of the master plan.
5. To acquire, by condemnation when necessary, land anywhere
within the urbanized area for a public purpose as above defined; to
hold, use, lease, sell, or exchange such land; and in any case to make
certain that it shall be used only in accordance with the master plan.
6. To enact and enforce ordinances requiring the owners of real
property within the urbanized area to use it or to permit its use only
in accordance with the master plan.
In addition to the passage of laws such as these, the states should
of course simplify and standardize the procedure of using eminent
domain to acquire land. Manifestly, too, the courts should rule
thereafter in accordance with the spirit and intent of the new laws
rather than the precedents set up under the conditions to be
remedied. The indispensable requirement now is for what in
America may seem a wide departure from traditional concepts of
land ownership and control, although it would mean merely the
adoption of concepts long established in the best governed countries
and cities of Europe.
How can the towns and cities get this sort of legal status? The
answer is not so simple as one might wish. A number of things will
be necessary. In the first place the local communities themselves
must become aroused to the nature and seriousness of the problem,
then convinced that it is not hopeless of solution. The average
citizen seems to know little or nothing about it; but if he shoitM
happen to try to visualize what would be involved in a solution of the
problem, he is likely to take one look at the magnitude of the job and
dismiss it from his thoughts as impossible of accomplishment. This
state of public opinion wtll have to be changed. When it is, pres­
sures will develop for the kind of legislation required.
But the state legislatures are usually dominated by rural rather
than urban interests. To get them to act, therefore, both they and
their rural constituents must be made to see that we cannot hope to



have a prosperous agriculture until we have prosperous towns and
cities. Clearly, there is a sizable job of education to be done in
both the urban and the rural communities.
Even when the educational task is accomplished, however, the
legislatures still may ask what reason there is to believe that the
towns could finance their rebuilding anyhow. What would be the
use, the lawmakers might demand, of passing legislation that would
accomplish nothing? To give a satisfactory answer, the towns will
have to come to grips with the toughest of their problems—the
removal of the second of the obstacles mentioned above.

From the economic if not indeed from the social point of view,
the most important of the principles of city planning outlined above
is the third, the one having to do with elbow room in the interior of
the urban community. To get plenty of it will involve a solution of
the problem of land use and population density for all the principal
subareas within the area to be planned. One fundamental require­
ment must take precedence over everything else: overcroitxKTMy <MM%
This means in the first place that
ample space must be provided so that motor vehicles shall not be
parked in the streets for any period whatever. It may mean also
that space will have to be provided for small airplane landing Reids;
for if the number of airplanes in use should ever become remotely
comparable to the number of automobiles, they will have to be
landed in the middle of town rather than away out in the country.
It means surely, in the second place, that in all residential neighbor­
hoods there shall be plenty of open space for light and air. It
means finally that most of the dwelling units must have plots of
ground of their own. If people are to be expected to bring up
children and thus enable the urban communities to maintain their
population without dependence on immigration from rural areas,
the families cannot be housed in tenements or apartments.
All this adds up to the inescapable necessity of a far less intensive
use of interior land than has been customary heretofore. But in this
case nothing like the present valuations placed on most of such land
can be maintained. A drastic reductidh will be indispensable.
Who then is going to absorb the loss? If it were a matter of a parcel
here and there, bought and held in the expectation of cashing in on a
redevelopment project, the answer would be simple: laws radical
enough to deal summarily with the situation. But it must be



remembered that much if not most of the land in question is held by
individuals or institutions who have held it for a long time. In
many other cases institutions hold mortgages on it—institutions
which are the custodians of the savings of the people. They have
acquired it or lent money on it in good faith, although usually with­
out much understanding of the great forces and tendencies at work
in the town. Already, however, where there is any real market, the
prices have usuaHy fallen considerably from the levels of a decade or
so ago, although they are still substantially higher than could
be justified for the new use in accordance with a sound master plan.
This difference is what must somehow be got rid of.
Study of the broader aspects of the problem leads to the conclu­
sion that the particular property owners involved here are no more
responsible for what has happened than are the other inhabitants of
the urban community. If they keep hanging on, as they feel they
must, no doubt eventually the prices realizable for their property will
sink low enough to make redevelopment a reasonably good risk.
But if, as is here being argued, the community as a whole cannot
afford to wait, the case becomes quite different. If then for the
benefit of the entire community a reallocation is made of the use of a
very large proportion of the entire land area, and the owners of
blighted and slum property 6nd their going market values suddenly
reduced thereby, they could make a very strong case in court to
prove deprivation of value in the public interest. Thus they could
present a convincing claim for compensation at current market
prices. And in that event the compensation would have to be
paid them by the urban community as a whole.
Let there be no mistake: no argument is here advanced for using
public funds merely to pay for the mistakes of people who have made
bad investments. A common superScial reaction is to compare
what is being proposed with relieving an investor or a speculator in
the stock market of his losses when prices fall. Only a little thought
is necessary to show that the comparison is fallacious. The really
comparable case would be that of buying the stock at current
market prices, regardless of what might have been paid for it by
the present holder, before taking some sort of action, for reasons
having nothing to do with the stock market, which would destroy a
large part of such value as was still indicated by the market.
This dilemma of excess valuations of interior land can be resolved
only through the intervention of the community as a whole. And
such intervention will involve large sums of money, money which



under present and prospective circumstances the cities and towns
cannot be expected to raise.

Now it is probably true that if the entire tax structure of the
nation—Federal, state, and local—were thoroughly overhauled,
most of the cities could meet the situation. The great bulk of the
Federal taxes comes out of the cities, and, if only they could some­
how retain a larger share of such taxes, their fiscal position might
become excellent. Such far-reaching measures of tax reform are of
course urgently needed. If they could be accomplished reasonably
soon, the cities might be in a position to finance their own replanning
and rebuilding. If this should happen, well and good; but a
realistic appraisal of the prospects forces the conclusion that such a
consummation is likely to be as long delayed as will be the fall of
land valuations without public intervention. Consequently, another
approach to a solution of this particular financial problem is needed.
When we look around for it, we are obliged to conclude that there is
little or no hope of help from the state governments, for these are in a
position scarcely more favorable than that of the cities and towns.
There remains then only the Federal government as the source of the
funds required.
Once granted the proposition that clearing away the obstacles to
sound replanning and redevelopment is the responsibility of the
whole community, Federal financial aid is justihable. For the
situation has gone far beyond the proportions of a mere local prob­
lem : it is a matter affecting virtually all the urban communities and
it involves more than half the population of the country. Conse­
quently, as previously argued, the problem must be treated as one of
national scope. Indeed, Federal policies share in the responsibility
for the conditions which make replanning and redevelopment
If it is so treated, what might be a sound procedure? In a recent
pamphlet of the National Planning Association (Washington, D. C.),
I have collaborated with Prof. Alvin H. Hansen in suggesting the
For every town or city—or for every group of contiguous muni­
cipalities a long-range master plan would be completed in broad
outline for the entire metropolitan area. And, of course, it would
provide for its own subsequent revision to meet unforeseeable needs.
It would be formally submitted to the appropriate Federal agency in



connection with an application for financial aid in the acquisition of
aU the real property within a clearly deSned slum or blighted area.
For each such area and the immediate surroundings, the planning
not only would have to be complete and in accordance with the
master plan, but should also be accompanied by the data necessary
to justify all assumptions as to future changes. Definitely indi­
cated would be the proposed use of every square foot of the area,
whether for public purposes or for leasing to private enterprise; and
such use would be determined without regard to acquisition cost of
the land. In other words, the acquisition would be a by-product of
the job of clearing away the obstacles to redevelopment: in arriving
at a decision as to its subsequent use, the land should be deemed to
have cost nothing.
Decision as to acquisition, as well as to future kind of use, should
be by the planning agency for the whole urban area, not by the local
housing authority, because the considerations involved would be
broader than housing alone.
Upon approval by the appropriate agencies in Washington of all
aspects of a proposal to acquire property, the government would be
prepared to advance funds, if need be, up to the entire cost of
acquisition. Possibly repayment of the principal might be required,
along with a share of the subsequent net proceeds from the property
in lieu of interest. In view of the fiscal position of most municipali­
ties, however, there are strong reasons for requiring them only to
pay over, for 50 years or so, something like two-thirds of such sums
as may be obtained from leasing the property, thus giving them a
long breathing spell in which to undertake an overhauling of their tax
structures. Of course, if they could accomplish tax reform at once,
they might be able to finance the whole program out of their own
resources and thus escape even the minimum of Federal supervision
that would otherwise be unavoidable. And let me add here,
parenthetically, that no centralized control over city planning is
envisaged. Eveiy possible safeguard should be included in the
Federal legislation (and in the accompanying discussion of the intent
of the laws) against interference with the local community in plan­
ning any sort of town it wants, so long as a few indispensable and
obvious standards are adhered to.
Demolition and rebuilding in the acquired areas, or rehabilitation
where this is feasible, would proceed as rapidly as all the attendant
circumstances would permit. Meanwhile, public work activities of
all kinds would be Btted into the larger program. Steady progress



would be made, over the years, toward realization of the growing and
developing master plan.

It will be observed that thus far housing has had no conspicuous
place in the present discussion. This was deliberate, for the reason
that the housing problem, if attacked as such, seems to be insoluble.
Essentially it is a problem of costs in relation to the incomes of the
families to be housed. And a very large, if not the largest, element
in such costs—if plenty of open space is to be provided—is land.
Another very important element, of course, is the backwardness of
the residential construction industry itself.
Apart from the matter of building costs, the chief requirement is
for plenty of /tosses, not apartments, for rent. Home ownership, as
far as financial arrangements are concerned, is now very well taken
care of, through the Federal Housing Administration and the savings
and loan associations operating under the Federal Home Loan Bank
Board. But the owning and renting of single-family houses has
been looked upon heretofore by real estate operators as an extremely
unsatisfactory business. The reason is that such properties were
never built for rent in the first place, but for home ownership. Their
rental status is usually the result of mortgage foreclosures. More­
over, they are scattered here and there all over the place, so that it is
difficult or impossible to operate them in a business-like way. But
the conditions prevailing hitherto can be changed. Experience of a
few rental projects with mortgages insured by FHA indicates
unmistakably that when properly planned and grouped, the renting
of single-family houses may become a highly satisfactory and moder­
ately profitable enterprise.
The problem of urban housing, therefore, needs to be attacked
from two principal sides. In the first place, in addition to the
method outlined above for wiping out excess land valuations, an
extensive program of research and experimentation should be under­
taken, to modernize the construction industry. In fact, something
is already being accomplished along these lines now by the con­
solidated National Housing Agency in connection with the produc­
tion of war housing. The other measure needed is a method of
doing for rental housing what FHA has been successfully accom­
plishing for home ownership. Clearly, as demonstrated by the
meager results obtained under Section 207 of the National Housing
Act, mortgage insurance for rental projects is not the answer. In



fact, those students of the problem most familiar with the FHA
experience have reached the conclusion that only through insurance
of the entire investment in rental properties can results be accom­
plished on a scale comparable to those in the Reid of home ownership.
Consequently, a procedure has been fully worked out, in a form
ready for introduction as an amendment to the National Housing
Act, to accomplish the desired results—and to do so, moreover,
with probably less risk to the government than is now involved in the
insurance of mortgages on rental housing. The insurance would
guarantee only a very low yield on the investment; would be granted
only to owners who could qualify as thoroughly reliable and com­
petent; would apply only to projects designed for rent to families of
moderate to low income. There would be some form of guaranty of
recovery of investment, but the minimum return insured would be
so low that the owners would be under strong compulsion to operate
the property so as to make it earn substantially more.
The measures mentioned above would not be sufBcient at once to
solve all the problems of housing the families in the lowest third of
the income groups. Consequently there will be a place and an
urgent need, for a good many years at least, for a substantial program
of publicly provided or subsidized housing. While the experience to
date of the United States Housing Authority probably does not
indicate a solution of the problem, that approach should be carefully
and sympathetically reexamined. My own personal opinion—
admittedly somewhat vague—is that the ultimate solution will lie in
reducing the cost of adequate housing, on the one hand, and in rais­
ing the incomes of the families now in the lower brackets, on the
other. In the meanwhile some form of subsidy would appear to be
indispensable, either of the families to permit them to pay com­
mercial rents, or of the production and operation of the housing

Supposing that all the foregoing suggestions are deemed accept­
able in principle, will the fiscal capacity of the Federal government
be adequate for the demands for funds likely to be made upon it?
There are the best of reasons for believing that the answer will be
yes. In the first place, the amounts to be advanced to the urban
communities are likely to be much less than at first glance the
magnitude of the undertaking would indicate. It is to be expected
that by far the greater part of the rebuilding will be carried out by



private enterprise. The public investment, whatever its amount,
wiH be made primarily for the purpose of removing the obstacles in
the way of private development. Moreover, the governments of the
local communities will undoubtedly be able to make some repay­
ments, perhaps in a good many cases the entire amount advanced.
At all events this will be a type of public investment characterized
by a great multiplying power.
In the second place, the actual rebuilding program will be started
and carried on for the most part when the demand for private invest­
ment funds is low—in other words, when a depression threatens.
Reverting to the analogy of a well-run family estate, the job of
rebuilding will be prosecuted in the spare time of the economy.
This and other forms of useful public investment should be made,
to whatever extent proves necessary, in order to take up any slack in
employment that threatens to occur. If this be done, we may look
forward to a permanent condition of substantially full employment,
and consequently to a high national income.
It is true that by the end of the war we shall have a large internal
debt of the government, perhaps approaching a Bgure double that of
the national income. But there is excellent reason to believe,
principally on the basis of the experience of Great Britain over the
past 150 years, that a nation with a full-employment income can
easily manage a debt substantially more than double that income.
Consequently, if and when it becomes necessary to increase the debt
for the purpose of making advances to the local communities, there
need be nothing terrifying about the proposal. For we may be sure
in the first place that the debt need never be fully repaid (but only
refunded over and over again as has been done in England ever since
the Napoleonic wars), and in the second place that in all probability
periods of private investment boom will come, during which times
the debt not only can but must be reduced in order to avoid price
These are ideas about government debt which may not be
entirely familiar to those who do not understand the nature of
public credit operations. They are, however, essentially matters
of simple common sense. Space here is inadequate for further
discussion of them, but I should like to refer the reader to an article
entitled "The Federal Debt and the Future'* by Alvin H. Hansen
and myself, in the April, 1942, issue of Harper's AfapaziTM.*
* See also Prof. Harris's essay on Post-war Public Debt in this volume.—



We shall have after the war the greatest productive organization
in our history. Our equipment and skilled man power will be all
set and ready to go; for the period of shifting from wartime to peace­
time occupations need not be long and dHBcult, if we use a little
foresight now. And be it remembered that as a
we shall be
debt-free, because we shall not have borrowed abroad* On the
contrary, we shall have lent enormous sums. Also, a# a wa%on, we
shall pay for our war effort as we go. This is inevitably so, for the
obvious reason that we can use up during the war only what we
already have plus what we can produce. The complicated job we
shall have later, with internal debt and taxation, can mean only that
we are redistributing the cost of a job already paid for.
The fiscal task, to be sure, will be a large one, no matter what we
do about the cities; but we are rapidly learning how to handle such
things, and to do so without damage to the essentials of our way of
life. We are learning at last how to make our financial mechanisms,
not the masters but the servants of our society, how to make them
fit the facts of our power to produce what we want when we want it.
And surely the restoration to civic health of our towns and cities, a
job we can surely do over the years to come, is one of the things we
know we shall want*







The Rnancial activities of the state and locai governments, no
less than those of the Federal government, must inevitably have an
important effect on the national economy. In fact, war finance
aside, the subordinate units collectively have always imposed more
taxes and spent more money than the central government.
In the fiscal year ending June 30, 1941, before the United States
actively entered the war, state and local tax revenues amounted
to more than 11 per cent of the national income, while in the same
period the expenditures of state and local governments amounted to
almost 12 per cent of national income payments. We can safely
assume that, although permanent changes in the public and private
economies are certain to result from the war, the states and localities
will continue to affect significantly the national economy. Whether
they do so favorably or adversely is of utmost importance.
The record of the past is far from encouraging. There are
serious limitations on the ability of state and local governments to
follow an economically sound fiscal policy. Nonfederal units can
be expected to contribute to the stability and progress of the econ­
omy only if certain fundamental changes are made in intergovern­
mental relations and in state and local financial structures.

The taxing, borrowing, and spending activities of the state and
local governments collectively have been characterized by a fairly
consistent perverseness from the standpoint of economically sound
fiscal policy. They have followed the swings of the business cycles,
from crest to trough. The governments have spent and built in
prosperity periods and have contracted their activities during depres­
sions. In the boom of the late twenties, their finances, instead of
tempering inflationary pressures, added to the disposable income of




the community: inflationary borrowing was expanded and prices bid
up in large-scale construction activities.




(In millions of dollars)

Fiscal year

Net income-increas- Expenditures for new
ing expenditures* public construction*


- 77

Taxes on sales

State and
State and
Federal t
-321 i
209 j!


2,104 If



* By sources of funds.
t Including work relief.
I Includes liquor, tobacco, manufacturers' excise, soft drinks, admissions, oleomargarine, and
4 Includes gasoline, general sales, liquor excises and licenses, and tobacco excises and licenses.
The license taxes could not be eliminated, because for certain years they are not reported sepa­
rately. Their yield, however, is very small.
If Average for 1925-1929.
[} Not available.
S ou R C E s: Net income-increasing expenditures: Estimates of Lauchlin Currie, T e m p o r a r y
Mittonal FconoTHtc ComwMKte #eartnpt, Part 9 (Washington, M ay 16, 1939), p. 4011, as revised
b y Haskell Wald.
Estimated expenditures for new public construction: National Resources Planning Board,
FconoTHtc -Ejecta o / fAe Federal PvMtc Wpr&s Fapendtfwe*, 1933-1938, prepared by J. K.
Galbraith (Washington, November, 1940), pp. 17-18.
Federal sales taxes: .AtMtMdl Report o / Me Secretary o/M e rreaavry, 1941 (W ashington, 1942),
pp. 416, 484-487. State sales taxes: 1930-1935: Treasury Department, CoHecitotn/rotn Seeded
gtaie-itnp<Me<i Toie*, 1930-1935 (Washington, November 30,1936), Table X ; 1936: Tax Research
Foundation, T a j gyittwn (8th ed., Chicago, 1940), pp. 351-355; 1937-1939: Census Bureau,
Division of State and Local Government, Financial S(ait*itc* o / tAt gtaie*, annual series.

In the depressed thirties, the finances of these governments
had a deflationary rather than an expansionary effect on the
economy: expenditures, and especially construction outlays, were
severely cut, borrowing was restricted, and taxes weighing on con­
sumption were substantially increased. Table 1 reveals the cyclical



character of state and local construction activities and net incomeincreasing expenditures (i.e., the net additions to, or deductions
from, the disposable cash income of the community), as weH as the
sharp increase in sales taxes (i.e., those taxes which weigh most
directly and heavily on consumption). In following a countercycle
expenditure program, the Federal government succeeded where the
states and localities failed. In tax policy, however, the Federal
government joined the swing toward consumption taxes.
Although the information now available is incomplete, it is
evident that, in the current inflationary period, state and local
governments are adhering to their record of fiscal perverseness.
State and local authorities are submitting in many instances to
the pressure to increase expenditures and to reduce tax rates.*
Provisions for debt retirement, for the setting aside of reserves,
and for the establishment of "shelves" of public works for postwar
construction are few and far between—and this in the face of
thoroughly sound resolutions and recommendations of the more
important agencies representing state and local ofEcials (e.p., the
Municipal Finance OSicers Association and the Council of State

A number of important underlying factors have contributed to
this unfortunate record of state and local finance. We must con­
sider these factors to determine what adjustments have to be made if
the Sscal household is to be set in order.
Financial Proyrants in Period# 6/ Prosperity.
Fiscal perverseness in boom periods would seem to be due in the
main to institutional factors. When treasury surpluses loom, strong
pressures are brought to bear for the construction of capital works,
on the one hand, and for the reduction of tax rates, on the other;
state and local traditions of legislative resistance to pressure groups
are far from well established. In addition, a number of state consti*
There has been a 25 per cent decrease in the New York State personal
income tax, and another reduction in tax rates is contemplated. Mississippi
has also reduced its income tax rates, as has South Dakota. Illinois has
lowered its general sales tax rate, while Indiana has reduced the rates of its
gross receipts tax. A report by Rosina K. Mohaupt for the National Municipal
League reveals that during 1942 cities with populations between 30,000 and
500,000 decreased tax rates, averaging 5 cents per $1,000 of assessed value,
from the 1941 levels.



tutions and local charters require annual balancing of the budget,
and thereby prohibit the accumulation of reserves. Limitations on
the reduction of expenditures appear also in the form of large outlays
for maintenance and replacement, which cannot be cut without
impairing essential services (e.p., waterworks, sewers, schools, and
hospitals). Moreover, localities in a number of states find them­
selves saddled with certain mandatory expenditures. A further
obstacle to reductions in expenditures is involved in the character
of the existing grant-in-aid system. Both Federal grants to states
and state grants to localities are rigid in their nature and hold out
financial inducements for the grant recipients to keep up their
expenditures in the aided fields during inflationary periods as well as
during periods of depression. Of importance, also, is the fact that
states and localities are limited in their ability to accelerate the rate
of reduction of debt because the bulk of their bonds outstanding do
not have "callable" -features. On the whole, however, under
prosperous conditions, there are few, if any, serious economic
limitations to the pursuance by nonfederal units of a sound Rnancial

The situation in periods of depression is quite different, however.
Then, state and local governments are confronted with serious eco­
nomic obstacles to the carrying out of a countercycle fiscal program.
In the face of a strong deflationary movement, most nonfederal
units 6nd it difBcult to adjust their finances so that aggravation of
the downward spiral will be prevented.
The ability of a governmental unit to maintain its expenditures
and to add to the disposable income of the community depends
fundamentally upon (1) borrowing capacity, (2) availability of
reserve funds, (3) ability to obtain funds through taxes which do not
reduce substantially the consumption of the community, and (4)
grants from a higher level of government.
AfM7Mcipa% Cred%.

There are strict limitations on the ability of states and localities
to borrow in periods of depression. Being dependent, in the main,
upon banks and other private investors—whose policies they cannot
control—they can obtain funds only when they can meet the
criteria of soundness set up in the municipal security market*



When tax yields shrink and borrowing becomes increasingly neces­
sary in order to maintain service levels, the private market for
municipals is most restricted. Credit can be obtained, if at all, only
under unfavorable circumstances—short terms, high interest rates,*
and stiff conditional requirements (in the form of provisions
dictated by private investors concerning economies in expenditure,
tax collection procedure, etc.). Most significant is the fact that the
states and localities which had been hit the hardest could not obtain
credit at all and were forced to default, to slash services, and, in
some cases, to resort to the practice of printing script
Certain economic problems connected with nonfederal borrowing
should be noted. Basically, for most state and local units, borrow­
ing has the characteristics of the receipt of credit from abroad.
Since to a large extent funds must come from institutions and
individuals located in other jurisdictions, the payment of interest
and repayment constitute a siphoning out of the area of current
revenues, rather than a mere redistribution of income within the
community. Unlike the situation for the national government
which borrows from its own citizens only, the payment of interest
involves a real cost to the members of a debtor state or locality.
Moreover, the preferential claims of interest charges and repayment
constitute an overhead cost in state and local budgets which, if large,
impose a serious element of rigidity and may impair the ability
of those governments to support their basic services. In the
face of the extremely regressive state and local tax structures, the
accumulation of large municipal debts would bring about, through
the payment of interest and repayment, an income redistribution
with unfortunate consequences. It would constitute a shift of
important proportions from the consumer to the bondholder. Such
a shift would be undesirable at all times except in periods of inflation.
* In 1932, in fact, no less than 78.7 per cent of all state and local issues bore
rates of 4.5 per cent and higher.
* In 1932, 697 issues totaling $260 million could not 6nd a market; in 1933,
528 issues with a dollar volume of $212 million failed of sale, including sales by
such governments as Buffalo, Philadelphia, Cleveland, Toledo, Mississippi, and
Montana. The governments were not shunning the capital market; instead
they found access blocked. The establishment of PWA and the liberalization
of RFC loans changed the picture substantially and assured a much broader
market for state and local securities. It is patent that in the future the national
government must stand ready to extend loans to nonfederal units on libera!
terms, through an administrative structure which can assure prompt clearance
of applications.



Of even greater importance from the viewpoint of Rscal policy is
the fact that through deScit spending a state or locality can affect
the level of income within its area only to a limited extent. The
secondary effects of its spending will be diffused; the geographic
"leakages" (the proportion of the new income not spent on domestic
output) will be very larged Moreover, an individual state or
locality can be expected to spend its money on projects which answer
its own immediate service needs. It cannot very well adjust its
orders for materials in such a way as to obtain a maximum total
"leverage" effect (t.e., the maximum amount of induced investment
and consumption). It may, in fact, aggravate maladjustments in
the economy. Apparently, then, the states and localities can con­
tribute to an expansionary policy only if guided by and under­
written by the national government. As a practical matter, the
responsibility for the stimulation of income and investment must
rest with the Federal government, for it alone is in a position to
handle adequately the interrelated problems involved in the carrying
out of a positive and flexible countercycle fiscal policy.
Prosperity Reserves.
A second source of funds for states and localities in depression
is that of accumulated reserves. The availability of such funds
depends on the foresight of the authorities and their resistance to
pressures during the previous period of prosperity. Unless the
prosperity period is of sufEcient duration, the reserves cannot be
expected to be of importance quantitatively. The most that can be
hoped for is that they cushion the first impact of the depression and
help to stop the deflationary spiral. Two safeguards are necessary.
Adequate provision must be made to guard against raids on the
reserves in prosperity and against depreciation of values in depres­
sion. If the downturn is sudden and severe, the bonds accumulated
in the reserves may be dumped on the market, with serious defla­
tionary effects on the market and on security values. This can be
avoided if reserves are kept largely in the form of special Federal
securities, or if national agencies are directed to purchase bonds
offered by the state and local reserves.
The production of construction materials, especially, is concentrated in a
relatively small number of industrial areas. It is also worthy of note that,
unlike the situation for large national units, state and local imports do not
necessarily create exports which help to sustain employment. There is no
adjustment mechanism at that level.



and Loca/ Taaas.
In general, limitations on borrowing capacity mean that the
ability to add to the expendable income of the community must
depend on the yield of nonconsumption taxes* Even so-called ?M?%are more or less deflationary, partly because they
fall to some extent at least on the consumption stream, and partly
because taxes per se are inherently restrictive. How serious a
reduction of consumption is caused by a given tax depends, of
course, upon the saving habits of the class of taxpayers upon which
the tax falls. Because the bulk of individual saving is made by the
higher income groups, estate, inheritance, and highly progressive
income taxes constitute a relatively small drain on consumption
compared with excise taxes on items which loom large in low-income
budgets. Another type of problem, however, arises in connection
with the first group of taxes, and that is the possibility of discourag­
ing risk-taking investment at a time when such investment is crucial.
The states rely heavily on consumption taxes. This reli­
ance arises largely from the inadequate yield of other state taxes.
Although a majority of states now have personal income taxes, these
taxes, with few exceptions, yield relatively little revenue. This can
be explained, in part, by the fact that wealthy individuals are con­
centrated in a few centers, and most states do not have a large
income base unless exemptions are extremely low. In 1938, for
example, the percentage of incomes of $5,000 and over to total
state income payments ranged from a minimum of 2% per cent to
a maximum of 28 per cent. In 35 of the 48 states, taxable incomes
of $5,000 and over amounted to less than 10 per cent of total income
payments within the state.
Competition among the states limits the steepness of income-tax
rates which any one state can impose. A further limitation, espe­
cially for the agricultural states, arises from the difficulty of assessing
farm incomes. Also, a number of the states do not possess the
administrative and legal talent required to administer a modem
progressive income tax.
During the thirties, when the income taxes and other cyclically
sensitive taxes yielded little revenue, the states—in their desire to
secure revenues that would enable them to obtain WPA and social
security grants—turned to the least cyclically sensitive and most
productive tax base, i.e., the transactions base. Finally, the
regressive character of the state tax structure is due in no small
part to the fact that, in its development, considerations of eco­



nomic soundness were generally subordinated to political feasibility
and to the expediency involved in "plucking the most feathers with
the least squawk." Now about 50 per cent of all state revenues
arise from taxes on sales. If the reliance on taxes that weigh
heavily on consumption continues, the state tax structure can be
expected to have a restrictive effect on the national economy dur­
ing periods of depression.
Since localities are restricted in their ability to borrow, the
level of their outlays will depend on the yields of the property tax—
upon which they are almost entirely dependent—unless they have
accumulated reserves or receive substantial grants from the Federal
government or from the states. Because a property tax constitutes
an overhead cost for individuals and businesses, it deals harshly with
those whose incomes contract in depression. With property taxes
levied at high rates in most areas, an avalanche of delinquencies can
be expected during a period of depression. If a locality should
attempt to sustain its outlays by raising tax rates to compensate for
the losses due to delinquencies, it will probably increase the number
of delinquencies. In a depression, also, the high rates of the prop­
erty tax tend to have a depressing effect on real estate values and on
the rate of private construction.

Grants from higher levels of government constitute another
source of income for states and localities which may enable them to
maintain their expenditures during periods of depression. Since
most states And their financial resources severely limited in periods
of depression, they can do little to aid their subordinate units.
Chief reliance must be placed upon the Federal government.
Today most Federal-aid acts apportion 6xed sums of money
among the states on the basis of service need (generally measured
by population), and require that the Federal grant be matched by
state or local funds, usually dollar for dollar. The Social Security
Act departs somewhat from this pattern, and authorizes indefinite
grants equal to expenditures from state and local funds to meet
public assistance costs falling within the limits of the Federal act.

Experience has indicated that where a grant is based on a match­
ing or other uniform-ratio basis, the larger per capita grants gen­
erally go to the states with the greater economic and financial
resources, and the states with the smallest resources as a rule receive
the smallest per capita grants. Moreover, while the wealthier



states, or those least affected by a depression, can take advantage of
Federal grants with comparative ease, the states with the least
resources, or those hit hardest by a depression, can do so only by
burdening their residents with extremely heavy—and generally
regressive— taxes, or can do so at the expense of unaided activities.
Thus, those governmental units which are most dependent on out­
side aid, if they are to maintain their services and their incomeincreasing expenditures, receive the least assistance under the
present grant-in-aid system.
R etire .Resources

iServ^ce LeueZs.

The limiting factors discussed above have forced state and local
spending generally into a cyclical pattern. But the global figures
hide significant differences among the various areas of the country.
The ability of a nonfederal unit to maintain a high level of services,
and to contribute to the disposable income of the community in
times of depression, depends on its fiscal capacity, i.e., its ability to
raise revenue. If we examine a significant index of relative fiscal
capacity among the states—i.e., per capita income payments to
residents— we find extreme variations. For example, in 1940 per
capita income payments ranged from $195 to $960, with a national
average of $573. The average amounts paid by the states to
recipients of public assistance correlated directly with income
payments: in November, 1940, the seven states with the highest per
capita incomes (over $750) paid old-age benefits that averaged
$25.78, while the seven states with the lowest per capita incomes
(under $325) paid benefits that averaged $8.84 (even the most
generous of these paid only $10.10).* The rates of unemployment
compensation follow the same pattern: minimum weekly benefits
for total unemployment for the seven richest states ranged from $5
to $10; for the seven poorest states the minimum payments ranged
from $2 to $5.s
* The richest states, which provided aid to dependent children, paid average
benefits ranging from $31.15 per family in one state to $58.50 in another, with
an average for those states of $42.92. The range among the poorest states waa
from $13.69 to $21.30 per family, with an average of $16.69. See Social
Security Board, Bureau of Public Assistance,
of 4ssM%<mce Pay­
Eectptew&, Mwewt&er 1940 (Research Memorandum 2, Washington,
May, 1941), Tables 2 and 12.
* Social Security Board Comparison o/
I7Me?np%oyTnen% Compensator
Lews as of December 31,1941 (Employment Security Memorandum 8, Washing­
ton, December, 1941), pp. 86-87.



Outlays for public assistance are provided in part through grants
from the Federal government, which cover a large share of the cost.
In elementary and secondary education, where the only equalizing
factor is state grants to localities, the disparity in service levels
among states is most striking: for example, in 1939-1940 average
expenditures per pupil (from state and local funds combined) ranged
from $30 to $157.* In the depression of the thirties the poorer
states lowered their education service levels drastically. Between
1930 and 1934, each of the 14 states with the lowest per capita
incomes decreased their educational expenditures, and 11 of the 14
had percentage decreases in expenditures per pupil substantially
more than the national average (22.2 per cent decrease between
1930 and 1934).
Obviously, the poorer areas of the country cannot finance an
adequate level of services from their own resources, nor can they
maintain their expenditures in periods of depression. In those areas
where purchasing power is at the lowest level, the nonfederal units
can contribute least to the disposable income of the community.

It seems safe to proceed on the assumption that, whatever the
rate of economic progress in the postwar period, we shall be faced
with serious economic tensions and the possibility of violent cyclical
fluctuations. It is imperative, then, that one of our most potentially
effective economic weapons—the Rnancial machinery of govern­
ment—be geared to making its full contribution.
The conclusion seems inescapable that if public finance is to
contribute to the progress and stability of our economy, certain
drastic revisions must be made in governmental fiscal structures and
in intergovernmental relations. Were it not for one factor, a dis­
cussion of "drastic revisions" would definitely be of the "ivorytower" variety. That factor is the assurance that political groups
* 11. S. OfRce of Education, Advance
19391940 (Washington, May, 1942). A similar discrepancy may be noted in other
local service levels. A study of 34 important urban areas throughout the
country made by the Children's Bureau of the Department of Labor reveals
that in 1940, per capita net expenditures for health and welfare services
excluding payments by persons receiving service) ranged from $13.32 to $52.86.
These 34 cities grouped by regions show that the average per capita disburse­
ment for health and welfare services for the cities in the South was one-third
below the average for all areas. Children's Bureau, TAe
Picture m 34 t/rban Areas, 1940 (Washington, June, 1941), pp. 9,11.



cannot hope to retain power, under modern conditions, unless they
can successfully deal with the problems of economic instability and
individual insecurity. The foregoing analysis would seem to
indicate that, if sound, coordinated fiscal programs are to be carried
out and if adequate levels of service are to be maintained throughout
the nation, there is need for action along several fronts.


The vicious cycle in which the poorer areas of the country And
themselves must be broken. The Rscal incapacity of these areas
largely precludes their pursuance of economic and Rnancial programs
which would enable them to improve living standards and to meet
successfully the onslaught of depression. This is not a problem for
the economically backward areas alone; it is the concern of the
entire nation. The poverty of undeveloped and exploited areas
spreads like infection to other communities. Moreover, when
children grow up without su&cient nourishment and medical care
and without adequate training, when disease and sickness are high,
and when workers are permitted to lose their skills, the whole nation
loses in productivity and fails to achieve its potential. On the other
hand, growth in one region generally fosters growth all around. To
provide economic opportunity for the people of an area and thereby
to increase their buying power is to expand the market for goods
produced in other areas of the nation and to open attractive outlets
for investment. For the areas with inadequate Rscal resources,
ability to solve the problems of cyclical fluctuations is contingent on
the improvement of economic capacity and the achievement of a
better balance in service levels and in purchasing power levels as
between different areas of the country. A multiform attack on the
problem seems necessary.
Programs <?f DeueZ<?pmey%. Through the coopera­
tive effort of the Federal, state, and local governments, long-range
developmental programs should be undertaken to bring about the
effective utilization of land, water, and mineral resources, so that
every region may develop as broad a base of economic activities as
its natural resources can economically sustain. The planned and
intensive development of native resources and markets is crucial for
the poorer areas of the country. It is an important key to economic
2. ReaMocali<m o/ Certain CoverwyTMwfa/
The Federal
government must necessarily assume the responsibility for the ade­



quate performance of public services which are of direct national
concern. The responsibility might be discharged either through
actual administration or through increased Rnancial participation,
together with control over standards of performance.
The reallocation of functions—either administrative or Rnancial
—is called for especially in two groups of public services. The Rrst
group includes those services that are essential to guarantee healthy,
productive individuals and to prevent the creation of permanently
underprivileged classes. Among these services fall education,
nutrition, child and maternal welfare, medical care, and public
housing. Broadly speaking, the provision of an adequate level of
such services is necessary to increase the potential income-produc­
ing power of areas where low income is attributable to long-standing
economic handicaps rather than to the ups and downs of the business
cycle. The second group of services includes those whose objective
is to relieve the acute forms of human distress associated with
extreme poverty. In this category fall social security and relief.
The maintenance of an adequate level of payments throughout the
country, especially of unemployment benefits and relief, is essential
if distress is to be alleviated wherever it may occur and if the pur­
chasing power of low-income areas is to be improved. Only Federal
administration or a high degree of Federal Rnancial participation
(on an equalizing basis) can put a floor under these crucial public
A reallocation of functions and costs from one level of govern­
ment to another must inevitably result in a shift in burdens from
certain groups of taxpayers to others. This follows from the defer­
ences in tax structures leading to varying impacts on the money
streams of the economy. Because of the breadth of Federal tax
bases and the relative progressiveness of the national tax system, a
shift of certain burdens to the Federal government has much to
commend it from the standpoint of equity and economic soundness.
3. VoriaMe
The grant-in-aid is a convenient tool for
achieving a better balance in service levels and in purchasing power
between different areas. To achieve greater equalization, distribu­
tion of the grants should be based on the needs and resources of the
recipient units.
Where, for the services discussed above, a relatively high degree
of Federal Rnancial participation is preferable—for political or
administrative reasons—to direct central administration, such
participation should take the form of variable-ratio grants, as



opposed to uniform-ratio or equal-sharing grants. The percentage
of Federal participation (possibly within a range of 25 to 75 per
cent) would be related to the signiScant differences in the resources
as well as in the needs and tax efforts of the various states. The
Federal percentages would vary inversely, and the state percentages
directly, with state resources, possibly measured by average per
capita income, which is a rough measure of both resources and
needs. Under a plan of this sort, in the states with relatively low
resources the increased Federal grant would offset the small amount
of funds which such states can obtain through their own tax systems,
making it possible for these states to provide the nationally impor­
tant services at levels of adequacy not much different from those
of the states that have larger financial resources.
Where the responsibility for the administration of a service is
shared by both the state and its localities (e.y., education) or is
entirely a local function, the Federal grant should be conditioned,
among other things, on the distribution by the state of grants to
localities on a similar variable-ratio basis. This is necessary because
differences in resources among the various areas
the states are
extreme. For example, a recent study of county taxable resources
in Ohio revealed that per capita assessed valuation (Ohio law
requires 100 per cent valuation) ranged from $571 to $1,759. The
picture for other states is undoubtedly not far different than that of
Ohio. The equalization purpose of Federal grants would be
defeated, in part at least, unless the states allocated funds to locali­
ties on the basis of relative needs and resources.*
4. LocaZ
In the case of localities, a better balance
of burdens and resources can be achieved through local government
reorganization. Generally speaking, inequalities in resources and
burdens decrease as the size of the district increases. In rural areas,
the problem is essentially one of shifting key governmental functions
from the manifold small districts to large county areas. In urban
areas, the development of metropolitan governments is of prime
importance. It would go a long way toward solving certain of the
problems inherent in the present tendency for wealthy families to
move to independent suburban districts, leaving the central city
with heavy burdens and a small tax base. The formation of such
metropolitan areas could be carried out directly in connection with
It is important, of course, to guard against the tendency of freezing uneco­
nomic situations through grants-in-aid, or, for that matter, through public
works. The death struggles of decadent communities should not be prolonged.



much-needed long-range programs of urban redevelopment. Local
consolidation might well be a precondition of Federal grants to
states and localities.*

Toward improved

awd Locaf


In addition to ensuring greater equalization in burdens and
resources, the foregoing proposals, if adopted, would undoubtedly
place the nonfederal units as a group in a better Snancial position
than at present. If the Federal government were to assume a
substantial share of the cost of carrying out the public functions
which are of direct national concern, state and local revenues might
well be adequate for the remaining responsibilities.
For the localities, the pivotal point would be increased central
financial support of public education. In recent years, public school
costs have amounted to roughly one-third of total local expendi­
tures. In 1941, for example, local government expenditures on
schools were $2,240 million out of a total outlay, exclusive of debt
retirement, of $6,730 million. The states contributed $735 million
to the localities—or one-third of the educational costs—in the form
of grants, while the Federal government contributed only $83
million in grants, chiefly for vocational education. ^ If the Federal
government were to assume the responsibility for roughly onethird of total educational costs, and the states another third,
both in the form of equalization grants, the localities as a group
would find themselves in a much healthier financial position.
The ramifications of such a shift in burdens are extremely impor­
tant. For one thing, the poorer localities would be in a position
to finance other local services more adequately. For another,
pressure on the property tax would be reduced. The property tax
has deteriorated in recent years, mainly because of the heavy burden
that it has had to bear. Relief of this burden can be expected to
* The reorganization of local governments into logical economic and admin­
istrative units is needed also because the carrying out of sound fiscal programs
requires a broad scope for planning and for financing, as well as expert adminis­
tration. Successful reorganization would bring within the scope of local
authority an area for which significant plans could be drawn up for such matters
as zoning, residential construction, transportation, recreational centers, and,
in general, the development of desirable citiea and towns.
* Of this sum, $61 million were for defense training. Another $30 million
were distributed, in loans and grants, directly to the localities faced with
special educational problems growing out of the war effort. In 1940, only some
$55 million in Federal grants were distributed for public education.



result in better administration of the property tax and in fewer
delinquencies, and it would help to remove the block to construction
activities. The financial position of localities could be improved
further through an increase in local sharing in certain statecollected taxes. Complete local reliance on the property tax is
both inequitable and economically unsound. It seems advisable
that the states share with their localities yields from gasoline and
automobile taxes and licenses. Local governments spend large
sums on highways and streets;* yet they receive little—in many
cases nothing—from automobile and gasoline taxes.
Federal assumption of the unemployment compensation program
in whole or in part, and some of the burden of relief of employables,
would be an important factor in preventing fiscal breakdowns and
inadequate assistance to the unemployed and needy in periods of
Tag Reform.
Certain changes in state and local tax structures are essential if
public finance is to contribute to the progress and stability of the
economy in the postwar period. It is necessary to eliminate the
tax barriers to interstate commerce as well as the disrupting effects
of an irrational assortment of business taxes and of the competi­
tion for business enterprises through the use of the tax mechanism.
Of paramount importance, also, is a shift away from consumption
taxation to income taxation. The personal income tax has shown
itself capable of yielding huge revenues in periods of prosperity.
If the states were to follow the practice of setting aside reserves
in prosperity periods to be used during depression, the pressure to
rely on the more stable, but regressive sales taxes would be relieved.
Significant improvements would undoubtedly result from the
adoption of a single nationally administered business tax, either a
business net income or corporate net income tax. A certain share
of the yield— possibly one-quarter or one-third—would be allocated
to the states on the basis of the widely accepted "Massachusetts
formula" (based on ratios consisting of gross receipts, pay rolls,
and tangible property). The advantages which would accrue from
the substitution of such a single tax for the present chaotic mass of
business taxes are many: (1) The single business tax would reduce
enormously the costs of collection and of compliance; (2) it would
In the fiscal year ending June 30, 1941, local government expenditures for
highways and streets amounted to $467 million.



eliminate the unhealthy competition for business concerns which
now exists between the states; (3) it would eliminate certain of the
interstate tax barriers and discriminations against "foreign" con­
cerns; (4) it would permit business enterprises to plan more securely;
and (5) it would lessen the burden on private enterprise during
periods of financial distress. Additional improvements could be
brought about by incorporating into the business tax certain fea­
tures which would create a favorable basis for the emergence of new
private investment; among others, the encouragement of investment
in equity capital, the elimination of discrimination against businesses
with highly fluctuating incomes, and the granting of tax credits
for new investment.
Another measure which can be expected to improve greatly the
6scal structures of the states is the adoption of a system of state
supplements to the Federal personal income tax, such supplements
to be collected by the Federal government along with its own levies
and returned to the states. Such an arrangement would give the
states complete independence as to whether or not they use the
personal income tax and as to the rates to be applied. It would,
however, have a number of important advantages: (1) It would
reduce the costs of administration and compliance; (2) it would
undoubtedly encourage a much greater uniformity in rates among
the states; (3) it would permit the use of the income tax by those
states which at the present time do not possess the administrative
and legal talent required to administer such a tax; (4) it would
enable many of the states to assess more adequately income in kind
and farm income generally; and (5) it could be expected to encourage
a greater reliance on the income tax.

