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MONOGRAPH No. 25-26 

Printed for the use of the 
Temporary National Economic Committee 






JOSEPH C. O'MAHONEY. Senator from Wyoming, Chairman 

HATTON W. SUMNBRS, Representative from Texas, Vice Chairman 

WILLIAM H. KING, Senator from Utah 

WALLACE H. WHITE. Jr., Senator from Maine 

CLYDE WILLIAMS, Representative from Missouri 

B CARROLL REECE, Representative from Tennessee 

THURMAN W. ARNOLD, Assistant Attorney General 

•WENDELL BERGE, Special Assistant to the iVttomey General-, 

Representing the Department of Justice 

JEROME N. FRANK, Chairman 

•SUMNER riKE, Commissioner, 

RepresenUng the Securities and Exchange Commission 

GARLAND S. FERGUSON, Commissioner 

•EWIN L. DAVIS, Chairman. 

Representing the Federal Trade Commission 

ISADOR LUBIN, Commissioner of Labor Statistics 

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics, 

Representing the Department of Labor 

JOSEPH J. O'CONNELL, Jr.', Special Assistant to the General Counsel 

•CHARLES L. KADES, Special Assistant to the General Counsel, 

Representing the Department of the Treasury 


Representing the Department of Commerce ^CT) 

LEON HENDERSON, Economic Coordinator 

DEWEY ANDERSON, Executive Secretary ^^^ 

THEODORE J. KREPS, Economic Adviser C^ 

Alternates. CD 

- Ui 















This monograph has been prepared from materials submitted to the 
Temporary National Economic Committee by 


Vice President of the Institute of 
Applied EcoTiometrics 


of Pennsylvania 


of Wisconsin 


of Calif omia 


Field Representative 

National Economic and Social 

Planning Association 





The Temporary National Economic Committee is greatly indebted 
to these authors for this contribution to the literature of the subject 
mider review. 

The status of the materials in this volume is pixcisely the same as 
that of other carefully prepared testimony when given hy individu^ 
witnesses; it is' information subtnitted for Committee deliberation. 
No matter what the official capacity of the loitness or author may he^ 
the publication of his testimony^ report^ or monograph by the Com- 
mittee in no way signifies nor implies assent to^ or approval of^ any 
of the facts^ opinions^ or recommendations^ nor acceptance thereof in 
whole or in part by the metjibers of the Temporary National E"ononrG 
Committee^ individually or collectively , Sole arid v/ndivided respon- 
sibility for every stateinent in s.uch testimony, reports, or monographs 
rests entirely upon the respective authors. 

(Signed) Joseph C. O'Mahoney, 
Chairman, Temporary National Economic Committee. 




Letter of Transmittal ix 



Preface 3 


Major types of recovery plans and their economic background 6 

Summary of major types of recovery plans 6 

A Framework for the Plans: the Economic Mechanism They Premise. 7 

Role of law, custom, and working rules 7 

Private ownership of land 8 

Government sanction of selected types of business organization. 8 

Competition or administration as the instrument for fixing prices. 9 

Type of monetary mechanism postulated 12 

A mechanism permitting income recipients to diversify their 

demand for goods 13 

A mechanism permitting iiicome recipients to postpone their 

demand for goods 13 

How the power to postpone demand arose 16 

Historic unconcern with the aggregate demand function. 18 


Monetary revision: Governmental injection of new purchasing power 20 

Government spending: Problems and methods of financing 20 

Government spending financed bj- borrowing 21 

"Pump-priming" proposals 21 

The Deane plan 23 

Government-sponsored lending 24 

Direct Government loans 24 

Government insurance of private loans 25 

Government loans to support debt structure 26 

Government spending for relief 28 

Systematic "compensatory spending": Capital outlays to offset 

deficiencies in private spending 28 

Basis of spending: High capital-goods activity necessary for 

prosperity 29 

Basis of spending: Private investment opportunities function- 
all}^ inadequate 31 

Basis of Spending: Continuous growth of debt necessary for 

industrial expansion 33 

Basis of spending: Money savings must be converted into 

physical savings 34 

"Money is always invested" 35 

Basis of spending: Public works are desirable for their own 

sake 36 

Limits beyond which deficit financing leads to authoritarian 

price control or inflation 38 

Interest burden of a heavy compensatory-spending program. 39 
Summary: Appraisal of compensatory spending — its justification 

and limitations 40 



Monetary revision— Continued. ^*8;e 

Government spending financed by taxation 41 

Effect on interest rates and utilization of private funds 43 

Limitation of the plan to tax current savings 43 

The "Townsend plan"__. 44 

The "Ham and eggs plan" 46 

Government spending financed by creation of "costless money" 47 

Argument that the quantity of money is inadequate 48 

Argument that money is a token valueless in itself which only 

the State should create. ^ — --- 50 

Evolution Of money" from wealth mediums tT) certificates of 

indebtedness 50 

The nature of "dollars" and "bank loans" 54 

Effect of "costless money" on savings, the price level and Gov- 
ernment credit - 59 

"Social credit" as a "costless money" plan + 61 


Monetary revision: Stimulation of private spending of idle funds. 64 

Taxing money into circulation 64 

"Stamped scrip" 66 

A Federal tax on bank deposits .- 67 

Revenue possibilities of a tax on deposits 69 

Effect of a tax on deposits upon entrepreneurs 70 

The nature of interest-, 72 

Interest rates under a tax on deposits 74 

Effect of a deposits tax upon the supply of money — 77 

A tax on unspent portions of annual income 1 — — 78 

A tax on unused depreciation reserves 79 

"Incentive fixation": Tax pressure on all the factors of produc- 
tion — 80 

Effect of a tax on idle money on the distribution of income.. 82 

Effect of incentive taxation on monopoly prices 84 

Effect of a tax on idle money on the price level 86 

Motivation of private spending by "restoring confidence" 86 

Lightening the sociai controls over capital .. 87 

Governmental insurance of business solvencies . 91 

Publicity to instill confidence.^ 91 


Monetary-institutional revision: Abolishing or penalizing debt as a form of 

contract 92 

Interest pa^^ments made uncollectible ^_ 92 

The debt instrument and hoarding as expropriatory tools 93 

Taxation of all forms of debt instruments 96 

Conclusion 98 




Remarks of Hon. Robert G. Allen ^^g 

Remarks of Hon. Thomas R. Amlie.. " 110 

Monopoly Control by Congressman Jerry Voorhis J J? 

H. R. 7504 















I. Growth of national wealth 187 

II. National income and value of manufactured products 188 

III. National savings 189 

IV. National bank deposits 190 

V. Capital invested in manufacturing 191 


T. Schematic price make-up of a good sold at retail 221 



Hon. Joseph C. O'Mahonet, 

Chairman, Temporary Natioruil Economic Gonymittee, 
'Washington, D. C. 

My Dear Senator : During the Committee's existence several files 
of correspondence have been received and numerous plans offered by 
citizens who considered the Committee a proper body to receive their 
suggestions. This correspondence has been most helpful in formulat- 
ing plans and outlining hearings and studies in which the Committee 
has engaged. Obviously, it is too voluminous for inclusion in the 
printed reports of the Committee, consequently, it has been deemed 
advisable to make a selection representative of the more compre- 
hensive suggestions offered which could be published in the mono- 
graph series. The present volume is the result of that selection. 

In Part I, Recovery Plans — An Analysis, Dr. Arthur Dahlberg, a 
member of the staff of the committee, has assembled and analyzed 
those plans which focus attention on correction of faults in the mone- 
tary mechanism as the means of achieving economic recovery and 
stability. He has brought to this task years of research and study of 
economic maladjustment. His own original works, "Jobs, Machines, 
and Capitalism," and "When Capitalism Goes on Strike,'\have been 
given serious attention by competent economists as a most helpful 
elaboration of the operations of our economy. 

Part II, Planning for Abundance, represents the collaboration of 
four Members of Congress who introduced simultaneously, but inde- 
pendently, a measure to achieve that end. The bill itself is based on 
the extensive research and analyses of Dr. Mordecai ^zekiel, of the 
Department of Agriculture. In offering it to the Congress, Hon. 
Maury Maverick, Hon. Robert G. Allen, Hon. Thomas R. Amlie, and 
Hon. Jerry Voorhis considered such a fundamental reorganization 
of our economy an essential step toward recovery. The original bill 
went through several revisions, to appear finally as H. R. 7504, intro- 
duced by Congressman Jerry Voorhis. The symposium of extended 
remarks of these gentlemen included in this monograph offers the 
Committee testimony of congressional colleagues who have given 
serious consideration to the problems of the economy and their 

Part III, Employment and Economic Progress, is the work of 
George B. Galloway, field representative of the National Economic 
and Social Planning Association. It is a brief, though compre- 
hensive, statement, of the problems of mass unemployment in an un- 
balanced economy. It comes inevitably to the conclusion that sound 
social planning is essential to the solution of these problems. 

Part IV, Debt and Economic Stagnation, is submitted by a busi- 
nessman, Irwin S. Joseph, whose analysis of the debt structure and 
its influence on economic stagnation is penetrating. 


Part V, Capitalistic System to Fit Present Needs, by Joseph M. 
Lurie, seeks to preserve the capitalistic system through a redis- 
tribution of purchasing power, using the tax instrument to achieve 
that end. 

Part VI, A Method for Controlling Unemployment and Increas- 
ing Physical Production, by Sterne Morse, is a carefully integrated 
plan for Government cooperation to achieve full employment. Its 
ingenious and novel character offers a stimulating challenge to our 
thinking in this area. 

Part VII, The Cleveland Plan, submitted by Sam D. Schearer, is 
an espousal of Government ownersliip of utilities and their use to 
expand consumption. 

These several plans have been selected with the purpose of making 
available different types of proposals for economic reform. In cer- 
tain features they overlap, but in others they are unique. Together, 
they afford a good cross-section of public opinion on these moot c^ues- 
tions. It is in this spirit that they are submitted to the Committee. 

Respectfully submitted. 

Theodore J. Kreps, 

Economic Adviser. 

October, 1940. 




Among the specific duties assigned to the Temporary National 
Economic Committee by the "joint resolution" which created it was 
that of hearing and receiving evidence on the "effect of existing tax, 
patent, and other Government policies upon competition, price levels, 
unemployment, profits, and consumption." The joint resolution 
directed the committee to make recommendations to Congress on the 
subjects studied. Apparently, Congress contemplated nothing less 
than that the committee look into the laws and working rules of our 
society for the causes of depression and that it suggest remedial 
measures for depression. The basic problem of economic statesman- 
ship for Congress in this period undoubtedly, consists in discovering 
ways in which to utilize our entire labor supply while preserving civil 
liberties and the individualistic values of democracy. While the prob- 
lem is drastically changed by the current defense program, this situa- 
tion is likely to be a relatively temporary one and the longer-term 
economic problem of overcoming depression and unemployment is 
likely to continue to challenge us. 

Dozens of we!l-kno^^ n leaders of thought were consequently called 
and heard by the committee ; hundreds of others submitted views and 
evidence by mail. From all sections of the country came the contribu- 
tions of thoughtful men of learning and experience. These views con- 
stituted a large and varied body of opinion bearing on the problem 
of depression. Practically all of those well-known approaches to the 
recovery problem with which the American public had been made 
familiar through books and magazines, were presented in one form 
or another in the plans submitted to the committee. In addition there 
were presented many worth-while approaches which had never been 
made known to the public before. The latter plans in particular, as 
well as the better-known approaches, the writer was employed to 
analyze. This he has tried to do in an integrated manner. The com- 
mittee believed that an integrated review of the many extant plans — 
brief as the review of each type would have to be — would be of public 

The interpretations made and conclusions drawn in this report 
naturally will not find universal agreement. They are the author's 
own. If they also represent the views of the committee or any mem- 
ber of it, that is entirely accidental. The committee entrusted the 
author with the task of uiaking an analysis, and this he has done to 
the best of his ability. The author is of the opinion that the causes of 
depression are clearer than is generally believed ; also that these causes 
lie not so much in fields which have been tediously surveyed as in fields 
which are just beginning to be explored. Despite the great diversity 
of thought reflected in current reemployment plans, a reading of them 
makes one feel that there has come to be a core of economic thought 
common to many of the plans. Ten years of Nation-wide reflection on 


the problem of depression seem not to have been in vain. Recom- 
mended cures are still extremely diverse, but surprising agreement 
exists in the analyses which underlie them. 

A remarkable change in the direction of economic thought seems 
to have occurred since the early years of the 1929 depression. During 
those early years, public attention was focused in the main on those 
proposals which sought to solve the problem of depression by fixing 
minimum wages, eliminating "unfair price competition," establish- 
ing production quotas, reducing working hours, sponsoring collec- 
tive bargaining, impeding the introduction of technical improve- 
ments, and so forth. Those early prdposals sought to interfere rather 
directly with the administrative details of industrial operation. 
Monetary proposals were more or less left in the background. The 
j)roblems of production and distribution as such held the spot- 
light, at least in the popular journals. The problem of exchange — 
the processes which constitute it and the laws and institutions which 
facilitate it — received scant attention. Today, a reading of current 
"recovery literature" leads the writer to believe that the orientation 
has changed. Most of the current proposals seem to seek continuity 
of exchange as a primary requirement for. business recovery. Much 
more direct attention than before seems to be given to the problem 
of how to maintain an adequate monetary demand. 

This study was made within rather severe time-limitations during 

5 months of the fall and winter of 1939 and 1940. These limita- 
tions and the pressure of other duties prevented the author from 
considering as many recovery plans as he would like to have sur- 
veyed. However, he feels that he has considered the more important 
types and those which have enlisted the largest amount of public 

. If judged by their details, recovery plans are legion in number. 
There are however, only a few major types. Inasmuch as the mere 
matter of mass made it unfeasible to discuss the details of plans, 
and because the details are important only if the premises on which 
the plans rest are sound, the author has elected in this report to 
focus most of his attention on the premises underlying the various 
plans. And to do this, even in an abbreviated manner, precluded 
extensive discussion of the details of the plans themselves. Should the 
reader become interested in the details ot any plan referred to, he msiy 
investigate it further himself. Since many of the plans mentioned 
herein have not been formally published but only submitted to the 
Temporary National Economic Committee in manuscript form, the 
home address of the authors of unpublished plans is given in every 

The subject matter of this report is obviously of an electric 
nature. Views bearing on the causes and cures of depression tend 
to entangle themselves deeply in our emotions; they tend to be held 
tenaciously and to be sponsored vigorously. Unfortunately, the 
conclusions arrived at and judgments rendered herein by the author 
are not susceptible of rigorous "scientific proof." Relationships, 
facts, emotional proclivities, and cultural values necessarily enter 
in varying degree into the making of social judgments. And there 
is no calculus by which one can extract provable answers. For that 
reason alone, conviction regarding social action should perhaps 


always be tentative. Solutions are necessarily relative to one's own 
changing time and culture, and social forces at any time are too 
numerous and dynamic to warrant fanatical conviction. Any plan 
meeting with public approval, therefore, should probably be intro- 
duced gradually, cautiously, a little bit at a time, rather than impet- 
uously and sweepingly. 

For more than a decade the American people have been plagued 
with continuous industrial stagnation on the on*e hand and divided 
counsel on the other. One of the author's major hopes is that this 
report may be of assistance in p6rtraying better the basic economic 
problem of our time, and in synthesizing somewhat the more im- 
portant plans advanced toward its solution. 

Arthur Dahlbero. 

July 1940. 




Although extant re-employment plans which do not look to a com- 
plete abandonment of our present economic order have a great diver- 
sity of detail, they can all be classified into a few types. They seem 
to fall into five convenient classifications, namely : 

Those which emphasize or call for — 

1. A modification of our existing monetary mechanism. 

2. A modification of our existing tax mechanism. 

3. A modification of our existing price mechanism. 

4. A modification or extension of the structure of our business 


5. A larger role for the Federal Government as the producer of 

goods and services. 

Many plans are so comprehensive that they cover more than one 
of these classifications. To facilitate analysis, however, the writer 
has considered each plan under that particular heading which calls 
attention to the piece of economic mechanism that would be most 
vitally affected by the adoption of such plan. 

Apropos of the plans as a whole, it can be said that they are 
unanimous in regarding our present institutions as imperfect. Until 
either the physical capacity of our workers or the engineering ca- 
pacity of our plants comes to be the factor which limits the volume 
of industrial production, they feel justified in believing that it is 
our institutions rather than our machines which are in need of repair. 
Most of the proponents of plans indicate that they were moved to 
submit their recovery proposals by the belief that democracy is 
doomed to be replaced by totalitarian government unless the institu- 
tional maladjustments which make for recurrent depression are recti- 
fied. Most of them also seem to have been moved to action by the 
unemployment, poverty, and disparity of income distribution gener- 
ated by our socio-economic system. In the main, tliey try to design a 
distribution mechanism which will divert more of the national in- 
come to w^ages and salaries and less to capital return, not particu- 
larly for reasons of "justice," but in order to get more income into 
the hands of people who will re-spend it promptly and spontaneously. 
They believe that those who spend income mainly for consumers' 
goods, which minister directly to personal needs, always tend to 
spend it quickly, while others tend to hold it idle when investment 
opportunities are unattractive. 


With the exception of those few people wlio recommend that the 
Government go into business on such a wholesale scale as to change 
materially the nature of our economy, nearly all of the proponents 
explicitly or implicitly indicate that they wish to rely on a system 
of private ownership of the means of production, to perpetuate indi- 
vidual initiative, to have the state enforce contracts, and to have 
both the prices of goods and the distribution of income determined 
jnainly in a competitive market rather than by the agents of govern- 
ment. They hope to attain legally and without violence any changes 
which they advocate. 


A review of the extant plans suggests that the proponents of all 
of them have in their heads a definite picture of the economic mech- 
anism to whicli they relate their plans. Although they throw the 
spotlight by turns, as it were, on those parts of our economic ma- 
chine to which their recommendations most directly pertain, they all 
premise a certain overall mechanism into which their suggestions fit. 
What is the nature of this mechanism ? 

It was possible to assemble the elements of this economic machine 
from the brief descriptions with which the writers prefaced their 
arguments. Tlie composite picture derived may serve as a framework 
against which to evaluate the different proposals. The writer will 
therefore describe some major parts of the economic mechanism as- 
sumed, and at the same time will attempt to fit into this framework the 
important types of reemployment proposals. Space does not permit 
the writer to qualify fully his description of the economic mechanism 
which he finds at the coi^ of the recovery proposals ; the reader should 
bear in mind that the aim here is not so much to present a detailed 
blueprint of our economy, as it is to provide him with a frame of 
reference for the evaluation of recovery proposals. As the writer sees 
it then, the following is the economic machine which the proponents 
of recovery plans apparently believe to exist : 


Essentially our economic machine consists of those institutional 
arrangements — customs, laws, and rules — which circumscribe individ- 
ual economic behavior. Through its laws and customs the community 
institutionalizes behavior by specifying the kind of agreements which 
it will initiate, tolerate, prohibit, or enforce. Some of its laws are old, 
others new, some date from colonial times, some from yesterday. Some 
meet with general approval; others have been under criticism for a 
hundred years. Whatever institutional arrangements happan to pre- 
vail currently, however, our over 131,000,000 people try to carry on 
under them an activity that is essentially cooperative. In the light 
of their laws — regardless of how flagrantly these laws may favor or 
disfavor them — workers, entrepreneurs, landowners, and money savers 
make agreements with one another. With a view to the production 
and distribution of particular goods, they make agreements not only 

273442—41 — No. 25 2 


as to who is to do what work and where, but also as to how the claims 
to the product are to be divided. 

Of course, most g;roups with special interests in common try to 
induce the community, which maintains the policing power, to set up 
rules and laws that will benefit them when making agreements with 
other factors in the productive process. They know that if the rules 
of the game read one way, the work undertaken and the reward for 
it will be different from what it will be if they read a second way. 
In a free market and under a given set of laws the distribution of 
income may depend largely on the efficiency and marginal productivity 
of the various factors of production, but if the rules and regulations 
are changed, then distribution will change also. Institutional arrange- 
ments,, therefore, are highly important. Let us review those major 
arrangements of the economic machine which advocates of social 
change wish to modify. 


Land is a "factor of production" as well as capital, labor, and en- 
trepreneurial direction. . For production must take place on $ r'-iticu- 
lar land site and must make use of natural resources der' ed from the 
land. Because most of our community's lands and resc ces were at 
one time or another given or sold by early governments to ancestors 
of certain of our contemporaries, these contemporaries have today a 
monopoly of one of the major factors of production. Tlien, because 
the community supports the power of these people to decide whether 
their land and resources shall be used or lie idle, they are able to col- 
lect for the use of their possessions a fee which in size is largely depend- 
ent on the value given to the land and resources by the coinmunity's 
growth and the use made of the resources. Several people who sub- 
mitted views to the Temporary National Economic Committee argue 
that the fee is not a reward for service but a toll on production which 
is made possible only because our laws respect the private ownership 
of land. Our system of land ownership, then, is one of the institu- 
tional arrangements, one of the pieces of economic machinery, which 
some people wish to change. 


As a producing mechanism ours is a society which seeks efficiency 
through the use of a high division of labor. Unfortunately, in order 
to make specialization feasible, society finds it necessary to set up 
institutional arrangements which in themselves introduce new and 
difficult problems. One such institutional derivative, with which 
other recovery proposals concern themselves, is that of providing 
satisfactory forms of business organization. 

Lone workers in simple societies have no problem of business 
organization. But when many men merge their specialized abilities 
in the production of single items, their agreements become hopelessly 
involved unless the community specifies the forms of organization 
which it will approve or prohibit. In its law, therefore, it does this. 
One form of organization of which the State approves is that of a 
single enterpriser, a second is that of the partnership, a third the 
cooperative, a fourth the corporation. The community also outlines 
the rights and duties, powers an^ privileges, liabilities and exposures 


of the various contributors to organized production. By modifying 
the rights and duties, powers, privileges, etc., which it grants to 
people active under the various forms of organization, the community 
can modify the structure, prevalence, and social repercussions of each 
form. Adoption of intricate structural forms like the modern cor- 
poration — under which stockholders are given limited liability, for 
example — brings forth not only increased engineering efficiency, but 
unforeseen social repercussions such as the concentration of industrial 
control, the divorce of business responsibility from ownership, and 
the existence of business giants which can dominate the price policies 
of entire industries. Several recovery plans are highly critical of 
the current laws which make for forms of organization that 
contribute to such repercussions. 



Another economic mechanism which is made necessary by resort to 
division of labor is one for determining the ratios at which specialized 
products shall exchange. A lone worker in a simple society who 
conceives, directs, and performs each task in its entirety, finds that 
the harder he works and the more ingenious he is, the higher is his 
standard of living. If he consumes less than he produces, he can 
live on the surplus while he constructs capital goods with which to 
improve his efficiency when he returns to the production of consumers' 
goods. At no time is he faced with the problem of justice in deter- 
mining what each of his factors of production — his land site, his 
capital equipment, his entrepreneurial eflfort, his manual labor — con- 
tribute to the value of the finished product. But when many men 
specialize in the production of a single item, then, although the 
specialization increases the rewards for all the specialists, the pro- 
blem arises of devising some way of determining how many units 
of any one product, service, or asset is to exchange for another. How 
much capital is worth a bushel of wheat, how much labor is worth 
a beefsteak, how much lipstick is worth a cigar ? How to determine 
the price of things is a very basic question. In practice the task 
takes the form of devising ways of determining the ratios at which 
goods and services shall exchange for units of whatever the com- 
munity uses as its medium of exchange. Because so many recovery 
proposals aim at fixing or regulating prices directly, a look at the 
machinery upon which they would have to rely is in order. 

By far the most common way of determining price is for the State 
merely to set the broad rules and to let the people work prices out 
among themselves. Under this method, when private enterprisers take 
the initiative in operating a basiness and undertake to pay out money 
for costs— for wages, interest, rent, materials, etc., they arrive at the 
cost sums by making price agreements with the sellers of labor, the 
renters of land, and the lenders of that capital which they themselves 
do not furnish. The prices or exchange ratios arrived at are reached 
by mutual agreement. Each party to the transaction drives as good 
a bargain as he can under the laws and working rules that prevail. 
By thus making voluntary agreements with those who assist him the 
enterpriser gets his goods produced. Having achieved this, he dis- 
poses of his products by driving another set of price bargains with 


the buyers and consumers of his goods. If this second set of price 
agreements is such that the stream of money flowing to him for his 
products is sufficiently larger than the stream flowing away from him 
for his costs, he makes a profit; if smaller, a loss. At the production 
end, price competition with other entrepreneurs in hiring labor, buy- 
ing materials, etc., presumably holds up his cost; at the selling end, 
price competition with other entrepreneurs in the disposal of goods 
presumably holds down his revenues. Every entrepreneur thus pre- 
sumably does business between two millstone regulators of his income 
and outgo streams. Only if they leave him an adequate profit, can he 

Now our State uses two types of mechanism for lowering and rais- 
ing the millstones. One is automatic price competition, the other is 
State regulation. Today our economy depends extensively on price 
competition to control the businessmen's intake and outgo prices. Tha 
State gambles that the "hiring-price competition" among entrepre- 
neurs in their efforts to hire labor, land, and capital will keep their costs 
high ; that in their efforts to dispose of their products the "selling-price 
competition" among them will keep their intake low ; and that, as a con- 
sequence, the profit return within the economy as a whole will never 
be more than just enough to induce businessmen to undertake socially 
desirable enterprise. This reliance on competition to settle prices 
makes the role of the State a very simple one. Foj when the forces 
of competition work as intended, all State interference with the fair- 
ness of prices becomes unnecessary. Everyone bargains and haggles 
with everyone else, and in the process of doing so all goods are dis- 
posed of, all transactions are cleared, all spheres of industrial activity 
are correlated, and all goods are produced in the order of their desir- 
ability as seen by those who have buying power or capital. Once 
the rules of the game are written, the State simply stands by, impar- 
tially enforcing the price agreements arrived at but never injecting its 
own opinion as to what the exchange ratios ought to be. At least 
that is the theory. 

But in recent decades the forces of competition have not worked as 
intended. The laws and rules under which price competition pre- 
sumably took place also nurtured the growth of political and economic 
pressure groups, giant corporations and financial powers which have 
often used their controlling influence to interfere with the normal 
operation of price competition. Most economic groups, it seems, are 
reluctant to accept a competitive price for their produce if they can 
avoid it, because all groups suffer from the competition of one another. 
Moreover, all groups seem impelled to try to establish whatever price 
will assure them of a maximum return ; they seem bent on "adminis- 
tering" their prices whenever they can. Thus in recent decades trade 
associations, labor unions, and corporations have often succeeded in 
eliminating the effects of competition from the prices which concern 
them directly. 

Many students of economics believe that this interference with the 
competitive determination of price is the major cause of depression. 
Those who so believe, propose two types of cures for the situation. 
Several variations of their proposals have been made available to the 
Temporary National Economic Committee. 

^ One type of cure regards flexible competitive prices as being highly 
desirable and seeks to restore price competition by penalizing thosfr 


who interfere with its free play. This type proceeds on the theory 
that if prices are perfectly flexible each increase in technological effi- 
ciency will result in lower prices, expansion of demand, and increased 
use of capital and labor. 

The second type of proposal, which also focuses its attention on 
the price mechanism, holds that our competitive machinery has 
broken down so badly that it cannot be repaired, that our economic 
evolution toward price fixing cannot now be stopped or reversed, 
and that the only feasible alternative is to replace our hypothetically 
competitive prices (which in practice are often privately adminis- 
tered) with prices that are governmentally and "justly" admin- 
istered. This type of proposal recommends that prices be set di- 
rectly or indirectly by authority of the State. Even though many 
sponsors of this type of plan know that when competition is no 
longer relied upon for the determination of price, a State's only 
alternative is the discreticwiary decisions of officials, they are willing 
to have the Government go either into business or into the regula- 
tion of business and to rely on such discretionary control. They 
prefer to depend upon the wisdom, social-mindedness, and business 
acumen of regulatory commissions for the determination of price, 
rather than on the imperfect price competition which prevails at 
present. Many of those who submitted recovery plans recommend- 
ing extensive governmental control over price did not seem to realize, 
however, that by setting both cost prices and selling prices regulatory 
bodies would have control over both the survival of private busi- 
nesses and the distribution of income. Others, however, such as 
those who favor minimum-wage laws, favor governmental regula- 
tion of price for the very reason that business survival and income 
distribution can in that way be the better controlled by the State. 

Certain subsidiary pieces of economic mechanism are made neces- 
sary whenever direct price control is resorted to. One sucli piece 
is the standardization of products. Commodity prices obviously 
do not pertain to abstractions but to definite sizes, shapes, and 
qualities of things. Hence a governmental resort to price control 
on a large scale necessarily calls for governmental machinery for 
standardizing products, as well as for a large and honest administra- 
tive staff cataloging the products. 

Governmental resort to price fixing also makes necessary the 
wholesale definition and classification of business terms. Enforce- 
ing price decisions is not possible without exact definition and 
classification of those goods, services, and activities to w^hich the 
controls pertain. When new spheres of industrial life are placed 
under arithmetical regulation, new definitions and classifications are 
necessarily called for. Enforcement agents must have them to lean 
upon. Yet delimiting and defining spheres of activity is a very 
difficult thing to do logically, since business processes do not take 
place within verbal frameworks. Business proceeds through adapta- 
tion of resources and processes by enterprisers to highly varying 
conditions without any regard whatsoever to how control agents 
might want to classify what they do. Administrative problems of 
increasing difficulty and complexity are thus introduced by central- 
ized price or production control. Nevertheless, many re-eniployment 
plans prefer to face such problems than to rely on competition for 
the determination of prices, values, and incomes. 



Society's search for efficiency through division of labor requires — 
besides the use of a mechanism for setting prices — the use of still 
another economic mechanism, that of money. For money is the 
instrument which makes feasible the exchange of hundreds of thou- 
sands of specialized products among hundreds of thousands of 
specialized producers. Were society not in possession of such an 
instrument, its gains from specialization in production would be 
largely nullified by the losses which would occur from the added 
difficulty of bartering specialized goods and services. Nonetheless, 
the modern exchange mechanism comes in for more criticism by spon- 
sors of recovery proposals than does any other piece of economic 

On April 8,. 1939, the Board of Governors of the Federal Reserve 
System transmitted a statement to the chairmen of the Committees 
on Banking and Currency of both the Senate and House, suggesting 
that appropriate congressional committees or a special joint com- 
mittee make a study of monetary views and proposals in relation 
to one another, both in order to discover the validity of the different 
plans and views and in order to outline objectives by which monetary 
and banking authorities might be guided. In its statement it 
enumerated the following kinds of monetary bills then before Con- 
gress which were seeking legislative action — many of them aiming 
to mcrease the supply of or control over money : ^ 

(1) Those which would remedy the country's economic dif- 

ficulties by the issuance of currency by the Treasury or 
the Federal Reserve banks. 

(2) Those which would retire Government bonds by issuing 

paper money and thus reduce or retire the interest-bearing 
public debt. 

(3) Those which would monetize silver at a high price and add 

silver certificates to the supply of money. 

(4) Those which would impose a stimulus to the use of money 

by placing a penalty on money which is not promptly 

(5) Those which would change the ownership and management 

of the Federal Reserve System. 

(6) Those which would require 100 percent reserves against de- 

mand deposits. 

(7) Those which would establish a new system of banks to supply 

intermediate and long-term capital to small business. 

(8) Those which would discontinue the current silver purchases, 

(9) Those which would establish a fixed price for gold and re- 

introduce gold coins into circulation. 
(10) Those which would not have the Government absorb so much 
of the country's. savings through the sale of its own se- 

Needless to sa}'^, it is necessary, if one is to evaluate various monetary 
proposals and to see how they are related to one another, to review 
carefully the salient features of our exchange mechanism. 

^Federal Reserve Bulletin, May 1939, pp. 363, -364. 


A Meohanisin Perrmtting Income Recipients To Diversify Their De- 
rrmnd for Goods. 

In a monetary economy specialized producers, who have surpluses 
which they wish to trade for other things, exchange them indirectly. 
Usually all products are first exchanged for some one thing of economic 
worth like gold or silver which is easily evaluated, highly imperish- 
able, easily subdivided, and highly compact. That unique thing, 
money, is then in its turn exchanged for the goods and services which 
are most greatly desired. By the roundabout process of comparing 
products with a standard of value, services, commodities, and priv- 
ileges can all be equated with one another and exchanged. The serv- 
ices of men who build steamships and those of the men who rim them, 
the services of men who raise oranges, and those of the men who ad- 
vertise them, can all be equated and exchanged in this way. 

By this means, too, each contributor to the productive process can 
be given, instead of his share of the particular product which he helps 
to create, a quantity of money presumably equal to his share of the 
money sale value of the commodity or service produced. Thisi quan- 
tity of money is put into circulation as wages, salaries, taxes, com- 
missions, royalties, rents, interest, dividends, and profits, and becomes 
the money income of the country. By resort to the instrument of 
money we convert each contributor's share of a particular product into 
the vastly broader opportunity of claiming in the markets diversified 
products of approximately equivalent value. 

A Mechanism Permitting Income Recipients to Postpone Their 
Demand for Goods. 
Modern money, however, does more than this. It gives the holder 
complete freedom in respect not only to what he will take in pay- 
ment but to when he will take it. By making use of the device of 
money, producers of all kinds are given the privilege either of taking 
their reward in the period during which they produce the goods and 
services, or of suspending as long as they please the exercise of their 
right to choose products in settlement of their claims. Inasmuch as 
undue suspension of choice means a piling up of goods, we see one 
arrangement in our economy which helps to make possible the phe- 
nomenon of "idle money'- — the phenoirenon which President Roose- 
velt in his letter of May 16, 1939, specifically requested the chair- 
man of the Temporary National Economic Committee to investi- 

* His letter included the following : 

"In my message to the Congress initiating the work of the Temporary National Economic 
Committee, I had occasion to say that 'idle factories and idle Workers profit no man.* 
It may equally be said that idle dollars profit no man. The present phase of the hearings 
before the committee bear directly upon this problem. 

"It is a matter* of common knowledge that the dollars which the American people save 
each year are not yet finding their way back into productive enterprise in sufiicient volume 
to keep our economic machine turning over at the rate required to bring about full 
employment. We have mastered the technique of creating necessary credit ; we have 
now to deal with the problem of assuring its full use. 

"In the series of hearings which the Securities and Exchange Commission is to hold 
before your commiftee, I take It that a major problem of your committee will be to ascer- 
tain why a large part of our vast reservoir of money and savings have remained idle in 
stagnant pools . . . 

"The hearings before your committee, I hope will assume the task of analyzing the 
financial machine in its relation to the creation of more needed wealth. We know that 
the mechanism can be Improved. Improvement can only be made on a basis of clear 
analysis. Having made that analysis, I hope that your committee will then be able to 
indicate ways by which the machine may be made to function more efficiently." (Hearings 
before the Temporary National Economic Committee, Part 9, Savings and Investment, 
Washington, 1940, p. 3519.) 


Because the majority of sponsors of recovery proposals single out 
"idle money" as one of our major disarrangements (even though they 
disagree widely about what "caused" it, and about how to correct 
it), it is well to examine basically how it manifests itself. In his 
testimony before the Temporary National Economic Committee, 
Ralph W. Manuel, president of the Marquette National Bank of 
Minneapolis, used an illustration that brings out a major disarrange- 
ment which results when money is used tardily for any reason what- 
soever.^ In condensed form the illustration was as follows : 

Let us suppose that a hundred families occupy a completely iso- 
lated island and undertake to raise their potatoes collectively, that 
each family is to receive its share of the crop in proportion to the 
contribution which it makes to the production thereof, and that a 
manager from day to day delivers to each family claim checks 
evidencing the contribution that each has made. When the crop has 
been harvested and a sufficient amount has been put away for seed, 
there might be a thousand bushels of potatoes in the pile and there 
might be a thousand claim checks outstanding. 

If some families have acquired claim checks substantially out of 
proportion to their needs for potatoes, these families may choose to 
present only part of their claim checks and to save the remainder 
for use in some future season. The manager of the enterprise may 
then find that a hundred bushels of potatoes remain uncalled for. 
The less fortunate families will have received their full share of the 
crop, and the more fortunate families will have received all they can 
use; so the enterprise appears to have been a complete success. But 
what about the hundred claim checks that are still outstanding? 
Shall the families who neglected or refused to accept their shares of 
this year's crop be permitted to claim shares of next year's crop in- 
stead, even though their claim checks do not evidence any contribu- 
tion to the production of next year's crop and the whole of that crop 
will b;4ong to those who produce it? 

Manuel concludes that the plan of collective production can func- 
tion only by repudiating, at the beginning of each new season, the 
claim checks that have been issued during previous seasons and have 
not been presented. This principle is not recognized, however, in 
our complicated modern economic scheme. 

In this illustration an issue is raised which is so basic and vital to 
an understanding of all recovery plans related to the monetary mech- 
anism that the writer wishes to consider it at some length. Inasmuch 
as theclaim checks which we use today not only do not depreciate if 
held out of use, but actually increase in value (in terms of goods), 
it is well to examine what we have done to our institutional arrange- 
ments to generate such results. 

Whatever changes have been made in money have represented 
evolutionary efforts to substitute one more efficient medium of ex- 
change for another. Our historical shiftings — from barter to ware- 
house receipts, to gold, to certificates of indebtedness, to deposit cred- 
its, etc. — have all been with a view to helping specialized producers 
exchange their surpluses more easily. But have we in our efforts in- 
advertently built a continuing imperfection into our system which 

•Hearings before the Temporary National Economic Coniraittee, Part 9, pp. 3707, 3708. 


facilitates the disruption of exchange, and through exchange both 
production and distribution? 

Continuity of exchange, full-blast exchange, should probably be 
the ^oal of all recovery efforts. For without it full use of our highly 
specialized facilities is impossible. A pioneer settler who works 
alone, as stated above, finds that the harder he works and the more 
ingenious he is, the higher is his standard of living. The same will 
be true of a second man who settles near by and works independently. 
If there is a division of labor between the two men so that each 
worker specializes on one-half of the budgetary items, then the aver- 
age output of the two men will undoubtedly be larger than before. 
If both men then exchange (that is "spend") their surpluses rapidly 
enough to maintain full-blast activity for each other, the standard of 
living of both will rise because of the specialization. Note, however, 
that in such a situation the standard of living of the two men de- 
pends not only on their efficiency and willingness to produce but 
also on their willingness to exchange or spend. Note that this is so 
whether the number of men involved is 2 or 2,000,000, and whether 
they exchange their surpluses directly or through some money-like 
comjnon denominator of value, such as bushels of wheat or pounds 
of tobacco. 

Notice too that the moment a worker specializes he subjects his 
standard of living to net¥ dangers, for it then depends largely on an 
"effective demand" coming from someone other than himself, and this 
demand may be fickle. When workers specialize, it is a primary requi- 
site for full production that every specialized producer keep offering 
to the markets the surplus of his specialty; also that he be willing, 
not only to accept in payment for his surplus the best offer he can 
get in the markets, but to accept that offer so promptly that neither 
he nor other producers are led to curtail their production in efforts to 
get higher prices. Socially, it is even more important that he accept 
payment promptly than that he personally get a square deal. For, 
when full-blast exchange maintains production and the actual product 
is there, an unfair price only generates an unbalanced distribution 
that might be corrected by taxation; but when exchange is delayed, 
production and the net living standards of the community decline in 
a way beyond repair. 

Even if goods are not bartered directly but are exchanged through 
a neutral commodity which serves as the communitj^'s medium of 
exchange, the shift of buyers and sellers — first into money and theai 
back again into goods — should be so rapid that neither the holder 
of surpluses nor the holder of money is instrumental in causing pro- 
duction to slow down. If holders of money or goods elect to slacken 
their rates of offering in order to get better bids for their holdings, 
they cause some specialized workers to become unemployed. Money 
should properly be a store of value sufficiently stable to enable special- 
ized producers to get from the possession of one kind of product to 
another — say^ from wheat to butter, or from wheat to gold and then 
to butter — without suffering greater losses in the process than they 
would incur if they sat idly by with their own surpluses; but money 
should not be so good a store of value that producers can retire into 
it and stay away from the production process so long as to force other 


Eroducers to ofirer their wares at sacrifice prices in efforts to lure them 
ack into the markets again. 

In a non-monetary community, or in one that uses a perishable com- 
modity like tobacco or grain as its medium of exchange, the money- 
substitute is no better as a store of value than it should be. Continu- 
ous offering and rapid acceptance of offers in such communities is 
insured because the retention of surpluses involves carrying charges, 
deterioration losses, and tax and warehouse charges. With few ex- 
ceptions, nature's products depreciate with time: Fruit spoils, meat 
decays, lumber rots, butter turns rancid. Moreover, most societies 
levy taxes on tangible property in order to maintain the rules of law 
which protect and preserve property. Thus both nature and society 
impose certain incentives which insure that specialized producers offer 
their surpluses in exchange and accept the market bids for them 
rapidly enough to keep themselves and othei-s busy at their specialized 

In modern societies, however, we have inadvertently created through 
our banking machinery a form of economic asset which has no carrying 
charges ; and that asset we use as our medium of exchange. It is there- 
fore possible today for a producer of cotton, steel, personal service, 
shoes, or any other product, to exchange the surplus of his specialty for 
the certificates and records of indebtedness which constitute our pres- 
ent-day claim checks, and then to withdraw from the productive process 
without incurring any carrying charges on theasset that he holds. In 
fact, by selling out his surpluses at a certain price level and withdraw- 
ing from the markets, he can hold idle society's exchange tool, money, 
and can force other specialized producers of tangible wealth, who may 
not have been as agile as himself in "getting liquid," to lower their 
prices in efforts to bait him into releasing his money. As employers 
and employees who were slow in becoming liquid attempt to bait with 
goods and services those who have partly withdrawn from the produc- 
tive process, the price level falls and makes money as an asset still more 
valuable to those who continue to hold it idle or to reduce its rate of 

Il<no the power to postpone demand arose. — A tracing-through of 
our present-day method of creating credit money will enable us to see 
how, in going from barter money to modern credit money, society acci- 
dentally not only removed carrying charges from its medium of ex- 
change but also so altered it that it became adapted to appreciation in 
value when sluggishly used. In order to understand why modern 
money can be sluggishly used with impunity it is necessary to recognize 
two things : (1) that money is a debt instrument — an asset held in the 
form of a debt claim; and (2) that assets held in that form differ in 
a most important particular from assets held in the form of outright 
titles to wealth. 