CrecM Po/z'cy.
If nonfederal units are to be in a position to maintain their
essential services and to contribute to the disposable income of the
community, state and local credit operations must be facilitated.
It becomes incumbent upon the Federal government, with its
superior credit standing, to underwrite state and local borrowing.
The national government should stand ready to extend loans to the
subordinate units at the lowest possible interest rates. This would
amount, in principle, to an extension and liberalization of the credit
policies pursued by the Reconstruction Finance Corporation and
Public Works Administration in the depression of the thirties.
The controls involved in the extension of loans to state ajid local



governments could be employed to bring about a greater conformity
to national economic policy.

A reallocation of functions and of taxes which resulted in a
larger scope for national fiscal policy would enhance the Reid for
coordinated and flexible financial programs. It seems apparent
that the states and localities, with few exceptions, are in no position
—economically or institutionally—to follow a flexible countercycle
fiscal policy. The most that can be expected—and possibly the
most desirable arrangement—is that they stabilize their financial
activities. This would involve the setting up of reserves and the
advance planning of public works in prosperity to enable them to
sustain their expenditures in depression. The states and localities
would maintain tax rates in prosperity, and during periods of
depression they would refrain from adding to the tax burden.
They would borrow in depression, from a Federal loan agency
as well as from private investors, to 611 any gap in revenues that
may appear.
The additional responsibilities placed on the national govern­
ment would make more imperative than ever improvements in
Federal Snances and administration. Improved management of
fiscal policy is urgently needed. Of crucial importance also is a
greater degree of decentralized administration. Responsiveness
to the needs of the people directly concerned must be safeguarded
as much as possible. A Federal-state-local commission to advise
Congress and the President on matters of intergovernmental rela­
tions would undoubtedly make for better understanding and
cooperation at all levels of government.

TAe Quesftow of
Admittedly, the proposals set forth above would involve certain
drastic departures from existing fiscal structures and intergovern­
mental relations. The indications that such steps must soon be
taken are so clear, however, that we have only the choice between
trying to plan for this development as wisely as we can or letting
it be forced upon us by the pressure of events.
These indications lie partly in the likelihood of a repetition
of our experience during the depression of the thirties. The period
was characterized by fiscal breakdowns and chaos and severe
suffering. It was marked by numerous tax delinquencies in dis­



tressed urban and rural areas, a breakdown of the local relief
structures, a wild scramble for tax sources with a shift to regressive
taxes, and an expansion of certain centrally aided programs at the
expense of other governmental functions. It seems inevitable
that a repetition of such an experience would compel the national
government to assume a major share of the responsibility for com­
bating the depression.
At the present time, under the stress of the war program, the
Federal government is assuming an ever-increasing share of the
responsibility for the performance of governmental services. Not
only is it absorbing new functions, but it is stepping in to remedy
specific maladjustments and abnormal needs both in individual
geographic areas and in individual sections of our economy. The
question, then, is largely one of whether or not this trend should be
extended, in a planned fashion, into the postwar period.
The prospect of increasing centralization generally conjures
up fears of totalitarianism and dictatorship. The obvious lessons
of history, however, should not be overlooked. In each instance,
during modern times, dictatorship has come as a result of social
and economic breakdown. Frustration and chaos are the forebearers of totalitarianism, not centralization. Certainly, the
experience of Great Britain, with a unitary form of government
and an ever-increasing degree of centralism, does not bear out
the fears of those in the United States who see in the increasing
importance of the Federal government the opening wedge for
Moreover, our traditions of local initiative would not be done
away with. On the contrary, a proper allocation of functions will
serve to remove from states and localities the onerous burden of
problems which they cannot manage, and to enable them to con­
centrate on the proper administration of functions of a local interest.
A healthy local financial structure is decidedly conducive to civic
interest and pride.


Z/zA or







What will be the position of labor in the United States in the
postwar world? What will be its problems? What will be its
position on national issues? What contribution will labor be will­
ing and able to make toward solving the postwar problems of the
The war will produce important changes in the position of labor.
Not all of these can be foreseen. Among the changes which seem
most certain to occur are:
1. An increase in nonagricultural employment relative to
agricultural employment. This will be the result of the unwilling­
ness of many young men drawn from agriculture into the war
industries and the armed services to return to farming. Prior
to the war about one-fifth of the gainfully employed persons of
the country were in agriculture. The demand for agricultural
products, however, was not sufficient to produce a good living
for such a large proportion of the gainfully employed. Conse­
quently the average income of the farm workers was roughly only
two-thirds of the average income in nonagricultural employments.
The improved distribution of labor after the war will tend to reduce
the disparity between the incomes of farmers and industrial workers.
To that extent it will reduce the downward pull of large agri­
cultural labor supplies upon wages in those industries which can
readily establish plants in small country towns.*
2. A far better trained working force than the country has
ever possessed. Never before has systematic training been given
in American plants on a scale comparable to that of the last 2 years.
The spread between farmer incomes and industrial wages may be kept
large or even widened by postwar tariR policy.



The scope of training will increase as the war continues. The
training is not con6ned to industry. It is being given on a large
scale in the army, navy, and air corps. Some of the jobs for which
people are being trained will not exist after the war, but the results of
training in precision, in close attention, in responsibility, and in selfreliance will persist. Furthermore, many of the skills will have
important peacetime applications. This is true of welders, airplane
pilots, tool- and diemakers, all-round machinists, and maintenance
men for aircraft, radio, and many other occupations. The avail­
ability of large numbers of well-trained workers will have an
important influence upon postwar industrial practices and develop­
3. Far more attention to systematic training and upgrading
of workers. Before the war progressive personnel men had been
persistently emphasizing the need for better training and systematic
upgrading. Their progress was slow because of preoccupations
and prejudices which prevented top management in most American
plants from gaining insight into labor problems. As a result of
the war, systematic training and upgrading has made as much
progress in 3 years as it would have made in a decade. The exten­
sion and development of systematic training will be important
both in raising labor efEciency and in compensating in part for the
restrictions on labor mobility imposed by seniority rules. Training
will also improve industrial relations by giving men a better oppor­
tunity to advance within a plant.
4. An enormous extension of industrial research. Research
had been growing rapidly in the 20 years before the war. Here
again we see the war forcing a far faster development than would
have otherwise occurred. The effect will be cumulative because
an extension of research by one concern forces an extension by
others. The great impetus given to industrial research by the
war will increase the elasticity of the demand for a wide variety of
products and hence will increase the elasticity of demand for many
kinds of labor. It may also cause workers to be confronted to a
greater extent than ever with the problems of technological change.
5. Broader employment opportunities for Negroes. The Ne­
groes' uphill fight to win a foothold in new occupations fluctuates
with the labor market. When men are scarce, Negroes gain
ground; when jobs are scarce, they lose part of their newly won
opportunities. The acute labor shortages of the war are giving
them an unprecedented opportunity to break into factory and



ofRce work from which they had been excluded. A good part of
these gains will be held.
6. Larger and stronger trade unions. Trade unions may suffer
to some extent because of excesses committed in their name during
the war and because some unions have gained power faster than is
good for any group of men. But although unions may suffer in
public esteem, they will gain in members and power. The reason
is that the war has given the government an opportunity to impose
union security clauses upon many employers. In the absence of
the war, a few organizations would have won union security clauses
by strikes or threats of strike, but the gains would have come far
less rapidly than they have come through the National War Labor
Board. The spread of unionism will require many changes in
managerial personnel, from foremen to presidents, and the replace­
ment of the slipshod personnel administration that has been char­
acteristic of American industry with management of far better
7. Spread of union-management cooperation in improving
methods of production. The production committees fostered by
Donald Nelson have done good technical work in some plants and
have advanced little beyond ballyhoo in the great majority.
Nevertheless the committees are helping to break down prejudices
among both workers and employers to the idea of organized par­
ticipation of workers in improving methods of production. Com­
petitive conditions in the metal trades after the war are likely to
promote the use of production committees in those industries.
8. New leadership in business and labor. When the soldiers
and sailors return, many men who have developed qualities of
leadership under the severe conditions of war will forge ahead in
both business and unions. It is impossible to predict how the
new leadership will affect the policies of business and unions, but
the returned service men are bound to be important in all branches
of national life and their points of view will be affected by their
war experiences.

Most unions believe that their principal problem after the war
will be Sghting deflation and unemployment. Some of them are
accumulating funds for Sghting wage cuts.
Whether the cessation of the war is followed by a boom or a
collapse will depend upon whether private expenditures for goods



rise as rapidly as public expenditures decline* For 6 months or
more after the war millions of war workers and others who fear
unemployment will spend cautiously. The proportion of war
workers to civilian workers will be far higher than in 1918 or 1919.
Hence their fears and caution are likely to influence the economic
situation to a greater extent. Tending to offset the restraining
effect of fear upon demand will be the large volume of shortages—
the result of the lack of availability of goods during the war. The
current output of civilian goods, when hostilities cease, will probably
be no more than two-thirds of normal and may be much less.
Some rise in civilian demand above this level seems almost inevi­
table. The government, therefore, by limiting the drop in its
expenditures, can prevent a drop in total demand.*
If the government does a reasonably good job of managing its
expenditures so as to prevent a drop in total demand, the fears
and uncertainities of the war workers and others will become less
and less effective restraints upon spending. Furthermore, the urge
to make long-deferred purchases will become more pressing. If
the war lasts until the middle of 1944, the volume of deferred
purchases in the United States will be about $25 billion. 2 The
amount of purchasing power available to convert these accumulated
needs into effective demand will depend in large measure upon how
successfully prices are controlled during the war. If prices are
held down with reasonable success, people will be able to spend
only about 60 per cent of their incomes (after taxes) for goods.
They will be compelled to use the remaining 40 per cent for the pur­
chase of war bonds or for building up deposits of idle cash. The rise
in prices during the first 3 years of the war has been considerably less
* It is possible that the physical necessity of making large expenditures to
support millions of men under arms may prevent a very large or sudden drop in
government expenditures. In the fiscal year 1918-1919, which contained only
4% months of fighting, government expenditures were nearly 50 per cent above
the fiscal year 1916-1917. The government may not be able to cut its expendi­
tures as fast as the rising demand for civilian goods makes desirable. The
efFect of government purchases of goods upon incomes occurs in the main many
the government pays for the goods. It occurs when the raw
materials are paid for or pay rolls are met either through the working capital
of the enterprise or through bank loans. Hence it is possible for the govern­
ment, through reducing new orders, to cut the income-increasing effect of its
budget even though actual payments on old orders are rising.
* For an estimate of the volume of deferred demand by principal categories
see my article, "Postwar Boom or Collapse," #artMrd Busies# Review, Fall
Issue, 1942, pp. 7-10.



than during the Rrst 3 years of the First World War; and the outlook
is reasonably bright for the accumulation of a large volume of war
savings bonds and demand deposits, which millions of persons will
wish to convert into goods as soon as hostilities cease. If prices
by some miracle were held substantially to the level of July, 1942,
the "surplus" savings
the savings which people are not
prepared to keep as such for a very long period after goods become
available) will amount to nearly $40 billion by the middle of 1944.*
Even a moderate rise in prices would permit an accumulation of
surplus savings of $20 billion.^ If surplus savings are very large,
the problem of preventing a postwar boom will be extremely
difficult and will require the use of extraordinary methods—restric­
tions on the redemption of war bonds, the continuation of heavy
rates of taxation, the continuation of price control.

Will the policies of organized labor make it easier or more
difHcult for the government to prevent a postwar boom? In
answering this question, one should distinguish between the eco­
nomic policies of organized labor and its political policies.
The economic policies of organized labor are likely to help
prevent a postwar boom. As indicated above, the basis for the
threat of a boom will be an abnormally high propensity to consume
—the result of efforts to convert surplus savings into goods. The
effect of the high propensity to consume may be offset, in part at
least, by an unfavorable shift in the investment function. Union
wage policy will tend to keep the prospect for proRts unfavorable,
because unions will press for wage increases despite the continuation
of price controls. The practical effect of union wage policies in
preventing a boom may not be important during the first year or
two after the close of hostilities. On the one hand, the execution
of most long-term investment plans will be discouraged by the allpervasive uncertainty; on the other hand, the unfavorable effect of
union wage policy upon the marginal efBciency of capital will not
* For the basis of this estimate see my paper, op. c%., pp. 15-16.
' If the price control is ineffective and there is a large rise in prices, there may
be no accumulation of "surplus" savings. In fact, the war, by reducing the
purchasing power of accumulated holdings of cash and securities and of income
from the latter, may actually produce a deficiency of savings. This deficiency
would manifest itself after the war by a decline in the propensity to consume, a
result of the efforts of people to restore the purchasing power of their savings
by increasing their current rate of saving.



greatly discourage enterprises from making the urgent replacements
of equipment which will represent most of the equipment buying
immediately after the war.* Union wage policy in the building
trades may limit the demand for housing, but experience after the
First World War indicates that people are likely to be cautious
in purchasing new houses until the transition from war production
to civilian production has been pretty well completed and until the
outlook for civilian employment has been clarified. As the tran­
sition proceeds and as urgent shortages are met, demand schedules
for all goods, but especially investment goods and labor, will become
both more clastic and more "shiftable." Union wage policies will
then produce more pronounced effects. In addition there will be
delayed effects of wage adjustments made during the period of
highly inelastic demands. All of this will help prevent a boom
during the years when surplus savings are being worked off and
demand deposits are abnormally large in relation to prices and
The political policies of organized labor during the first 2 or 3
years after the war are likely to affect the stability of the economy
even more than its economic policies. No one, however, is in a
position to predict what the political policies of the labor movement
will be and, therefore, whether they will tend to make the economy
more or less stable. The crucial questions are the positions that
organized labor will take on the redemption of war savings bonds,
on taxation, and on price control.
One is tempted to predict that labor will oppose restrictions
on the redemption of war savings bonds, will demand large and
immediate reductions in taxes on the lower income brackets, and
will demand the termination of most forms of price control (since
price control will hinder unions in negotiating wage increases).
These would be the easy demands for labor to make. They would
reSect pretty adequately the shortsightedness and the ignorance
of the man in the street—his obliviousness to the danger of an
uncontrolled boom, his difEculty in thinking in terms of general
rather than particular interests, his trouble in taking account of
the long run rather than the immediate consequences of decisions.
Fear of higher labor costs may be so great that the Rrst effect of union
wage policy may be to raise the demand for industrial equipment.



These are demands which will be made with much noise by a host
of demagogues who will proclaim themselves friends of labor.
If the tabor movement were to take these stands, it would
represent a great failure of the principle of labor organization. The
man in the street cannot be expected to think very concretely in
terms of his general interests and in terms of the long run. This
is one reason why he needs organization—so that through men
whom he trusts and whom he regards as capable of representing his
general and long-run interests he may be protected against blindly
and naively reacting solely in terms of immediate and particular
It is possible that the labor movement in the years immediately
after the war will fail to represent the general and long-run interests
of its members in economic stability. Eagerness to make longdeferred purchases will be great, and people will be highly impatient
with anything which limits their ability to buy. Restrictions on
the redemption of war bonds will not be popular. The demand for
large reductions in taxes on the lower income brackets will be eagerly
pressed and vigorously exploited by some politicians. Price control
will be less unpopular than taxes or restrictions on the redemption
of war bonds and will have a better chance- of surviving. It may
survive even though unions oppose it on the ground that it limits
their ability to win wage increases.* Price control will not be
effective, however, unless accompanied by a broad system of
It is not unrealistic to conclude that the balance of power in the
struggle over the prevention of inflation after the war will be held
by organized labor. Whether stability is achieved through the
effective control of the conversion of surplus savings into goods or
whether there is a runaway boom followed by a great collapse will
depend upon whether the trade unions support the retention of
controls during the critical transition period when the consumption
function is abnormally favorable. They will not support a policy
of control unless their leaders are capable of thinking in terms of
the economy as a whole and not simply in terms of the immediate
The politics of price control may be compared to the politics of the tariff.
Each union may support the peiteraZ prtTMxp/% of price control, but demand
relaxation of control of the prices of particular products in which it is espe­
cially interested. It is impossible to predict the net result of such a conflict
between support for control in general and opposition to control in particular.
A compromise is indicated.



markets for particular industries and immediate employment in
particular industries.

Suppose that the immediate problem after the termination of
hostilities is one of averting deflation rather than of preventing a
boom. This might well be the case if price control were to break
down pretty completely during the war so that there would be only
a small accumulation of surplus savings to convert accumulated
needs into effective demand. Would the economic and political
policies of unions help or hinder the fight against a postwar delation?
The economic policy of unions in nearly all instances would be
to resist wage cuts. Some economists believe that wage cuts
produce unfavorable shifts in the investment function (and thus
intensify depressions) by arousing the expectation of further wage
cuts and price cuts. Undoubtedly an unrestrained struggle by
each employer to improve his condition by wage cuts, such as might
occur in the absence of unions, might arouse unfavorable expecta­
tions and thus accentuate the depth and possibly the length of the
depression.* Hence unions, by holding wages rigid during depres­
sion, might keep employment higher than it would be in the case of
competitive wage cutting. But rigid wages also have unfavorable
consequences. 2 Hence one cannot be certain whether rigid wages
would permit more employment than competitive wage cutting.
Better for employment than either competitive wage cutting or
complete rigidity is selective wage cutting. A period of contraction
is a time when all demand schedules are abnormally inelastic and
also when they have a one-sided "shiftability,"
when they shift
The effect upon the length of the depression is less certain than the effect
upon the depth. The more severe the depression, the more complete is the post­
ponement of commitments of all sorts, and the faster the accumulation of
deferred demand. Consequently, an earlier turning point would be a possibility.
' Rigid wages do not prevent the expectation that wages 77 Mph% be cut.
Consequently, they do not prevent the postponement of commitments. Rigid
wages are likely to produce less favorable cost-price relationships than wage
cuts. Unfavorable cost-price relationships retard the repayment of debts and
the improvement of the cash position of business enterprises. Since the execu­
tion of many plans, such as the catching up on deferred maintenance, depends
upon the cash position of the concern, unfavorable cost-price relationships
would limit the demand for goods. Finally, since short-term marginal costs
include raw materials, rigid wages tend to depress raw material prices and,
hence, farmer incomes. This means that rigid wages may have little or no
favorable effects upon the propensity to consume,



more readily in response to unfavorable influences than to favorable
ones. Even at such times, however, there are a few commodities
for which the industry demand is elastic. In such cases, wage cuts
would help employment. Furthermore, many concerns can cut
some or all of their rates without provoking an appreciable number
of competitors to make offsetting cuts and, therefore, without pro­
ducing offsetting cuts in prices. Cuts of this sort create investment
opportunities for the particular Srms and thus produce favorable
shifts in the investment function* Finally, there are the wage cuts
which induce little immediateemployment becauseof the inelasticity
of demand but which create more favorable cost-price relationships
and which, therefore, pave the way for recovery when various
changes in the business situation cause demand schedules to become
more elastic and also more shiftable in response to favorable
Union wage policy in its present stage of development is deSnitely hostile to selective wage cutting. As unions gain experience
in selling labor, they may be expected gradually to adopt more
flexible and discriminating wage policies. Progress in that direc­
tion, however, will occur slowly and will not affect union wage
policy in the years immediately after the war. Consequently, one
cannot be certain how union wage policy will affect the problem of
averting deSation after the war, should that problem arise. If
rigid wages produce a higher level of employment than competitive
wage cutting (which is uncertain), union wage policy will help avert
deflation. But one can be sure that the unions will not be ready to
support the wage policy which would be most effective against
deflation—the policy of selective cuts designed to take advantage
of elastic demands and of opportunities to create investment

How would union political policies affect the problem of fighting
a postwar deSation? If deflation occurred, the public, with the
support of organized labor, would insist upon unrestricted redemp­
tion of war savings bonds and prompt repayment of forced savings.
As a result, a severe deflation would be halted.* Deflation would
This would not prevent the continuation of a persistent creeping deflation
over a number of years, provided the outlook for profits were extremely unfavor­
able. Even a highly favorable consumption function cannot offset the effect of
an extremely unfavorable investment prospect. The unfavorable outlook would



prevent there being a question of the retention of price ceilings.
On the contrary, there would be a great demand, especially from
farmers and raw material producers, for price "Boors." Labor
would probably support such schemes because its traditional preju­
dices have been in favor of "stabilization." Whether commodity
stabilization schemes mitigated or intensiBed the deBation would
depend upon how they were administered, particularly upon how
the liquidation of supplies was managed.
DeBation would raise important questions of tax policy and
government spending, and the position of organized labor would
be important in each case in determining the course adopted. It is
significant, however, that union leaders have given little considera­
tion to the use of fiscal policy in combating deBation beyond sug­
gesting an expansion of public works. This means that organized
labor is not yet well prepared to consider the problems which might
be raised by the wide variety of circumstances that might accom­
pany a deBation. For example, deBation might occur because the
large yields of war taxes produced a substantial surplus over postwar
government expenditures. In this case a reduction in taxes rather
than an increase in expenditures might be indicated. Or deBation
might occur in spite of a large government deBcit because extrava­
gant demands of veterans for service allowances and pensions, of
farmers for subsidies, and of workers for wage increases produced a
dread of the future and led individuals and enterprises to hoard
cash in large quantities. Experience between 1933 and 1940 indi­
cates that hoarding of cash because of fear of the future may almost
completely offset the stimulating effect of large deficits. The
fears which encourage the hoarding of cash may be partly fears of
higher taxes, i.e., fears aroused by the deBcit itself. If fears of the
future are causing large-scale hoarding, direct attacks on the causes
of the fears may be more effective than larger deBcits. Certainly
one cannot expect to offset by larger deBcits every defect in policy
which produces deBation. Organized labor, however, has not yet
had occasion to probe carefully into these matters and is dis­
posed to support the simple view that the remedy for every deBadiscourage not only the shift from war savings bonds into capital goods,
securities, or housing but also the shift from war savings bonds into consumer
goods of all sorts.
If restrictions were imposed on the redemption of war savings bonds in an
attempt to control a postwar boom, there might be an unfortunate delay after
the collapse (if Congress were not in session) in getting restrictions removed.



tion is a larger deficit and that the deficit should be produced in the
main by large public works.* For the time being, labor's great
political influence may cause it to support the combating of defla­
tion by rather mechanical and oversimplified fiscal policies, with
the result that attacks on deflation are less effective than they might
After the shift from war production to civilian production has
been completed—say 2 to 5 years after the conclusion of hostilities
— the country will face the problem of maintaining high level and
stable employment. This means avoiding both a belated boom
and a creeping deflation. How will the spread of labor organization
and the shift of bargaining power to labor, accentuated by the war,
affect these problems? Again, it is convenient to distinguish
between labor's economic policies and its political policies.
The spread of labor organization which has been accelerated by
the war represents one of the greatest shifts of economic power in
history. It greatly increases the ability of employees to appro­
priate the gains of successful ventures and of technological progress.
In the absence of labor organization these gains would be passed
on sooner or later to consumers. ^ Unless the shift in bargaining
power produces a sufBcient rise in the rate of technological dis­
covery, it is reasonable to suppose that the prospect for profits is
reduced by the capacity of unions to convert all or part of the
proceeds of successful ventures into higher wages. Consequently,
the investment function shifts with the bargaining power of labor.
So also to some extent does the distribution of income and hence
the propensity to consume, although the evidence points to the
conclusion that the distribution of income is surprisingly little
affected by changes in labor's bargaining power.* Hence we may
* Public works, of course, are of special interest to the building trade unions.
* Thus the spread of labor organizations may be expected to modify the
pattern of price and wage movements, causing wages to climb to unusual
peaks in the particular industries and enterprises in which technological progress
is greatest and limiting the transmission of the gains of technological progress
to the community as a whole. Consequently, labor organization may limit
in some measure the effect of competition in socializing the gains of progress.
But labor organization is likely to stimulate technological research and thus to
increase the gains to be socialized.
* Between 1929 and 1939, labor, through the spread of organization and the
help of the government, succeeded in raising hourly earnings in manufacturing



conclude that for every distribution of bargaining power between
employers and workers there is a different investment function, a
different consumption function, and a different schedule of liquidity
preference. There is nothing to assure that the distribution of
bargaining power between employers and workers will be such as to
make possible a high level of employment. Hence is it not likely
that the gains of labor organization during the war will produce
unfavorable shifts in the investment function and in the schedule
of liquidity preference and thus aggravate the problem of main­
taining full employment and a high standard of living after the war?
This question seems to require an af&rmative answer. Never­
theless, the chances are good that the new distribution of bargaining
power may produce no serious general problem for at least a few
years after the war—possibly not before 10 or 15 years. It was
stated in an earlier section that the war will leave an enormous
quantity of technological discoveries to be exploited and that it will
produce a substantial jump in industrial research. In fact, it
would not be surprising if the outlays for technological research in
1945 were double those of 1940. Both the war's legacy of discovery
and its effect on the size of research organizations will produce
favorable shifts in the investment function.
Added to this is the probability that even an unfavorable invest­
ment function will be offset for some years after the war by an
abnormally high propensity to consume. At least this will be true
if the control of prices during the war and immediately after is
reasonably effective. There will be large quantities of war savings
bonds to be converted into goods. Even if the increase in tax
revenue and in the sales of war savings bonds far exceed present
estimates, demand deposits by the middle of 1943 are likely to be
$45 billion or more, and, by the middle of 1944, $55 billion or more.
At the end of 1929, demand deposits were $16.4 billion and when
the war started about $27 billion. If price controls limit the rise
in the level of prices to not more than 60 or 75 per cent above 1939,
demand deposits will be abnormally high in relation to incomes and
by about 22 per cent. In other branches of industry the rise was less, probably
about 15 per cent. In the same period the cost of living dropped 15.6 per cent.
This means that the purchasing power of an hour's work in manufacturing rose
about 43.7 per cent and in other parts of industry about 36.1 per cent. Despite
the rapid rise in real wages, the share of private wages and salaries in income
produced by private industry rose only from 61.3 per cent in 1929 to 62.6 per
cent in 1939, and 63.1 per cent in 1940.



prices. A large and sudden attempt to shift from cash to goods
would produce a boom and a collapse. If such attempts can be
prevented, the large volume of demand deposits would tend to
stimulate a steady increase in production. Eventually, of course,
the expansion of production and the rise in prices would eliminate
excessive liquidity. While this adjustment was going on, labor
might possess great power to appropriate profits without seriously
limiting the volume of employment. The warning should be
repeated, however, that, after the outlook for profits becomes too
unfavorable, surplus liquidity disappears very rapidly.*
After the effect of the war upon the rate of technological change
has worn off, and after money incomes have been brought into
normal relationship with the volume of cash, will not the great
bargaining power of labor prevent the attainment of full employ­
ment and thus limit the standard of living of the workers? This
is a possibility. One may argue that the maldistribution of bar­
gaining power cannot become very extreme, partly because gains in
labor's strength will stimulate counterorganization by employers
and partly because the bargaining power of the workers is limited
by the unemployment which itself is a result of the bad distribution
of bargaining power. Support for these arguments may be derived
from the experience of Britain and Sweden and to some extent
from the United States. One may argue also that the ill effects
of a maldistribution of bargaining power are not likely to be serious
because the very gains in labor's power stimulate technological
discovery. 2 The fact remains, however, that there is nothing to
assure that the distribution of bargaining power between employers
and workers will not produce a large amount of chronic unemploy­
ment. Perhaps it will not, but possibly it will.
The basic difEculty seems to be that the customary bargaining
units, the enterprise, the region, or the industry, are too small.
They do not permit employers and workers to take account of
* When would-be investors believe that the chances of loss are greater than
the chances of gain, their appetite for cash becomes enormous. Furthermore,
a dark economic outlook causes consumers to cut consumption and to build up
holdings of cash. Thus unfavorable shifts in expectations produce unfavorable
shifts in
the investment function and the schedule of liquidity preference.
* The distribution of bargaining power which is best depends, of course,
upon the yardstick which one uses. The distribution which is best from the
standpoint of employment is not necessarily the one which produces the most
rapid rate of technological change and, therefore, after several years, the highest
standard of living.



the full effect of their decisions upon the general level of employ­
ment. Furthermore, the available evidence points strongly to the
conclusion that for the nation as a whole the conditions which make
possible the largest pay rolls also make possible the largest proRts.
Pro&ts and pay rolls almost invariably move upward and downward
together, and in such a way as to suggest that for each change of
1 billion in the prospect for profits there are corresponding changes
of about 2 to 5 billions in the amount which employers are willing
to pay for labor. The greatest possibilities of collective bargaining,
therefore, will probably not be achieved until representatives of
labor as a whole and of business as a whole are able to fix the broad
outlines of a national wage policy. A wage policy, in order to be
truly national, would need to rc&ect the interest of labor as a whole
in the largest possible pay rolls and of business owners as a whole
in the largest possible profits.* Only if bargains in the several
plants and industries conformed to a national wage policy designed
to maximize pay rolls and profits, would the organization of labor
no longer threaten to produce an unfavorable shift in the investment
function, a high preference for cash rather than for ownership of
shares in industry, and chronic unemployment.
The happy stage in which collective bargaining is really based
upon the national interests of capital and labor will not be easily
or quickly reached. The struggle of individual employers and
groups of employers and of individual unions to use their bargaining
power in their own way and to their own particular advantage
regardless of the effect upon the nation as a whole will be stubborn
and persistent. Let us remember that never yet have employers
permitted national interests to govern the setting of import duties.
And yet so long as bargaining is conducted by rather small auton­
omous units (enterprises, sections of industries, or industries),
it is not so much a method by which workers gain wages at the
expense of employers as a method by which each of many thousands
of small groups of workers limits slightly the employment opportuni­
ties of all workers. Once the day is reached, as it eventually will be,
when the broad outlines of a national wage policy are fixed for the
purpose of producing the largest possible pay rolls and profits,
relations between employers and workers will undergo a revolu­
In other words, the mere fact that the policy was made in a national con­
ference would not make it national in reality. It might be merely a compromise
by which the interests of some groups were advanced at the sacrifice of the
largest possible national pay roils.



tionary change and the basis will be laid for cooperation between
them in promoting expansion and technological progress—a coopera­
tion which will give the economy far greater power to raise produc­
tion than it has ever possessed.

The long-run outlook for employment will be aiTected also by
the political policies of the labor movement. Of special importance
will be the stand of organized labor upon international economic
policies and taxation.
The unprecedented shortages of goods all over the world created
by the war will provide a golden opportunity to reverse the trends
of the last two generations and to start a movement to reduce
barriers to trade. A substantial reduction in trade barriers would
open many investment opportunities for American savings and thus
would increase employment opportunities and raise living standards
in the United States. The world needs equipment of all sorts—
automobiles, agricultural implements, diesel engines, gas engines,
mining machinery, electric power equipment, railroad equipment,
airplanes, textile machinery, refrigerating machines, printing presses.
If the United States is to supply the world with equipment on a
large scale, it must be willing to take goods in exchange. This does
not mean a dollar's worth of imports for every dollar of exports.
Rather it means, for the time being, accepting perhaps $1 increase
in imports for every !2 or $3 increase in exports—sufRcient to
provide an adequate return on foreign investments and possibly
some amortization. In the course of time, as our foreign invest­
ments increase, we shall gradually develop an import surplus.
In order to help foreign nations pay a return on new American
investments abroad, the import duties of the United States, which
in the course of 150 years have reached fantastic heights, must be
substantially lowered. The best opportunity to do this, or its
equivalent, will be shortly after the war when rates of exchange are
established between the dollar and various foreign currencies. If
the rates of exchange are made more favorable to foreign countries
than were the prewar rates, (if the pound, say, is eventually priced
at about $3.50 or $3.75), that will be equivalent to a reduction in
our duties.

The farmers of the country, with the exception of the cotton
growers, are irreconcilably protectionist and will oppose participa­
tion by the United States in a general movement to reduce barriers



to trade. Whether the policy of the United States is restriction^
or anti-restrictionist will depend, therefore, in the main upon whether
organized labor supports the cotton farmers in favor of freer trade
or the wheat, dairy, fruit farmers, the wool and sugar raisers, and
the cattlemen in favor of trade barriers. The interests of most
industrial workers (with the principal exception of most of the
textile workers) will be promoted by freer trade. This will be
especially true of nearly all workers in the metal trades. The
traditional view of American labor, however, has been protectionist.
It has feared the so-called
M)<?r of Europe and Asia and has
supplied the votes that kept the industrial Northeast protectionist.
Hence labor will experience a clash between its traditional views
and its current interests. Eventually its current interests are
bound to win over its traditional views, but time may be required
for this to happen. Just when labor's support is most needed to
enable the United States to participate in reducing the barriers to
trade, that support may be lacking. If it is lacking, the labor
organizations will lose a golden opportunity to raise the standard
of living of their members and of workers all over the world.
During the last 10 years the Federal tax system has developed
in such a way as to bear heavily upon profits, to produce an
unfavorable shift in the investment function, and to limit employ­
ment opportunities. Even in 1940, Federal income and excess
proBts taxes took $2.5 billion out of $9.5 billion of corporate income
before taxes. Furthermore, the government has developed a
strong propensity to tax proBts, with the result that one may
expect almost any new revenue need of the government to be met
by stiffer taxes on proBts. The possibility that large and more or
less unforeseeable taxes may be imposed upon proBts is bound to
have most unfavorable effects upon estimates of prospective returns
and, therefore, upon the volume of investment and of employment.
With the necessity of meeting a postwar budget of roughly $17
billion, the kind and amount of taxes levied by the Federal govern­
ment will be of Brst importance. Drastic changes in taxes, espe­
cially in taxes on proBts, will be necessary to permit the community
to have the amount of enterprise which it needs. Furthermore, in
order to prevent tax policy (or lack of tax policy) from producing
an unfavorable investment function and, therefore, from limiting
employment opportunities, the principle needs to be Brmly estab­



lished that increases in taxes on profits will be made only as a last
Up to the present, organized labor has taken little interest
in taxes on profits. Labor has assumed that such taxes did not
fall on labor and that they might even prevent the passage of taxes
which would fall on labor. Sooner or later labor will discover
that it has an even greater interest in taxes on profits than do
business owners, for the simple reason that a change of $1 in the
prospect for profits produces a change of several times that amount
in pay rolls. Labor does not know this fact yet, but labor
cannot be expected to remain ignorant of it forever. Possibly
labor will not discover its interest in taxes on profits in time to get
its interests effectively represented when tax reductions and changes
in tax laws are made within a few years after the war. If labor
does not, the country will be severely handicapped in its efforts to
maintain a high level of employment after the shift to civilian
production. Continuation of the Federal tax policies of the last
decade are incompatible with an economy in which a spirit of
enterprise and adventure flourishes. Without the support of organ­
ized labor the country will probably not be able to establish a tax
system which is carefully and skillfully designed to encourage enter­
prise and thus to promote a high demand for labor.

The rise of trade unionism will accelerate the revolutionary
change in government represented by the shift of policy making
from legislatures to administrators. This gradual supplanting of
legislative government by administrative government has been
going on in all democratic or quasi-democratic countries for over a
generation. It has been speeded up by the great depression and
by the two world wars.
No one knows whether the rise of the administrators and the
decline of the legislators will help or hinder the realization of
democratic ideals, i.e., the creative participation of large numbers
of people in making ethical systems and in selecting policies and
men to implement the ethical systems. For a generation or two
the rise of administrative government may be harmful to democracy
because the public may require time to convert the administrators
from masters into servants.
For other guesses concerning postwar budgets see the papers by Hansen,
Biaaeil, and Harris in this volume.—EDITOR.



Whether the revolution in government is immediately good or
bad for democracy, the leaders of labor will support it because the
new kind of government enhances the power of the national union
leader and makes it easier for him to participate in the process of
policy making. Certainly, it is much easier and more satisfactory
for a union leader to present views on policy to administrative
of&cials than to committees of Congress. If the administrator
agrees with the union leader, he can modify his policies immediately.
Even if the Congressional committee agrees with the union leader,
action will be slow and nothing may happen anyway. In other
words, the very conditions which are producing the revolution in
government, the fact that the administrators are usually better
informed policy makers than the legislators and better able to act
quickly, will cause labor leaders to support the revolution. In most
of the clashes between Congress and administrators, the union
leaders will be on the side of the administrators. The preference
of labor leaders for administrators or legislators will, of course,
change with political shifts, but in the long run the union officers
are likely to support the administrators more often than the legis­
lators. A principal reason for this belief is that the administrators
are gradually learning how to gain support from labor leaders by
making regular consultants of them and giving them a wider voice
in public policy making.

The great impetus given to the growth of labor organization by
the war will confront employers, unions, and the public somewhat
earlier and in more urgent form with many problems which other­
wise they would have been compelled to face somewhat later. The
great spread of unionism will produce a change in the nature of
unions and will cause them to become quasi-public organizations.
Up to now unions have been very private affairs, free to admit or
expel men as they saw
and to run their own affairs as they (or
their leaders) desired.* In a few instances, unions have virtually
been the private property of a few leaders. Public policy toward
The worldwide tendency for administrators to gain power at the expense
of legislators extends to the internal life of trade unions. The adjustment
of the internal business methods of unions so as to preserve a reasonable
amount of democracy in unions will be a principal problem of trade union
government during the next generation.



the internal operation of unions has been one of Zatssez/tMre. Obvi­
ously, organizations which control employment opportunities in
great industries and which can deprive men of an opportunity to
make a living in those industries cannot remain private. They
must keep their doors open on reasonable terms to all reasonably
qualihed men who may wish to join. New York State recently
passed a law forbidding unions from refusing membership on the
ground of race, color, or creed. A few organizations still draw
the color line and a few restrict membership by stiff initiation fees.
Such restrictions need to be removed.
Important also is control of the imposition of discipline by
national unions—discipline of entire locals or districts by putting
them in "receivership," and discipline of individuals by the imposi­
tion of fines or by expulsion. Such control is necessary in order
to protect the democratic process within unions and to make unions
effective instruments for industrial democracy. "Receiverships,"
by which nationally appointed representatives supplant for the
time being the elected representatives of the local, are from time
to time necessary.* In some cases, however, they are simply used
to remove from ofEce effective critics of the national union admin­
istration. Furthermore "receiverships" may be continued long
after they are needed. There are instances of "receiverships"
lasting 20 years.
The most satisfactory arrangements for protecting the integrity
of democratic processes within unions would be for the labor move­
ment itself to establish a judicial body to which locals might appeal
for the removal of "receiverships" and to which individual union
members might appeal cases of expulsion, suspension, or fine.^
* They may be necessary because indiRerence of the members has permitted
irresponsible or corrupt leadership to gain control of the local, because an
extreme growth of factionalism prevents the local from functioning effectively,
or because of other reasons. In every instance, the "receivership" should have
the purpose of restoring ordinary democratic processes as soon as possible.
* Appeals in some cases of union discipline might be to the umpires who
hear discharge cases arising under trade agreements. A closed-shop contract
gives the union the opportunity to discharge men by expelling or suspending
them or by imposing a 6ne which they are unable to pay. If men have the
right to appeal to an umpire when they are discharged by the employer, they
should have the same right when they are discharged by the union. Such right
is given under a number of agreements. Employers should not sign closed-shop
agreements which do not provide for an open door into the union and for appeal
to a neutral umpire in cases of discharge, whether the discharge is made by the
employer or by the union.



This would not be an easy step for the labor movement to take
because it would conflict with the strongly established tradition
of union autonomy. This tradition, however, seems destined
gradually to be modified. If the labor movement does not act,
the government undoubtedly will. The National Labor Relations
Board might be authorized to determine whether the principles
of fair representation require the removal of a "receivership"
and to hold an election where it considers its supervision necessary
to protect the rights of the members of the locals. Likewise, the
board might be given authority to receive appeals from severe
discipline by unions (cases of expulsion, suspension, or large fines,
say $100 or more) except where appeal to other neutral agencies
is provided by the union constitution or by agreements with
employers. The regulation of the internal life of unions by govern­
ment agencies, if abused, can easily become a threat to the integrity
of the democratic process in the community at large. Conse­
quently, it is to be hoped that the unions make such regulation
Problems are also presented by the terms of trade agreements.
The community cannot always rely upon the opposition of interests
of employers and workers to exclude from trade agreements pro­
visions which are contrary to public policy. Consequently, the
community must work out general principles by which to determine
whether or not the provisions of trade agreements conflict with
public policy; and it must work out procedures by which to obtain
modification of agreements which conflict with public policy. To
take a simple but fundamental question: how far should trade
agreements be permitted to restrict the making of technological
changes or the use of new materials or new methods? To particular
groups of workers and employers certain technological changes may
be injurious, and a trade agreement may place stifT impediments
against these changes. For the community as a whole, however,
technological changes are the only hope of producing large improve­
ments in the standard of living. Furthermore, such changes are
needed to produce sufBcient investment opportunities to yield
full employment. Which shall prevail: the security of the com­
munity that requires technological change to prevent unemploy­
ment, or the security of the small group that will suffer loss of jobs
if methods are changed? If the community decides that its interest
must prevail, by what equitable and practical methods can the
public policy be implemented?




By far the greatest question presented by the gains of labor
is whether unions will prove able to assume the responsibilities
that go with great power. Until recent years the labor movement
in the United States has been small and weak. It has had an uphill
struggle for existence against tremendous odds. Naturally, it
has had the psychology and also the problems of the underdog.
Unions did not worry about unduly encroaching upon the profits
of employers, or about limiting the amount of enterprise (and hence
the amount of employment) in the community. Organizations
Bghting for bare existence do not consider such problems.
Today very few unions are underdogs. Some of them are even
overdogs. The others are quite powerful enough to take care of
themselves. Within broad limits, they now determine the amount
of enterprise in the community. If they overreach themselves,
they injure both employers and their own members. Because of
their great power, unions will defeat their purposes unless they show
concern for the profits of employers and the prosperity of industry,
unless they become in large measure guardians of enterprise. To
the pioneer fighters in the battle of the unions for survival, such a
policy would seem a betrayal of the labor movement. And yet
there is no escape for the unions. If their policies really do deter­
mine in large measure the amount of enterprise, they must either
take account of this fact in formulating their demands or they must
become instruments for limiting rather than raising the standard
of living of their members.
As indicated in a previous section, the great power which unions
are acquiring, and the necessity of their taking account of the
interests of labor as a whole, require a change in the structure of
the labor movement and in the methods of making the policies.
The problem of developing a structure within the labor movement
which permits policies to represent the interests of labor as a whole,
rather than the interests of carpenters, steelworkers, or plumbers,
is simply a part of the general problem which confronts the com­
munity as a result of the rapid rise of group organization during
recent years.
The nineteenth century developed the theory that history is to
be interpreted mainly as a struggle between classes and groups.
That doctrine has much historical truth. But a better organized
and harder fought struggle among farmers, manufacturers, wage



earners, retailers, pension seekers, veterans, and others offers no
promise as a way of raising the standard of living. It would be
sheer accident if the struggle produced the distribution of income
and of economic advantage which makes possible full employment
and the largest volume of output of which the working force and the
plant are capable. And the uncertainty in the position of each
group, particularly business owners, which is an almost inevitable
result of a vigorously conducted struggle, would have an unfavorable
eiTect upon the investment function. The achievement of the
conditions most favorable to full employment and a high standard
of living, therefore, requires cooperation among organized groups
for that purpose. It is the task of the twentieth century to make
group organization the instrument of constructive cooperation
rather than of destructive conflict. Organized labor will be able
to make a major contribution to intergroup cooperation provided it
develops the capacity to think in terms of the national interests of
labor rather than simply in terms of the interest of small groups.