(1) In our society there is usually a reserve of wealth behind every 
evidence of indebtedness. Titles to houses worth $10,000 frequently 
serve as collateral for $1,000 mortgages ; factory facilities worth $5,000,- 
000 frequently "secure" $1,000,000 bond issues; $1,000,000 enterprises 
frequently secure the $50,000 notes of bank borrowers. Now it happens 
that our "dollars" — the paper and deposit dollars which together con- 
stitute our medium of exchange — are assets of the type which have 
their values fortified with reserves of wealth. For dollars are brought 
intb being by banks when they transmute into demand obligations 


against themselves the obligations of bank borrowers who fortify their 
debts with reserves -of wealth. 

Businessmen and farmers could conceivably use their own obliga- 
tions as mediums of exchange without first converting them into de- 
mand-deposit equivalents. A wheat farmer, for example, could write 
on a piece of paper "I promise to deliver to bearer 100 bushels of wheat 
in 180 days," and that promise — backed as it would be ^^ith the value of 
his crops, barns, etc. — would have value in the community. The insti- 
tution of contract gives exchange value to such promises. But in order 
to make his promise into a better exchange instrument the farmer elects 
to state his obligation as a promise to deliver dollars in 180 days instead 
of wheat, the product for which he expects to obtain the promised 
dollai-s. He knows tha,t if he puts the obligations against himself into 
dollar form, he can for a fee exchange them for the dollar obligations 
of the bank. He knows that by using the buying power of the already 
created deposit dollars as a gauge of the value of the debt which he 
offers for conversion (formerly he used the value of gold as his gauge) 
he and the banker can transmute private debt into bank debt. Today 
it is by making such exchanges that businessmen create new money. 

(2) Mortgages, bonds, and notes do not fall far in value when 
demand and industrial activity decline so long as the contraction in 
demand does not decrease the dollar value of the wealth assets behind 
these forms of indebtedness below the face value of the debt cer- 
tificates themselves. If you, for example, own a $1,000 mortgage 
against a house that was worth $10,000 at the time of the loan, your 
asset is relatively stable in value so long as the fluctuating market 
value of the house, the security behind the borrower's obligation to 
you, exceeds the value of your claim. If the value of the house falls 
to $8,000, reducing the owner's equity in it to $7,000, your asset will 
probably still be worth $1,000 because of the reserve of wealth behind 
your claim. 

Observe also that the note, mortgage, and bond obligations which 
borrowers transmute into money always have collateral behind them, 
and that the deposit dollars which the banks create against bor- 
rowers' debt obligations are exactly as immune to depreciation as 
the collateral against which the deposit dollars are minted. Thus 
"debt assets" — Rke bonds, mortgages, and deposit dollars — differ 
fundamentally from "wealth assets" — like homes, automobiles, and 
radios. The monetary value of a "wealth asset" fluctuates widely; 
the monetary value of a "debt asset" on the other hand is relatively 
stable because it is fortified with a reserve of wealth. This means 
that modern credit money — because it represents an insured claim — 
is intrinsically an asset with a valuable characteristic which "wealth 
assets" do not possess. 

This review of the nature of monej' repriesents the writer's own 
views which he elaborated much further in his When Capital Goes 
on Strike.* The review provides a link which he felt necessary for 
the synthesizing of recovery plans.^ It brings out that deposit dol- 

* Harper & Bros., New York, 1938. 

^ Some economists, however, hold to a different view. Stuart Chase, for example (In 
The New Republic, December 18, 1935, vol. 85, p. 162), says: "For a long time the tradi- 
tion lingered that money, being tied to gold, had intrinsic value. With the world-wide 
abandonment of the gold standard, it is now generally agreed that money is not worth 
anything in itself ; it is simply a useful convention, a game we play." Today there are 
recovery proposals based on this diametrically opposite view as well °as on the view 
outline above. 


lars which are created for borrowers and disbursed by them for 
materials, wages, salaries, rent, etc., are not likely to decline in value 
if tardily used by their recipients. No carrying charges are placed 
on the money distributed, with the result that the recipients are 
privileged, under vhe particular mechanism of money and banking 
that we employ, to hold the money received indefinitely. They are 
privileged to hold without carrying charges as one of their life 
savings an' asset which was created to serve merely as a medium of 
exchange. Money received in 1 year, recipients are privileged to 
spend slowly over a period of many years. They are privileged to 
lower its rate of use despite the fact that, as above indicated, our 
economic system automatically generates falling prices, lower values, 
closed factories, insolvencies, and unemployment when money is 
tardily used. There is today no device in our monetary mechanism 
which insures that money be respent at the same rate at which it is 
disbursed by the men who were instrumental in creating it. 

Thus, because they are in the form of debt and as a result are 
fortified with reserves of wealth, present day claim checks, which 
were originally designed by potato-raising society only to facilitate 
exchange, are also adapted to forestall exchange and production 
itself. Institutional arrangements which provide us with such claim 
checks, or which permit the non-use of such claim checks, are among 
the major arrangements which proponents of recovery proposals wish 
to change. No central theme is more generally adhered to by sup- 
porters of recovery poposals than that the idleness of money must 
be overcome in some way if depression is to be eliminated. Whether 
their proposals aim at flexible prices. Government spending, "restor- 
ation of confidence," or something else, they agree surprisingly well 
on the view that money must be kept moving. 

Historic uncoTwem with the aggregate demand fimction. — In gen- 
eral, economists have come to recognize that when owners of dollars 
hurry to exchange them for goods, demand increases and production 
booms ; that when holders of goods hurry to get dollars, demand de- 
clines, prices fall, and output shrinks. Today economists recognize 
that when goods are deemed the more valuable, w^e have booms ; when 
dollars, depression. Many of them consequently advance recovery 
proposals of one form or another which are designed to increase the 
dollar demand for goods. This is, however, a new and revolutionary 
concern for economists. Although they have historically concerned 
themselves with repercussions which result from fluctuations in de- 
mand for particular commodities, they have almost always concur- 
rently assumed in their theory that stability automatically prevailed 
in the aggregate monetary demand for goods. That was Say's "law." 
Few of them regarded declines in aggregate demand as reflecting a 
decreased rate of use of money, and none observed that it resulted from 
the institutional removal of carrying charges from the medium of 
exchange. In fact, many of them specifically argued that money as 
an exchange instrument was a neutral tool which of itself would cause 
no serious derangement of the level of production. As a group they 
had accepted Say's and Ricardo's view that, even though -monetary 


demand were left uncontrolled, it would never be seriously lacking. 
As John Maynard Keynes says : 

The idea that we can safely neglect the aggregate demand function is funda- 
mental to the Ricardian economics, which underlie what we have been taught for 
more than a century. Maithus, indeed, had vehemently opposed Ricardo's doctrine 
that it was impossible for effective demand to be deficient ; but vainly. For, since 
Maithus was unable to explain clearly (apart from an appeal to the facts of 
common observation) how and why effective demand could be deficient or exces- 
sive, he failed to furnish an alternative construction; and Ricardo conquered 
England as completely as the Holy Inquisition conquered Spain. Not only was 
his theory accepted by the city, by statesmen, and by the academic world, but 
controversy ceased ; the other point of view completely disappeared ; it ceased to be 
discussed. The great puzzle of effective demand with which Maithus had 
wrestled vanished from economic literature. You will not find it mentioned once 
even in the whole works of Marshall, Edgeworth, and Professor Pigou, from 
whose hands the classical theory has received its most mature embodiment.' It 
could only live on furtively, below the surface, in the underworlds of Karl Marx, 
Silvio Gesell, or Major Douglas." 

It is the writer's opinion that the causal relationship between the 
inadequate demand for goods and the accidental institutional removal 
of carrying charges from the medium of exchange, a relationship 
which even Keynes ignores, is the missing link of economic theory. 
However, even though economists have not as yet discussed how the 
evolution of money into its modern form has operated to give hoarding 
opportunities to holders of money, they do admit today the fact of 
hoarding, the inadequate rate of use of money. Recovery proposals 
before the world today, consequently, indicate that the unconcern with 
aggregate demand is slowly disappearing. A host of extant monetary 
proposals, now to be reviewed, will make that clear. It will be pos- 
sible to consider in detail only the proposals aiming to correct the 
serious deficiencies in the exchange mechanism. 

• J. M. Keynes, General Theory of Employment, Interests and Money : Harcourt, Brace 
& Co., New York, 1936, p. 32. 





For full-blast operation of our industrial system it is necessary 
that claims to current production be exercised as rapidly as goods 
are produced. In the aggregate, recipients of money claims must 
turn around and release them at the same rate at which they 
receive them or depression will ensue. ( 1 ) Money must be kept mov- 
ing at the rate at which it is disbursed by the men instrumental in 
creating it through bank borrowing. Or, (2) if this requirement is 
not met, then, to avoid falling prices and unemployment, a new and 
balancing quantity of purchasing power must be injected into the 

The two requirements for full operation just cited are theoretical 
alternatives, and logically enough each has called forth a broad type 
of monetary proposal with many subtypes. One oi the broad types 
wants the Government to undertake the difficult task of insuring 
that recipients of money themselves use their money at an adequate 
rate. Tax concessions, tax pressures, official reassurances, pleadings, 
and "confidence"-instilling legislation are among the means suggested 
for getting the desired spending behavior. The other broad type 
of proposal wants the Government to undertake the task — also diffi- 
cult — of introducing into the markets from time to time new quan- 
tities of purchasing power to offset the deficiencies in spending which 
result when the money claims derived from the normal processes of 
production are sluggishly used. Both approaches posit that the 
crying need of present-day governmeutal policy is an institution- 
alized control over spending (with "spending" used to mean 9utlays 
for either consumption or investment goods). The first approach 
seeks primarily to activate or systematically control the velocity of 
money; the second, the supply of money. Because in practice gov- 
ernments which experience depression have done almost nothing' 
about the first approach, because practically all of them have used 
the second approach to some degree, and because there are far more 
variations of this second type of recovery prosposal than of any 
other, it is well to survey it first. 

These plans take many forms. Throughout the depression there 
have been those who advocated that the Government gather in slug- 
gishly used money by taxation and substitute itself as the spender 
until private money-holders are induced by its action to spend again 
in a satisfactory fashion. Others have advocated that the Govern- 
ment borrow and spend only a limited sum to reach a limited goal. 
Still others have wanted the Government to borrow all the laggard 


money and spend it until full production is reached. Many other 
variations exist. They revolve around the following sets of prob- 
lems (which all necessarily arise when it is proposed to utilize the 
compensatory-spendinff technique' to a degree such that all employ- 
able workers are absorbed) : 

1. How much money shall the Government borrow or otherwise 

gather in and spend ? What theoretical considerations de- 
termine the limits ? 

2. How shall the Government obtain whatever funds it needs? 

Should new money be created through bank borrowing? 
Should old money be borrowed at interest or not? Or 
should money be obtained through higher taxation on the 
upper-income groups? 

3. How shall the Government repay borrowed funds? And 

when should it repay them ? Or should it never repay 
the debts at all ? 

4. For what should the money obtained be disbursed ? Should it 

be passed out in direct relief? And if so, to whom should 
it be given? What criteria should govern? Should the 
money be spent primarily ior capital goods? Or for con- 
serv'ation of our social and natural resources? Should it be 
disbursed through small loans to businessmen, or through 
small loans to residential builders? Should it be disbursed 
for an armament boom, or for public buildings and roads? 
Or only for self-liquidating projects of a type and size which 
private industry cannot handle? 

5. How shall prices be held down when Government disburse- 

ments absorb the unemployed and the competition for labor 
shifts both labor costs and the price level? Should prices 
be allowed to find their own level ? Should direct price con- 
trol be resorted to, as in Germany ? Or, in the effort to hold 
down prices, should industrial activity itself be curtailed by 
raising reserve requirements, changing the rediscount rate, 
and resorting to open market operations? 


Four major types of reemployment plans which would have the Gov- 
ernment offset deficiencies in private spending by injection of funds 
obtained by borrowing, will be considered : (1) "Pump-priming" pro- 
posals; (2) Government-sponsored lending to private groups or indi- 
viduals who will start the funds moving; (3) Government spending 
for relief; and (4) systematic compensatory spending of a capital- 
investment nature to offset deficiencies in private spending. 

"pump-priming" PR0P08AI.S 

The "pump-priming" version of the compensatory-spending tech- 
nique, of which J. M. Keynes has been a strong advocate,^ proposes 

^ In an "open letter" to President Roosevelt on Dec. 30 ,1933, Keynes wrote as follows : 
"As the prime mover In the first stage of the technique of recovery, I lay overwhelming 
emphasis on the increase of national purchasing power resulting from governmental 
expenditure which is financed by loans and Is not merely a transfer through taxation 
from existing Incomes. Nothing else counts In comparison with this. • • * In a 
slump governmental loan expenditure is the only sure means of obtaining quickly a rising 
output at rising prices." (N. Y. Times, Dec. 31, 1933, VIII, p. 2, col. 2.) 


that in periods of depression the Government borrow — in return for 
interest-bearing bonds — those claim checks which private individuals 
do not pour back into the income stream of the Nation as rapidly as 
they receive them. These borrowed claim checks are then to be 
diverted into public works activity. Regardless of the level of busi- 
ness activity at which the pump-priming process begins, additional 
production, employment, and profits can be generated if the opera- 
tion is carried out on large enough scale. And pump-priming advo- 
cates do propose to carry it on until profit margins and price trends 
turn upward and instill in businessmen a double incentive to expand 
their own capital-goods activity. When capital investments have 
been thus activated, the priming is to be discontinued, additional tax 
revenues are to be collected (at no increased rates of taxation), and 
the bonds against which the money was borrowed are to be retired 

Except for a short period in 1937, the pump-priming teclinique has 
been a major recovery tool of the United States Government for the 
past 6 years. From 1933 to 1937 the Government borrowed money 
against new debt and diverted it to willing spenders to such an extent 
that industrial activity was sharply expanded and unemployment cut 
from about 15 million to 7 million. However, in late 1936 and early 
1937, when rising industrial activity began to induce laggard holders 
of claim checks to use their money in making new investments and 
the price level began to rise, the Government reduced its borrowing 
drastically. It reduced its public works activity, announced a budget- 
balancing policy, and for a few months, with the help of new social 
security taxes, practically balanced its budget. 

If we recognize that, to obtain desired results with the pump-prim- 
ing technique, the size of Government expenditures must vary widely — 
depending greatly on whether the trend of new orders in private in- 
dustry for consumers' goods and capital goods is headed up or down — 
there is good reason to believe that pump-priming can, if enough 
water is used, stimulate private industry to higher levels of activity. 
A major criticism of the technique, however, is that it makes no 
basic improvements in the rules of the game — no change in the design 
of an economic engine which has demonstrated that it generates de- 
pression. Pump-priming calls for only administrative adjustments. 
It is, moreover, inherently unable to generate full employment: it 
merely proposes to induce additional activity by inaugurating a period 
of rising profits and prices and then to stop whenever private industry 
takes hold, regardless of how far short of full production the level 
of activity may be at the time. Unless those economic maladjustments 
which caused the depression in the first place, and which pump-prim- 
ing was invoked to cure, have on the whole been corrected, it is ques- 
tionable whether private spending will continue long at the higher, 
induced level after Government support has been withdrawn. 

It is also questionable whether tax revenues likely to be obtained 
during the induced periods of recovery will be adequate to retire the 
funds used for priming the pump.^ Too, it is very unlikely that 
added tax burdens levied for debt-retirement purposes will be placed 
only, or even primarily, on the unused incomes of those who gener- 

2 The proper point of transition between injection of purchasing po^er and the heavier 
taxation necessary to pay off the debt incurred is exceedingly difficult to determine ; and 
if the pump-priming period is too prolonged, retirement of the debt in the ensuing period 
is made increasingly difficult. 


ated the depression by using their mone.y too sluggishly. More likely 
is it that it will fall on the recipients of current income, whoever they 
may be. In 1937, for example, when Government spending was re- 
duced and a budget-balancing policy announced, the new taxes im- 
posed were levied not on the unspent incomes of laggard spenders 
but — ^in the form of social security taxes — on employers and employees. 

The ''Deane Plcm:' 

A reemployment plan, empirical and rather hybrid in design but of 
the compensatory-spending, pump-priming type, is the rather well- 
known "Deane Plan." ^ In periods of depression this plan would gov- 
ernment ally divert to unemployed and partially employed workers tax 
revenues collected from workers and employers durmg periods of rela- 
tive prosperity. To initiate the scheme during depression the Gov- 
ernment would resort to borrowing, these loans to be retired later 
from the tax collections. The plan would make eligible for benefits 
and taxes all workers, employed or unemployed, in all industries — 
except agriculture and personal service, whose average earnings were 
less than $60 per week during the previous year. The plan would 
divide the country into regions and be administered regionally. 

At the close of every month the average weekly hours of employ- 
ment of all "eligibles" in each region would be computed. This would 
give a "regional average" — 35 hours per week, for example. At the 
close of every year the average weekly hours of employment of all 
eligibles in the country for the past 10 years would be computed. This 
would be called the '^national average." 

Wlienever an eligible works fewer hours during a week than the 
regional average, he would receive additional income from a reserve 
fund which would have been provided. His extra compensation 
would be equal to 50 percent of the additional amount he would have 
received had he worked the full regional time. Should his working 
week also fall short of the national average, he would receive an 
additional sum equal to 50 percent of what he would have earned in 
the number of hours by which his working week is short of the 
national average. 

If the employer works his men more hours per week than the 
regional average, then both the worker and the employer contribute 
to the reserve fund a sum equal to 25 percent of the worker's hourly 
wage multiplied by the number of hours worked in excess of the 
regional average. Similarly, both the eligible and his employer pay 
a tax equal to 25 percent of the hourly wage for each hour worked 
above the national average.* The employer would be responsible for 
deducting the tax from the worker's pay and transmitting it with his 
own contribution to the collector of internal revenue, who, under the 
plan, is entrusted with the handling of the funds. 

Under t^ese provisions for building up the reserve fund, particu- 
larly the taxes effective whenever the working week exceeds the 10- 
year national average, it is obvious that contributions often would be 
made at times when unemployment is severe. The authors realized 
that it would be difficult to initiate the program during depression, 
and so — in lieu of funds obtained through taxes — they proposed, as 

"Albert L. Deane and H. Kittredge Norton, The Deane Plan (New York), lfl33. 
* Ibid, pp. 26, 27. 

273442— 41— No. 25 3 


an initial source of revenue, that the Government borrow a maximum 
of $3,500,000,000.^ These funds would be used for payments to 
eligibles on the basis outlined above, and the loans would be repaid 
from the reserve fund. 

Inasmuch as the building up of the initial reserve fund by taxation 
would be deflationary during depression and provision therefore had 
to be made for obtaining funds by borrowing, the only part of the 
proposal which has significance as a recovery plan is thfe suggestion 
to prime the pump in a unique manner with Government subsidies. 
Disbursing $3,500,000,000 would prime the pump even better than the 
"soldiers' bonus" primed it, but the Deane Plan as such introduces no 
new force or formula which would operate to keep business going 
once it was accelerated. 

As a long-run plan to smooth out the business cycle, the plan is 
empirical and unintegrated. It mi^ht help to even out the weekly 
income of workers, and by smoothing purchasing po^ver over the 
cycle it might tend to flatten it somewhat; but this would no doubt 
be achieved only at unreasonabl}^ low level of average wages, pur- 
chasing power, and business activity. 


Of the "compensatory-spending" type of recovery proposal there 
is a second variety : extension or sponsorship of loans by the Govern- 
ment. This plan likewise is not inherently adapted to generation of 
full employment but only to relief by administrative adjustment. 
This variety has subtypes which derive from the different groups to 
whom it is proposed to lend money. Some of the subtypes propose 
to lend money to small business men; some to "consumers," home 
builders, or farmers; some to banks and insurance companies; some 
to railroads, etc. Some propose to lend directly through a loan 
agency of the Government money obtained from private savers in 
return for interest-bearing obligations; others propose to have the 
Government merely insure loans made by banks to governmentally 
designated business groups. The United States Government already 
has set up about a dozen lending agencies, and has lent about 
$12,000,000,000. The Reconstruction Finance Corporation alone has 
lent since 1931 over $7,000,000,000.^ Many people propose to extend 
the scale of such loans as a recovery measure. 

Direct Govenvment Loans. 

Consumer credit loans, for example, are proposed by Maxwell C. 
Katz.^ He would have the Government make loans to employed 
workers in sums equal to five times their weekly earnings. The loans 
would be in the form of merchandise-credit certificates, would carry 
3 percent interest and would be repaid at the rat-e of 2 percent per 
week. Katz argues that money offered at such rates would induce 
the majority of American workers to take advantage of the offer 
and lead to the borrowing of from two to three billion dollars, also 

» Ibid, pp. 47, 48. 

« Quarteilv Report of Reconstruction Finance Corporation (Quarter ending September 
30, 1839), 1940, Table 1, p. 9. 
' ♦ Address : 120 Broadway, New York. 


that the rapid spending of such a large amount of otherwise stagnant 
money would provide a strong stimulus to business. 

Robert C. Barnstone ^ proposes that all "small businessmen" be 
granted loans of a minimum of $100 per year, and that the loans 
be increased annually for 10 years if the business and repayment 
performance of the borrowers is satisfactory. He would have the 
Post Office Department of the Government act as the agency which 
investigates the borrower and handles the loan. 

Government Insurance of Private Loans. 

Of the many proposals currently before the public which call for 
Government-sponsored loans to business groups, the best-known one 
is probably the "Mead bill," which was widely discussed during the 
Seventy-fifth Congress, The bill was sponsored by Senator James M. 
Mead, of New York State, and endorsed by Assistant Secretary of 
State A. A. Berle, Jr., Chairman Jerome N. Frank, of the Securities 
and Exchange Commission, and Chairman Marriner S. Eccles, of the 
Federal Reserve Board. 

The Mead bill would have the Reconstruction Finance Corporation 
insure loans which banks make to small business. The Government 
would insure the last 90 percent of each loan, and have the banks 
risk the first 10 percent as an incentive to them to use good judgment 
in the making of loans. The Government would charge an insurance 
fee against business failure by the borrowers, and would stipulate 
that the banks in their turn could not charge, in addition to the 
insurance fee, over 4-percent interest on the money lent. Loans 
would be made for from 1 to 10 years, so that many of them would 
be in the nature of capital loans. Up to $1,000,000 could be lent. 
To provide for their liquidity the Federal Reserve would accept the 
loans as eligible for rediscount. 

Inasmuch as United States Government lending agencies have been 
fairly successful as bankers (only two agencies, the Home Owners 
Loan Corporation and the Regional Agricultural Credit Corpora- 
tions, show deficits), inasmuch as an insurance premium on loans 
is charged which is based on the past rate of business failure, and 
inasmuch as means are to be provided for preventing banks from 
insuring only their sour loans, it may well be that adoption of the 
Mead bill would lead to a wholesome increase in the use of funds by 
small business. Especially is this true if our present banking ma- 
chinery in itself makes it unduly difficult for small businessmen to 

Since the economic system has no monetary machinery which 
insures that those who save money out of current income themselves 
lend it to consumers or businessmen, or that they use it for capital 
investment^ more employment and production is at least temporarily 
insured by some form of Government-lending program than by doing 
nothing about diverting money savings to users in increased quanti- 
ties. The policy simply purchases activity at the expense of addi- 
tional direct or contingent Government debt. Such procedure 
means, however, that — unless the continuous growth of the Federal 

* Address: 21 Maiden Lane, New York. 


debt is viewed as of no consequence— the proposal to use Government- 
sponsored loans as a support to business activity is an ameliorative 
rather than a corrective proposal. 
Government Loans to Sujyport Debt Structures. 

The plan to use Government loans to support existing debt struc- 
tures, rather than to assist borrowers who themselves wish to use the 
idle funds for buying industry's current goods and services, is still 
another version of the Government "spending-lending" proposal. 
Under this plan the Government would borrow at interest the slug- 
gishly used funds of people with money savings and divert them to 
those large industrial and financial enterprises whose failures would 
bring losses to large numbers of relatively poor people. At the time 
of the bank holiday in 19^3 the debt structures of banks, insurance 
companies, and railroads were heavily -supported by Government 
loans. Soch aid has continued in some degree ever since. Some 
people recommend as a recovery measure an expansion in Govern- 
ment loans to support not only the solvency of industrial and finan- 
cial organizations but also that of farmers and home owners. In 
order to judge the merits of a proposal which aims at recovery by 
forestalling insolvency, it is necessary to examine further the nature 
of debt. 

Debt represents in modern society a peculiar kind of contractual 
arrangement which society both permits and enforces. The making 
of debt agreements in business permits parties to such transactions 
to place most of the risk of a business venture on one party to the 
agreement and to remove it from the other. To illustrate: If two 
brothers each invest $50,000 in a business venture, the state permits 
them to arrange between themselves, first that the contribution of on© 
brother shall be regarded as "share capital" and shall receive a return 
only if the business earns a profit, and secondly that the contribution 
of the other brother shall be regarded as "fixed capital" and shall 
receive a definite, limited return from the venture, even if the business 
loses money and it is necessaiy to pay this return out of the share 
capital which was put up by the first brother. 

It seems reasonable that a state should be interested in using its 
control machinery to insure that money savings which are not spent 
for consumption goods be spent inamediately for capital goods. The 
over-all requirement, that money savings be exchanged promptly for 
physical savings regardless of how spenders apportion the risks among 
themselves, would seem to be a logical concern of government. But, aa 
it is, the state concerns itself more with how those who do invest 
apportion the risks among themselves. First the state permits agree- 
ments to be made between cooperating investors to the effect that the 
assets of one party to a transaction are to insure the value of the 
assets of the other. Then, if recipients of claim checks to current 
production withhold their demand from the markets so extensively 
that commodity prices, production levels, business profits, and capital 
values decline to the point that even the capital of stockholders does 
not suffice to meet the contractual claims of bondholders, the state uses 
ail appreciable part of its court machinery to assist bondholders in 
liquidating enterprises. Such liquidation, with its reshuffling of own- 


ership and management, is itself disruptive of production and 

Althougli as H. F. Stoke * says, a state could have capitalism in all 
its pristine purity if it permitted the existence of only share capital 
and forbade the existence of fixed capital, it chooses to support ar- 
rangements of questionable value which concern themselves largely 
with the apportionment of individual risk. Now that the invention 
of the corporate form of business organization enables money savers 
to diversify their investments and reduce their risks, it might not be 
necessary for the state to provide savers with the fixed-debt form of 
contract which brings about disruption of business whenever money 
receivers unduly withhold their money from the markets. All busi- 
nesses might use corporate structures like those employed today by 
our large automobile companies rather than like those used by our 
railroads. Later we shall review proposals which recommend as a 
recovery measure the partial elimination of bonds and mortgages from 
the business structure. Here we are concerned with the merits of 
Government loans to support the solvency of corporations and indi- 
viduals whose earnings do not suffice to pay interest on borrowed 

If a government borrows the savings of income receivers who use 
their money sluggishly, and in the form of loans diverts these savings 
to corporations whose solvency is endangered by the sluggish use of 
the money, solvency can be protected indefinitely. Receiverships and 
foreclosures can be prevented, but contingent national debt will rise. 
Moreover, since government cannot know when income receivers who 
save will again be disposed to re-spend their money as rapidly as they 
receive it, it can have no assurance that its lending policy provides 
more than temporary relief. Its support of imperiled investments 
might have to go on indefinitely. If the' government is bent on pro- 
tecting the solvency of borrowers or the investments of creditors, it 
may well discover that it has embar^ked on the long road of either 
converting private debt into public debt or augmenting private debt 
with public debt. 

In theory, government support of private capital structures through 
loans might be advisable at certain times. During the trough stage of 
a business cycle — for example, when prolonged industrial stagnation 
probably has through obsolescence, depreciation, and technological 
advance reshaped the situation so that investment opportunities have 
again arisen, and the stampede for liquidity irrationally continues, 
nonetheless, security values may be below the levels which current 
business activity justifies. In this case government support of capital 
structures may be desirable. At such times government support of debt 
structures would ease appreciably the pressure on security markets, and 
in that way forestall many liquidations until private spending again 
expands business earnings. In practice, of course, it would be difficult 
to know when the particular stage of the depression indicated was at 
hand. Government aid in 1929, for example, would, in retrospect, have 
been advanced too soon. Perhaps aid in 1930 and 1931 would also have 
been too soon. At best there are no criteria by which to determine the 

•Address: 1420 Watts Ave., Roanoke, Va. 


proper time for supporting corporate solvency with government loans, 
or for determining how much aid should be extended. 


Many of the plans which support government spending and lending 
as a recovery measure set no theoretical limits to the amount of spend- 
ing recommended. The criteria imj)lied are public need and expedi- 
ency. The Federal Emergency Relief Administration, for example, 
seemed to have as the basis of its operations no theory of monetary 
balance. The needy unemployed existed, and the F. E. R. A. simply 
sought to borrow enough funds to help them. Sociological criteria 
sufficed. Plans with similar criteria are those which recommend help- 
ing not only the distressed unemployed but the blind, the aged, widows 
with children, and so forth. Our current system of Federal, State, 
and local public relief is of this kind. 

Similar plans are those which call for government subsidies of bor- 
rowed funds to selected groups of consumers. The soldiers' bonus 
subsidy of approximately $2,000,000,000 voted in 1936 was such a plan. 
So is the plan of Mrs. Ruth Hall Chatfield ^° which proposes that a 
Federal subsidy be granted to mothers for each baby born to them. 
Government subsidies, if made on a large enough scale, can undoubt- 
edly generate increased business activity. But difficult problems arise. 
How large can the outlays be without causing pronounced increases in 
the price level? How shall the Government select the groups to be 
subsidized? How determine the amount to be awarded? Only the 
latter issues will be touched on here ; the former will be discussed under 
another heading. 

The equitable and efficient rationing of borrowed monev by political 
representatives is a tremendously difficult problem. Should Negroes 
be given as much money as the whites ? Should carpenters be given as 
much as white-collar workers, or more? Civilians as much as war 
veterans ? City residents as much as country folk ? People in Alabama 
as much as people in New York ? Bachelors as much as mothers ? Or- 
phans as much as people over 65? Few criteria other than political 
pressures tend to prevail. Those people who build up the strongest 
pressure-groups are usually treated best; the unorganizable, worst. A 
democratic government by its very nature has poor machinery for 
administratively dispensing purchasing poAver in "just" proportions. 


The particular version of the compensatory-spending technique 
which seems to receive the widest academic support is that which rec- 
ommends that government borrowing and spending proceed on such 
a scale that the spending deficiency resulting from the tardy use of 
money handed out in normal production will be completely offset. 
Men who advance such compensatory-spending views are Prof. Alvin 
H. Hansen, Prof. Arthur W. Marget, Marriner S. Eccles, Lauchlin 
Currie, "Seven Harvard and Tufts Economists," Stuart Chase, A. A. 
Berle, Jr., and others. AH these men are advocates, not of sporadic 
pump-priming efforts, but of systematic, continuous, and long-range 

" Address : Baldwin, New York. 


coordination of governmental activities with private business. Among 
the theoretical bases advanced for their views are those that follow : 
(1) High capital-goods production is in itself necessary for pros- 
perity; since prosperity does not exist, the Government should pro- 
vide for capital-goods production out of borrowed savings. (2) 
Adequate investment outlets do not exist today in private industry 
and, since money cannot be invested without outlets, the Govern- 
ment should provide them. (3) Money savings should be promptly 
converted into physical savings such as public or private works, 
and since savings currently are not being adequately converted into 
private works, they should be converted into public works. (4) 
There are many kinds of worth while activity, such as soil conserva- 
tion, highway construction, bridge building, reforestation, and health 
conservation, in which private individuals and corporations cannot 
feasibly engage but which the State can undertake. Note that all 
of these theoretical bases provide for activity in the field of capital 
investrrient. The virtue of practically all proposals for ^stematic 
compensatory-spending is that they are tied by their sponsors to the 
"problem of savings" and, therefore, are theoretically more integrated 
than other types of Government-spending proposals. 

Basis of Spending: High Capital-Goods Activity necessary for 


The first argument — that prosperity cannot exist without great 
activity in the capital-goods industries — is supported by Professor 
Hansen, among others, who says : "It is the margin of income which 
is created by tlie capital-goods industries that fills the gap between 
prosperity and depression. No high level of employment and income 
has ever been achieved without a large outlay on plant equipment 
and new construction." " Many businessmen support a similar view. 
The Bulletin of the National City Bank of New York (June 1939, 
p. 62), for example, says: "Business analysts of all schools have 
agreed that the primary cause of unemployment is subnormal capital- 
goods activity, although the conclusions that they have drawn from 
the thesis have differed widely." Properly to examine the view that 
additional capital-goods activity must be provided for, even if it 
is necessary to engage in Government borrowing to do so, requires 
a look at the nature of savings. 

In an economic sense "savings" are wealth items, actual stuff, 
desirable products of mankind's labor. In the financial sense, how- 
ever, "savings" are claims to wealth, slices of money income, which 
have not been exercised for the purchase of consumption goods. In 
business-cycle theory economists usually use the term in the financial 
sense. "Investment must equal savings," is a cliche in point. In a 
statement before the Temporary National Economic Committee. 
Lauchlin Currie said, "The most commonly accepted definition oi 
saving, as applied to the Nation as a whole, is that it is the differ- 
ence between the national income and the amount spent out of that 
income on consumption." ^^ 

In the United States, income groups who have annual incomes of 
less than $3,000 per year accumulate in the aggregate practically 

"Testimony In Hearings before the Temporary National Economic Committee, Part 9, 
p. 3498. 

" Hearings before the Temporary National Economic Committee, Part 9, p. 3522. 


no money savings.^^ - Stuart Chase cites the Brookings Institution 
as authority for the data that of $15,000,000,000 of sayings in 1929, 
$13,000,000,000 accrued to 10 percent of the population, and that 
60,000 families at the top of the income scale saved as much money 
as the 25,000,000 fapiilies at the bottom.^* People in. the lower- 
income groups are forced to spend practically their entire incomes 
on- consumption goods. Those with the largest incomes and savings 
spend only a relatively little that way. By investing the remainder 
they spend it for plant and equipment in periods of boom ; but they 
hold it idle in periods of depression. Business analysts who advo- 
cate expansion of the capital-goods industries as the best path to 
recovery reason that, since money savers insist on spending their 
savings for plant and equipment or for nothing at all, the thing 
to do is to stimulate the capital-goods industries. If necessary they 
even want the Government to borrow the savings at interest and 
itself divert them into the capital-goods industries. 

Even in 1929, the Brookings Institution reported the country's pro- 
ductive capacity in all lines was excessive.^^ To maintain, therefore, 
as one group of. analysts has been doing for a whole decade — a decade 
in which we probably were not using over 75 percent of our already 
existing facilities — that the crying need was for more activity in the 
capital-goods field, is rather illogical on the face of it. No astronomer 
looking at us from Mars would agree with the contention. A priori 
it seems illogical that a society which already has excessive productive 
capacity should divert its laggard purchasing power into still more 
plant. A nation's income, including its money savings, must be 
promptly spent ; that is a primary requirement. But it does not follow 
that idle money must move into the channel of investment. It is 
enough for full employment that the money move into any tiling, 
consumption goods or investment goods. And on sociological grounds 
it is perhaps more desirable that society should direct laggard pur- 
chasing power into consumer channels than into investment goods. 

Writing to the T. N. E. C, Harris K. Randall ^^ stated the situation 
this way : "Tlie long-time need of increasing the national wealth by 
the saving of income and the investing of it in productive goods, so as 
to increase our national capacity for producing consumer goods * * * 
affects unemployment only indirectly, and is not now particularly crit- 
ical; our present productive capacity is far from being fully utilized, 
and labor-saving invention has flourished during the depression, help- 
ing greatly to compensate for falling off in production of capital 
goods. The current highly critical need is for more active buying of 
goods and services, regardless of whether the goods are for present or 
future consumption. This is the unemployment problem that has 
plagued us for 9 years, and it has little to do with 'saving' or 

This monograph brought out on page 15 that in a world of special- 
ized workers it is essential in order to maintain full employment that 
producers keep offering their surpluses — or the money they receive 
for their surpluses — to the markets as rapidly as they produce their 

"Based on 1935'-36 data. U. S. National Resources Committee. .Consumer Expenditures 
in tlie United States. 1939, table 8, p. 48 ; chart 16. p. 54. 

*♦ In an article, "Saving and Spending," Survey Graphic, November 1935, vol. 24, p. 534. 

" Ibid., p. 535. 

"Address : 37 West Van Buren St.. Chicago. 111. 


goods ; also that in return for their goods or money they accept the 
best offer of other goods so promptly that other specialized producers 
are not forced into unemployment by a delay in exchange. If money 
is taken out of the income stream for a time, however, it is liot neces- 
sary that its owners divert it into investment channels when they 
begin to move it again; the state would probably have a better eco- 
nomic machine if it could arrange to cause them to divert most of it 
into consumption. 

Wliat particular merit resides in diverting into investment all the 
money savings which people in the upper-income groups are able to 
acquire under our existing laws and working rules, if that investment 
is far larger than is technically necessary to create the products to 
meet current consumers demands? What fraction of the annual in- 
come do we want our economic machine to divert into new plant and 
equipment year after year? Ten percent? Twenty-five percent? 
"Fifty percent? The fraction available for plant and equipment was 
about 22 percent in 1929,^^ and that amount is generally judged to have 
been excessive. 

If — to throw the question into bold relief — our distribution of in- 
come were such that only 30 percent of our national income were used 
for consumption goods and Yo percent of the income were diverted to 
"savers" who actually make a practice of investing all their savings 
year after year, we would have a society in which men would be build- 
ing an ever better physical plant to which savers would be acquiring 
the title.. Workers would then be but drones, not living life to its full 
in their own time but working away at capital-goods activity, making 
plant ever more efficient and excessive for the benefit of unborn chil- 
dren who in their turn might continue to use their economic machine 
to the same end as their forebears. On sociological grounds it is 
difficult to decide how much capital-goods activity we should have, but 
on economic grounds it seems reasonable to believe that we should not 
have much more than enough to provide the plant which the money 
in consumer channels can cause to operate near capacity. To borrow 
savings only in order to provide additional productive plant and 
equipment, therefore, is probably a questionable solution. 

Although, as we shall see, much can be said for proposals which 
call for a governmental diversion of laggard money savings into 
public works, not all the arguments advanced in justification of such 
action are convincing. Two arguments are especially open to ques- 
tion: (1) That public works must be undertaken because adequate 
lending opportunities do not exist outside of Government channels; 
and (2) that industrial growth is not possible without a continuous 
growth in the volume of debt. These two arguments will next be 

Bash of Spending: Private Investment Opportunities Functionally 
In a statement before the Temporary National Economic Com- 
mittee Lauchlin Currie said : "If it can be established what propor- 
tion of an assumed national income will be saved, * * * it is also 
established how large the outlets for, or offsets to, saving will have 

" Based on M. Leven, H. G. Moulton and C. Warburton, America's Capacity to Consume, 
Brookings Institution, Washington, 1934, cli. VIII. 


to be to attain and sustain that national income. Hence the problem 
of maintaining full employment is the problem of securing sufficient 
outlets for the saving that will accompany full employment." " 

Some people, like George B. Johnson ^^ and Alvin H. Hansen 


argue that enough outlets do not now exist in private fields and that 
therefore the Government must make new ones in the field of public 
construction. John Maurice Clark holds a similar view. "Over- 
saving would not create depression so long as the savings continued 
to be spent for tangible goods in ways that created employment and 
a corresponding distribution of incomes. The trouble would seem 
to be that when capital equipment reaches a certain state of surplus 
relative to demand for goods, further savings cease to be so spent. 
* * * It appears, then, that the direct source of tlie trouble lies 
in a shortage of investment rather than an excess of savings in and 
of itself ".2^ 

An implication of the approach of these analysts is that the Gov- 
ernment cannot feasibly act to divert savings into consumer-goods 
channels, so that the only choice is to divert them into capital-goods 
channels or have the savings go into nothing at all. This is a dubious 
premise. We shall see that there are recovery proposals which — not 
accepting the premise above — propose to solve the problem of idle 
savings by resorting either (1) to taxation and other means to hold 
down the volume of money savings of the "saving" classes to such 
an extent that they do not acquire more savings than current invest- 
ment opportunities can continually attract, or (2) tO' tax pressures 
and other means to induce people who abstract money savings from 
the income stream to offer their savings to the markets on terms 
which will cause the funds to be borrowed. The money might have 
to be offered at 4, 2, or percent, or even (as bonuses or subsidies to 
borrowers) at 2 percent, 4 percent, etc., to get promoters, enter- 
prisers, building contractors, and consumers to borrow the funds. 
Whatever the interest rate or clearance price would have to be, there 
is some price which would clear the market; and advocates of tax 
pressures on idle money advocate increasing the pressure until that 
price is reached. They hojDe to force money savings into' both con- 
sumer-goods loans and capital-goods loans at such low yields that 
consumption as a whole will be stimulated. If laws could be designed 
which would cause money automatically to seek borrowers at low, 
zero, or negative yields, there would be outlets enough in housing 
construction and other private activity without governmental bor- 
rowing and investing in public outlets. 

Even on the face of it the view that communities must provide 
new activities in order fully to use existing plant facilities cannot 
be basically sound. An economic system should be designed to oper- 
ate full-blast in meeting existing wants, whatever they happen to be. 
It should not require for continuous full operation that new indus- 
tries like the automobile, airplane, and television industries be 
continually introduced. If we were to read of a distant land which 
could not satisfy its current wants or completely feed itself because 
new .wants were not being innovated rapidly enough, we should prob- 

" Hearings before the Temporary National Economic Committee, Part 9, p. 3523. 

« Address: Port Hope, Mich. 

^Testimony in Hearings Before the Temporary National Economic Committee, Part 9, 

TT ^^ Economics of Planning Public Wqrks (a study made for the National Planning Board), 
U. S. Government Printing Office. Washington, 1&35, p, 47. 


ably regard the situation as fantastic. No doubt we should also 
regard the suggestion that the Government provide ne,w fields of 
investment as not being a basic cure. 

Basis of /Spending: Continuous Growth of Debt Necessary for Indus- 
trial Expansion. 

Another argument for Government borrowing and spending — that 
industrial growth is not possible without a continuous growth in the 
volume of debt — is also open to question. In a recent book seven 
Harvard and Tufts economists who advocate Government spend- 
ing wrote, "If we look at the whole Nation as a going concern, we 
see that its internal debts, business and govermnental, are merely 
another aspect of its assets. Debt in the broad sense is the obverse 
of investment. This fact, taken for granted in business accounting, 
is entirely ignored in our present method of Federal budgeting. 
An expanding economy not only can, but must, continually increase 
the total volume of debt outstanding." ^^ Stuart Chase supported the 
same view when he wrote, "There cannot be a system to be called 
capitalism without a huge and growing debt structure." ^^ Similarly, 
Secretary of Agriculture Henry A. Wallace said, " * * * in- 
creased prosperity is definitely dependent on increased debt either 
public or private." -* All three of these writers justify an increased 
governmental incurrence of debt as necessary for increased pros- 
perity inasmuch as private debt has, for a decade, ceased to increase. 

A capitalist economy, so long as it uses certificates of indebtedness 
for money, cannot function without a continuous flow of credit 
originating in either private or public debt operations. That is 
true, but once enough debt has been created, both to serve as a 
medium of exchange and to facilitate slow-moving transactions, a 
nation has enough debt. Vast amounts of long-term debt such as 
mortgages and bonds, which, fortified with reserves of equities, are 
mainly adapted to exempt certain investors from the major hazards 
of taking part in specialized production, are hardly necessary to a 
full operation of the economic machine. Money savers conceivably 
might be induced or taxed -into investing on a share-capital rather 
than on a fixed-capital basis. Moreover, a growth in public debt 
is not a prerequisite to an expanding program of public works. 
England has been able to finance both a public works and an ar- 
mament program primarily by expanding taxation instead of debt. 

Permission by the State to use the bond and mortgage instrument 
as a business tool seems to have stimulated a fallacious belief. Econ- 
omists on the whole are agreed that income which is not spent for 
consumers' goods must be disbursed for producers' goods as rapidly 
as it is received or the difference will be represented by unemploy- 
ment. Economists recognize that, in general, money savings not spent 
for consumers' goods must be exchanged for titles to capital goods. 
However, even though they all realize that if, say, $10,000,000,000 
is annually saved and invested in the form of stocks, the money so 
disbursed need never be returned to the stockholders, some of them 
believe that if the saved $10,000,000,000 is invested in the form of 
bonds, the money must some day — to insure permanent solvency — ^be 

23 An Economic Program for American Democracy, Vanguard Press, New York, 1938, 
p. o3. 

f '■Behind the Budget," Atlantic Monthly, September 1939, p. 316. 

-♦Speech entitled ''New Freedoms, Responslbflitles, and Disciplines," at Philadelphia 
dinner, December 17, 1937 (Department of Agriculture Release 973-38, p. 8). 


"repaid" to the bondholders. Although society makes no arrange- 
ment for its stockholders to get their money back, it permits its 
bondholders to stipulate that their money shall be paid back after 
10, 20, 50, or any number of years. But in practice investment 
debt is seldom repaid in the sense that the debt is wiped off the 
corporate books. When old debts are retired, new ones usually are 
incurred; new creditors simply relieve old ones. Regarding the 
indestructibility of debt on a large scale, S. M. Eccles, Chairman 
of the Federal Keserve Board, recently said : 

In connection with the question of debt, you (Senator Byrd) also make the 
curious statement that some day the whole amount must be repaid. Such a 
fltatement reflects a misunderstanding of the fundamental nature of our capital- 
istic economy. Debts and obligations, of various kinds are but the other side of 
investment, and if we ever tried to liquidate the whole amount or even any 
substantial fraction, we would precipitate a crisis so severe that general 
economic paralysis would result.™ 

It does not follow from Eccles' statement, however, that just be- 
cause debt in the aggregate cannot be retired, industrial growth can- 
not occur without additional debt. We shall shortly review plans 
which propose to get money savings adequately into use without re- 
sorting to the questionable tactic of incurring additional debt. H. 
F. Stoke,^^ writing to the Temporary National Economic Committee, 
criticized as follows the arguments for increasmg debt : 

Nominally we operate under the capitalist system ; actually we are dominated 
by a credit (debt) system. So closely are the two intertwined that economists 
unquestioningly accept the credit system as an essential part of the capitalist 
system. They are in error. • The credit system is in reality a parasite existing 
within the capitalistic system. By its very nature it is devouring its host. So 
far has the process advanced that it has become the paramount business in the 
Nation. * * * Estimates furnished by informed authorities place the sum 
invested in the credit business (debt) at from $175,000,000,000 to $275,000,- 
000,000. Assuming the mean of $225,000,000,000 to be correct, we have a debt 
investment of approximately twice the sum of the capital stock of all American 
corporations. * * * The annual income of the credit business, including 
brokerage, legal charges, fees, and other incidental charges borne by the bor- 
rower, cannot amount to less than $12,000,000,000. 27 * * * The same capi- 
tal, directly invested and sharing alike the hazards and rewards of enterprise, 
would represent pure capitalism at its best. 

Stoke then criticizes the effort to cure what he regards as the evils 
of credit with more credit, and argues that public credit is being 
thrown into the breach to assist exhausted borrowers with their 
interest payments. He maintains that private debt is thus being 
converted into public debt with the result that taxes are becoming 
forced interest payments, and debt-free individuals and corporations 
are being made to pay tribute to the creditors through taxation. 
Thus although much can be said for Government spending, as we 
shall see, several arguments supporting it are open to criticism. 

Basis of Spending : Money Sowings Must Be Converted Into Physical 


Also open to criticism is that argument for compensatory spending 
which postulates that if economic equilibrium is to prevail, money 
savings must be converted into physical savings, and that, €ince sav- 
ings are not currently being converted by their owners into private 

*> Quoted by Rudolph L. Weissman in the New York Times, Apr. 30. 1989, IV, p. 10. 
column 6. 

*« Address, 1420 Watts Ave., Roanoke, Va. 

"" Data given below suggest that It is less tban this. (Author's note.) 


works, they should be borrowed and converted by the Government 
into public works. John E. Exter, of Cambridge, Mass., voices this 
view when he writes : "We must * * * permit the Government 
to use them (money savings) in a long-range program of investment 
whenever private investment is insufficient. * * * Xf we persist 
in increasing our savings, we must therefore increase our investment 
in order to avoid serious deflation. And we cannot depend on the 
unpredictable fluctuations of business confidence for the absorption 
of the idle deposits which our relatively fixed savings habits tend to 
accumulate." ^* As is evident, this is essentially the Keynesian view 
that "investment must equal savings." 

Charles Meinshausen ^^ has a plan which implements the above 
view. He would collect all laggard money savings at a central 
Federal savings bank which would issue bonds in return for them. 
This bank would then be responsible for investing the funds in 
worth-while public-works activity (which he believes could be made 
largely self -liquidating) , and in limited production of consumers' 
goods. Meinshausen would set up an "economic congress" of elected 
representatives to control the investment institution. Essentially his 
plan is a tremendous P. W. A.-W. P. A. type of arrangement. 
' The questionable premise in the above view is that, as a prerequisite 
for economic balance, money savings must be converted into physical 
savings. We shall see that there are other types of plans which 
premise that it is enough that money savings move back into a 
demand for goods and services. These other plans deem it incidental 
whether the savings move into investment or into gifts, consumers' 
goods, or subsidies. They argue that the primary requirment is 
that disbursements must equal savings," not that "investment must 
equal savings." We shall see that recovery proposals whose; primary 
concern is to get savings back into any existing chamiel of demand, 
would tend to expand the scope of private enterprise at the same time 
that it tends to reduce the fraction of the national income flowing to 
capital return, whereas those whose primary concern is to insure that 
savings flow into "investment," almost invariably call for greater 
governmental activity and a coiitinuous payment of interest to those 
"savers" who shun all outlets other than Government loans. 

Not only is the premise that "investment must equal savings" open 
to criticism on the ground that there is no reason to assume that 
money once abstracted from the income stream as savings must 
necessarily move back into investment goods when it does return ; the 
premise also has stimulated two pieces of theoretical confusion. In 
the first place it has led to a quibble among economists over whether 
private savings are ever uninvested ; in the second place it has helped 
to divert attention from the vital question of the rate of use of money. 

^'■MoTiey is- always invested.''^ — Frequently when discussion focuses 
on the idleness or sluggish use of bank money as a possible cause of 
economic unbalance, the issue is parried with the answer that "money 
is always invested," the implication being that that is answer enough. 
Technically speaking, money is necessarily always "invested," assum- 
ing that it is not hoarded in cash. That is true, but its rate of use — 
quite another matter — may vary nonetheless. 

"Communication to the New York Times, July 4, 1939, p. 12. column 5. 
"Address, 11 West P'orty-second Street, New York. 


Bankers always regard their cash and similar lodgments as being 
"invested" in their earning assets. The basic question is not, "Are 
money savings technically invested?" or "Are investments equal to 
money savings?" Kather it is, "Are society's institutions set up to 
give its specialized producers strong enough incentives to exchange 
their products with one another at a pace which keeps them all busy, 
or are its institutional arrangements and privileges set up to enable 
some of its producing members to withdraw from the markets with 
impunity, with the result that exchange and production decline? 

Businessmen borrow and spend. Governments also borrow and 
spend. Both inject money into the channels of business. Both pay 
interest on their borrowings, and both thus are conscious of a carry- 
ing charge on their money : the sooner they use it and retire their loans, 
with either sales revenues or tax revenues, the less the carrying 
charges. Both therefore disburse their borrowings rapidly. Busi- 
ness and government employees, who are the main recipients of the 
initial disbursements, also tend to re-spend their money promptly. 
After a few circuits through the markets, however, some of the dis- 
bursements come into the hands of the "saving classes" who wish to 
lengthen the interval between transactions and, because the money 
they receive is not a depreciating asset, are in a position to do so. 
When they thus lengthen the interval they give to money a lower 
rate of use than do the business and governmental agencies which 
were instrumental in creating it. But by reducing the rate of use 
of money (which, incidentally, may always be technically "invested") 
they initiate a deflationary process. The properties of money which 
permit of such reduced rates of use and deflationary behavior seem, 
however, to be outside the orbit of concern of those whose primary 
aim is to make investment equal savings. 

Even when the view that "investment must equal savings" is broadly 
interpreted to mean that, for business recovery, money savings must 
be promptly disbursed for investment goods, the approach is too nar- 
row. For when the tempo of activity is low, the volume of annual 
savings is necessarily small, and it is not enough at such times to 
insure that (mnucd money savings be disbursed. During 1932 and 
1933, for example, when production was low and money savings were 
small, depression would have continued even if capital investment 
had equaled savings. A broader attack is needed. During depression 
periods, what is necessary is the removal of spending restraints and 
the provision of spending incentives which together bring on full ex- 
change among specialized producers. Because of its limitedness and 
indefiniteness, therefore, the argument that investment must equal 
money savings and that governments must borrow and spend to in- 
sure that relationship, offers little justification for a policy cf com- 
pensatory spending, even though that policy may be desirable on other 

Basis of Spending : Public Works Are Desirable for Their Own Sake. 

More can be said for the argument, as made in a proposal by John 

Bauer and Irving B. Altman,^° that during periods of depression the 

8" Program of the Commonwealth Federation to Eliminate Unemployment and to 
Establish a Stable Economy of Abundance, Apr. 6. 1939, submitted to the Temporary 
National Economic Committe by the Commonwealth Federation of New Yorlv, 315 Fourth 
Avenue, New York. 


Government should borrow idle savings and spend them for public 
works because such worfe are useful and desirable for their own sake. 
Soil conservation, reforestation, and flood control, together with the 
construction of waterAvorks, bridges, sewage-disposal plants, hospitals, 
express highways, and city by-passes, are all socially desirable activi- 
ties. Most of them pay social dividends which outweigh their costs. 
Although not all of them render a type of service which can feasibly 
be charged for on an a la carte basis (as is, for example, the postal 
service), all of them are of a type which can be paid for through 
municipal. State, or Federal taxes if fee charges are unfeasible. 

Insofar as it is possible for governments to go into busings in lines 
in which private industry cannot feasibly operate, or in which the 
Government itself has been needlessly inactive, the recourse to public 
works is commendable. There may still be many projects similar to 
the Triborough, Whitestone, and Spuyten Duyvil Bridge projects of 
New York City, for example, which, worth while and self-liquidating, 
provide valid investment opportunity. So long as the Government 
acts only as a trustee investing private funds in self-liquidating public 
works, governmental enterprise is unquestionably laudable. The 7- 
year $3,860,000,000 program proposed to^ Congress by President Roose- 
velt in June 1939 ^^ was essentially such a program. Large as that 
sum appears to be, however, it was much too small to use to the full 
the country's productive facilities. The annual activity which would 
be brought forth by a 7-year $3,860,000,000 program could not begin 
to counterbalance the laggard use of money which prevails today. 
Moreover, one suspects that even potentially there are not enough 
self-liquidating public works to provide an adequate CQunterbalance. 
For, if the Government were to borrow all laggard money savings and 
supervise their movement into investment, it appears doubtful that 
the projects into which the money would be poured could be liquidated 
in due course through either fees or taxes. 

There are, however, sponsors of government-investment plans who 
do not advance "self-liquidation" as a guiding criterion. Stuart Chase, 
for example, writes : '•'•What we need^ then, is not pump priming, but a 
two-cyliThder pump. One cylinder is private investment ; let it work 
for all it is worth. But beside it must stand another cylinder repre- 
senting public investment. * * * The theory that the function of 
Government spending is to prime the one-lunger pump of private in- 
vestment has not worked. I do not believe it will ever work. The time 
is overdue for a permanent new cylinder on the investment pump." ^^ 
And referring to Keynes' compensatory-spending thesis. Chase says : 
"The theory centers around the devastating effects of idle capital. 
Someone must invest this capital when unemployment is severe, or 
the whole economy is in danger of collapsing. If priva.^ citizens won't 
or can't spend or invest, the Government must. This seems to be 
virtually a law of survival for interdependent, power-age communities. 
The New Deal has followed this thesis only in a left-handed, half- 
hearted manner." ^^ Chase then argues that, when private debt is 
not expanding, a growing public debt is necessary for industrial 
growth, and proceeds with recommendations for supporting Govern- 
ment investment with Government deficits. 

8^ Congressional Record, vol. 84, pt. 7, p. 7840. 

« "Behind the Budget," Atlantic Monthly, September 1939, p. 324. 

••Ibid., p. 313. 


Mr. Chase is probably correct in his view that the New Deal, from 
the standpoint of monetary balance, has resorted to the public-invest- 
ment pump to only a mild degree. During the years 1937, 1938, and 
1939, for example, public expenditures for new durable goods totaled 
only about $2,790,000,000, $3,360,000,000, and $3,830,000,000, respec- 
tively.^* Had the Government, however, tried to borrow and spend 
enough money to raise business activity to levels at which all "employ- 
able" workers would have been employed, new kinds of difficulties, be- 
sides the debt problem, would have arisen. For deficit financing has 
varying characteristics depending upon the limits to which it is 

Limits Beyond WM^h De-ficit Financing Leads to Authoritarian 
Price Control or Inflation. 

Usually even conservative citizens favor carrying deficit financing 
far enough during depression to provide for relief. Humanitarian 
motives make them go so far. Then there are thbse who realize, when 
they see millions of unemployed workers roaming the streets, that, in 
the aggregate, society's laws — tax, land, monetary, corporate, and 
property laws — must be seriously defective, so defective in fact that 
to protect existing arrangements against reckless legislative action it 
may be advisable to provide a modicum of work through deficit financ- 
ing while those in control either wait for the situation to blow over or 
struggle with the problem of drafting better laws. In addition there 
are those who, as we have seen, want the Government to spend sums 
sufficient to balance what private savers elect not tp spend. To go as 
far as that, however, introduces a difficult problem. For deficit financ- 
ing, when carried beyond certain limits, seems to lead either to 
authoritarian price control or to a runaway price level. 

To make clear where that limit lies, it is in point to bring out that 
under conditions where factories operate only part time and millions 
of workers are available at "customary" rather than "competitive" 
wages, producers, if supplied with additionaL orders, are willing, to 
turn out additional quantities of goods without raising their selling 
prices. Under such circumstances, governmental injection of new 
buying power does not for some time cause wage rates, costs, or the 
price level to rise ; yet it brings about increased business volume. The 
problem of runaway prices, price inflation, or centralized price con- 
trol, thus does not arise when deficit financing is carried on so lightly 
that millions of unemployed workers still remain in the labor market 
and relieve producers of the necessity of paying competitive wages. 

It is when efforts are made to bring all productive facilities and the 
entire labor supply fully into use by goverimient spending that the 
action ends not only in increased employment but also in upward- 
spiraling prices. For as soon as orders begin to put pressure on pro- 
ductive facilities and to tax a country's labor supply, producers are 
forced to pay competitive wage rates and, after taking up some slack, 
to lift their prices in step with wages. When competition for labor 
prevails and new monetary demand continues to come forth nonethe- 
less, it becomes easier for producers to gather in customers' dollars by 

** George Terborgn "Durable GoodS Expenditures in 1939," Federal Reserve Bulletin, 
February 1940, p. 116. 


raising prices than by giving more goods for the money. As a result, 
the new monetary demand becomes insufficient to take up all the slack 
of unemployment which the Government spending was intended 
to absorb. During the first World War, for example, when com- 
petitive wages prevailed and yet the Government continued to make 
large injections of new purchasing power, the price level ran away 
as soon as the added buying power began both to use existing facil- 
ities to the full and to raise business costs. It is when new injections 
of buying power have the effects indicated above and governments are 
committed to supporting purchasing power with public funds even 
though rising prices discourage or make inadequate the current effec- 
tive buying power, that governments are forced to choose between (1) 
ever more deficit spending to support business activity (at prices which 
entrenched business, labor, and monetary groups may be in a position 
to command) and (2) dictatorial efforts to hold down prices by Gov- 
ernment regulation. 

In other words, compensatory spending, when on a scale intended 
to absorb all of the "employables," tends to lift prices. And such 
an effect — after inventories are built up — tends in its turn to dis- 
courage demand. (That is, it tends to encourage money holders to 
take advantage of their privilege of retiring into non-depreciating 
money.) Then declining demand causes private activity to bog down 
unless compensatory spending steps in with additional outlays of 
money. Thus there tends to come a time, after a big injection 
of Government spending has been made, when demand declines 
again unless increasing injections of Government funds are made. 
It is because compensatory-spending proposals are committed to 
engage in a balancing amount of governmental activity whenever 
private activity bogs down for any reason whatsoever, that the 
program is faced with the dilemma of either disbursing increasing 
sums of money indefinitely as prices rise, or of govemmentally con- 
trolling prices. 

During both the Civil War and the first World War the United 
States let prices rise and maintained full activity by disbursing 
ever larger sums of money at ever higlier price levels.^^ In contrast 
to this procedure, Germany, since 1934, has held down its prices 
authoritatively wliile maintaining full activity by disbursing bor- 
rowed money. Governmental attempts to bring productive resources 
fully into use by monetizing Government credit must necessarily 
end in either price inflation or Government price fixing, because 
there is nothing in sucli a policy to induce specialized producers 
to continue their function of exchange regardless of whether pre- 
vailing prices are "competitive" or "achiiinistered," high or low. 

Interest Burden of a Heavy Compensatory -Spending Progratn. 

Perhaps the major reason, however, for believing that Govern- 
ment borrowing and spending is a makeshift recovery proposal is 
that it requires, as part of its mechanism for keeping money moving. 

'^ It may be of interest to note that deficit f?pending in the United States from 1933 to 
1939 was never on a scale large enough to biing the price level back even to the oft- 
mentioned "1926 price level." Only in the spring of 1937. when the pc wcr of the Federal 
Reserve Board to change reserve requirements was being invoked to halt advancing 
prices, did deficit spending proceed on a scale large enough to lift prices ai)preciably. 

273442— 41— No. 25 4 


the continuous payment of interest ^^ to savers who otherwise will 
not utilize their funds. A more permanent and balanced recovery 
proposal would seem to be one wherein everyone personally dis- 
bursed his own savings into the markets as rapidly as he collected 
them, and one wherein society's working rules brought it about 
that all savers together did not accumulate more than they either 
were willing to return to the markets or could be made to return 
without being baited with Government interest payments. 

Nor would continuous growth in the size of the interest burden 
be a matter of small consequence. In answer to the criticism that 
expanding public debt imposes on the community a weight of in- 
terest charges which must eventually become intolerable, "Seven 
Harvard and Tufts Economists" argue that "It is ridiculous to 
maintain that debt in general must be repaid," ^^ and write : 

The payment of interest on the public debt does not in itself constitute a 
deduction from the Nation's income. "What the Government raises in taxes to 
meet debt charges it pays out again in interest to the holders of its bonds. 
The extent to which a burden is involved depends on who holds the bonds. 
This point is of importance in considering the extent to which the debt will 
impose a buiden on future generations. The same generation that pays the 
taxes inevitably receives the interest payments. It is thus up to each genera- 
tion to determine by the way it apportions its taxes how much of a real 
burden interest payments on the public debt shall be.'^ 

True, Government borrowing will cease to generate an interest 
burden if and when generations arise which can and will impose 
tax laws that recapture for the public coffers the very interest pay- 
ments handed out by the Government in order to keep money mov- 
ing. But so long as this generation which obtains its revenues for 
interest payments from all of its income groups does not itself impose 
such taxes, its legacy to future generations is either an increased 
interest burden or a tax problem which it deems to be too knotty for 
itself to solve. 

summary: appraisal of compensatory spending ITS JUSTIFICATION 


Even if taxes were set up which thus recovered interest disburse- 
ments, a balanced situation would not necessarily prevail. Costless 
money would be provided for useful public works, true, and rewards 
would no longer be diverted to savers as at present for permitting 
the Government to keep their money in circulation ; but savers would 
still be able to hold intact the principal of the money savings made 
during years or decades when they refused to spend. 

Compensatory-spending programs aiming at full employment (as 
pointed out above) also would have to face the difficult problems in- 
volved in administratively holding down prices, and in keeping them 
^'fair" while holding them down. 

Perhaps the best justification for compensatory spending is the 
sociological one that it affords a simple and direct method of pro- 
viding subsistence to millions of people who are unemployed against 

8» Government interest payments to savers for the use of otherwise idle money actually 
are more in the nature of rewards for "not-hoarding" than of inducements for saving. 
BecaHse claim checks to society's goods are neither depreciated nor canceled, and be- 
cause society's savers predominantly belong to those income classes which have no press- 
ing needs for goods and services, society can get savers to use their claim checks only 
toS" baiting them with interest payments. 

^ An Economic Program for American Democracy, p. 65. 

'"' Ibid., p. 68. 


their will because society's leaders either will not or cannot repair 
the defective laws and rules which make for unemployment. Be- 
cause the laws and institutions do not insure reasonably full employ- 
ment, and because every additional day that the unemployed remain 
idle means an irretrievable loss to the Nation in wealth not pro- 
duced, it seems that considerable compensatory spending is justified. 
For every j'^ear that our millions of men remain unemployed and oui 
billions of savings move sluggishly the cost to the Nation in un- 
created wealth runs into such high figures that our annual deficits 
seem trivial. It is most important to bear in mind that it is not 
unsound economy to put idle men to work creating wealth. "Injus- 
tice" between classes may be engendered by doing so, but from the 
over-all viewpoint more wealth is produced. It is the loss of wealth 
that chronic idleness engenders which perhaps justifies compensa- 
tory spending up to the point where, to be effective, it calls forth the 
installation of new political and economic machinery which, tb 
achieve compliance with its program, must exclude civil liberties 
from its world. If not carried too far, compensatory spending is a 
method of buying time in which to think, and of staving oflf revolu- 
tion, although, of course, compensatory spending itself becomes revo- 
lutionary when undertaken on a scale — as in Germany — such that 
the state is driven into using military methods to control prices — 
life values — in efforts to keep from shoveling out larger increments 
of money at ever higher prices. 

Inadequate as it is in theory, and dangerous as it is to resort to, 
compensatory spending must nonetheless, when all the criticism is in, 
be appraised as peihaps the only recourse as yet politically accept- 
able which in a large measure is able to counterbalance the with- 
drawal of money from the markets. The writer believes that there 
are other recovery plans, to be discussed later, which are simpler, 
sounder, more effective, and altogether more desirable ; but they seem 
a long way off politically. Government borrowing and spending, 
therefore, becomes at least a reed to lean upon until better supports 
are acceptable. 


Some of those who would have Government spending counter-bal- 
ance private inactivity recommend that the Government obtain its 
funds from money savers by taxation rather than by borcowing. 
"Seven Harvard and Tufts Economists," ^^ and also Hansen,^" Bauer, 
.and Altman,*^ Chase,*^ and several others, regard such action, as 
well as Government borrowing, as a fruitful approach. Obviously, 
the financing of Government spending through taxation sidesteps 
several of the knotty issues which are raised by resort to ever-expand- 
ing public debt and interest payments. 

Financing Government spending (if it must be engaged in) 
through taxation rather than through borrowing has much to com- 
mend it. Inasmuch as money savings must go back into circulation 
as rapidly as they are extracted from the income stream if added 

** An Economic Program for American Democracy, pp. 53— 56. 

*o Hearings before the Temporary National Economic Committee, part 9, pp. 3354, 3854, 
"Proposal submitted to the Temporary National Economic Committee. (See p. o6 

« "Behind the Budget," Atlantic Monthly, September 1939, pp. 324-326. 


unemployment is not to result, and inasmuch as society's current laws 
enable our upper-income groups to extract more money savings than 
they continually deem it wise to use as rapidly as they receive them, 
it niiight be wise for society to enact laws which operate to re-channel 
the flow of income more to those groups who spontaneously keep 
money savings in motion when they do get hold of them. It may 
be, however, that society has not the wisdom to draft laws which 
bring about a more balanced distribution of income as an automatic 
outgrowth of normal haggling in the markets. If so, it might be 
well for it to provide through the cruder tool of corrective taxation 
a distribution which permits less savings to be made by those who 
customarily hoard when they do not spend largely for producers' 
goods, and more by those who both hoard little and are as disposed 
to divert their funds into durable consumers' goods — such as houses 
and automobiles — as into producers' goods. 

Also if, as Professor Joseph A. Schumpeter and others maintain, it 
takes time for the discovery and development of new techniques, new 
resources, new industries, and the growth of population, if such 
developments do not follow an even course but have their violent 
ups-and-downs, and if investment of funds in private producers' 
goods must always wait until new developments set the stage for 
renewed prosperity, then money savings should either be shunted 
into consumption channels throughout the preparatory period, or 
be diverted into public works through taxation. 

Arthur Dunn proposes to tax away profits not needed for con- 
sumers' goods, capital goods or reserve (i. e., the approximate equiv- 
alent of savings that would otherwise be hoarded), and proposes to 
use these funds either for worthwhile public works or as subsidies 
to help correct disparities in consumers' buying power.*^ 

Much has already been done in England in the direction of cut- 
ting down the total volume of money savings through taxation. In 
a statement to the Temporary National Economic Committee, Leon 
Henderson said: 

The English have, I expect, a little better estimate of what the savings in 
relation to national income is than our own. They show that around 1907 
they were saving maybe 12 percent of their national income ; in 1924 that had 
dropped to 8.1 ; in 1929 it was 7.2 ; in 1935 it was 6.9 percent. The significance 
lies in the fact that since 1924, and since 1929, the amount of savings which 
the English system was making was considerably less than our own [which 
was running at the rate of about 20 percent per year] and was considerably 
less than had been the situation in earlier times, and yet England, we know, 
has had a kind of recovery that we have not experienced. * * * n 

(During the second half of 1937, before England's intense reanna- 
ment race was begun, the index of industrial production for the 
United Kingdom — with 1923-25 as a base — averaged 130, as against 
103 for the United States, according to data published by the United 
States Bureau of Agricultural Economics) .*" Heavy English income 
taxes simply operated to divert excess savings, via public channels, 
into slum clearance, housing subsidies, unemployment insurance, 

"Thirty Million Jobs (2d ed.), a booklet published by Arthur Freeman, New York, 
19.3S, pp. 28 ff., ."^.5, 46, 47. 

** Hearings before the Temporary National Economic Committee, Part 1. Economic 
Proldsue, p. 177. 

*^ Bureau of Agricultural Economics, Demand, Credit, and Prices Outloolj Chart Book, 
Washington, 1940, p. 19. 


medical care, old-age pensions, and the support of consumption in 


Obtaining Government funds almost exclusively tJiroug;li taxation 
of the type above described, rather than through borrovs^ing, would 
have a slightly stimulating effect on business because Government 
bonds would no longer provide an investment outlet for timid money, 
and interest rates would go lower. Since 1932 the United States Gov- 
ernment has borrowed over $20 billion at the rate of about $3 billion 
per year. Its stream of new issues has provided an investment outlet 
the absence of which would have put added pressure on investment 
funds and would have resulted in reducing interest rates even lower 
than they have been since 1932. EA^en though such a repercussion 
might not have stimulated appreciably the producei-s' goods indus- 
tries, it would have stimulated private borrowing for such purposes 
as housing construction and would have led to greater activity in that 

Cutting off the stream of new Government issues to serv« as invest- 
ment outlets for timid capital — through substitution of taxation for 
borrowing — would be particularly effective today in inducing money 
savers to take bigger risks in private industry. Because we impose 
very high tax rates on bi^ incomes on the one hand, and simulta- 
neously provide tax exemptions on incomes derived from certain kinds 
of securities on the other, money savers today refuse to invest in pri- 
vate industry unless the likely gains are large. John T. Flynn has 
pointed out how an investor who earns 10 percent on a new investment 
can retain, because of our current high income-tax rates, only about 
3 percent of it for himself if his income in addition to that on the new 
investment is $100,000 or more per year.*^ And no one will take risks 
at 3 percent when he can get approximately that percent with less 
effort and greater safety by simply buying tax exempt securities. 
Shutting off the stream of new Government obligations by relying on 
taxation instead of Government borrowing, would thus undoubtedly 
put pressure on savers to invest in ventures which promise smaller 
returns. More outlets in private industry would thereby be made to 
seem attractive. 

Limitation of the Plan to Tax Current Savings. 

One can, perhaps, raise no major criticism against using taxation 
rather than borrowing as the preferred means of financing a com- 
pensatory-spending program. But one cannot regard the proposal 
to tax annual money savings away from their owners when such 
savings are not being adequately used, as an integrated recovery 
proposal, for the following reason.^^ 

Even if it were administratively feasible by means of taxation to 
collect money savings to the degree indicated, the plan could insure 
only that the industrial situation would not get worse: it could not 

'•Cf., A. H. Hansen testimony, hearings before the Temporary National Economic 
Committee, pt. 9, pp. 3554-3558. 

*'' "Scared Dollars," Collier's, Mar. 11, 1939. p. 72. 

**The plan to tax all money pavings away from their ownt^rs unless these owners 
prove that they themselves have disbursed them within the- year is, as we shall see later, 
a different type of proposal. 


insure that it would get better. If perfectly administered, it could 
prevent the annual income generated during any one year from 
having a decreased rate of use ; but it could not operate to make 
previously distributed income move more rapidly, and, if depres- 
sion were already at hand, that would have to be done. Stated 
differently, a tax only on current savings would not operate to make 
the money savings of past years — the vast sums of relatively idle 
money which reflect themselves in millions of unemployed men — 
move m.ore rapidly. It is desirable to insure that at least annual 
new money savings move into circulation as rapidly as they are 
acquired; it is also preferable, if the Government is to disburse the 
annual savings which private savers themselves are reluctant to 
spend, that this be done by resorting to taxation rather than to 
borrowing. But in times of depression, when the total volume of 
idle money far exceeds the volume of current savings, that is not 
enough. At such. times the money savings of past years, too, must 
be made to move. 

Federal efforts to divert income via taxation from those particular 
savers who will not re-spend tends to direct money into channels 
where it will be used mora actively. But the approach is quite 
limited in what it can accomplish. Moreover, it is tedious and 
expensive, so much so that it is doubtful whether the Government 
can ever hope by income-tax action alone to bring about even an 
uninterrupted flow of current savings into current disbursements. 


Perhaps the most ambitious of all reemployment plans advanced 
for diverting income from one income group to another by means of 
taxation, is the "Townsend plan." Backed as it is by the emotional 
and voting support of millions of elderly people, it is a plan which 
has obtained the approval of many Congressmen from all sections 
of the country. As drawn up, however, its machinery would not 
divert money savings from income groups who tend to hold them 
idle, but primarily- from income groups who themselves tend to 
spend more than they earn. 

The Townsend plan has the following major features: (1) A pen- 
sion of $200 per month is proposed for all citizens 60 years old or 
over who are not habitual criminals, (2) on condition that they take 
an oath to spend the entire sum for goods and services within the 
United States during the month in which it is received, and (3) 
provided they refrain from all remunerative employment. (4) Per- 
sons with independent incomes of more than $2,400 per year are not 
eligible for the pension. (5) A tax on all transactions would be 
levied to raise the necessary revenue; a 2 percent tax would also be 
placed on all inheritances and gifts in excess of $500, and a 0.1 
percent increase in all income taxes would be made. 

There were 10,385,000 persons in the United States 60 years old 
and over in 1930. It is estimated that there are over 13,000,000 
such persons in the United States in 1940.*^ Allowing for those 
elderly people who are either aliens or have incomes over $2,400 

*9 Estimates of the National Resources Committee, Population Statistics National Data, 
October 1937, p. 9, table 1. 


per year, there are about 10,000,000 people who would be cared 
for under the plan. Over 4,000,000 persons over 60 years of 
age held jobs in 1930, so tliat it is reasonable to suppose that at 
the present time well over 4,000,000 jobs would be released to younger 
people by retirement of elderly people under the plan. 

With the cost of administering the pensions estimated at 10 per- 
cent, and the cost of collecting the taxes placed at 2 percent, it has 
been estimated that $28,000,000,,000 would be needed annually to 
provide for the pensions.^" This is equivalent to about two-fifths of 
the national income for 1939. It is very doubtful that such a large 
portion of the national income could, in a democratic society, ever 
be collected through taxation. 

The arrangement which, under the Townsend plan, aims to assure 
complete expenditure of each monthly pension by the pensioner 
within the month, is also probably unfeasible. After all, what is a 
bona fide "expenditure" ? Suppose a pensioned grandfather gives his 
grandson $20 for shining his shoes, and the grandson puts the $20 
in his bank for his future education, is that money expended? And 
how would administrators prevent the relatively well-to-do elderly 
people from giving funds to relatives in distress? As one critic 
put it : What is to prevent pensioners from "losing" their money in 
places where their younger relatives can conveniently find it? 

The transaction tax on which the Townsend plan would largely 
rely is a compounded sales tax. A retail sales tax hits a finished 
commodity only once, when it passes into the hands of the consumer ; 
but the transaction tax peppers it with a levy at dvery stage of its 
progress from raw material to finished product. Because this tax 
would bear most heavily on products manufactured in separate stages 
in many plants, multiple-process (vertically integrated) concerns 
would tend to supplant the smaller single-process ones. This would 
increase the concentration of economic power. 

Deflationary rather than stimulating effects would follow from 
the adoption of the Townsend plan. In the first place, the incidence 
of the transaction tax would be primarily on consumers, and since 
poor people play relatively larger roles as consumers than do the 
well-to-do (the bulk of the country's buying being done by persons 
with annual incomes of less than $2,000), the transaction tax would 
bear more heavily on the poor than on the rich. The Tax Policy 
League points out that the 3 percent sales tax of Michigan, for ex- 
ample, takes approximately $18 per $1,000 of income from the scrub- 
woman but only 30 cents per $1,000 from the multimillionaire.^^ Be- 
cause the Townsend transaction tax would bear more on the poor 
than on the ri^h, money would be extracted from spontaneous 
spenders and diverted to elderly people who (especially in the case 
of elderly couples receiving $400 per month) would probably, alter 
an initial splurge of spending for clothes and furniture, be at a loss 
as to how to spend the money on themselves. 

On a second score the Townsend plan would likewise be de- 
flationary. The plan does not propose to dispense pensions for 5 
months after its adoption, whereas it proposes to begin collecting 
taxes during the second month after adoption. For several months 

so "The Townsend Plan Analyzed," Tax Policy League, New York. March 1936, p. lt<. 
*i Where the Sales Tax Falls (a buUetia ) New York, March 1934. 


therefore, income equal to two-fifths of the national monthly income 
would be extracted from the mass of consumers and in effect hoarded 
until the 5-month period was up and the disbursing of funds was 
begun. Such a collapse in current purchasing power would at least 
temporarily cause wholesale unemployment, falling prices, and wide- 
spread bankruptcy. 

Moreover, as the Tax Policy League says, a forcible jacking up of 
the standard of living for the older part of the population (in large 
part against their natural inclinations) by forcing down the stand- 
ards for the rest seems a distorted way of attempting to achieve 

"If the Townsend plan were economically sound it would seem 
much more socially desirable to spread the benefits over the entire 
population and give $20 monthly to everyone of the 93,000,000 
persons now receiving less than $1,000 per year." ^^ 

There seems to be no arrangement in the whole Townsend plan to 
induce increased spending for any purpose whatever among those 
wealtliier people who today are laggardly spending their money. 
In summary, it seems likely that the Townsend plan would give 
luxuries to about 10 percent of the population by depriving almost 
90 percent of necessities, that it would probably he administratively 
unfeasible, that it would, at least temporarily collapse the price level 
and probably have continued deflationary effects, and that it would 
make for severe unemployment during the initial period when money 
was being collected but not disbursed. 


Several variants of the Townsend plan have appeared in recent 
years. Among them are the "Oregon Citizens' retirement annuity 
plan," the "Arkansas plan," and the "California pension plan." All 
of the above are "pension plans," although none of them proposes to 
give as kirge sums to the aged as the $2,400 suggested by Mr. Town- 

The "ham and eggs plan" first proposed to disburse $25 every 
Monday to all citizens in California over 50 years of age who had 
resided in the State for at least 1 year prior to the adoption of the 
amendment (or for 5 years thereafter). This was later changed to 
$30 every Thursday. To those eligible, pensions would be paid in 
the form of State v.arrants. Then, instead of relying on the recip- 
ient's oath that he would keep his pension money in circulation, the 
ham and eggs plan would require a 2-cent stamp to be affixed weekly 
to each $1 warrant in order to insure its circulation. The stamps 
would have to be purchased from the State for cash. After 52 
weeks, every $1 Avarrant w^ould be redeemab^3 for $1 in cash at a 
specially created State bank. Provision is also made for incorpora- 
tion into the plan of California's sales tax and use tax. 

The proposal has unusual features which would give the adminis- 
trator of the plan practically dictatorial powers. The administrator 
would control the appointment of the directors of the contemplated 
State bank, a bank which would be the sole permissible depositary 

^2 The Townsend Plan Analyzed, p. 18. 


for all State, county, city, and district funds; he would in addition 
have other tremendous appointive powers, and his actions would not 
even be subject to judicial, executive, or legislative review or control. 

Aside from the nefarious political implications of the plan, the 
economic aspects of it would be deflationary. It has been estimated 
that in the first year of its operations the plan probably would call 
for the issuance of warrants in the amount of $1,248,000,000 and 
that this in turn would involve the collection of about $1,300,000,000 
in cash through redemption stamps.^^ Obviously, the plan contem- 
plates collecting in taxes from the general public larger sums than it 
contemplates disbursing to a favored age group.^* However, inas- 
much as — to start operations — the plan would inject large quantities 
of purchasing power immediately, and the direct deflationary effects 
of the tax would not have a chance for almost a year to neutralize 
the stimulating effects of the initial injections, a temporary fillip 
would probably be given to business activity which would be analo- 
gous to the one provided in 1936 when "soldiers' bonus" payments 
were dispensed. Even this temporary fillip would result, however, 
only if the public fear of large localized injections of State warrants 
did not cause a wholesale disruption of trade, rapid liquidation of 
assets, and a flight of capital to other States. 

In brief, the ham and eggs plan, like the Town send plan, would 
generate deflationary effects by extracting funds from the big major- 
ity of spending consumers in order to benefit a designated age group, 
and would do nothing about stimulating the flow of those particular 
laggard funds which today are probably mainly responsible for our 
widespread unemployment. 