The term social security, in the connotation it now has, is of
American origin and less than 10 years old. It did not gain wide
currency until the House Ways and Means Committee in 1935,
looking about for a title distinguishing the substitute bill it reported
for the Administration's "Economic Security Bill," hit upon the
"Social Security Act," for no particular reason. Ever since, the
term has been applied to everything included in this important
Federal law and to other similar institutions.
Today social security is an immensely popular term, not only in
the United States, but throughout the British Dominions and in
other lands as well. In Article V of the Atlantic Charter, President
Roosevelt and Premier Churchill proclaimed "improved labor
standards, economic advancement and social security for all" to
be one of the major postwar objectives of the two great Englishspeaking nations. In the United States, both major political parties
are pledged to the "extension of social security." In England,
Ernest Bevin recently said: " I suggest that at the end of this war
we accept social security as the main motive of our national life";
and the same view has been expressed by Anthony Eden and Lord
Halifax. Elsewhere the term is not so well established, but it is
gaining acceptance in Latin America and is at least understood by
informed people throughout the world.
Yet this term lacks precise meaning even in the United States.
The most widely prevalent usage is that adopted by the Inter­
national Labour OiRce,* which includes within the term both social
assista^e and social inFMratMe and also social security systems.
Social insurance systems "represent an integration of social insur­
ance and assistance." Social assistance stems from the old insti­
tution of poor relief and "expresses the obligation of the community
* Internationa! Labour OfBce, ApproagAe* f#
naMowal Rvrtvy (Montreal, 1942), pp. i, ii.

i&cMrRy; An Zytter-



toward its needy members." It includes noncontributory pensions
for the aged and for invalids (the American oM-agre assistance and
aid to tAe btind), mothers' pensions (in statutes called aid to depend­
e d cAiMren in this country), unemployment assistance, medical
assistance, and rehabilitation of the disabled. Social insurance, in
contrast, "is situated between social assistance and commercial
insurance." It is established by law and serves social purposes but
utilizes insurance principles. It first made its appearance in Europe
in the 1880's. Its foundations were, not poor relief, but the
employer's liability principle, voluntary sickness funds, and pension
funds for small groups in the population, such as civil servants,
miners, and seamen. Today it includes workmen's compensation
(or industrial accidcnt insurance), sickness (or health) insurance,
old-age, invalidity, and survivors' insurance (called pensions in
Europe), and unemployment insurance.
As thus defined, sociat security is broader than social insurance,
although the latter term is often loosely used to include social
assistance and integrated social security systems. It is narrower
than the English social services and the Scandinavian social poKcy,
which include, besides social security institutions, such other govern­
mental services as public education, public-health and medical
services, public housing developments, and still other publicly
financed and directed programs for the benefit of people in lowincome groups. It is also narrower than economic security or
security, as economists use these terms. The social security
approach is basically that, of individual and family welfare. Its
concern is with the immediate hazards that spell want and depend­
ency to many individuals and families, not with ultimate causes or
basic reforms.
As thus conceived, social security has but limited values. It is
not a panacea, nor a cure for any of the conditions it seeks to relieve.
Yet it serves vital needs of society. Without maintenance of
individuals and families in all contingencies of life, the hope of
fundamental remedies for economic ills is but illusory.
For this reason, relief is as old as is civilization. In this day and
age, it is predominantly a responsibility of the state. Social
assistance is specialized relief, adapted to the needs of clearly distin­
guishable groups among the people without adequate means for
individual or family maintenance (not mere subsistence, but a level
of maintenance compatible with prevailing concepts regarding the
needs of the beneficiaries of the several programs). Increasingly,



social assistance has come to include not merely cash grants for
maintenance, but health and other services designed to reduce the
need for assistance in the future.
Social insurance serves, basically, the same purposes. Through
social insurance, the costs of meeting the economic hazards whose
consequences are want and dependency are reduced from the maxi­
mum costs which the individual must be prepared to meet if he does
so on an individual basis to the average costs of affording protection.
Like private insurance, social insurance serves as a method of dis­
tributing the costs of meeting economic risks over large numbers of
people and over periods of time appropriate to the particular hazard.
In addition, it has some distinctive advantages which private
insurance does not have. It is generally compulsory, which
ensures normal distribution and reduces costs. In social insurance,
also, only part of the costs fall on the insured, the balance being met
through contributions from the employers or the government or
both. These characteristics make social insurance peculiarly
valuable to people with small but fairly stable incomes. From
society's point of view, moreover, its values do not lie solely in the
fact that it affordsinsuranceprotectiontomany people who otherwise
would have little or no insurance. It has important repercussions
on the economic system and can be utilized for socially desir­
able ends beyond those of providing insurance protection for the
masses. In theory, the large reserves, which are no less necessary
in social than in private insurance, can be so managed as to increase
the stability of the economic system. At least some forms of social
insurance can be set up in such a way that they will operate as a
strong stimulus to preventive efforts, thereby lessening the serious­
ness of the hazards against whose economic consequences they are
designed to provide protection.
Yet the great extension of social security in recent years and
its present immense popularity are not due solely to its intrinsic
values. In large part, this is but one manifestation of the broader
quest for security which, in all industrially mature countries, has
become the economic objective of the great majority of the people.
The factors which have led so many people to value security above
opportunity cannot here be discussed. SufBce it to repeat that this
is the age in which people in all walks of life are searching for
security. Seniority rights in jobs, guaranteed employment,
restrictive union rules, parity prices for farm products, the openprice practices of trade associations, the "live and let live" policy



pursued by businessmen toward competitors, the growing number
of licensed occupations, and the great concern of economists over
economic fluctuations are only a few of the many illustrations of
the ever-growing present-day interest in security. Social security
is but another manifestation of the same phenomenon. It is the
quest for security on the personalized level of the common man and
the everyday family. Some people may see in it far more of danger
than of promise, but it is a natural, if not inevitable, development
in the day and age in which we are living.
Poor relief is as old as is civilized society. In this country it
dates back to the earliest days of settlement. The institutions out
of which social insurance developed in Europe antedated the nine­
teenth century. Social insurance itself and specialized forms of
relief now known as soc^a%
first developed in the last
decades of that century. In the United States, aid to the blind,
aid to dependent children, and workmen's compensation, our first
form of social insurance, all were started before the First World
War. Out of that war we got vocational rehabilitation and public
medical care for veterans, and in the twenties old-age assistance.
In Europe, the decade following the war was that of the most rapid
progress in social insurance. In this country, the great spurt did
not come until the thirties, when want and dependency became the
lot of many millions of American families. In the depression we
passed the Social Security Act, and in the space of a few years
registered the greatest growth in social security institutions ever
recorded in any country. When the Second World War began in
1939, we had all forms of social security known in Europe except
health insurance and disability insurance. Our social assistance
payments were the most liberal in the world. In a decade, our
expenditures for social security purposes increased more than
twentyfold. Yet we had by no means satisfied the popular demand.
In the present war, social security has been pretty much at a
standstill in the United States. In his message recommending
passage of a selective service law, the President urged Congress to
include provisions for the protection of the social security rights
of workers called to the colors, but no concrete plan for doing so
has ever been presented. At the present writing (late in 1942),
this country is the only major belligerent which has failed to protect
its service men in this respect. In January of this year, the Presi­
dent, in his budget message, recommended increase of the rates of
the social security taxes, the extension of coverage of the old-age



insurance system, the establishment of a national system of disa­
bility and hospital insurance, and the liberalization of unemploy­
ment insurance under standards to be established by the national
government. But the promised detailed Administration proposals
to give effect to these recommendations have not yet made their
appearance. A plan for war-displacement benefits to supplement
unemployment insurance was brought forward soon after the
President's message, but did not even get out of committee, because
it aroused fears that it was designed to federalize unemployment
compensation. Less than a month before Hitler started the shoot­
ing war and in face of warnings that this nation would soon need
all the revenues it could get, Congress reduced the social security
taxes. Since Pearl Harbor, Administration leaders have repeatedly
urged that the social security taxes be increased, but Congress has
been deaf to these recommendations. Numerous bills to extend
and strengthen our provisions for social security are pending in
Congress, but none of them have been even accorded a hearing,
exccpt the Downy bill for a flat pension of $30 per month to every­
body over sixty-6ve (a modified Townsend plan), which was favor­
ably reported by a special committee but which the Senate refused
to swallow.
A very different story is to be told for other countries.* Begin­
ning with England, it is to be noted, first, that the rights of men
called to the colors have been preserved, as to both old-age and
health insurance. To meet the costs of providing this protection
a small deduction is made from the soldiers' pay, but the Treasury
defrays most of the expense. Similarly, the government has
assumed responsibility for medical and hospital care for civilian
war victims and, in connection with this service, has given financial
assistance for hospital improvements and extensions. It also has
undertaken large social service programs to meet needs peculiar to
the war, such as the feeding of school children, communal food
kitchens, and subsidies to the producers of essential foods, to make
certain that people in low-income groups will be able to get these
foods at prices they can afford to pay.
In addition to these wartime innovations, quite extensive
changes have been made in the old social security institutions. In
The information in this and succeeding paragraphs about developments in
the social security Reid during the war comes mainly from the /nterymttonat
Labour Review, published monthly by the International Labour Office, whose
headquarters are now at Montreal.



all the social insurance systems—health insurance, old-age and
survivors' insurance, unemployment insurance, and workmen's
compensation— coverage has been extended and benefits and con­
tributions increased. Since the war started, the unemployment
insurance fund has finished paying off its debt to the Exchequer
and is now trying to build up a large reserve for meeting the situa­
tion of mass unemployment with which it is again likely to be con­
fronted after the war. In the social assistance programs, benefits
have been increased to keep pace with increases in the costs of living
and a long-standing grievance of the working people has been cor­
rected through the abolition of the household means test and the
substitution therefor of a family and individual basis for determining
need. Unemployment assistance, through which, since 1935, the
national government has assumed responsibility for all relief neces­
sary to workers normally regularly employed in industry, has been
extended to include all pensioners and has been renamed "public
assistance." Finally, the government has recently organized an
Interdepartmental Committee on Social Insurance and Allied
Services to consider how a unified social security system may be
developed after the war.*
For other parts of the British Empire, similar developments
are to be recorded. Canada established a national unemployment
insurance system which came into operation on July 1, 1941. It
has also adopted a comprehensive plan for the restoration of dis­
charged soldiers to civilian life, which includes payments by the
government to the unemployment insurance fund to give all service
men the same rights under the unemployment insurance system
as if they were in private employment, and special grants if, during
the first 18 months after their discharge, they become unemployed
and exhaust their unemployment compensation benefits. New
Zealand, likewise, gives its service men the same credits in its social
insurance system for time spent with the military forces as they
would get in private employment, with the government paying
the entire costs, and it has organized a National Rehabilitation
Council to make plans for the restoration of the service men to
civilian life when the war ends. In Australia, the Commonwealth
in July, 1941, set up a Joint Parliamentary Committee on the
Improvement of Social Legislation and Social Conditions, charged
This committee has issued the Beveridge Report, which provides for a com­
prehensive program of social security. This report has been published by Mac­
millan here and is having a significant influence in the United States.— EDITOR.



with the duty of developing a coordinated plan for social services.
In an interim report made by a committee late in 1941, it took the
position that in view of the federal system of government which
exists in Australia as in the United States the best results could be
secured "if future services are to be administered on the basis of
Commonwealth-State cooperation/' with grants-in-aid to the states
by the Commonwealth for social services "to be administered by
the States on lines laid down in Commonwealth legislation." It
also announced that it expected at a later date to make recom­
mendations for a Commonwealth Social Security Act. More
recently, the Commonwealth government has asked the committee
to make a special study of the feasibility of unemployment insur­
ance, and it has been giving a great deal of attention to a national
plan for public medical services.
Very notable also has been the progress of social insurance
in the last few years in the Latin American countries. Costa Rica
and Peru in 1941 enacted comprehensive social insurance laws,
which include all forms of social insurance except unemployment
insurance. Brazil has extended its previously very limited pension
insurance system to substantially all employees except agricultural
workers, and, under it, affords combined old-age, invalidity, and
survivors' insurance protection. In both Argentina and Mexico,
governmental commissions are at this writing engaged in studies
looking toward the establishment of comprehensive social security
systems. There has also been organized, at the instance of the
International Labour Organization, a Social Insurance Commission
of the American Countries, to assist the participating countries
in developing social security systems on a coordinated and sound
In enemy countries, particularly in Germany, there also have
been important developments affecting social security. Not only
has Germany provided that men called to the colors retain all
social security rights without cost to them, but their dependents
are automatically included in health insurance. Additionally,
health insurance has been extended to war widows and orphans
and to all pensioners, and its benefits have been liberalized, par­
ticularly by the medical-care services. There also has occurred
some extension of coverage and liberalization of benefits in accident
insurance and in old-age, invalidity, and survivors' insurance.
These developments do not differ fundamentally from those in
the free countries, but something radically different is foreshadowed



in the announcement made by the government, early in 1942, that
it is working on a plan for a universal pension system, which will
include all the German people and which will be based on National
Socialist principles, and not on the social insurance concepts of
the "plutocratic-democratic countries." What appears to be
contemplated is to make old-age, invalidity, and survivors' insur­
ance a direct government obligation, but with all payments based
on need, rather than right. In unemployment insurance such a
transition has already been effected. Since the beginning of the
war, no one in Germany has gotten unemployment insurance as a
right, but payments have been made only to unemployed workers
on a basis of their actual needs. The old contributions from
employers and employees, averaging a combined 6.5 per cent of
pay rolls, have been retained but are now commingled with other
government funds. Thus, while Germany has been extending
its social insurance institutions, it has also been remaking them in
accordance with the Nazi philosophy and what they are developing
is something very different from social security as known elsewhere
in the world.
In the countries overrun by the Nazis, the established social
security institutions have been nominally continued. From such
scattered information as is available about the actual situation,
however, it would appear that for most of the conquered people,
at least, loss of freedom has also meant loss of all social security
These wartime developments forecast what is likely to be the
future of social security. Should the Axis powers win the war,
there will be no social security worth discussing in any of the
defeated nations. For the white and yellow "Aryans," also, social
security will not be a right, but a payment which the government
may withhold at any time.
Assuming the victory we still have to win, great advances
in social security are to be anticipated. Precisely what will be
done in each country to give reality to the pledges made by the
political leaders of social security for all, it is, of course, impossible
to say. But something of the probable lines of development can
be forecast, if past trends, current needs, and popular demands
are correctly appraised.
Dealing in this forecast only with the United States, it is of
but slight signiRcance that we have been laggard in the adaptation
of social security to war conditions. It is unthinkable that this



country wiH not protect the social security rights of the men it
calls to the colors. Before the war ends national legislation to
accomplish this purpose will be passed. The fact that this has not
been done to date may create injustices in a few cases, involving men
discharged during the war, but for the great majority of the service
men it will be timely if such legislation is passed before the
war ends. And we may hope that this country will deal with the
men who are risking their lives in its service as generously as have
other belligerents, allowing them the same credits as if they had
been in private employment, without requiring any contributions
from them.
Very probable also is legislation before the war ends to facilitate
the return of the demobilized service men to civilian employment.
The provision which is included in the Selective Service Act that the
drafted men are to get their jobs back if they still exist will not
alone prove sufficient. We shall have need for expanded vocational
training services and educational bonuses and, probably, also for
cash payments to men who cannot find jobs or hold them, which
should be conditioned upon participation in training programs
designed to make them more valuable to industry.
The problem of demobilization after the war, of course, will
involve much more than merely the return of the service men to
civilian life. It includes also the problem of transferring many
millions of workers from war production to production for peacetime
needs. This is likely to be accompanied by much unemployment
and clearly will necessitate widespread movements of workers and
shifts of occupations. This is much more than a problem of social
security, but one of its most important aspects is that in the transi­
tion period millions of Americans will have low or no earnings and
many of them and their families are likely to be in want.
Various proposals have been put forward for meeting this
situation. Among these is the establishment of a dismissal wage,
to be paid on discharge to the workers no longer needed in war
production, either from a social insurance fund or directly by the
employers. This proposal has recently been endorsed by the
National Association of Manufacturers, but it is not clear whether
this organization favors legislation on the subject or merely volun­
tary action on the part of the employers. To be more than a salving
of the conscience of employers who dismiss workers after they have
helped them eam large profits, dismissal compensation must be
compulsory and a fund should be built up on a contributory basis.



while profits and earnings arc good, to ensure payments when
needed. The early establishment of such a system of dismissal
compensation is much to be desired, but politically it as yet com­
mands little support.
Within Administration circles and also on the part of organized
labor, the most highly favored proposal for meeting the social
security problems of postwar readjustment is "the federalization
of unemployment insurance." By this is meant the replacement
of the existing Federal-state system of unemployment insurance
(which is really a system of 51 separate state funds, but with a
large measure of control over administration vested in the national
government) by a unified system, exclusively administered and
controlled by the national government. There are many arguments
to be made for federalization, as well as arguments against it, but
the most popular at this time is that such action is necessary to
meet the problem of the expected large volume of postwar unem­
ployment. At the moment, federalization of unemployment
insurance has little support in Congress, but it is a distinct possi­
bility that as the war approaches its end and fears develop about
the mass unemployment which is expected to accompany postwar
readjustments we shall "federalize" our system of unemployment
compensation. This cannot be regarded as a certainty, however,
because federalization has aroused bitter opposition. Regardless
of whether we should federalize unemployment compensation,
other measures will clearly be necessary if we are to make the
transition from war to civilian production without a large and
dangerous increase in want and dependency. There will be need
for a planned and controlled transition, assisted migration, exten­
sive retraining, and expanded public works programs, as well as
for both unemployment insurance and dismissal compensation.
But there is danger that, in the bitterness of the controversy over
the federalization of unemployment compensation, little or nothing
will be done in preparation for meeting what might be called the
human or family aspects of civilian demobilization.
Beyond the period of demobilization lies that of recovery from
the ravages of war and of the establishment of a world in which the
four basic freedoms will prevail. The basic economic problem will
doubtless be that of maintaining full employment, but there will
also be many social security problems requiring attention.
Of these it is quite likely that major attention will again be
given to old-age security. For the moment, even the Townsendites



are more interested in the war and its outcome than in old-age
pensions. Yet the politicians continue to make vague promises
of support to the Townsendites. This situation is indicative of
the fact that there is much dissatisfaction with the present pro­
visions for old-age security, although as a group the old people
are being treated much more generously than any other large
element among the poor in our population.
Beyond question the present provisions for old-age security
are far from being completely satisfactory. Old-age assistance,
which is now and for many years will remain by far the larger part
of our total program for old-age security as measured by benefits
currently paid, varies greatly in actual operation from state to
state and often within the same state. Grants in many areas are
miserably small and the conditions under which they are made are
deemed humiliating by many of the old people. The greatest
defect in the present provisions is that the Federal aid for old-age
assistance goes mainly and very disproportionately to the wealthier
states. This could be corrected through a system of variable
grants, but Congress has refused to accept this recommendation
of the Social Security Board. The old-age insurance part of the
program also has many defects. It is not financed on an actuarially
sound basis. The so-called
which it provides
are illogically set up and the survivors' benefits are very limited.
Most serious of all, large groups in the population are excluded
from coverage, and under the present law at least one-third, and
probably more, of the people who are covered for tax purposes will
never be able to qualify for benefits.
In trying to forecast what is likely to happen after the war,
account needs also to be taken of popular feeling in relation to
old-age security. Most important in this connection are the
widespread sentiment that all Americans should enjoy old-age
protection and the belief that excessive reserves are being collected
and that much larger benefits might be paid without any increase
in contributions. Out of these popular beliefs arises the danger
that after the war we may replace our present contributory old-age
insurance system with a "baby Townsend plan"—a Hat pension
payable to all old people regardless of need. Such a program
would either prove financially impossible ere long or become some­
thing closely akin to the German
under which
everybody would be taxed for old-age insurance purposes but only
the people in need would get beneBts. Yet it is quite likely that



we shall experiment with a baby Townsend plan, unless very soon
we extend the present contributory system to include all our people
and correct the injustices and anomalies which now exist in both
oid-age assistance and old-age insurance.
But urgent as is the need for betterment of the present pro­
visions for old-age security, there is equal, if not greater, need for
more adequate protection against other social security risks. Of
these, health and disability are among the most important.
Besides China and India, the United States is the only major
country in the world which does not have a national health insurance
law. There have been two periods of great interest in compulsory
health insurance in this country, 1915-1920 and 1932-1939, but
neither resulted in the passage of such a law in any state. Very
considerable progress has been made in recent years in voluntary
medical care and, particularly, in voluntary hospital insurance.
But compulsory health insurance seems remote. While endorsed
by organized labor, farmers' organizations, and women's clubs, there
are but few people who are very much interested in it, while organ­
ized medicine Rghts it relentlessly as "socialized medicine."
In the meantime, actual socialized medicine—medical care at
public expense—has increased at a rapid pace. Medical care, in
the United States as elsewhere, has long been furnished under a
mixed system of private and public care. During the depression
and still more in wartime, the public part of this mixed system has
become increasingly important. It is probable that this trend will
continue. One reason for expecting this is that the veterans of the
present war will doubtless get medical care very largely at public
expense for the rest of their lives, as did veterans of the last war.
There is also reason to expect that the American people will in the
near future manifest much more concern than they have done to
date over the large number of rejections for physical reasons in the
draft, which, while not indicating lack of progress since the last war,
nevertheless reveal that many Americans suffer from curable and
preventable diseases, largely because they lack sufBcient income for
adequate medical care.
Equally clear, if not more so, is the need for social insurance
institutions to provide income in replacement of lost wages, in
cases of illness and permanent disability. In most countries the
former is provided through compulsory health insurance, the latter
in connection with old-age insurance.* In this country, because
* In England, as a part of health insurance.



compulsory health insurance has met with such violent opposition
from the doctors, the Social Security Board has proposed that
compensation for both temporary and permanent disability be
administered along with old-age and survivors' insurance. It was
hoped that such a program would be acceptable to the doctors, but
organized medicine, while not unqualifiedly opposed, seems fearful
that anything of this sort will serve as an entering wedge for com­
pulsory health insurance.
The final form of social insurance, workmen's compensation, is
seldom mentioned in discussions of social security in this country,
but in benefits paid it ranks among the most important of our social
security institutions. By and large, workmen's compensation has
been a success and is exceedingly popular* But there is need for
extension of coverage, liberalization of beneBts, and inclusion within
its scope in all states of all occupational diseases, along with indus­
trial accidents.
Finally, in relation to social insurance, note needs to be taken
of the fact that after the war—possibly even before its close—we
are likely to have proposals for a uniBed social insurance for all
contingencies of life. Anything along this line is difEcult to work
out and is likely to become snarled up in a Federal-state controversy,
but it merits attention.
In any reasonably satisfactory social security program, social
assistance will have almost as large a part as social insurance.
There is need for the improvement of our social assistance institu­
tions in many respects. Particularly if it should prove impossible
to get disability insurance, we shall need to consider assistance to
the disabled as a new form of specialized assistance. And we clearly
need to improve our measures for security for children. With
children becoming more valuable in our society as they become
scarcer, and with two-thirds or more of all children bom in the
homes of the poor, it is to be hoped that the American people will
ere long come to realize that security for children merits quite as
much attention as does old-age security.
In addition to all specialized programs, we shall need to give
thought to the leftover group provided for under general relief.
In the depression period we spent many times as much for direct
and work relief as we spent for all other types of social security put
together. Millions of Americans had personal experience with
relief, and to but few of them was this experience one that they care
to repeat. Almost unanimously, our relief institutions were



regarded as most unsatisfactory. Yet at the end of the depression
these institutions were pretty much what they have always been,
and we lacked a national program for handling relief. A committee
working under the National Resources Planning Board, appointed
at the suggestion of the President, studied the problem for nearly
2 years, but its long overdue report has still not been made public.
In the meantime the Civilian Conservation Corps has been liqui­
dated, and the Works Progress Administration is gradually being
liquidated. But relief is still a very sizable problem and, almost
certainly, will be much larger after the war ends. While we cannot
be optimistic about what will be done, the development of something
like a permanent relief policy is one of our most urgent social security
The program that has been suggested for social security after
the war is a large order. Many people will think that it is not
hnancially possible, while others will take the position that it is
futile to talk about social security apart from attaining full employ­
ment. Both points of view have some merit but arc false in their
extreme form of statement. Under present conditions, adequate
social security can be financed only on a contributory basis, and
there are limits to the benefits that can be provided. But social
security costs are largely in the nature of a better distribution of
costs which society must meet in any event. Our economy, more­
over, cannot survive at all unless it satisfies the mass of the people,
and social security is their rightful demand. How far we can go
toward satisfying this demand will depend upon our total volume
of production, but full employment will not eliminate the need for
social security. Even when we have what may be technically
there is much unemployment, and most
other hazards leading to poverty and dependency have little or no
relation to employment. In the postwar world we must provide
reasonably adequate social security protection for all our people in
all contingencies of life or we will have dictatorship and chaos.
What forms social security will take in future years is uncertain.
In this chapter a conservative program of development has been
discussed, but more radical measures are well within the range of
possibility. Social security has no meaning apart from the govern­
ment and the economic and social systems which prevail in a given
nation at a given time. Its content and underlying purposes, even
its meaning, will change with changes in the government and the
economic system. Social security appropriate to our old Federal



system of government, in which there were sharp lines of distinction
between the authority of the national and the state governments, is
different from that which suits a cooperative or a unitary govern­
ment, either of which we may be developing in this country.
Similarly, social security consistent with an economy of free enter­
prise differs from social security in a planned economy. The future
of social security is unseverably tied up with the future of our
government and of our economy and wili reHect changes which may
occur in those basic institutions. But social security has become
an important part of the American way of life and in the years
which lie ahead will become increasingly important.










The basic pattern for democratic civilization is that the indi­
vidual shall enjoy the greatest amount of freedom commensurate
with the general welfare of society. To enjoy this democratic
freedom, the individual automatically is called upon to move within
certain limitations and disciplines through which alone democracy
can be assured.
Politically these limitations have, in the United States, been
deRned by the Bill of Rights and in laws growing out of subsequent
statutes and court decisions. Economically the past few genera­
tions have seen the development of a deRnite pattern of economic
democracy. But in matters of adjusting ourselves democratically
to the rapid progress of science, much remains to be done.
In recent years, we have learned that there are some rigid
adjustments—physiological and psychological—which mankind
must be willing to make if it wants to enjoy the beneRts of the
scientiRc and technological age in which we Rnd ourselves. For
man to live and progress with the machine and with science he must
accustom himself to a whole new set of disciplines and rules of
living, which formerly were more or less determined by natural
laws of survival.
A prominent example of how these adjustments can be made,
and are made, is found in the Reid of modem nutrition. Nutritional
science has moved forward at a rapid rate in the past 20 years. At
the end of the First World War, scientists were talking about
two or three vitamins. At the time this is written, there are about
thirteen, all of which have been isolated in pure form.

Hunger and satisfaction of hunger through food are phenomena
as old as man. The biological process of converting food into the




energy and resistance necessary for sustenance, growth, and good
health has gone on through the ages* Whether or not individuals
recognized the scientific nature of this process, it was there. Today
we recognize it. We have a vast new Reid of knowledge which we
speak of as
Everyday eating which contributes to the
most favorable growth and health of human beings is called pood
Eating which does not meet the minimum requirements
for favorable development and good health is called
Through most of man's history, food getting has been a hit-ormiss matter. Hunger has been one of his greatest fears. One of
the four horsemen of the Apocalypse is known as Famine. Famine
today is stalking throughout the occupied countries of Europe.
One wonders why, in an age when science has made man master
over nature, there should be such a thing as hunger.
The hunger of primitive peoples was a different kind of hunger
from that suffered by modern man. Primitive man was closer to
nature. Hunger to him meant an aching, empty stomach. But
since he lived closer to the soil, he more likely than not subsisted
on plant and animal tissues and blood as he found them. In this
way he got an abundance of minerals and vitamins and other
essential nutrients.
Modern hunger, more often than not, is an artificially broughtabout phenomenon. We speak of it as
man, Rnding himself in an urbanized kind of civilization, depends
on an almost endless chain of events and services before his food
is Rnally eaten. It must Rrst be grown. It must be taken from
grower to processor. From the processor it must be sent to the
distributor and from there to the retailer. Then it is still subject
to handling and meal preparation. The ordinary person can,
therefore, very easily be deprived of the minerals and vitamins
and proteins which are necessary to make him healthy and strong.
He can suffer from hidden hunger unless everyone handling his
food—from the soil to the table—understands something about

The development of the various physical and biological sciences
on which all modem knowledge of nutrition is based is relatively
recent. It is less than 200 years since man discovered hydrogen,
oxygen, and nitrogen, three basic elements in biochemical processes.
It is only within this century that we have learned about vitamins



and how to isolate them and their great need in proper balance
with minerals, proteins, and other factors in the human diet.
Progress in the Seld of nutrition came in somewhat the same
manner as in sanitation. The general public Srst was skeptical of
the germ theory. But people gradually began boiling their own
water, watching their food supplies, and generally guarding against
contamination. Finally, they recognized the need for public
action in many sanitation measures such as sewers, water reservoirs,
sanitary regulation of the milk supply, and the like.
It took time for people to appreciate the real importance of
understanding the close relationship between diet and health. At
first, researches were confined largely to animal nutrition. Results
obtained with animals provided ample proof that human beings, too,
might be beneSted by applying science to eating. Despite natural
variations in reactions among the different species, the response
in man to nutrition is similar to that in numerous other mammals.
From the earliest researches in human nutrition, centering at
8rst on elementary studies in proteins, carbohydrates, and fats,
studies have now been undertaken which extend into the Helds of
hormones, enzymes, vitamins, rare minerals, and the many com­
plicated biochemical processes in the human being. Research of
this latter type is still in its infancy. But signs are already appear­
ing which link nutrition with the phenomena of life, longevity, and
the genera! physical, mental, and spiritual well-being of people.
The professional nutritionists like to think of Lavoisier as the
father of nutrition.* He analyzed foods and found them to consist
of three principal elements—protein, fat, and carbohydrates. 2
Liebig considered the 6rst of these very important, and German
chemists subsequently set out to determine the minimum amounts
of protein required. Voit established 118 grams of protein a day
as the standard requirement for a moderately active man. Atwater
compiled the tables of the nutritive values of foods in common use
in the United States, and the requirements for the various elements
by individuals of different ages, sex, and occupations. Sherman
pioneered in the requirements for minerals, and McCollum, Funk,
and others in vitamins.
Some of the most signiBcant developments in the Seld of nutri­
tion during the past decade have been:
* Estelle E. Hawley and Grace Carden,
Ar% and
Tez&oot on
and AppHcci6?n qf JVuirMon (St. Louis, 1941).
* J. C. Drummond and Anna Wilbraham,
.EbtpKaAwMm's ood (London
and Toronto, 1939).



1. The discovery of numerous vitamins not known before, the
isolation in pure chemical form of others, and the accumulation
of much knowledge about all the vitamins and their relation to
minerals and other factors in the diet.
2. Determination of the specific role of nutritional deficiency
in disease, such as the part of niacin deficiency in pellagra.
3. Determination of the part which deSciency of such sub­
stances as thiamin may play in human behavior.
4. The widespread acceptance of the relation between adequate
nutrition and the efficiency of industrial workers impaired by subclinical deficiencies.
5. Fuller understanding of the important relationship between
food constituents for their full and effective use in the body.
6. Progress in the better understanding of the metabolism
of various food constituents, e.p., the role of vitamins in the enzymes
of the body.
7. Increased knowledge as to the effect of methods of process­
ing, preservation, and preparation on the nutritive qualities of food.
8. Revelation through survey by scientific methods of the
extent to which the dietaries of large groups among the American
people are inadequate.
9. The incorporation of knowledge about dietary deSciencies
in large groups of the population into the planning and production
of foods needed to alleviate these deficiencies.
10. Standards of nutrition agreed upon, after consulting experts,
by the Technical Commission of the League of Nations Health
Committee (1936).*
11. The National Nutrition Conference of 1941, at which recom­
mendations were made and plans formulated for a coordinated
nationwide program of improving the nutrition of the people of
the United States, s
12. The establishment of dietary allowances as a standard for
human food consumption by the Food and Nutrition Board of
the National Research Councils
* Report 07i t&e pAysto2oy?ca% &ases o/ MMtr%zon (Scr. L.o.N.P. 1936, II B.4).
See also 7%e Region qf ,AyrMH^tMre to #ea?th, Agriculture, 3 %% Economic PoKcy.'
Report of tAe 3%tzed Committee qftAeLeayiie of JVatio^ (Ser. L.o.N.P. 1937,
II A.10).
* Proceeding of tAe JVatioiKiJ Attrition Con/ereTMe /or Defense (Washington,

' Recommended Dietary AMotoancas, Committee on Food and Nutrition,
National Research Council (May, 1941).




Like sanitation, nutrition presents a broader Reid than bio­
chemistry, home economics, or preventive medicine. Nutrition
stems from both the biological and the sociological sciences. It
is in fact a multiple science which gives the rules whereby the indi­
vidual and society can build physical health, endurance, and morale.
It provides the pattern whereby the food needs of modem soci­
ety can be met intelligently. It becomes the guidepost of a common-sense standard of food sufRciency for every segment of the
The significant role which nutrition plays in the life of civilized
nations today has grown out of the acceptance and substitution
of science for folklore habits and ways. This represents a change—
a highly important change—in the culture of man. It means
that, in the matter of foods, we are ready to accept scientific truths
in place of the traditions and superstitions of the past. There is
hope that, if this attitude becomes dominant in all countries and
among all peoples, man will in fact have become master over the
age-old threat of hunger. Thus, if we take into account the possi­
bilities which science offers in the Reids of scientiRc agriculture and
scientiRc nutrition, we can envision a practical application of
President Roosevelt's third great freedom—freedom from want
everywhere in the world.
Today it is important that people as a whole have general
knowledge about the importance of nutrition. Every individual
must be ready to adjust his eating habits to sound nutritional
patterns. Like the individual, society as a whole must likewise
accept its responsibilities.
An outstanding example of the public acceptance of nutritional
responsibility, and of the beneRcial results, can be found in England.
Sir John Orr, eminent British agriculturist and nutritionist, reports
that, prior to the use and application of the new knowledge of
nutrition in Britain, 50 per cent of the children in factory towns
suffered from rickets. The British recognized early that numerous
factors associated with poverty, in addition to faulty diets, were
responsible for such obvious indications of mass malnutrition. In
the past 25 years, deRnite improvements have resulted from publichealth measures among the low-income groups. During this
period the consumption of protective foods has been increased
about 50 per cent, while nutritional diseases have been greatly



lowered. Even under wartime conditions, the British government
has taken steps to assure a minimum daily supply of milk to small
In this country, too, nutrition, as a matter of public policy, has
found its way into government. As early as 1886 it was pointed
out in a state document that obtaining a good diet is frequently not
so much a matter of money as of winning people over from bad food
habits to good food habits. Forty-eight years ago Congress
appropriated $10,000 for the study of human nutrition in the United
More recently nutrition has entered as a policy matter into such
developments as agricultural programs, consideration of nutrition
in setting food standards, emphasis on nutrition education, and
feeding programs among low-income groups.
The subject of food habits and the historical and social aspects
of nutrition are ably presented by Dr. Richard Osborn Cummings.*
Dr. Cummings goes into many factors, such as urbanization,
technological change, and food habits brought to this country from
many parts of the world, all of which have had a dccidcd influence
on American food standards of living. More studies of this type
by sociologists, cultural anthropologists, social psychologists, and
home economists will be of considerable help in bringing together
facts rather than fancies about the importance of the various foods
in the diet.

In the formulation of agricultural policy, the use of nutritional
science to determine production requirements has gone well beyond
the stage of theory. In 1933 a study called
Cosf was begun by Dr. Hazel K. Stiebeling
of the Bureau of Home Economics. This and subsequent studies,
in which the Extension Service of the Department of Agriculture,
the Division of Labor Statistics of the Department of Labor, and
the Works Progress Administration cooperated with the Bureau of
Home Economics, served as a basis for gauging the adequacy of diets
of people of different income levels.
* Richard Osborn Cummings, TAe 4merMxm and RtsFood (Chicago, 1940).
* Hazel K. Stiebeling and Medora Ward, Diets of Four Levels qf
Consent and Cost (U. S. Department of Agriculture, Circular 296, Washing­
ton, 1933). See also
the Mnc yar&tt<% of Good <ZVntr#MMt
(U. S. Department of Agriculture, Bureau of Home Economics, Washington,



In 1935 this series of dietary patterns as they were found to exist
in fact entered for the Rrst time into the consideration of foodproduction planning. At the urging of Secretary Henry A. Wallace,
and under the leadership of Dr. Howard R. Tolley and Dr. Stiebeling, steps were taken by the Program Planning Division of the
Agricultural Adjustment Administration, the land-grant colleges,
experiment stations, and state extension services to inaugurate a
nationwide planning study to relate different systems of agriculture
to the diets set forth in the Stiebeling findings. This series of
studies showed that, if a satisfactory food standard was to be
enjoyed by all classes of the population, it was essential to increase
greatly dairy products, eggs, green and leafy vegetables, and crops
ensuring the increase of these and other protective foods.
The Agricultural Adjustment and other farm programs were
changed, as far as practicable, in such a way as to promote soilconserving practices and at the same time increase those crops that
would give the 130 million people of the United States the most
satisfactory diet from the nutritional standpoint. Acreages previ­
ously growing some of the crops of which there was an oversupply
were diverted to soil-conserving crops. County planning com­
mittees took an active part in recommending the adjustments for
the counties and communities. Surpluses of basic crops were pro­
vided for in the Ever-normal Granary program, under which farmers
received government loans for commodities stored under govern­
ment seal. The policy of abundance was further strengthened by
providing surplus outlet programs for such crops as fresh fruits and
vegetables, dairy products, eggs, and other high-protein commodi­
ties. Among these were the stamp plan and the school-lunch
While this new trend of thought did not take into account the
coming of war, it provided a policy background which is a funda­
mental factor in the setting of wartime and postwar food produc­
tion goals.

In May, 1941, President Roosevelt called a National Nutrition
Conference for Defense. It was presided over by Governor Paul V.
McNutt, administrator of the Federal Security Agency, and coordi­
nator of defense health and welfare services. The work of this
conference was as important, from a standpoint of national policy
making, as was that of President Theodore Roosevelt's Country
Life Commission in outlining our national policy of conservation.



One of the many outstanding contributions of the National
Nutrition Conference was the announcement, by the Committee
on Food and Nutrition, of the recommended dietary allowances for
people of different ages. This standard provides a yardstick against
which the nutritional quality of foods can be measured, meals can
be balanced, menus for people of different incomes worked out.
The intelligent use of this standard permits the serving of plain
meals which nevertheless meet minimum nutritional needs.
Perhaps of greatest significance, however, is the fact that the
recommendations of the National Research Council can play an
important part in planning food-production goals. Some pre­
liminary work of this nature has already been done by Dr. O. Y.
Wells of the Bureau of Agricultural Economics.* On the basis of
three specified diets which meet the National Research Council
requirements, Dr. Wells translated the nutritional needs of our
estimated 1942 population into terms of crop acres and heads of
animals required. Dr. Wells cautions the reader of the tables
presented with his study that all figures are preliminary. He and
other trained agriculturists know that statistical calculations of this
kind are at best approximations and, therefore, subject to correction
as subsequent facts and data come in. However, we have passed
the pioneer stage of applying quantitative nutritional requirements
to the establishment of agricultural food-production goals.
As this is written, in the midsummer of 1942, plans are under
way for establishing the 1943 food-production goals. Conferences
will be held between those responsible for ensuring the nation's food
supplies. These include the President's Food Supply Committee,
headed by Secretary of Agriculture Claude R. Wickard, Department
of Agriculture officials, farmers and farm leaders, food administra­
tors, college and experiment-station specialists, nutritionists, repre­
sentatives of the food industries. Many factors will be taken into
account. One of the most important will be the estimate of the
kinds and amounts of food required to provide a minimum dietary
standard for our population and to supplement the food required
by the peoples of nations fighting on our side.s

Whether from the standpoint of improving food-processing
methods, or from the standpoint of the welfare of industrial employ* O. V. Wells,
House of Representatives, Feb. 13, 1942 (Washing­
ton, 1942, processed copy).
* This program has since been worked out.—EDITOR.



ees, industrial and business organizations must henceforth
regard nutrition as an important social force which holds equal rank
with health, sanitation, recreation, and the cultural, spiritual, and
moral progress of the nation.
During a considerable part of the period of industrialization of
food processing, the trend was actually in the direction of removing
important nutritional parts of the raw food. Milling of white
patent flour and sugar refining were typical examples. This was
not the fault of processors or manufacturers. They merely tried
to accommodate public demand. Mankind as a whole was simply
ignorant of the tremendous implications of nutritional quality, of
eating a properly balanced diet, and of the bad effect of numerous
preserving and transporting methods on health.
Food-handling and -processing developments were largely the
result of American genius for short cuts to manufacturing methods,
of a high degree of promotional ability on the part of American
businessmen, and of a general desire for the convenience, ease, and
comfort enjoyed by Americans before the outbreak of the Second
World War. Nutritionally, many of the early food-processing
methods fell short of making a contribution. One can only specu­
late as to what the effect on the health of the present generation
might have been if the nutritional knowledge of today had been
available to the early pioneers in industrial food manufacture.
Even today, it still remains quite a question as to whether or not
people are going to pay a great deal of attention to nutritional
quality in food. To make the general public nutrition-conscious is
one of the main purposes of the National Nutrition Program. In
this the government has been aided by a large segment of the com­
mercial food industry. Many important food industries are now
emphasizing the nutritional quality of their product in the advertis­
ing and merchandising of their product. They are, by and large,
doing so with a sincere desire to arouse interest in good nutrition
generally, rather than indulging in exaggerated breast thumping
regarding the nutritional advantages of their own respective
In a few foods, like bread and oleomargarine, enrichment or
fortiScation with vitamins under principles recommended by the
National Research Council and standards approved by the Food
and Drug Administration have been regarded as good public policy.
In a few states, the enrichment principle has been made mandatory
by law. To date, however, this has been applied to only a few
foods. Naturally, it is in the public interest that such enrichment



of foods should meet the most rigorous tests, both in the laboratory
and in the determinations of impartial bodies of science; that sound
determinations, based on scientiRc Rnding, are made by those
responsible for setting the regulations regarding food standards;
and that such enrichment does not result in unfair trade practices
that place producers of a naturally more nutritious product at a

The present war is unquestionably going to produce much new
experimentation in the Reid of nutrition. This is true particularly
in the direction of techniques in the handling of foods. No one
claims to have complete knowledge in this Reid yet. But we are
at a point where revolutionary changes in the handling of food are
taking place. Without doubt, consideration of nutritional quality
will have a great deal to do with the handling of food in the future.
We are in a sky-minded age. Already air transport of foods is
becoming an important factor in supplying food to troops in isolated
places and to populations in need of food. The preparation and
shipment of food in this way may become a permanent thing after
the war and offers many possibilities to carry such important foods
as dried milk and eggs, dehydrated fruits, vegetables, and meats,
to out-of-the-way places like the tropics.
Developments regarding food which come from the experimental
efforts of the present war emergency are likely to leave lasting
changes. No doubt food in the postwar world is going to be
regarded in its health sense, and governments will have a deliberate
policy to ensure that everybody has the right diet.
Nutrition will also play a leading, if not a dominant role, in the
shaping of international relations after the full fury of the present
devastating global war has subsided. There is a school of leaders
in both Great Britain and the United States who look forward to a
peace and a civilization based on human needs. Progress in the
Reid of nutritional research, and development of methods whereby
we can gauge approximate dietary needs under a reasonable food
standard, offer a starting point from which any nation can calculate
its minimum food requirements. When this is coupled with intelli­
gent planning of agricultural production on a worldwide scale, and
with good will and intent as between nations, there is no doubt that
people of all the earth will have the opportunity to enjoy improved
health and a happier allround existence.






The nature of the problems that will confront agriculture in the
United States at the end of the war is very highly conjectural, but
possibly no more so than that of the problems of the general econ­
omy. The dislocations which accompany inflation and subsequent
deflation have always been unusually serious in the case of agri­
culture. If prices are permitted to rise considerably during the
war and in the secondary inflation period that follows, there will
be a strong demand for the support of prices of farm products. The
political situation is likely to be such that this demand will be met
in large measure, particularly if urban wage rates hold up as they
did after the First World War. This will create a condition of
maladjustment for the general economy unless prices can be sus­
tained across the general front. In the past, the low annual earn­
ings of urban workers resulting from vast unemployment in spite
of nominally sustained wage levels have been offset in part by cheap
food and clothing. This may not prove to be true this time if a
postwar depression of the general type of 1921-1922 develops,
following a brief period of postwar prosperity.
Any such inflation as has just been hypothecated would be
accompanied by a writing-up of farm real estate values and con­
siderable buying of land under heavy mortgages at these inflated
values. Land values rose substantially in 1941, after remaining
practically level from 1937 to 1940. They are still climbing. 2
During the period from 1920 to 1929 values of farm real estate
declined at a decelerating rate.' They took a further slide in 1930* This analysis is a by-product of a research project on agricultural policy
financed by the Committee on Research in the Social Sciences of Harvard
*J. D. Black, Por#y, Portiy, Por%y (Cambridge, Mass., 1942), pp. 48,
* During the same period, prices received by farmers were at levels very
close to the "all commodity" wholesale price level during the decade.




1933. Taking the whole period from 1920 to 1940, nothing con­
tributed more to the adversities under which agriculture suffered
than this deflation of farm real estate values. In many sections
of the country, every third or fourth farm went through some form
of forced sale during these two decades, and some of them more than
two or three times*
The method now likely to be most favored for supporting prices
of farm products will be the device of "loans without recourse,"
which has come increasingly to the fore since 1933. These are loans
on storable commodities held by farmers, which they can redeem
or not as they see St. They may see fit if the price keeps above the
loan value and they need the additional income, or if they think
the moment a good one at which to sell. If the price has dropped
below the loan value, they let the government worry. The govern­
ment in such case is likely to extend the loan, hoping for higher
prices in another year. This procedure effectively holds the supply
off the market and keeps it from depressing the price. Thus, in
general, the government tends to accumulate stocks from year to
year, since buying and holding commodities is easier than disposing
of accumulated stocks.
Confronted by an offer of such a loan, the producer of cotton,
wheat, or corn considers whether the loan offer is higher than the
market price is likely to be. If he thinks the loan offer is higher,
he is pretty sure to accept it and to put his crop in storage, counting
upon "selling it to the government." If he thinks otherwise, he
may accept the loan anyway, taking advantage of the government's
offer to help him carry his crop until he wants to sell it or feed it.*
To make a program of loans without recourse work successfully
even over as short a period as 2 or 3 years, some procedure must be
devised for disposing of the stocks which the government accumu­
lates "outside the normal channels of trade" or some procedure
that will reduce the volume of oncoming supplies. Probably in
practice both are needed. Accordingly, assuming for the moment a
period of postwar deflation, the United States will be faced by a
demand for resuming the kind of production controls that were
introduced in 1933, which we still have with us so far as wheat, cot­
ton, and tobacco are concerned, but which may largely disappear if
the war lasts 3 or 4 years.
Even though there is no period of acute deflation, our agriculture
in the United States will be faced with the need for some important
* Black, op. c%., Chap. X X .



shifts to a peacetime basis. The nature of these shifts, however, is
greatly dependent on the outcome of the war. If the accustomed
sources of supply of tropical oils in the East Indies and Africa are cut
off, we shall want to continue and even expand our production of
soybean, peanut, and other vegetable oils, Likewise, if rubber from
Malaya and the East Indies is no longer available, we may want to
continue growing grain as a raw material for industrial alcohol.
Even though the war ends in 1944, as seems to be the basis upon
which planning is now being done, there will be much urging that
we continue domestic production of these products so as to be no
longer dependent on the outside world for them in case of another
war. There will be equally strong support, however, for the
opposite policy of resuming trade with the countries in order that
they may be reestablished on a basis that will maintain peace in the
world. Around this issue will center some of the important debates
of the postwar years.
The United States will also have a considerably expanded output
of dairy, poultry, and pork products, judged by prewar standards.
Will it be possible to sustain this volume of production, or will
adjustment back toward prewar production organization be
It is entirely possible, of course, that all the increased output of
foods and Sbers will be needed to take care of the postwar consump­
tion of these products at home and in those countries which we
may be helping to reconstruct. The outcome of the war and the
international arrangements for the armistice period may be such
that every ton of food that this country and the allied exporting
countries of the New World can turn out will be needed to feed the
hungry populations of the lands devasted by the war and to continue
the levels of feeding that have been developed in the United States,
Great Britain, and elsewhere as a contribution to the vigor of the war
effort. On the other hand, the war may so end that this country
will find itself faced with the necessity of disposing of most of its
agricultural production at home, at least for several years.

Let us assume for the moment, however, an outcome of the war
such that the provision of food for undernourished people generally
in all the United Nations becomes a feasible objective. What are
the possibilities along these lines, and what do they mean for



agriculture in the United States? In order to understand the nature
of the difficulties inherent in such a program, something must be
said about the nutritional conditions under which most of these
people are existing.
Charles Morrow Wilson, writing recently in Harper's Afapagme,
has opined that one-half of the population of the Latin Americas are
ill. This guess is safe enough—but a still safer one would be that
two-thirds of it is inadequately nourished. We know the second is
the major cause of the former. No person improperly fed year after
year can remain well. If there are 65 millions of poorly fed people
in the Latin Americas, there are twice or thrice this number in
Europe, and ten times as many in Asia and the East Indies. Here
at home, the common report is that a third of our people are poorly
fed, and another third only fairly well fed.
These fractions mean little as such. A deRnite line cannot be
drawn around malnutrition. Harvard University's great authority
on nutrition, Dr. George R. Minot, draws a block diagram, and
across the top of it a line marking off about 15 per cent of the ordi­
nary run of people in this country who are truly well nourished.
Across the bottom, he draws another line marking off another 15 per
cent or so who have definite clinical symptoms of poor diets. In
between comes the great bulk of the population living "suboptimally" most of the time and yet managing to escape positive dis­
ability; some of them keep well toward the top, but others show
clear symptoms of malnutrition now and then. During an attack
of fever or even of a cold, one's system does not receive the usual
amount of important vitamins from food, and, without these, nutri­
tion suddenly drops to clinical levels. The same thing happens if
one is exposed to unusual strain or fatigue, as soldiers are in a
Thus, even in our own country, only a small fraction are in
vigorous buoyant health all the time. The majority of Americans
lack the diet that is indispensable to energy and robust health.
But if Dr. Minot were drawing his chart to represent some of the
Latin Americans, say our own Puerto Ricans, his clinical line would
rise to take in half or more of the diagram. One could proceed to
enumerate the specific dietary diseases that are prevalent in such
situations. It is enough merely to say that people living on this
subsistence level grow old and haggard before they are fifty, and the
average expectancy of life may be under forty years. The incidence
of disease and disqualifying defects in our Selective Service experi­



ence has been found to be 36 per cent at thirty-six years of age,
contrasted with only 13 per cent at twenty-one years.
But malnutrition wreaks greatest havoc among the children.
Infant mortality rates may run into the hundreds. Two states in
our own country—New Mexico and Arizona—have rates of over 100.
There have been scientists of a sort who have insisted that these
high infant mortality rates are not an evil, that they kill off the
weaklings so that only the sturdy survive, and that the race stock
is thereby made virile and resistant. The empirical evidence alt
points another way, to a general weakening in childhood of a large
proportion of those who do survive the Rrst blasts—with a high
mortality rat€ at an early age for the survivors.
Some comment should be made on measures of material well­
being appropriate to a consideration of a program of the sort under
discussion. It must be kept in mind that figures on resources per
capita are only averages, and that population pressure is always on
the margin, t.e., among the lowest income groups in any country.
Probably there is very little difference between the living conditions
of the poorest group in the different countries. Locate them in any
section of the world and they will be found to be living on a bare
subsistence level, not even enough to allow them to reproduce their
numbers. More die than are bom. Then there is a larger margi­
nal group in which net reproduction is a slightly positive quantity.
But the existence of such groups as these two in almost any country
is not the question at issue; we know that they exist in all countries.
The important point is the proportion of them, relative to the total
population. The fraction is large—perhaps over a half—in much
of the Orient, in Puerto Rico, and among many of the Indian groups
in the Latin Americas. We have a small fraction of them almost
anywhere in the United States, a fairly sizable one in a few spots.
Among the non-Indian population of the New World countries,
and in much of western Europe, the largest marginal group consists
of the families that have been able to raise their plane of living
somewhat above the mere subsistence level, to include a few com­
forts, a modicum of medical care, a little education for the children,
An occasional night at a cheap movie house, and the like. This
group probably makes up two-thirds or more of the population of
Great Britain and of some of the peoples of western Europe, and onethird, at least, of the people in the United States.
Obviously, to throw these three marginal groups into one national
average, which also indudes perhaps another 10 per cent who earn



half the national income, does not give us any meaningful or useful
measure. Our concern is mainly with these marginal groups per se.
How well do these groups feed themselves, for example?
Two important circumstances that have an instructive bearing
on the matter of the diets of these marginal groups must be pre­
sented. The Rrst is that a large fraction of them work for cash
wages as laborers on highly commercialized plantations and eat
very little except cheap staple foods, which they buy with their
wages. A clear example of this is provided by tbe natives who work
on the Dutch sugar plantations and eat rice imported from the
mainland. The sugar-plantation laborers of Cuba, Puerto Rico,
and Hawaii are in the same bracket, as are the rubber-plantation
workers, the cacao workers of Ecuador, the coffee workers of Brazil,
the sisal workers of Yucatan, etc. These groups ordinarily have no
land of their own and produce nothing for their own consumption.
Cash-crop cotton production in the United States is pretty much of
the same pattern. Although the cotton workers operate the land as
croppers or tenants, they have tended in the past to put most of
their tillable land into one cash crop. One can 6nd the counterpart
of our cotton production on grain farms in eastern Europe. The
second circumstance is that the staple foods which these workers
consume have become more and more reRned. The rice is polished,
the cornmeal has its germ removed, and the bread is made more and
more from white Hour.
Relatively few if any of the three marginal groups above listed
are fed at or even near the optimal line. Most of them are
somewhere in the lower half of Dr. Minot's diagram. The
landless workers on large plantations are merely one important
type of these underfed marginal people.
What has the United States to offer as its contribution to a
program for better nutrition for these groups at home and abroad?
Surely no phase of postwar planning is more vitally significant
or offers more real promise for peace at home and in the world at
large. The utopias that are being designed by the various schools
of after-the-war planners have many delightful chambers in them.
Mr. Roosevelt has limited his to four—the "four freedoms."
Some others have not been so easily satisfied. The writer will be
content if out of this new world war will come just one new generally
accepted idea or principle, t%s., that each child and each worker
shall be assured the opportunity of a minimum adequate diet,



and that means shall be taken to establish food habits that will
comprise such diets.

Merely abolishing hunger or partial starvation will go a good
way toward checking the unrest among the great masses in the
marginal groups and making good democratic citizens out of untold
miHions of people who now doubt their governments. If, in addi­
tion, these people can be supplied with the protective foods needed
to furnish them with a sound basis for health and vigor, a large
part of the discontent that is rife among bodies politic will disappear.
The International Labour OfEce has published its conclusions
from a study made of Great Britain's wartime food program.
This report says:
There seems little doubt that the milk scheme will remain as a perma­
nent part of British social policy, and already many are urging that its
scope be extended. The extension of communal meals, especially in the
schools, in the factories, and in the mines, has provided for decent mid-day
meals facilities that will not be scrapped when the war is over.*

This system of providing one good meal of the proper supple­
mentary protective foods to workers in factories and in mines is
just beginning to take hold in the United States. It should be
encouraged with great energy. Such meals can be assumed to be a
necessary part of wages and required as a wartime measure in this
country as in England. When the war is ended, they will then be
accepted as an essential feature of the "working conditions" over
which employer-employee battles are constantly being fought.
The employers will have discovered by then that the increased
output of their workers and the saving in costs from illness and
absenteeism far outweigh the cost of the meals. Free school
lunches, prepared so as to make up deficiencies in the home feeding,
can be accepted as a regular and expected part of educational
programs, as essential as textbooks.
These two programs alone will not reach all who need help with
their diets, especially those peoples whose social institutions aj*e not
so far advanced as our own, but they will go a long way toward it.
The children will carry into their homes the habits and lessons
learned from the school lunches; in lesser degree, so will the adult
in Creot Rrt/atn, prepared in Montreal and London by Edith
Tilton Denhardt of the Economics and Statistical Section of the International
Labour OfEce.



workers in factories. The further measures needed will follow
easily in due time.
Several eloquent passages about foods and nutrition have of late
been included in addresses dealing with the international phases of
the postwar period. The hungry are to be fed in the countries
released from the dictators, and, after that, the diets of the multi­
tudes in the crowded regions of Europe and Asia are to be supplemented with the needed protective foods.
Between what we are doing now in this country, what the British
Empire is doing, and Russia, and China (the democratic quartet),
what the political leaders in this country are thinking—in the United
States, the writer has in mind particularly the Farm Bloc—and
these idealized programs of international food dispensation, there is
a vast gap. It is easy to idealize the future. Any of us can design
a utopia. The difRcult problems are those of getting our govern­
ment and our people to take the necessary steps in the direction of
the desired goals, to take them one at a time from month to month
and year to year.
Out of the various forms of communal feeding which will follow
the war in Europe and elsewhere, let us hope that something in the
nature of permanent food and nutrition programs can be salvaged.
One prospect by way of a transition from emergency to perma­
nent programs is that of using the schools as agencies for providing
children with protective foods. Using the factories and workshops
in similar manner may be another.*

The more that is said about solving the problems of international
food distribution and minimum adequate diets for all, through level­
ing of tariff barriers, the less the chances are that the Congress of the
United States will permit the necessary steps. Every doctrinaire
internationalist who starts talking along these lines endangers the
program of nutrition improvement.
The proposal for an international Reconstruction Finance
Corporation has similar dangers. The language of billions which
the RFC customarily uses is frightening to those many millions of
our people who are appalled by the prospect of a national debt of
$300 billion.
A safe transition can be made, however, by an intelligent and
forthright application of the new principles of international arrange* Dr. Wilson

has further discussed the problem of nutrition.— EDITOR.



ments that have developed out of the present conflict. Along the
path from lend-lease for winning the war, to lend-lease for feeding
the starving people of released Europe, to lend-lease for reconstruc­
tion, and Anally to lend-lease for keeping the peace of Europe and
Asia lies the safest approach to the desired goals. Moreover, the
international Bnancing of it can all be arranged in such a way that it
contributes strongly to continuing prosperity in our own land.
If no such program of international utilization of agricultural
products proves possible, then, as stated earlier, each of the coun­
tries with expanded wartime production will need to develop plans
for disposal of surpluses at home, at least until such time as produc­
tion can be restored to a peacetime basis. The most obvious form
which such disposal can take is the selling, out of accumulated
granaries, the stocks that have been acquired through the medium of
loans without recourse. In this country the Farm Bloc is opposing
such procedures at present because it wants to see farm prices reflect
in full measure the influence of the war situation. Once the war is
past, however, no realistically minded person can look forward to
the holding of these stocks indeBnitely. One can expect, therefore,
that even the Farm Bloc will approve measures relating to disposal
of accumulated stocks outside the normal channels of trade. In a
few cases this may mean the utilization of them in lower value uses,
such as potatoes for starch, or cotton for road building. Commonly,
however, the best channel will be among the low-income people of
this country through such programs as school lunches, direct dis­
tribution, and the orange and blue stamp arrangement.*

No one of these programs will meet the needs of the occasion,
neither will all of them put together in their present form. Instead,
a comprehensive integrated program of consumption adjustment will
be needed, which will reach all groups in the population that are
improperly nourished. This is no occasion for demonstrating that
an adequate food intake of the population of the United States would
require a larger output than in any year of the nation's history,
including the bumper crop of 1941, which was 14 per cent above the
1935-1939 average, and the 1942 crop, which was substantially
larger than the 1941 crop. Nevertheless, the data all bear out
such a conclusion.
* Black, op. c#., Chap. XXI.



If a well-integrated program of consumption adjustment were
developed, the nation would 6nd itself needing to adapt its produc­
tion program to its consumption needs. Expansion would be the
keynote. The output of farm products which we would need in
greater quantities would be so great that the pressure would be
the production of those goods rather than toward
the output of those products which in the past we have
tended to produce in too great amount.
A particular reason for this is that the improved diets would call
for an expansion of output of dairy and meat products, and this
expansion would call for the use of more acres of land. This
country would have then much more of its land in pasture and forage
crops, but it would need to increase the yields of the land devoted
to cereals in order to obtain the concentrates needed to supplement
the forage rations.
A rise of extensive cultivation of this sort would improve greatly
the fertility of the soil and would contribute in a large way to the
conservation program that we had started before the w^ar. This
evolution would be particularly important in much of the South,
which very greatly needs to shift toward general farming, wdth
forage and cereals and livestock as the main lines and cotton and
tobacco as supplementary cash crops.

If, however, such a change to extensive cultivation is going to
prevail in the South, its population of agricultural workers must be
reduced considerably below present levels, probably even below the
levels that may result from the further expansion of war output that
can be expected if the war lasts several more years. The critical
factor in the situation will be the keeping of these workers from
returning to the overcrowded rural areas, first, in the conversion
period just at the end of the war, second, in the first real depression
period afterward, and, Snally, in a possible very severe depression
that may come still later, paralleling that of 1930-1933. It has
become apparent that preventing such depressions is as vitally
important from the standpoint of maintaining a proper ratio of
population to resources in areas now congested, as from the stand­
point of the baleful effects of the accompanying slump in agricul­
tural prices. In the decade of the twenties, the cityward movement
of surplus farm population was accelerated appreciably by the higher
real wages that had come to prevail in the cities and by the expan­



sion of employment, particularly in distributive industries, which
accompanied the revolution in transportation that came with the
automobile and truck. In the early thirties, this migration was
checked and there was even a small net movement the other way for
1 or 2 years. Analysis of this movement has shown that the families
thrown out of work in the cities tended to return to the same lowincome areas from which they had migrated.

Programs of public works to take up the slack of employment in
the conversion period immediately at the end of the war, and in
subsequent depression periods, should not, however, overlook the
needs of rural areas. Thus far the public housing programs of the
United States have been almost wholly confined to cities. One has
to go almost to the worst slums of our large cities to And as wretched
housing as prevails in the rural sections in the South and Southwest.
The needs for public sanitation and recreation developments are
equally important. Programs of this sort, however, need to be
formulated with reference to the total picture in any given area and
to be developed in such a way that they will not return large num­
bers of war workers to their former haunts.
Much thinking about rural public works is also running in terms
of resuming the program of soil conservation which is now being
retarded because of concentration on the war effort. As the nation
approaches the end of the war, it will need to review in a compre­
hensive way its experience with soil-conservation measures and to
develop an integrated, effective program for attaining the goals that
are then set. It may well prove to be the case that some of the
practices worked out and applied in the last 10 years have not stood
the test of wartime production.
The program of Hood control and watershed development formu­
lated in this country since 1933 is now much more subordinated to
the war effort than the direct soil-conservation procedures. A large
amount of basic planning has been done, and it should be easy to lay
out feasible Hood-control projects whenever resources can be spared
for them during depressions.
The war demands for lumber have been appallingly large.
Because of transportation shortages, the timber stands that are
nearest to the place where needed have tended to be stripped. As a
result, timber that might have found a market gradually over the
next 30 years has been harvested all over the East and South. The



nation wiU therefore need to undertake a more vigorous program of
forest management and reforestation than was in prospect before the
war. Much of this will be on farm woodlands and can be combined
with farming operations if suitable systems of credit can be devised.

Basic to any sound program of rural works is a large amount of
sound land-use planning. Grants and loans should not be made for
construction of farmhouses except on the basis of planning that will
indicate which farms are likely to persist under the conditions of
competition likely to prevail in the postwar world. Even housing
repairs need to be based on such plans* There may be warrant for
improvements in areas where agriculture is likely to be reorganized
on a more extensive basis, but each situation of this sort needs to be
thoroughly explored. Similarly, the various conservation and forest
restoration measures need to be fitted into carefully developed landuse plans.
Fortunately, such plans have already been formulated in a few
dozen counties under the county land-use planning program that has
been fostered by the Bureau of Agricultural Economics jointly with
the agricultural extension services of the various states. In a much
larger number of counties, planning organizations have been set
up and considerable progress has been made. Perhaps more impor­
tant than the actual progress is the education in such planning,
which has accompanied the planning effort in the last 5 years.
During the war, most of the kind of planning that is needed for the
postwar period has been set aside. Planning committees and the
agricultural extension services have been assisting the County War
Boards with activities directed toward getting out the enlarged
agricultural production demanded for our own war effort and for
lend-lease shipment. What type of organization and Federal-state
collaboration will be best suited to the needs of postwar land use
planning is difficult to indicate at this time. At the proper time in
the course of the war, when the end of it begins to be sighted, this
question should be taken up and carefully reviewed.
Any agency which undertook at this time to make land-use plans
for the postwar years might very well find its recommendations
largely ignored when the time came. There are too many uncer­
tainties in the picture, and any assumptions that might now be
made with respect to these points would in all probability be wrong.
The optimum use and type of development which any tract of land



should receive is highly conditioned by the market at the end of
the war for different types of farm and woodland products. How
much of an outlet there will be for the products of this country in the
rehabilitation efforts abroad, and how much of a program for improv­
ing the consumption of our own populations, will determine in an
important way how much of the land should be in pasture, forage
crops, grains, and woodland. The agriculture of a region such as
the Northeast is greatly dependent upon how much of a market is
provided for milk among the low-income families of the cities. The
combination of grazing and cereal production of the Great Plains is
likewise dependent upon the prospects of outlets for beef, wool, and
Equally important for any postwar land use planning will be the
program that the nation undertakes for converting its war industries
and for maintaining full urban employment at the end of the war,
and, likewise, the success which is achieved in carrying out such a
program. With one outcome, a strong movement toward extensiRcation of agriculture, larger acreages per farm, and more use of power
machinery will arise. With the opposite outcome, the trends in this
direction will be retarded.

Specific comment needs to be made on the role of machinery in
postwar agricultural developments. Regardless of the programs for
postwar employment that are adopted, we are likely to witness a
strong urge toward the use of machinery and power on farms in all
parts of this country. The limited allocations for the manufacture
of farm machinery during the war years—the expected allocation for
1943 is 30 per cent of 1941 sales—is going to produce a very great
need for such equipment. The heavy burden of labor which has
been imposed upon farm people in getting out the war production
will contribute to the same reaction. Generally speaking, the
farmers of the country will have been receiving much larger incomes^
during the war and will either have reduced their outstanding debt
to a point where they can purchase machinery, or they will have war
bonds and other savings accumulated. Perhaps most important of
all, the nation will have a tremendous capacity for machinery
production, and out of the experiences of the war will come some
revolutionary ideas for improving farm machinery. It therefore
seems a safe forecast that a very great change toward the use of more



power and machinery will take place at the end of the war, regardless
of almost anything that can happen.
Many in this country look forward to such a prospect with grave
forebodings. It predicts for them the rise of great factory farms and
the passing of the family farm. This need not happen if the situa­
tion is properly handled, and, as a matter of fact, will not happen in
any overwhelming way even if nothing is done about it. The
manufacturers of farm machinery have an interest particularly in
producing machines that can be used on family-size farms. They
have a much larger and better market with farming organized on
this basis than otherwise. However, the matter should not be left
to the self-interest of the manufacturers. There is a public interest
in the family-size farm, which warrants adopting measures that will
ensure its overwhelming prevalence in nearly all parts of the country.
These measures may include credit for the manufacture and pur­
chase of machines, the expansion of the tenant-purchase program
with its strong emphasis on family-size holdings, and vigorous
extension programs designed to develop successful systems of
management for family-size farms. The way to ensure perpetuation
of family-size farms is to see that they have land enough and equip­
ment enough to ensure a decent reward for the operators and a scale
of living that will make it possible for the sons and daughters to
obtain a good education.




In the midst of the grim tasks of waging the most titanic world
struggle in history, our supreme objective is victory over the forces
that threaten brutal subjection of aH free peoples. Yet the peace
must be won, as well as the war. Constructive steps toward estab­
lishing a more progressive world order on more solid foundations
must be taken while the war is on and can be potent auxiliary
weapons of war itself. Accordingly, thousands are already earnestly
wrestling with postwar problems, in ofRcial, semiofficial, and unofBcal capacities. Such efforts, hopelessly inadequate to date, are
promisingly cumulative, and much further progress in these direc­
tions is vital to the success of the United Nations.
Humbly, unofficially, and in preliminary fashion, I venture to
explore a small sector of the Bold of postwar policy that is now in the
making, one phase of international planning in the concrete.
Penetrative thinking, realistic analysis, and frank expression are
called for, to puncture bubbles of illusion and dispel dreams that
obscure genuine vision, as well as to pave the way for solutions of
.the vexing problems involved. Here the attempt is to clarify
issues rather than to settle them. SpeciBc, comprehensive advice
must wait on maturer understanding than anyone yet has. Proph­
ecy too is beyond my competence, but at the outset one needs to
state the reasoned assumptions on which his discussion rests.

First, I assume that there mil be a postwar world; that this war
will truly end, sooner or later; and that, contrary to the prophets
This study is essentially a revision of a paper presented before the Ameri­
can Economic Association in December, 1941, and published in the American
Rfconomic Revteu?, Vol. XXXII (Papers and Proceedings, March, 1942), pp.




of doom. Western civilization is tough enough to survive both cur­
rent and postwar crises.
No one can safely predict the length or outcome of this far-flung
war. Who wins, and when, and how, will profoundly affect the
nature of the postwar world and the role of international commodity
agreements in it. Accordingly, it might seem appropriate to con­
sider elements and issues of policy in relation to alternative postwar
worlds, notably two: (1) a world dominated by Nazi Germany, or by
some combination of Nazis and Japanese; and (2) a world freed from
such domination, actual or threatened. A possible intermediate
type I deliberately exclude, primarily because I assume that this war
will not really be over until the Axis powers definitely lose or win.
If a so-called peace is negotiated before that central issue is decided,
war economies will merely be modiBed and not replaced by true
peace economies. In that event, international commodity agree­
ments might be utilized as weapons of economic warfare, even more
than now; but it would not be in a truly postwar world.
There is no point now, however, in discussing international com­
modity agreements in an Axis-dominated world. The term oyreeindeed, is inappropriate for arrangements made in Germany
or Japan, dictated by their experts, and imposed on other political
units. Moreover, an Axis victory is neither imminent nor inevita­
ble, despite vast gains by Germany and Japan since November,
1941. For the present, I am unwilling to expend energy reasoning
on the assumption that the war may be lost by what we at last
unitedly recognize as our side.
Assuming, then, the eventual defeat of the Axis powers, I make
the further assumptions that a postwar world with some kind of
political and economic freedom can emerge from the storms and
strains of war and oppression; that the postwar world will still be
made up of more or less independent nations, however they may be
tied together; that the British Empire and the United States will
play the most influential roles in shaping and guiding that world,
with Soviet Russia and China exerting powerful influence also; but
that none of these, nor all four together, will dominate it as Nazi
Germany and Japan would if they should win.
Further, I make bold to assume that the United States will bear
its full share in constructive world leadership. This implies that we
have outgrown isolationism. During the past 2 years we have
become increasingly conscious of the vital role the United States has
to play in this terrific struggle, and the view is gaining that any sort



of assurance against its recurrence requires that we help safeguard
the peace that follows victory. Progress of American public opinion
encourages the belief that we shall be ready to play a sounder role
after hostilities end than we did in 1919. Vast expansion of our
navy, air force, and war industries, and experience in integrating
them with those of the British Empire and its formal allies, should
render easier practical measures of postwar cooperation in guarding
the peace of the world. Current and prospective strides in aviation
increase the feasibility of political, economic, and military collabora­
tion. While major issues remain to be faced and decided, it no
longer seems simply idealistic to look forward to the United States
taking its due share in world leadership after the war.
My next assumption is even bolder: that ways will be found to
dispel fears of another world war, for a generation or so. Otherwise,
we must expect every nation to strive, even more vigorously than in
the recent interwar period, to become as self-sufBcient as possible
in what are regarded as basic foodstuffs and basic raw materials,
even at grave sacrifice of otherwise attainable consumption levels.
I also assume that international agreements, of various kinds,
will have a large place in such a postwar world. The alternatives are
wholly independent actions by the several nations, taken with con­
flicting views of national interests, or outright domination exercised
by one or more within particular spheres of influence. Some of
both there will doubtless be, but I assume that successful efforts will
be made to enlarge the subject areas covered by general and specific
Finally, I assume that some such agreements will be made with
respect to individual commodities. Prewar and wartime experience,
pressure of postwar needs, and evolution of thought in high circles,
all seem to point in this direction. Blundering there will be, of
course; but the better the advance thinking, the smaller the area of
blundering is likely to be.
These are assumptions, not predictions. They seem to me
reasonable, though rather optimistic than pessimistic. But even on
such assumptions, many questions remain: What commodities will
be involved? What objectives will be sought? What types of
agreements will be tried? What principles will be followed?

One important distinction must first be sharply drawn. Real
peace does not instantly follow war. As time is required to convert



a peace economy into a war economy, so it takes time to reconvert a
war economy into a peace economy. Armistice Day, 1918, con­
veniently marks the end of the First World War, but a transition
period lasted well beyond the signing of the Versailles Treaty,
perhaps into 1925. Extensive reconstruction will be necessary, and
many special problems will press for solution, in the transition period
following the Second World War. We cannot now forecast its
timing and length, but we may safely expect some years to elapse
before peace becomes full-fledged. What role may international
commodity agreements have in the postwar transition period?
When hostilities cease, grave shortages of foodstuffs and raw
materials in many areas will presumably coexist with huge surpluses
of such commodities elsewhere, as they have during most of the war
to date. Cessation of war requirements, including needs for special
war reserves, will release for peaceful uses stocks of many goods.
The urgent tasks will include human relief and rehabilitation on a
gigantic scale, in addition to rising international trade in the usual
sense. The problems will be to match needs and supplies, to organ­
ize and Bnance this special movement of goods, and to provide for
physical shipment and ultimate distribution with the utmost speed,
efBciency, and equity. This will assist in guarding against civil
turmoil, revolution, and early recurrence of hostilities. Even the
strongest countries will have an interest in seeing that the distress
incident to the war be quickly relieved instead of allowed to grow
worse, that the means of economic recovery and rehabilitation be
made promptly available, and that surplus stocks be used instead of
lying idle, deteriorating, or being destroyed. Well in advance, the
basis and terms on which international gifts and loans are made will
need to be wisely conceived and clearly set forth.
One basic point will not be overlooked in planning and execution.
While the United States will presumably furnish a substantial share
of both commodities and financial resources, the enterprise will be a
joint one, including not only the United Nations and their depend­
encies but various countries that are still nonbelligerents. Even the
food commodities involved may include corn, beef, coffee, sugar, and
Latin American and African fruits as well as wheat, cotton, wool,
lamb, pork, dairy and poultry products, and fruits of North Amer­
ican and Australasian origin.
Mr. Churchill said in the House of Commons on Aug. 20, 1940:
We shall do our best to encourage the building up of reserves of food all
over the world, so that there will always be held up before the eyes of the



peoples of Europe, including—I say deliberately—the German and Austrian
peoples, the certainty that the shattering of the Nazi power will bring to
them all immediate food, freedom, and peace.*

In the following year the British government made considerable
progress on plans to this end.^ During the summer of 1941, the
United States Secretary of Agriculture expressed our government's
adherence to much the same policy, coining the catchy if misleading
slogan "Food will win the war and write the peace/'
It was "to organize in good time the action required to give eSect
to this policy" that the British government sent invitations to a
historic interallied conference held in London on Sept. 24, 1 9 4 1 .3
Here the Roosevelt-Churchill Atlantic declaration was endorsed by
ofBcial representatives of the USSR and eight conquered countries,
as well as by representatives of the leader of Free Frenchmen.*
More speciReally, this conference adopted a six-point declaration
calling for their organized collaboration in drawing up, and eventu­
ally executing, detailed programs for promptly supplying the
liberated peoples with "articles of prime necessity" after the
* Winston S. Churchill, J%ood,
and Tears (New York, 1941), p. 344.
* Summarized by Anthony Eden at the interallied conference mentioned
below: /n/fr-a?;ied Refieto (Inter-allied Information Centre, New York), Oct. 15,
1941, p. 7.
* /n/fr-aMed
Oct. 15, 1941, p. 7.
' /Md., p. 1.
* This declaration reads:
**1. That it is their common aim to secure that supplies of food, raw mate­
rials, and articles of prime necessity should be made available for the post-war
needs of the countries liberated from Nazi oppression.
**2. That while each of the Allied Governments and authorities will be
primarily responsible for making provision for the economic needs of its own
peoples, their respective plans should be co-ordinated, in a spirit of inter-allied
collaboration, for the successful achievement of the common aim.
*'3. That they welcome the preparatory measures which have already been
undertaken for this purpose and express their readiness to collaborate to the
fullest extent of their power in pursuing the action required.
"4. That accordingly, each of the Allied Governments and authorities
should prepare estimates of the kinds and amounts of foodstuffs, raw materials,
and articles of prime necessity required and indicate the order or priority in
which it would desire supplies to be delivered.
" 5. That the reprovisioning of Europe will require the most efRcient employ­
ment after the war of the shipping resources controlled by each Government and
of allied resources as a whole, as well as of those belonging to other European
countries, and that plans to this end should be worked out as soon as possible



Auspiciously, the lead in evolving this ambitious joint program was
entrusted to Sir Frederick Leith-Ross, the able and experienced chief
economic adviser to the British government. Despite war pres­
sures, progress is undoubtedly being made, though as yet few details
have been disclosed to the public.
Foreign Secretary Eden told the interallied conference: "In this,
as in so much else, we may conSdently hope that the great nation
across the Atlantic, as well as other friendly nations, will in due
course lend their cooperation."* In an admirable address before the
National Foreign Trade Convention on Oct. 7, 1941, 2 Undersecre­
tary of State Sumner Welles gave assurance of American support for
such a program. While not mentioning the conference, he spoke of
the same objectives, adding: "Both humanitarian considerations
and self-interest require that we cooperate to these ends to the fullest
extent of our ability. So long as any important part of the world is
economically sick, we cannot be well."
Since Pearl Harbor, with the United States a Bghting partner and
a new leader among the now United Nations, British-American
mutual understandings and joint agencies have been expanding,
and cooperation is becoming a fact of widening scope. The "mas­
ter" Mutual-aid Agreement between the United States and the
United Kingdom signed on Feb. 23, 1942/ and like agreements with
other bene6ciaries of lend-lease aid, set forth certain basic, agreed
principles of great importance for postwar policy. A series of
notable addresses by American, British, and other statesmen are
helping to supplement formal commitments by improved public
understanding—as yet short of legislative approval.
On the basis of such over-all agreements, flexible yet fairly
specific relief agreements will presumably be worked out before
hostilities end. Wartime commodity agreements designed for other
purposes will presumably be brought into harmony with this policy.
between the Allied Governments and authorities in consultation, as and when
appropriate, with other Government concerns [ate].
"6. That, as a 6rst step a bureau should be established by His Majesty's
Government in the United Kingdom with which the Allied Governments and
authorities would collaborate in framing estimates of their requirements and
which, after collating and co-ordinating these estimates, would present pro­
posals to a committee of allied representatives under the chairmanship of Sir
Frederick Leith-Ross."
i fnter-aMied Revtew, Oct. 15, 1941, p. 7.
* New KorA; Times, Oct. 8, 1941, p. 14.
s Depar%7neH% 6/ #%a%e
Feb. 28, 1942, p. 192.



Many such agreements may well pass through provisional drafts
before they are ready for adoption. Nutritionists and students of
food habits, as well as commodity, Bnancial, shipping, and political
experts, will need to work over the drafts if serious mistakes are
to be avoided. Some agreements may be signed to take effect when
the war ends and be revised as circumstances change in the interim.
Reconstruction problems will accompany and follow those of
relief and human rehabilitation. How can various commodity
stocks and new supplies under government control be handled so as
to lessen the shocks of transition to peace, to hasten reconstruction,
to facilitate the conversion of industrial capacity from war to peace
uses, to create new jobs to absorb men and women released from
military activities and war industries? With such objectives, resort
may well be had to special types of international commodity
agreements,* and wartime agreements may be appropriately modi­
fied or supplemented with such temporary objectives, though inde­
pendent action on lines of agreed general policy may be found
adequate in many cases. As the recent League of Nations report
states, "the maintenanceof various forms of economic control will be
necessary, in some cases for a considerable time, after the war. " 2
Nevertheless, at various points all such relief and readjustment
agreements will be influenced by dominating ideas regarding the
shape that the postwar world is to take after the transition period.
Obviously, all such agreements should facilitate recovery to a new
normal, far superior to the abnormal prewar position. But what
sort of normal shall be aimed at?

For the peace period proper, one consensus seems in process of
crystallization: the normal, over-all objective of individual effort and
social policy—local, national, and international—is the persistent if
irregular advance in planes of living, for families, communities,
states, and mankind, according to their several standards and pref­
erences except as these may endanger advances elsewhere.
We need not hitch our wagon to a star. We cannot realistically
expect early attainment of uninterrupted peace, optimum nutrition,
It was with such an objective that the late F. W. Taussig suggested, late in
October, 1918, setting up a central board of control and allotment of raw mate­
rials, to minimize tensions in the postwar transition period. Redvers Opie,
"Frank William Taussig (1859-1940)," FeonimMC Journal, Vol. LI (JuneSeptember, 1941), pp. 362-363.
' Mm? For* Wrne*, Aug. 10, 1942.



perfect health, full personal security, universal enjoyment of two,
four, or more "freedoms," or equalization of living planes at peaks
somewhere reached. But neither need we set our aims low.
Outstanding progress in these directions will be possible, after war's
devastation ceases. The world's productive powers are larger than
we have realized, and at least
larger per capita than ever
before. The world's people have urgent needs, clamorous wants, for
more and better commodities, services, and spiritual environment
than they have yet enjoyed. Obviously, the basic task is to utilize
abundant productive power, more fully and more consistently
than hitherto, to satisfy these needs and wants and others that will
arise as they are being gratified.
Cynics may scornfully ask: "What is progress? Can we agree
on how to de6ne it, measure it?" Maybe not, but must we?
Some signs we may misread, but surely we are safe in accepting
various indicators of undoubted human progress. Diminution of
slavery, serfdom, peonage, and their counterparts; decline in infant
mortality and the general death rate; shorter hours of labor and
lessened drudgery; reduction of illiteracy; increasing safety and
variety in food; abundance of soap and its newer alternatives; more
comfortable and healthful living quarters; wider availability of
recreational facilities and social services: these are a few of many
such indicators from which a trustworthy index will some day be
Advance in living planes is not identical with rise in consumption
levels.* Some would live better if they consumed less. For the
mass of men, however, increased per capita consumption is an
essential condition of better living. The possibilities seem vast,
especially now that history has forced radical modification of
Malthusian doctrines. If a modem economy temporarily stagnates,
the reason must surely be found elsewhere than in lack of true
capacity either to consume or to produce.
In the worldwide advance of planes of living may perchance be
found what William James once called the "moral equivalent of
war." In any event, it makes a powerful appeal to the vast
majority of mankind, in advanced and backward countries alike, as
the leaders have belatedly recognized. Interlocking but essentially
subsidiary objectives include widening the range and lengthening
I have discussed this distinction, and the relation of levels and planes to
"standards'* proper, in a note in the ./ourHol of Afar&ettnp, Vol. VI (October,
1 9 4 1 ), p p . 1 6 4 -1 6 6 .



the duration of peace, moderating tendencies toward widespread and
violent economic fluctuations, enlarging the volume of Internationa!
and interregional trade, and perfecting methods of employing all,
even the handicapped, who want to work or whose work is needed.
Others may envisage a very different over-all objective of peace­
time effort and policy. But if I have set forth, however crudely, the
truly normal one, the Brst criterion by which to judge the social
desirability of any specific type or example of international com­
modity agreements is this: Does it aid or hinder the progressive rise
of consumption levels and advances in living planes?
Other legitimate aspirations of many nations must be reckoned
with. One of these is the claim of the so-called Aaue-7w%
free and equal access to raw materials and foodstuffs, at least to the
extent that these are not used to plunge the world again into war.
This vital issue is cautiously dealt with in point 4 of the Atlantic
Charter, which committed the United States and Great Britain to an
endeavor, "with due respect for their existing obligations, to further
the enjoyment by all States, great or small, victor or vanquished, of
access, on equal terms, to the trade and to the raw materials of
the world which are needed for their economic prosperity." The
implications of honorable fulBllment of this pledge must be worked
out. We need satisfactory answers to such questions as this: Can
such free access be assured (a) if great wealthy powers pursue policies
that seriously limit the purchasing power of other nations for
imported goods, and (&) if exports are restricted by quotas and other
price-raising devices? Mr. Welles well said:
The basic conception is that your government is determined to move
toward the creation of conditions under which restrictive and unconscion­
able tariffs, preferences, and discriminations are things of the past; under
which no nation should seek to benefit itself at the expense of another; and
under which destructive trade warfare shall be replaced by cooperation
for the welfare of all nations.

Foreign Secretary Eden earlier said much the same thing,* and
In Parliament on May 29, 1941, he declared that Great Britain will effect
such arrangements after the war "as will permit the revival of international
trade on the widest possible basis. We shall hope to see the development of a
system of international exchange in which the trading of goods and services will
be the central feature . . . let no one suppose that we, for our part, intend
to return to the chaos of the Old World." Quoted in George Peel, "M r. Eden
v. Dr. Clodiua" Contemporary Rewev, August, 1941, p. 95.