We have now examined two broad classes of compensatory- 
spending plans for governmentally injecting money into the purchas- 
ing-power stream when holders of existing money elect to use it 
too slowl}^ One type would finance its injections by borrowing; the 
other by taxing. There is still a tliird class. Its proponents would 
have the Governmei;. obtain its funds by issuing "costless money." 

Since the depression began in 1929 the United States Government 
has not resorted to this third method of financing. A move was 
made in that direction in 1933 when the Thomas amendment to the 
Agricultural Adjustment Act empowered the President to purchase 
and retire up to $3,000,000,000 of Government obligations with non- 
interest-bearing notes ; ^^ but the power was never used. The idea, 
however, is still current and still before Congress. In its recommen- 
dation of April 8, 1939 (above mentioned), to the chairmen of the 
Committees on Banking and Currency of the 'Senate and House for 

u A^^™ ,^^^ Eggs," by Gary McWilliams in the New Republic, Oct. 25, 1939, p. 332. 
A similar proposal for "self-liquidating" "pension or recovery money" paid for by 
|}"J?,P^..^s the "American Recovery Plan," Occidental Building, Indianapolis, Ind. (W. S. 
^^ i\i°K ' -^^^^""^^ director). Pensions sufficient to provide an income of $30 weekly 
would be issued to unemployed citizens over 50 years old. The aim is to eliminate in- 
terest costs and Government debt itself, but again the incidence of the taxation would 
De on the consuming public. 

"48 Stat. 31, sec. 43 (b). 


a study of monetary proposals the Board of Governors of the Fed- 
eral Reserve System wrote : 

During this session of Congress, as during other recent sessions, the Board 
of Governors has been asked by committees of the Senate and House to report 
on a large number of bills dealing with proposals for overcoming the country's 
economic difficulties by monetary action. Among the proposals that are cur- 
rently before Congress, many are based on the belief that our difficulty is in 
the lack of an adequate supply and control of money. Some vs^ould remedy 
this situation by the issuance of currency, either directly by the Treasury, or 
through the Federal Reserve banks ; some would retire Government bonds by 
issuing paper money, and thus not only increase the supply of currency, but 
also reduce or retire altogether the interest-bearing public debt."" 

Most of those who favor financing Government spending by having 
the Treasury issue currency or its equivalent dilTer, as do most other 
advocates of Government spending, over how they would disburse 
the new moneys. Ex-Congressman Charles G. Binderup, for ex- 
ample, would disburse the new costless money to widows, orphans, 
and other needy people ; ^^ James R. Allen ^^ would disburse it to all 
adults with assets of less than $5,000 ; James H. Lang °^ to those who 
would use it in construction of new housing — on a mortgage-loan 
basis at profitless interest rates. Maj. C. H. Douglas would disburse 
it as subsidies to those who demonstrate in purchase receipts that 
they spend the money they receive ; '^° James H. R. Cromwell and 
Hugo E. Czerwonky would disburse it as subsidies to those business 
men who borrow and initiate new activity.''^ A. A. Berle, Jr. — pro- 
ceeding on two premises, first that more "investment" is needed to 
heal depression, and second that it is justifiable to create additional 
money for the purpose — would set up a system of "capital credit 
banks" to disburse the new money to all agencies, public or private, 
that are willing to make new investments.**- The money would be 
credited and extended at usual commercial rates to straight business 
enterprises, but would be created and extended at practically zero 
interest to non-profit enterprises. 

Arguments for financing Government spending with costless money 
usually revolve around three contentions: First, that depression 
exists mainly because the absolute quantity of money in the Nation 
is inadequate; second, that money is inherently only a token, and, 
since the Government has the sole right and power to create it,^^ more 
of it should be created and disbursed to meet existing needs; third, 
that interest on money is largely a reward to money savers for "not- 
hoarding," and that in times of depression such a reward should not 
be paid to them and hence the Government should utilize costless 
money in place of borrowing. 


The view that depression prevails because the existing quantity of 
money is inadequate and that the provision of a larger supply of it 

^ Federal Reserve Bulletin, May 1939, p. 363. 

" See Congressional Record, Appendix, 75th Cong., 3d sess., vol. 83, pt. 10, p. 2274. 

^ Address, 722 Bennett Street, Wilmington, Del. 

^^ Address, 35 Beach Avenue, Larchmont, N. Y. 

«« Social Credit, W. W. Norton & Co., New York, 1933. 

«i In Defense of Capitalism, C. Scribner's Sons, New York, 1937, pp. 80-89. 

«2 "A Banking System for Capital and Capital Credit," Exhibit No. 620, Hearings 
Before the Temporary National Economic Committee, Part 9, pp. 4067. 4068, 4072 flf., 

«» Proponents of this contention maintain that the Constitution of the United States 
provides that the Federal Government alone has the right to create money, and that the 
creation of credit money by private bankers is a usurped power. 


would effect a rapid recovery is very widespread. It is so common 
that the Federal Keseive Board, in the statement referred to above, 
singled it out for criticism in saying : 

The Board at different times in response to committee requests has stated 
its position on individual proposals. While it has expressed disagreement with 
some of the measures which in its judgment would not accomplish the purposes 
for which they are intended, it recognizes the importance of making every effort 
to achieve the underlying objective, which, broadly speaking, is the fullest prac- 
ticable utilization of the country's human and material resources. It has been 
the Board's view that, since the money supply, however measured, is larger now 
than at any previous time, the difficulty must lie not in the scarcity but in the 
inadequate use of the existing supply." 

The fact that the Nation's quantity of currency was larger during 
the spring of 1938, for example, when the Federal Reserve Board's 
index of industrial production was down to 76, than it was in the 
spring of 1937 when this index was up to IIS,^'^ confirms the Federal 
Reserve Board's view that depression was not being caused by a short- 
age in the money supply. On the other hand, the fact that prevailing 
unemployment is not being caused by a national shortage of money 
does not rule out the possibility that in times of depression there may 
be a shortage of money in the hands of those who are willing to use 
it, nor the possibility that' new injections of costless money at the 
proper points might alleviate economic conditions. 

One source of confusion responsible for the view that we have an 
inadequate supply of money is the. belief that the quantity of money 
should equal the value of the product. Many people recognize that 
business borrowers, who are instrumental in creating money, release 
(in the form of wages, salaries, interest, dividends, etc.) approxi- 
mately enough money to buy back the goods and services produced; 
but not everyone recognizes that, whereas the goods produced travel 
a one-way path from production to consumption, money created by 
business borrowers circles around the markets and is capable of per- 
forming a highly variable amount of work — capable, that is, of "clear- 
ing" a highly variable number of transactions. As the National Re- 
sources Committee puts it : "Production moves by successive steps 
toward the consumer while the money flows directly connected with 
production move in the opposite direction. Production, with rare 
exceptions, is a straight-line flow toward the consumer, ending with 
the latter. Money flow is in the main a circular flow, the same dollars 
being able to repeat the circuit time after time. It is partly because 
of the circular character of the flow of money that the financial flows 
are so poorly understood as compared with the more direct flows of 
production." ^^ Failure to recognize these relationships lies at the 
root of the belief of such writers as Major Douglas, Cromwell, and 
Czerwonky that the creation of money and goods must be synchro- 
nized and that if, as they maintain, structural and institutional changes 
occur which impede the flow of some of the constituent money streams, 
more money must be introduced into the system. 

As a matter of fact^ the historic growth of time deposits within 
*he banking system is itself proof that in the normal course of trade 
business borrowers are instrumental in creating and releasing into 
the channe ls of trade more money than is needed to exchange in our 

"* Federal Reserve Bulletin, May 1939, p. 363. 

«^v® same, p. 422; for currency supply, see the same bulletin for July 1938, p. 591. 
T ^?^o^*^"<^t"'"^ of the American Economy, Part I. U. S. National Resources Committee. 
June 1939, p. 79. 


markets the goods and services produced. A large fraction of the 
demand deposit dollars disbursed by borrowers are soon received 
by people who do not wish to use them as exchange instruments, pre^ 
ferring to extinguish them as mediums of exchange by depositing 
them at their banks as time deposits rather than as demand deposits. 
(Time deposits may be regarded as "money" by some people, but it is 
difficult to see how time deposits can be regarded as mediums of 


Another group of advocates of a costless money, such as Hugh 
Fack,'^^ Frederick Soddy,^^ J. E. Bistor,*^" and G. Binderup,^° contend 
that money is a token which in itself is valueless, that the state 
should properly retain as a state monopoly the power to create 
money, that the state today unwarrantedly permits bankers to usurp 
this power (the group regards bankers as counterfeiters who are 
benignly tolerated by the state) ; that the state unjustly requires 
citizens to pay bankers a fee for creating this medium of exchange, 
and that the Government certainly should not pay bankers for con- 
verting Government obligations into money. 

If we are to evaluate contentions like these and if we are to under- 
stand both the relative merits of fiat money, Government money, 
private credit, and gold as mediums of exchange, as well as the rela- 
tion which these various forms of money have to one anotlier in our 
own banking system, we must examine the complex nature of modern 
money itself. We must examine how, in the web of law and prac- 
tice, tangible monetary mediums like gold and silver are related to 
intangible monetary mediums like Government credit and private 
credit. We must examine how our exchange mechanism came to 
shift from the preponderant use of wealth mediums and certificates 
of ownership (warehouse receipts) to the current preponderant use 
of certificates and records of indelDtedness. In the process of doing 
so we shall find that some of the widespread fears of "inflation," 
"expropriation," "Government bankruptcy," etc., are rooted in per- 
plexity regarding the interrelated roles played by our gold bullion, 
private credit, and Government debt in our monetary and banking 



Within loosely organized societies and between societies with inde- 
pendent sovereignties, wealth mediums like gold, silver, furs, tobacco, 
or other materials with intrinsic value, tend to be used exclusively as 
the mediums of exchange. But when organized societies develop 

^ Address, 309 Madison Street, San Antonio, Tex. 

«s The Role of Money, George Routledse & Sons, London, 1934. 

* President of "Honest Money Founders, Inc., a monetary group with headquarters at 
111 West Washington Street, Chicago. This organization has as 2 of Its first de- 
mands : "Replace gradually our $34,000,000,000 of tax exempt interest bearing Govern- 
ment bonds with sound constitutional money (saving our taxpayers nearly a billion dol- 
lars yearly Interest now paid to the money monopoly of banks and insurance companies)," 
* • * and "Restrict all future money to Treasury notes, to be full legal tender, good 
for all debts and taxes at face value." From Booklet No. 2, published by Honest Money 
Founders, p. 21. 

'"> See p. 48 above. 


efficient court and police systems, wealth mediums tend to be super- 
seded as exchange instruments by certificates of indebtedness. 

Wherever contractual agreements pertaining to future behavior 
are treated as property, there rights, duties, liberties, exposures, 
powers, and restraints (the constituent ingedients of property rights) 
are given to the ownership of intangible expectations based on "prom- 
ises to pay" as well as to that of tangible items like gold dust. Both 
become assets wortii owning. And whenever the institution of prop- 
erty evolves to the point where it becomes even more convenient and 
efficient to use "certificates of indebtedness" as mediums of exchange 
than to use gold itself, then such certificates tend to supersede the use 
of wealth as mone3\ For even precious metals are imperfect ex- 
change instruments. They are liable to loss, chipping, and inaccu- 
rate evaluation at each transaction. On the other hand, "promises 
to deliver," say, wheat or lumber or gold, when backed by real-prop- 
erty collateral in the enforcement machinery of the State may be- 
come more useful as mediums of exchange than either gold bullion 
or warehouse receipts to gold bullion. And when promises are insti- 
tutionally scrutinized, O. K.'d, and insured with a reserve of value 
(see p. 16), they become superior as exchange instruments to both 
gold coins and gold certificates. 

Historically, the evolution of money has tended to make it a 
medium with an ever better store of value. Relatively perishable 
commodities like Alaska's furs and Virginia's tobacco were early 
superseded by coins of silver and gold. When the institution of 
property evolved further, to the point where titles to property 
€ould conveniently be made out and protected, warehouse receipts 
came to compete with coins as money. For, when societies made 
warehouse receipts negotiable, warehouses sprang up where rich 
traders could store their goods. And, with warehouses set up, pro- 
ducers could sell their products to traders on consignment and take 
warehouse receipts in exchange — receipts which were yery accept- 
able as money. Consequently, by means of book entries, book 
"credits," "scrip," "transfer slips^" or whatever they chose to call 
their warehouse receipts, producers could exchange goods with one 
another by simply transferring their receipts to goods in the 

"Certificates of ownership" or "warehouse receipts" were more 
divisible, convenient, and theft-proof than gold bullion itself. Yet 
they could not be hoarded without loss except in the single case 
of certificates of ownership to metals such as gold. For, obviously, 
the title to specific furs, hides, crops, or fabrics depreciated in value 
as rapidly as the goods themselves; they had the same carrying 
charges. Only titles to gold and silver did not depreciate with 
time, and tiiese alone could be hoarded with impunity. Consequently, 
people ceased using as money all warehouse receipts except those 
for gold and silver; that is, they began using "gold and silver cer- 
tificates" as a major form of medium of exchange. Under this 
arrangement th& legal title to and the physical possession of wealth 
were separated. The gold itself, for example, stayed in the ground 
or in the warehouse, while the title to the gold circulated as the 
medium of exchange. At this stage of monetary development the 
monetary form was slightly better as a store of value than was 
.gold ; for the losses of shipping and inaccurate weighing were* elimi- 


nated. There had come to be less risk in the enforcement of con- 
tracts than in the physical weighing and transferring of precious 

Money improved as a store of value, in pronounced fashion, how- 
ever, only when certain kinds of certificates of indebtedness came 
to supplant gold warehouse certificates as a medium. Before we 
explain how such assets came to be used for money it is best to 
review how certificates of indebtedness came into existence in the 
first place, and how they came to have the relative imperishability 
which they now possess. A look into the nature of contract will 
explain why certain kinds of certificates of indebtedness like bank- 
notes were able to drive out warehouse receipts such as gold certificates 
as the preponderant form of medium of exchange. 

With development of the institutions of property and contract, 
certificates of indebtedness of many kinds came into existence. And 
as soon as these institutions were crystallized business borrowers 
could use their own institutionalized promises — backed as they were 
by their possessions — in payment of goods and services. Since the 
farmer's promissory note in terms of potatoes had value, he could 
use it in his immediate neighborhood to purchase other goods. Next, 
by stating the current value of his promise (and having that value 
endorsed by a banker) in terms of a unit of the particular kind 
of asset used by the commui^ity as its "standard of value," he could 
convert his promise of very limited acceptability into an asset recog- 
nized and accepted everywhere as valuable. 

When business borrowers made /such conversion arrangements, 
however, and spent their transmuted promises for goods and serv- 
ices, they unintentionally provided those who wished to "save" the 
transmuted promises with an asset that was well-nigh perfect as 
a store of value. For the value of the borrowers' promises, based 
as they were on a postulated future selling price for their prod- 
ucts, was not only expressed in terms of the current monetaiy unit 
and evaluated on the basis of that unit's current purchasing power, 
but also insured for the recipients for 90 days with the borrowers' 
farms, barns, and other possessions. For the value of all the bor- 
rowers' possessions above the face value of their promises operated 
as an insurance to the recipients and "savers" that the value of the 
promises would persist. When possessions are put up as forfeits 
behind what are in effect current appraisals of future revenues from 
production, savers of such insured appraisals need no warehouses 
or safety vaults to preserve their assets. With these certificates 
of indebtedness standardized in the form of banknotes which were 
issued to one borrower after another, their value acquired continuity 
and they became relatively imperishable. 

If it is clear how certificates of indebtedness in the form of banli- 
notes came to have a reserve of value behind them which appre- 
ciably insured their face values, and how they came to be the safest 
kind of asset to hold, it is easy to see how they came to be sought 
more than warehouse receipts (even gold certificates) and to replace 
the latter as mediums of exchange. 

Before the inauguration of credit money, money lenders like the 
medieval family of Fuggers, lent to clients both gold and warehouse 
receipts to gold. Borrowers, probably because of their faith in the 


money lenders, in the uniform quality of the metal, and in the Gov- 
ernment's enforcement of agreements, were disinclined to carry the 
gold itself away from the bank. Borrowers were as willing to use 
and pay interest on transferable warehouse receipts as they were to 
use and pay interest on the chunks of gold themselves. Because 
people were so disposed, bankers were presented with a new business 
opportunity. They noted that on the whole not more than one 
certificate of ownership to gold out of every ten issued was pre- 
sented for redemption within a given period of time. Consequently, 
when a warehouse receipt was presented, bankers could redeem it — 
the gold being uniform in quality — with any ounce of gold they had 
on hand. The bankers discovered, too, that the stream of deposits 
practically equaled the stream of withdrawals, and that to buffer the 
difference they needed only one-t^nth as much gold as their depositors 
assumed they had in the warehouse. As a consequence the bankers 
could issue and "lend" 10 times as many warehouse receipts — or 
certificates of ownership to gold — as the actual supply of gold seemed 
to warrant. This came to be the banking custom. One thousand 
ounces of "gold" came to be "lent" at "interest" for every 100 ounces 
of gold in existence. 

But by "lending" more gold than they had, the bankers were — as a 
matter of economic fact — "lending" promises to pay gold upon de- 
mand, promises which were not actually warehouse receipts. For 
the bankers did not have all the gold that they "lent"; they merely 
promised it and hoped to get it by selling or rediscounting their assets 
(in exchange for each other's gold) if driven to do so. The bankers 
realized that they could not all obtain enough gold to redeem their 
promises simultaneously — there was not enough of it to go around; 
but each banker gambled that he could obtain it more quickly than 
the others. Still by "lending" more gold than they owned, they 
were really lending "certificates of indebtedness," not "certificates of 
ownership to gold." In Striving to maximize their loans the bankers 
actually had changed the nature of money. 

After a time the bankers dropped the pretense that they were lend- 
ing warehouse receipts, or certificates of ownership, and they dropped 
the pretense that they were acting as custodians of the gold on which 
borrowers were paying interest. Finally, indeed, they frankly wrote 
on the notes or negotiable instruments that they lent: "This is our 
promise to pay an ounce of gold upon demand," not, as formerly, 
"This is your certificate of ownership to ounce of gold No. 2481 in 
vault No. 14." Obviously the new paper money was no longer a title 
to gold but a promise to (attempt to) get it when called upon to do 
so. Thus "promises to pay," or debt obligations, came tt) circulate 
sice by side with gold coins and even to exceed them in point of 
volume. The circulation of the gold was a hangover from a barter 
economy ; the circulation of the promises was the inauguration of a 
credit economy. And by this evolutionary change assets with 
superior hoarding qualities were increased tenfold. 

The introduction of "certificates of indebtedness" was not the last 
physical change made in the nature of money. When bankers set 
about entering into new debt obligations they did not issue in each 
case an actual piece of paper stating, "This is our promise to pay 
gold on demand." They created only a few such physical certifi- 


cates. In the United States until 1933 these few comprised a large 
part of our paper money, our "currency," and were designed pri- 
marily for ready hand-to-hand use. The vast supply of bankers' 
debt obligations were set up merely as book entries to the credit of 
borrowers. The borrowers themselves signed "notes" and made out 
actual physical slips of paper, but the bankers only made boak entries 
to their depositors' accounts. The simple process of having bank 
clerks record figures in deposit books was the efficient substitute for 
creating and using cumbersome paper bills. Functionally and, on 
the whole, legally, the entries were the equivalents of printed certifi- 
cates of indebtedness; but physically they provided a much simpler 

In passing, it may be interesting to reflect that we have been so 
naive in our understanding of money that, while we have regarded 
the non-use of currency (that is, of promises to pay that are reduced 
to paper bills) as "hoarding," we have not customarily regarded as 
hoarding the non-use of bank deposits, which are the economic equiva- 
lents of those paper bills (since both moneys are but claims against 
the generalized assets of the banking system). Naively, too, we have 
passed laws punishing those who hoarded gold and gold certificates, 
but have lauded as "savers" those who have hoarded those insured 
appraisals of future production values which are held in the form 
of book entries. 


We have just seen how bankers who began by lending only titles to 
the gold that they owned ended by "lending" promises to pay 10 
times as much as they had. Superficially it would seem that bankers 
were unwarranted in doing this. Still Ave should not jump to the con- 
clusion, as many critics of banking have done, that the bankers were 
counterfeiting the difference. Accurately to understand the situation, 
it is necessary to examine into what bankers do when they "lend" 

When bankers first lent gold to their clients, they had a certam 
quantity of it. Let us assume that the first American bank doing busi- 
ness under the gold standard had only 23,200 grains of gold. Since the 
law said that the country's monetary unit (the "dollar") must con- 
tain 23.2 grains of p>ure gold, let us assume that the banker lent out 
his gold in chunks with 23.2 grains or multiples of 23.2 grains in each. 
Then how could it develop that the banker managed and dared to 
"lend" more gold than he had? It developed out of his habit of 
demanding contractual "security" for his loans. 

Borrowers who initiated loans were usually businessmen with prop- 
erty. Such men (like the farmers) could, of course, have carried on 
exchange with one another without the help of the banker by exchang- 
ing with one another their notes — their secured promises to produce 
goods. Because exchanging such debt obligations was relatively diffi- 
cult and inconvenient, however, they nuich preferred to convert their 
notes into more acceptable pledges — into bankers' promises to pay 
"gold on demand" — since everyone was willing to accept such promises 
on sight. 

An examination of the process of converting pledges reveals that 
bankers (in the days when we were on the full gold standard) could 


*'lend" more gold than there was in existence only because they were 
really lending nothing at all. We shall see that borrowers always use 
as purchasing power only a part of the current value of their own 
assets after the value of those assets has been transmuted into a new 
form and guaranteed to the public by the banker. 

In the creation of deposit money, borrowers carry out the conversion 
of their assets by inducing bankers to exchange debts with them. 
They promise one another an unequal quantity of "dollars" to be 
delivered at different dates. In initiating, say, a $1,000 loan, that is, 
in creating $1,000 worth of "money," the borrower has the banker 
assign a $1,000 value to such a fraction of his assets as he pledges will 
be worth, say, $1,015 (at 6 percent) 90 days later. The borrower plans 
to produce and sell goods before that date, and it is this product 
which he plans to exchange for at least 1,015 of the public's dollars 
before tlie 90 days are up. The banker plans on such performance, too. 

Since, however, both realize that something may go wrong with 
the borrower's plans, the borrower gives the banker a note which the 
courts regard as being a contingent claim against hi« property. The 
borrower in substance says that if he fails to pay the banker $1,015 
within 90 days, the banker may commandeer his pledged property and 
sell it to reimburse himself. The banker is willing to promise 1,000 
gold dollars "on demand" (even though he realizes that there may be 
no new additions to the country's quantities of gold to make his 
promise a realistic one) because the borrower puts up, as collateral, 
assets which the banker believes at the time of the loan can be ex- 
changed for much more than $1,000 in gold, and which he feels con- 
vinced will be worth in gold at the loan's maturity — even in a forced 
sale — at least as much as the face value of the loan. 

Thus by means of an exchange of debts, the banker in effect says 
that for an "interest" (or conversion) fee of $15 (6 percent), he will 
guarantee that the borrower's security, which may be worth many 
thousands of dollars at the time of the loan, will be worth at least 
$1,000 at the termination of the loan, and that he, as banker, will con- 
vert, for the duration of the loan period a prior claim against the 
borrower's assets into a claim of $1,000 against himself. In a nominal 
sense, the banker underwrites the borrower's pledge by taking the 
responsibility for its value at maturity. In a realistic sense, however, 
the borrower himself underwrites the banker's evaluation and takes the 
bigger risk because he insures his note with a contingent claim against 
his other possessions. 

The fact that bankers usually go bankrupt only after large num- 
bers of their clients first go bankrupt indicates that borrowers and not 
bankers are the primary underwriters of the debt exchange. Func- 
tionally speaking, the banker simply puts part of the present value of 
the borrower's assets into a new dress which has a more acceptable 
form and credits it back to him. After the money is created the 
borrower has part of the value of his assets expressed in their dollar 
equivalent and can more readily distribute his purchasing power for 
labor and raw material. 

Note that in the asset-conversion process the banker has lent no 
gold or titles to gold ; he has remained the custodian of his own gold 
the whole time. He has merely incurred an obligation to pay dollars. 
And while he has incurred an obligation to the borrower, he has re- 

273442— 41— No. 25 5 


ceived in its place the borrower's equivalent (though numericallj' 
larger) obligation to repay dollars to him. The borrower's future 
obligation may be on its face some 6 percent greater in dollar terms 
than the banker's balancing liability, but the present value of both 
obligations is regarded by the parties to the transaction as equal. 

Since the community feels that, as a matter of course, the banker 
always balances his debts with contingent claims against borrower's 
assets which have values far in excess of the amount of his loans, and 
that he gets no poorer as his loans increase, it reasons that there is no 
logic in investigating whether the banker really possesses that myste- 
rious asset, gold, which he claimed that he had in vault when he first 
began his role as banker. Normally the banker's $1,000 gold supply 
is never looked at or asked for. Yet in a nominal sense, whenever 
the banker has "lent" exactly $1,000 — no more and no less — against 
borrowers' assets, a "dollar" can be regarded as a realistic claim to 
23.2 grains of gold, for the banker actually has 23,200 grains of it in 
his vault available for redemption. Thus at the very beginning of the 
banking process, when the bank's gold reserve of 23,200 grams was 
exactly equal to the value of the borrowers' notes, the "dollar" could 
be regarded as being eitheri/iooo pa^rt of the value of the boiTowers' 
obligations to the banker, or, if the holder of it so chose, asi/iooo 
part of the gold in the vault; that is, as a claim to 23.2 grains of gold. 
(This claim citizens are permitted to exercise normally when they do 
not want gold, but are not, as a rule, permitted to exercise at times — 
like the bank holiday period — when they prefer gold.) 

When, however, bankers "lend," say, $2,000 against the secured 
obligations of borrowers, and there is only $1,000 worth of gold in the 
banking system, each "dollar" in circulation cannot be, as a realistic 
matter and despite any legal definition of it, a claim to 23.2 grains of 
gold. It is then at most a claim to i^ooo part of the bank assets, 
assets which consist of a mixture made up of 1,000 pieces of gold plus 
miscellaneous bundles of borrowers' debts which are in the nature, of 
contingent claims against property. As soon as bankers began to 
issue obligations to pay gold on demand against borrowers' assets, the 
gold dollars became merely yardsticks of value — gauges against which 
bankers could evaluate the assets of borrowers. The gold is in effect 
locked up like a gauge at the Bureau of Standards while the assets 
evaluated or measured against the gauge circulate as the medium of 

As soon as the bankers promise to pay on demand more gold than 
there is in the banking system, a dollar ceases to be a realistic claim 
to a certain number of grains of gold, and the deposit "dollar" becomes 
only a fractional claim to the assets of the bank — assets consisting of 
a hodge-podge of pledged values which are backed by contingent 
claims against farms, goods in process, real estate, railroads, fac- 
tories, etc. 

We may now summarize the money-creation process. Men with 
valuable but clumsy assets, like goods in process, farms, factories, 
''accounts receivable," and even speculative prospects — assets which 
cannot be conveniently broken up and handed out as money to workers 
and manufacturers in exchange for labor and materials — come to the 
banker when they want to engage in exchange to get him to help them 
convert rtheir assets into a usable and acceptable form. Because the 


banker has gold and other wealth, they want him to certify that they, 
too, have assets which, if offered in exchange, have a gold worth at 
least equal to the $1,000, $2,000 or whatever sums they wish to borrow. 
The borrowers want the banker to underwrite his judgment to the 
effect that their assets have a definite worth. For this assistance they 
are willing to pay him a fee and to extend to him, for the duration of 
the transaction, a contingent claim against their assets. 

Until we went off the full gold standard bankers pretended to be 
lending gold. Actually, they were evaluators of the assets of bor- 
rowers, cautiously transforming, by means of a debt exchange, part 
of the l3orrowers' clumsy assets into negotiable "dollars," which were 
intended to be so unquestionable in worth that they would be accepted 
on sight at their face values. Then after making an exchange of debt 
with each of^the borrowing clients, they balanced the indebtedness 
accounts of all of them. Tliey did the bookkeeping. They were the 
treasurers for a community that dealt in pledges. They, in effect, 
balanced one man's promise to produce butter against another man's 
promise to produce potatoes, and by so doing assisted all producers in 
exchanging goods with one another. 

Bankers have a tendency to be conservative in iheir evaluations be- 
cause they stand to lose their own assets if the borrowers' assets do not 
have the total value on their dates of maturity that was anticipated 
when they were converted. If a banker carelessly grants a $1,000 loan 
on a note which proves worthless, he really makes a present of $1,000 
to the borrower. And, since the banker is, in effect, the treasurer of 
the community and keeps his own funds with those of the community, 
he has the power to lend some of the community's property to bor- 
rowers who have none of their own. As A. A. Berle, Jr., says, "In 
earlier times, the local bank not infrequently used to do this, providing 
capital to young men who had ideas and ability, and staking them to 
the creation of enterprises of benefit both to the enterpriser and to the 
community. Many American businesses which have since attained 
substantial proportions were started in exactly this way. The large 
commercial banks do not do this today. If they desired to do so, they 
would probably not be permitted to do so under the prevailing banking 
regulations. Indeed, the major theory on which they operate, i. e., 
creation of bank credit for short-term processing or transportation or 
merchandising jobs — runs chiefly counter to any theory that the bank, 
among other things, is supposed to assist in organizing new produc- 
tivity.'^^ Thus, as a rule, the banker does 7iot divert to borrowers 
someone else's assets on which to operate until they have produced and 
sold their goods. The borrowers buy labor and raw materials with 
their own assets — with the present value of their own future 

Borrowers' secured obligations necessarily have a present value. By 
overlooking this fundamental fact many theorists have erred in be- 
lieving that bankers today extend to borrowers claims against the 
assets of the community which the borrowers would not otherwise pos- 
sess. Such a belief is unwarranted. Bankers are not essentially 
lenders; they are evaluators and converters. Unwarranted, too, is 
the view that those price rises which usually follow rapid expansion 

" In "A Banking System for Capital and Capital Credit," Exhibit No. 620, Hearings 
Before the Temporary National Economic Committee, Part 9, p. 4072. 


of bank ."loans" are caused by the extension by bankers of purchasinsf 
power to producers. Such a rise is due to the willingness of pro- 
ducers themselves to add a new quantity of money — their own newly 
converted debt obligations — to the old money that is currently bidding 
for the goods and services for sale in the markets. 

Since 1933 the quantity of money in the United States has been ex- 
panding. This has not been caused, however, by an increasing mone- 
tization of private assets, but by an increased monetization of public 
debts and an unusual influx of gold for deposit. Since 1933 the United 
States Government has been the major borrower whose obligations the 
banking system has been converting into money. Unlike the conver- 
sion of private obligations, the conversion of Government obligations 
requires little risk-taking by the banker and the "conversion fee" or 
interest rates charged the Government have as a result been very low.'^^ 
The reason that the Government must still pay over 2 percent for the 
monetization of its long-term obligations is not that banks run a risk 
that Government bonds will not be redeemed (so long as the Govern- 
ment retains its sovereign power to create money, it can always redeem 
its bonds in terms of the promised "dollars"), but because a business 
upturn might raise the yield on money and thus cause the market 
value of outstanding bonds to fall. 

The question of which is the more desirable kind of asset to use for 
money, whether monetized private debt or monetized public debt, may 
be a relatively important one; but it is, nonetheless, highly secondary 
to the issue of keeping in circulation whatever asset happens to be 
selected for use as money. For all kinds of money, whether they be 
rooted in Government borrowing or private borrowing, whether they 
be bank obligations with fractional reserves or with 100 percent re- 
serves, may, under our present laws, be laggardly used by their 

In one respect monetizing Government debt affects the money sup- 
ply in a different way than does the monetizing of private debt. When 
credit money is created against private debt and that credit money is 
used so slowly that workers are dismissed, prices fall, and factories 
close, then loans are curtailed by the banker and the money supply 
is contracted sharply as a result. That is what happened, for exam- 
ple, during the deflationary period from 1929 to 1933. But when 
credit m.oney is created against Government debt, and that money is 
used so slowly that depression results, loans to the Government are 
not curtailed and the money supply is little affected. From the peak 
of business recovery in 1937 to the bottom of the dip in 1938, for 
example, the supply of money representing Government debt even 
continued to expand, while that which consisted of private debt con- 
tracted sharply. Even though business activity was declining, banks 
had no reason, as explained above, to "lose faith" in the redeemability 
of Government bonds in terms of "dollars." 

" Apropos of this point, Berle writes : "There may be every reason for aslfing 4 or even 
5 percent return from a commercial enterprise ; but there should be the possibility of 
charging, say, one-eighth of 1 percent for a noncommercial enterprise, such as a hospital. 
It is to be remembered that when the Government gives to a banking organization the 
power to create' money, it no longer is necessary to offer an interest rate to stimulate 
that creation." ("A Banking System for Capital and Capital Credit," in Hearings Before 
the Temporary National Economic Committee, Part 9, p. 4073). 



Novp, with perhaps a clearer understanding both of the nature of 
money and of the banking process, we can resume our examination of 
the proposal to finance Government spending with costless mone^'^, 
mentioned on page 47. Would such action be inflation? Would it 
deprive banks of a valid source of income ? Would it lead to expro- 
priation of the present savers of money? Would resorting to fiat 
money and the printing press save the Government large sums in 
interest ? 

Recourse to costless money would undoubtedly constitute monetary 
inflation, inasmuch as the quantity of money — currency or deposits, 
or both — would swell in volume continuously. But such results would 
not necessarily spell price inflation. Price inflation would result only 
if voters and their leaders elected to create and disburse costless money 
on such a scale that practically all unemployed workers were absorbed 
and pressure was put on existing productive capacities to the extent 
that competition between producers raised costs and prices (cf. page 
38). If, in deflationary periods like that which prevailed from 1929 
to 1933, fiat money had been resorted to in only a mild degree, prices 
certainly would not have run away. And if, since 1933, money had 
been printed and disbursed on no greater scale than it has been bor- 
rowed and disbursed since that time, the price level would probably 
be no higher than it is today. Thus recourse to costless money does 
not necessarily mean higher prices. 

The major objection to fiat money, perhaps, is not economic but 
political. The danger is that politicians would not adjust their 
demands for costless money to criteria which would preclude price 
inflation. It might well appear obvious to them that if a little fiat 
money can do some good, much of it can work wonders. Politicians 
might compete with one another in promising their constituents 
bonuses and pensions to be financed with costless money. 

On the other hand, it does not necessarily follow, once fiat money 
is resorted to, that the quantity of money will inevitably be expanded 
in such astronomical quantities that the price level Avill run away and 
all internal debts will be destroyed. Russia and Germany did de- 
stroy the value of their moneys by resorting to such unlimited mone- 
tary inflation that they generated an astronomical price inflation 
which expropriated the creditor class. On the other hand, France 
and Italy resorted after the first World War to enough monetary 
inflation to generate considerable price inflation, and stabilized their 
currencies at a new level, but did stop short of completely expropri- 
ating creditors. 

Ex-Congressman Binderup '^^ advocates disbursing costless money 
to people at the bottom of the income scale, on the ground that they 
need it and would keep it in circulation. Would such disbursements, 
if made, in themselves bring on Government bankruptcy? Not if 
resorted to on such a mild scale that the price level did not rise. And 
to judge from our experience during the past decade, the Govern- 

'" See p. 48 above. 


ment's net contribution to the purchasing power stream would have 
to exceed appreciably $2,000,000,000 to $3,000,000,000 per ysar to 
keep prices on an up-trend. 

If recovery is to be sought, not through installation of social con- 
trols which induce private industry itself to work more actively, but 
through calling on the Government to disburse purchasing power 
among otherwise idle workers, it seems sounder to create the money 
disbursed than to borrow it. Government credit probably would not 
be injured by doing so. Just as heavy Federal borrowing since 1933 
has not — to judge from the manner in which each new issue of Fed- 
eral bonds is over-subscribed — caused investors to "lose faith" in the 
solvency of the Government, so limited recourse to costless money 
probably would not cause them to lose faith in the redeemability of 
its promises. 

During the past y years the Government has borrowed and spent 
on the average about $2,900,000,000 per year. {On July 1, 1931, 
the gross debt of the United States was $16,801,000,000;^* on July 1, 
1940, it was $43,061,000,000.)'^ Each successive injection of Govern-- 
ment funds has come to rest in the hanas of well-to-do people who 
have preferred not to keep the injected tunds circulating at the rate 
at which they were disbursed. Year after year the injections have 
slowed down, and the Government has borrowed at interest again. 
Not even the interest payments have continued to circulate at their 
initial injection rate. 

Some people, like Josef Geiger '^ and Jesse LaRue, would have the 
Government cease paying interest on its borrowings. LaRue 
writes — 

It is because interest, like the larger part of business profits and individual 
savings, is held out of use, and thus robs the 'economic blood-stream of its 
substance, that men can no longer earn their . livelihoods. Such large with- 
drawals ultimately bleed industry white. This is why interest must be 

Whether it must be abated or not, the replacement of tax-exempt, 
interest-bearing Government bonds with costless money would, as he 
maintains, save our taxpayers about $1,000,000,000 per year.'^^ 

But would obtaining Government funds without paying interest 
be an injustice to money savers? It is generally believed that re- 
course to costless money would operate to expropriate the present 
holders of money. Would it? Again it would depend upon the 
extent to which costless money were resorted to. It is even possible 
that, in times of depression, moderate issuance and disbursement of 
fiat money would operate to protect savers of money against deposit 
losses which they would otherwise incur as a result of their own 
behavior. This is explained as follows: 

Ours is a system in which business borrowers, in converting assets 
into a current monetary equivalent, in effect contract that their 
products (or collateral security) will have a specified "dollar" value 
at a future date (even though they have no control over the future 
demands, which will largely determine that value). Under such a 

'* See the President's Budget message to Seventy-iixth Congress, first session (Coa- 
;re8isonaI Record, vol. 84, pt. 1, p. 118). 
''s Treasury Statement as of July 1, 1940 (New York Times, July 4, 1940, p. 21). 
'« Address, 412 East Wright Street, Milwaukee, Wis. 

'" The Truth About Interest, Booklet No. 2 of Honest Money Founders, Chicago, p. 12. 
" The same, p. 21. 


system the failure of savers who come into possession of "fortified" 
money ^^ to offer their money in exchange for goods, operates to 
enhance the value of dollars outstanding by generating industrial 
recession and price deflation. For prices fall and hoarded dollars 
increase in value in terms of goods whenever the rate of use of 
fortified money is reduced. Consequently, by the mere process of not 
using money at the same rate at which it was originally disbursed, 
savers of money can make big gains by buying "surplus" goods 
and properties at distress and bankruptcy prices. 

But if savers hold their money idle to too great a degree, or hold 
it too long, so that many business borrowers are forced to default, 
then bank portfolio values crumble too. And if they crumble far 
enough, banks become insolvent and the "saved" dollars — the unused 
clflims to society's products held in the form of bank deposit lia- 
bilities — are themselves wiped off the conimunity's books. Thus, 
the habit of "saving" money too long may defeat itself. Since it 
is a behavior which is individually wise but collectively foolish and 
is carried on without group direction, it is frequently carried too far. 
It is at such times, when saving is about to go too far, that injec- 
tions of fiat money can benefit money savers as well as the public 
at large. If in January 1933, for example, just before the banking 
system of the United States began to crack as a final result of 
inadequate monetary demand, the Federal Government had dis- 
bursed several billions of dollars of fiat money, business activity 
and business values might have been raised so far that the deposit 
accounts of many money savers would not have been wiped out. 

Similarly, it is quite clear that during depression the disburse- 
ment of costless money on a scale which would raise prices some- 
what would not expropriate the savers of money so long as prices 
were not raised beyond their level at the time when the investors 
first began to "lose confidence" and to withhold their savings from 
the business stream. Governmentally injecting costless money at 
such times would operate only to deprive money holders of the gains 
which they would stand to make by buying goods at the lower prices 
which their own laggard spending had generated. If society is not 
to devise controls which insure that recipients of money themselves 
use it for goods and services at the same rate at which they receive 
it, there is perhaps a better case for neutralizing hoarding ^° with 
costless money than there is for borrowing it and increasing the 
Federal debt. 

"social credit" as a "costless money" plan 

One of the better-known reemployment plans of today which ad- 
vocates the handing out of costless money, is "social credit," first 
sponsored by an Englishman, C. H. Douglas.®^ Recourse to costless 

■^ See p. 17 above. 

'" Today the term "hoarding" is used in monetary theory to mean, not the accumulation 
or cash holdings, but the decreased rate of use of the money under one's control. Hoard- 
ing cannot be measured statistically. When the rate of spending falls, business activity 
declines, loans are curtailed, and the decline in the quantity of money, currency and 
demand deposits, parallels the decline in the rate of use of money. Since loans are called 
and reduced and money goes out of existence when spending is curtailed, hoarding should 
be measured not only by the decreased rate of use of existing money, but also by the 
amount of money that has indirectly" been driven out of existence by the lessened business 
activity generated by the reduced velocity of money. 

'^ In his "Social Credit". 


or fiat money is not advocated in such terms by the plan referred 
to, but the money which it advocates handing out as '*hational 
dividends" it proposes to obtain in a costless manner by simply 
"capitalizing" the assets of the state. 

Under "social credit" the assets of a country, its land, roads, build- 
ings, minerals, etc. (with no distinction between public and private 
property), are to be "capitalized." To this will be added a sum 
"representing the present commercial capitalized value of the popu- 
lation." ^^ Initially an arbitrary percent of this total is to be paid 
monthly through the post offices to all but the more well-to-do citi- 
zens. Thereafter citizens qualify for their "dividends" by buying 
goods from registered business concerns which will give to each pur- 
chaser receipted accounts for goods purchased. These receipts the 
State will accept, when the purchaser deposits them at the bank, at 
a value equal to an arbitrary percentage (25 percent at least, is 
recommended) of the value of the goods purchased.^^ 

Payment for goods will be made in the ordinary way, either by check or cur- 
rency. The purchaser will lodge his receipted account for goods bought with 
his bank in the same way that he now pays in checks, and the discount per- 
centage of the amount of such account will be recredited to the consumer's 
banking account. Unregistered firms will not, be supplied with the necessary 
bill forms for treatment in this manner, with the result that their prices will 
be 25 percent, at least, higher than those of registered firms. * * * The 
total of the sums credited by the banks to private depositors in respect of these 
discounts will be reimbursed to them by a * * * Treasury credit.** 

The plan is obviously one which proposes to disburse costless money 
to citizens on the basis of the extent to which they spend their money 
for goods and services. 

Whereas temporary fillips could be given to business by periodic 
injections of costless money in quantities of, say, $2,000,000,000 or 
$3,000,000,000 per year, relatively full employment, followed by either 
dictatorial price control or continuous price inflation, w^ould neces- 
sarily result from the full adoption of "social credit." This is be- 
cause "social credit" proposes by means of "national dividends" to 
"make good the total deficiency of personal incomes" ^^ until the 
Nation's productive capacities are fully used. As was pointed out 
on pages 59 ff. above, when efforts are made to bring a nation's pro- 
ductive facilities fully into use by governmentally disbursing buying 
power, the action ends in upward-spiraling prices as well as in in- 
creased employment unless nation-wide price control is adopted. 
(Briefly, the sequence is pressure on plant facilities and the labor 
supply, competitive wages, higher prices, sales resistance; additional 
governmental disbursements in an attempt to maintain demand, buy- 
ing power and employment; still higher prices, and finally either 
dictatorial limitation of prices or price inflation.) With price infla- 
tion, even the additional money continually received through national 
dividends would be found to provide inadequate buying power to 
absorb industry's products at the constantly rising prices. 

"Social credit," like plans for obtaining full employment through 
Government borrowing and spending, is also deficient in that, when 

«2 Ibid., p. 205. 

" Ibid., pp. 205^-212. 

«* Ibid p. 209. 

•5 A. W. Josepli, The A Plus B Theorem (brochure), New Age Press, London, p. 20. 


the prices of the factors of production — labor, land, or capital — (or 
of the products themselves) are too "sticky" or inflexible to bring 
forth adequate demand, it tries to hand out enough purchasing power 
to make the system run even though it must pamper certain existing 
institutional arrangements which make for favored prices in order 
to make, it run. The plan does not automatically call forth such 
adjustments as lower prices for land, lower prices for strategically 
entrenched labor, lower interest rates for "fortified" and sheltered 
capital, and similar pressures on the rigid contributors to production, 
pressures which would result in inducing already existing money to 
move around more actively in private business. 




Having discussed several variations of those plans which aim at 
recovery by having the Government introduce new quantities of 
money whenever the money claims derived from the normal proc- 
esses of production are used too sluggishly — plans which, in prac- 
tice, all governments resort to when faced with economic break- 
down — we shall now review what appears to be the next most 
common tj'-pe of recovery proposal. 

This type recommends that the Government so modify its laws, 
taxes, behavior, attitudes, and other means of social control that 
money savers themselves will elect to use their money in private 
industry at an adequate rate. Advocates of tliis approach fall into 
two major classifications: (1) Those who advocate legislative 
changes which would — through fewer restraints or by additional 
rewards — lure money savers into disbursing their money; and (2) 
those who would impel the savers into disbursing their money by 
destroying the institutional safety which today enables them with 
impunity to withdraw from production and the channels of trade. 
The outward actions of the first group revolve around efforts to 
"restore business confidence"; the actions of the second, to impose a 
tax on idle money. Because a review of the second approach throws 
light on the theory involved in the first, while a review of the first 
throws no light on the theory of the second, it is advisable to begin 
this section with a review of the proposal to tax money into action. 

This proposal, which basically the author believes has great prom- 
ise, was advanced in over a dozen different forms by those who sub- 
mitted recovery plans to the Temporary National Economic Com- 
mittee. It has long been observed that when people run from a 
"money" to a "goods" position they experience booms, and that 
when — vice versa — they run from a "goods" to a "money" position, 
they experience depressions. As a result, many men want to pre- 
vent flights for "liquidity" by neutralizing whatever advantage money 
possesses that causes people periodically to prefer it to goods. In 
advancing such proposals they raise some fundamental questions. 
Why should people ever want to rush to a "cash position"? What 
safety lies in holding cash that does not lie in holding goods? Why 
should people ever want to go from a goods to a money position when 
the real goal of all peoples is to produce and possess more and more 
goods — not more and more money? Why should people ever decline 
to use money primarily as a medium of exchange and choose to use 


it primarily as a store of value? What advantage has money over 
goods that leads to such behavior ? 

The writer's own answers to these questions he has attempted to 
condense on pages 50 ff. of this report. He believes that in drifting 
from the use of precious metals to the use of certificates of indebted- 
ness for money, society inadvertently shifted to the use of an asset 
as its medium of exchange which has its face value bolstered with a 
reserve of wealth, and that it was the making of this change which 
has enabled possessors of money to withdraw with safety from the 
milieu of production. 

Men who advocate taxing money into use realize, as do advocates 
of most other recovery plans, that economic law decrees that money 
income must — for economic equilibrium — be disbursed as rapidly as 
it is received; but — unlike the others — they challenge the wisdom of 
maintaining laws which facilitate the withdrawal of money from pro- 
duction. In other words, they challenge the right to hoard, hitherto 
regarded in economic theory as inalienable. 

Traditionally, in approaching the problem of business cycles, classi- 
cal economists premised that monetary demand was continuous. Im- 
plicitly they always posited that if money was not spent at one place 
it would be spent at another, and that in the aggregate all money 
would automatically be disbursed at the same rate at which it was 
received. They had accepted Say's and Ricardo's view that even 
though demand were permitted to be anarchic it would, nonetheless, 
never be seriously missing. Reasoning thus, they argued that the 
valves which operate to divert the steadily flowing money stream 
from one channel to another were the ever-changing rent, interest, 
and wage prices. Because the classical economists followed this ap- 
proach, practically the only integrated plans for solving business 
depressions which they could advance were those which hinged on 
greater price flexibility for overcoming the "frictions" in the system. 

Economists have overlooked the fact that when the Nation's money 
came to consist of certificates of indebtedness, "hoarding" — in the 
sense of being a decreased rate of use of money — was not only a pos- 
sible recourse but at times a desirable one for the recipients of money .^ 
Consequently, they have always premised statutory laws which would 
permit hoarding to occur. The analyses of the eminent economists of 
the past and present include no hint that industrial stagnation may 
result from giving an undue store of value to the medium of exchange ; 
from giving, through institutional arrangements, hoarding privileges 
to the possessors of money. In systematic economic literature the 
possibility goes undiscussed. No suggestion has been made to deprive 
money of the power to "go on strike," to withdraw from the produc- 
tive process while awaiting better terms. Unrestrained liberty to 
hoard or to spend — anarchy in the exipression of monetary demand — 
is always tacitly assumed in econorr :c theory. Therein, perhaps, lies 
a clue to its historic ineffectiveness in contributing to the curtailment 
of depressions. As Keynes -says (cf. page 19 above), complete ac- 
ceptance of the Ricardian doctrine that it is impossible for effective 

^In fact, even the term "hoarding" (along with D. H. Robertson's term "dis-hoarding") 
was, until recently, used Jo mean only variations in the size of one's cash holdings, not — 
as 13 frequently now the case — a decreased rate of use of money. 


demand to be deficient, has historically operated to sterilize economic 
thought. He adds : 

The completeness of the Ricardian victory is something of a curiosity and a 
mystery. * * * That it reached conclusions quite different from what the 
ordinary uninstructed person would expect, added, I suppose, to its intellectual 
prestige. That its teaching, translated into practice, was austere and often 
unpalatable, lent it virtue. That it was adapted to carry a vast and consistent 
logical supei:structure, gave it beauty. That it could explain much social in- 
justice and apparent cruelty as an inevitable incident in the scheme of progress, 
and the attempt to change such things as likely on the whole to do more harm 
than good, conmiended it to authority. That it atforded a measure of justifica- 
tion to the free activities of the individual capitalist, attracted to it the support 
of the dominant social force behind authority. 

But although the doctrine itself has remained unquestioned by orthodox 
economists up to a late date, its signal failure for pur]Joscs of scientific predic- 
tion has greatly impaired, in the course of time, the prestige of its practitioners.' 

Today, however, some economists are beginning to apply them- 
selves to ways of directly stimulating even private demand. They 
want to know what institutional arrangements enable money savers 
to stop using a community's exchange medium in a society where 
full-blast exchange is necessary for the maintenance of markets for 
specialized producers, not what the subjective "reasons" are for tak- 
ing advantage of those arrangements. The institutional "why" — 
why savers are presented with arrangements which enable them to 
stop spending — interests them greatly; the hedonistic "why" of eco- 
nomic theory — why savers choose to take advantage of those arrange- 
ments — is only of secondary interest. 

"stamped scrip" 

Among the better-known plans for impelling private savings into 
greater activity is Prof. Irving Fisher's proposal for "stamped 
scrip." ^ Under this plan a carrying charge would be placed on all 
currency. Paper money would retain its buying power only if 
stamps, purchased from the Government, were periodically attached 
to its surface. Every recipient of currency would thus have a new 
force impelling him to reduce the interval between transactions and 
to move more readily from money into goods and services. 

Stajnped-money as a recovery proposal was first suggested by Sil- 
vio Gesell (1862-1930), who clearly saw that unless money incurred 
carrying costs which paralleled those of other kinds of assets, posses- 
sors of money would be in a favored position.^ For, in a world of 
specialists, barter is so unfeasible that all workers are at the mercy 
of money holders if these for any reason decide to withdraw from^ 
production. Consequently, those who hold the medium of exchange, 
regardless of what it may happen to be — gold, silver, shells, fiat 
money, or what not — are able, if the money does not tend to melt 
away as they hold it, to charge a premium (an added ingredient in 
"interest") for its relinquishment. Gesell was probably also first 
to see that at times interest may be (at least partly) a reward for 
not-hoarding rather than a reward for saving or not-spending. He 
proposed to make the possessors of money pay for the bnrgaining 

2 Keynes, General Theory of Employment, Interest, and Money, Harcourt, Brace & Co., 
Kew York. 1936, p. 39.. 

» In Stamp Scrip, Adelphi Co.. New York, 1033. 

* The Natural Economic Orrler (.\merican translation), Free-Economy Publishing Co., 
San Antonio, Tex., 1934, pp. 130-147 ff. 


advantage with which the greater lioarding privileges attaclied to 
money provided them.^ 

Perhaps because Gesell mistakenly contended that the vahie of 
money is given to it entirely by the state — that money is only paper 
which the state transforms into paper nioney," and because he en- 
tirely overlooked how it is the collateral behind bank paper which 
indirectly gives modern money its unique hoardability (a role re- 
viewed above on pages 51 ff.), his proposal for imposing a carrying 
charge on money has not been taken seriously. Moreover, Gesell's and 
Fislier's proposal to tax only currency is patently unfeasible in a 
modern banking system which uses checks against bank deposits as 
its main form of exchange medium. Our "deposit dollars" are, in the 
main, cb.ims against the assets of our member banks; our currency 
dollars, in the main, direct claims agaiast the assets of our central 
bank. The two forms, being equivalents, are exchangeable. The first 
kind is left in the form of a bookkeeping claim ; the second is reduced 
to tangible form. Obviously, since paper currency and bank deposits 
are alternate forms of money, it w-oukl be necessary, if one wished to 
tax one form of money, to tax the other too, or people would have an. 
incentive to sw-itch from one form of money to the ther. 


Men who have lately advocated a tax in some form or other on 
both kinds of money include Jesse La Rue,' E. S. Woodward,^ J. 
Stuart Barr,^ George Richmond Walker.'" Jo Henry Biichi," Arthur 
H. Brasch,^-^ Hugo Fack,^' John Downie,^* and C. G. Hoag,^^ In 
general the tax mechanism suggested by these men is a combination 
of stamped scrip and a tax on demand deposits. Some suggest that a 
part of every deposit account, the first $1,000, for example be ex- 
empted from the tax. 

The author, too, worked out a mechanism for taxing both currency 
and bank deposits.^® Instead of stamped scrip, however, he pro- 
posed to use a "calendar" currency on which would be printed the 
changing values of the notes, values which would be synchronized 

' In discussing Geseirs views, Keynes wrote : "Tlie incompleteness of his (Gesell's) 
theory is doubtless the explanation of his work having suffered neglect at the hands of 
the academic world. Nevertheless, he had carried his theory far enough to lead him to 
a practical recommendation, which may carry with it the essence of what is needed, 
though it is not feasible in the form in which he proposed it. He argues that tlie growth 
of real capital is held back by the money-rate of interest, and that if this brake were 
removed the growth of real capital would be, in the modern world, so I'apid that a zero 
money-rate of interest would probably be .iustitied, not indeed forthwith, but within a 
comparatively short period of time. Thus the prime necessity is to reduce the money- 
rate of interest, and this, he pointed out, can be effected by causing money to incur 
carrying-costs just like other stocks of barren goods. This led him to the famous pre- 
scription of 'stamped' money, with which His name is chiefly associated." Incidentally, 
Keynes remarks, "I believe that the future will learn more from the spirit of Gesell than 
from that of Marx." (General Theory of Employment, Interest, and Money, pp. 356, 3.55.) 

*The Natural Economic Order (American translation), p. 44. 

^Address, 1320 Princeton Avenue, Birmingham, Ala. 

* Address, 4444 West Twelfth Avenue. Vancouver, British Columbia. 

* Address, Care Stanley Nott, publisher, Fitzroy Square, Loildon, England. 
'"Address, 120 Boylston- Street, Boston, Mass. 

" Address, 2 Princess Crescent, London N. 4, England. See his Free Money, Search 
Publishing Co., London, 1933. 

" Address, 465 West End Avenue. New York. 

M Address, 309 Madison Street, San Antonio, Tex. See his bulletin, Secret of Money 
rower, Free-Economy Publishing Co. 

J* Address, :il4 Fifth Avenue West, Seattle, Wash. 

" Address, 61S> Walnut Lane, Haverford, Pa. 

" When Capital Goes on Strike, Harper & Bros., New York, 1938. 


with tlie declining value of the taxed deposit dollars. He aimed to 
design a mechanism which would fit into our existing (fractional 
reserve) Federal Eeserve System, without requiring or causing or- 
ganizational changes in the banking system. He has reason to be- 
lieve that he succeeded both in doing this and in working out a 
technically feasible method of making the holding of money costly .^^ 
Relatively simple means can be devised for insuring that, when pres- 
sure is put on the holding of money, holders can feasibly go only 
into goods and services and not into time deposits, gold, foreign 
exchange, checks of others, matured drafts, short-term assets of 
banks, etc.^* 

The author believes that a good case can be made in theory for 
imposing carrying costs on both currency and deposits and for re- 
quiring that the recipient of money use it for some purpose within a 
reasonable length of time after its receipt. He believes an intrin- 
sically harmful privilege was inadvertently granted to money holders 
when the state drifted into supporting with its court machinery those 
fortified obligations which money-lenders found it convenient to in- 
troduce as a medium of exchange, and that the state would do well 
to neutralize the privilege. It seems not unreasonable that a carry- 
ing charge, a demurrage charge, be permanently imposed on money 
to insure its use for the purpose for which it was created. 

However, even if people were to concede the theoretical validity of 
a permanent demurrage charge (which could be reduced in distant 
years if 'the savings of the community should become inadequate to 
provide the requisite new capital goods annually) for the purpose of 
taxing laggardly used funds into more rapid action,^® they would 
probably rebel at the nuisance of handling a currency of changing 
value. Realizing" the unpalatability of such a currency, the author 
has recently worked out a modification of his original mechanism for 
impelling money into use,^° a modification which taxes bank deposits ^^ 
but leaves currency alone. The modification follows : 

Prior to the imposition of a tax on deposits, the Federal Reserve 
banks should distribute to the member banks a quantity of new, dis- 
tinctively marked coins and currency roughly equal in amount to the 

• " See the paper "The Proposal To Tax Hoarding," discussing the author's plan, by 
Emile Despres, senior economist, Federal Reserve Board, in "Papers and Proceedings ' 
of Fifty-first Annual Meeting of American Economic Association, American Economic 
Review, March 1939, Supp., p. 226. Despres writes : "A variety of technical questions 
is raised by the scheme. * • * It is probably valid to assume, however, that it is 
technically feasible, through some variant of Dahlberg's plan, to make the holding of 
money costly." 

18 See chs. VII and VIII in When Capital Goes on Strike, 2d ed., 1938. For a dis- 
cussion of objections to the author's plan and po.ssible con.sequences of its adoption, see 
Clarence V. Smazel, We Can Abolish Depressions (booklet published by himself j, Lansing, 
Mich.. 1940, pp. 20-28. 

i» The composite figures of the 1-5 largest banks in this city reveal that in the quarter- 
year just ended there was a continued shrinkage of loans for the fifth successive quarter 
and a further piling up of cash, so that these banks now have a larger proportion of their 
assets lying idle in the form of cash and a smaller proportion employed in loans than 
ever before. Cash on hand and due from other bauKS constituted 35. .51 percent of the 
assets of these 15 banks on September 30, compared with 34.6 percent on June 30, 1938, 
and 29.3 percent on September 30, 1937. From news item, "Idleness of Money Reaches 
Peak Here," New York Times, October 9, 1938, III, p. 1, column 1. 

2" When Capita] Goes on Strike, 2d ed., pp. 70-72. 

21 The tax should under certain circumstances properly bear on time as well as demand 
deposits. True, time deposits are always "invested" ; but, in the same sense, so are de- 
mand deposits. As we have seen (p. 50), the issue is not whether money is invested, but 
whether it is being rapidly used. Time deposits are not mediums of exchange, but they 
are, in the main, "converted demand deposits" (cf., p. — ) which may be moving, slowly. 
It would be feasible to place a tax on only demand deposits. In that case, however, the 
quantity of time deposits would have to be legally limited to bear a certain ratio to the 
prevailing quantity of demand deposits. Were this not done, a tax on demand deposits 
would lead to a wholesale flight of demand deposits into time deposits. 


quantity of coin and currency in circulation. ^^ Then, after the new 
coins and currency have been distributed, the United States Govern- 
ment should announce that if the day ever arrives when the total 
quantity of coin and currency in circulation expands to some pre- 
announced figure (such as, say, $8,000,000,000), then all outstanding 
coin and currency will be accepted (in payment of United States taxes) 
as worth only, say, 95 cents on the dollar, and that after that devalua- 
tion date only new coins and currency will be accepted at par. (It 
could also be part of the proposal — should devaluation ever become 
necessary — that the banks be instructed to replace all old coin and 
currency with new, whenever old coin and currency is handed in to 
them; also that all old coin and currency that is not turned in and 
retired be devalued a second and third time if and when additional 
coin and currency devaluations are made necessary.) The Government 
would also regularly announce to the public (through its daily Treas- 
ury statement) the changing volume of outstanding currency, so that 
people could follow the volume figures as easily as they now do, for 
example, the "Dow-Jones averages." 

With a threatened penalty placed on undue coin and currency expan- 
sion, owners of demand deposits logically would not seek to increase 
their holdings of coin and currency when the volume outstanding 
approached the limiting figure. They could thus, on the whole, be 
prevented from fleeing into coin and currency if their deposits were 
taxed. Under an arrangement such as that described, it is highly 
unlikely that outstanding coin and currency would ever reach the dead- 
line figure. Should they ever do so, however, a profit of 5 percent on 
the volume outstanding Avould be realized by the banks, a profit which 
the Government would, of course, divert to itself as Federal tax reve- 
nue. In any event, the arrangement of providing for a penalty on an 
excessive expansion of outstanding coin and currency insures that we 
could, under a hoarding-tax proposal, continue to use coin and cur- 
rency of the general form now in use. 

Thus, in contrast to the stamped-scrip proposal which would tax 
currency but leave deposits alone, the author would tax deposits but 
leave currency alone. 

Revenue Possibilities of a Tax on Deposits. 

A tax on deposits which did not (except at rare intervals) impinge 
on currency to cause a nuisance in handling it, might — if levied on 
only large deposit accounts — meet with considerable political favor. 
The suggestion to "tax the idle billions" might have great political 
appeal if the tax bore only on the accounts of big depositors who, of 
course, derive most of the benefit from the imperishability of money. 

With the exception of assets held in the form of money, practically 
all kinds of property today are subject to taxation. "We tax incomes, 
profits, pay rolls, capital gains, amusements, club dues, imports, per- 
sonal property, and real estate. We tax everyone who does any busi- 
ness. * * * We tax everyone — except the Tnan who has a million 
dollars lying idle in the hank. * * * Property in the form of a 
bank deposit * * * may be held idle for years without costing 
a cent for maintenance, storage, or insurance. * * * A tax on 

-v^^ I" .f^SX'^^^^JC-.P^^' <^^*° ^°^ currency In circulation totaled about $7,480,000,000, of 
which $080,000,000 was in coin and $6,900,000,000 in currency. (Federal Reserve feul- 
ietin, January 1940, p. 29.) 


bank deposits (with proper exemptions) would be good for business. 
Like a tax on land, a tax on idle funds would discourage their being 
held out of use." ^^ Perhaps money should more properly be taxed 
than some other forms of property such as consumers' goods. 

In these times of unbalanced budgets and chronic unemployment a 
tax on deposits might provide a splendid source of revenue. Our 
banking system has deposits of over $50,000,000,000. Even a 2 percent 
annual tax (imposed monthly) on only those deposit accounts which 
have average monthly balances of over $5,000, would — in addition to 
stimulating production and broadening the base for other kinds of 
taxes — generate an appreciable revenue for the United States Treas- 
ury. Thus, even if every argument for a tax on big deposits as a 
recovery measure v;ere fallacious, such a tax is recommended by its 
revenue-producing features. Moreover, far more than sales taxes and 
real estate taxes, it would bear on those who are most able to pay. 

Today, the State of Illinois collects a tax. on deposits once a year. 
But a single State cannot feasibly prevent wholesale evasion. Over 
the tax date, deposits move to banks across the State border, or de- 
positors remove their deposits from the banks' books by buying bank 
assets, and then sell them back to the banks later. Such escapes, and 
other alternatives to incurring the tax or buying goods, can, however, 
be rather easily provided against if the tax is imposed on a national 

Deposits, unlike other property, are singularly easy to assess. They 
always have their value expressed in terms of dollars, so that political 
discretion is automatically excluded when they are evaluated for 
taxation purposes. 

Effect of a Tax on Deposits Upon Entrepreneurs. 

For the last 8 years the Federal Government has made a practice of 
injecting on the average over $3,000,000,000 of new purchasing power 
annually. It has discovered, however, that each annual injection cir- 
culates but a little while and then ends up stagnant in the hands of 
people who have no inclination to keep the money moving. Under 
such circumstances it might be well at least to insure by means of a 
deposit tax that the usefulness of the stiniulus does not wear off, and 
that further injections will not be needed. 

More important than the revenue aspects of the deposits-tax pro- 
posal is the question whether such a tax would lead- to a greater 
monetary demand for goods. Might not depositors simply sit and 
suffer the tax? With selfishness assumed to be the mainspring to 
action, would a money tax provide a force that would impel depos- 
itors to pour money into both consumers' and producers' goods more 
readily? Again, what would a tax on deposits do to the supply of 
money and to the incentives which lead to the creation of money? 
For the full employment of men and machines, it is not enough to 
insure only that money be exchanged by its recipients as rapidly as 
the creators of money disburse it, desirable as such behavior may be. 
We must also insure that a supply of money be created by borrowers 

® George Richmond Walker, in a communication to the New Republic, January 22, 
1940, p. 118. 

^ Even a flight into gold can be easily controlled. The United States Treasury need only 
buy and sell gold freely at a price per ounce which it lowers annually by an amount equal 
to the current rate of taxation on money. 


at a pace, which reflects an effort of entrepreneurs to run at capacity. 
Would a tax on big deposits provide such insurance ? 

Our existing quantity of money is probably far more than enough 
to carrj^ on exchange at current levels of production (because much 
of it was created in response to Government borrowing and an 
artificially induced inflow of gold rather than to business needs), sa 
that if a large quantity of deposits were wiped out through depos- 
itors' buying bank assets ^^ with their funds — probably no money 
stringency would exist. But if the liquidation were large enough 
to cause a money shortage, would the tax on deposits operate to give 
business borrowers an incentive to create additional quantities of 
deposit inoney ? It would do so only if it gave them — after meeting 
their costs of materials, labor, and capital — additional prospects of 
gain in undertaking new enterprise. Can any reemployment plan 
be designed to do this? Here we come to the crux of the recovery 
problem insofar as it lies within the framework of capitalism. 

Can a social mechanism be devised to give additional prospects of 
gain to those organizers and managers of industry — who search out 
the goods and services that are wanted, the men and materials who 
can produce them (below a certain price), and the capital that will 
finance the effort to make them available — and at the same time 
curtail the rewards to capital, which many economists already be- 
lieve to be too high? J. M. Clark, for example, says: "I believe, 
though I cannot prove, that capital must in the future adjust itself 
to a lower rate of return than it now considers reasonable, and to 
degrees of competition which it now considers unduly severe, or 
paralysis will follow, and capital will suffer along with all other 
interests." ^^ The problem seems to be to increase the reward of the 
live- wire manager-enterpreneurs (who invest little or no money) 
and simultaneously to reduce the reward of those who inertly supply 
funds. Can any plan be devised to induce capital to renew its co- 
operation in expanding industry at a smaller percentage of the na- 
tional income? 

On the assumption that a simple tax mechanism can be worked 
out which involves no discretionary political control, would a tax on 
deposits tend either to increase the businessman's net revenues or 
decrease his costs so as to leave him with larger prospects of gain ? 
Would it, moreover, do this at the expense of interest payments and 
some forms of dividends — i. e., at the expense of the return to cap- 
italists? If so, one can feel certain that adequate money creation 
(rooted in the monetization of private assets) would occur. It is. 
the author's opinion that a deposits tax not only would tend to 
increase the businessman's gross income by increasing the demand 
for his product (because it would induce a mild flight from money 
into goods), but that it also would tend to decrease his costs bv 
cutting his interest charges. 

To understand how this would occur we must stress the func- 
tional difference between the entrepreneur-organizer and the supplier 

25 A well-designed tax on excess reserves could easily forestall this action if thought 
desirable. See Chapter VII and Appendix A of the author's When Capital Goes on 
Strike, 1938. ^ ,„„_ , ,o xt o ^ o 

2» Proceedings of Academy of Political Science, January 1939. vol. 18. No. f p. J. 
(Quoted by Leon Henderson in hearings before the Temporary National Economic Com- 
mittee, Part I, p. 170.) 

273442— 41— No. 25- 


of funds — i. e., between the active manager and the inactive cap- 
italist; For it is the uniqueness of the deposits tax that it would 
operate to increase the rewards of the entrepreneur-manager and 
employee at the expense of the capitalist; wages and management 
return at the expense of interest. Such results might be socially 
desirable. So long as society's incentives are strong enough to cause 
adequate money savings to be made, society probably gains nothing 
by having its rewards for such saving high rather than low — 20 to 25 
percent of the national income (as is indicated below) when 10 or 
16 percent might do. In a selfish world we must bait enterpreneurs 
with enough rewards to make them willing to play entrepreneurial 
roles when funds are provided; and we must bait capitalists with 
sufficient rewards to get them to save enough funds for new plant. 
In the light of our vast inactive supply of investment funds, how- 
ever, we seem currently to have made the second bait too strong. 
Today, it may be both advisable and possible to divert to enter- 
preneurs and workers as managerial return and wages much of that 
return which flows out to capitalists as interest and dividends. 

The magazine Business Week in its issue of October 1, 1938 (p. 33), 
presented a table which showed how all American corporations dis- 
posed of the revenue (more than a trillion dollars) which they received 
in the 10-year period from January 1, 1928, through December 31, 
1937. This is summarized as follows : 

Gross income - $1, 210, 022, 000, 000 

Costs (materials, depreciation, depletion, and 

taxes) 870,914,000,000 

Balance available for distribution 
among workers, managements, bond- 
holders and stockholders 339, 108, 000, 000=100 percent 

Workers (in salaries and wages) (68.83 

percent) — ^33, 395, 000, 000] „ 9 

Managements (7.14 percent) — 24, 219, 000, OOOf '^'^^ percent 

Bondholders (11.71 percent) 39, 696, 000, 000 _„. ^n ^^^^^„<- 

Stockholders (12.32 percent) 41, 798, 000, OOOJ """^*-"'* P^^^^"'^ 

Thus over a 10-year period return to labor and management was 
75.97 percent and capital return was 24.03 percent. Would a tax on 
big deposits operate to divert less to capital return? For example, 
would it operate to divert less to "interest" ? 

The Nature of Interest. 

Unfortunately the term "interest," the premium- paid for the use 
of money, is used both in business and economic theory to mean the 
reward for two different kinds of service. In a credit economy we 
pay interest not only to bankers who create and lend "new" rnoney 
against borrowers' obligations, but also to men w^ho merely save and 
lend "old" or already created money. By "old" money is meant money 
that was initially created through loans and investments, spent by the 
borrowers, and saved by those to whom the borrowers passed it on. 
The demand deposits which we possess but did not obtain through bank 
loans are "old" money. On page 55 we spoke of the fee paid to 
bankers for creating new money. Let us call that fee "conversion 
interest." Then let us refer to the fee paid by borrowers to lenders 
of old money as "possession interest." We then have "conversion 
interest," the premium paid to bankers for converting private credit 


into bank credit, and "possession interest," the premium paid to 
"savers" for delegating to others the jurisdiction over their money. 

The man who receives a reward for converting the assets of bor- 
rowers into money plays a different role in society from that of the 
man who receives a fee for permitting others to substitute themselves 
as spenders of his money. The commercial banker who spends his 
time and effort intelligently converting the private credit of business 
men performs a social service. For bankers' debt obligations, when 
properly designed, are efficiency tools which facilitate exchange. But 
men who lend money accumulations to others, directly or through the 
bank, may perform no service whatsoever. In fact, if they — or their 
agent, the bank — invest it more slowly than they accumulate it, they 
perform a disservice, since they restrict demand. "Possession inter- 
est" is today a return which can be obtained largely because the banker 
cannot offer unlimited credit and because "old money" is able to com- 
pete with the new money which the bank stands ready to create. 

A receiver of dollars who tends to spend them for bread, bonds, or 
what-not, as rapidly as the goods against which they are issued come 
to market (considering the banking system aS a whole) , is deserving 
of a fee for permitting other people to use his claims to goods ; but an 
owner who tends to spend or lend his dollars more slowly than prom- 
ised production comes to market should probably be prodded into 
using his money. 

Money saved out of income must be reconverted into monetary de- 
mand at a velocity which keeps our "employables" fully employed, or 
"saving" becomes unsocial. The timing is as important as the saving. 
When there is full employment and activity, society can justifiably 
permit one man to pay "possession interest" to another for the priv- 
ilege of substituting himself as the spender, for the saver of money 
claims is then rendering a service to another individual which is not 
simultaneously a disservice to society ; but when there is serious unem- 
ployment, society should probably limit the reward of "savers" of 
claim checks against society's goods by means of a deposit tax, since 
their saving stifles the opportunity of businessmen to redeem in goods 
their promises to produce. 

"Conversion interest" is a fee for a service rendered. Even under 
a system of mutual banking, such as Proudhon and Bilgram advo- 
cated, it would have to be paid. "Possession interest," on the other 
liand. seems at times today to grow out of a special privilege. In 
an era of scarcity when men save by actually foregoing the filling of 
their pressing wants, "possession interest" may well be a reward for 
postponing consumption and saving money. But in a productive era, 
when saving is institutionalized and money accumulations are made 
largely by people whose spontaneous wants are more than satisfied, 
"possession interest" is more probably a reward for not hoarding than 
a reward for saving." Today it represents in the main the price paid 
in order to overcome the hoarding privilege accidentally given to 
savers by our processes of money creation. 

Both the state and the historic church in its laws against usury 
have tried at times to prevent owners of money from taking advan- 
tage of the favorable bargaining position which institutional arrange- 

J" Charles O. Hardy says : "Interest serves not so much to induce savin? as to induce 
those who save to forego the maximum of liquidity and safety • * *." Br-^okings 
Institution, The Recovery Problem in the United States, Washington, 1936 p 360 


ments have given them, but their restraints have never been effective. 
The imposition of carrying charges on money might prove to be a mor& 
feasible alternative. 

Interest Rates Under a Tax on Deposits. 

Since both "old money" and "new money" are equally useful for 
carrying on exchange, borrowers do not care which of the two kinds 
they get ; they are as willing to pay a "saver" 6 percent for the use of 
existing money as to pay a banker 6 percent for the creation of an 
additional supply of it. The cost of "old" and "new" money is always 
competitive and approximately tlic same. This cost of money, interest 
rates, is determined by the supply and demand for money at various 
prices. Consequently a tax on deposits would cause interest rates to 
fall if it caused funds to be offered for investment faster than it 
caused the demand for capital to rise. 

Since a tax on deposits would immediately put pressure on holders 
of money to rush for goods or securities, the effective supply of money 
would increase immediately. Unless the businessman's demand for 
such money rose simultaneously and to a corresponding degree, in- 
terest rates would drop. Although a deposit tax would undoubtedly 
increase the businessman's demand for funds because it would vivify 
business activity, the increased need for money would probably be as 
nothing compared with the increase in funds offered for use, with 
the result that interest rates would probably decline in line with the 
severity of the tax. That is, a tax of 3 percent on deposits would 
probably decrease the yield on several kinds of paper by about 3 per- 
cent. Short-term paper, and bonds nearing maturity, for example — 
which are both nearby alternatives to money — would probably sell at 
premiums of close to 3 percent. 

Moreover, if the tax on deposits were set up as a permanent ar- 
rangement, intended permanently to counterbalance the carrying 
charge which industrial products naturally carry, and depositors 
were convinced that the tax was likely to be permanent, the effects 
might permeate the whole interest-rate structure. Long-term in- 
terest rates such as those on housing developments, might then also 
•decline in line with the tax imposed. A person with $1,000, for 
example, if faced with a permanent carrying charge on his money of 
3 percent per year, might readily invest his money with a reliable 
borrower for 20 years on condition that he get back only his prin- 
cipal after that period. That is, an investor might well be satis- 
fied, under the conditions postulated, to invest in long-term projects 
at zt^ro percent interest. He might be pleased to place his money 
where his principal — ^his original saving — would only be husbanded 
for him. If, furthermore, he placed his money at zero percent in- 
terest in consumer loans rather than in capital loans, the Nation's 
standard of living and not its relatively excessive plant facilities 
would benefit from the disbursements. Thus the tax could be a means 
of subsidizing consumption, of diverting our excess money savings 
into consumption instead of as now into either unneeded plant or 
industrial inactivity. 

A tax on money would thus tend to force the holders of money- 
savings to pour their funds more rapidly into three channels: 

(1) It would cause them to offer money to the capital-goods in- 
dustries on lower terms. Then, since the cost of money would be 


lower, additional capital ex]3ansion would occur. Because, how- 
ever, the volume of capital-goods facilities at any given time does 
not tend to exceed a rational engineering balance in relation to the 
demand for consumers' goods, the limit to which plant and equip- 
ment facilities would be expanded would be quickly reached. The 
factor of increased risk of principal would soon outweigh the factor 
of cheaper money rates. 

(2) It would cause savers to offer money in the durable goods field 
at such low terms that almost unlimited housing activity, for ex- 
ample, would result. At zero rates of interest, it is easy to visualize 
that the demand for capital would be tremendous in this field even 
though it would not be much greater in the capital-goods industries. 

(3) It would, if the tax were as high as 3 or 4 percent per year, 
induce savers to offer their money holdings to consumers on such 
low terms that the standard of living of consumer-borrowers would 
in effect be subsidized. If the average of all interest rates were to 
go to zero percent in a society such as ours, in which recipients of 
interest payments have for a decade averaged 11.71 percent of the 
national income, it is obvious that 11.71 percent more of the national 
income would (under a money tax of the intensity postulated) go to 
recipients of wages, salaries, managerial return and dividends. The 
tax could thus play a very effective role in altering the distribution 
of income within the economy. 

Testifying before the T. N. E. C, R. R. Rogers, vice president 
of the Prudential Insurance Co., estimated the three elements of in- 
terest costs to be (1) cost of money, 3.85 percent, (2) risk, 0.48 per- 
cent, and (3) cost of doing business, 0.5 percent.^^ (The "cost of 
money" is, strictly speaking and from society's point of view, not 
a "cost" but 'a return to investors. It is "possession interest" paid 
to savers for transferring to others the use of their money). 

Robert L. Davidson, who also appeared before the T. N. E. C, 
pointed out that a 20-percent reduction in material costs would 
reduce monthly fixed charges on new housing by about 9 percent ; 
that a 20-percent reduction in labor costs woiild reduce such charges 
by about 5 percent; while a 20-percent reduction in interest and 
amortization would reduce monthly fixed charges by about 17 

In summarizing information on the effect of interest rates on build- 
ing costs, Theodore J. Kreps brought out that if the rate of interest 
on the nioney invested in a house is lowered from 5 to 4 per- 
cent and the amortization period extended from 20 to 30 years, the 
reduction thereby achieved in carrying costs is equivalent to a cut of 
more than 50 percent in the total outlays for labor on the job site.^" 
The reason for this large effect is, in part, that the outlays for labor 
are made but once, whereas the outlays for capital are made year 
after year for the life of the investment. Obviqusiy, few things could 
serve better as a stimulus to venturesome builders than a reduction in 
the cost of money to between, say, zero and 2 percent. 

Today, "below a certain interest rate, complete liquidity is deemed 
preferable to financial investment. The rate of interest, therefore, 

^ Cited by Theodore J. Kreps, Hearings Before the Temporary National Economic 
Committee, Part 11, Construction Industry, p. 5434. 

29 Statement of Kreps, Hearings Before the Temoorary National Economic Committee. 
"Part 11, p. 5433. 

« Ibid., p. 5455. 


fails to fall to the point to which it would have to be driven in order 
that the whole flow of planned individual savings might find a ready 
outlet in investment. Taking, therefore, the propensity to hoard 
(liquidity preference) in conjunction with the relatively constant pro- 
pensity to save, it is discovered that the rate of interest does not 
equilibrate the volume of planned individual saving and investment." ^^ 
That is undoubtedly the case today. But might not a tax on big 
deposits operate to equilibrate savings and investment ? ^^ "Currently 
investors are holding out for the rate of return, safetyj and increment 
in value they enjoyed while the Nation was growing rapidly, building 
its basic capital structures, and paying oiff its capital debts to Europe. 
That basis for confidence probably wUl never return, at least not to a 
degree sufficient to keep all our money in use all the time through 
voluntary processes. How long will it take owners of idle money to 
discover this truth and accept the inevitable?"^* 

Sooner or later we must boldly face the question whether society can 
function within limits which people will tolerate when it maintains 
rules which (1) enable money savings to be made predominantly by 
those people whose personal needs do not induce them to disburse the 
savings; (2) then permit the holders of money hoarding privileges 
which enable them to defer their disbursements indefinitely; and (3) 
autbmatically generate depression and hardship if the money savings 
are disbursed more slowly than they are received. Our present rules 
seem not to constitute a well-integrated machine. Perhaps limiting 
the privileges of capital could serve as a means of preserving the in- 
stitution of private capital. 

A permanent carrying charge on money of from 2 to 4 percent per 
year would probably be reasonable. The businessman who borrows 
at the bank, and is instrumental in minting our modem credit money, 
in effect has a 6-percent carrying charge on his money to impel him 
to disburse it quickly for goods and services. If it were feasible, one 
could not object if — ^to help insure an adequate market for his goods 
when his note matures — the business borrower wrote on, say, every 
$100 check that he sent out, "The value of this check declines 50 cents 
(1/^ percent) per month." In the li^ht of the 6-percent carrying charge 
on money when the borrower has it, a tax of from 2 to 4 percent on 
it when the recipient has it, would not appear to be too high. 

Should unconstitutionality forestall the imposition of a direct tax 
on money, perhaps the Government could forego the possible revenue 
and work out a plan for getting the same stimulating effects simply by 
arranging not to enforce those debt agreements wherein the principal 
of the debt does not contract — after a short interval — at the rate of 
at least 2 or 3 percent per year. 

Or a law might be passed (under the constitutional power to regu- 

»*A. H. Hansen. Full Recovery or Stagnation? W. W. Norton & Co., New York, 1938, 
p. 23. 

" In view of the large supply of laggardly used money savings which exists today, It 
is apparent that it would take a negative interest rate (i. e., a subsidy to borrowers) to 
bring forth a demand for money which would equilibrate the supply. It is obvious, too — 
money being the bolstered asset that it is — that if economic forces operating under our 
present system of laws cannot even bring average interest rates down to zero, negative 
rates can be obtained only if new rules of the game are written to alter the relative bar- 
gaining powers of the various contributors to production. 