Secretary HuU elaborated it in his eloquent radio address of July
23, 1942.*
Another central question presses for answer: Shall the postwar
peacetime world be broadly characterized by freedom of private
enterprise or by far-reaching government operation and controls?
Some consider irresistible and irreversible the drift or drive in the
latter direction, or else account desirable not the liquidation of war­
time agencies but their conversion into peacetime agencies of like
character, or revere "planning" and regard it as essentially implying
vast extension of such measures in peace. Granting the fact of a
long-term trend toward enlarging the economic sphere of govern­
ments, I wish to suggest grounds for questioning these views.
Modern wars, and preparations for them, inevitably force expan­
sion of governmental activity in the economic sphere. Production
must be diverted to defense and offense at the expense of individual
consumption, freedom, and leisure. To achieve this major if
abnormal objective, commodity scarcities must be coped with and
even enforced, quickly and equitably; and for this government
action is essential, with resort to priorities, allocations, rationing,
price Cxing, and government purchase and sale. But such moves
mainly represent deviations from trend, not the trend itself or a new
one. Powerful reactions from such deviations occurred after the
First World War. In spite of wartime concentrations, entrenched
bureaucracies, and convictions of some responsible statesmen,
something comparable may be expected after the Second World War,
in some countries if not everywhere.
The ends of peace call not for continued constraints on consump­
tion and leisure, but rather for expansion of both, in inBnitely varied,
unstandardized forms, in aid of what Vice-president Wallace has
rightly called "the more abundant life," including economic
security in reasonable balance with liberty and progress. Where
diffusion of commodity abundance is called for, I venture to assert,
government controls beyond certain limits tend to interfere with
effective distribution and maximum consumption. Except possibly
under a dictatorship, moreover, government regulation of produc­
tion and surplus stocks has thus far proved diSicult, costly, and
uneconomic, and there are reasons for thinking this not merely
temporarily but well-nigh inevitably so. Private enterprise and
initiative, subject to limited regulation and supplemented by govern­
ment action in restricted subject areas, promise far more effective
* JVen? KorA %7Mes, July 24, 1942.



contribution to higher living planes than does maintenance of public
"controls" at or near wartime levels. We shall be shortsighted if
we embrace the theory that "the age of enterprise has given place to
the age of security."*
More and better planning, in the literal sense of the term, is
essential if the problems ahead are to be well solved. But I reject
the view that planning—local, national, or international—neces­
sarily implies extension of government controls ad infinitum. It
properly includes measures to promote and facilitate private enter­
prise under restraints mainly of the trafEc-regulation type. Free­
dom of incorporation under general corporation acts represented
planning even more than did multifarious special charters. Recip­
rocal trade agreements, designed to lower barriers to commerce,
represent planning no less than the Hawley-Smoot Tariff Act of
1930. Nowadays, indeed, removal of obstacles to international
trade may take more planning than adding fresh obstacles. Meas­
ures to facilitate enterprise, competition, and other constructive
economic forces represent planning quite as much as measures to
subsidize cuts in crop acreage or destruction of coffee at national
expense. Prevailing misconceptions, cultivated by ardent devotees
of national and international pfanTtmy, have brought even a good
term into disrepute in balanced minds.
Which school of thought, if either, will dominate after the armis­
tice, and where, I cannot predict. Divergent views appear to
coexist within our present government and the British. The direc­
tor of our OSice of Foreign Agricultural Relations wrote in October,
The eight-point statement signed at sea by President Roosevelt and
Prime Minister Churchill formalized, among other things, the conviction
that if this war is to lead to a sounder relationship between the nations of
the earth, then international trade must be so regulated aS to minimize
destructive economic rivalries.*

This, in its context, is strongly at variance with my own reading of
both the Atlantic Charter and relevant passages in Secretary
Welles's contemporary address and Secretary Hull's more recent
one. Mr. Hull merely conceded: "There may be need for some
special trade arrangement and for international agreements to
(London), Vol. CXL (June 14, 1941), p. 7S4.
'L . A. Wheeler, "Agricultural Surpluses in the Postwar World,
4fotr*, Vol. 20 (October, 1941), p. 87.



handle difficult surplus problems and to meet situations in special
areas." British official spokesmen have in general expressed views
similar to those of Mr. Welles and Mr. Hull. On the other hand,
it is not surprising to End Sir Stafford Cripps saying, in his address
of July 25, 1942:
One thing is sure— that the United Nations must, at the end of the war,
undertake the international regulation of the production and distribution
of essential raw materials, both in the interest of immediate rehabilitation
of the devastated countries as well as with a view to attaining that steadily
rising standard of living throughout the world which is one of our

The issue remains to be determined, but no convinced believer in a
liberal versus some form of socialistic policy need prematurely take a
defeatist position.

The largest group of international commodity agreements,
mostly bilateral, are part of the political and economic machinery
of rearmament, defense, and war. Such were most of Germany's
prewar commodity agreements, within and outside Europe; and
those between Britain and the United States with the objective of
building special reserves of wheat and cotton there, of rubber here,
and of wool in both countries. Such also are the wartime agree­
ments between Britain and her dominions and Argentina with
respect to wheat, wool, beef, lamb, pork, and butter; and our agree­
ments with individual Latin American countries for purchase of their
output of strategic materials. Most such agreements, I assume, will
either be liquidated after the present war, as others were after the
First World War, or be merged into the type next to be discussed.
The more representative multilateral international commodity
agreements have been concerned with regulative restriction of
export and/or production of staple raw materials and foodstuffs,
such as rubber, tin, sugar, wheat, tea, and coffee. Experience with
these has been short and, in general, admittedly unsatisfactory.
Some broke down soon; some have worked, for better or worse;
some have satisBed their members without clearly passing "social"
tests. 2 Several existing and proposed agreements represent
* ATew FarA; Ttmes, July 26, 1942, p. 18.
* Most of these have been subjected to careful examination by various
competent scholars of several nationalities; and my colleagues and I have in
hand a coordinated study of both experience and potentialities.



attempts to buttress costly and vulnerable national commodity
"controls." All represent a special manifestation of the traditional
tendency to protect existing investments or coddle producers, in this
case by international sponsorship of price-supporting restraints of
trade such as monopolistic business frequently resorts to. Often
they protect the strong against the weak, and restrict competitive
adjustments making for lower production costs, instead of promoting
consumption. By and large, they have constituted elements in an
increasingly complex system of restrictions on production, inter­
national trade, and consumption. Of this whole system, but with­
out speciSc reference to commodity controls, Mr. Welles rightly
said: "There exists the danger, despite the clear lessons of the past,
that the nations of the world will once more be tempted to resort
to the same misguided policies which have had such disastrous
There are those who hope or expect that a whole network of
international commodity agreements will be devised and adopted
that will be free of such recognized defects.* It is perhaps conceiva­
ble that such agreements might be so made as to raise consumption
levels generally, ensure free access to raw materials, facilitate inter­
national trade, reduce economic fluctuations, and promote full
employment. This ambitious scheme deserves earnest study; but
the time is unripe for blithe commitments in advance of thorough,
unprejudiced investigation. Broad principles, efBcient techniques,
and sound administrative procedures have yet to be worked out,
and relevant commodity researches are as yet poorly developed.
For broad principles we must surely go beyond favorite devices
such as export quotas, and beyond catch phrases that are, for the
most part, plausible camouflages. In practice, "stabilization of
prices" commonly means boosting prices above equilibrium levels,
*Cy. "Commodity Control Schemes/' P&intMn# (a broadsheet issued by
PEP,London), No. 174, July 29,1941.
In August, 1938, J. M. Keynes sketched a proposal that commodity stocks
be held, with aid from the public treasury, in order to moderate extreme fluctua­
tions of commodity prices in time of peace. "The Policy of Government
Storage of Food-stuffs and Raw Materials," i&XMtowMC
(September, 1938), pp. 449-460. Commenting on his proposal, the London
(Aug. 20, 1938, pp. 353-354) pointed to unsatisfactory past experi­
ence but added: " . . . It should not be beyond human ingenuity to discover
means of doing successfully in the general interest what has hitherto been done
with indifferent success in one interest alone. And in any such system of
commodity control, the public holding of stocks will play an easenti&l part."



not moderating fluctuations around an economic level. "Fair"
or "parity prices" are undefined or politically deSned, typically well
above economic normals, perhaps on ill-judged historical bases rather
than on economic grounds. "Fair shares in world trade" are set by
bargaining with historical averages, rather than with respect to
current ability and willingness to compete. "Production control"
means attempted restrictions of acreage or output, in such ways
as keep high-cost units in operation and otherwise raise average
costs. "Ever-normal granaries" represent stocks far above eco­
nomic normals, manipulated to support prices rather than maximize
consumption, and with political pressures interfering with eSective
disposition. " Destructive economic rivalries" usually mean vigor­
ous normal competition.
Commodity analysis, far more adequate than hitherto, is also
essential if serious mistakes are to be avoided. The characteristics
of each commodity concerned need to be fully explored. To a
degree of which few economists are aware, wheat is not simply
wheat, or coffee coffee. Rubber, tin, wheat, coffee, and sugar differ
greatly in their vulnerability to displacement by alternative goods
and in their potentialities for increased consumption. Conditions
of demand, supply, and consumption need to be far more fully
understood, and in particular the responsiveness of production and
consumption to changes in price, income, and business activity.
Congeries of crude ideas require testing and restatement, in respect
of actual burdens and benefits from holding and release of stocks,
attempts to regulate production, and measures to improve world
nutrition. The plausible but inadequate and often seriously
misleading summaries in reports by various government officials and
agencies need to be replaced by unbiased studies by competent
scholars who are free to seek, find, and speak the whole truth.*
Crucial questions press for answer in connection with planning
such agreements for a world at peace. A preliminary one is this:
Can such agreements really be reached among the nations truly
concerned, be modified as conditions change, and be kept, without
resort to dictatorial methods? Experience renders this highly
improbable for the types of agreements that are most commonly
contemplated, but not necessarily for all types. Other questions
For one recent example, compare the annual reports and press releases of
the Federal Crop Insurance Corporation with the recent study by J. C. Clendenin, "Federal Crop Insurance in Operation," tTAeat
qf the Food
Research ZnstiMs, Vol. XVIII (March, 1042), pp. 220-290.



that suggest both obstacles to be overcome and principles appropriate
to be observed are these:
Is it possible to reach and maintain essential harmony between
numerous commodity agreements in continual flux?
Can such agreements be expected to facilitate or thwart techno­
logical progress and adjustments in the
pito between nations
and between competing commodities?
Can agreements be reached on price levels that will tend to
promote consumption instead of restricting it?
How far is price stability truly advantageous? Can inter­
national commodity control agencies be trusted to facilitate needed
price reductions as well as price advances?
Insofar as agreements succeed in price-maintenance objectives,
will it be possible to avoid distortion of the world's productive
resources, and cumbersome regimentation of overstimulated
Can such agreements effectually ensure free and equal access to
foodstuffs and raw materials wanted by deficit countries?
Can they be made consistent with such policies as our own with
respect to reciprocal trade agreements, or do they inevitably involve
multiplying obstacles to the flow of goods?
Should a system of commodity controls be used to prevent piling
up of reserve stocks by potential aggressors, and as machinery for
economic sanctions?
Can political pressures of various kinds be prevented from wreck­
ing the economic functioning of the schemes?
Much is to be lost, and nothing gained, by ignoring or glossing
over such problems, or plumping for widespread resort to politicoeconomic machinery of which sample tests have revealed short­
comings galore. Along that road lie disillusionments, even disaster.
Excessive ideas as to prices, and political interference designedly in
the interests of producers, have been the most typical sources of
failure in both national and international controls.
Our own experience with wheat, in 4 years of operation under
the Agricultural Adjustment Act of 1938, is tragically illuminating.
Acreage restriction, bought by Federal subsidies latterly reinforced
by miscalled "marketing quota" penalties, has worked only within
the limits that Congress has permitted, and to call the result "pro­
duction control" is absurd. In the name of an "ever-normal
granary," and despite subsidized exports and surplus disposal,
carryover stocks have risen from a reasonable level of 153 million



bushels in 1938 to a prospective total of 800 million in 1943. Even
now, Congress limits the disposal of government-owned wheat
for urgently needed feed uses. Much more storage space must now
be provided, at the expense of the war effort. As wheat supplies
have sharply risen, prices have been forced up by government
purchases, mostly in the guise of Federal loans at successively higher
rates, while high returns to growers are augmented by other Federal
checks. No ofBcial dares publicly to estimate the full cost to the
Federal treasury and the nation, and none has proposed a way out of
the impasse. While what were deemed "positive measures" to
solve the wheat-surplus problem have been in force, it has grown to
dimensions hitherto undreamed of. Yet the international wheat
agreement effective June 27, 1942, and the Draft Convention that
accompanies it / seem heavily based on the assumption that the
United States has mastered the relevant arts.
Promising experience with and possibilities for different types
of international commodity agreements should be fully explored.
The Brussels Sugar Convention of 1902 ended for a time what had
proved uneconomic and unfair practices—export dumping of sugar
following overstimulation of beet-sugar production in several
European countries. Less important and less successful, but not
wholly unpromising, have been a few agreements to eliminate obsta­
cles (such as heavy export duties) to the international Row of speciRc
goods. More signiRcant, within limited scope, have been agree­
ments with respect to fur seals, halibut, sockeye salmon, and
whaling, which have sought to check serious depletion of valuable
marine resources and bring about their replenishment instead. ^
Most of the limitations upon unrestrained competition involved are
essentially comparable with the trafRc regulations that have
facilitated enormous growth of transportation by land, water, and
The marine-resource agreements have revealed the special
importance of intensiRed scientiRc research, focused on both under­
lying problems and appropriate regulatory measures; but even in
these cases there has been inadequate parallel research on economic
and political aspects. Far more effective recognition should be
* Depgr%77M7% of
Aug. 1, 1942, p. 670. I have explored this
subject, and examined these documents in some detail, in the November, 1942,
issue of
Rfi/dtes, entitled "New International Wheat Agreements."
* The Food Research Institute will shortly publish a book on this subject,
of JtfaWne Resource, by Jozo



given to the importance of such well-focused, well-financed research
in connection with the formulation, operation, and modification of
other agreements. Insofar as resort is had to international com­
modity agreements, ample provision ought to be made for objective,
expert, continuous study of their structure and operations, and
their effects on the world economy and international political
relations, to assist in correcting major errors of policy as well as
blunders in detail.
Some agreements, like the sockeye-salmon agreement now in
limited operation, may well be essentially investigatory, at least
initially. One promising subject is beef. This concerns not merely
Argentina, Britain, and the United States, but a number of other
countries. Beef has been a source of international friction. Poten­
tially it has contributions to make to better nutrition and consumer
satisfactions. The actual demand for beef is notably incomeelastic, and in the world as a whole there is a huge potential demand.
The time is not ripe for any multilateral international agreement
designed to promote maximum economical production and con­
sumption of beef. There is, however, urgent preliminary need of
studies by specialists in animal diseases (especially hoof-and-mouth
disease), agricultural and animal husbandry, geography, nutrition,
several branches of economics, and political science. Why not
put them to work in coordinated fashion? The countries chiefly
concerned might set up a small commission to organize a wellbalanced body of able experts to study all the complicated issues
involved—if need be for several years—with the task of finding,
organizing, and analyzing the relevant facts and opinions, and clari­
fying the issues, so that eventually an intelligent program of
practicable solutions could be drafted.
To conclude: A proper Seld for international commodity agree­
ments suitable to a free world at peace can be found. I regard not as
hopeless, but as moderately hopeful, the search for methods of
international cooperation, agreement, and even regulation that will
genuinely promote peaceful progress of the world economy. Yet
too much current thinking is vitiated by carryovers from the decade
of the 1930's, when desperate efforts to combat depression were
accompanied by widespread economic measures in preparation for
war. A new orientation is needed. Larger vision, and critical
and constructive thinking, are essential to formulate the principles
and to perfect the devices appropriate for a world rededicated to
freedom and progress.








This essay deals with the following questions: Is it easier, more
promising, and desirable to build the international organization of the
world on the basis of independent states—those states which we
6nd on the map of, say, 1937—or should the individual countries be
grouped in regional or continental blocs or federations which then
could be organized more or less tightly or loosely in a worldwide
superstructure? To put the question the other way around: sup­
pose that some machinery for international cooperation on a world­
wide scale, like the League of Nations, is set up; should it be based
on regional blocs or on independent states? Are the small countries
capable of living at all? Is it not essential for their eco7MMMC
survival—not to mention political and military considerations—that
they consolidate themselves in larger units or join groups led by big
powers? Using a somewhat philosophical—or should we say
flowery?—language, we might say: should the world be organized
on an "atomistic" basis (taking the states existing in, say, 1937 as
the atoms) or on an organic one?
The view that the latter is the "natural," preferable, and more
promising solution is by no means confined to writers in totalitarian
countries, who wish to build up their respective blocs or "living
spaces" and to organize the world in a few power spheres of con­
tinental dimensions. In the democratic countries, too, the view is
frequently expressed that the organization of the world should be
developed from below by the formation of regional federations or
blocs, and these views are supported by economic, political, and
military reasons.
We shall discuss mainly the economic aspects of the problems;
but since, in this field, economic, political, and military factors are
closely and intricately interrelated, the discussion of the economic




aspects cannot be carried on in a political vacuum; assumptions
about certain politica! realities and expediencies must be clearly

In detail, there is an infinite variety of possible contents for an
economic federation of countries. The most important and most
frequently discussed subjects for collective regulation are (a) move­
ments of goods, (5) migration of men, and (c) monetary standard and
policy and the How of capital and credits. A complete economic
unification of two or more countries would apply to all three sub­
jects, implying free trade, free migration, common currency arrange­
ments, free How of funds, and synchronized monetary and credit
policies. A federation can, however, be restricted to certain fields,
and in each Reid a different degree of intimacy of interrelation may
obtain. If two or more countries introduce free trade for goods
among themselves while maintaining restrictions against imports
from the outside world, we speak of a complete customs union. If
duties on internal trade are not completely abolished but only
reduced as compared with duties on imports from the outside, we
speak of an incomplete customs union or of a preferential tariff
regime, the difference between the two being one of degree rather
than one of kind.*
The establishment of freedom of migration has been little dis­
cussed and proposed except as part of a complete economic unifica­
tion which would also imply a customs and monetary union. It is
much harder to achieve a removal or reduction of barriers to migra­
tion than of barriers to trade. While, conceivably, certain countries
might agree on freer or free trade and on a common monetary policy
without at the same time loosening restrictions on migration, it is
almost inconceivable that free migration should be introduced and
at the same time tariffs maintained. 2 In fact, the obstacles to free or
* There are many cases of preferential tariff arrangements; e.y., the empire
preferences between the members of the British Empire, the case of preferential
duties on imports to the United States from Cuba, Hawaii, the Philippines, etc.
Many others were proposed and discussed and a few introduced (e.y., in Central
Europe) during the interwar period.
* Contrary to popular misconceptions, the economic argument for free trade
does not necessarily presuppose free migration. Apart from special cases, free
or freer trade is profitable even if migration is not free. In fact, in many cases
the lack of freedom of population movement strengthens the case for free trade.
For densely populated countries, like Great Britain or Belgium, trade is a
matter of life and death precisely because the people cannot emigrate. To
some extent the movement of goods is a substitute for the movement of people.



freer migration are so formidable, so much greater than those to
free or freer trade, that it may well be argued that the question
should be dropped altogether or at least not linked with the question
of freeing the movement of goods in order not to jeopardize the
chances of achieving something in the trade Reid.* For this reason,
as well as for reasons of space, we shall not deal with the migration
problem in the following pages.
Cooperation or unification in the Reid of money and banking
can be effected in very different forms and degrees. ^ The layman
will think in the Rrst place of the establishment of a common mone­
tary unit. The Latin Monetary Union of the prewar days is for
him the ideal type of monetary internationalism. In reality,
equality of the currency unit is an unimportant technical detail.
If two countries have dissimilar monetary units, e.y., pound and
dollar, but if their exchange rate (relative value of the two currency
units) is Rxed by an appropriate policy, the countries may be just
as closely coordinated as if they had the same currency units. What
matters is the rules of policy which guarantee the Rxity of the
exchange rate. Both the countries may be on a gold standard,
or one may be on an exchange standard pegging the value of its
currency to the currency of the other. Or the relationship may be
still more intimate, the two countries having agreed to support one
another by extending credit, if necessary.* In the pre-1914 years,
and to some extent during the interwar period, the same effect
was achieved automatically by the mechanism of interrelated money
markets and the free Row of funds in response to small differences
in interest rates. There is, however, no general agreement between
experts as to whether Rxed exchanges are the best method of inter­
national monetary cooperation. Many economists believe that it
* Just think of the chances of persuading the people of the United States,
Australia, or any other country with a high standard of living to permit the free
immigration of Chinese (not to speak of Japanese) labor after the war! Also,
from a sel6sh point of view of the country or of large groups (e.p., labor) in the
country into which immigration is to take place, much more serious objections
can be raised against free immigration than against the free importation of
goods. (Cf. Prof. Lemer's essay in this volume.—Editor.)
* A more systematic discussion of types of monetary cooperation will be
found in Ch. 12, §4 (pp. 425jf.) of my Prosperity and Depression (2d and 3d eds.,
Geneva, 1939 and 1941). See also John H. Williams, "International Monetary
Organization and Policy/' in Lesson* of Monetary Experience (New York, 1937),
and Albert Halaai, "International Monetary Cooperation," in iSocia% Research
(May, 1942).
* A small step in that direction was made in the tripartite agreement of 1936
between the United States, Great Britain, and France.



is sometimes easier to bring about necessary price adjustments by
changing the relative values of two currencies rather than by price
changes in one or both of the countries concerned.* Suppose, for
example, a shift in demand of one region for the produce of the other
(due, say, to a good harvest or a bad one or an industrial change
or a change in consumers' taste). If the two regions belong to the
same country and have the same currency, or if they have dissimilar
currencies but are rigidly linked together by a common standard
(e.0., gold standard), then incomes, prices, and purchasing power
must fall in the one country and/or rise in the other in order to
restore equilibrium. 2 Such a deflation entails at least temporary
depression and unemployment. Now the 7?Mme%an/
argue that what is required is only a
change in incomes and
prices as between the two countries, and that this can be brought
about more smoothly and speedily by adjusting the relative value
of the two currencies than by reducing prices in one and raising them
in the other country. It would follow that complete uniScation
of the currency between countries is not desirable because it
eliminates the possibility of varying the exchange rate.
There is no room here to argue at length the merits of the two
proposed solutions, s The above discussion only serves the purpose
of showing that monetary cooperation or federation may mean very
different things for different people.*
* Those who hold this view have been called by their opponents Monetary
MtttonaMsts. To this school belong Lord Keynes and his followers, S. E. Harris
Cambridge, Mass., 1936), C. R. Whittlesey (7n%ernattonaZ Monetary Zssttes, New York, 1937), and many Swedish economists.
Staunch ?7tonetary internationaHsts (according to their own description), t.e.,
advocates of fixed exchanges, are F. A. Hayek (Monetary Mittona^sm and
international StaMMy, London, 1937), L. Robbins (Economic Planning and
international Order, London, 1937, Ch. X, and "Economic Aspects of Feder­
ation," in Federal Pnton, ed. by M. Chaning-Pearce, London, 1940, pp. 176180), and M. A. Heilperin (international Afonetary EconoTntca, New York,
* Temporarily, all this may be obviated by letting gold Row out or by the
extension of credit on the part of the other country.
* As Prof. Robbins has stressed (see his "Economic Aspects of Federation,"
foe. cit.), the monetary nationalist has the difRcult task of demonstrating why it
should be desirable for, say, Canada and the United States to have different
currency systems, but not for, say, the state of New York and the state of
Pennsylvania. Where must we draw the line? What is the difference between
"county" and "country"?
* However, on certain basic postulates, expert opinion ia well agreed.
Monetary cooperation should eliminate competitive or predatory exchange
depreciation, provide for consultation before any act of depreciation, etc.



In the comparatively libera! era up to 1914, and even during the
interwar period until the outbreak of the great depression, it was
possible to deal with the two areas—tariffs and monetary arrange­
ments—separately and to reduce either one to simple formulas:
reduction or abolition of tariffs on the one hand, and fixity or varia­
bility of the exchange rate on the other. Neither of these two
procedures will be possible in the future unless the trend in economic
policy, domestic and international, toward greater and greater
interference by the governments—a tendency which has been
enormously accelerated since the great depression of the thirties—
is radically reversed; and this is not likely to be the case. The
regulation of international trade by tariffs, quotas, and other
measures has become very complicated; trade policies and inter­
national monetary and credit policies have been more and more
closely integrated in most countries; protection and exchange
control, the regulation of the flow of goods and of payments and
money, are now everywhere so designed as to support one another.
And this comprehensive control of international economic relations
is everywhere integrated and linked with domestic policies.
One consequence of this state of affairs is that economic coopera­
tion or federation cannot be deSned simply in terms of low customs
duties and a stable exchange rate. There would be little use in
agreeing on low tariffs if the other partner could always nullify
such an agreement by exchange control measures or by suasion or
coercion of producers and traders which would prevent them from
buying foreign products. The United States has had a foretaste
of these complications in connection with reciprocal trade agree­
ments with countries that had advanced in the art of totalitarian
economic control.* It became necessary to deal in commercial
treaties with a lot of subjects which formerly were entirely outside
of international negotiations and commercial treaties. Similarly,
future economic cooperation and federation will have to be con­
ceived of in terms of many more things than customs duties,
exchange rates, and international credits. Domestic industrial
control measures, transportation and labor policies, public spending
and taxation, price control, and many other things will have to be
considered and agreed upon; if these domestic policies are not some­
how coordinated, an agreement on tariffs will be futile and situations
will frequently arise which make tariff agreements untenable.
* Cy. Henry J. Tasca, The World Tro&np Rystem* (Paris, 1939).



Space does not permit an exhaustive discussion of these questions
in all their complexity. We shall begin by discussing the problem
in terms of tariffs, taking the word to include all sorts of trade
restrictions (quotas, prohibitions, exchange control, etc.), and
assuming that nullifying or disturbing domestic policies are excluded,
either by mutual agreement concerning their coordination or by a
return to more liberal practices. In the last section, some implica­
tions of the general tendency toward central planning for our
speciRc problem will be analyzed.

From a purely economic point of view—
taking maximiza­
tion of the national income as the sole end and disregarding military
and political considerations—the economic arguments for the for­
mation of regional blocs are identical with the old classical argu­
ments for free trade. Small countries are uneconomical because
the markets which they supply are not sufficiently large to make
possible their enjoyment of the advantages of mass production and
of full division of labor. The modem development of techniques
of mass production, which entails a tremendous increase of the
optimum size of plant in many lines of production, and the improve­
ments in transportation technique, which brought about larger
and larger market areas and increased the scope for a proStable
exchange of goods, have augmented the handicaps of the small
countries compared with the large. That this reasoning is sub­
stantially correct is almost universally agreed among economists.
Most experts believe that there are exceptions to the rule, ^.e.,
that there are conditions under which protection from foreign
competition is economically defensible. Some of the best argu­
ments for protection, however, do not apply against a
reduction in duties; they apply only
unilateral reduction
(and, hence, /or unilateral imposition of duties). But the forma­
tion of larger economic areas on a regional basis implies, of course,
a mutual and not a unilateral abolition or reduction in trade barriers.
Other defensible arguments for protection are essentially short
run; they are concerned with the difBculties and losses of the
transition that could be avoided by a suitable policy of gradual
Without a doubt, the free-trade reasoning applies to complete
customs unions of contiguous countries. If regional or continental
economic blocs are formed by abolishing duties between the mem­



bers of the group, the participant countries will be enabled to enjoy
the benefits of mass production and more extensive division of labor.
The economic situation is, however, by no means so clear in
the case of incomplete customs unions. If duties between the
members of the group are not abolished but oniy reduced, %.e.,
if the members of the group grant one another preferential treat­
ment, the economic gain is questionable. The difference between
the two cases is not one of degree only; in other words, a preferential
low tariff regime is not simply less beneRcial than a complete
customs union, though still an improvement over the old arrange­
ment.* It can be shown that preferential duty reductions are
frequently valueless or positively injurious. The argument has
often been used by the proponents of preferential regimes that a
partial (i.e., preferential) duty reduction is better than none at
all, even though it is conceded that a general reduction (not con­
fined to the imports from certain countries) would be still better.
This argument has been shown to be incorrect, 2 at least in many
cases; a partial duty reduction is not only not always better but
frequently worse than no reduction at all.
The reason for that can be made clear by means of an actual
example from American tariff history, which was statistically
examined and evaluated in the writings of F. W. Taussig and the
United States Tariff Commission (under Taussig's chairmanship).*
Suppose that the United States should reduce the duty on sugar.
Imports will rise, the sugar price will fall, the consumer will benefit,
and, eventually, factors of production will be shifted from sugar
production to other places where the product is larger.* Now
* It goes without saying that, if a preferential regime is brought about not by
reducing duties between the member states but by raising them against the out­
side world, it constitutes a step backward from the free-trade point of view.
But this is not the case contemplated in the text.
* Cy. F. W. Taussig, "Reciprocity," Quarterly JottrnaZ of Fcoftowtca (October,
1892), reprinted in Free 7rade, the Tart#* and Rgc:proc%y (1920), pp. 120y.
See also Taussig,
^specis qf Me Tar%f
(3d ed., Cambridge, Mass.,
1931); U. 8. Tariff Commission, Reciprocity and Commerce! T reats (Washing­
ton, 1919), pp. 103-136; J. Viner, "The Most-favored-nation Clause," /ndes
(ed. by Svenska Handelsbanken, Stockholm, 1931); Jacopo Mazzei, "Kritische
Betrachtungen zur neuzeitlichen Handelspolitik," Ife%tMrfschaffItches -ArcAtv,
Vol. 37 (1933), pp. 12f. G. Haberler, The Theory of /nlerna/tonai Trade
(London, 1935), pp. 385-390, and Lt'&era/e und pJamrtrfgcha/MicAe #ande%spoMM (Berlin, 1934), pp. 61-71.
' See preceding footnote.
* If factors Are immobile and their prices rigid (as they frequently are, espe­



suppose that the duty is reduced only preferentially for imports
from certain countries, e.y., Cuba. If this privileged country
cannot 611 the import needs of the United States, sugar will still
be imported from nonprivileged countries, say, from the world
market. Suppose now that the world market is large and the world
market price practically independent of the American purchases;
then the American domestic price will not change at all. It will
still be at the level of the world market price plus the unchanged
duty from countries outside the privileged area. There will be
only a shift of imports from the world market to the privileged
country. The American consumer is not beneRted, the domestic
sugar producers are not affected, no shift of production resources
takes place, but the United States Treasury loses a part of its
receipts from the sugar duty because Cuban sugar pays less than
before. The preferential duty reduction tums out as a subsidy
by the United States Treasury to the Cuban sugar producers and
is to that extent a clear loss for the national economy.* The case
need not be so extreme, of course. The preferred country may
be the principal source of supply. Then the sugar price will fall.
But in that case there is no reason why the concession should not
be generalized. Very frequently, however, especially in central
and eastern Europe during the interwar period, duty reductions
on a preferential basis have been granted precisely for the purpose
of avoiding price repercussions. To make doubly sure that total
imports would not rise and domestic prices fall, the preferences
were frequently limited to comparatively small quotas. The
result was that, e.p., Austria, Germany, Italy, imported more grain
from eastern Europe and less from overseas. These kinds of
preferences cannot be defended on ordinary free-trade grounds;
they certainly offer no way out of the maze of protectionism^

These worthless or even injurious preferential duty reductions
we may leave out of consideration altogether and concentrate
cially in the short run) the benefits from free trade may be illusory. But this
complication is irrelevant for the issue at hand and need not detain us here.
There may be indirect gains and advantages of a political or economic
'Some slight qualifications of these statements are necessary. See my

Liberate MtM%




on substantial reductions of trade barriers that have a positive
If a case can be made for a regional reduction in trade barriers,
a still better one holds for a general reduction. What is then the
reason for advocating regional blocs rather than universal free
or freer trade? In practice, the reason was frequently nothing
but the wish to increase exports without increasing imports. Coun­
tries were willing to grant special privileges to other countries,
carefully limited to small quotas, because they wanted to export
more without increasing imports. Total imports were to be kept
unchanged by importing less from nonprivileged countries. Many
proponents of preferential blocs were under the naive illusion that
the preferential system provided a means of reaping the advantages
of free trade without hurting anybody, a way of increasing the
volume of trade without any reshufBing of productive resources
and without any pains of transition. We need not spend time
on such notions.* But they accounted for much of the popularity
of the preferential idea among politicians and statesmen, which
found expressions at innumerable international economic confer­
ences during the interwar period.
A complete customs union, however, is a different matter. It
implies an extension of the division of labor and a reshuffling of
productive resources. If introduced abruptly it would create
severe disturbances of transition. And even in the long run,
it must hurt individual interests, although, according to accepted
From the short-run point of view A policy whereby two countries grant one
another preferential duty reductions limited to certain amounts (quotas), so as
to make sure that total imports do not rise, may have a certain stimulative
value. Each country increases its exports; total imports are kept unchanged by
cutting down imports from third countries. This is equivalent to a policy of
export subsidization by the two governments, which should have approxi­
mately the same effect as public works expenditures of the same magnitude,
with the exception that it is injurious to third countries, wz., to those from which
imports are reduced.
It is interesting that in some cases preferential duty reductions were actually
concealed as export subsidies (which again were clothed in the form of export
credits at especially low interest rates). This was done by Austria, Italy, and
Hungary. The reason for that clever masquerade was the wish to evade mostfavored-nation claims of third powers. If duties had been reduced, third
countries could have asked for similar duty reductions in fulfillment of mostfavored-nation pledges given to them in commercial treaties. But countries do
not like having imports into their territory subsidized, and hence would not ask
for subsidies of other countries' exports on the strength of the most-favorednation clause!



principles of international trade, the national income as a whole
will rise after the necessary adjustments have been made. The
difficulties in the short run, and the opposition of employers and
workers in those industries which have to contract, will be in
principle the same as those encountered by an attempt to introduce
free or freer trade in general. (General free trade is equivalent to
an all-round customs union.) What, then, is the advantage of
striving for regional customs unions rather than for freer trade
in general?
It might be thought that the elimination of trade barriers
between contiguous countries would be especially advantageous.
This is, however, by no means necessarily so. If transport costs
were always especially low between countries belonging to a geo­
graphic region, there would be some foundation for that belief.
But, in the first place, transport costs are determined not only by
distance. Because of the low ocean-shipping costs, countries
lying in different continents but on the ocean are frequently closer
to one another from the point of view of transport facilities than
each of them is to landlocked countries in the same continent or
In the second place, low transportation cost is not the only
factor determining the economic benefit derivable from unimpeded
international trade between two countries. Another factor which
is at least as important is the extent of differences in cost of produc­
tion due to different climate, soil, abilities of the population,
natural resources, and other factors. To give a much-quoted
example, trade between the United States and the tropical countries
of Latin America is more profitable than trade between us and
Argentina. The more dissimilar are conditions of production
between countries, the more profitable is trade for both of them.
Hence a customs union with faraway countries would frequently
be more useful than a union with one's neighbors.

It follows that the case for regional customs blocs as against a
general reduction in duties must be based on arguments of political
feasibility and military consideration rather than on economic
efBciency and advantage. For example, division of labor among
distant countries would be fatal in times of war, if these economic
ties can be easily severed by the enemy. Moreover it is frequently
said that, apart from the hazards in case of war, neighboring coun­



tries that belong to a region or group the members of which are
closely related by cultural ties, common history, perhaps linguistic
or racial affinity and have similar political systems and traditions
are more likely to reach an understanding than countries not
belonging to the same region. Also, an agreement reached between
such countries is likely to be more lasting than one reached between
countries belonging to different regions. Discussion of this thesis
in the abstract is not of much use. We had better look around and
see whether we can find such regions in the real world.
Let us begin with large areas of continental size. Some reflec­
tion will show conclusively that continents cannot be regarded
as such regions. There has been much talk about Pan-Europe
and Pan-America. Take Pan-Europe first. Where shall we draw
the line in the West? Does Great Britain belong to Europe?
If she does, then the British Dominions must be included too and
also the United States! For the ties—cultural, political, economic
—between Great Britain and the Dominions are at least as close
as those between her and the continent of Europe. If she is
excluded (as she was in most Pan-European utopias before the war*)
do France and the Low Countries and the Scandinavian countries
belong to Europe? Are not the ties between these countries and
Great Britain much closer than their ties with eastern Europe?
A similar reasoning holds for Italy. Italy and France have very
close economic and other relations with Africa and other overseas
At any rate, Pan-Europe is obviously out of the picture for a
long time to come. For it is inconceivable that the countries now
occupied by the Axis will enter a political scheme which sooner or
later would give Germany, their common enemy, a dominant posi­
tion. Germany can be defeated only with the help of the United
States and the British Empire; is it thinkable that France and the
Low Countries, Scandinavia, etc., will turn away from their libera­
tors and form a bloc with their former enemies? In the light of
these considerations, the whole idea appears utterly unrealistic.
Pan-Europe could be created only by the power of Germany against
the will of all non-German countries of Europe.
There is no need to show that the same is true of any PanAsiatic or eastern Asiatic scheme, with Japan taking the place of
After the outbreak of the Second World War she was graciously admitted
into the Pan-European utopia by its framers.



Also, the Western Hemisphere cannot be said to consist of
countries which by their geographies and economic, social, and
political relations offer a good chance of being integrated into a
Pan-American bloc. Not even from a geographical-locational point
of view can the Americas as a whole be regarded as a well-rounded
region with clear boundaries all around.* It is now common knowl­
edge that the parts of the Western Hemisphere which are in the
temperate zone—the United States, Canada, Argentina, Uruguay,
and the southern part of Brazil—are on the whole economically
competitive rather than complementary as far as their economic
structure is concerned. They have large surpluses of the same
commodities (e.p., wheat), for which they can And a market only
outside the Western Hemisphere. That does not mean, of course,
that a fruitful exchange of goods between these countries is not
possible, that this exchange cannot be proStably intensified, and
that, in the worst case, if the Western Hemisphere had to face a
hostile Axis-dominated world (and if certain American countries did
not choose, in such a case, to cooperate with the Axis!), a more
complete integration could not be achieved. But that is true of
any two countries anywhere in the world, practically without
exception, and such a complete integration would be possible only
at the price of major reconstructions of the economies concerned,
implying a tremendous reshuf&ing of production and productive
resources within each country. In fact, we find that "Western
solidarity" increases in times of emergency (such as during the
First and Second World War), and that it ebbs quickly after the
emergency is over. 2
Let us now look for smaller groups and see whether we can
discover regions that are predestined to form an economic bloc.
The cases most frequently mentioned are the Scandinavian coun­
tries, Belgium and Holland, the Danubian countries, and the
The Scandinavian countries are certainly closely related by
language, similarity of social organization, political outlook, etc.
Economically, however, they do not 6t together well. Not much
could be gained by combining them in one customs union. Only
1 For a good discussion of the whole problem from a geopolitical point of
view, see N. Y. Spykman,
gtratepy tn WorM PoMtics. TAe Uwted
States a7M% the BaZance qfPoteer (New York, 1942), especially Chs. 9, 11, 12, 13.
The political aspects have been excellently discussed by Eric Hula in Pro5Zems
c/Post-war Reconstruction (ed. by H. P. Jordan, Washington, 1942).
2 See Spykman and Hula, op. c%.



from the military point of view, as a safeguard against aggression,
could a union between them have some value. Similar arguments
hold for Belgium and Holland.*
The region, par
which was discussed most during the
interwar period is the Danubian basin and eastern Europe. It
was the politically and economically weakest spot of Europe. In
that region a large economic unit, the Austro-Hungarian mon­
archy, had been dismembered by the Parisian peace treaties. The
frontiers were unsettled and not generally accepted, partly because
they were new and partly because they simply could not be drawn
so as to separate distinctly the various nations, t.e., in this case,
language groups.
It became customary to see a cure for the economic ills from
which these countries were suffering in a closer economic coopera­
tion, a customs union, or a substantial preferential customs regime.
Undoubtedly, the creation of a larger free trade area would have
benefited all these countries very much. Actually, however,
developments were in the opposite direction. Each country raised
its tariff wall continuously, and the economic ties between the
members of the group became weaker as time went on. Many
new industries were nurtured behind high duties; and, in 1938, the
creation of a customs union would have constituted a major opera­
tion on the body economic of the countries concerned. (To what
extent the economies of these countries have been integrated with
one another and with Germany under the Nazi occupation, we do
not know.)
Nobody can foresee what the situation will be when the Second
World War comes to a victorious end. Is it possible that the
nations in eastern Europe will bury their nationalism and create
a big state east of Germany? The Polish and Czechoslovakian
governments in exile have reached an agreement to that effect and
have declared that they will be ready to invite other countries to
join them. The history of the last 50 years, and especially of the
interwar period, justices some skepticism with respect to such
declarations. But the terrible experience of Nazi occupation
through which these countries have gone in recent years may bring
about a profound change in attitude, although nobody can tell for
certain whether that will be so or not. But a few things seem to
These two countries actually tried to form a customs union in the period
following the First World War. Their plan, however, was frustrated by the
British insistence on the most-favored-nation rights.



be clear: there will be great chaos when the Nazi regime cracks,
and it will almost certainly be necessary for Great Britain and the
United States to occupy Germany, central Europe, and a part of
eastern Europe (if these regions are not occupied by Russia). This
will offer a rare opportunity to change the organization of these
regions in anyway that seems desirable, e.<y., to unify these countries.
If this opportunity for a radical reconstruction is lost and the various
countries are allowed to rebuild their economies independently of
one another, a reconstruction or unification will be much harder,
or even impossible, to achieve later on. What the long-run chances
would be for the survival of such a large federation, comprising,
say, Poland, Czechoslovakia, Austria, Hungary, and possibly other
countries, nobody can tell. It is, however, quite possible that when
the memory of the Nazi occupation fades and the German people
draw away from aggressive nationalistic ideologies and adopt a more
pacifist attitude, centrifugal nationalist movements will again make
their appearance as they did under the comparatively liberal regime
of the old Austrian monarchy. If that development is anticipated,
it would be preferable not to insist on too close integration; it
might be better to set up a loose federation that would give rise to
less friction between the different nations than a unified and central­
ized type of organization.* But in any case, whatever the type of
federation adopted, these countries will need guidance and economic
help immediately after the war (relief, then capital, finally markets)
from the Western powers or from the League of Nations (or what­
ever the international organization, which the victors will probably
set up, may be called). If this leadership and economic help and
cooperation from the Western powers is forthcoming, if a strong
international organization is set up, with the backing of the victori­
ous power, and if political and military security is thus secured,
Europe gradually pacified, and the burden of military expenditure
reduced, the countries of central and eastern Europe should be able
to live on a tolerable standard, even without a customs union or a
preferential tariff regime. It would be quite sufEcient, if excessive
protectionism were avoided.*
The advocates of regional superstates will say that the economic
and political nationalism will flare up again, unless it is checked and
held in leash by the formation of a regional federation. This raises
a big sociopsychological problem that far transcends the question
of regionalism and recurs with the same acuteness in the case of
t €y. the views of Prof. Simona in this volume.—Editor.



larger federations which are not restricted to certain regions. The
problem is this: which has to come 6rst, the setting up of inter­
national organization and machinery or a change in spirit? To
put the question slightly differently: is there any use in setting up
international machinery like the League of Nations unless the
majority of its members are in a conciliatory, cooperative, peaceful
mood? Will the creation of an international organization help to
promote such a spirit, even if it did not exist in the first place?
"Organizational pacifists" take the latter position. They think
that the mere existence of "machinery" or "organization" will
force a change in attitude. If the representatives of different
countries are forced, by the existence of an international organiza­
tion, to sit down at regular intervals around a conference table to
discuss their problems, they will learn to understand one another
and one another's problems and will adopt a more conciliatory
attitude. The "realist"* criticizes this view as facile optimism.
He thinks that the setting up of international machinery is useless
unless the proper spirit prevails and proper policies are adopted;
he even believes that the existence of an international organization
like the League of Nations with its large conferences and opportuni­
ties for resounding but empty speeches may be positively harmful.
It may hide existing cleavages, spell an atmosphere of false security,
and thereby prevent or postpone the solution of pressing problems.
Or the argument may be advanced that the premature creation of
an international organization, even if it does not actually make
matters worse than they are, is unwise because it may compromise
the idea of an international organization for a long time to come.
For example, the League of Nations as an international institution
has been saddled with failures and mistakes for which influential
member states of the League and their leading statesmen should
have been blamed.
The truth is probably somewhere in the middle. There has
certainly been an overemphasis on matters of organizational detail
among internationally minded people.* What has been said
* See, e.p., E. H. Carr, The
Peers' Crw* (London, 1940).
*In many quarters the distinction between "federation" and "confeder­
ation" is now being stressed. Confederation is a union of sovereign states. A
federation or federal union is a type of international organization whereby the
individual states give up their sovereignty in certain respects and confer it upon
the union. The subjects of the union are thus individuals and not govern­
ments or states. The literature on the subject (e p., the literature emanating
from the C/nton JVotc movement organized by C. Streit in this country) seems to



recently of a good peace, that it was not a single event, but a con­
tinual process, holds here. More important than the creation of
machinery and even the delegation of power to the international
organization is the content of policies pursued by means of that
machinery and the spirit in which the power is used.
But, on the other hand, there must be some international
machinery and organization. Economic relations between countries
are getting too complicated to be satisfactorily settled and arranged
by informal agreements and irregular, casual conferences. The
liberal methods of general and automatic settlements by means of
the most-favored-nation principle and the adherence to certain
simple rules of monetary management (adopting a common mone­
tary standard) have broken down and given way to chaotic condi­
tions. It seems almost impossible to revert to an automatic, more
or less unconscious process after it has once been called in question
and destroyed. As F. H. Knight once said (speaking of the break­
down of the system of democratic government by discussion), "The
first aspect of the practical situation resulting [from such a break­
down] is the impossibility of going back to an unconscious or tradi­
tional process. There is no way in which a thinking process, once
set going, can 'turn itself oR.'"* The alternative to an automatic
liberal system is conscious international agreement which makes a
permanent international organization and machinery necessary.
But one of the theses of the present essay is that it is better to build
on a truly international rather than on a regional basis.