8SC. V. Smazel, in We Can Abolish Depi-essions (booklet), 1716 Alpha Street, Lansing, 
Mich., 1940, p. 13. 


late the "value of money") which would require that the value of 
demand deposits be reduced by a few percent each year. Since the 
Government would not be receivinjj; the values subtracted, a large gain 
would accrue to the banks. These additional profits of the banks 
could then be made subject to a special Federal tax of, say, 90 percent. 
(The banks could be permitted to retain 10 percent for service charges.) 
Such an arrangement would be constitutional. 

Effect of a Deposits Tax Upon the Supply of Money. 

If the carrying charge on money were continued after the business- 
man creates it through borrowing, the cost of money to businessmen 
would decline. Businessmen would gain at the expense of investors. 
Income return which currently flows from business as "interest" to 
inert investors would tend to be retained by the dynamic entrepreneur. 
Such gain would lead to additional business expansion and, after the 
existing superfluous and artificial quantity of money were reduced to 
what is functionally needed, to additional bank borrowing. 

With existing money available at very low interest rates, bankers 
would not be able for some time to charge high "conversion interest'* 
rates on their new loans and discounts. In fact, if pressure were put 
on "old money" to bid for goods and services, the volume of commercial 
loans would probably decline because the existing superfluity of money 
would seek to make itself available. The existing quantity of money 
would undoubtedly shrink (unless forestalled by a special kind of tax 
on excess reserves) until each surviving dollar was acting as the ex- 
change instrument for a maximum amount of trade. 

But suppose the quantity of dollars in use .did contract to where it 
was the shortage of money, rather than the human reluctance to use it, 
which limited industrial output. Then the price offered for existing 
money (i. e., "possession interest") would rise until it induced com- 
mercial bankers to convert additional quantities of borrowers' obliga- 
tions into money. Tlius by merely lowering "possession interest" rates 
by means of a deposits tax, "conversion interest" rates would be kept 
low, and the quantity of money would be attuned to the needs of busi- 
ness. Both interest rates would hover around a figure just sufficient 
to induce bankers and borrowers to create a supply of money adequate 
to the needs of business. 

To help prevent undue credit inflation, i. e., monetary inflation, a 
heavy tax could also be imposed on all credit issued against paper 
which does not represent goods in process. 

Peculiarly enough, a deposits tax would not, in the long i?un, tend 
to result in an aggregate decrease in the country's quantity of money. 
On the whole, people would have more purchasing power than before. 
Much of what you as an individual would be impelled to spend would 
be income for the other fellow, and much of what others would be 
impelled to spend would be income for you. The money stock of a 
people tends not to be reduced by impelling a people to use it. From 
the social point of view, a tax on money would simply impel people inta 
demanding goods, into producing goods, and into creating and obtain- 
ing new dollars which would correspond to the new goods. In the. 
process of this adaptation a small percentage of the Nation's money 
would be diverted into public coffers for. mutual benefits. 



Several men — among whom were F. I. Raymond, president of the 
F. I. Raymond Co., Chicago ; ^* Joseph E. Goodbar, president of the 
Society for Stability in IVfoney and Banking ; ^^ Warren S. Eaton ; ^^ 
Gordon Fulcher ; ^^ L. IJ. Bergeron ; ^^ and Charles S. Mackenzie ^^ — ■ 
submitted analytical reemployment plans to the T. N. E. C. which 
also found the root of unemployment in the failure of money savings 
to flow back promptly into industiy. These men proposed, instead 
of a tax on money as such, a tax on that part of each saver's annual 
income which is not promptly respent.*" 

Goodbar writes: 

Prompt return of money savings to the monetary stream is the aim we have 
in mind. If owners of savings are unable to find adequate investment oppor- 
tunities, they m'ay use up their excess income either in personal expenses, or 
as an increase in salaries of employees, or otherwise direct it back into con- 
sumption. On failure to do one or the other, then Government taxation will be 
standing around the corner, like some financial policeman, to see that the excess 
is not withheld from constructive use. 

Mackenzie writes : 

As capital will not voluntarily cooperate with labor in producing the capital 
goods which are now greatly needed, it seems to be the duty of Government to 
compel such cooperation of newly created capital in the interest of the general 

And again: 

Money is a creature of the Congress * * * Congress has the right to 
see to it that the fiow of that medium of exchange is not hampered. It has 
the right, which has been asserted repeatedly by the United States Supreme 
Court, through the medium of incentive or penalty taxation, to compel money 
to go to work in channels helpful to the general welfare. 

Gordon Fulcher wants a "tax on underspendings," and would 
•exempt savings which are invested promptly in capital goods. He 
specifies that the money must flow into that outlet. He maintains 
that his basis for exemption would place a premium on new cor- 
porate securities and thus enable businessmen to obtain new capital 
at a discount. He maintains, too, that the tax would not be a burden 
on business because corporations could avoid the tax either by dis- 
tributing dividends or by investing their funds themselves. 

This proposal — to tax annual money savings unless they are 
spent — differs significantly from the proposal, discussed on page 70 
above, to tax annual savings as such. The proposal to tax money 
savings 'unless they are converted into physical savings rapidly, 
would act as a stimulant to business far more than the proposal to 
tax money savings as such, because people could avoid the first tax 
by contributing directly to industrial activity whereas they could 
not avoid the second in that way. 

" Address, 629 West Washinsrton Boulevard, Chicago, 111. 

»5 Address, 36 West Forty-fourth Street, New York. 

3" Address, 1636 Cicero Drive, Los Angeles, Calif. 

^ Address, Chevy Ghase, Md. 

•■« Address, 4611 Sphiyten Duyvil Parkway. New York. 
_ 3» Address, 120 Broadway, New York. Mackenzie Plan, a monograph presented at hear- 
ings before the tax fetaflf of the Treasury Department, September 27, 1939 

*<• Julius F. Stone, Jr. advanced a similar proposal in his book Compulsory Spending, 
Ransdell, Washington, 1934, 


Tax mechanisms advanced by sponsors of the proposal to tax un- 
spent annual income are quite similar. Mackenzie seems to 
worked out his plan in some detail. Specifically his plan states that — 

A tax of 5 percent shall be imposed on all net general income spent or invested 
in new products of American industry within any calendar year and the three 
succeding months ; and a tax of 85 i)erceilt shall be imposed on all net general 
income not spent or so invested. 

Investment that would be subject to the 85 percent incentive tax would be- 
that which is employed in the purchase of lands, already constructed buildings, 
stocks and bonds already issued and outstanding, or of stocks or bonds tiie 
proceeds arising from the sale of which are not pledged, as * * * to he- 
used in the purchase or production of new products of American industry, or in 
fact in anything that does not require American labor to produce. 

Mackenzie apparently tries to deal with an administrative diffi- 
culty which the proposal would have. A tax arrangement which 
one could largely avoid by disbursing one's money, is obviously one 
which requires that criteria be set up to help tax officials to determine 
when money has really been spent (in the economic sense of having 
been exchanged for goods and services which employ additional 
labor) and when it has merely passed through "wash sales" which 
lead to no increase in ind^ustrial activity. Mackenzie gets at the 
difficulty by outlining what a real disbursement is not. Whether thia 
is feasible or not perhaps only experiment could determine. 

Even granting, however, that it is administratively feasible to 
determine for tax purposes whether money is reaUy being invested 
or whether it is only moving through "wash sales," the proposal 
could only insure that unemployment would not get worse. Goodbar 
and Mackenzie seem to recognize this limitation of the proposal. 
But the other sponsors do not; they regard it as a reemployment 
plan. The proposal would tend to insure that the money savings of 
any one year would not slow down in their rate of use. But it would 
not operate to insure that the money savings of past years — those 
existing accumulations which currently reflect themselves in millions, 
of unemployed menr— would move more rapidly. It is well to insure 
that annual money savings move into investment, but in times of 
depression that is not enough. Savings of past years, too, must be 
made to move. 


A variation of the above proposal is that of Milo F. Snyder,*^ who 
wishes to have a special impellent tax apply to the depreciation 
reserves of corporations. He points out that^ although physical 
plant depreciation is steady and gradual, and the reserves set aside 
by corporations for depreciation ai^ rather uniform year after year, 
corporate expenditures for replacements fluctuate very widely. Dur- 
ing boom times corporations tend to invest even more than their 
reserves, whereas during depression they tend to spend very little. 
Snyder proposes, therefore, that the Federal Government tax depre- 
ciation reserves (with some exceptions) — up to 50 percent if neces- 
sary — when the annual depreciation is not promptly respent for 
capital replacements. He accompanies his proposal with the sug- 

*^ Address, 208 East Mason Street, Milwaukee, Wis. 


gesticn that small concerns, and possibly the first $25,000 of any cor- 
poration's depreciation reserve, be exempted from the tax. 

The recent Federal "undistributed profits tax" on corporations 
resembled in some respects the proposal just described. It placed 
a tax on one part of annual income which the corporation could avoid 
paying only by rapidly investing its funds in capital goods or by 
rapidly disbursing its earnings to stockholders. Even at best, how- 
ever, that, arrangement insured only that money savings would not 
get "hung up" while in the possession of corporations. The arrange- 
ment did not follow through to insure that the savings did not get 
stalled after they had come into the hands of the recipients of the 


Among reemployment plans of broadest sweep is that of "incen- 
tive taxation," a proposal advanced in a book of that name by C. 
William Hazelett.*^ Basically his plan is a whole method of ap- 
proach, which proposes to use the taxing power of the State per- 
vasively as a constructive tool for obtaining desirable economic 
action. Historically the taxing power, besides being used for reve- 
nue purposes, has been extensively used to discourage particular and 
isolated forms of economic behavior and activity. Hazelett, how- 
ever, proposes to use it systematically to bear on all the factors of 
production, penalizing each in turn if they lessen their contributions 
to production. Henry George advocated a tax on land which aimed 
to prevent land from being less than fully used; the author and 
others have advocated a tax on money aimed to prevent money from 
being less than fully used; but Hazelett proposes tax pressures on 
all the factors of production to keep them at maximum production — 
pressures which would be low when the contributors were fully 
active, but increasingly severe as they slackened their efforts. 

Any solution which applies to a particular class only will fail, as they have 
all failed in the past. Incentive taxation should apply to all producing facili- 
ties : money, land, factories, buildings, and transportation systems. It must 
apply to the sources of raw materials, to capital, to monopolies, to railroads, 
and to one's own customers. The rate of increase in taxes as production de- 
creases must be sufficient to keep all productive facilities in a substantial rate 
of production. * * * Unless the Government confiscates private property, 
the only people who can put these productive facilities into production are those 
who own or control them * * *. Since all business is organized for profit, 
it is intended that incentive taxation shall be too expensive for any of them 
to entirely take their productive assets out of production.*' 

Hazelett outlines specific measures for insuring that factories and 
money holders contribute fully to production, and then makes gen- 
eral suggestions on how to put pressure on the other contributors. 
His specific measures include income tax rates such as we now have, on 
employers who utilize a low percentage of their plant capacity, 
and progressively lower tax rates as they approach full employment 
capacity. Then he would impose a tax on the idle money of both 
individuals and corporations, but place no tax on money in reason- 
able use. The decreasing tax rates would bait plant owners and 

« 3d ed., B. P. Button & Co^ 1939. 

*• C. W. Hazelett, Incentive Taxation (brochure), 1939, pp. 4, 5. 


managers to turn out more goods/* and the tax on money would 
insure that all possessors of money would furnish producers with 
adequate markets for their goods. 

Thus one factor determining a company's tax rate would be its 
percentage of full employment ; a second would be its "turn-over rate 
of money." The employment factor would be computed by dividing 
the man-hours actually worked during the year by the maximum 
man-hour potential employment capacity of the property. This 
maximum would be determined by the taxpayer himself, but a heavy 
penalty tax for underestimating would be provided to insure an 
honest appraisal. The turn-over factor would be the ratio of "real 
disbursements" to the average cash balance maintained during the 
year. "Real disbursements" would include all outlays for goods and 
services, for dividends, and for the purchase of domestic invest- 
ments that are bought directly from the original issuers. 

The tax form which Hazelett proposes would eliminate all refer- 
ence to excevSs profits, undistributed profits, and capital gains. For 
the substituted tax on idle money would in itself be the equivalent 
of a tax on idle excess profits, idle undistributed profits, and idle 
capital gains. "If the tax vand turn-over rates are properly set, the 
taxpayer should pay none of the idle money tax. But by using the 
money, the net income of employers and the living standards of the 
individual would be increased so that sufficient normal income taxes 
could be collected from these sources. The tax on stagnant money 
would substitute and require private and corporate spending in place 
of Federal." « 

In theory, the withdrawal of capital from production can be 
countered either by a tax on big bank deposits or by a tax on inade- 
quate rates of turn-over of bank deposits. It might prove to be 
administratively far more difficult, however, to review and adjudge 
transactions in order to determine whether money has been produc- 
tively spent than it would be to impose a tax on money as such, 
especially so if it is necessary to give tax officials any discretionary 
power in deciding whether money has been productively spent. 
Regardless of the basis for the tax, however, it seems desirable in 
theory that the tax should be continuous in order that the bargaining 
advantages- which money holders would otherwise enjoy may be 
neutralized. If it were not continuous, long-term interest rates 
would probably not be appreciably lower because of the tax, and one 
of the major stimuli to industrial expansion would be lost. 

** As a result of a Senate resolution introduced by Senator Arthur H. Vandenberg, a 
subcommittee of the Senate Committee on Finance (76th Cong., 1st sess.) made a report, 
•"Survey of Experiences in Profit Sharing and Possibilities of Incentive Taxation." In 
that report tlte term "incentive taxation was used exclusively to mean tax reductions 
for employers for increasing their employment and output, etc. It was given the ab- 
breviated meaning of tax rewards only ; not a meaning or tax rewards and tax pressures. 
Used in that sense, the possibilities of incentive taxation seem very limited. At best a 
temporary fillip — analogous to an Inventory boom induced by an oncoming period of 
higher prices — could be given to industrial activity by such a recourse. In Germany In 
1932 a similar effort to obtain production through tax concessions and other rewards 
was tried. After generating a short-lived fillip, it failed. ("Why the 'Papen Plan' for 
Economic Recovery Failed," Social Research, February 1934), vol. 1, pp. 83-96. Ac- 
cording to Gerhard Colm. the effort failed because no means were devised for stimulating 
demand in line with production. Both — as Hazelett says — must be stimulated together : 
"The writer does not recommend applying only one of the incentive taxes, such as on the 
employer for employment, since it gives an unwarranted advantage to the owner of 
money. • * * If a tax is only applied to idle money, the reverse is true." Incentive 
Taxation (brochure), p. 12. ' ' 

** Incentive Taxation (brochure), p. 9. 


If the turn-over tax were ever entirely removed, interest rates, 
would be too high, with the result that at full production profit 
margins would needlessly begin to decline, and industrial activity 
would begin to fall off. Of course, if it did begin to fall off, the tax 
on idle money could be put on again, and the ability of money 
holders to charge monopoly prices for the use of their money would 
be taken away, but until the tax was again imposed, interest rates 
would contain a monopoly ingredient which would make for unfair- 
ness in distribution. If the turn-over tax were kept on continuously, 
however, it would — except for being far more difficult to administer — 
be the equivalent of a tax on money in its effects on unemployment, 
long-term interest rates, the price level, the distribution of income, 
etc. It is probable, too, that it would — since it would be a tax that 
one could avoid by using one's money more rapidly — be palata- 
ble politically. Perhaps on that score it merits investigation. It 
might seem to be more just to tax money only if it is "idle" than to 
tax money as such regardless of its rate of use. However, money as 
such should have a constant carrying charge, roughly equal to the 
carrying charges on goods, or money will be so good as a store of 
value that the savers of money will be able to obtain a favored share 
of the national income. 

Effect of a Tax on Idle Money on the Distribution of Income. 

The low interest rates which a tax on idle money would generate 
and the continuous pressure which it would exert on money to stay 
in use (at whatever price would keep it in use) would probably have 
tremendous repercussions, first, upon business incentive and then 
upon the distribution of income. 

Managers and stockholders want to see the reward to capital (or 
the pressure on capital) high enough to induce it to invest rapidly in 
new activity, but as soon as that end is achieved, they prefer to see 
"interest" — which, after all, is one of their "costs" — remain at .the 
lowest rate that will insure rapid investment; three percent bond 
yields please them better than do 7 percent yields. And in society's 
eyes, yields of even less than 3 percent are in order if savings occur in. 
quantities which suggest that the reward to capital is excessive. 

If "oversaving" occurs — in the sense that new investment in fac- 
tories", schools, residence, etc., at yields of, say 5. to 7 percent is not 
warranted by the current purchasing power of willing spenders — it 
might be well for society to modify its tax laws so that savers will be 
inclined to invest at 2 percent, or even zero percent return. 

Not only would a tax on idle money hold down the "entrepreneur- 
manager's" fixed charges and make it easier for him to earn money; 
it would also make it easier for him to obtain venture capital. 
Suggested business ventures, such as housing developments, which 
today seem unattractive to investors because the likely yields are be- 
low what stockholders currently expect, would loom as attractive out- 
lets. A mere 1 or 2 percent return in either interest or dividend pay- 
ments together with the preservation of one's capital might seem at- 
tractive to "savers" if they werfe faced with inroads of a 2- tor 4-percent 
tax on their money as an alternative, particularly so if the tax had the 
earmarks of being a permanent arrangement. 

The businessman who is functionally active in organizing, pro- 


moting, and managing new ventures would have better prospects of 
reward than ever before, both because his interest costs would be 
down, and because share capital would be satisfied with lower yields. 
He would expand industrial activity as a result. Business expansion 
ii^ turn would tend to absorb the unemployed. After a time, how- 
ever, the employers would be forced to compete against one another 
for the available labor, and wages would begin to eat into the in- 
creased net earnings. By such a sequence of repercussions would a 
tax on idle money gradually come to divert to wages and salaries an 
appreciable part of the national income which now goes to inert 
investors. A portion of what had been a business cost and diverted 
to capital, would still be a business cost, but diverted to labor. To- 
day, under the chronic unemployment that prevails, workers tend to 
bid against one another for jobs; under incentive taxes on idle money 
investors would tend to bid against one another for men. 

Oddly enough an arrangement which impelled people to spend 
their money more rapidly would help them to accumulate more 
genuine savings for their old agef For it would impel them to con- 
vert their money savings — which are nothing but the I. O. U.'s of 
business — into titles and shares to real homes and factories. And if 
money were put into securities, real estate, etc., or into savings banks 
which in turn are driven to spend it for tangible investments, either 
reserves of equities or savings-bank credits could be built up which 
frugal savers could reconvert into cash in later years. 

Under a tax on idle money, expansion from our present' low level 
of industrial activity would stop only when competition between 
producers for available labor began to wipe out the more inefficient 
concerns. Inefficient' producers and unwanted products would in 
time fall by the wayside. Thus default liquidation generated by a 
shortage of labor, and not by the retreat of capital (induced by dis- 
satisfaction with prospective yields) would be the factor limiting in- 
dustrial growth. 

Default liquidation is probably an essential to a competitive 
economy. Hazelett maintains that all producers in a competitive 
economy should operate at full speed and accept whatever price they 
can get for their contributions. If they are unable to get a price for 
their contribution which enables them to remain at their preferred ac- 
tivity, society should permit the dollar voting of consumers to force 
them to liquidate their private debt structures and shift to other work. 
And if they hold up the price of their products artificially, and the 
demand for their product is inadequate, society should either change 
the rules so that demand cannot feasibly be defective or so that 
prices cannot feiasibly be administered. 

Today if business concerns begin to shut down, a government can- 
not tell whether they are shutting down because savers of money have 
unjustifiably elected to withdraw from the markets or because the 
prices which the concerns ask for their products are so out of line 
with other life values of consumers that dollar voting relegates the con- 
cerns to bankruptcy. Occas^ anally, today, it is the privilege to hoard 
and at other times unwarranted price quotations, which are responsible 
for shut-downs. Either action can disrupt industrial production. A 
tax on idle money attacks both institutional obstructions, the first di- 
rectly, and the second indirectly. This contrasts with the approach of 


compensatory spending which attacks neither arrangement directly or 
indirectly, but simply seeks to counterbalance the unemployment which 
either hoarding or price pegging provokes. 

Effect of Incentive Taxation on Monopoly Prices. 

Hazelett realizes that if his suggested tax on idle money were used, 
employment would probably be generated without recourse to his em- 
ployment tax and other taxes which he proposes to place on laggard 
contributors to production, because, as he says, "A general depression 
is a strike of capital." *^ However, he believes, and probably correctly, 
that the other taxes might prove highly useful in attacking a second 
major economic problem, namely that of monopoly prices.^^ His sug- 
gestion to tax land, labor, factories, railroads, funds, etc., if they are 
less than fully used, is a pervasively promising suggestion for breaking 
up and forestalling monopoly prices throughout the economy. Al- 
though few factories, labor groups, landholders, or railroads are cur- 
rently withholding their contributions from the markets, many of 
them have the power to withhold. In good times — and frequently 
at other times — they either use or threaten to use that power to raise 
their prices and incomes. Incentive taxation seems to be a promising 
technique for insuring tliat no group obtains monopoly prices for its 
contribution to production by threatening to withdraw from 

All people with power to take property or services out of production 
if their prices are not met have monopoly power. As brought out on 
page 15 above, all contributors to production in a specialized society 
must — if they desire full production — exchange their products and 
services in the markets as rapidly as they can produce them. To do 
this they must obviously accept the best price offers made for their 
products and services rapidly enough to permit them to stay in full 
production or else shift to other production where the full product is 
sold promptly at some price. If one grants the right to withdraw from 
production, one automatically grants the power to generate unemploy- 
ment as well as some power to obtain monopoly prices. Take away 
that power to withdraw, however, and the monopolist at most can only 
generate unjust values. Unemployment could no longer occur. If 
■monopolists were required to re-spend their incomes as rapidly as they 
received them, their "administered" prices would not make for unem- 
ployment. If every price in our economy were an "administered" one, 
unemployment would not result so long as every dollar were re-spent. 
A dollar spent by a monopolist creates as much work as a dollar spent 
by anyone else, even though the monopolist may be getting more dollars 
for his efforts than competitive dollar voting would give him. 

If money were taxed into taking part in production at the best price 
it could get, it would probably be unfair to permit other contributors 
to production, such as landowners and organized laborers, to withdraw 
from production unless their price terms were met. Although rela- 
tively full production could continue even if these other contributors 
were privileged to withdraw, since granting them that privilege would 
not cause as much inactivity as granting capital the right to withdraw 
(unless the men who Went out on strike numbered in the millions) , in- 

<« Incentive Taxation (2d ed.), p. 15 
^T Ibid., pp. 125-127. 


justice in distribution would simply be reversed thereby. The rules 
of the game, would, under the altered conditions, give to organized 
labor the privilege and preponderant bargaining advantage which 
today is given to capital. 
Hazelett says : 

Incentive taxation would require labor and capital to do what the farmer already 
does, that is, to accept the best price obtainable for their services which permits 
of full employment ; the condition of maximumu income for every class. . Incentive 
taxation would say nothing about what anyone should do with his hands, his 
money, or his property except to use them * * *." The farmer and nonunion 
labor can never receive an equitable price for their services unless they unionize 
and use the right to strike, or eliminate the right of capital and labor to strike." 

According to Hazelett, if farmers were to follow the policies of labor 
and capital in the cities and ask unreasonable prices for a bushel of 
potatoes or wheat regardless of quality or full measure, or refused to 
sell food at all, labor and capital would soon decide that the right to 
strike is not such a sacred right : 

The farmer represents the only great class which already follows the correct price 
policy for all, namely, that of getting the highest prices that can be obtained at 
full production.'* 

Is it possible to conceive of any business, regardless of size and whether it be a 
monopoly or not, performing any greater service to the public than to sell its entire 
capacity output to the public at a price the public can and will pay? It is not. If 
a railroad gives us the maximum amount of travel and freight haulage possible 
with its facilities at prices we can and will pay, no form of regulation, except 
one to stimulate this condition, is needed. * * * Under incentive taxation, if 
a public utility or other monopoly raised its rates or prices beyond what the public 
would pay for its entire capacity, people would decrease their use of the service, 
and down would go the revenue from the customer and up would go the utility's 
tax rate. This the utility could not afford. However, if the demand for the use of» 
say, electricity exceeded the capacity of generators and distributing equipment, the 
rates could be raised only to that point where the output could still be sold, and 
additional profits could be earned. Since incentive taxation proposes to tax idle 
profits, these would either be paid out in dividends or wages or put back into addi- 
tional equipment to improve and increase the service, since a profitable demand 
therefor exists. Incentive taxation applying to the customers of monopoly would 
assure the monopoly of a maximum demand for its particular public service."" 

Incentive taxation — if assisted by income taxes to modify the distribu- 
tion of income — might be very helpful in generating a system of bene- 
ficially flexible prices. 

If the spending of money savings were induced, still another power- 
ful pressure against price fixing would probably be built up. If those 
people who were taxed into action had no choice but to pay monopo- 
listic noncompetitive prices for the things they are impelled to buy, 
they would probably be moved to attack all institutional arrangements 
which favored price fixing; they would certainly be more incensed at 
price fixing than if they had the privilege of hoarding whenever they 
deemed prices to be outrageously high. 

Investors, jtoo, would have an incentive to break down whatever 
mojiopolistic prices existed in whatever fields of activity they might 
seek refuge in because of the pressure on their money. Today, under 
uncontrolled demand, they can simply say, "Prices are too high," and 
for years defer their investment spending. With pressure on their 

** Incentive Taxation (brochure), p. 19. 

« Incentive Taxation (2d ed.), 1936, p. 54. • 

^Incentive Taxation (brochure), p. 15. 
« Ibid., p. 16. 


money, however, they would be impelled to invest (in housing, etc.) 
nonetheless, and be given an incentive to assist in the cutting of the 
repellent prices. 

It would seem far better for society to force spending and to give 
people an incentive to clean up the business world in which they have 
to spend than to try to arrange prices so as to bait them to proceed. 
For under forced spending the country would at least be producing 
goods and feeding itself while it wrestled with its price situations, 
whereas under hoarding privileges it first collapses into unemploy- 
ment and then patiently waits for Government committees and trade 
commissions to wrestle with the evil of monopoly. 

Effect of a Tax on Idle Money on the Prhe Level. 

If competition between employers for labor were to go on under 
conditions of full employment so that only plants making socially 
desired products survived, and unwanted activities were wiped out 
through default liquidation, the price level would not run away. En- 
forced movement from money into goods would probably raise the 
price level at first (since movement the other way — from goods into 
money — makes the price level fall) but prices would tend to become 
stable when labor costs eat into profit margins so far that price sacri- 
fices, which default liquidations bring on, begin to occur. 

The price level' would rise rapidly under a tax on idle money, but, 
on the other hand, an upward spiral of prices requiring either gov- 
ernmental price fixing or governmental resignation to price inflation 
would probably not result. For no new money would be coming into 
the money stream which was not rooted in a transmutation of business 
values by bankers and business men themselves — ^by men who operate 
in free and open markets. Under a tax on idle money additions of fiat 
money to the money supply would not occur. 

Under such a tax, the price level would probably rise to a higher 
level than that of 1929, for example — because the urgency to go from 
money into goods would be even greater than it was at that time — but 
the price level would probably not rise to the levels of, say, 1918-20, 
when there was not only a strong inclination to spend but also a large 
superimposed injection of monetized Government debt added to the 
effective demand for goods. 

The "joint resolution" of Congress which created the Temporary 
National Economic Committee specifically directed the committee to 
^'investigate the subject of governmental adjustment of the purchasing 
power of the dollar so as to attain 1926 commodity price levels." ^^ A 
carrying charge on money, or a tax on an inadequate rate of turn- 
over of money, would bring on a rise in prices. Whether a 1926 
price level would be reached or passed would all depend upon the size 
of the incentive tax imposed. 



As brought out on page 64, there are two kinds of recovery pro- 
posals of the broad type which seeks full employment by inducing 
money sav ers themselves to use their money in private industry at 

«" 75th Cong., 3d sess., Public Resolution No. 113 (S, J. Res. 300). 


;a faster rate. The first kind, whicli has just been reviewed, seeks 
by means of tax pressures to force savers to disburse their money. 
The second, now to be considered, seeks by means of legislative 
rewards to lure them into disbursing their money. 


The general attitude of sponsors of this second approach is that 
recent "punitive and reform" legislation has "destroyed the confi- 
dence" of potential investors, and that if such legislation were modi- 
fied, capital would go to work. Joseph D. Goodman,^^ in a pamphlet 
sent to the TNEC, enumerated many legislative changes which he 
believed would restore confidence. Among his 34 suggestions were 
the following : 

(1) Amend the National Labor Kelations Act. 

(2) Repeal the undistributed-profits tax. 

(3) Repeal the capital-gains tax. 

(4) Reduce income-tax rates in the higher brackets to encourage 

venture capital. 

(5) End Government competition with the utility companies. 

(6) Reduce Government expenditures in order to balance the 

Budget and reduce the national debt. 

Writing in his syndicated column. Gen. Hugh S. Johnson argued 
for similar changes: 

Private money must go to work. * * * It is damuied ui) in idleness by 
the billions. Why doesn't it go to work? The answer is clear. The Govern- 
ment won't let it. The Federal undistributed-profits tax prevents a man 
from building up a new business out of profits. He must distribute all he 
makes to his stockholders, or pay a prohibitive tax. * * * "pije income tax 
<ioes the same thing on another front. Money is only risked in industry in 
the hope of gain. Money in such large blocks as would make substantial 
employment, returns large profits. * * * if the capital is risked and lost 
the owner is through. If it is risked and gains any large amount — eveji 
though the percentage of profit be, say, 3 percent. Federal taxes take 60 
percent, 70 percent, and sometimes as much as 100 percent of the whole 
profits. Why should the owner risk it? It is cheaper and safer to leave it 
idle. 1= * * This is the most important single fact of this moment. The 
Federal tax policy has stopped progress and reemployment. It could return 
larger revenue in another way. If it is not changed it will bring a new 
depression with as much suffering as the last."^ 

In an article. Idle Money — Idle Men," ^^ Wendell L. Willkie ex- 
pressed a similar view when he wrote : 

In short, it is fear — fear as to what the Government is going to do, fear as 
to what may happen to industry — that has kept the investor from providing 
business with capital and has prevented the reequipment of established industry 
and the launching of new business ventures. 

In an editorial, "Idle Money and Men," on May 18, 1939, the New 
York Times wrote in the same vein. It said: 

The President has recommended that the Temporary National Economic 
Committee investigate the reasons for the idleness of money with a consequent 
idleness of men. If the Committee undertakes this task seriously it will 
have to look into some of the policies of the administration. * * ♦ The 

"Address, 611 Upsal Street, Philadelphia, I'a. 

■°^* United Feature Syiulicate, October 20, 11>87 (New York World-Telegram of that date, 
p. 27). 

^ Saturday Evening Post, June 17. 1939, p. 6.S. 

27.3442— 41— No. 25 7 


briefest consideration of some of these policies and, above all, of their cumula- 
tive effect is enough to indicate why American capital is timid. The effect 
of the undistributed-profits tax has been suflSciently dilated upon. The 
excessive and one-sided capital-gains tax must alone have an effect of the 
first importance. When men who are asked to put their money into new 
business ventures stand to lose the entire amount if they fail, but to retain 
only a minor fraction of their gains if they siKceed, the timidity of risk capital 
cannot be regarded as mysterious. * * * The "emergency" money powers 
granted to the President and the unbalanced Budget add to the elements of 
uncertainty. The workings of the Wagner Labor Act and heavy pay-roll 
taxes add to the dilBculties of employers and place serious obstacles in the 
wav of full employment. 

The President, as his letter to Senator O'Mahoney illustrates, has ignored 
or underrated these psychological factors. He tends to view "the financial 
machine" as if the difficulties were purely in "the mechanism." But American 
capital is idle largely because of understandable timidity, a)id idle mcmey is 
certainly one of the major causes for idle men. 

Senator Arthur H. Vandenberg also believes that existing taxes are 
repressive, and argues for tax exemptions and tax rewards as a desir- 
able means for stimulating employment. He terms such exemptions 
and rewards "incentive taxation," v/hich he would have replace "puni- 
tive taxation" as represented by the undistributed profits tax.^*' For 
example, he advocates tax concessions to producers if they increase 
their output. But Vandenberg does not propose to use the taxing 
power in the customary manner. He would use it only in the sense 
that he would progressively grant offsets and reductions in taxes in 
return for desirable economic behavior. (Evidently, too, Vandenberg 
has a different definition of "incentive taxation" than the author has.) 
It has already been brought out that there are many people who 
believe that a major obstacle to full employment lies in a "financial 
machine" which inadvertently bestows upon capital the opportunity 
to hoard, and that these people believe that the privilege should be 
modified. The parties quoted above, however, tacitly premise that 
the privilege should be continued in its present magnitude. They 
tacitly premise that the freedom of private enterprise should include 
the privilege to withdraw from private enterprise, and that if hoard- 
ing is resorted to, concessions should be given to the hoarders to make 
them change their minds. They would resort to what the author calls 
"incentive concessions" instead of "incentive taxation" to spur eco- 
nomic activity. Traffic officers deem automobile speeding to be an 
evil, and try to check it with fines and penalties. The men quoted 
above, however, even though they recognize the idleness of money to 
be an evil, would check it, not with penalties, but by reducing as it 
were the culprit's license fees, property taxes, income taxes, etc., as a 
reward for behaving as he should behave in the first place. 

Just as one could undoubtedly dissolve a general strike of labor 
by luring the workers back into production bj^ reductions in their prop- 
erty taxes, so one could undoubtedly lure idle capital back into pro- 
duction by systematic reductions in income taxes, corporation taxes, 
etc. If that recourse were resorted to, however, what would one do 
after compensatory tax concessions had been granted at (lie beginning 
of several depressions and the stage had arrived where no taxes re- 
mained to be reduced to furnish the necessary incentive to renewed 
action? It seems that basically the hoarding privilege should be 

^ See New York Times, October 29, 19S7, p. 7, column 2. Cf. his statement in Senate 
Report No. GIO. 76th Cong., 1st sess., on "Survey of Experiences in Profit Sharing and 
Possibilities of Incentive Taxation," 1939, p. 6. 


countered with laws and rules which make hoarding unfeasible, and 
that to grant tax concessions until the bait overcomes the desirability 
of hoarding will only lead to accentuated concentrations of income 
and wealth and to the development of more violent depressions in the 

If the privilege to hoard is continued as the men mentioned above 
premise it should be, the quoted sources are probably correct in their 
view that venture capital will not be forthcoming unless certain legis- 
lation is changed. After all, ours is an economy which both relies 
exclusively on the prospects of profit to induce our savers to invest and 
simultaneously provides the savers with an island of safety to which 
to retreat should the profit prospects appear too dim. So long as we 
provide savers with the alternative of safely withdrawing from pro- 
duction, there is little doubt that new tax policies and new changes in 
the rules of the game might easily induce capital to remain idle. Our 
Congress may indicate through its legislation that it desires high 
income tax rates in the higher brackets, that it favors the existing 
S. E. C. regulations governing the issuance of new securities, that it 
supports Government spending for relief purposes, etc., but if its 
legislation causes money holders to "lose confidence" in the profit pos- 
sibilities of the future, unemploj^ment will result from its legislation. 
Today Congress seems to have the choice either of requiring that cap- 
ital continuously offer itself to the markets for the best price it can 
get for its services — whatever that price may be (in the same manner 
as farmers, most workers, and dwelhng owners in effect do) — and then 
of passing legislation which on its merits the community ddorses, or — 
if it elects to permit money to withdraw from the channels of trade — of 
eschewing all legislation which miglit cause money holders to abstain 
from spending. If one makes it both moderately safe and profitable 
for money to shun private activity, one is naturally limited in the de- 
gree to which one can decrease the rewards for taking risks, justifiable 
though such decreases may be on sociological grounds. Businessmen 
generally contend that the Government must lighten its regulation and 
control over potential investors until those investors deem it advisable 
to invest at higher speeds. The logical alternative exists, however, to 
drive money by a tax on loitering, instead of tempting it into action by 
the removal of taxes which chill its fervor. 

Were labor to withdraw from production on such a wiiolesale scale 
that millions of men were thrown into unemployment, the withdrawal 
would be called a "general strike." Our Government might even 
break up such a withdrawal with its Army and police force in the 
manner that the French and British Governments did in recent times. 
But when money capital withdraws from production and idle money 
generates idle men, the resultant unemployment and liquidation is 
suffered Avithout public criticism of the laws which permit money 
capital to withdraw. Even when the Government acts to neutralize 
the effects of the withdrawal by borrowing the idle money at interest 
and then spending it for relief and public works, many possessors of 
idle capital advocate a balanced budget in order to "restore their 

In time of war or in time of national danger, when it is customary 
to forbid labor to withdraw from the productive process, it is doubt- 
ful whether the State can safely continue to give to money saver& 
unlimited liberty in deferring the use of their money claims. 


If capital is to be permitted to withdraw from production every 
time it sees legislation that it does not like, improvement of the social 
order will probably always be difficult. Under such a set-up a gov- 
ernment might always have to tolerate business arrangements — 
whether harmful or not — that potential investors demand upon the 
threat of strike. 

George Richmond Walker vividly and vigorously designates those 
with money to invest as a "super-supreme court." 

Enact reforms, and they will be declared objectionable. Elect your Congress- 
men and President, and their efforts will be frustrated. Those with money to 
invest have power ; they are above the Government and above the law ; ♦ * * 
the people may vote but they will rule * * *, They hold prosperity in their 
pockets, and they will dispense it when they please * * *. The right to 
hoard is the power to sabotage. It is the right to sell without buying, to 
interrupt the processes of trade, and to bring productive industry to a stand- 
still. The money-hoarder, not the Government, is the enemy of business 
* * *. The privilege of not spending is the power to obstruct. It is a power 
that is pervasive, subtle, and unseen, for it lies not in acting but in not acting. 
It holds the Nation in its thralldom at the present time * * *. it blocks 
the creative energies of the people * • * and makes mockery of their 
democratic institutions and their freedom. 

The power is felt by the people * * * but it is not understood. They 
blame each other or the Government, while they hope for better times. Their 
thinking is entangled in a myth : "A man's money is his own," they suppose, 
"and you can't force him to spend or invest unless he wants to." This myth 
is carefully preserved. It is sacred to the theory of capitalism. Bankers, pro- 
fessors of economics, and Government officials are agreed : "You must induce 
investors to invest ; you cannot force them." Very well. But see what this 
implies : 

Investors are induced by profits. No matter how much money they have to 
invest they have a right to invest it all at a profit or to hold it idle * * *. 
But how is it possible to invest at a profit? Industry is operating at 60 per- 
cent. Industry does not need new plants, and therefore it is irrational that 
new ones should be built. There is no market for the products that new 
plants would turn out * * *. And so we must make up our minds to this 
fact ; investment will not take place on any substantial scale so long as there 
is excess plant activity. We must wait until excess capacity has dwindled 
through depreciation, obsolescence, and bankruptcy. The only way to induce 
investment is to let deflation run its course. Let wages fall, let prices decline, 
let machinery rust, let produce rot in the fields ; it is the way to recovery under 

The evil power of capitalism lies in the right to hoard money; it does not 
lie ih the private ownership of the means of production. Karl Marx was 
wrong. The owner of a factory must run it or he will go bankrupt with 
upkeep and taxes. The worker must work or go hungry. The farmer must 
sell his crop or else it will spoil. The shopkeeper must go on doing business 
or he. will go broke. But those who have money are not under any compulsion. 
Money will keep. It costs nothing to hold money idle.^ 

That business would recover vigorously today if legislation dis- 
advantageously affecting the incomes of people in the upper income 
groups were modified is highly probable. From 1929 to 1933 — when 
industrial activity was contracting even though our currently criti- 
cized legislation was not then on tlie statute books — "confidence in- 
stilling" legislation would not have brought on recovery, but in 1940, 
after a decade of factory depreciation and machine obsolescence, it 
might easily do so. As soon as the present deficiencies and deple- 
tions were provided for, however, and the volume of new investment 

^ In an article "Set America Free" in the October 1^39 issue of Free Economv. See 
also his article "The Case for Monetary Reform," Dynamic America, November 1939, pp. 
S — 13. 


went beyond a certain ratio to the purchasing power available for 
consumeTs' goods, the prospects of return would again look dim to 
investors, and capital would once more Avithdraw from the industrial 
process. Lightening the social controls over capital might easily 
make for a short lived boom, just as a rapid injection of billions 
through a government spending program might do, but the boom 
would be purchased by diverting additional government benefits to 
people who probably need them least, and without removing the 
particular privilege which is probably one of the major obstacles to 
continuous operation of industry under private enterprise. 


Two other proposals — of more interest, perhaps, than importance — 
are those suggested to the T. N. E. C. by Joseph Freeling^^ and 
Joseph Greenberg.^® Greenberg also desires to spur investment by 
increasing business confidence, but he proposes to achieve it through 
a system of insurance. He would have businessmen insure their 
solvencies with the Government at a premium which would vary in 
size with the values and time periods involved. Even if an arrange- 
ment such as he suggests were feasible, which is highly doubtful, it 
could at best only even up or distribute the losses from business 
failure; it could do nothing fundamental toward forestalling the 
oncoming of business depression itself. 


Freeling premises that there are many people who both need con- 
sumers' goods and have purchasing power and yet defer their buying 
unduly. He would instill in these people a greater propensity to 
spend by organizing the radio, the press, the motion pictures, the 
schools, etc., to present to them "reasons" why they should buy sooner 
than later. Freeling is undoubtedly correct in believing that in 
times of depression consumers in the lower-income groups are more 
tardy in their spending than at other times, but it is very doubtful 
that such public appeals as he suggests would instill any more con- 
fidence in consumers than did the extensive "Buy Now" billboard 
campaigns which characterized the early years of the 1929 depres- 
sion. There is good reason to believe that the propensity of con- 
sumers to spend swings up and down with the indexes of employ- 
ment; that it is not in itself a causal force but a variable which 
fluctuates with variations in the volume of investment spending. 

^ Address, 1769 Townsend Avenue, Bronx, N. Y. 
** Address, 110 Belmont Avenue, Newark, N. J. 




Even granting that means can be devised to reduce interest rates 
to zero, to reduce the interest burden to nothing, and to prevent 
falling prices, foreclosures, and disruptive changes in ownership 
from occurring — that is, even granting that means can be employed 
largely to forestall the customary ravages of debt, there are those 
who, like H. F, Stoke ^ (in a communication to the T. N. E. C.)) 
raise the profound question, "Why should not the State abolish the 
debt agreement as such as a permissible form of contract?" His 
is an unorthodox but valid question which the world largely fails 
to ask. Despite the fact that for centuries governments have en- 
forced the debt contract as a permissible form of transaction. Stoke 
suggests that private interest charges should properly be made un- 
collectible by law. For, in his opinion, enforcement of the debt con- 
tract operates in the long run to choke industrial activity. 

As brought out on page 17, the making of debt agreements is not 
only a means by which investors or providers of money are largely 
able to absolve themselves from the hazards of doing business when 
they permit their money to be put to use, but also a means by which 
they assure themselves of the ownership of the business should fu- 
ture levels of industrial activity fall sufficiently below the borrower's 
expectations. "VVliat would happen if the State ceased to enforce 
contracts which called for fixed — rather than contingent — monetary 
returns ? Nothing but good, says Stoke. To him the State's permis- 
sion to citizens to enter into debt agreements is — like its earlier per- 
mission to citizens to sell themselves into slaverv — a basic social evil. 
Writes Stoke: 

In prosperous times debt is incurred in the hope of gain; in bad times be- 
cause of necessity. But whatever the reason for which debts are incurred, 
the lowering of the fortunes of the borrower, whether isolated or because 
of a depression, has the same effect. Rope a wild bull, and snub the rope 
around a post. The bull may outclass you 10 to 1 in weight and strength, 
but by taking up slack as he plunges, soon you have him with his head Jammed 
against the post, and in subjection. Interest is like that; it always tightens 
Its hold m the slack period ; it gets its man, its age, its civilization. 

Debt * * * is the mortal enemy of the capitalist system. America has 
furnished it an ideal hot-bed of peace, order, and favorable law, so its ravages 
have been more rapid here than any time or. place in history. The 50 years 
since the pioneer period ended see it fully in control of our economy, which it 
IS now destroying. The billion dollars it extracts monthly from the producers 
of real w ealth, and those who render service, accounts for the growing annual 

' Address, 1420 Watts Avenue, Roanoke, Va. 


national deficit. It is solely a financial middleman's fee, for which there is not 
one iota of material return. 

No better example of the way the credit system extracts not only the profits 
but the capital from industry is to be found than in a study of the American 
railways. The Missouri Pacific Railway, which was recently put through the 
-wringer by the Interstate Commerce Commission, is a characteristic example. 

On a foundation of $152,000,000 in capital stock, had been erected a debt 
structure of more than five hundred millions, or a ratio of debt to direct 
investment of 'SV2 to 1. Now this did not happen overnight. At one time the 
road was solvent and paid dividends ; but a time came when net operating 
earnings fell below interest charges. The excess of interest had to be paid out 
of capital. First to go was surplus, followed by depreciation reserves. When 
replacements became imperative, borrowing had to be resorted to. Borrowing 
meant more debt, more interest, more deficit, more borrowing. The ever- re- 
volving vicious circle spun faster and faster * * * until no more loans 
could be secured and strangulation resulted because of want of operating 

In recent years the road had been making an annual operating profit of 
$7,000,000, or $8,000,000, but the interest overhead was more than $20,000,000. 
In simple terms, * ♦ * $12,000,000 to $18,000,000 of the road's capital had 
to be added to meet the annual interest bill. When the end came, stocks were 
"found to have no value, and the holders of those stocks are given no partici- 
pation in the securities of the new company." In a word, the capital structure 
had become wholly a debt structure. 

Why, it may be inquired, was borrowing continued to such ruinous lengths? 
Simply because it was the only way working capital could be maintained. The 
public had become too wise to buy stock in such a set-up, just as today they 
prefer to hoard rather than to make direct investment in a tottering economy. 
It is sadly significant that 90 percent of the new security issues of the last 6 
years are bonds, and only 10 percent are stocks. In reorganizing the Missouri 
Pacific the I. C. C. reduced the .iunior bonds to stocks. * * * The I. C. C. 
missed an opportunity to make financial history by failing to convert all bonds 
into stocks. Instead, they issued bonds in sufficient amount to absorb the 
present earnings of the company, presaging a future wringing process. * * * 
If Missouri Pacific had been financed by stocks only, it would have been solvent 
and paying dividends today. This is mathematically demonstrable from the 
fiscal records of the company. If I. C. C. had refinanced it with stock issues 
only, it would certainly survive many roads that are solvent today, but stag- 
gering along under a load of debt. 

Missouri Pacific presents in miniature a picture of our entire economy. Now, 
with the nation's wealth mortgaged beyond debtor'^ power to pay, with investors 
unable to find well-secured interest-bearing securities, and wisely refusing to 
take the hazards of direct investment, what hope is there in coaxing or coerc- 
ing idle capital into high-velocity action? 

A conservative plan for the gradual elimination, first of priA^ate 
long-term corporate or business debt (housing? loans not included), 
and then of public long-term debt, is that of Irwin S. Joseph, 132 
West Thirty-first Street, New York, in The Debt Problem and Its 
Effect Upon Our Economy (booklet published by himself), March 
1940. (See his revised booklet. Part 4, of this monograph.) 


We must realize, however, that it is the wild variation in rate of 
use of money which is the factor that is mainly responsible for making 
the debt instrument so effective in its expropriatory role. It is one 
thing to have creditors inherit what is left of a failing business in 
periods when the aggregate monetary demand is stable. For at such 
times poor management is probably the main cause of the failure. 
But it is quite another matter to maintain rules which permit creditors 
to inherit defaulting businesses during periods when not poor man- 


agement but retreat of money from the channels of trade is responsi- 
ble for the defaults. Even though one may question the social advisa- 
bility of protecting one group of risk takers at the expense of an- 
other even when money flows steadily and continuously, one cannot 
entirely attribute the seriousness of the convulsions depicted by Stoke 
to the existence of fixed debt as a business form. There seem to be 
two questionable arrangements in existence which operate to generate 
expropriations and distributions like those depicted. It is the combi- 
nation of fixed debt and the right to hoard which together generate 
situations like that illustrated by the Missouri Pacific. Recurrent 
sprees of capital spending and capital hoarding — with the rope of 
debt hitching the bull of ownershi]) ever closer to its post — can hy 
themselves have tremendous effects upon the distribution of income 
and the concentration of economic power. 

Orthodox economic theory has historically limited itself to studying 
distribution under "equilibrium conditions" — under conditions where- 
capital spending is unrealisticilly premised always to the stable. It 
believes that it can understand distribution without reckoning with- 
those repetitious business-cycle convulsions which expropriate the 
financially distressed. Consequentl}^ even today it does not discuss 
how existing distribution might be largely the result of "squeeze- 
plays" in times of depression ; how they are not simply the result of 
free bargains struck in the labor, land, and monfey markets between, 
the contributors to production. An illustration will bring out the 
joint roles of fixed debt and periodic hoarding on the distribution of 
the national income. 

Suppose that from 1870 to 1940 distribution between the factors of 
production remained constant; that during the whole period wages 
received a hypothetical 65 percent of the national income, entrepre- 
neurial return 10 percent ; land, 5 percent, and interest and dividends 
together, 20 percent. Suppose that while this was going on, the dis- 
tribution of the income between families was nonetheless changing^ 
continually so that instead of, say, the richest 10 percent of the popu- 
lation receiving 25 percent of the national income in 1870, 1 percent 
of the population comes to receive that 25 percent in 1940. How 
could this altered distribution — not between the "factors of produc- 
tion" but between real people — occur? 

Suppose that during a period of stable business activity prior to a 
depression, a John Jones earned $200 per month as wages; that his 
wages constituted a routine 65 percent of the value of the product on 
which he worked, and that he also owned a $7,000 house on which 
he annually received a rental return equivalent to his pro rata share 
of the national income that was currently going to "rent." Under 
such suppositions Jones is a recipient of both labor and investment 
return and is holding his own in" relation to other workers and owners. 
Ownership and income are being neither concentrated nor diffused. 

But suppose investors slow down their rates of spending until the 
activity of the Nation is cut in two, that as a result Jones along with 
others receives only $100 per month in wages instead of $200 as before, 
and that he also receives only one-half as much rent as before. Sup- 
pose this reduced income pinches him so that he takes out a $1,000 
mortgage on his home. If capital remains idle long enough, Jones 
might lose his job and be unable to meet his mortgage at maturity. If 


his creditors foreclose, Jones' house will pass for $1,000 into the hands 
of creditors who are better able to survive the hoarding period. (It 
will not do to say that inasmuch as the "richer creditors" who fore- 
close on property often consist of savings banks, life insurance com 
panics, etc., in which the poor also have large equities, that the poor 
probably gain as much as they lose. Kealism forces us to recognize 
that poor distressed property holders usually liquidate their bank and 
.insurance company equities before they let their homes go at distress 

Note that, if and when Jones' property transfers for $1,000, the 
creditors receive what was a $7,000 property for what was a $1,000 
•claim. Now if, after the foreclosure has taken place, the Nation's 
hoarders resume a rapid rate of spending, they will reflate the value of 
the house, from perhaps $1,000 to $7,000. Thus, by merely being 
granted the privilege to hoard and taking advantage of it, creditors 
who are not themselves driven to liquidate assets, acquire a $7,000 prop- 
erty for $1,000. If big investors go through such hoarding and expro- 
priatory proceedings only occasionally (and keep the courts properly 
respectful of their contracts), they can make large returns on their 
capital. To the degree that creditors more than debtors survive de- 
pression without living off their property, are creditors benefited rela- 
tively by periodic withdrawals of capital from industry. 

More of the Nation's income tends to be diverted to the well-fortified 
creditor after each depression. After each expropriation, for example, 
creditoi'S naturally receive the house rent which had formerly gone to 
Jones and his kind. Statisticians may continue to bring out that 
^'rent" is still only 5 percent of the national income, but they usually 
do not indicate the new strata of income recipients to which the 5 per- 
cent now goes. Thus the situation seems statistically reassuring and 
respectable from one depression to another while unemployed prop- 
erty holders drift into poverty and the concentration of economic 
power grows. Historically the study of distribution has been disso- 
ciated from the study of business cycles (and the study of business cycle 
theory even dissociated from the fact of hoarding) with the result that 
the mechanics of the expropriatory squeeze-play has never been given 
attention in "theories of distribution." 

The abolition of debt as a permissible form of contract, as proposed 
by Stoke, would of course abolish our present form of money, inas- 
much as money today consists primarily of certificates of indebtedness. 
And if it did so, what would we use for money ? Goods ? Warehouse 
receipts? Gold? Perhaps with some $18 billion worth of gold al- 
ready in the country, it might be feasible to use gold certificates — 
warehouse receipts — in large enough quantities to serve us well as 
medium of exchange. Or, perhaps, if the state made interest charges 
uncollectible by law only on those debt obligations which had maturi- 
ties of over, say, 1 year, then short term debt obligations would still 
remain with us and these alone could be transmuted into bank deposits 
to constitute our money. 

Now that the modern corporate stock certificate as an investment 
form has been invented to facilitate the diversification of risk the 
author can see no functional justification for the existence of those 
forms of long-term debt agreements which seem only to absolve one 
group of investors from risk at the expense of another. However, 


it might prove difficult to abolish interest simply by making interest 
charges uncollectible by law. For hundreds of years the church 
labeled interest "usury" and tried to abolish it but failed. When 
money has no carrying charges — that is, when there is no pressure 
on it which operates to put it into use — people in distress have no 
alternative but to bait it out with rewards in the form of interest. 
Only by putting pressure on money itself to induce it to look for 
takers is it likely that interest can be reduced or destroyed. And, 
administratively, it is far simpler for a State to impose a tax on a 
self -assessable asset like money than to inspect, scrutinize, and judge 
those specific contractual agreements which take the form of fixed 
debt agreements. 


A similar but milder proposal than Stoke's suggestion to make 
interest charges uncollectible by law is one proposed by both Harris 
K. Randall ^ and Jacob Baker,^ both of whom would tax all instru- 
ments of indebtedness progressively. In outlining possible "Sources 
of Additional Revenue for Extended Social Benefits" for the C. I. O.'s 
"Committee on Social Security," Baker proposed a tax on all instru- 
ments of debt. Although holders of bonds, mortgages, and other 
such paper pay their share of income tax in accordance with their 
abilit}^ to pay, they do not, according to Baker, pay in accordance 
with the benefits received. He says: 

The whole paraphernalia of courts of equity and much of civil law, the whole 
procedure of bankruptcy and receivership, the whole authority of the Federal 
marshal are directed tov^ard the protection of instruments of debt. This vast 
and expensive machinery is an insurance to the creditor of the collection of his 
claim against the debtor. Much debt is on a long-time basis and because of 
that fact partakes of the nature of equity investment. Even here, however, 
the creditor has a superior claim to governmental protection of his interests 
and rights above the holder of share capital or the partner or the owner of a 

Every instrument of debt, whether it is a 90-year railroad bond or 3-month 
demand note, shares this peculiar protection from the sovereign Government. 
Indeed, the protection is duplicated and triplicated in that several overlapping 
jurisdictions — municipal, State, and Federal — may, any or all of them, be called 
. upon in the protection of certain types of debt claims. The shorter the debt 
claim, the greater the volume of court business in its protection and the greater 
the reliance upon sovereign power for insured collection. 

The long-term instnunents of debt represent actual participation in economic 
ent<rprise. The investor has been willing to lay his money down for a long 
period. While he has a good deal of protection, he does share some of the risk. 
Short-term debt participates nu;ch less in risk. The short-term lender is a 
well-known figure in many communities in the United States. He is the man 
who buys tax warrants, lends money on warehouse receipts or any other secu- 
rity that he can realize on quickly. He anticipates the profits of others. Debt 
claims range from those that are completely participatory to those that are 
completely anticipatory. They are all an important part of the economic sys- 
tem, but the more anticipatory they are, the more they are subject to the 
abuses of hoarding, high interest rates, and other forms of legalized profit that 
may be extortionate. 

* * * Because the long-term debt obligations do not require as much gov- 
ernmental service in protection and because they partake of the nature of perma- 
nent investment, the scale of payment should be lower for this type of debt.* 

- Address, 37 West VanBuren, Chicago, III. 

* Address, United Federal Workers of America, Washington, D. C 

* "New Taxes for Social Benefit," in Dynamic America, November 1939, p. 25. 


Short-term debts like time deposits, protected as they are by Gov- 
ernment regulation and inspection, Baker would tax at relatively 
higher rates. Also — 

Unless demand deposits are taxed, there will be a tendency to transform long- 
time deposits into demand deposits bearing interest on average balances. De- 
mand deposits constitute the first point of Immediate hoarding in periods of 
depression. TTie demand depositor holds his deposit as cash in hand, so that 
he may buy commodities at a low price and sell them at a higher one. This 
privilege of hoarding and speculation is a very great one and a very profitable 
one, and in consequence on both scores can bear a heavier tax. * * * 

Government debt, too, is in a protected position and the holders of Govern- 
ment obligations because of the security of income are in general in a good 
position to pay a tax. However, there may be constitutional difficulties in- 
volved and until there is certainty on that score, the possibility of taxing 
Government debt is only indicated.' 

Randall's approach parallels the above. He would — 

impose a supplementary deterrent tax on all private holdings of liquid assets — 
money, bank deposits, and debt paper. Let this "debt-tax" be progressive with 
the liquidity of the paper held (scaling up to a maximum rate on money itself 
as 100 percent liquid) and steeply progressive also with the amount held by the 
Individual — thus to deter debt-hoarding by the wealthy * * * as well as 
jolting the inactive dollar into purchase of something — anything — whose pro- 
duction will employ labor, boost the genuine demand for it, and so force up 
real wages. Make exempt from the debt tax all paper held by banks against 
their deposits, and by insurance companies against the cash value of their 
policies — these to be taxed to the individual policy-holders and depositors 
insofar as they hold totals large enough to be taxable. 

In advancing the merits of this debt-tax proposal, Baker adds: 

This is a new source of Government revenue. It is projected upon ability 
to pay and benefits received. It carries with it incidentally but inherently 
highly beneficial economic results in that it attaches a slight expense to the 
peculiar privilege of hoarding and speculation, places some charge on all debt 
and thus encourages funds to move into common stock equities, venture capital, 
and productive investment generally.® 

Long-term private debt in the United States, according to the latest 
study available,^ is over $99,000,000,000. The current Federal, State, 
and local debt exceeds $60,000,000,000. For revenue reasons alone, 
therefore, the question of levying taxes on a major part of such debt 
(with exemptions of the kind indicated by Randall) seems worthy of 
careful investigation. 

Finance officers of States and municipalities, such as Morris S. 
Tremaine, of New York State, have contended that a Federal tax 
on the return from municipal bonds, for example, would operate to 
cost the municipalities more for their financing.^ That would nor- 
mally be the case and is certainly the case today, but it would not 
be the case if the tax is also levied on time and demand deposits, as 
both Randall and Baker suggest. For, without that stipulation, 
money would be safe in remaining idle, and financing which aimed 
to lure money into buying taxable instruments such as municipal 
bonds would undoubtedly have to pay higher interest rates. Bvit 
if the safety in lemaining idle were concurrently taken away, no 

•Ibid., p. 26. 
« Idem. 

' Evans Clark and George B. Galloway, editors, The Internal Debts of the United 
States, Twentieth Century Fund, Macniillan Co., New York, 1933, p. 5. 
8 New York Times, May 9, 1939, p. 35, column 5. 


higher price would have to be paid. In fact if — as both Randall 
and Baker suggest — short-term debts were subject to higher rates of 
taxation than long-term debts, municipalities, States, and the Federal 
Government would all be in a position to finance and refinance their 
debts at lower rates than before. 


Today, as always, shocks occur to our economic system. Periodi- 
cally, production in some fields of acti^^ity is disrupted. That is un- 
avoidable. A hurricane in New England overexpands our lumber 
supply. A European war destroys our foreign markets. A court 
decision terminates an N. R. A. Disruptions are destined always 
to be with us. Our weakness seems to be that periodically we are 
not able to prevent production in all fields of activity from declining 
when a serious miscalculation or disruption of production occurs 
in any one field. Spiethoff, Hansen, Schumpeter, Cassel,' and Rob- 
ertson all properly point out that investment demand probably 
always will, because of its heavy dependence on technological change, 
come by fits and starts. Our problem is to provide a balancing de- 
mand for consumer goods when specialized investment demands are 
disrupted or disappear. 

Soon we may be faced with the problem of what to do when the 
European war is over, war orders stop coming in, and defense prep- 
arations are curtailed. People are already speculating on how severe 
the additional unemployment will be. The unemployment problem 
may thus become an increasingly urgent one. Weary as we may be 
of it, we cannot abdicate it. We still have six or seven million 
unemployed and we cannot feed them retroactively. The problem 
is, moreover, one which must be solved fairly well — so well in fact 
that people feel that the goods they receive reflect in a reasonable 
measure their capacity to produce. 

History teaches us that the masses do not necessarily regard their 
right to vote and other freedoms as a sufficiently valuable stake in 
democracy to merit their support for the existing forms of govern- 
ment. Elsewhere the right to vote has been used to destroy democ- 
racy, and in time it may even here be so used unless a reasonable 
participation iruthe benefits of production is provided for the mr i 
of citizens. In our regard for the vested rights of those who oppose 
change, we should not forget that the industrial stagnation which 
that regard generates places the rights of the many in abeyance. 

We may make rapid scientific advances in technical fields, we may 
eventually harness the energy of the atom itself, but nonetheless 
unemployment will assuredly be with us — perhaps in even larger 
proportions than heretofore — so long as we do not directly inSure 
full-blast exchange of goods and sendees between specialized pro- 
ducers. So long as we provide laws which permit any factor of pro- 
duction to gain more over an appreciable period of time by with- 
drawing from production than by accepting the prices which enable 
it to remain fully and continuously at work, we are probably doomed 
to lose many of the potential gains of technical progress. 

Because it is usually a levy upon income, taxation is commonly 
thought of as one of the least satisfactory methods of social reform. 


For it is usually a remedy applied after the act. Income taxation^ 
for example, may — in lieu of better solutions — be very helpful in 
rectifying a maldistribution of income which has its roots in exploita- 
tion and special privilege. But income taxation does not attack the 
causes; it does not even aim at the particular rules of the game 
which make for exploitation and special privilege. Moreover, when 
States thus participate in the fruits of unfair rules, they may even 
be tempted to tolerate the evil for the sake of the revenue. This 
seems currently to be happening in many States in connection with 
race-track revenue, for example. There are taxes, however, which 
differ fundamentally from taxes on income in that they attack dir- 
rectly the sources of economic advantage which lie at the root of 
maldistribution. Such taxes imply no tacit alliance whereby the 
State tolerates unfair rules in exchange for the privilege of sharing 
in the ill-gotten fruits. 

The growing intricacy of modern life makes the need for planned 
adjustment continuously more pressing. The task of correlating 
and coordinating the multitudinous details of our living together 
seems to outgrow human capacities. To administer properly from 
a central source the details pertaining to our vital social problems 
seems ever more unfeasible. In this situation many realistic people 
are coming to believe that the tool of taxation offers the most promis- 
ing escape. For the taxing power is a tool with which democracy 
can destroy special privilege. And if this power is used in a major 
way to release impellent forces and to remove retarding ones, it may 
be possible to hold stable or even to reduce the area of detailed 
governmental regulation to limits within the bounds of human 







In the first session of the Seventy-fifth Congress, four Members of 
the Congress, Hon. Maury Maverick, Hon. Jeri*y Voorhis, Hon. 
Robert G. Allen, and Hon. Thomas R. Amlie, simultaneously intro- 
duced an industrial expansion bill. A different number was given 
to each bill, but they are identical in content. Their remarks con- 
cerning this bill are included in the following pages of this monograph. 

The industrial expansion bill went through several revisions and 
in its latest form appears as H. R. 7504, the Monopoly Control Act, 
introduced by Hon. Jerry Voorhis in the first session of the Seventy- 
sixth Congress. 

It is not to be understood that the Congressmen who introduced 
the first act are supporting this last version, but as their statements 
concern planning for abundance and a positive program for indus- 
trial expansion, which is the subject matter of this last version of the 
industrial expansion bill, they are grouped in this section of the 

DAY, AUGUST 16, 1937 

Mr. Allen of Pennsylvania. Mr. Speaker, on June 1 Representa- 
tives Amlie of Wisconsin, Maverick of Texas, Voorhis of California, 
and I jointly introduced in this House a measure known as the 
Industrial Expansion Act. This measure is the outgrowth of a great 
deal of painstaking work and innumerable conferences between the 
Members who introduced it. We not only contributed to it our 
own ideas but on many points we sought the assistance and advice of 
economists and political scientists who think in terms of society as a 
living, expanding organism. To the best of our ability we framed 
a measure in line with modern technological and economic develop- 
ments and in harmony with human instincts. Because this is a new 
approach and a new departure in legislation, a prologue to the dis- 
cussion of the bill seems pertinent. 

Not even in a despotism, and much less in a democracy, can any 
legislation be long enforced which runs contrary to and violates pri- 
mary human instincts. These instincts are: Se.^f -preservation, which 
includes all that has to do with access to and mastery over the physi- 
cal necessities of life; race preservation, which embraces mating, 
reproduction, and the rearing of offspring; and the instinct to push 
ever outward the horizons of knowledge, which include exploration, 
experimentation, education, and modern science. These primal in- 
stincts are far older than man-made laws and stronger than any sort 
of police powers. They arc so deeply buried- in the inner core of 
being that no religion has ever been able to dominate them, no legisla- 
tion has been crafty or drastic enough to turn many for any length of 
time from life'^ destined way, and no dictator or tyrant has ever 


273442 —41— No. 25 8 


been able to seize enough power to bend and shape these instincts of 

the people to his will. i j • 

As true as that throughout the ages men have always been domi- 
nated by these common instincts, is also the fact that all men m all 
of human history have been gripped by one common fear— the fear ot 
scarcity. Self cannot be preserved, the race cannot be propagated, 
and intellectual horizons cannot be extended if scarcity denies access 
to means of life; so scarcity has always been the common enemy and 
abundance has always been the dream of all mankind. 

The lash that has driven man every step of that long, weary, 
blood- washed march of social evolution has been his longing to escape 
scarcity and want, and to- achieve plenty and security. It has been 
the urge back of every migration since Cain traveled to the land of 
Nod to find himself a wife and a home, down to the last wheezing 
flivver loaded with "dust bowl" refugees headed for California. It 
was this fear and this hunger that led our savage ancestors to face 
the terrors of the unknown. It was this fear and this dream that led 
our ancestors across Asia, across Europe, across the Atlantic, and 
across America to the Pacific, which is the end of the trail for western 

The fear of want and the hunger for plenty fuse into one uncon- 
querable human drive, and in its baser forms it is a terrible thing. 
It has been the breeder of all the wars and all the crimes that have 
ever blackened the earth, but in the final judgment its virtues will 
outweigh its sins; its achievements will stand forth as the dynamic 
force and the never-fading light that has led man up from the pits 
of savagery to the highest type of civilization the race has ever 

Not in our own country alone but in the whole civilized world, men 
and nations are stumbling and staggering about in the wreckage of 
an economic system that is changing. Scarcity is gone. Modern 
science and mass production methods have routed it, and a scarcity 
system falls when the driving force of scarcity is no more. Frantic 
with fear because we see that the old verities are no longer valid, we 
slash at our equally fear-crazed neighbors in wars, strikes, mob mad- 
ness, vigilantes who would be the law, and moribund courts who 
would use dead laws to turn back the march of progress, and violate 
the primary instincts of men. Hunger and want, still-born hopes, 
and wasted opportunities result because we try to revitalize a system 
o"f scarcity that is gone. 


The Industrial Expansion Act, now presented for your consideration 
and action, is the first legislative measure ever offered in the Congress 
of the United States that gives dne consideration to the technological 
developments which make an anachi-onisra of an economic system based 
on scarcity. It is a measure which seeks to make possible Iw legal, con- 
stitutional metliods the full utilization of all our machiiipry and m.'^n- 
power to increase production to a |)oint where it will assure to all our 
people the comforts of life. It seeks to keep step with technological 
progress, rather than to turn back the march of time to an artificially 
created scarcitv. 


This measure is designed to effect greater production of goods and 
services by putting all available manpower and machinery to work, and 
greater consumption of goods and services by providing the necessary 
purchasing power through productive employment at living wages of 
those now disemployed. 


Abject fear of scarcity is no longer sane, nor do we need to speculate 
and guess what our productive capacity might be. Two recent surveys 
answer for all practical purposes our questions as to \shat the United 
States Could produce if it used fully its productive possibilities. 

The Brookings Institution, in its. study called America's Capacity to 
Produce, stated — and the findings have not been questioned — that addi- 
tional goods and services to the extent of many billions of dollars could 
have been provided during 1929, our all-time high in production, if our 
machinery and our disemployed labor had been used to capacity. In 
our best year we were using our industrial and agricultural plants at 
only 81 percent of their capacity, and technological disemployment was 
a serious problem. 

The National Survey of Potential Product Capacity was set up in 
1934 by the Federal Government under the Civil Works Administra- 
tion to study this problem. Federal funds were used, but the study was 
not made by relief workers. Thirteen experts were employed, chosen 
from the best of our engineers, sociologists, and economists. 

This study, summed up by Harold Loeb and his associates in The 
Chart of Plenty, indicates that the United States could, by using more 
fully and intelligently all of our productive facilities, add to what was 
produced in 1929 approximately $40,000,000,000 worth of goods and 


To be on safe ground we may discount the finding of the Brookings 
Institution and The Chart of Plenty one-half or one-fourth, yet the 
fuller and saner use of our capacity to produce would transform the 
very nature of our social order. Additional goods and services worth 
twenty to thirty billions of dollars, if divided annually between the dis- 
employed in wages and salaries, would make poverty as extinct as the 
black plagues which scourged whole nations and laid waste to cities 
before modern hygiene, sanitation, and medical science routed igno- 
rance and superstition. 

The bill which we present is designed essentially to make it possible 
for the one-third of our population ill-fed, ill-clad, and ill-housed to 
make full use of our productive capacity. It deals with the simple, 
primary needs of life; foodstuffs, milk, vegetables, meat, and fruit, our 
daily breaii with butter and jam on it, which we can produce in super- 
abundance, and the lack of which makes so .large a part of our people 
ill-fed. It deals with clothing which our farmers, textile mills, and 
garment factories could turn out in ample quantities if we could only 
tliinlv and act in terms of plenty. It deals with housing, the pestholes 
of modern society — slums, rural and urban — with miles of modern, 
comforta,ble, well-equipped, sanitary and beautiful homes which our 
ai'chitects and builders are so capable of producing. It deals with 
travel passenger-miles which lack of opportunity to provide has bank- 


rupted railroads, and made of automobile manufacturing a hazardous 
occupation. It deals with medical care, education, recreation, music, 
art, and drama, necessary services which during the depression have 
been beyond the reach of great masses of our people. The Industrial 
Expansion Act seeks but to implement and make possible of achieve- 
ment what every normal human being wants — an end to poverty, pen- 
ury, pauperdom, the slow starvation of body, brain, and soul — ^^for it 
recognizes that there are no physical factors preventing the creation of 
the requisites for decent living in generous quantities by self-support- 
ing, self-respecting American citizens. 


This bill may seem revolutionary in that it deals with abundance 
and seeks to make it available to our whole people rather than at- 
tempting to restrict production to niggardly, penurious quantities 
that can be sold at a profit in a market of shrinking purchasing power. 
But we have reached a point where life itself is in a state of revolution. 
We are faced by a situation unprecedented in human history. We 
have perfected machinery and techniques capable of producing food,, 
shelter, and clothing in ample quantities. Yet, to quote the President, 
one-third of our population lives below the penury line and fully 20 
percent are economic outcasts, social lepers, unclean with the disease 
of poverty, pariahs outside the pale. They are the mortgaged and 
tenant farmers tilling poor soil with poorer equipment whom society 
does not need. They are the workers whom modern labor-saving 
machinery has replaced, the technologically disemployed whom in- 
dustry no longer needs. They are the surplus professional and ''white 
collar" workers whose highly skilled services are as much a drug on 
the market as labor's brawn. They are the workers past 40, whom 
industry rejects, and the young born 20 years too late, whom industry 
ignores. They are the W. P. A. workers and the relief clients whose 
starvation doles we recently voted to cut, and who now disturb us 
with their frantic protests that to drop them from relief rolls means 
slow starvation. 

We have had 4 years of experience to prove that mere relief is not 
the answer. Whether we slash it to a billion and a half or boost it to 
three or four billions of dollars per year, it is only a faulty makeshift.^ 
We whose job it is to legislate for our country's welfare should acquire 
some ability to think realistically. We might just as well face the fact 
that the 80 percent of our people who have a place inside the economic 
system, whether as owners and profit takers or as poorly paid farmers 
and wage workers, who produced the $70,000,000,000 of our national 
income, are not willing to permanently support the 20 percent outside 
the system. We may pile the burden of supporting the disemployed 
on the producers for a time, but political realism should teach us that 
tax-supported relief for those forced to be drones in industry is not 
enough to meet the problems either of the low-wage brackets where 
income must be supplemented by charity or of the outcasts outside 
the pale. 


President Eoosevelt's National Resources Committee very recently 
published a report which presents another view of the challenge of 


tlie machine age. This Committee's work is the first effort of our 
Federal Government to scientifically chart not only existing produc- 
tion possibilities but the potentialities and social portents of inven- 
tions and technological processes now being developed. It forces us 
to consider that an ounce of foresight is better than a ton of hindsight 
in making the necessary human adjustments to modern machinery. 
It deals at length with the social portents of tlie cotton-picking ma- 
chine, which might throw seven to nine million southern cotton pro- 
ducers out of employment and dump them into an already over- 
crowded labor market in the industrial sections of the North and 
East. It calls our attention to the profound social changes and threats 
to the existing order of air conditioning, photoelectric cell, plastics, 
fabrics made from cellulose, synthetic rubber, prefabricated houses, 
television, trailers, synthetic gasoline, and tray agriculture. These 
are not wild dreams of visionary inventors; they are accomplished 
facts; and we will be forced to deal with their impact on our social 
problems in the very near future. 

Any thinking person knows that neither the sort of business recov- 
ery we are now enjoying nor congressional oratory will put the' dis- 
•employed to work. You may be only politely bored with our insistence 
that we legislate for industrial expansion that will find jobs for all of 
our working people ; but when the next depression arrives, which is as 
inevitable as that the sun will rise tomorrow morning, what n\ay 
sound like visionary Utopianism to you now will have a different 

The industrial expansion act which we present to you sets up ma- 
chinery to bring about voluntary agreements in the major industries 
to provide : 

(a) For the inclusion in all agreements of provisions against any 
rise in price, except in a few sweated industries, where prices must be 
raised somewhat in order to make possible the payment of living wages. 

(b) For coordinated increase of output, planned according to na- 
tional needs. 

(c) For an equitable division of the new purchasing power resulting 
from increased production. 

(d) Industry will be protected against loss if it cooperates in the 
plan by a system of purchase agreements covering possible unsold 

(e) Labor will be protected because wages must be increased under 
the plan; because prices will be prevented from rising; and because it 
vrill have equal representation with capital on every industry authority. 

In order to secure the cooperation of industry in carrying out a 
national plan calling for capacity operation, the Federal Government 
Avill depend primarily upon a processing tax similar to that used in 
the A. A. A. It is contemplated that a processing tax of 25 percent of 
the value added to goods by the manufacturer will be charged on all 
manufacturing operations covered by the act. However, if a unit 
cooperates with the Government in the matter of wages, output, and 
other conditions, all but 5 percent of this amount will be refunded. 
But in order to secure cooperation with the Government depends not 
only upon the imposition of a tax but also proposes to enter into agree- 
ments with all cooperating units by which the Government will take 
over at cost a certain proportion of the total output that proves to be 


It is not expected that the Government will incur any great loss by 
so doing, if. as a result of achieving full production all along the line 
national income is stepped up from seventy to one hundred billion 
dollars a year. The manufacturer will be just as safe in turning out 
100 units as he is now in turning out 70, because the people will be 
assured of the requisite purchasing power to purchase them. 

It is still recognized, however, that with the advance that has taken 
place in technique during the past 10 years, even if we were to achieve 
full production we should still have three or four million people unem- 
ployed. The industrial expansion act contemplates that the services 
of these people will be utilized in a long-terra, far-reaching housing 
project. As far as possible, private builders will be encouraged and 
assisted in providing employment for these people. It is further 
recognized, however, that in order to rehouse America the Government 
itself will have to assume responsibility for the main part of a long- 
term rehousing program. This feature of the bill is the balance wheel 
that will absorb any slack that may develop in the operation of the 
act. It should be noted that this act does not contemplate the socializa- 
tion of industry, but it does contemplate the degree of cooperation 
ftom the-'Federal Government that is necessary to operate Ajnerican 
industry at full capacity and give all of the American people a high 
^andard of living. 

In conclusion, I should like to state that we are not attempting some 
"utterly new departure in the field of legislation. We are merely try- 
ing to do what the New Deal started out to do in 1933. Even the 
'methods that we are using are the methods that the New Deal has 
already sold to the American people. The only dilFerence, if any, is 
that we are seeking to use these methods in order to achieve abundance 
rather than artificial scarcity. It is our opinion that the American 
people are ready for a program of this kind. They were probably 
not ready for it 4 years ago, but a great deal of fundamental educa- 
tional work has been accomplished by the New Deal since its inception. 

We know tliat human folk ways do not change overnight, and that 
it is always dangerous to attempt too drastic changes without a pre- 
liminary period of education. We feel that the necessary trial and 
error methods have gone far enough ; that events have proven that the 
system of artificial sca^-city may hobble along until the next depres- 
sion, but that artificial scarcity in a world of potential plenty is just 
plain dumb. 

We have framed this act to make a reality of the dream of plenty 
glimpsed by Veblen 30 years ago, dramatized by Loeb and his asso- 
ciates in The Chart of Plenty, and brought down to earth by Ezekiel, 
who has proven beyond successful contradiction that if the machinery 
set up by the A. A. A. and the N. R. A. were used to secure full pro- 
duction instead of restricted output, a mininuun in goods and services 
equal to what $2,500 a year will now buy would be available for every 
family in the United States. 

We know we are sufl'ering poverty because we are not producing 
enough wealth to give all of our people a comfortable standard of 
living, and that the reason poverty is so widespread and disastrous 
is that artificial scarcity, engendered by class legislation and reac- 
tionary decisions of the Supreme Court, has been forced on an era of 
teclmological abundance. We know that if our present national 
production of approximately $70,000,000,000 annually Avere divided 


equally among all of us we would all be living in penury. But if the 
established machinery of the A. A. A. and the N. R. A. are framed into" 
law by the Industrial Expansion Act ; if they are used to boost produc- 
tion to wliatever point is necessary to provide American standards of 
living for all our people, no one would be robbed of what he now has 
and nothing would be taken from those now living on a scale above 
the average. 

One-third of our people ill-fed, ill-clad, and ill-housed, and one-fifth 
of our people economic outcasts outside the pale is a challenge to us, 
to our democracy, and to the eternal principles of human brotherhood 
which Ave Representatives of the people dare not ignore. 

AUGUST 21, 1937 

Mr. Amlie. Mr. Speaker, on June 1, 1937, Congressmen Allen, of 
Pennsylvania, Maverick, of Texas, Voorhis, of California, and I intro- 
duced in the House of Representatives the Industrial Expansion A-.t. 
This measure was prepared with a great deal of painstaking effort en 
the part of the Members who introduced it. While Gen. Hugh S 
John.son, in his syndicated column, has intimated a shrewd suspicion 
that the bill originated with the President's "brain trust," his opinion 
is without foundation. 

Properly speaking, a measure of this kind is not the work of any 
one man. Ideologically it stems from the writings of the late Thor- 
stein Veblen. More specifically, it goes back directly to the findings 
of 3everal recent surveys made to determine the. productive capacity 
of the United States, particularly the National Survey of Potential 
Product Capacity, under the direction of Harold Loeb, and financed 
by Federal funds, and the studies of the Brookings Institution, Amer- 
ica's Capacity to Produce and America's Capacity to Consume. The 
findings of the National Survey were set forth at length in a speech 
by Byron Scott, of California, Congressional Record for July 1, 1935,.. 
page 10577. 

"a. a. a. in reverse" 

As a direct outcome of this survey. Dr. Mordecai Ezekiel, economic 
adviser to the Secretary of Agriculture, Mr. Henry Wallace, wrote a 
book entitled "$2,500 a' Year." In this volume. Dr. Ezekiel offered a 
tangible plan by which the great productive capacity of the eountry, 
disclosed by the N. S. P. P. C. and the Brookings studies, might be 
released and the benefits made available to the people of the country 
as a whole. It was Dr. Ezekiel's thesis that Tf the Government could 
set up instruments such as the A. A. A. in order to achieve artificial 
scarcity, the same instruments might be used to achieve optimum pro- 
duction. If a processing tax coidd be imposed on the value added to 
the goods by the manufacturing process, and the proceeds of such a 
tax used to pay the raw-material producers for cutting down their 
production, why could not the ,same processing tax be used to induce 
them to increase production ? In this volume, Dr. Ezekiel proceeded 
to show how the specific instruments used in the crop-control plans 
might be used throughout industry as a whole to step up production 
enough to give all the American people a high standard of living. 



Unfortunately, however, this book was published just when the 
Supreme Court held the A. A. A. unconstitutional. As a result, the 
plan did not receive the attention it merited. Only when the Supreme 
Court upheld the constitutionality of the National Labor Relations 
Act did it become apparent that what Dr. Ezekiel had proposed to do 
under the general- welfare (clause could be done just as well under the 
power to regulate interstate commerce. The Industrial Expansion 
Act, therefore, while based essentially upon the Ezekiel proposal as 
•outlined in his book, rests not upon the constitutional power upon 
which he based his plan but rather on the power of Congress to regu- 
late interstate commerce, which as construed by the Court in the Na- 
tional Labor Relations Act decision is amply broad to legalize the 
provisions of the Industrial Expansion Act. 

The formulation of this act stems more directly from a resolution 
adopted by the State convention of the Commonwealth Federation of 
New York, held on April 17, 1937, favoring a measure that would 
enact into law the plan outlined by Dr. Ezekiel. The sponsors of this 
lain have worked assiduously for several months prior to its intro- 
'duction to put the bill into its present form. 


The central theory of the bill is that if the power of the Govern- 
ment can be invoked to reduce production, as in the case of com, wheat, 
iind cotton, the same instrument can be used to step up production all 
along the line. That is to say, why cannot a 25-percent tax be imposed 
•on the value added to goods by processing in the principal or essential 
industries? To the units that cooperate in stepping up production, 
keeping down prices, and meeting certain labor requirements regard- 
ing hours and wages, this processing tax will be refunded. It is 
recognized that this uSe of the processing tax is purely a method of 
persuasion. It is the teeth that were put into the A. A. A. and that 
v/ere left out of the N. R. A. 