So far we have discussed the problem of regionalism exclusively
in terms of tariffs. This limitation can be justified only under
one of two conditions:
that sufficiently liberal policies prevail
in most countries to make it unnecessary to come to an explicit
international understanding on many questions other than tariffs
or that, in the absence of such liberal policies, an explicit under­
be too much under the influence of words and legal distinctions. It over­
emphasizes technical questions of organization and machinery.
'"Econom ic Theory and Nationalism," Part III, Section 1, "Possible
Alternatives to Liberalism," in
FiAtcs of Competition (New York, 1935),
p. 318.
This, of course, does not mean that in order for an international league or
federation to function with tolerable smoothness all countries of our globe
without exception must join it and that all necessary concessions should be
made to induce literally everyone to participate.



standing is reached concerning other factors and measures that
would nullify the effects on international trade of any agreement
on tariffs.
In this section a few words will be added on how our problem
—regionalism—would be changed if interventionism and central
government planning in most countries were on such a large scale
as to make pure tariff agreements between countries worthless.
Furthermore, some indications will be given of the degree and types
of non tariff intervention that would seriously upset the conclusions
reached earlier in this essay.
Suppose a large part of control and planning, which was adopted
before and during the present war, is retained after the war,
not only controls of international trade, such as export and
import quotas, licenses and monopolies, exchange control, etc.,
but also internal controls of investment, prices, raw-material
production, agricultural marketing schemes, and the like. It
would still be theoretically conceivable—and, of course, economi­
cally desirable—to operate all these controls in such a manner as
to utilize as fuliy as possible opportunities of increasing output
through international trade and division of labor.* This would
necessitate, however, an explicit agreement on many or all of the
policies and types of controls mentioned above. Wholesale adjust­
ments in these matters through the automatic working of the
most-favored-nation clause, as under the comparatively liberal
tariff system, would be impossible. Moreover, it is fairly obvious
that what would be required is not an agreement once for all, or
for a long time, but continual mutual adjustments. International
negotiations on economic matters between all countries concerned
would have to go on almost without interruption. 2
It is virtually certain that it would be impossible to handle
the same volume of international trade and to maintain the same
degree of international division of labor under the interventionist
system of a planned economy as under a system of liberal trading
* We are not going into the question here of whether it would be possible at
all under such a setup to resist successfully protectionist demands. In other
words, we assume— although it may be rather unrealistic—that the various
controls are operated with the sole purpose of maximizing and stabilizing output
(within the limits set by considerations of external security) and are not misused
for the beneEt of particular groups.
* Between countries with full-hedged quota and exchange control systems,
this state of affairs already existed for several years before the outbreak of the
present war.



methods. This is true even if we assume—unrealistically—that
the strong temptation to misuse the various controls for purely
protectionist ends can be successfully resisted.
The implication of this situation for our problem is obvious:
the economic handicap of small countries increases sharply under
the full-Hedged interventionist economic order. It becomes harder
or impossible to mitigate it by multilateral trading methods. In
addition to this, under a strongly interventionist economic system,
opportunities for utilizing international trade and its regulations
for purposes of economic exploitation of weaker countries, power
politics, and outright agression and subjugation become in6nitely
more numerous than under the comparatively liberal tariff system.
Hence the economic case for bilateral or regional mergers and
consolidations of countries, i.e., for the formation of larger economic
units, becomes much stronger. In other words, under socialism
or highly developed interventionism,* the benefits of international
division of labor can be obtained on a large scale only at the price
of complete economic uni6cation. Moreover, the setting up of
consistent production plans and their continual mutual adjustment
will certainly require complete political uni6cation.
Whether such consolidations can be achieved peacefully by
voluntary agreement is open to serious doubts. The prewar
attitude of the then existing states in all parts of the world would
have seemed to exclude this possibility. Whether a sufficiently
profound and lasting change of heart has occurred, at least in those
parts of the world which were ploughed under by the steam roller
of totalitarian agression, occupation, and war, remains to be seen.
The alternative to rigid central planning is not, to repeat, an
uncompromising laissez-faire policy. That would be hopelessly
utopian—and not only because of the wickedness and stupidity
of men! What is needed and what to the present writer does not
seem to be an entirely hopeless task (although this point cannot be
argued here) is the development of an economic system which
preserves the essentials of free enterprise, free markets, the freedom
of consumers' choice, and the freedom of choosing and changing
the kind and place of occupation and which at the same time elimi­
nates or at least sufficiently alleviates the grosser evils of a com­
pletely free system. It is impossible to discuss at this point the
Whether and where to draw the line between these two systems and
between both of them and capitalism need not be discussed here. See below
for a few more remarks.



nature of these evils as the writer sees them and the possibilities
of curing them without destroying the free-enterprise system and
eliminating the freedom of consumers' choice.* SufRce it to say
that the greatest economic evil and problem of modern capitalism
is not so much inequality but the business cycle,
the fact that
our economy is subject to cyclical depressions and periods of chronic
stagnation, characterized by unemployment, misery, and falling
real income. If it were possible to maintain reasonably full employ­
ment in the leading countries by appropriate policies and to assure
a fairly steady rise in the standard of living through the smooth
assimilation of the beneRts derivable from technological progress,
a major contribution would be made to the solution of the problem
of international economic relations. Professor Hansen, especially,
has repeatedly emphasized in recent years that the solution of the
domestic employment problem in the leading economic countries,
especially the United States, is a necessary (but of course not a
sufficient) condition for a successful policy of expanding inter­
national trade and international division of labor. ^ In depression
periods, when unemployment rises, sales shrink, and output falls,
the demand for protection of the home market from foreign com­
petition becomes irresistible. Every increase in imports seems
to (and in the short run in most cases actually does) create more
unemployment, and every reduction in imports through tariffs
seems to add to home production and to augment employment.
On the other hand, in periods of prosperity, when labor and mate­
rials are scarce and orders in most industries exceed productive
capacity, imports rise automatically and the reduction of impedi­
ments to imports is accepted with greater equanimity. (At present,
for example, imports could be raised enormously and many duties
could be reduced or abolished with ease, if the goods could be
obtained and transported.)

Our conclusion then, is, this: if fairly prosperous (full-employment) conditions in the leading countries could be maintained,
it would not be hopeless to revert to liberal policies in the Reid of
international economic relations, abolish quotas, restore stability
* A brief statement with which the writer would largely agree will be found,
for example, in a paper by F. H. Knight, " The War and the Crisis of Individual­
ism," in Z&WMWMCProMem* qf War and /t* A/termed (Chicago, 1942).
* (7f. Prof. Ellis's essay.—Editor.



and freedom in the foreign exchange markets, reduce tariffs, and
eliminate discrimination. This is the policy which was promised
in the Atlantic Charter, in the mutual-aid agreement between
the United States and Great Britain of February, 1942, and which
was on several occasions eloquently proclaimed by Cordell Hull
and Sumner Welles. In a world organized along such lines, the
merger of small countries (complete customs unions) would still
be desirable from the economic standpoint and perhaps also from
the point of view of preserving peace, if it could be achieved by
the free will of the partners; but the creation of such regional
units would not constitute an indispensable condition for the pre­
servation of economic prosperity. Moreover, incomplete mergers
(regimes of preferential duties in contradistinction to free customs
unions) are decidedly undesirable, both from a selSsh economic
point of view of the countries concerned and because they contain a
serious threat of discrimination.




Internationa! trade and finance after the war, it is sometimes
thought, either wilt go the way of the thirties, marked by rigid
national interferences of an autarchic nature, or will return to the
relatively unregulated character of trade in the prosperous twenties.
These extremes—intensive national regulation versus "free" inter­
national trade—may appear to be the natural alternatives; in fact,
however, they are not the alternatives in prospect. The inter­
national movement of commodities and funds will be regulated in
all events, and the only issue is, will the regulation be national or
international? For now, more generally than before, "governments
have definitely accepted welfare economics as a basic policy";* and
it is altogether unlikely that any nation will again leave to the
vagaries of unregulated international competition the crucial matter
of total effective demand for its products and its man power. If
the regulation is national or even if it emanates from blocs of nations
set against other blocs, it will most certainly revert to the types of
restriction ushered in by the world financial crisis of 1931—exchange
control, quotas, import and export prohibitions, and other beggarmy-neighbor devices. If the regulation is international, these
will fall into desuetude; and, under attain­
able standards of economic intelligence, the international
supply the conditions necessary to vast economic progress.
Which route shall we travel? Looking toward ofEcial declara­
tions of policy, we find the Atlantic Charter in points 4 and 5
promising access on equal terms to the trade and raw materials of
the world and international collaboration for improved labor
standards, economic adjustment, and social security; the Anglo* J. P. Young, "Problems of International Policy for the United States,"
Fconomtc RsvMM, Vol. 32, No. 1 (March, 1942), p. 185.



American agreement of Feb. 23, 1942, contemplated "the reduction
of tariffs and other trade barriers," although Clause IV makes this
"subject to existing obligations." Meanwhile, however, the most
important organs of business in Great Britain, while calling for
international cooperation, proceed to the advocacy of measures
directly antagonistic to this end: the Federation of British Industries
to a system of bilateral trade and the Association of British Chambers
of Commerce to the complete organization and control of foreign
trade on trade association lines.* In our own country, Vicepresident Wallace's plan for the application of the "ever-normalgranary" principle to a large number of commodities on a worldwide
basis parallels the conceptions of British industrialists.^ OfBcial
spokesmen of the Axis powers, Herr Funk, the German Minister
of Economics, and M. Riccardi, Italian Minister for Foreign Trade
and Exchange, descant upon European cooperation "to bring the
nations' standard of living up to the highest possible level," upon
the "reduction of economic regulations and coercive measures,"
and upon the "creation of multilateral agreements"; but "free
trade should be considered definitely abolished," and "balanced
trade will be increased . . . to eliminate as far as possible the ebb
and How of free exchange and gold."s
Whether the postwar period will witness the regulation of foreign
trade and finance by nations along traditional lines of protection
to particular producer interests, or whether the interest of the com­
mon man as producer and consumer—employment and a high
standard of living—will form the goal of international controls, this
we cannot predict. There are those who conSdently look forward
to the latter.
If you hold your ear close to the ground, you can hear a mufAed roar
echoing around the whole world. It does not come from bombs, or thunder
on the Russian front. It is the voice of the people demanding security
and an end to the paradox of plenty. It is the revolt of the masses asking
for the food which farmers let rot upon the ground or dump into the
streams. This subterranean roar is the most powerful force in the world
today. Statesmen who listen to it will be upheld. Statesmen who shut
* "Restraint of Trade," T&e JPconcwMst (London), Vol. 142, No. 5154 (June
6, 1942), p. 781.
* M. S. Stewart, "Headaches in Post-war Planning," The
Vol. 152,
No. 12 (Mar. 21, 1942), p. 337.
3 Geneva Research Centre, OjTEcia? ^a%e?nen%s o/ War and Peace Atnn
(Geneva, Switzerland, December, 1940, and September, 1941), Vol. I, p. 30,
and Vol. II, pp. 1, 5, 11, 12, 13.



their ears will be buried, no matter how lofty their sentiments about
freedom and initiative.*

Or more briefly, in the words of the EcoTMTmst, "Food comes before
farmers."^ There can be no doubt that this principle, championed
by Adam Smith a century and three-quarters ago/ wiH be bitterly
contested; should it prevail, innocent as well as guileful beneficiaries
of the protective system will suffer.

Is there not an easier way to the revival of world trade than an
uphill struggle against bilateralism, national exchange controls,
quotas, and high protective tariffs? Professor Hansen and his
followers would rely chiefly upon an "expansionist program" at
home coupled with extensive foreign investments by the United
States* Proponents of this policy concede that: "It would be as
fatal during peace as it would now be during war to revert to think­
ing in terms of dominant and dependent powers, of competing cur­
rency blocs, of discriminatory trade practices, or of restriction of
output at the expense of human morale or well-being."* But
thinking about international security in terms of "tariffs and cur­
rencies, . . . cartels, competition, non-discriminatory trade, for­
eign-exchange control," and the like, is "wholly inadequate,"
compared to the "more fundamental tasks" of a "positive expan­
sionist program."*
Any constructive plan of economic rehabilitation must include
large capital exports by the United States, and it will be gratifying
if the weight of Prof. Hansen's authority and the influence of his
followers secure the adoption of this policy together with the inter­
national collaboration it presupposes. If an immense postwar
boom is permitted to develop, it may be politically or economically
difBcult to cope with a tendency toward recession and an excess of
saving over investment. In this situation especially, the foreign
investment of otherwise idle funds will bless taker and giver alike.
* Stuart Chase, The Road Wf <Arc TrapefHnp (New York, 1942), pp. 83-84.
* " Post-war Agriculture," TAe Economist (London), Vol. 141, No. 5127
(Nov. 29, 1941), p. 645.
* Stuart Chase, however, mentions Adam Smith only (pp. 32, 51, 97) as an
apostle of antiquated ideas.
* National Planning Association,
Trade tn
Post-war tForM
(Washington, 1941), p. 4.
' Alvin H. Hansen and C. P. Kindleberger, "The Economic Tasks of the
Post-war World," Foretf* 4fatr*, Vol. 20, No. 3 (April, 1942), pp. 467-469.



Aside, however, from the circumstance of cyclical depression,
capital exports by the United States would play an important and
salutary role. If the hand of government, either national or inter­
national, is to be felt in economic intercourse between countries,
as most certainly will be the case, the regulation of capital Rows
interferes with private initiative and "individual" enterprise to a
much smaller degree than does the regulation of commodity trade.*
The position can be taken, and is indeed defended in these pages,
that the control of international capital movements offers one of
the main opportunities for combining freedom and order in inter­
national economic relations. The guaranty and placement of
foreign loans by the United States or a government corporation will
achieve more toward domestic employment and standards of living
than interferences with commodity trade, such as bilateral clearing,
with its inevitable losses in particular lines at home and abroad
and its lowering of the general level of efRciency.
Emphasis should be put also upon the revivifying effect upon
foreign commerce in the immediate postwar scene produced by the
transfer of the prmctpa% of the loans. However great the eventual
marginal efRciency of the transferred capital may be in the receiving
economies, the principal will amount to several multiples of the
annual product. Thus the strongest stimulus to trade comes at a
time when it is most needed, both from the angle of physical and
economic wants and from the angle of morale. Finally, there is
good reason for believing that an extensive outRow of capital from
the United States would be in the direction of increased long-run
productivity for the lending economy, an assumption which rather
clearly underlies Prof. Hansen's arguments If so, an old frontier
of investment has been rediscovered.
Despite the unquestionable merits of the lending program, it is
very doubtful whether this is really the "fundamental" task,
whether indeed it is not decidedly less important than the removal
of restrictions on trade and capital, characterized by Prof. Hansen
* From the angle of the cost and utility calculus, the stoppage of a million
dollars of capital movement entails, under ordinary conditions of trade, a
smaller economic loss than the stoppage of an equal movement of any specific
commodity. Furthermore, the wwaZe of private enterprise is more seriously
impaired by the latter sort of interference. The same conclusions hold if we are
thinking, not of reducing a movement below its "natural" potential magni­
tude, but of forcing it above that level.
* Hansen and Kindieberger, op. c%., paMtm, and especially p. 474, end of
Sec. III.



as "wholly inadequate." "The 6rst step/' declares the author of
B r a n 's Trade (p. 31), "is to render the world prosperous." This
is a brave sentiment. But is it not worth inquiring whether the
government of the United States can command resources sufficient
for this "first step/' and whether this is in reality the ^rs% step?
If the American economy can contribute 50 to 60 per cent of the
national income for war, it is no doubt both "physically" and
"economicaliy" possible to make a contribution of comparable
magnitude for the guaranty of international security by peaceful
means. Politically or psychologically, however, the matter would
assume quite another aspect; and the "several billion" mentioned
by Prof. Hansen* probably connotes to him also much smaller
sums. Our largest net balance of foreign lending, which occurred
in 1919, amounted to somewhat over $3 billion. In 1927, a year
of rather general peacetime prosperity, creditor countries in the
aggregate lent $2.25 billion net.^ Richard M. Bissell, in over-all
estimates of American postwar expenditures, assigns to foreign
lending a sum of $1.5 billion, but as "the lowest figure that is at all
Suppose we think provisionally in terms of United States loans
somewhere in the region of $3 billion annually. In 1938, the last
year before wartime controls of trade, world exports amounted
to $13.3 billion and world imports to $14.2 billion/ If after the
war trade is resumed upon a comparable scale, the transfer of $3
billion annually would mean a very substantial increment to
/ra&, as was emphasized a moment ago. But even a
large increase of foreign commerce is a far cry from rendering the
world prosperous. For prosperity indicates, and undoubtedly
Prof. Hansen means, an approach to full employment in the demesne
econcTmes of the nations; and there, in contrast to international
trade, $3 billion would dwindle to relative insigniRcance. Federal
net contributions to national expenditures of about this size during
our domestic spending program failed to prime the economic pump
of this one country; the expenditure of $3 billion, or even sub­
stantially more, diffused through the world, without a drastic
* /bid., p. 466.
* This figure, in predevaluation United States dollars, is given in a compu­
tation covering 1927-1937 by Colin Clark, TAe Conations o/ Fcofwmtc Prepress
(London, 1940), p. 463.
* Richard M. Bissell, Jr., "The Anatomy of Public Spending/' Part II,
fortune, Vol. 25, No. 6 (June, 1942), p. 132.
* League of Nations,
yearbook, 1940-1941 (Geneva, 1941), p. 177.



change in underlying conditions, would meet the same fate. Inter­
national commerce would be sustained, as was our domestic trade,
only so long as the transfer of new loans continued.
The raising of $3 billion annually for foreign investment, and
for larger amounts, might encounter difficulties, whether
the process involved direct government loans or merely government
guaranties. If our own economy were approaching full employ­
ment, it is quite conceivable at the termination of a long war that
capital should be relatively scarce and interest rates threatening to
rise, with unwelcome consequences for government bonds and bank­
ing and insurance companies. Public sentiment in these circum­
stances—which include also a public debt of unprecedented size—
might be intolerant of the loan program, particularly if the bottle­
necks of this new prosperity were less labor of particular sorts than
capital for reconverting plant, introducing new processes and
products, and making good upon wartime depreciation, all of which
some economists believe may involve very large outlays.* Public
sentiment might be the intractable element also in the contrasting
situation of a postwar slump, when a perverse but highly probable
mass psychology, heedless of the possibly beneficent operation of
the foreign-trade multiplier, would rebel against foreign loans when
the money, following the advice of the expansionists, could have
been used for domestic public works, relief, or subsidies to private
industries. Finally, if the program of foreign investment were to
be provided out of Federal deficit financing, we would encounter
in augmented degree the popular misgivings about increasing
indebtedness. 2
The resistance of public opinion, however, whether in a setting
of prosperity or depression, is not evidence
a program of
foreign lending any more than it is an argument against a policy
of removing the prevailing obstacles to trade, which would also
encounter formidable opposition in quite vocal quarters. Strateg­
ically, the position of the latter program for the United States has
in its favor the fact that bilateral payment arrangements, quotas,
direct prohibitions, and discriminatory practices have prevailed
only during the war period, and probably have not, except for
protective tariffs, come to be regarded as a part of the American
* C/- Bissell, op. <?%. (also Bissell's essay in this volume.— Editor).
* "Our own view is that the success or failure of public works and budget
deficits during a depression will depend largely on whether the public in general,
and investors in particular, approve of these policies." Frederic Benham,
Great Britain under Protection (New York, 1941), p. 236.



way. The point concerning public opinion is not, on the other
hand, its more favorable aspect for the reduction of restrictive
devices, but the limits it may impose on resources available for
foreign loans. Need it also be said that public opinion on this
head may not be without substantial foundation in facts? These
limits warn against too optimistic expectations of "making the
world prosperous" through a Rood of investment capital pouring
out from America.*
Let us look aside from these limits and imagine capital exports
by the United States of magnitudes so great—probably several
multiples of $3 billion annually—that not only is international
trade increased through the transfer process but also the capital
equipment of foreign economies is raised substantially. Would
this bring universal prosperity? Was it through inadequate capital
equipment in European and other economies that the depression
of the thirties deepened into something thought to be secular
stagnation? Had New Deal policy also included the making of
extensive loans abroad, is it at all imaginable that it would have
broken the mainspring of Empire preferences, of German bilat­
eralism and discriminatory trade, of the French quota system?
Without some sort of political accord leading to economic and
monetary collaboration and direct procedure against these practices,
nothing more than transitory alleviation would have resulted.
Nothing more could be expected in the postwar scene.
Without some form of international economic authority and
control, itself powerful enough to cope with threatened restrictions
on capital and commodity movements, there is little likelihood that
foreign loans of any signiRcance will be made by this or any other
country. Neither the government nor private investors will be
disposed to the "reconstruction of Danubian agriculture" if this
region is again open to a German trade drive with the weapons of
economic discrimination, nor to "the control of the Rood of the
Yellow River" if Japan can conduct economic warfare on its
neighbors. Aggression is not the only peril: what becomes of
creditors' claims when a country attacks its own domestic unem­
ployment by means of import duties, quotas, and prohibitions, or
by exchange control and frozen accounts? Extraterritoriality is
probably at an end, and it is even doubtful whether countries poor
in capital could be induced to borrow without international guar­
anties against a repetition of the capital withdrawals following
*Cf. the viewa of Mr. Bryce in this volume.—Editor.



1931. Finally, without international guaranties against economic
warfare, Russia can scarcely be expected to acquiesce in the exten­
sion of American Rnancial capitalism through enormous foreign
In short, instead of being less fundamental than the "positive
expansionist program/' the removal of restrictions on trade and
capital completely conditions both its existence and its success.
The former is the sme
7MWof the latter, not reciprocally, how­
ever desirable the loan program per se. "There will be substantial
and fruitful movements of capital only if a peaceful, orderly world
is restored, if nations find their balance, both inside themselves
and between themselves," writes Herbert Feis.* And, he con­
tinues, in a world brightened by freedom of trade and finance,
international capital movements can be expected upon an unpre­
cedented scale. Measures to restore that freedom can be regarded
as passive only if investment has inherently a tendency toward
stagnation. But it may well be discovered that stagnation inheres
only in the obstacles to spontaneous economic intercourse.

The indispensable and adequate posi%ve coniro! which must
be exercised ofer national governments in economic matters to
preserve equilibrium and reasonably full employment of resources
is best described as "monetary" control. The reasons for this
will be set forth shortly; but first we must consider the necessary
conditions for removing the obstacles to international trade and
finance. This is primarily not an economic but a political problem.
But the economist must envisage the most probable political settings
in order to frame his analysis. If the war ends with the Axis powers
either victorious or undefeated, there will be no prospect for the
removal of existing complete authoritarian control of foreign trade
along strictly national lines. Bilateralism, exchange control, and
other weapons of economic warfare are a part of the Fascist-Nazi
arsenal, and they can be met only with the same devices. If the
war ends with victory for the United Nations, the decisive issue
will be the prestige and attitude of Russia. If Russia holds a
position of great power and will have no truck with "capitalism,"
the Western countries will again have to retain import and export
controls practically upon the existing basis. If the United States
Herbert Feis, " Foreign Investment in a Post-war World," Fortune, Vol. 26,
No. 1 (July, 1942), p. 116.



with Great Britain holds the reins, or if Russia is inclined by interest
or political philosophy to collaborate in a liberal international
economic regime, the regulation can be transferred from nations
and blocs to some
in this event, as the first para­
graphs of the present analysis indicated, the regulation can be
transformed from interference to control. Those who believe that
we fight for the outlawing of military aggression will expect this
"joint authority" to rest, not upon mere "cooperation," which is
limited by the self-interest of a particular state, but upon genuinely
sovereign power including force of arms.*
Only the victors can introduce freedom of trade, and being
victors they would be able to impose it upon the vanquished. The
victors may hesitate because of vested interests, "depressed areas,"
and pressures within. However, in Great Britain protection to
domestic industry is only a decade old, it is restricted to fabricated
goods, and the rates of duty are relatively moderate. Furthermore,
imperial preference has been reported to be losing favor, in both
England and the colonies. ^ Bilateralism was for the most part
induced by the freezing of England's accounts abroad, though
the case of Argentina is an important exception; and the quota
system before the war was not extensive. Finally, except for
the war, England has not adopted exchange control. For these
reasons, England may show less resistance to reform than the
United States. Here, it is true, bilateralism, exchange controls,
quotas, and the like, are not apt to enjoy much favor; but protective
tariffs in the United States, particularly on certain agricultural
raw materials, promise to be the one most formidable obstacle to
postwar international reconstruction. If the state must aid
particular segments of the economy, it may perhaps be recognized,
however, that direct subsidy is much less costly and destructive
than protectionist devices.
Assuming the will to remove these obstacles, the
is to remove them. Capital movements will have, it is true, to
be governed, in both negative and positive senses. But for the
trade in goods and services, action must be prompt and drastic.
The immediate postwar period, as John Parke Young maintains,
* Eduard Benes, "The Organization of Post-war Europe/' Foretpw
Vol. 20, No. 2 (January, 1942), pp. 240-242; John Foster Dulles, comment upon
"The United States in a New World/' supplement to Fortune, Vol. 25, No. 5
(May, 1942), p. 28; Prime Minister Menzies, TAs
(London), Oct. 18,
1939, p. 7.
* Benham, op. c%., Chs. II, IV.



"will be a time of flux and shifting within industry, a period of
extensive adjustment to new conditions. At such a time sharp
reductions in certain rates could be made with the least harm and
opposition."* Still-better, perhaps, is Buell's proposal that "the
United States and the United Kingdom should declare that any
restrictions on their own trade would come to an end, say, within
six months from now." When trading relations are reestablished,
exchange would proceed "without hindrance of tariff, license,
quota, exchange control, or subsidy." s Only thus can the economic
readjustments after the war be made to serve the purposes of
international exchange, instead of perpetuating old barriers or
creating new ones.
This is particularly true of Great Britain; and those who would
aid her by a continuance of bilateralism actually jeopardize her
welfare. Her salvation rests upon "adapting British productive
skills to the requirements of the world market," not only ultimatelyy
as admitted by those condoning a transitional bilateralism, s but
pro %a%%o immediately after the war. With her peculiar dependence
upon a flourishing state of world commerce, England can ill afford
any provocative beggar-my-neighbor devices. The most sub­
stantial aid, beyond the program for liberating trade from national
restrictions, would be the extension of long-term loans for the recon­
struction, rationalizing, and redirection of her industries and the
replacement of lost shipping.
International monetary control in active and positive roles could,
and indeed "must," follow the liberation of trade from restrictive
and discriminatory devices. Since real co%%ro% is unimaginable
without an international sovereign power, it would be anomalous
if the monetary authority were not a part of this power. An inter­
national banking consortium, a congress of central banks, or an
international Reconstruction Finance Corporation, would be a half
loaf better than none and might be successful in implementing the
very desirable program of foreign investment which Prof. Hansen
envisages for the United States. But the organ charged with this
responsibility almost automatically inherits responsibility for
exchange rates (their stabilization and occasional adjustment), for
* Young, op. c%., p. 189.
Raymond L. Buell, "Relations with Britain," supplement to fortune,
Vol. 25, No. 5 (May, 1942), p. 14.
* Hansen and Kindleberger, op. <?%., p. 471; National Planning Association,
op. c%., p. 31.



checking capital Rights, for staying the process of recession and
liquidation in key economies and its spread to other economies,
together with some necessary responsibility for national monetary
and Sscal policies when they give rise to international repercussions.
Quite clearly, this implies a great deal more than an international
loan agency, indeed, it involves nothing short of general economic
cooperation and an international economic authority. Further­
more, national economic and political power
not only in the magnitude of a country's international trade but
also in the division of a country's exports and imports among its
trading partners, as a brilliant theoretical and statistical demon­
stration by Hirschman proves. Indeed, the necessity of a regulating
international authority is the logical implication of the current
theoretical and "practical" works dealing with recent tendencies
in world trade.
And vet "monetary authority" seems to carry about the right
implication as to powers already characterized as "indispensable
and adequate" to this end. The preceding paragraph has indicated
the principal functions of an
nature, and these, it will
be observed, are largely monetary. In the immediate postwar
period, private capital would scarcely brave the risks of overseas
investment alone, and it is desirable that the guaranties be inter­
national rather than national. Secondly, as Halasi explains,
Confidence is destroyed if debts are not paid on maturity; and it is
destroyed if the relative prices of commodities fluctuate wildly. These two
prerequisites mean, if applied to transactions between economic areas, that
the balance of indebtedness between them has to be kept liquid, and that
their rates of exchange should not change frequently and strongly.^

After the experiences of the thirties, it does not seem necessary to
press the point that international authority must be invoked to
assure the inviolability of creditors' claims. The analogy with
domestic loans is perfect: who would lend if creditors had no
legal rights? But the analogy extends to the debtor side as well.
Nations, like commercial banks, are vulnerable to runs; their only
protection is a central institution to provide liquidity to check the
flight of capital.
* 0. A. Hirschman, in a forthcoming work entitled Afglottal Power and
Structure of /n4erna%tonaJ Trade.
* Albert Halasi, "International Monetary Cooperation," gocM* Reward,
Vol. 9, No. 2 (May, 1942), pp. 183-184.



The international monetary control would be too narrowly
conceived, however, if its functions were merely episodic; responsi­
bility extends also, perhaps primarily, to cyclical and "structural"
changes. To cope with international aspects of the latter, the
control must occasionally adjust exchange rates to parities corre­
sponding to equilibrium rates in the new situations. To cope with
cyclical variations, it will, in the first place, veto any devaluation
below equilibrium designed to expand employment in one country.
But, secondly, it will need to exercise continuous control over the
volume of purchasing power in the important collaborating coun­
tries. This involves powers comparable to those of a strong
central bank—but not more—on the side of commercial credit.
If control over cyclical expansion and contraction is to be effective,
the international instance will also impose outside upper and lower
limits to the amount of deficit financing or debt retirement by the
Treasury. Together with the imposition of outside limits to com­
mercial bank credit, this power, of which cooperating nations would
be most jealous, is veritably the crucial defile of international
economic comity. While somewhat less severe than the complete
suppression of money creation by members, as for the states in our
own country, it secures the essential element of international
money. The adoption of this crucial over-all control has not only
the great merit of really ensuring international equilibrium but also
of relieving the countries of the intrusion of international control
into matters of the "social budget" and wages. Such an inter­
national control is not without historical precedents, for example,
the limitation of credit expansion by the Reichsbank under the
Dawes Plan and the League of Nations' oversight of national
treasuries and banks in the debtor countries of southeastern
If these avenues of regulation—it will be observed that they fall
under "monetary control," broadly interpreted—are admitted to
be necessary, can they also be regarded as
This question
can be answered, of course, only in an approximate fashion; but, I
believe, it can be answered affirmatively. The international con­
trols should be designed to permit the inclusion of "capitalist"and
collectivist economies alike; and, although a collectivist economy
such as Russia's can survive and even flourish in a liberal inter­
national regime, a liberal economy would be next to impossible in a
collectivist or totalitarian international order. The monetary
controls which have been set forth seem to be at least approximately



adequate to a Hheral international system. They are a far cry from
tatssez /<Mre, but they would encourage private saving and invest­
ment and individual enterprise in the production, export, import,
and sale of particular goods*

International monetary (or economic) cooperation does not
involve the invention of some new international money, the rehabili­
tation of sterling or dollars as a world currency, the creation of a
universal multilateral clearing system, or even the restoration of
the gold standard.
of these systems could indeed be used,
so long as short-term balances (or the money itself) are freely
transferable; but
any of any—t.e., with nothing but national
Sat standards in existence, but with the same stipulation concerning
transferability of balances—the international monetary authority
could operate quite successfully. Economically, international
money is created by the existence of this authority; and the physical,
numismatic, and technical character of the medium or mediums of
value and exchange are impressively inconsequential. The only
serious limitation upon this heartily dogmatic statement arises
from the psychological aspects. Thus, a proposal for international
currency "backed by gold" might appeal to the popular imagina­
tion and lead to a wave of sentiment for an international monetary
authority, the powers of which are really the crucial matter. Or a
system of "international bookkeeping" might be a catchword; we
would have it anyway with a gold standard, Sat currencies, or
multilateral clearing. From the psychological angle, in itself very
important, probably most can be expected from the reconstruction
of the gold standard under international auspices.
Thus the necessities of future economic collaboration have
rendered largely otiose the discussion of gold versus free exchanges,
and of stabilized versus fluctuating rates. The former is merely
technical, given the purposes and powers of the collaborative organ;
and the latter is settled by the recognition of the desirability of
stability, with provision for adjustment by international authority
on rare occasions to meet secular or structural change.*
Commenting upon a proposal for an "export currency" apparently made
at the Rio de Janeiro conference of foreign ministers by the United States
Treasury, Secretary Morgenthau "emphasized that he was not proposing
stabilization of currencies domestically, since 'when you try to stabilize a cur­
rency within a country, you get into the whole question of its economic wellbeing/ " Cy. JVtw Tot* ft#**, Jan. 23,1942, p. 8. Did the Secretary imagine



In contrast with technical payment arrangements, just now
discussed, the choice of parities for the resumption of normal trade
after the war may be thought to be an especially severe problem.
The problem would be impossibly complex, indeed, if it were neces­
sary to rely upon computations of parity from price and wage levels.
Both have been controlled, and the addition of rationing and
priorities, to say nothing of export and import controls, makes the
data of the war period valueless for the restoration of free exchange
and free exchange rates. Rates must be allowed to assume their
positions freely in answer to supply and demand forces, the only
precautions being the rapidity with which frozen funds are made
available/ and the rate of new lending and borrowing. "Freely"
does not, upon a reasonably liberal interpretation, preclude the
use of foreign loans or a stabilization fund to prevent an excessive
ba^sse, unwarrantable upon somewhat longer run conditions, which
would probably attend the removal of commodity controls.
The policy of permitting exchange rate adjustment to pros­
pective long-run equilibrium levels should be followed in the case
of Great Britain specifically to cope with the probable "shortage"
of dollar exchange. Against this it has been argued that the
sterling area and the United States would meet the depreciation of
the pound by parallel devaluations; but this is an argument only
in the absence of international monetary agreement which would
secure the fall of sterling relatively to other currencies. Again, it is
apparently argued that favorable British terms of trade are neces­
sary as an offset to the loss of her foreign markets, her foreign invest­
ments, and her mercantile marine. These circumstances do indeed
establish the necessity of postwar economic aid. But it is a
to argue from the necessity of aid to the necessity of a high
sterling rate. If in the long run and aside from discriminating
prices and rates, the price elasticity of British exports exceeds that
of imports—familiar reasoning establishes a fair expectation of
precisely these circumstances—the "aid " would take an ironically
perverse turn. Furthermore, whatever temporary gain might
ensue from an artiBcially high sterling rate could be equaled
mechanically by a loan, with a marked superiority of the latter
device in securing an objective price system on commodity markets.
that an internationally stable currency avoids the issue of domestic stability
and well-being?
Judd Polk, "The Future of Frozen Foreign Funds," 4in6rMan
Revtew, Vol. 32, No. 2, Part 1 (June, 1942), pp. 260-271.



It is also maintained that a depreciation of sterling would fail
to lower the price of British exports because the price of imported
raw materials for fabrication and reexport would rise. This over­
looks the facts that the margin between import and export prices
would necessarily decline and that a fall of this margin, on the
presumable long-run import and export price elasticities, would
necessariiy improve the British balance of payments situation.
Finally the inelastic demand for imports into England under war
conditions where "price doesn't matter" has been projected indefi­
nitely into the postwar period, when, unless England is permanently
to be supported by this country, the price of imports
The best answer to the policy of maintaining sterling above its
natural equilibrium level appears later in the tract defending* the
policy. The salvation of the British export industry "must be
found in the development of products which that industry can make
cheaper and better than the rest of the world"; the alternatives,
"exchange control, clearing agreements, and bilateral trade"—
which, it may be added, would be necessitated by the overvaluation
of sterling, as they were in the case of the mark—"would have
consequences for an international economic order of peace and
harmony which are terrifying."*
The anaiysis of the preceding pages is based upon two premises:
that full employment and high incomes are more likely to be
achieved when production is oriented toward maximizing the
consumers' position than when it is oriented toward producers'
proSt margins; and that the maximization of the consumers' posi­
tion under conditions of peace is more likely to be achieved by an
objective price system than by authoritarian price control. In
international trade and finance the orientation of policy to pro­
ducers' proSt margins spells protection and restriction; and the
6xing of prices at levels incompatible with consumers' choices
spells bilateralism, exchange control, and discrimination. The
removal of these obstacles to international trade and Bnance effec­
tively conditions both the appearance and success of extensive
foreign investment by the United States. In conjunction, the two
programs hold the economic promise of the future: the encourage­
ment of saving, investment, and free enterprise, and the establish­
ment of international economic order.
* National Planning Association, op. c#., pp. 24-25.
, p. 31; t/. also p. 29.





Under this heading two questions are to be considered: firstly
and briefly, certain international effects of a substantial, directed
program of domestic investment, and, secondly, the opportunities
and need for international investment in a publicly directed program
of postwar investment intended to provide full employment and to
increase the standard of living of the peoples of the world. Obvi­
ously, both of these are large and important questions, on which
only a very little can be said in a few thousand words. For most
countries of the world, these international aspects of an investment
program are the vital ones, and in the light of them the outside
world will judge the success of the United States in discharging
the historic responsibilities that victory will thrust upon the domi­
nant political and economic power.*
A program of active domestic investment in any country will
have an immediate and substantial effect in increasing the demand
for imports. The relative amount of this eCect will, of course,
depend upon a host of factors, including the nature of the investment
and the amount and nature of the increased consumption to which
it gives rise, the type of economy in which it occurs, and, par­
ticularly, the degree to which that economy is dependent upon
imports. If foreign exchange is available, this increased demand
for imports will be effective in markets abroad and will result in
higher imports. The more that domestic investment programs
are being followed in other countries, the more general will be the
increased demand for imports and the more readily will foreign
exchange be available to each country to make its import demands
It need hardly be stated explicitly that the discussion in this essay is based
upon the expectation of an Allied victory. The author desires to emphasize
that the opinions expressed or implied here are purely personal.




effective. Fortunately, the United States, whose domestic invest­
ment program is most relevant here, is possessed of such vast gold
and exchange reserves that there is no need to worry about the
possibility of its not being able to make its import demands effec­
tive, so it is free to take the initiative. Many other nations,
however, particularly after this war, will not have the gold or
exchange reserves or other international assets to indulge their
higher demands unless and until export markets increase, owing to
parallel action in other countries, or to other causes. Indeed, in
many countries a domestic investment program, ii it is to take a
useful form, must itself be contingent upon the exchange being
available to purchase the imports of capital goods, and, in the
absence of expanded export sales, or loans from abroad, such a
program may require a reduction in other types of imports. This
consideration indicates the importance of parallel action in following
expansionist programs, and of countries such as the United States,
which have large exchange reserves, taking the lead in the initiation
of expansion.
Substantially increased demands for imports, such as would
result from a successful investment program, would be of the utmost
importance in international economic affairs. Indeed, it would
hardly be an exaggeration to say that a strong and effective demand
for imports by the major industrial nations is the key to the solution
of most of the very troublesome problems of international trade
and finance. Given that demand, nations dependent on exports
are not at the mercy of one buyer and have an opportunity to
adjust their economy to the production of alternative products, if
there is a surplus of one. Given markets, debtor nations can
honor their obligations. Exchange rates can be maintained at
reasonable levels, and controls can be relaxed. The increase in
the imports of the countries carrying on the investment program
will enable their suppliers in turn to import more from them, because
of higher incomes and a larger volume of available exchange, which
of course will add to the original effects of the program upon employ­
ment and production.
A high level of employment, production, and import demand
will have more lasting institutional effects. It will provide a milieu
in which existing impediments to trade can be removed or reduced.
Any internal effects of such changes can be more readily absorbed
at times of good employment and production, because the economy
is more fluid and labor and other resources can be transferred with­



out running the risk of prolonged unemployment. Moreover,
vested interests are less likely at such times to get sympathetic
political support in opposing changes that would favor interna­
tional trade.
The favorable effects noted above constitute the methods by
which the recovery or prosperity produced by a well-directed
investment program is transmitted and shared between nations. It
must be realized, however, that these beneficial international
results arc not obtained without certain immediate effects upon
the domestic situation. The nation giving a lead to others will
not, during the period of leadership, be receiving as much stimulus
from abroad as it is transmitting, and the net increase in its imports
over its exports constitutes one of the "leakages" by which the
original stimulus of th6 investment activity is absorbed;
international effects cut down the domestic "multiplier." They
make full employment in one country more difBcult to obtain
because it is shared to some degree with others. In the long
run, however, they make it more effective, because they make
possible the advantages of trade, which make it possible to use
!abor where it is most productive, thereby enabling a higher stand­
ard of living to be obtained from a given level of employment.
Moreover, they create an international situation in which foreign
as well as domestic investment is possible.
For any nation largely dependent upon imports, these con­
siderations are of the highest importance and make it necessary
to relate an expansionist domestic program to the situation in the
countries with which that nation carries on its most important
trade. If such countries take a lead in expansion, they may find
their domestic "multiplier" disappointingly low and their exchange
reserves depleted. Temporary foreign borrowing, or in its absence,
exchange depreciation or control, may be a necessary and possibly
quite justifiable price for such a country to pay for initiative and
independence in economic policy.
Finally, we must, of course, remember that the physical fruits
of a domestic investment program are bound to have international
effects. It is difBcult to generalize in advance about these, but
if the investment is to a large extent in industries likely to displace
imports, then the international beneBts accruing from the immediate
e?ect of the investment upon incomes and import demands would
before long give way to unfavorable international results. On the
other hand, investment which has the permanent eSect of so adding



to productive power that it raised the general standard of living
and therefore the demand for imports would continue to have
favorable international repercussions long after the immediate
stimulus afforded to purchasing power had passed away.

If the type of program contemplated in this book is to be general
and most effective, it must involve international investment on a
large scale. If our wartime protestations of allied solidarity and
of a desire to improve the standard of living of all those who live
in want are to be carried out—if indeed in the postwar world we
are to apply the lesson the world has now learned at so heavy a
price, that no nation can live unto itself alone—then we must have
substantial loans from the richer states to the poorer states of the
United Nations. If this is to be either the American Century, or
the Century of the Common Man, or both, American capital must
go abroad to make it so.
These conclusions follow from the fact that most of the world
and its inhabitants are woefully short of capital and are unable
to provide it from current income at the low levels that must prevail
until capital is available to make it more abundant. Modern
knowledge and technique, alone, are not enough and indeed cannot
be applied without capital. Billions upon billions of dollars must
be invested in Asia, Polynesia, South America, and Africa, if the
great masses in these lands arc to be made productive and eventually
brought up to minimum standards of health and decency, let alone
comfort. No amount of good will, or even of demand for native
products, will substitute for the capital that is necessary to improve
production and health.
It is in these backward economic areas that capital in this
century can be most productive, in the sense of earning the highest
real return in goods and services. For that matter, it should be
possible in those areas for capital to eam the highest monetary
return as well, if the investor desires to exact all he can from the
needy borrower and if the investing nation is prepared to accept
directly or indirectly the goods in which such return must eventually
be transferred. Indeed, when one bears in mind the appalling
shortage of capital and opportunities for investment in so many
parts of the world, it is disturbing to see the economists of the
United States and Britain racking their brains to cope with the
apparent dearth of investment outlets, to devise artificial means



of reducing the propensity to save and of stimulating expenditure,
and even at times defending relatively wasteful expenditure or
investment. Only if large-scale international investment is out
of the question can such eflorts be justified.
It is well to recognize at the outset that the benefits of such
foreign investment would not be confined to those who live in the
borrowing countries. The lending countries will gain immediately
in the sense of finding a useful outlet for their employment, produc­
tion, and savings; and if, over the course of time, they can manage
their economic and international affairs sensibly, they will gain in
the higher return of real goods made possible by such productive
foreign investment and obtained as interest and repayment.
In what form is this international investment required? A
proper answer, of course, must require careful, detailed study
of the various regions concerned, but from general knowledge of
the areas it is not hard to suggest the main lines. If large areas
of Asia, South America, and Africa are to be made productive
and arc to enjoy a little of the benefits of modem science and
technique, they will need capital in the 6rst place—and perhaps
most significantly—to make their agriculture more productive,
for it is on agriculture that most of their people depend. They
require great amounts of capital for the roads and railroads that
form the essential framework of a modern economy and that are
needed to make possible the specialization of land and labor and
the interchange of products that is the beginning of efficiency.
In many areas, flood control and irrigation works are needed, and
these absorb capital in vast quantities. Capital is needed for
public health—for water-works, sewage systems, hospitals, and
housing. It is needed to build towns and cities. And of course
it is needed for commercial and industrial construction and equip­
ment—from retail stores to mines, from utilities to cotton mills.
We are too likely to think of capital as being required primarily for
industry; we must remember that in these areas as elsewhere greater
amounts may have to be invested in other forms than in industry
proper, if an efHcient economy is to be created. This fact is
important in assessing the magnitude of the Row of capital required,
As well as the probable nature of the investment mechanism.
China is the outstanding example of the magnitude of the
opportunities for investment and of their diversified nature. Here
we have the largest nation in the world and the poorest economi­
cally, an ally that has suffered longer than any in this war—and



certainly as badly—that is desperately short of capital, with its land
deteriorating and its increasing population pressing continually
against its means of subsistence. Yet it is a nation with large
material and human resources, now keen to take its place among
the progressive democracies of the world and to do its share of the
work and the trade, thereby to achieve something better in the way
of living standards than the dreadful poverty that has been the lot
of most of its people. But it obviously cannot save enough out of
its meager income—even in times of peace and good trade— to
improve its position quickly. Its people have literally starved for
the lack of capital for roads and railroads; millions have been
drowned and millions more have lost their homes because of lack
of Hood-control works. If China is to be rehabilitated, improve
her agriculture, establish a minimum of transport, industry, and
commerce, and, within a few generations, provide the barest needs
of public health and education, she will require foreign capital on a
scale never witnessed elsewhere in the world. Of course, the world
is better able than before to supply capital on the vast scale required,
once the war is over.
It must be recognized that more than capital, in the narrow
economic sense, will be required in most cases. Technical knowl­
edge and management will be needed, firstly, to carry on the con­
struction work and the creation of new industries (possibly to assist
in the improvement of agriculture); secondly, to assist, at least
for a time, in the operation of what is created; and, finally, to train
and educate those who will ultimately take over the management.
It is natural to expect that those, or at least those nations, who
furnish the capital will also furnish the technical and managerial
skill required to make it effective.
The methods and institutions by which this foreign investment
will be made are difRcult to anticipate until one has some idea of
the political and social circumstances to be expected after the war.
From what has been said above, however, it is clear that a con­
siderable part of the funds will be required by public or quasi-public
agencies of the borrowing nations—such as capital for roads, flood
control, irrigation, public-health projects, and other municipal or
local utilities. Possibly capital for agriculture in these regions
will also have to pass through some governmental channels if it
is to be used in programs of national development and to be available
at interest rates within the ability to pay of the farmers who need
it most. Capital to provide railways and utilities may be invested



by either private or public agencies, and the choice will probably
depend as much on the willingness of investors to risk their capital
in foreign rails and utilities (some of which have not had happy
histories) as on the political and social complexion of the borrow­
ing country. Commercial and industrial capital seems much
more likely to be invested and managed by private organizations,
although even in this Eeld the events of recent years in Latin
America and the Far East would give some grounds for expecting
that nationalist foreign governments will prefer to establish state
concerns, particularly for the development of natural resources
where the dangers of unreasonable exploitation are greatest.
Chinese experience with industrial cooperatives and government
trading organizations during the war may lead to vigorous peace­
time development of these relatively novel types of organization.
Experiments with government-sponsored "m ixed" foreign- and
domestic-owned corporations in South America may also point
toward new forms of international investment more suited to both
the economic and the political requirements of the twentieth century
than anything common in the past.
There is no fundamental reason why the intervention or use
of the government or of quasi-govemmental agencies in the borrow­
ing country would necessitate the intervention or use of the govern­
ment or an oiBcial agency in the lending country. In the past,
at one time or another, private capital has been borrowed directly
by foreign governments or their agencies for almost all conceivable
purposes. The history of such foreign investment, however, has
been anything but happy in a great many fields. The experience
of British and American investors in the government securities of
other English-speaking countries has been generally satisfactory
and in most cases highly proStable. Nevertheless, in the future,
the type of project we are considering is much more likely to be
compared with the investments in other areas where the investors'
experience with privately sponsored security flotations has been
far from satisfactory, particularly in recent decades. Political
risks are likely to be considered very serious after the turbulent
30 years we have just been through. Both these and the economic
risks of depressions and exchange diSiculties will make the private
investor and investing institution in North America—and probably
Britain, too— hesitant about risking his capital in the development
of distant areas unless he is offered some sort of guaranty or until
he has had some chance to see the brave new world behave. More­



over, there does not appear to be a sufficient number of established
private organizations, in the United States at least, with knowledge
of the investment requirements of the Far East and South America
and with adequate contacts there to serve as a channel for the very
large volume of investment which would be required. Given some
assurance of political stability and confidence in economic
development, private investors may ultimately be prepared to
lend great sums abroad, but we cannot rely upon them in the
early stages.
Furthermore, the governments of the borrowing countries and
their agencies may be somewhat reluctant to go to private bankers
and underwriters for their requirements if there is any chance of
obtaining capital from official agencies. Private capital is apt to
demand higher interest rates or better security. There is also some
chance that borrowing countries may feel a greater danger of
imperialist, capitalist influence in their affairs by private investors
and bankers than by the government of the lending nation or some
agency of it.
These considerations suggest there will be a considerable demand
for a public or quasi-public foreign investment agency in the large
lending countries, particularly the United States, which will be
looked upon as the obvious source of foreign capital. What would
be the most effective form of such organization, whether it should
be international in its composition, and howr it should function,
are questions into which we cannot enter at this time. Possibly,
some such organization will grow out of wartime or immediate
postwar relief organizations.
A government lending agency would have some substantial
advantages. It could raise capital very cheaply and in the large
amounts required. Therefore, it could more readily lend on terms
that were possible of fulfillment. It would be better able to provide
for flexible terms of repayment over a long period, integrated with
the trade and monetary policies of the creditor nation. It could
take into account as gains the many indirect benefits to the lending
country of the investment program, the stimulus given to employ­
ment, and the improvement of international relations and security.
If, as one might hope, there are to be genuine humanitarian motives
in a program of foreign investment, as well as economic and strategic
purposes, then clearly governmental agencies are better fitted to
participate than private investment organizations. On the other
hand, it must be recognized that public lending agencies will be



subject to serious difEculties. They are more likely to be hampered
or restricted by political opposition to the whole policy or opposition
to particular features of interest to certain domestic groups or
areas. They may be slower to act, particularly if they are inter­
national agencies requiring the cooperation of various governments.
Finally, there may be danger of international political implications
and complications arising from the investment, from the manage­
ment of the newly developed projects, or possibly from default
or delays in meeting the terms of the contract.
While it seems likely that a substantial part of this postwar
foreign investment will take place through ofBcial agencies, there
will almost certainly be considerable scope for private investment
as well. If the major elements in the development program begin
to show signs of success, and if openings appear for industrial and
commercial investment within the larger framework, then one can
count on some private capital moving in fairly rapidly. In par­
ticular, one would expect to see another wave of direct investment
by large, established industrial and commercial concerns setting
up their own branches or subsidiaries. This direct investment—
though hardly the typical example of the economic textbooks—
has been one of the most important and successful types of foreign
investment, particularly by the United States. It has one great
advantage for the type of program we are considering in that it
provides a very convenient and effective way of introducing into
new areas the most modem techniques and able management, as
well as capita!.
There are several matters relating to the transfer of capital
from the lending to the borrowing country that we must note. The
capita! movement must somehow be reflected in a movement of
goods or services; it must increase the exports of the lending country
in re!ation to its imports and increase the imports of the borrowing
country in relation to its exports. These changes need not, how­
ever, be con6ned to the direct trade between the countries. The
capital may in effect be exported via third countries, to greater
or less degree. The funds advanced by one country may be spent
in another, which in turn uses them to import from the Srst, or
from others who in turn will import from the first. In practice, a
further complication is introduced by variation in exchange and
gold reserves and in short-term balances, so that there may be a
delay in the working out of these trade embodiments of the original
capital movements.



It will be of the greatest importance whether or not the lending
country requires that the proceeds of the loan (or the funds provided
for other forms of investment) be spent in buying imports from
itself. There may be some temptation for it to attach this require­
ment to loans made by public agencies, particularly in periods when
difRculty is being experienced in maintaining a satisfactory level
of employment. If this condition is attached to most of the foreign
investment after the war, however, it will be a very serious impedi­
ment to the development of general, multilateral, international trade,
for the imports required by the borrowing country would normally
be obtained from several countries, and the borrowed funds would
be fairly widely dispersed in paying for them and would serve to
finance a whole series of multilateral transactions before finally
returning to the lending country. In particular, it now appears
that much of the world will for quite a period suffer a fairly chronic
shortage of American dollars unless these are made available by
substantial loans from the United States to those nations requiring
capital, who in turn would be permitted to pay over the dollars
to third countries where they will be needed to pay for an excess
of imports from the United States.
The second point to be noted in relation to the transfer of the
capital by means of goods (and services) is that it does not neces­
sarily involve additional trade in "capital goods" but may be
embodied largely in additional movement of consumer goods, even
food. It frequently seems to be taken for granted that the export
of capital by a country will take the physical form of export of
machinery, steel, and other capital goods, possibly because the
great lending nations have also been the great industrial nations.
If one reflects that the substantial movements of capital after the
war are likely to be to countries of large or fairly large populations
at very low standards of living and the capital will be invested in
construction projects probably to a greater extent than in machinery
and equipment, then it seems probable that at least a part of the
capital will be transferred in the form of food and materials, and
other consumer goods, to sustain the local population that must be
diverted to capital creation. Therefore, there is some chance that
the large-scale movement of capital to the Far East may use up
threatening surpluses of wheat, cotton, and other Western products
not usually regarded as capital goods.
A third and most important transfer problem arises in the
repayment of the loan or the payment of the interest on it, This



problem wiH not be an immediate one, fortunately; and, in the
large-scale investment programs under consideration, it might not
arise at aU during the lengthy period when the investment is going
on and not on a substantial scale until repayment of principal
commences. When it does arise, the problem will be to find means
of increasing the exports of the debtor country, relative to its
imports, and of increasing the imports of the creditor country,
relative to its exports. In part, but only in part, the ability to
make this transfer will depend on the success of the investment
program in developing a productive economy in the debtor country,
which will enable it to produce the exports to pay for its obligations
or to get along without imports to the corresponding extent. For
the rest, the possibility of transfer will depend on the willingness
and ability of the creditor nation to accept the additional imports
of goods and services represented by the payments of the amounts
owing to it or to accept a corresponding reduction in its exports.
Experience in the last 20 years suggests that the debtors may be
better prepared to meet their part of this transfer problem than
creditors are to meet theirs. The creditor country's difBculties
in accepting payment in real goods arise primarily from the fact
that a change toward a more liberal tariff or other trade policy is
hard to achieve unless or until a fairly high level of employment
and production can be maintained at home. Consequently, the
ultimate stage in a foreign investment program brings us back
face to face with the problem of securing and maintaining full
employment. If that problem can be solved in the creditor country
by constructive methods rather than merely by excluding imports,
then the repayment of foreign investments can be accepted in goods,
and the people of the creditor country will stand to gain the very
real advantages represented by the higher real rate of return which
can be earned upon capital in the borrowing country. The more
conSdently we can look forward to continued success in achieving
full employment, the more sense there is in a well-directed program
of foreign investment.
It is not to be expected that a large program of foreign invest­
ment would be without risks and opposition. We have already
noted the difBculties that may be faced in the transfer problem at
the time of repayment. It is conceivable, though hardly very
likely, that these ultimate difBculties would be made the basis of
immediate opposition by vested interests. It is more likely that
they would be cited by others to rebut a claim that the foreign
investment would bring a real benefit to the lending country.



There will be risks of loss even apart from the transfer problem.
The investments may not be efficiently or economically made and
the return may be disappointing for that reason. This can be
guarded against only by care and good management on both sides.
There is also the danger that economic conditions in the debtor
country in future years may, for other reasons, be so unsatisfactory
that investments will not be so productive as anticipated and will
neither yield a direct return nor provide a taxable capacity or local
borrowing capacity that is sufRcient to make possible the meeting
of the obligations that have been incurred. The significance of
this danger will depend upon the success of the whole development
program in the debtor country and the international economic
situation with which the country is faced at the time its obligations
must be met.
In addition, of course, there will be what we may term the
political risks. The form of government of the borrowing country
may not be sufficiently strong or firmly based to offer much assur­
ance that the country will be able to carry out the investment and
development program in question or to meet the obligations it
incurs for the purpose. To some persons this danger, for example,
appears as a potential barrier to large-scale investment in China.
One cannot assess the risks of this character until the shape of the
postwar world is clearer than at present. One can expect, however,
that a government able to obtain foreign capital and use it to
develop its country and substantially improve the condition of its
people will in that very process gain enormously in strength and
prestige at home. If it has the assistance and cooperation of a
friendly great power, its stability should be further augmented.
Another type of political risk is the danger that the government
of a borrowing country may decide to default, or to force those
within its control to default, even though the ability to pay is
present. Some element of this danger may always be present.
It may be expected to be less than has been usual in the past, if
the loans are obtained at a reasonably low interest rate and are
used to carry out a vigorous program of national development.
If international economic conditions can be maintained on a fairly
stable and favorable basis, in which national development programs
can be expected to proceed with some real hope of success, then
we may look forward to far less international distrust and friction
than in the past and consequently far less danger of deliberate
default or repudiation of obligations. Even fairly radical political



change would not necessarily lead to repudiation of international
bans that were honestly obtained on reasonable terms and used
for sound, productive purposes, for real development, and for the
improvement of the condition of life of the people. There will be
an added reason for honoring the contracts if the loans have been
obtained from a friend!y power whose good will any government
would wish to retain. If the new government is one dedicated
to a more vigorous program of social and economic development,
it will undoubtedly wish to borrow more abroad and will have a
material interest in meeting the obligations it will have inherited.
Once we can look forward with confidence to many years of
secure peace between nations, the greatest of all political risks will
be eliminated. Surely it will not be beyond the wit of man to
achieve this all-important goal, after a decisive victory is won.







So far as can now be judged, four principal factors of disequi­
librium will exist at the condusion of the period of relief and recon­
struction after the war, to plague the establishment and maintenance
of a free system of intemationa! trade and exchange:
1. The distribution of international monetary reserves will be
more distorts than in the prewar period.
2. International liquidity will be more difHcult to accord to
national capital assets, not only because of shortages in foreign
reserves, but also as a result of the increase in internal liquidity
in all countries.
3. The long-run shift in the relative prices of Enished goods and
primary products, which has resuited in a steady worsening of the
terms of trade of countries dependent upon exports of agricultural
and raw commodities, appears likely to persist.
4. The "chronic world shortage of dollars," due partly to the
height of American tariff protection and partly to the economic
stagnation in the United States during the 1930's, but resting
fundamentally upon the fact that the rest of the world feels the
need of American products in greater value amounts than the
United States requires foreign commodities, is likely to be accen­
tuated as a result of the changes during the war.
Considerable progress toward the reconstruction of free, stable,
And multilateral international economic relations will have been
achieved if problems of war debts, including the costs of Enancing
relief and reconstruction, are overcome by treating national war
expenditures in behalf of allies as direct costs of war which do not
give rise to international obligations.* An attempt to collect
reparations from the defeated enemy, which would further com­
plicate the problem of international economic adjustment, is also
unlikely to be made on the basis of past experience. Yet it should
PP. 21-23.

Rtywl to CoBfyreM on Lcwd-tcase OperaftofM (Washington, 1942),



be remembered that the disintegration of the international economic
system during the interbeUum years continued to take place at a
rapid pace during the decade of the 1930's, after war debts and
reparations had passed from the international scene as live issues.

The inability of the world to cope, prior to Sept. 1, 1939, with
the four factors of disequilibrium just listed was fully evidenced
by the growth of bilateralism, trade discrimination, foreign exchange
control, and clearing agreements. The war in its progress to the
end of 1942 has accentuated the potential disruptive powers of
these factors in the postwar period.
1. The facts relating to the concentration of monetary gold in
the United States, the loss of British gold, foreign balances, and
foreign securities, the accumulation of blocked sterling by Empire
and other countries, etc., are too well known to require repetition.
It may be noted, however, that the Lend-lease Act in the United
States and the Canadian provision for a billion-dollar gift to
Britain, both initiated because of the inability of the United King­
dom to Snance its North American purchases out of income or
capital, have halted British losses of foreign assets in these countries.
2. The problem of international liquidity, familiarly known
before the war as the "hot money" problem, has been effectively
disposed of for the period of the war by foreign exchange control.
If exchange controls are to be removed after the war, however, the
problem must be dealt with. Even apart from the question of
confidence in currencies, hot money will be troublesome because
the proportion of liquid to total assets* has grown enormously in
all countries. Currency in circulation, central bank deposits,
commercial and savings bank deposits have increased markedly,
while physical capital assets have been consumed for war purposes.
At the same time, the distinction between government debt and
cash has narrowed as governments have given explicit and tacit
undertakings of stability of interest rates during and after the war.
Savings bonds in the United States can be redeemed 60 days after
issue at any time without notice, and similar special securities have
been sold to the public in many countries. Ordinary government
bonds are so widely held by the public, corporations, and banks
that any reversal of the cheap-money policies pursued during the
* See A. A. Berle, Jr., and V. Pederson, Liquid Clowns to yaiwwf ITeaRA
(New York, 1934).



war would be likely to meet with extensive political opposition and
endanger the safety of important national institutions. Cheap
money has been adopted as an immutable policy of finance during
the war when capita! is scarce; it would appear virtually impossible
to dispense with after the war when the need for capital is reduced,
the danger of deflation threatening, and a heavy load of war-contracted debt must be carried by governments.
If money remains cheap after the war, government debt in
the hands of the public in all countries will be convertible into cash
with a low risk of loss on principal. The increased liquidity of
national assets will accentuate the problem of providing inter­
national liquidity. Capital flight will be a greater peril to a coun­
try's international monetary stability. If free exchange markets
are maintained, the ease of converting national assets into cash
will lead to increased attempts to distribute the risk of capital loss
The trend in the terms of trade against primary products in
favor of industrial goods may be expected to continue after the war,
unless further steps are taken to correct it, because of the wartime
expansion in agricultural and raw-material capacity and the
accelerated development of manufactured substitutes for natural
commodities * That this trend has been disturbing to the main­
tenance of international trade equilibrium under an open system
cannot be doubted. The shrinkage of markets in general gives
monopolistic advantages to markets which remain available. By
making full use of the power of their bargaining position, largescale importing countries can require the countries from which
they buy to buy from them. Once involved in bilateral clearing,
moreover, primary producing countries are vulnerable to attempts
further to reduce agricultural and raw-material prices or to raise
quotations on industrial goods. The long-run shift in the terms
of trade has opened opportunities for government intervention on a
discriminatory basis in the pricing and distribution of goods in
international trade.
Reviews of Colin Clark,
FcottottMC* qf 1960 (London, 1942), which is
not yet available at the time of writing, indicate his view that a new shift in the
terms of trade in favor of primary products will occur in the near future. This
position does not necessarily conflict with that expreased above, since Clark
apparently expects the steps necessary to reverse the trend— the expansion of
purchasing power and productive capacity in the economically backward areas,
and the further industrialization of primary producing countries—will in fact
be taken.



The reasons underlying this movement in the terms of trade can
be illustrated by reference to agricultural products. The inclusion
of raw materials complicates the analysis but does not greatly
modify its conclusions.
The terms of trade have moved against agricultural products
and in favor of industrial commodities because of differences in
the institutional organization of production in the two Reids, on the
one hand, and in the character of the demand for them, on the
other. The differences in the organization of production need
not be elaborated. In various quarters it is urged that they be
narrowed by national and international acreage controls and inter­
national agreements to stock-pile surpluses on the "ever-normalgranary" principle, as far as agriculture is concerned/ or by the
destruction of monopolistic practices in industry. The fact that
the demand for agricultural products as a whole is relatively
inelastic and the demand for industrial products relatively elastic,
however, presents a far less tractable problem. As productive
efRciency improves in agriculture, factors of production must be
shifted out of agriculture into manufacturing or service industries,
because the demand for agricultural products is limited; as produc­
tive efRciency increases in industry, on the other hand, an over-all
expansion in industrial output as a whole is possible, s
The possibility of technological unemployment in agriculture
calls into question a fundamental assumption on which the case
for international specialization rests. Greater efRciency in agri­
cultural production can raise the real income of a country dependent
upon exports of the agricultural product only if labor freed from
the land is able to migrate abroad, or, where migration is impossible
for political reasons or for inability to accumulate the capital
initially called for, when industry is developed within the country.
This industry need not be so efRcient as industry abroad. The
real income of the country will be increased if, at some level of costs,
* See L. A. Wheeler, "Agricultural Surpluses in the Post-war World,"
Fwetyn Afatrs, Vol. 20, No. 1 (October, 1941), pp. 87-101.
* This discussion omits consideration of population trends, synthetic indus­
try, and other new sources of demand for agricultural products, the role of
better nutrition, and many other relevant aspects of the problem. It should be
pointed out, however, that malnutrition, for which more production of protec­
tive foods is needed, raises the ceiling on total agricultural output but does not
vitiate Engel's law. It is further significant for the world problem that
Engel's law does not apply where the standard of living hovers at or below the
subsistence level. In this area, Malthus's law applies instead.



tabor displaced from agriculture can produce industrial products
previously imported to enable part of the proceeds of an unchanged
volume of exports to be spent upon other types of imports.
If neither migration nor industrialization occurs, the terms of
trade of the country experiencing an increase in productive efEciency
in agricultural products will move against it, and the country will
have made no gain from the increased output. The terms of trade
may even move so far that the country experiences a net loss in
real income as a result of an increase in efEciency in the exporting
The concept of a chronic world shortage of dollars is perhaps
too complex for full analysis in a paper of this length. That a
shortage exists is supported by the fact that the balance of payments
of the United States has recorded surpluses on current account
in all but 2 years since 1919 and the fact that the merchandise
trade balance of the country has been favorable each year since
the large-scale capital imports of the 1870's. The small balance
of payments deBcits in 1936 and 1937 occurred during a period
of heavy inventory accumulation and drought.
The difficulties encountered by foreigners in obtaining adequate
supplies of dollars are "blamed" on United States tariff policy or
on the fact that during the 1930's United States recovery lagged
behind that of other countries as compared with 1929. These
explanations fail to make clear why a new equilibrium is not estab­
lished when United States tariff barriers are raised, after simply a
transitional shortage of dollars; and they fail to push the analysis
of higher United States income and ensuing higher imports to the
impact of these in turn on the purchases of foreign countries in
the United States.
At basis the explanation for the chronic world shortage of dollars
is to be found in the technical superiority of the United States in
the production of many goods necessary to a high modem standard
of living and to the natural desire in other countries to raise real
incomes faster than the basic conditions of their economic pro­
ductivity justify. The United States has large and fairly balanced
natural resources, relatively modem and efficient capital equipment,
a. comparatively small population in relation to natural resources
and capital equipment, but a large domestic market for the output
of its own mass-production industries. The United States can
produce a variety of producers' and consumers' goods with a price
and quality advantage so great as to be almost absolute. The



advantages of other countries over the United States in the produc­
tion of other industrial goods are relatively narrow. Under these
conditions, the iaw of comparative advantage can establish equi­
librium in international trade only with great difficulty, especially
since technological advance is being made in the United States
and abroad at a rapid pace.
The fact that other countries want to increase their standard
of living faster than the facts of their economic productivity justify
can be expressed in the statement that the demand of the rest of
the world for American manufactured products* is highly elastic
with respect to income and price, whereas the United States demand
for foreign products is relatively inelastic.^ It can be demonstrated
that disequilibrium in trade relationships will be brought about
if national money incomes increase by a similar percentage in two
countries, one of which has an inelastic demand for the goods of
the other, while the demand of the latter for the goods of the former
is elastic. If the ratios of exports to national income in the two
countries also differ, further disturbances result.
Assume country 4 with a low marginal propensity to import
(low elasticity of demand for imports with respect to income), and
country B with a high marginal propensity, trading exclusively with
one another. From a position of equilibrium in trade, an auton­
omous rise in national money income of an equal percentage in
* The foreign demand for American primary products is, of course, subject to
the influences of the long-term shift in the terms of trade, as well as to the
economic forces in the United States, which have lately assumed political
forms, tending to bring about equalization of incomes. Compare the shrinkage
of American foreign markets for lard, wheat, cotton, tobacco, fruit (other than
citrus), etc.
* That the American market can be sold by modem methods is illustrated by
the success of Czechoslovakia in developing outlets in this country for sales of
pottery, glass, shoes, gloves, and other leather goods, during the interbellum
years. The "Corporacion para Promocion del Intercambio," organized by
American exporting interests in Buenos Aires to promote the sale of Argentine
products in the United States, was apparently achieving considerable success in
1941, until shipping difRcuIties curtailed its operations.
The American demand for raw materials is, of course, derived. The
influence of this fact on the course of imports is so strong that the volume of
total imports fluctuates closely with the physical volume of industrial output in
the United States, as measured by the Federal Reserve index. This relation­
ship is so marked, moreover, that no distortion in the correspondence appears to
have resulted from the imposition of the Smoot-Hawley Tariff Act of 1930 or
the tariff reductions under the Trade Agreements Act of 1934.



relation to the preexisting level occurs in each country* 4 's imports
from B will rise somewhat, but B's imports from 4 will rise con­
siderably. National income in 4 will receive a further stimulus
from the favorable balance of trade; national income in B will tend
to decline from the new level. If a new trade equilibrium is to be
established (assuming no change in the exchange rate, demand
schedules, or other conditions of trade), national income must rise
still higher in ^4, decline in B, or both. If the original increase in
national money income were sought in both countries, say, in order
to eliminate a certain amount of unemployment, and a strenuous
attempt made to maintain it, the equilibrium of the trade position
cannot be restored.
When 4 has a low marginal propensity to import and is only
slightly dependent upon export trade, and B a high marginal pro­
pensity to import and is heavily dependent on exports, adjustment
becomes much more difEcult. An autonomous rise in the national
incomes in A produces a small increase in imports from B. The
rise in B's exports, however, results in an increase in incomes in B,
most of which in turn is spent for imports from ,4. This rise in
imports may be larger than the increase in exports which prompted
it, with the result that the original stimulus to the favorable balance
of trade in B eventually produces an unfavorable balance. The
maintenance of trade equilibrium in a world where these conditions
obtain is a difficult task.
It may be suggested that the United States has a comparatively
low propensity to import and a low ratio of exports to national
income, whereas the rest of the world has a relatively high elasticity
of demand for United States exports of manufactured goods and a
relatively high ratio of exports to income. If this be true, and if
the foregoing analysis be applicable to the postwar situation,
additional dollars made available to foreigners by increased United
States imports may lead to a greater increase in foreign expenditures
for American products, leaving the world still short of dollars. This
is not to gainsay the desirability of lower American tariffs, since the
shortage would still occur at higher levels of real income. It simply
underlines the conclusion that a reduction of the American tariff is
not of itself an adequate solution for the world shortage of dollars
and that the earnest admonitions of the rest of the world to the
United States that it "live like a creditor nation" fail to come to
grips with the fundamentals of the problem.



The types of solutions appropriate to the problem of establishing
and maintaining a free system of international trade and exchange
after the war may be illustrated by the analysis of three recently
advanced proposals: (1) the Feis plan, (2) the Twentieth Century
Economic System, and (3) pool clearing.* These are all variations
of an essentially similar idea, to use international clearing as a
substitute for or a complement to an open exchange market.
Feis's plan, which he describes as a suggestion for a "Trade
Stabilization Fund or Budget," calls for the United States to make
$3 or $4 billion available to foreign nations as a minimum annual
budget for payments to the United States for goods, services, or
debts. This sum would be allocated among various foreign nations
by negotiation. Foreign countries drawing against the minimum
credit assigned to them would credit the United States with an
equivalent amount of their own currencies, computed at agreed
rates of exchange, or of other foreign currencies as agreed upon.
These credits in turn would be drawn upon as the United States
spent dollars—which would be paid in to the authority handling
the plan—for foreign goods and services. If a balance of dollars
credited to foreigners, or of foreign currencies credited to the United
States, were left unspent at the end of a speciRed period of time—
Feis suggests 2 years—the unspent sums would be canceled. As
the use of the plan developed, it would be expected that all countries
would credit all other countries with minimum budgets of local
currency at the beginning of each trade year, at agreed rates of
exchange alterable by negotiation. Feis also anticipates that
private markets for foreign exchange, free of government control,
would grow up outside the confines of the minimum budgets, to
provide media of international payment for capital movements,
trade in excess of minimum requirements, gold flows, etc.
* See Herbert Feis, "Restoring Trade after the W ar/' Fore^n
20, No. 2 (January, 1942), pp. 282-292, and Anonymous, X
pamphlet (London, 1941). The third proposal has been put
forward in an unpublished, privately circulated memorandum, and provides for
a system callcd
cJeawi#. It is perhaps unfair to analyze pool clearing, when
the reader is unable to test the validity of the analysis against the text of the
proposal. The reason for so doing, however, is that the proposal in question is
the most able presentation of the basic idea common to the three schemes.
An earlier variant of essentially the same idea is advanced by Edgard
Milhaud, ^ GoM Truce (London, 1933). Chapter VII is particularly worth
examination as an attempt to answer all possible objections to the plan.



The plan outlined in A
Ce?t%Mry #co?M7?ttc
endorsed by the London Chamber of Commerce/ involves less
elaborate machinery. It starts with an international convention,
in which the participating countries agree on a series of exchange
rates. Exporters draw foreign currency bills against foreign pur­
chasers, discounting these bills for local funds with their respective
national exchange-control authorities, which debit the importing
country. Importers make payment for purchases from abroad in
local currency to their respective exchange authorities, which credit
the exporting country. The exchange control of a country with
a surplus of exports over imports vis-&-vis another country builds
up a claim on that country which can be reduced only by importing
further amounts of its goods. Otherwise the latter is entitled to
cancel the credit after 7 years.
The author states that multilateral trade could be provided by
the creation of an international exchange, where blocked credits in
one country could be canceled against debits in another at the con­
ventional rates. He is opposed, however, to holding all credits and
debits with the international exchange. He considers it important
that countries owning uncanceled credits recognize in which
countries these have arisen, in order that they can "take steps to
clear those credits either by taking more imports or restricting
exports to them."
The third proposal, that for pool clearing, is similar to the
Twentieth Century Economic System plan but is shorn of its strongly
bilateral tendencies and without specific provision for the cancella­
tion of unused surpluses. Each country establishes a national
clearing fund, and together all countries establish an international
clearing oiBce. Exporters obtain payment by drawing bills on
importers abroad and discounting these bills at the national clearing
fund. The latter pays the exporter by borrowing local funds from
the central bank and registers a claim with the international ofBce.
Importers pay their national funds for foreign merchandise. In
this case the national fund repays loans to the central bank, and its
credit at the international clearing ofBce is canceled. The inter­
national ofEce regards net claims from all net exporting countries
as offset by balances accumulated in net importing countries as a
whole, without identifying particular claims with balances in partic­
ular countries. The persistent accumulation of deficits by a country
See Report on (7eTMrcl Prinetp&M of a Post War Fcowomy, pamphlet (London
1942), p. U.



will require: (a) the funding of deBcits into loans or exchange depre­
ciation, in the case of countries the trade of which is only tech­
nically out of balance; (b) enforced depreciation or exclusion from
the system on the part of countries continuing to import but
unwilling to export; or (c) no action at ail, i.e., the continuous
accumulation of balances in the case of countries ready and able
to sell abroad, but from which the world is unwilling to buy. Sur­
plus countries run some risk of loss through depreciation of the
claims they have amassed against deficit countries. It is felt that
they can be relied upon to increase their imports from the world
as a whole (not the deficit countries alone), in order to keep down
cumulative and unmanageable surpluses which represent barren
investments and run the risk of loss.
These brief summaries fail to do justice to the speciRc plans put
forward but may indicate their broad outlines. In general, the
proposals are designed to relieve countries with chronic deficits in
their balances of payments on current account from the sole neces­
sity to undertake adjustments and to shift the bulk of the burden
to surplus countries. The Twentieth Century System is frankly
bilateral; the Feis plan tries to rid itself of evident bilateral features
by leaving room for the negotiation of balance transfers; pool
clearing makes a valiant attempt to avoid bilateralism/ but it is
not at all certain that the plan would operate successfully in this
connection.^ All three systems depend upon foreign exchange
* The objections to an international system of settling trade bilaterally are
obvious and compelling. In prosperous times, the United States buys $200 mil­
lion of tin and rubber from British Malaya and sells that country some $25
million of American goods. To force a bilateral balance would involve a reduc­
tion in American tin and rubber imports or an increase in Malayan imports from
the United States, the latter in the face of cheaper goods available in the
Netherlands Indies, Japan, and perhaps the United Kingdom.
Under the Feis proposal, the interested governments would negotiate the
distribution of the British Malayan export surplus against the United States,
which would require government distortion of trade unless it were possible to
elaborate a system which, prior to the fact, would distribute the surplus in the
same way that dynamic forces of a free market would have dictated. The
Twentieth Century System also makes allowance for negotiated transfers of
balances, but, under the case cited, appears to insist that, if the United States
has an over-all deficit, or British Malaya an over-all surplus, some special merit
attaches to corrections in the mutual trade between these countries as a means
of arriving at the needed adjustments. Subjecting transfers of surpluses and
deficits to government negotiation in any case seems to retain the likelihood of
trade rivalry and discrimination on a political basis.
* If one or two countries accumulate large surpluses and one or two countries



control to ensure that trade transactions are in fact handled through
the mechanism set up for the purpose; the Feis plan ostensibly
leaves room for freedom of exchange transactions outside the trade
stabilization fund, but these transactions have to be examined to
ensure that they do not include deals which belong inside, say,
imports on the part of a country which has credits abroad to be
used up. The Twentieth Century System is not opposed to trade
adjustments in the form of export restrictions by surplus countries:
the Feis proposal, put forward to assure countries of import minima,
and pool clearing are evidently averse to this method of adjustment.
To get back to the four factors of disequilibrium:
1. All three proposals evidently fill the immediate need of
countries which will be left after the war without adequate monetary
reserves. If any of them were adopted, no nation need retain its
controls over trade transactions for fear of being unable to pay for
imports or in order to reconstitute a monetary reserve of appropriate
2. The Twentieth Century System and pool clearing meet the
problem of international liquidity by providing for exchange control
which presumably forbids any but ofRcial capital movements that
are undertaken to fund surpluses and deScits in balance of pay­
ments. Provision under the system could, of course, be made for
more latitude in capital movements. The Feis plan purports to
allow for freedom of exchange transactions outside the "trade
stabilization budget device/' It is evident, however, that exchange
surveillance is required outside this area, and it is not clear how
the plan expects to make movements of short-term capital manage­
able outside the system. In all three cases, the meeting of the
problem of lacks of monetary reserves will serve to increase con­
fidence in currencies, at least for a period. If deBcits pile up con­
tinuously against a country, however, a movement of the exchange
rates may be anticipated, at least under pool clearing, which would
provide a stimulus for exchange speculation. Under these condi­
tions, the exchange control necessary to operate the system at all
would probably be used to prevent short-term capital movements
on private account.
3 and 4. Where these proposals fall short of providing an
adequate basis for the reconstruction of international stability in
large deficits at the international clearing ofEce, it is hard to see how the adjust­
ments on the part of the surpluses countries could avoid being put on a bilateral



world trade and exchange is in their lack of correctives for the
deep-seated factors of disequilibrium discussed above under the
headings of the trend of the terms of trade against primary produc­
ing countries and the chronic world shortage of dollars. The
proposals rely on various means of adjustment: (a) consciously
promoted increases in imports by surplus countries; (&) consciously
promoted decreases in exports by surplus countries; (c) exchange
depreciation on the part of deficit countries, or exchange apprecia­
tion on the part of surplus countries; (J) the conversion of unsettled
balances into gifts from surplus to deficit countries.* The effective­
ness of these measures of adjustment may be tested against the two
disequilibrium factors.
(3 ) To rely on increased imports by industrial countries to
correct the shift in the terms of trade against primary-producing
countries is futile in the long run, since at higher standards of living
a country wants a greater proportion of industrial goods relative
to primary commodities. In the short run, the position is complex.
An industrial country with substantial resources, engaged domes­
tically in primary production, may benefit by shifting resources
from, say, agriculture to industry, importing more agricultural
products from abroad. In this instance, the migration of labor
from agriculture to industry occurs within the surplus country
rather than from the deficit to the surplus country. In highly
industrialized countries like the United States, however, a shift
of labor from agriculture to industry is already taking place to
adjust for the increased efBciency of domestic agriculture. It
has not proceeded in peacetime fast enough to absorb all the domes­
tic labor freed from agriculture; it is difEcult to see how it could be
speeded up, in view of the economic barrier to such migration on
private account—lack of capital—and because of political and
institutional frictions. The inducement to a more thoroughgoing
shift provided by the piling up of current account surpluses under,
It may be noted that, while the various authors do not explicitly rely on
expansion or contraction of money incomes as a method of adjustment—such
as are called for under the "gold standard/' which has been politically repudi­
ated on this account—the three proposals do involve such changes. To take
the simplest example, under pool clearing, a surplus country borrows from the
central bank, which directly enlarges national income and expands the credit
base; the deceit country builds up idle balances at the central bank, which
contracts money incomes directly and the credit base. To be sure, further
central bank or treasury operations could offset these inflationary and deflation­
ary effects.



say, the pool-clearing scheme, would have little effect in view of
the domestic resistances.
If a country like the United Kingdom were to accumulate
surpluses under the pool-clearing scheme, there would be almost no
incentive to increase agricultural imports. The operation of Engel's
law in the long run makes it impossible for these schemes to solve
the problem of adequate terms of trade for primary products.
Will surpluses accumulated by the United States under the
pool-clearing scheme lead to increased imports by the United States
which will be suSicient to correct the chronic world shortage of
dollars? The analysis of the dollar shortage above suggests that
it will not. The United States could import more finished goods
at any level of production, can import more raw materials at higher
levels of production, and might import more agricultural products
to the extent it succeeds in moving factors of production already
engaged in agriculture into industry. But these increased imports
will raise money incomes abroad and will produce increased demands
for American products in excess of the original increases in American
imports.* The chronic shortage of dollars would remain, albeit at
higher levels of real income throughout the world, and the United
States would continue to pile up surpluses.
The gold accumulated by the United States during the 20 years
prior to the war has not succeeded in inducing an expansion of
United States imports which was not followed by an equal or
greater rise in exports. This gold represents an investment as
cumulative and as barren as claims on foreign countries and is
increasingly recognized as such by the man in the street and in
vaudeville jokes. Perhaps claims on an international clearing
ofBce would provide a greater inducement than gold to stimulate
imports. In any event, it may be doubted that increased imports
would correct for long the world shortage of dollars.
The Argentine experience of 1936-1938 reveals the effects of a high
dependence on foreign trade and a high propensity to import on the balance of
payments adjustments. The North American drought of the summer of 1936
raised world prices of wheat and corn. Argentina with large crops of those
cereals enjoyed an enormous export surplus during the 1936-1937 season, using
some of the proceeds to pay off debt. After a normal lag, money incomes in
Argentina rose sharply. Imports followed the rise in income, and orders were
placed for substantial quantities of American automobiles, etc. Even if the
gain in exports had been sustained in the following year, Argentina would have
found itself with a large import surplus which had to be corrected by foreignexchange-control measures, directed primarily against imports from the
United States.



&. The adjustment of trade through reductions in exports by
surplus countries has already been shown to fall short of the desires
of the authors of two of the proposals under consideration. To
limit exports of industrial products to primary producing countries
will, of course, widen the terms of trade between primary and
industrial commodities. The same measure fails to solve the
problem posed by the world chronic shortage of dollars, since the
demand for dollars is in effect an insistent expression of the deemed
need for American goods. To reduce the amount of goods available
would meet the problem, but in a highly unsatisfactory fashion.
The author of the plan for pool clearing gives great weight
to exchange depreciation as a solution for deficits which arise as a
result of trade disequilibria. "Experience shows that the elasticity
demand for import and of the
foreign demand for a
country's exports is always such that, at one point or another,
depreciation can effect a balancing of trade." Issue may be taken
with this statement on two counts. Some experience, that of
Germany in 1922 and of the United States in 1932, suggests that
exchange fluctuations need not result in a balancing of a trade
position; in addition, the type of trade adjustment brought about
by depreciation may not be the most desirable one.
Rather than recount the complicated experience of Germany,
a possible case to be encountered in the postwar period may be
examined. Assume that country X has lost foreign assets, on the
earnings of which it depended for a considerable proportion of its
income from abroad; Z is resolved to maintain its standard of
living, and in fact to improve it through a nationwide program of
reconstruction and rehousing; it has an unfavorable position in
export markets, the demand for its products being relatively
inelastic with respect to price, and many of its exports are manu­
factured of imported raw materials; X's demand for other imports
is inelastic since these consist of foodstuffs and raw materials for
domestic consumption. Under these circumstances, depreciation
will be slow in raising the value of exports and may increase the
over-all value of imports in terms of X's currency. If, in addition,
wage rates are tied to changes in the cost of living, the expansion
in the total value of exports may not occur at all. Under these
and other imaginable circumstances, exchange depreciation is a
very clumsy device and may prove ineffective because of progressive
inflation at home.*
*See Geoffrey Crowthefs discussion of the British postwar shortage of



Exchange appreciation, on the other hand, may be matched pan
passu by deflation so that the appreciation of the currency does not
stimulate an increase in imports nor restrict exports. This is
strongly suggested by the experience of the United States when
the pound sterling fell from $4.86 in 1931 to $3.12 in 1932, even
though the deflation in the United States did not originate solely
or mainly in sterling depreciation. Deflation kept up with the
appreciation of the dollar, so that the current account balance
continued favorable at the highest values of the dollar.
Exchange fluctuations will doubtless correct balance-of-payments difficulties in the usual case, but they do so, like reductions
in exports by the surplus countries, by frustrating the economic
forces which make for disequilibrium. In the case of countries
with trade deficits resulting from a worsening in the terms of trade,
exchange depreciation is likely to balance the position by ensuring
that the country obtains less imports for a given or slightly larger
volume of exports. Such depreciation will redistribute income
within the country and may be desirable in diverting real income
from the mass of the consumers to export producers. It is hard
to see, however, that it can alter, and it may perpetuate, the dis­
tribution of the factors of production between primary and indus­
trial occupations which give rise to the growing disadvantage to the
exporting groups.
The cancellation of unsettled balances may or may not correct
the deep-seated disturbances which give rise to trade disequilibria.
If the trade deficits forgiven represent imports of capital goods,
which will increase the productivity of the de6cit countries in
appropriate lines, their financing by cancellation will tend to
promote long-run equilibrium. If, on the other hand, the deficits
arise from consumption and the underlying situation as to economic
dollars in "Anglo-American Pitfalls/' Foretpw
Vol. 20, No. 1 (October,
1941), p. 11: "In the classical theory of the free exchanges a situation of this
aort would be corrected by a depreciation of the pound, which would cheapen
British goods in America and make American goods dearer in the sterling area.
But in this particular case it is questionable whether the remedy would work.
British goods do not, in general, sell on price in America. . . . On the other
hand, many of America's exports to the sterling area, particularly the auto­
mobiles and machinery, are virtual necessities for the maintenance of industry
and trade. It would be rash to go so far as to say that there is no rate of
exchange between the pound and the dollar which would balance the accounts
in a free market. But it would have to be a very severe depreciation, which
would hardly be welcome in either country."

productivity remains unaRected, cancellation, or making a gift
of the surplus, is a palliative which must be maintained so long as
the system is kept in operation.
Where there is a long-run tendency for the terms of trade to
move against primary products in favor of industry, factors of
production must be shifted from agricultural and raw-material
production into industry. To the extent that the necessity to
make gifts brings this about in the surplus country, which is pre­
sumably already largely industrial, the necessity to cancel surpluses
will improve the basic situation. But the prospects in this con­
nection are unlikely to provide an adequate solution in the long
run, as pointed out under a above. Where the deceit (loans) in
the agricultural country is utilized to Rnance domestic industrializa­
tion, the cancellation of the deBcit produces a real improvement in
the situation. If deficits on the part of the primary-producing
countries arise from expenditures on consumption goods abroad,
the cancellation of such deficits will continue to be necessary in
the future.
Similar reasoning applies to the problem created by the world
shortage of dollars. If dollars are made available to the rest of
the world to finance a higher level of consumption than would
otherwise obtain, the system may be counted upon to be a perpetual
one. Where, however, the dollars are given to foreign countries
to enable them to narrow the gap between their efBciency in produc­
tion and that of the United States, i.e., to finance capital formation
abroad, the cancellation of United States trade surpluses will tend
to correct the fundamental disequilibrium in the international trade
It is politically difBcult to justify gifts from surplus to deBcit
countries on either of these grounds. An increase in public debt
in the United States to finance more effective resistance to the Axis
and a somewhat higher standard of living for United Nations is
deemed appropriate in time of war on the principle of equality of
sacriBce in the attainment of a mutually sought end. In peacetime,
with wide variations in the standard of living within the United
States, it is doubtful whether use of public funds to increase con­
sumption abroad would be politically supportable, except in cases
of desperate need. It would also be politically difBcult to justify
gifts of capital equipment abroad. Capital equipment is productive
and can pay for itself with a portion of the increased output it
makes possible. If the United States is not ready to receive added



imports when repayment is offered, the funds repaid can be rein­
vested abroad.
Britain in the nineteenth century had a technical superiority in
the production of industrial products and lent abroad on a large
scale to 6nance the spread of industry abroad. If Britain had
stopped lending for any reason, while it retained its margin of
superiority, there would have been a world shortage of sterling and a
plea for renewed loans rather than for Britain to restrict its exports
or to "act as a creditor nation/' Britain continued to pile up
surpluses for reinvestment until the First World War, and has
acted as a creditor nation as far as the whole balance of payments
on current account is concerned, only since 1914. For Britain
to have given away the advantages of its superior productivity
during the nineteenth century would have been unthinkable at
that time.
To sum up: the three proposals put forward cannot be expected
to solve the deep-seated disturbances in international trade and
exchange through voluntary increases in imports by the creditor
countries, by reduced exports of such countries, or by exchangerate adjustments. To the extent that these proposals at basis
resolve themselves into gifts from surplus to deficit countries, they
may or may not help to correct the disturbances. The proposals
may therefore be taken as inadequate to meet the basic needs of
the postwar period.

Can international monetary stabilization then be achieved
through the more orthodox techniques of gold purchases by surplus
countries, or by the formation, by surplus and de6cit countries
alike, of an international stabilization fund? The system of gold
purchases, which the United States practiced from the passage of
the Gold Reserve Act of 1934 to the Lend-lease Act, evidently fails
to clear the first hurdle—the fact that most of the countries of the
world no longer possess adequate gold reserves. On the second
score, hot money, the proponents of gold insist that con6dence in
currencies can be maintained only through basing national cur­
rencies on gold reserves.* This position is debatable. As far as
See any journal catering to a financial audience interested in gold-mining
securities, especially 77%
AfttMr (Toronto), TAs FtTMWMf Poai of the
same city, and
ftVMacMtZ JVtuw (London).



the tendency for the terms of trade to move against raw-materialproducing countries is concerned, gold purchases are on the whole
neutral, except possibly in some areas where the alternative to
employment in gold mines is more intensive use of labor in agri­
cultural pursuits. The real contribution which the gold purchase
system makes, however, is in its easing of the world shortage of
dollars. So long as the United States is prepared to monetize
gold more readily than other claims upon foreign goods, $1,200
million are made available to the world annually against foreign
new gold production.
Despite these advantages to the system of gold purchases, it is
abundantly clear after the experience of the last decade that there
is nothing inherent in the limping type of gold standard practiced
before the war which tends to correct disequilibria in international
economic relationships. The open system of international trade
based on gold broke down completely in spite of the attainment of
new high records by gold production.
An international stabilization fund with large resources would,
like the unorthodox proposals, obviate the necessity for a redistribu­
tion of international assets and might contribute effectively to
confidence in national currencies. The collection of international
assets in the fund could be made available to countries with tem­
porary balance-of-payments difficulties for a suBicient period of
time to enable disequilibria of an ephemeral character to be cor­
rected. Surplus countries would be paid for their excess of sales
over purchases, so long as their original contributions to the fund
sufEced for this purpose. Loans by the fund to deRcit countries
would have to stop, however, when the assets of the fund were
fully engaged in unpaid previous loans, unless further contributions
from the surplus countries were forthcoming.
It should be observed that neither gold purchases nor an inter­
national stabilization fund are far different from the three unortho­
dox proposals outlined above. Under the system of gold purchases,
surplus countries receive payment for their excess of sales over
purchases in a conventional commodity which they can monetize.
Under the Feis plan, the Twentieth Century Economic System, or
pool clearing, however, surplus countries could monetize this
excess in a sense by financing it at the central bank. The surplus
could, on the other hand, be financed by the national treasury,
but this is entirely similar to the policy of gold sterilization followed
by the United States Treasury in 1936-1937.



An international stabilization fund requires financing by the
contributing countries which can be undertaken out of central
bank credit or budgetary receipts. So long as the country main­
tains a balanced position in trade, the line of credit or collection
of assets allocated to the stabilization fund has no effect on the
economy. When a surplus occurs, however, new central bank
funds are made available to the market, or a budget deficit must
be 6nanced (or a budgetary surplus reduced). The result of the
surplus is inflationary in its effects on national income, whether
under the gold standard, pool clearing, an international stabiliza­
tion fund, or any other type of conceivable formula.
The strong kinship of gold purchases and an international
stabilization fund with the three proposals for righting world trade
discussed above does not mean that these devices must inevitably
be discarded because the unorthodox proposals were found to fall
short of their objectives. Within a limited sphere, an international
stabilization fund can make an effective contribution to monetary
stabilization, by providing a collection of international assets for
short-term use. Its proponents, who claim for it a broader objec­
tive, or the perpetuation of monetary stability through a formula—
e.y. a country can borrow up to 2 per cent of its national income
from the stabilization fund to finance trade deficits, but thereafter
in order to qualify for further loans it must depreciate its currency
by 3 per cent—these advocates are simply more timid than the
authors of the unorthodox schemes discussed above.

While some new international monetary machinery, such as a
stabilization fund, may make an effective contribution to inter­
national monetary stability in the short run, the effective basis for
such stability must be found in a revival of long-term capital
movements. The authors of the three unorthodox schemes already
discussed and most of the advocates of gold standards, international
stabilization funds, etc., aim at achieving a balance in the currentaccount position of most countries and hope to keep these accounts
perpetually in balance. In so doing, they are waging war against
the fundamental economic tendency for the rewards of like factors
of production to move toward equality.
Within an area or region where factors of production have
mobility, the tendency for incomes of like factors to achieve equality
can be observed in practice as it is recognized in theory. Where



mobility does not obtain, it once was possible for unequal incomes
to be received by simitar factors of production over long periods
of time without stress or strain on political or economic institutions.
It may be doubted, however, whether wide inequalities in
incomes received by like factors of production can endure for long
today without some conscious effort to narrow them. While the
physical mobility of the overwhelming majority of the world remains
limited, there is great mobility of ideas, including the idea of what
constitutes an adequate standard of living. Ease of communication
of thought is a twentieth-century commonplace; but the conse­
quence that like factors of production are beginning to insist upon a
greater approach to equality of real incomes in spite of lack of
mobility is barely beginning to be realized.
The desire for greater equality in standards of living and its
continued frustration lie close to the basis of the international
disequilibrium of the twentieth century. Primary producing
countries insist that if they are capable of producing more goods
they should be privileged to consume more of the types of goods
they want. Dollars are chronically short because the world wants
American products in order to enjoy a high standard of living
directly, or in order to have the use of the most eSicient tools for
producing desired goods.
International monetary stabilization, therefore, must be sought
in a wider area than that circumscribed by pool clearing, stabiliza­
tion funds, gold stocks, hot money, interest rates, or even budget
balancing. The need of all countries for adequate monetary
reserves may be readily handled if steps are taken to assure that
these reserves will not be quickly dissipated by capital Right or
through uneconomic imports. Faith in currencies can be restored
in the short run, but confidence adequate for an open system of
international exchange must wait on a trend which promotes rather
than frustrates income equalization.
It must be accepted by the economist that large-scale migration
cannot be relied upon heavily to achieve the desired equalization
of incomes. Some migration will be possible, from the most
densely overpopulated areas in terms of natural resources, capital
equipment, and the standard of living to which the population has
been accustomed, to underpopulated and developing countries.
Principal reliance, however, must be placed upon the spread of
capital equipment and modern techniques of production. The
movement of the terms of trade against primary products can be



halted by improving still further productive efficiency in agriculture
and raw materials, at the same time that domestic industrial
opportunities are realized as fully as possible* The world short­
age of dollars can be met by the spread of American, British,
German, Swedish, and other modern production techniques through­
out the world, together with sufficient capital to put them into
Monetary stabilization, therefore, rests fundamentally upon the
resumption of long-term capital lending on a significant scale.
Proposals which ignore the basic problems of stability and aim
merely to provide temporizing means to 611 the gap in balance of
payments on current account are doomed to fail.*
* Mr. Bryce, in this volume, discusses more fully the problem of long-term










Price has long been recognized by economists as the centra!
problem of economic analysis. Consequently, the manner in which
prices are made is as accurate an expression as we may find of the
organizational character of the economy as a whole. The question
of price control after the war, therefore, is a topic of unusual interest
and difEculty. Since a discussion of this subject perforce involves
reference to the broad organization of economic life, it scarcely
need be said that a brief essay has value chiefly as it directs attention
to issues central to the development of price regulation after the
termination of the present conflict.
The present essay is exploratory in character. It purports
to be no more than a speculative reconnaissance of certain influences
and issues. Questions will be posed which may contribute, by
way of emphasis and suggestion, to what necessarily must be a
continuing discussion: (1) We may begin by considering whether
there has been a compelling trend in economic events which fore­
tells a gradual decline of competitive markets and a corresponding
increase in monopolistic conditions. (2) Next, we shall consider
the effects of war influences on price making after the war. Has
war introduced into the pattern of events factors so powerful as
to break sharply historical continuity, so that what occurs after
the war may bear scant relation to what has gone before? (3)
Following this, it will be worth while to consider what general
types of price control may develop in the aftermath of the present
conflict, and what other controls are entailed by each such broad
type of price regulation. (4) Certain broad economic and political
The subject matter of this essay in certain respects relates to topics dis­
cussed by the author in "The Effect of the War on Price Policies and Price
Making," .American FcotMWMC Revtew, Supplement, Vol. XXXII (1942), pp.
404r-415. The present essay, however, places considerably more emphasis on
the types of price control which may be employed after the war and the prob­
lems which such controls entail.




consequences of adopting widespread control of commodity prices
as a long-run policy will then be outlined. (5) And, finally, reierence will be made to some factors in the postwar world which will
influence the choice between those types of price control which
government may undertake.

Over the past several decades a popular and widely accepted
dogma has developed to the effect that economic markets are
tending to become more and more monopolistic. As a corollary,
competitive forces are assumed to be weakening in scope and
This view has often been expressed in a form which implies
that once upon a time there was "free competition." Sometimes,
and with less naivete, it is presumed that free competition in a
full sense never did exist, but that, nevertheless, a much closer
approximation of it prevailed during portions of the nineteenth
century than has been characteristic of, say, the last half century.
"Proofs" have been advanced. Tables have been thrust upon
us, showing that the number of ironworks, flour mills, and the
like, has declined over the decades, while the total volume of out­
put has grown apace. From such data of the decreasing number
and increasing size of 6rms in various lines of manufacture, the
decay of competition has been inferred. Likewise, writers have
vividly portrayed the growth of large corporations and the devices
by which the corporate form of organization has become the vehicle
of monopoly.
Such studies are stimulating. But they are inadequate to the
strain placed on them by those who wish to demonstrate the decline
of competition. For competition and monopoly are concepts of
the market, and their extent must be related to the dimensions of
markets. In a period when avenues of transport and communica­
tion were being broadened in phenomenal degree, it was somehow
assumed that the political boundaries of a nation were a measure of
the geographic extent of a market. Moreover, while men wrote of
technology as a force making for monopoly via large-scale pro­
duction, they rarely mentioned technology as a force which
tended also constantly to blur the boundaries separating particular
"markets" and "commodities" from another.



We Anon; only that divergent forces have been set in motion
by an industrial revolution which has by no means run its course.
During the same period in which technology, improvements in
industrial management, and changes in the form and mores of
law joined in facilitating large-scale production in all its aspects,
similar changes were broadening the geographic areas within which
men bought and sold and were increasing the possibilities of using
one material, process, or finished good in displacement of another.
Perhaps competition has declined; perhaps it has increased.
But certainly the dogma of its decline has been nowise demonstrated
by our economic historians.* This is not important, save as the
acceptance of the dogma has led many of us to assume that the
modern world is in the grips of a technology which drives it inexor­
ably toward an era of highly monopolistic markets in which govern­
ment must resort to an ever more extensive control of price.
Unfortunately, we must view the future in this respect with
little assistance from our study of the past.


It is patent that the present conflict has set in motion forces
which bid fair to remake both our thinking and our scheme of things
economic. In a total war, when every resource must be marshaled
ruthlessly to the end of physical combat, there is little place for
the free operation of market forces.^
The forces at work in wartime are well known and it will sufRce
merely to refer to the chief among them.
a. Modern war involves an over-all reallocation of human and
material resources between products and their uses.
b. Under the stimulus of dire necessity, war also brings rapid
advances in technology with respect to both the techniques of
production and the methods of utilizing new materials and com­
binations of materials.
c. Moreover, government controls of various sorts, including
price control, proliferate to such a degree that we Bnd ourselves
possessed of a highly regimented economy.
* Rarely has the economic historian proved himself both an economist and
an historian.
* This is true even though there is legitimate controversy as to the precise
degree to which usual market influences must be replaced by government



Even more significantly, perhaps, a 8ux takes place in men's
ideas about the future organization of society. Urgently questioned
are traditional views as to the role of the state, the desirability of
various measures and degrees of control, and the place of individual
responsibility in both economic and political affairs.
The impact of these wartime influences upon price making and
governmental price control is both specific and general. Specifi­
cally, factors such as the three first mentioned above tend sub­
stantially to modify what may be referred to as the pattern of our
economy, including particularly the structure of markets and the
operation of market forces. More generally, the ferment of ideas
challenges each preconception about things as they have been and
creates a climate of thought out of which sweeping changes may
come. (In this essay emphasis will be placed on the specific influ­
ences directly affecting the pattern of our economy, rather than
on the general influences operating indirectly through changing
Price making depends essentially on the competitive structure
within particular industries
on the number and relative size
of firms in a given market); the strength of the barriers between
"markets," "commodities," and "industries"; the competitive
attitudes of firms (which we may term their "will to compete");
and the extent of direct price regulation by government.
The competitive structure within and between industries and
markets is now undergoing rapid adjustment under the pressures
engendered by shortages of materials and manpower in some areas
and the expansion of capacities in others, and by developments in
technology. Shortages of material bid fair to eliminate entirely
certain enterprises, the nature of which precludes their change-over
to war production. Moreover, revolutions in technology with
respect to both industrial processes and the uses of materials are
creating a situation in which many enterprises and industries will
find their position materially changed when the fighting is over.
The effect of these basic factors—scarcity of resources and their
consequent reallocation, expansion of productive capacities, and
technological developments—is in considerable measure contingent
upon the types of policy used by government in its regimentation
of the economy for war purposes. Policies with respect to the
allocation of orders and materials, geographical dispersion of plants,
deliberate concentration of business in a few plants, conversion of
facilities, man-power allocation, Snancing of plant expansion, and



many other phases of war planning are obviously of major signifi­
cance. It would be incorrect, however, to assume that these
influences operate only to decrease the competitive potential after
the war. In transportation, for example, the impetus given by
war to the development of air commerce may well create a far more
competitive structure than has heretofore existed. The conse­
quences of this change, moreover, may weaken the power of local
and national monopolies. Likewise, experimentation in such areas
as plastics and synthetic rubber may change altogether the prewar
competitive structure in these and related industries. As we
readjust ourselves to peace, we may find that areas such as steel
and aluminum, once popular illustrations of monopolistic industries,
present a far more fluid picture as a result of developments affecting
the substitutability of materials.
Wartime price control, per se, need not alter the competitive
structure of industry one way or the other, but it may do so. The
influence of wartime price control in this direction depends largely
on the policies employed. We may mention a few. Insofar as
price control authorities, in relating prices to costs, follow a policy
which leaves adequate provision and incentive for plant main­
tenance and replacement (within the limitation of available mate­
rials), the number and relative size of firms may not be affected
by price control as such. Likewise, it makes a difference whether
price authorities employ a bulk line as contrasted with a multiple
or differential pricing system. The latter may permit more firms
somehow to End their way through the depression of war than
would an employment of a single price policy which refused
to recognize the necessities of marginal plants and enterprises.
Conversely, the rigid maintenance of a price freeze with no pro­
vision for adjustments therefrom, save in the case of military
supplies, would obviously result in a much greater mortality of
firms than would ensue from materials shortages only.
So far as the competitive attitude of industry, or the "will to
compete/' is concerned, the forces at work during war should have
their consequences largely after the fighting is over rather than
during the course of the conflict. In the immediate postwar
period, we are apt to encounter two general types of situations.
Some enterprises may be in a comparatively happy situation of
booming markets in commodities where demand during war had
to be choked off for reasons of conservation. In such areas it is
difficult to imagine any widespread movement toward monopolize-



tion whether by conspiracy, gentlemen's agreement, or otherwise.
In less fortunate areas, however, production during the war is being
raised to levels never before equaled. Basic materials of war
are being turned out in such volume that only a supreme optimist
could conceive of postwar years which did not bring deflation in
certain of these industries. In such circumstances the "will to
compete" may well be replaced by desperate efforts to control
supply and thereby to maintain prices.
Some would say that controls such as price regulation now
developing in wartime will become so entrenched that their con­
tinuance when peace is established is more than likely. The
strength of this argument clearly increases as the length of the
war is prolonged. The result is unlikely, however, if we assume
a war short enough that controls continue to be regarded as
"emergency" in character and our frame of reference remains one
in which the presence of the direct price controls now developing
is regarded as "abnormal."
The above may be summarized by stating that price making
after the war, so far as the specific influences during the period of
conflict are concerned, will depend on the extent to which the
competitive structure within industries and markets, the barriers
between rival goods, markets, and industries, and the competitive
attitudes of firms have been altered, and on whether wartime price
controls have had an opportunity to become habitual. Wartime
price control, as such, may well have much less effect upon the
outcome than results from materials shortages, expansion of the
capacities to produce war materials, and technological change.
Whether wartime influences will operate sharply to break the
continuity of development of our economic organization cannot be
predicted by reciting the above and related factors. One can only
express the opinion that the forces at work are to a great extent
divergent in their consequences and, further, offer the commonplace
observation that the longer the war lasts the more difficult and
improbable will be a return to the semicompetitive economy in
which once we lived.


The postwar situation may be viewed from either an immediate
or a long-run point of view. Clearly, the types of price control
that may continue for a short while are considerably different in
character and purpose from those which would necessarily develop



if the United States chooses to employ direct price regulation as a
continuing policy.
The immediate postwar situation will certainly be one in which
the inflationary potential is very great indeed. Consequently,
many will favor the continuance of maximum price regulations,
particularly in the areas of consumers' goods and services, as a
means of preventing a severe inflation of costs of living.*
A brief continuance of emergency regulations along these
lines may well occur. Their longer retention, however, will be
handicapped by the fact that the support for such controls will be
politically anonymous and disorganized rather than coming from
powerfully organized groups. 2 Effective political support is more
likely to be given to requests for minimum price regulations to
protect industries and areas confronted with surpluses of capacity
and inventory inherited from the years of conflict.
Either type of temporary control, be it the establishment of
maximum or of minimum prices, should prove to be considerably
more difficult to administer during the immediate postwar years
than is maximum price control during the war itself. The wide­
spread popular support that is marshaled during wartime will be
absent. Such temporary postwar control, if it is to be successful,
will require an insight into changing supply and demand situations
more difficult to predict than those encountered by price regulation
during the period of conflict. Moreover, it will be essential that
somehow or other such control be so administered as to facilitate
its own termination. This will require a high degree of flexibility
and the use of somewhat different criteria than prevailed during
the war.
If national policy develops along the lines of the
tion of commodity prices, certain developments in control will
necessarily occur which can be largely avoided in the case of emer­
gency regulation. Emergency control must content itself with
highly approximate results. Moreover, it is assisted by the exist­
ence of a situation in which economic interests are less controlling
of business decisions than in peacetime. Likewise, continuing
control must be prepared to meet problems of long-run economic
* Just as after the First World War, the emergency price control that was
continued the longest was that of rent.
* Unless American labor by that time comes to have a greater and more
realistic appreciation of the consequences to it of price inflation than it has
shown thus far during the war.



adjustment which can be largely ignored during war. To illus­
trate: the OfBce of Price Administration finds it neither possible nor
necessary to determine with decimal-point accuracy the economi­
cally necessary level of earnings in the case of each product of each
industry. It can and must content itself with rough approxima­
tions. In doing so, if price ceilings are set which create a situation
in which the production of commodity 4 is slightly less profitable
than the production of commodity
it does not necessarily follow
that production will reflect the comparative proSt margins of the
two commodities in question. To a certain extent business firms
will continue to guide relative production on the basis of their
appraisal of the long-run importance of the markets for products <4
and 2?, regarding the war as a temporary situation. To a certain
extent, also, if commodity 4 is more necessary for war purposes,
Brms may continue to produce it as a matter of patriotic obligation.
Price control, furthermore, is assisted by the allocation of scarce
materials and perhaps man power, so that firms may not be free to
exploit the higher net margin available on commodity
price regulation a continuing policy in peacetime, such difEculties
as these, which can be minimized in time of war and in the shorter
run, would become problems of paramount importance. To operate
successfully during peacetime, price control necessarily would have
drastically to reformulate its procedures and criteria of action.
To discharge its long-run functions adequately, price regulation
would have to be bolstered by a number of correlative controls over
private Bnance, accounting, and the quality if not quantity of
production of goods and services. Thus, such control must be most
comprehensive, embracing virtually all the economy. One is
reminded of the development of rate regulation in transportation
and public utilities. Begun with limited objectives and methods,
control in these areas has extended both vertically and hori­
zontally. The successful regulation of railroad transportation was
found to require control also of the rates charged by other means of
transport. Likewise, adequate control of rates was discovered to
require control also of accounting methods, company Bnance, com­
pany expenditures for certain items, intercorporate relationships,
and the quality and quantity of services rendered.
There is little reason to suppose that this record would not be
duplicated in substance in the commodity areas where wartime
controls are now functioning. In fact, controls would probably
have to become much more extensive, with respect to costs of labor



and materials, than has proved necessary in the field of transporta­
tion and public utilities. With certain minor exceptions it has not
been necessary for the Interstate Commerce Commission to control
the prices of materials and services purchased by railroads. Like­
wise, while wage rates have been subject to compulsory mediation,
they have not been under direct government regulation. In each
of these cases, the ability of railroad regulation to limit its scope lay
in the existence of other unregulated areas within which wage rates
and materials prices were broadly determined by market forces.
If, however, commodity price control covers substantially the whole
economy, costs can scarcely be left to the determination of non­
governmental forces.
It seems conservative to predict that general control of com­
modity prices could not be made effective without full regulation of
both wage rates and cost prices of industrial materials and services.
Indeed, it might well be necessary also to accompany the control
of costs and prices with the direct allocation of productive resources.
The essential correctness of this view has been indicated even
during the short period of wartime price control which has thus far
transpired. Our war experience is demonstrating not only the
intimate interdependence of all costs and prices, but also the
inability of either price or allocation policies to function adequately
without the other.


During the years immediately following the war, the economy
of the United States will be at the crossroads. The issue is not in
any sense whether government will intervene largely in economic
affairs; the only question is the character of government interven­
tion. (a) An attempt may be made to return to approximately the
same general lines of policy followed before the war; (5) alternatively,
the choice may be to follow a course of widespread general com­
modity price regulation, including perhaps the allocation of human
and material resources among various industries and products;
or (c) an effort maybe made to secure a maximum degree of competi­
tive controls in the market place, accompanying this policy with
certain other measures designed to create a higher level of social
well-being and stability than we have had heretofore.
It is necessary to refer only briefly to things as they were.
Before the war our economic policy was a strange complex of con­
flicting ends and conflicting means. On the one hand, a reinvigor­



ated antitrust policy was endeavoring to foster competition. At the
same time, various measures in areas of retail prices, interstate trade
relations, agriculture, and labor were designed to foster what were
essentially monopolistic conditions. We possessed an economy in
which the most was made neither of individual and competitive
forces nor of public control. The United States was in the throes
of change, but the direction or purpose of change was anything but
When peace comes this country may well embark on a perma­
nent policy which includes the general regulation of commodity
prices. As stated in the preceding section, such a policy may almost
inevitably entail the regulation of ail prices, including wages, indus­
trial materials, and services, as well as such key phases of private
business as the financing of enterprise, intercompany relationships,
accounting methods, and the quality and quantity of goods pro­
duced. Perhaps, also, the allocation of materials and labor among
different uses will be necessary.
Such a course poses economic and political questions of the
utmost significance. FccftomicaM?/, private enterprise in such a
system would be stripped of its functional justification. This
justification is a familiar argument. A system of private enterprise
is eco7M?MMca%/ preferable to one of public ownership only if over
the years it produces more for less. Its defense rests on the propo­
sition that individuals and groups of individuals, left to their own
devices, will do a better job in the course of the struggle for survival
and success than would be done if the incentive to private initiative
were absent. Yet, a combination of private "ownership" with a
public control so pervasive that the key elements in business deci­
sions are in public rather than private hands may well create a
situation in which we have the evils of both systems with the advan­
tages of neither.* This amounts to saying that the essential deci­
sions of business center around prices and costs, including wage
rates, and that, if full public control of those decisions is established,
what remains of a system of private enterprise is but a shell, the
retention of which is questionable. For such reasons the choice in
the postwar years between continuing and widespread regulation
In areas where price control has already had opportunity for substantial
development, e.p., in public utilities and transportation, where price control has
been used for 50 years, this dilemma is well recognized. One body of opinion,
consequently, has favored the establishment of competition through public
ownership of rival plants. Another has favored abandoning this private
ownership in favor of public enterprise.



of prices by government and the abolition of such controls, perhaps
after a short transition period, is no less a question than that of the
fundamental character of our future economy.
The political issue is equally basic: can a highly regimented
economy be operated efBciently by a representative political
democracy? The question can be expressed simply and perhaps
more realistically by asking whether it is possible to operate an
economic system through the medium of the ballot box. Few
problems have been commented upon more often in recent economic
and political literature than the danger to national unity and
stability arising from the increasing power of economic groups. So
long as farmers may gain at least in the short run by persuading
government to legislate in their behalf, and so long as the same is
true of industry, labor, and of virtually every group of individuals
with common economic interests, it is diBicult to see how a national
government can at once operate an economy efficiently and at the
same time answer at the polls to its constituents.
The above does not in any sense mean that important govern­
ment action along economic lines is incompatible with political
democracy as we have known it in this country. Many types of
government policy, far reaching in their consequences, can be
adopted without incurring the political results attendant upon
government control of such matters as prices and wages. The
United States has far to go before it will have established a real
program of social security or created a situation in which there are
not strong barriers between classes, which in many instances deny
economic freedom to the individual. Moreover, we have scarcely
made a beginning in the direction of achieving stable economic con­
ditions through various measures that may well stop considerably
short of a full regimentation of the economy.*
Insofar as competition and monopoly are concerned, it cannot be argued
that government policy—national, state, and local—has really attempted to
foster competition and thus prevent the exploitation of the many by the few.
Antitrust law enforcement has for the most part been an extracurricular activity
in government over the past half century. Trade barriers between states have
been permitted to grow alarmingly. Monopolies have been fostered by tariffs
which check the competition of others who happen to live on the wrong side of
political boundary lines. Government has sanctioned the fixing of retail
prices. Where competition has existed, as in agriculture, and where monopoly
could not well be achieved through private eRort, government has hastened to
create the essential conditions of monopoly. Even our laws governing entrance
into the professions, including teaching, have been partially motivated by a




A number of influences will condition the choice among the types
of economic policy outlined in the preceding section. Certainly
it is possible to predict some of the more important of them. First,
and foremost, the decision will turn on whether we have really won
the war. If the United Nations achieve but partial victory, it will
be necessary for this country to live as in an armed camp. If so,
the fashioning of a military state will make it most difficult to
achieve a system in which significant scope is left to private economic
decisions. In other words, if the peace is but an armed truce, we
may well expect a continuing policy of economic controls including
price control. Likewise, if we win the physical combat but lose the
peace through stupidity in providing for a postwar world in which
nations have a practical opportunity to live in peace and security,
then, also, we may find it necessary to continue an economy designed
essentially for purposes of war rather than of peace.
A second and correlative factor is the character of international
relationships that are established. One Snds in the provisions of
the Atlantic Charter a point of view which may free channels of
trade throughout the world to an extent never before known. The
widespread absence of artificial barriers to trade, coupled with the
phenomenal revolution occurring in the technologies of transporta­
tion and communication, may well create a situation in which
private monopolies have hard sledding indeed* (unless government
chooses deliberately to encourage their formation).
A third conditioning factor is our ability to avoid a severe and
prolonged depression.^ Whatever may be the "economic merits of
the case," it seems most unlikely that such a depression will be
desire to maintain monopolistically the fees and salaries of those in such
* It is interesting to speculate whether the lack of interest in antitrust
legislation on the part of England during the period between the repeal of the
Corn Laws and the doldrums of the 1920's was not due in large measure to the
fact that industry in England was continually confronted by a substantial
degree of competition consequent upon a policy of free trade.
* There are excellent reasons why it should not be assumed that such a
depression will follow closely upon the coming of peace. World rehabilitation
opens prospects of trade of substantial magnitude. The demands pent up
during the war will likely act as a cushion to adjustment. It may well be that
the passing of the American frontier so deplored by many students of business
conditions will be replaced by new frontiers in South America and in Asia which
will provide a continuing stimulus of great magnitude. The same influence, in



tolerated by the people of this nation. The paradox of full employ­
ment in wartime and continuing unemployment during peacetime
is rather too painful for a leader or governing class to explain away.
Whether or not a more collectivistic economy will in fact make
people "happier" or provide for them a more abundant life, still
prolonged depression will create a popular demand to try some­
thing different.
And finally, whether the United States adopts a program of
general price fixing as a long-run policy will depend in large measure
on the ability of political leaders and voters to distinguish between
the consequences of alternative types of economic policy, as well
as upon their willingness to subordinate group interests to the
larger good. Some may challenge the statement, but to the writer
it seems established that the time has passed when the government
will be permitted to follow a do-nothing policy. Our difEculties,
however, arise in considerable degree from the seeming conviction
among many that any sort of government action is about the same
as any other in its implications. "Conservatives" still inveigh
against each new government statute provided it is not merely the
repeal of an earlier one, while "liberals" too often assume that,
if an evil exists, a law declaring that it shall not exist will cure the
The point is that certain types of government policy, such as
those having to do with social security programs, public expendi­
tures to maintain a minimum level of economic activity, and
management of the credit and monetary structure, do not intervene
so drastically in the functioning of private enterprise as do specific
regulations aimed at the heart of business decisions, ^.e., controls of
the prices of goods and services (including the services of labor).
Controls of the latter type run a grave risk of reducing private
enterprise to a system that, from a social point of view, is essentially
When the war is over the United States may employ commodity
price regulation as a temporary expedient only, in which case the
character of price regulation must change considerably from that
developed during war itself. If, on the other hand, we choose to
a shorter run, stems from a rehabilitation of Europe. Moreover, the potential
investment opportunities resulting not merely from the shifting of industry
from war to peacetime production but from the exploitation of great advances
in technology here and elsewhere in the world will provide a potential capita!
goods market of significance for years to come.



establish the general regulation of commodity prices as a long-run
policy, then certain results should be recognized at the outset.
Such control, if it is to be employed at all, may necessarily become
so comprehensive as to include the fixing of virtually all prices,
including the wages of labor and the prices of industrial materials.
It may well be necessary, also, to accompany price control with
governmental allocations of industrial materials and labor.
The consequences of such a policy, as a long-run proposition,
are of the greatest import both economically and politically.
Under so complete a system of controls, private ownership will
have become a mere 8ction shorn of its functional significance.
Thus, the adoption of price control as a genera! and "permanent"
policy amounts to the choice of a basically different type of economic
system than that which we have had.
A number of factors— political, economic, and social— will
condition the choice between fundamentally different avenues
of policy. Among others, the factors that will influence the choice
include the degree of victory by the United Nations, the character
of international economic relationships established after the war,
the ability of the United States to avoid severe and prolonged
depression, and the intelligence of the leaders and voters of this
country in distinguishing between the consequences of different
types of economic policy.

Agricultural planning and free trade,
populations, movements, 300-301
postwar shifts, 293-293
production, adjusting to nutritional
needs, 286-287
surpluses, disposal of, 298-299
Agriculture, elimination of submarginal lands, 56-57
Anticapitalist measures, likelihood in
postwar, 121-123
Antidepression policy, new attitude,

Armed forces, absorption of, in labor
market, 63-64

Commodity agreements, past experi­
ence with, 316-317
Commodity analysis, need of, 318
Consumption in postwar, estimates,
17, 193
manner of stimulating, 17-21
rise of, with rise of income, 33
secular relation with income, 34^35
Consumption goods, availability of,
in postwar transitional period,
Consumption rise, as suggested by
Moulton, 75-76
Control of agricultural production
and surplus stocks, reduction of,

Deferred demand, 46-47
exaggeration of, 52-53
Capital exports, conditions of, 137Deficit financing, incompatibility with
capitalism, 12&-125
in relation to stabilization, 390-391
Capitalism vs. collectivism, false issue, Demobilization, in First World War,
130, 132
in Second World War, danger from,
Capitalist process and decay of
capitalism, 118^121
Capitalist society, features of, 113-115 Depression, not inevitable in postwar
period, 194—195
City planning, burden of revaluing
of the thirties, alternative explana­
land, 212-214
tions of, 88-90
distribution of fiscal burdens, 214analysis of, 86-88
215, 217-218
Development program, outline, 22-26
essentials of, 209-210
and financing houses for rent, 216- Dietary requirements, 288
Dollar shortage, 379-381
lack of, 207-208
legal aspects of, 210-212
and less intensive use of interior
Economic liberalism, conditions of,
lands, 212-213
Commodity agreements, 320-321
vs. taMaeg /aire, 127-128
future, questions on, 319



Economy, public vs. private, 26
Effective demand, problem of, 30
Employment and political policies of
labor, 25&-256
English liberalism, 142-145
Exchanges, flexible, need of, 132-134
Farm prices, postwar, pressure to
maintain, 291-292
Federal government, increased re­
sponsibilities in finance, 237-238
Federation vs. alliances, in relation to
liberalization of trade, 152-154
Figures, Rood of, 159
need of integration of, 159-160, 165
Finance, municipal, rigidity of, 224225
Fiscal incapacity, correcting, methods
of, 231-235
Flexibility in public policy, need of, 9
Food distribution, in transitional
period, 307-308
Foodstuffs and raw materials, free
access to, 313-314
Foreign lending, renewal of, vs.
removal of restrictions, 347-352
Free trade, incompatibility with to­
talitarianism, 143-145
Frontier, American and foreign, 80
Full employment, dependence of, on
adequate investment in relation
to savings, 67-68
Geographical dislocations, corrections
in postwar period, 64-65
Government spending, and more
radical attacks, 83-84
Grants-in-aid, 228-229

High income, possibility of, in post­
war, 12-13
Hunger, historical and present, 282

Imports, rise of, and stimulation of,
abroad, 362-363

Income, and public spending, 2-5
relation of, to investment, 41
in A .D . 2000, 4
Individualism vs. collectivism and
syndicalism, 145-147
Industries, readjustment of, to post­
war demand, 60-63
Input-output relationships, in peace­
time economy, 164-165
in war economy, 161-163
International disequilibrium, 375-379
International economic authority,
need of, 351-352
International investment, channels of,
defaults in, 372-373
form of, 365-366
government participation in, 367369
and leakage, 363-364
need of large-scale, 364-365
private participation in, 369
and rise of imports, 361-362
special aspects of, 370-372
success related to employment in
lending nations, 371
warning against tied loans, 370
International monetary control, na­
ture of, 355-357
International monetary and economic
control, need of, 354-355
Investment, components estimated
for postwar period, 99-105
relation of, to growth, 77-78
stimulation of, vs. stimulation of
consumption, 81-82
Investment outlets, declining tend­
encies as revealed in literature,
reasons for shrinkage, 71-72
Investments, theory of vanishing op­
portunities refuted, 116-118

Keynes, J. M., inSuence on this book,
Keynesian economics, 84-85

Labor, attitude of, toward excessive
taxes on pro At, 256-257
toward increased public adminis­
tration, 257-258
changes wrought by war, 241-243
improved bargaining power, effects
of, 251-255
political power of, 246-248
in relation to postwar deflation,
restricted basis of agreements,
spending power and availability of
goods, 243-246
wage policy of, 249-250
Labor force, reduction of, in postwar
period, 65-66
Land tenure, 303-304
Land-use planning, 302-303
Liberal automatic system vs. con­
scious international agreements,

Malnutrition, 293-296
Man power, redistribution of, as
result of war, 57-58
Migration, extent of freedom of,
Military expenditures, reduction of,
and dangers of, 169
Monetary nationalism, 327-328
Monetary parities, 358
Monopolistic prices, trends in, 400401
Monopoly and minority interests,
need of removing, 147-148
National expenditures, gross, 19291943, 93-96
and postwar composition and dis­
position, 92-97
National income, components in post­
war period, 20-21


Nutrition, government contributions,
history of, 282-284
postwar aspects of, 290
public responsibility for, 285-286
relation of, to food processing and
manufacturing, 288-289

Old-age security, improvement in,
Peace, in relation to German eco­
nomic and political policies, 151152
and Russia, 152
Policy, after the war, 21-22
Population increase, restricted move­
ments of, 137
supporting or initiating force, 79
Postwar economic policy, 1-2
Postwar pattern, 187-189
Price control, likelihood of long con­
tinuance, 410
permanent and political aspects of,
permanent and profound effects of,
on industry, 405-407
postwar, in transitional period, 405
Price structure, effects of war on,
Private investment, need of control,
Production and consumption of food­
stuffs, future progress, 311-313
financing problem, 15
Profits, in fluctuating society, 19
Public debt, growth of, and offsetting
assets, 171
large increase compatible with
capitalism, 184-185
limit of, 176-178
on various assumptions, 181-184
manner of growth, 179-181
potential, relation of, to size of
national income, 173-174



Public debt, potential, relation of,
to other public charges, 172173
relevant variables to, 169-170
repayment of, not required, 170
and tax capacity, 175-176
and transfer burden, 174^175
transitional problem of growth,
Public expenditures, fiscal perverse­
ness, 221-224
Public investment, case against, 106107
Public works, cost concept used, 191
definition of conccpts, 191-192
interrelation of projects in general
plan, 200-201
need of, and shelf, 189-191
operational and maintenance costs,
secondary employment, 192-193
special aspects of, 195-196
state and local problems, 202-203
timing and telescoping, 196-197
types of projects, 198
Purchasing power, need of maintain­
ing at high level, 113-114

Reallocation of national production
resources, problem of postwar
adjustment, 160-161
Reemployment, issue of, in relation
to stimulation of business enter­
prise, 58-60
relation of, to timing of production
of complementary factors,
Regional blocks, of contiguous coun­
tries, difHculties in forming, 335337
political aspects of, 335
preference for, as against universal
free trade, 333-334
Regional federations, economic con­
tent of, 326-329
Relief programs, 275-276
and readjustment programs, 308311

Restrictions, removal of, 148-151
Rewards and compensation, ade­
quacy of, 130-131
Rural public works, 301-302

Savings, consumption income pattern
of, 31f.
and distribution of income and
taxation, 43-44
need of full offsets, 38-39
offsets, 37y.
of foreign lending, 42
of losses, 42
in relation to income, 97-98
Social insurance, nature of, 265
Social security, broad considerations
of, 275-276
definition of, 263-265
greater advances abroad than here
since 1939, 266-269
legislation to cover demobilization,
new fields to conquer here, 274-275
payments of, on basis of need, in
Germany, 269-270
search for, 265-266
Spending, effects of initial contraction,
Stabilization, through cancellation of
balances, 389-390
comparison of various proposals and
past practices, 391-393
through exchange adjustments, 388389
proposals for, 382-385
in relation to deficits, 385-386
in relation to increased imports by
industrial countries, 386-387
and renewal of foreign lending, 393395
Stagnant economy, 69
Stagnation theory, 69-70
in relation to cycle theory, 67
State and local revenues, inelasticity
of, 226-228
States, resources and services, 229-230
Sterling, overvaluation of, 358-359

Tariff reduction, partial, 331-332
in relation to contiguous countries,
Tariffs, and monetary policies, inter­
relationship, 328-329
practical limits of reduction, 338
Tax reform, state and local govern­
ments, 234r-235
Trade controls, case for removal, 352354
relation of, to domestic controls,
329-330, 340-343
Trade restrictions, removal of, 345-347
Trade unions, assumption of increased
responsibilities, 261-262


Trade unions, increased public interest
in government of, 258-260

Unemployment and inflation, 132
Unemployment insurance, federaliza­
tion of, 272
Utilization of resources, full and
efRcient use of, 10

War, eRect of, on structure of industry,
pressure of, on existing social struc­
ture, 116