To begin with, the processing tax would not be levied on any in- 
dustry until a comprehensive plan had been worked out for all the 
essential industries. The units within the industry would first be 
^iven the opportunity to set up their own code; if they failed to do 
this, and the industry were essential, the Government would have the 
power to set up a code. No units would be compelled to come in, except 
and insofar as a refunding of the processing tax would persuade it to 
•do so. Moreover, it is not the intention, unde- this plan, to bring ail 
industry within the operation of the plan. It is the feeling of the 
authors that this was a mistake under the N. R. A., and that in the 
operation of this act only the industries actually necessary to the 
operation of a Nation-wide plan should be affected. 

NATIONAL INCOME INCREASED FROM $65,000,000,000 TO $95,000,000,000 

If industry is stepped up all along the line, it should be possible to 
increase our present national income of $65,000,000,000 a year to $95,- 


000,000,000 a year. The individual manufacturer, therefore, would 
be just as safe in turning out 95 units as he is today in turning out 65. 
There would be the same chance of disposing of his product at a profit, 
for the simple reason that the national income would be stepped up 
proportionately. But the Government depends not only upon the 
coercive pressure of the processing tax but also upon governmental 
cooperation with all manufacturing units that are willing to come in 
under the general plan. The industrial expansion authority, for in- 
stance, would have the power to enter into contracts with all manu- 
facturers by which it would take over at cost a certain percentage of 
the total output, should it prove to be unsalable. 

This, briefly, is a summary of the machinery provided by the In- 
dustrial Expansion Act, and the economic analysis and theory upon 
which it is based. Since the actual provisions of the bill have been 
discussed at length in the remarks of Congressmen Voorhis and Allen, 
I shall not further discuss this phase of the bill. 


I wish, rather, to devote my remarks to that rather large group of 
American citizens who can see the anomaly of actual poverty in the 
midst of potential abundance; who realize the great productive 
capacity of the United States, measured in terms of natural resources, 
modern factories, a highly perfected technique of production, and a 
highly skilled and industrious citizenry ; who, envisioning the possi- 
bilities of production in a country where artificial shackles have been 
removed, have also been moved by the injustice done to large sections 
of the people in denying them access to the Nation's raw materials and 
machinery of production. 

I know that these people do not need to be persuaded that our ob- 
jective is a desirable one. They are already persuaded. Their con- 
cern, however, as well as ours, is to find the method by which this 
goal may best be reached. 


We are all, of course, familiar with the various approaches to this 
problem. First and foremost come the adherents of that scnool of 
thought which believes that the natural resources and means of pro- 
duction upon which the welfare of society depends ought to be owned 
and operated by society itself. 

On the one hand are the Socialists, who have believed that it was 
possible to achieve this goal by gradual extension of the field of 
political ownership to the taking over of utilities, natural resources,^ 
and essential factories after properly compensating the owners there- 
for. But it has become perfectly clear that the 4 percent of the people 
who own 80 percent of the Nation's wealth are thoroughly opposed to 
any plan of this kind, and that they will use their wealth in any way 
they find effective to defeat it. Consequently most Socialists, observing 
their frustration here and their failure abroad, have concluded that 
this program, while it is thoroughly logical and ethical, is nonetheless 
politically impossible. 

On the other hand are the true Marxists, who believe that this change 
in the ownership of the means of production can come about only as a 


result of a violent revolution, overturning the present capitalist clasSy 
and the setting up of a dictatorship of the proletariat on the part of 
the masses, through which instruments the classless society will finally 
be achieved. 


But it has always seemed to me that there was little justification 
for any hope in such a program in the United States. I have written 
extensively on the subject, and have as a result been condemned at 
^considerable length in the official publications of the Communist Party 
in this country. I have long been convinced that the American people 
will never regain that equality of opportunity that has been an Ameri- 
<ian heritage by the traditional program of either the Socialists or the 
Communists. On the other hand, I am equally sure that the old order 
of laissez-faire and rugged individualism will never again work satis- 
factorily. I am convinced that the American people will regain the 
equality of opportunity of which they dream only when American 
industry is operating at full capacity. 


In the field, between 65 and 95 percent of capacity operation is, in 
my opinion, to be found the frontier which alone can reestablish the 
equality of opportunity in which we all believe. It is my firm con- 
viction that only through such a plan as that proposed in the Industrial 
Expansion Act is it possible to move in the direction of capacity 
production, a high standard of living, and equality of opportunity. 
I believe that in any other direction lies the certainty of failure — 
failure that will set in operation forces of retrogression rather than 

Germany's experience a lesson 

There is, as I see it, a deadl}^ parallel between what is happening in 
the United States today and what happened in Germany in the decade 
preceding Hitler's rite to power. During this period three friends 
of mine visited Germany, and because of their backgrounds came into 
intimate contact with certain large, and at that time important, groups 
of the German people. 


This man, because of his pioneering in certain fields of labor rela- 
tions in this country, had the opportunity during a 6-month stay in 
Germany to meet many of the most important leaders of the Social 
Democratic Party. When he returned in the spring of 1933 he told 
me that he, as an outsider, seeing the desperate need for action by the 
Government — that is, the Social Democratic Party — had warned some 
of these leaders, that they must act before it was too late, because 
Hitler might very readily come into power if they failed. But they 
had the situation figured out statistically. Hitler could not possibly, 
with his antilabor policy, win over a majority of the German voters. 
They were positive that very few of the unemployed would support 
Hitler, because after all they belonged in the main to the working 
class, they had a working-class psychology, and it was inconceivable 


that they would turn against their friends and join an avowed enemy 
of labor. These unemployed people, however, regardless of class back- 
ground, had become desperate and demanded action. They listened 
uncritically to the promises of Hitler, and concluded that it would 
probably be all right to give him a chance. 

nUEND NO. 2 

This was a young man recently graduated from college, who as an 
undergraduate had been in close touch with the various youth move- 
ments of the world. In Germany he met many of the young Com- 
munists and some of the Communist spokesmen. He told me that 
they were hQi)efully watching the rapid liquidation of the status of 
that large number of people who had formerly belonged to the middle 
class. They were confident that as these people were forced into the 
ranks of the unemployed proletariat they would join with their equally 
unfortunate comrades to give the Communists the needed mass sup- 
port for a successful class revolt. But these dispossessed members of 
the middle class did not join the Communists. They joined Hitler. 

tlllEND NO. 3 

This was a woman who, with her husband, had played a long and 
distinguished role in the history of the American Socialist Party 
before and during the World War. While in Germany she naturally 
had entry into Social Democratic circles. They pointed with pride 
to what they were doing for labor— ^aiding in unionization, shorter 
hours, better working conditions, unemployment insurance, old-age 
pensions, worknien's compensation, industrial housing, municipal 
ownership, and so forth. But as she viewed all this progress she could 
not shake from her mind the disturbing conditions of that large part 
of the population that had formerly belonged to the middle class and 
who were now being forced into the ranks of the economic outcasts. 
What was being done for them, and what plans did they have for their 
future? The invariable answer was, "Aber das ist nicht unsere 

"but that is not our problem" 

This is the answer that would be given by almost any farm or labor 
leader in the United States today. The average farm audience does 
not care to hear about the problems of business or the workers. They 
want to know how they can get cost of production for their crops, and 
they regard anything else as extraneous. Since a disastrous export 
market lessens the price of the local crop, obviously the most sensible 
suggestion is to reduce production to the level of the effective domestic 
demand, thereby reducing labor and increasing income. And if the 
A. A. A. and Soil Conservation Act can reduce agricultural output 
to the amount for which there is an effective demand, laboring men 
are wondering why labor cannot be made artificially scarce by limiting 
the number of hours per week that any man can work. Important 
labor leaders are offering this as an ultimate solution for the problems 
of the workingman.. 




The liberals of the country might as well realize that the 80 percent 
of the people who have a place within the system, whether as owners 
and profit takers or merely as poorly paid farmers and workers, and 
who produce the $65,000,000,000 that makes up our national annual 
income, are not willing to take care of the 20 percent who are outside. 
The argument that purchasing power given to these people would 
make greater prosperity possible has never had any great persuasive 
force with the average man. If he has a place within the system, he 
feels that he is contributing to the Nation's total income, and that the- 
unemployed man is not. In an emergency he was wiUing to admit 
that he owed some obligation as his brother's keeper, but the plain 
truth of the matter is that he will not assume this role permanently. 
The weakness of the relief program lies in the ethical nature of its 
hold on the people within the economic system. Political realism 
should teach us that this is not enough. 

The time has come when the various groups and individuals who 
are seeking to improve the lot of the "one-third of our people who are 
ill-fed, ill-clad, and ill-housed" must get behind a program that will 
have a chance to divide politically not the people outside from the 
people inside, but rather the one-fifth who now own and control the 
United States and all that is in it, from the unemployed, those who 
are employed at low wages, and those who earn the barest subsistence 
on the Nation's farms — -in short, the 80 percent of the people who^ 
whether inside or outside the system, are unable to enjoy even a modest 
standard of living. 

So far as the traditional Socialist program is concerned, no one can 
question its thoroughly logical approach; but socialism has always 
left in the hands of the enemy those psychological instrument? that 
are so well designed to take care of every form of psychological lag. 
It is needless to argue the point, since the voters have already given 
their answer in the past two Presidential elections. 

The Communist program is based on certain assumptions that are 
not applicable to this countrv. The question, therefore, is whether 
there is some program, outside of socialism and communism, which 
will solve the problem and at the same time anpeal to the great 
maiority of th^ citizens of the United States. The sponsors of the- 
Industrial Expansion Act believe that this measure provides a pro- 
gram that can now secure this support. Briefly, these are the reasons 
for our optimism. 


If the Industrial Expansion Act had been proposed in 1932, it would 
have been premature. The people of the country, despite the chaos 
then prevailing, would have cried out against this attempt at indus- 
trial regimentation. The farmers were with difficulty persuaded to- 
accept the A. A. A., which merely permitted them to reduce their 
output to the level of the effective domestic demand. As a matter of 
fact, farm leaders had been advocating this kind of program for many 
years. The A. A. A. gave the farmers the kind of scarcity they were 
interested in. 


Even while Hoover was in the White House, the United States 
Chamber of Commerce had advocated a plan similar to the N. R. A., 
except, of course, that it did not include section 7 (a), giving labor 
the right to organize. American business was already on record as 
favoring self-rule for business; that is to say, granting business the 
right to ignore the Sherman antitrust law, permitting them to form 
trade associations, restrict output, maintain prices, eliminate competi- 
tive practices that absorbed profits, and so forth. In short, American 
businessmen were not averse to regimentation if it increased their 

Just now there is considerable pressure upon Congress to enact the 
Black-Connery bill, which is designed to make labor a scarce com- 
modity, by limiting the number of hours of work per week that a 
workingman can sell. Laboring men are, of course, anxious to work 
as long and earn as much as possible, and their support of the bill is, 
therefore, a bit half-hearted, but it might be said that the philosophy 
of scarcity for labor embodied in the Black-Connery bill comes as close 
to expressing the demands of labor as any proposal that has been 
advanced. Many intelligent labor leaders are not enthusiastic over 
the bill, because they know that to the extent that hours are cut and 
wages maintained the cost of labor is increased, and an inducement 
provided for the replacement of men by machines. 

Now the American people have become accustomed to new symbols. 
The farmers are willing to accept regimentation if it is their kind of 
regimentation. Businessmen are willing to accept their kind of 
regimentation, although with more enthusiasm in periods of depression 
than boom. The workmen also believe in regimentation if it will make 
of labor a scarce commodity. 


But with the acceptance of these symbols which, in the final an- 
alysis, means state control, the conviction is growing that our prob- 
lems will be solved not by scarcity mongering but by enabling in- 
dustry to operate at maximum capacity. The Industrial Expansion 
Act merely takes the instruments of regimentation that the New 
Deal has sold to the American people to further scarcity, and uses 
them to achieve abundance. It does not, like Other liberal or radical 
programs, try to introduce to the American people a completely new 
88t of symbols. It seeks to utilize the old symbols that the people 
have already accepted. The Industrial Expansion Act is merely 
New Dealism put on the track headed for abundance rather than 
scarcity. It recognizes, of course, that many of the old liberals are 
horrified by any proposal that would give the Government the power 
contemplated in this bill. These people apparently feel that we 
have recaptured business as usual and can repeat the history of the 
past 50 years. They do not realize that, while our present pros- 
perity looks natural, it is largelv due to some sixteen or twenty 
billion of New Deal spending and that, as a matter of fact, the next 
depression is now being staved off only by the confidence of the 
American people that the Government would spend us out of it as 
it did last time plus — what is much more important — the stimulating 
economic effect of the next world war. 



There is every reason to believe that this intensive preparation 
for war throughout the world will inevitably result in another world 
Avar more far-reacliing than the last one. It is to be assumed that 
we will continue to benefit from wa,r trade insofar, at least, as for- 
eigners own American securities that can be conscripted by their 
respective governments, sold, and converted into purchasing power 
here. Eventually, however, we shall come to the end of that type 
of purchasing power, and we shall then be faced with the problem 
that faced us in 1916 and 1917 — having to terminate a profitable 
foreign trade and face a severe depression at home—or work the peo- 
ple up to a war psychology, enter the war, and continue to supply 
our allies with the raw materials and munitions of war, financed 
by the sale of war bonds to our own*, citizens. 


If we are to avert the catastrophic effects of terminating profitable 
war trade, it will be only as a result of setting up a system under 
which American industry can operate at full capacity, not to wage 
a war which devours the prosperity it creates but to turn out for 
all the American people the goods and services that they need and 
want in their ordinary, normal, peace-time pursuits. 


There is, to my mind, no greater stupidity to bo found in the 
United States today than the assumption by many so-called national 
liberal leaders "that we have recaptured normal prosperity and 
business as usual." It seems to me, in the first place, that they are 
forgetting that our present prosperity is due to Government spend- 
ing and intensive world-wide preparations for war, which by the 
very nature of things are not permanent, and, moreover, if it were 
possible to get on indefinitely as we are doing, running a deficit of 
two or three billion a year for relief purposes, we cannot assume 
that the 20 percent of the people outside the economic system will 
remain politically impotent and economically helpless. If the so- 
called liberals are to continue to support a policy that contemplates 
the permanent exclusion of these people, 20 percent of our people 
will be given no real alternative, from an economic standpoint, than 
to join a Fascist movement, which is certain to develop in this coun- 
try under intense economic stress and strain just as it has in other 
countries. I am disgusted to find the so-called nationally known 
liberal leaders taking the initiative in the fight against what they 
term Roosevelt's attempt to concentrate power in the hands of the 

When the next depression strikes, the Government will have to 
nssume a degree of control heretofore unknown in this country. 
AYlien that time comes, the key to the whole situation will be the 
power of the Federal Government. The power of the. Federal Gov- 
ernment may either be turned over to a reactionary military clique — 
and in no country is the militar-y more reactionary than in the 
United States — or it may be exercised by a democratically controlled 


adniinistratioii that will seek to use its power over industry to im- 
prove tlie living conditions of the people as a whole. 

To many liberals thinking in terms of an ultimate and logical 
solution, the Industrial Expansion Act is far from satisfactory. To 
them I should like to point out that the real reason for the common 
man's refusal to take seriously the proposals of the Socialist Party 
or any other progressive group offering a logical system is that he 
does not trust any group to operate American industry as efficiently 
as its present owners are doing. If the Government could step up' 
production from $65,000,000,000 to $95,000,000,000 a year, this doubt 
would be effectively removed. It is certain that if this were once 
done, the American people M^ould never again stand for operation 
of the productive machine at less than capacity. 

Many purists will object that this plan does not socialize the means 
of production, that private ownership of the means of production and 
the taking of the lion's share in the form of profits will still exist. 
That is true. Under the Industrial Expansion Act it is contemplated 
that 10 percent of the increase in production will go to the owners of 
American industry in the form of profits. But, in tlie final analysis, 
when enough support has been built up to put the Industrial Expan- 
sion Act into operation the American people will understand that 
any income in the form of wages or profits that cannot be spent for 
consumers' goods by the recipient, and for which there is no need 
for capital-goods purposes, must be taken over and converted into 
the channels of consumption through the instrument of taxation. 

Under the provisions of the Industrial Expansion Act the Federal 
Government will contract with industry to maintain the price level 
and to buy unsalable surpluses. The Government, tlierefore, assumes 
the factor of risk. The manufacturer or entrepreneur will cease to 
be the risk taker. In the meantime production will be stepped up to 
limits approaching maximum capacity. The needs of the people will 
be taken care of and they, in their own good time, can determine how 
long society shall continue to pay an owning class for the performance 
of a function that has been relinquished to the Government. 



Neither democratic government nor a system of free enterprise can 
long survive a continued growth of monopolistic control of industry, 
production, price, or finance. The chance to "play the game" is the 
right of all. An insistence on the privilege of not playing it and 
at the same time preventing others from doing so is indefensible. 

The arch-crime against a democratic people today is the crime of 
nonproduction where there could be abundant production. It has 
taken a terrible war to teach us that — though we should have learned 
long years ago that all the "isms" and dictatorships, as well as many 
of the war machines in the world were being built out of the frustra- 
tion of peoples who knew no other way of ending a condition of un- 
necessary scarcity where there might be plenty. 

Today, at least, it is clear that no nation can expect to survive aa 
a significant power in the world unless it achieves a full employment 
of its resources, its machinery, and its people. The task of democracy 
is to achieve this without abandoning constitutional government or 
free, enterprise. 

To jump at once to a conclusion it may be said with emphasis here 
that the thing democracies must do, therefore, is not to restrict enter- 
prise where it is free, or to reduce production where it is abundant, 
but rather to require that those areas of its economic life which are 
not free, must become so, and that artificial restrictions on production 
must cease. 

Much can be accomplished and with little or no loss of liberty by the 
establishment of a system ef monetary controls, taxation, and social 
security payments, which will regularize and make dependable the gen- 
eral flow of purchasing power in the Nation. 

But, however well this is done ; however well satisfied business might 
be with the administration in power; and however great "confidence" 
might become, so long as there remains in and is exercised by private 
groups the power to artificially cut down production and increase or 
maintain price, the whole economy will be thrown off balance and full 
production will be impossible. 

x\. fair and just way must be found, therefore, to bring about a coor- 
dinated increase in production by all industry, including the monopolis- 
tic ones. 

For example, let us take the case of clothing. In 1929 we could have 
produced and our people needed to use about twice the quantity of 
clothing that actually was produced. 

At the same time, one of our great problems in the United States is 
that of profitable disposal of the cotton crop. The most obvious answer 
to this problem is the production of more clothing for our own people. 
This cannot be effected, however, unless it can be demonstrated that 


273442 — 41— No. 25 9 


additional buying power, properly distributed, will be in the hands of 
all the people. Hence, the production of the clothing we need depends 
in turn on increased production and employment in housmg, glass 
making, printing, and other industries. 

We may say with perfect accuracy that because we do not clothe our 
children in America — ^nor, of course, our men and women, either — we 
are forced to subsidize our cotton farmers or see them ruined, and we 
are forced to continue a great program of Government work relief. 
And the other side of it is that if we determined the volume of our cloth- 
ing production on need for clothing instead of on the present severely 
restricted ability of the people to buy it, and then saw to it that buying 
power with which to purchase the clothing was created by other produc- 
tion, then, by clothing our people, we could solve the problem of cotton 
and end the relief problem all at once. 

Why, then, do not we do it ? 

Why do we do exactly the opposite of the sensible thing ? 

Briefly, the reason seems to be that Americans have learned to think 
almost exclusively in terms of the welfare and dollar income of the 
individual producers, and seldom, if ever, think in terms of the welfare 
of all producers or of the people as consumers. 

Certain it is that the only reason we permit this practice of refusal to 
produce — or nonproduction — to go on is because we do not recognize the 
disastrous effect of what we are doing. It does not, unfortunately, 
sound ridiculous to us to say what obviously is true, namely, that we are 
today permitting production to be limited to the amount of goods that 
can be exchanged for money by the producer. But let us analyze this 
practice and see what it leads to, for it is the root of our trouble. 

Manufacturers, processors, and other producers turn out goods today 
only when they believe that people with dollars are ready to buy them. 
And people only receive dollars by receiving wages or some other re- 
turn from previous production. In no other way is real purchasing 
power created. The dollars themselves, of course, are not wealth. But 
they rule our lives. When small amounts of purchasing power are dis- 
tributed, therefore, either because of small production or because a few 
Eeople keep an inordinately large share of the purchasing power, we 
nd our producers reducing production to meet what is called "effective 
demand." But clearly, for the people as a whole, what is needed under 
such circumstances is to increase production and improve the distribu- 
tion of the income from it, which in turn would make more production 

But each individual producer sees a different picture. He believes 
that if his particular product can be made scarce and its price kept high, 
then he will get more dollars and be better off. If other producers do 
not do what ne is doing, if they go on producing plenteously, as our 
farmers have done for so long, then this producer who restricts his out- 
put will be right in thinking that he or his corporation will benefit from 
short production and high prices. 

If, however, all cither producers follow suit and also reduce and raise 
prices, the advantage to the first producer is more than canceled and the 
only result is an impoverishment of the Nation. 

In the second place, each individual producer is also an employer, 
and as such he largely controls the payment of wages.' And wages make 
up 80 percent of all the buying power of the Nation with which the 
products of all employers are to be bought. Clearly it is to the advan- 


tage of employers generally if good wages are paid by all industry. 
But it seems to be to the advantage of the individual employer to cut 
wages wherever possible so his particular costs will be reduced. Other- 
wise, if competition is severe, he may be forced out of business. Thus, 
the advantage of the individual producer and employer is to reduce his 
production, keep his prices high, and cut his costs by cutting wages. 
But the welfare of all society demands that just the opposite be done m 

ftll tilGSG CH-SGS. 

Why have we made these terrible blunders ? Because we have learned 
to think only in terms of dollars or token wealth, not in terms of real 
wealth ; and because, as has been said, wg look at our whole economic 
problem through the eyes of the individual producer instead of the eyes 
of producers as a whole, or consiuners as a whole, or society as a whole. 

The present problem is made the more severe because, apparently, 
we as a Nation have adopted the policy of encouraging scarcity which 
benefits the individual producer at the expense of the balance of society, 
instead of the policy of encouraging full production, for which, as has 
been described, the very nature of man cries out. Notable exceptions to 
this national policy are the Federal power policy— T. V. A. — the con- 
servation program, the work of the Anti-Trust Division of the Depart- 
ment of Justice, and the Surplus Commodities Stamp Plan. 

Everyone wants a balanced Budget and an end to increases in public 

Everybody wants an increase in production. 

Everybody wants the unemployed to go back to work ih private 

Everybody wants a better home market for our agi*icultural and 
industrial products. 

Everybody wants to save our constitutional democracy and under- 
stands—down deep in his heart, at least — that this can only be done 
if within the framework of that democracy we can solve the problems 
of unemployment, nonproduction, and poverty in the midst of possible 

And everybody wants the other fellow to make the first move toward 
accomplishing any of these things. 

It is obvious that the troubles we face are in the nature of a vicious 
circle — or cycle. Producer A would like to hire more men and pro- 
duce and sell more of his goods. But he will not, and probably does 
not- dare, do this because, at present, he has no assurance that producers 
B, C, D, E, F, and so forth, will do likewise. And unless they do 
likewise producer A will have no market for his increased produc- 
tion unless the Government hires more people on public works. 

The only answer, therefore, to the problem of producer A, and all 
other producers, is either for the Government to furnish him a market 
or for some method to be found so that all other producers will in- 
crease their production at the same time. A general expansion of 
production all along the line must, therefore, be the alternative to 
increasing public expenditures. 

But the thing is more complicated than that. For there are some 
producers in the Nation, like farmers and small competitive manu- 
facturers, who cannot decide how much they are going to produce. 
Economic necessity drives them to produce as much as possible be- 
cause, unless they do so, someone else in their same line of work will 
do so and take even what curtailed market there is. As long as 


monopolistic industry refuses to increase production, agriculture is 
doomed because the farmer's crops will be sold in a glutted market, 
white most of the things he has to buy are produced under conditions 
where the volume of production as well as the price charged can be 
largely if not entirely controlled by the deliberate decisions of a 
comparatively few individuals or corporations. The small industrial 
producer finds himself in the same fix as the farmer. 

And so we can understand that it is monopolistic industry that in 
large measure holds the key to national prosperity. For by curtailing 
production — for whatever reasons — not only is employment reduced in 
one industry but the market for goods of all other industries is made 
smaller. And, furthermore, since monopoly can, generally speaking, 
exact such prices as it chooses, there is a constant tendency for all 
competitive producers to be robbed of a portion of their share of 
cunent purchasing power and for surpluses to accumulate not only 
of goods on the shelves of merchants but of idle funds in the coffers 
of monopolistic industries. As soon as this latter tendency makes 
itself felt, then a larger proportion of current national income is 
withdrawn from the general market for goods, and depression deepens. 
Many people are arguing today that "if only Government would 
get out of the way, business would move ahead." Perhaps for a brief 
time that might happen. But it could not last for a number of rea- 
sons. Chief among them is that however "free" business may become, 
its advance will not be steady or well balanced unless united effort is 
put forth to bring this about. We need a continuous, effective dis- 
tribution of the purchasing power represented by goods and services 
produced. And we need to see to it that a few very powerful highly 
organized industries do not crowd out all the rest when it comes to 
obtaining the profits from increased business activity. The "confi- 
dence" that a few people may be able to profit greatly because a 
much larger number are about to lose their shirts is hardly a sound 
basis for national prosperity. And, finally, no "boom" can possibly 
last unless, while it is on, provision is made for stepping up general 
consuming power as fast as production increases. 

The confidence that must be given to the producers of America, if 
we are to have lasting prosperity, is the confidence that production is 
going to increase steadily and evenly all along the line. We have 
got to enable people, to be sure that other pay rolls beside their own 
are going to increase, for it is in those other pay rolls that they will 
find their principal mark-'^t. 

It is evident that business unaided cannot bring about this condition 
of general steady balanced increase of employment and production. 
It may not even be to the interest of all monopolistic industries to see 
an abundance produced. 

Therefore we come to consideration of a measure called the Monop- 
oly Control Act. The basis of the bill is twofold: First, that all 
America will benefit from a general increase of production and restor- 
ation of private employment, and that it is entirely possible to accom- 
plish both these things; second, that the one thing a nation has an 
unquestioned right to demand of a monopolistically controlled indus- 
try is that it use its productive machinery to turn out at least as much 
of its product as the nation really needs. It is a bill to get people 
back to work in private industry by assuring each private industry 
that all other private industries will have large enough pay rolls to 
consume their goods. 


The bill does not affect any industry or business unless it is a major 
producing industry and also is found to be engaging in monopolistic 
practices. Other industries may come in under the bill if 70 percent 
of both employers and employees vote to do so. Otherwise they do 
not have to. In effect, what the bill does is provide machinery through 
industry councils and a monopoly control commission to bring about 
a coordinated expansion of production in all lines at once. In return 
for this a production-insurance corporation is set up to guarantee alL 
participating businesses against loss due to increasing their productioii. 

An abstract of the main provisions of the bill follows : 

The Monopoly Control Act proposes a new attack on the problem 
of the monopolistic control of certain industries. Since the purpose 
of monopoly is the obtaining of excessive profits through the limi- 
tation of production and the maintenance of high prices, the 
bill proposes a direct attack on the reduction of interstate 
commerce^ by expanding the production and controlling the prices of 
monopolistic industries of the country. A general expansion is 
planned of all of the monopolistic industries of the country, as well 
as of competitive industries which may voluntarily participate in the 
program, under provisions for raising wages and lowering prices 
through the economies resulting from increased production, the ex- 
panded production being distributed and consumed through the in- 
creased employment provided by the program. 

Section 1 lays down the policy of Congress to remove the hindrances 
on interstate commerce by expanding production, expanamg markets 
for farm and industrial products, and controlling monopolistic 

Section 2 consists of definitions. The act applies only to the major 
industries of the country operating in interstate commerce. Profes- 
sional, domestic and personal service, and trade occupations are ex- 
cluded, as well as the printing and publishing industries. Interstate 
major industries in Vv'hich monopolistic practices are found to prevail 
come under the act compulsorily, while competitive major industries 
may adhere voluntarily, to secure the benefits of the act. Monopolistic 
practices are defined to include the following prevailing practices or 
situations: Selling prices wiiich do not fall after unit costs of labor 
and 'material fall; control of the majority of the production of an 
industry by a very small number of companies; long continued profits 
far in excess of those earned by competitive industries ; control of vital 
patent rights in the hands of a small number of companies using them 
exclusively ; failure of prices or wages to reflect technological improve- 
ments ; and prices set in accordance with a basing point system.' Pro- 
vision is made for public hearings, with due notice to all interested 
parties, before decisions are reached under the act. 

Section 3 creates a Monopoly Control Commission of seven mem- 
bers, representing consumers, labor, agriculture, and large and small 
business. The Commission will administer the provisions of the act, 
being guided by the principle that the economic resources of the Nation, 
are to be utilized as fully as practicable in the promotion of the 
national general welfare. It shall cooperate with other agencies of 
the Government and of labor and industry, especially through .the ' 
industry councils to be described below. 

Section 4 provides for the preparation each year of a national mo- 
nopoly control and expansion program. The objects of this program 


are the balanced expansion of production simultaneously in the inter- 
state industries of the country, providing for increased employment 
within the limits of the available manpower. It is also to provide 
for the gradual expansion in the productive capacity of the coitntiy, 
and the sharing of the benefits between management, workers, farmers, 
and consumers. Prov'^ision is made for the conservation of natural 
resources; the improvement or elimination of hazardous or undesir- 
able conditions of work; the replacement of workers displaced from 
employment ; the increasing of wages generally, and most rapidly in 
the lowest wage brackets ; vacations with pay, reduced hours of work, 
and elimination of child labor and home work; the prevention of 
unwarranted increases of prices and the pas.sing on of economies to 
consumers in the form of lowered prices; the reduction of waste in 
production and distribution; and a gradually rising assured annual 
minimum income to the unskilled and semiskilled worker in industry. 

Section 5 provides for the setting up of an industry council in each 
participating industry, giving equal representation to management, 
labor, and consumers, in addition to representatives chosen by Con- 
gress and one representative of the Commission. The industry coun- 
cils are to formulate and propose tentative expansion programs for 
their respective industries, to be submitted to the Commission for 
review and final approval. Under guidance from the Commission 
concerning t?ie general program for national expansion, the councils 
will work out the practical possibilities of increasing production and 
allocate the resulting economies between higher wages, lower prices, 
and increased profits. 

Section 6 provides for putting into effect the national expansion 
program when industry programs have been prepared for a sufficient 
number of interstate industries to insure a general expansion of the 
industry of the country. Maximum prices are to be set at such levels 
as will yield to participating industries a rate of profit on their used 
and useful assets equal to the higher of the following two standards : 
(1) The average earnings of businesses in competitive industries over 
the past 20 years, or (2) such earnings as will be necessary to assure 
efficient businesses in the industry the availability of private capital 
for their future expansion in capital equipment. Provision is made 
for the exclusion of particular industries if the Commission finds 
their exclusion will further the purposes of the act. Other major in- 
dustries engaged in interstate commerce may participate voluntarily on 
an affirmative vote of the managements representing at least 70 per- 
cent of the products of an industry and of the representatives of at 
least 70 percent of the employees of an industry. On such affirmative 
vote a competitive industry b^omes a "participating industry" to ob- 
tain the benefits of the act on the same footing as a monopolistic in- 

Section 7 provides for the setting up by the industry councils of 
quotas for each individual business m participating industries, to as- 
sure the balance and comprehensive expansion in the production of all 
the units in an industry. Maximum and minimum quotas within a 
given range are provided for, based on the average production of 
individual businesses over a past term of years. Provision is made 
for new businesses and for annual revisions in view of current pro- 
duction. Quantities within their minimum quotas which businesses 


are unable to sell are to be purchased as provided in the next section. 
The purpose is to assure the increase in activity all along the line. 

Section 8 establishes a Production Insurance Corporation as an 
agency of the Corrimission whose duties are to underwrite the expanded 
production. The Corporation will offer to each business in a partici- 
pating industry a contract promising to take over, at stated intervals, 
at a price of not to exceed 90 percent of the maximum prices allowed 
under a program, any quajitities within its minimum quota it is unable 
to sell. The Corporation may hold oi" dispose of such quantities in a. 
variety of ways through subsequent resale to the businesses from which 
acquired, resale in the open market, distribution to those on relief, or 
holding over to a future period. In the last case such amounts are to 
be deducted from the quotas for the industry for the following year, 
to prevent the piling up of unused surpluses of any commodity. Where 
a participating business is unable to obtain necessary bank credit for 
its requirements, the Corporation may approve and guarantee such 
bank loans, under appropriate safeguards. 

Section 10 provides for the licensing of businesses in participating 
industries. Where violations have been established, licenses may be 
refused, suspended, or revoked by the Commission after due notice and 
public hearing. Appeals are provided to the courts. 

Section 12 provides for the readjustment of farm programs of the 
Department of Agriculture in line with expanding industrial activity, 
in order to assure adequate supplies of raw materials, bring about 
concurrent expansion in farm income, and increase the efficiency of 

Section 15 provides that actions properly taken pursuant to this act 
will not be deemed violations of the antitrust laws. 

Section 16 provides for the nonpartisan administration of the act. 

Section 23 sets up an advisory Worker's Rehabilitation Board to 
coordinate the action .of various governmental bodies in the replace* 
ment of displaced workers, and proyides for payments to displaced 
workers while undergoing retraining. 

Section 24: In order to encourage adequate standards of housing 
and insure that the housing industry will take its part in the expansion 
program planned for the Nation, this section makes special provision 
for the expansion of building operations in the low- and medium-cost 
housing fields not covered by existing agencies. The construction of 
low-cost rental houses is to be encQuraged by a guaranty for a 30 year 
period of the net income from properties constructed under standards 
set up by the Commission. The building of houses for sale is likewise 
to be encouraged through contracts with the Production Insurance 
Corporation providing that houses constructed under standards set by 
the Commission and which remain unsold after 1 year will be taken 
over by the Corporation at a price which safeguards the actual costs 
of the builder, but not his profit. 

Section 25 : The separability clause contains the provision that if 
section 5 of the act is declared invalid, the whole act shall fall. This 
is to assure the democratic control provided through the industry 

Other sections cover various legal and administrative details. 

It is clear from this abstract that this bill proposes to deal with 
unemployment in an entirely different manner than has our previous 
public action. It does not attempt to break up big corporations into 


little ones or to hamper them in carrying on their regular business 
operations. On the contrary, it proposes to see that the productive 
capacity of our big-business units is turned loose to produce and 
employ men. It sets up means by which expansion in production 
can be made safe for business through Federal underwriting of in- 
creased production. At the same time it insures that the increased 
production will be moved into consumption by providing for higher 
wages and reduced prices. Yet the manufacturers are reasonably 
assured of increased profits, because with increased output and sales 
their costs will come down even faster than prices will be reduced. 
At the same time it assures farmers of increased markets for farm 
products and increased farm incomes — a much more satisfactory solu- 
tion for the farm problem than the present program of subsidizing 
farmers in the place of providing adequate markets. 
It is becoming increasingly apparent that the problem of unem- 

Eloyment is too big to deal with by any of the stop-gap methods we 
ave used thus far. For a long time now we have had upward of 
10,000,000 unemployed in cities, in addition to those on farms who 
are waiting for a chance at a city job. And even if industrial pro- 
duction should move up to a level of 130 on the Federal Reserve 
Board index, there would still be more than 6,000,000 nonfarm un- 
employed, and it is extremely doubtful that we will, even tempo- 
rarily, reach a level of 130 under the single impulsion of the great 
governmental expenditures of the defense program. 

The program here proposed, on the contrary, would provide for 
putting the entire 10,000,000 back at work over the next 2 to 4 years — 
putting them back to work in private industry, and would not be 
any direct cost to the Government. The Government would be taking 
a certain amount of contingent liability in underwriting the increased 
production, but any losses it might incur would be much less than 
what, it would gain in increased revenues and reduced relief costs 
from increased employment. 

During recent years a num.ber of different groups have begun to 
realize more and more clearly that much more positive action than 
has yet been undertaken was needed to start definite moves toward 
reemployment and full production. One of the first steps was taken 
by the American Farm Bureau Federation at its annual meeting in 
New Orleans on December 15, 1938. The first resolution they adopted 
read in part as follows: 

Believing as we do that recognition of these principles by all groups, and 
translation of such recognition into action, is the only way out of our economic 
diflSculties, we respectfully urge the President of the United States to call to- 
gether representatives of industry, labor, and agriculture selected from a list 
of those recommended by the duly selected leaders of the three major economic 
groups, to discuss a program of action designed to promote economic balance 
between these groups on a basis that will permit full utilization of our great 
productive resources, and we further urge that in view of the serious effect of 
the present maladjustment, these representative leaders be kept in session until 
they have agreed upon such a program. 

This important farm group recommended that the leaders of indus- 
try, labor, and agriculture be called upon by the President to prepare 
a program of increased production and employment. This resolu- 
tion recommended two essential elements of the program which the 
Monopoly Control Act provides, (a) that leaders of business, labor, 


and agriculture should participate in the development of a program, 
and (b) that it should be set up on a democratic basis. 

It may be noted that the 1940 platform of the Democratic Party 
called for the same sort of action as the Farm Bureau advocated 2 
years ago. 

The American Federation of Labor in its Monthly Survey of Busi- 
ness has repeatedly called attention to this same problem. Thus, for 
example, in its February 1939 issue the statement was made : 

What are the next steps to expand production? First, Government, business, 
farmers, and labor must work together. We need regular channels through 
which business thinking and labor thinking can reach the Government and take 
part in policy making. Business has its advisory council to the Department of 
Commerce who are being called in for consultation, but labor has no open 
door for making its views known to the Executive. It is for the Federal 
Government to take the initiative in bringing representatives of labor, as well 
as business, farmers, and others into its councils to develop practical measures 
for immediate industrial expansion. * * * 

Any plan for industrial expansion must include labor. Democratic procedure 
requires that labor as well as business be represented and consulted by the Fed- 
eral Executive. Labor's interest must be protected and wage gains must keep 
pace with rising production and profits. Any practical plan for expansion re- 
quires team work of all groups under Government supervision. 

Similarly the June issue of the A. F. of L. monthly publication 
reemphasizes the same point as follows : 

Sound recovery in an age of mass production can only come through planning 
to advance all economic groups and timing undertakings so as to provide con- 
suming power to buy output. Such planning, as advocated in our last issue, 
has two important features: The National Planning Board is (1) representa- 
tive, and (2) continuous. Representatives of businessmen, labor, consumers, 
farmers, industrial engineers, should have a voice in formation of policies. 

Steady progress in production and living standards cannot be achieved un- 
less all groups cooperate to carry out a workable plan for these ends. Busi- 
nessmen, in the May United States Chamber of Commerce meeting, brought out 
a number of points bearing on recovery; their counsel and cooperation .is needed. 
Labor counsel is necessary to aid in directing national social and economic 
policy toward provision for human needs, higher living standards, and better 
work conditions. The advice of engineers, heretofore not utilized on the plane 
of national affairs, is essential in the difficult problems of national planning, 
organization, and coordination which lie ahead. Counsel and cooperation from 
consumers, farmers, and other economic groups is equally important. 

The fundamental technique used in maintaining production in the 
Roosevelt administration thus far has been that of public expendi- 
ture. At the same time it is ckarly apparent that spending or in- 
vestment alone, unless done in far more tremendous volume than 
heretofore, cannot deal with the problem of 10,000,000 unemployed. 
The theory of lack of "business confidence" and that with "confi- 
dence" restored business will invest enough to increase activity is 
illusory., The testimony of Owen D. Young and Alfred P. Sloan, 
Jr., and other industrial leaders before the National Temporary 
Economic Committee here showed clearly that their industries do not 
need capital and are now investing as much as they see markets for 
their products. Regardless of what party is in power, it will be 
faced with the same economic problems we are now faced with. 
Regardless of what party is in power, it will have to develop a pro- 
gram to provide increased employment through a broad program 
including the correction of monopolistic practices. 

It may be that we will not adopt such a positive national program 
until another great depression reduces industry and finance to desper- 


ation and leaves everyone willing to use strong and positive measures 
where weak and partial measures have failed. But whether we 
adopt a positive program such as this cooly and with foresight, or 
whether we adopt it hurriedly and frantically in the midst of another 
great depression, certainly it is important for it to be well considered 
ahead of time. This proposed bill is introduced in the hope that it 
will encourage the study and consideration of such proposals ahead 
of time so 'that if and when we finally do come to adopt them they 
will be as rational and sound as possible. 

The program here proposed is complicated throughout by provisions 
for public hearings and participation in the central authority and 
in the industry councils of labor, consumers, and of business, and 
also by representatives of the Congress selected by that body ; by pro- 
visions for votes and other procedures; and also by provisions of 
public hearings not only in each industry but eventually in each 
factory participating in the program. It will take longer to work 
out a program with all of this elaborate machinery, and the admin - 
isttators will have many headaches in trying to compose the interests 
of the various groups who have to fight things out in various hear- 
ings and industry discussions. That is, however, part of the price 
we pay for democracy. 

For what we must be constantly aiming at is not merely providing 
for economic security for the people but also maintaining freedom 
and liberty at the same time. The democratic process with its lumber- 
ing discussion groups and public hearings does provide means through 
which concerted action -can be taken with the understa.ndirtg and 
support of the whole people aflFected by the actions. Whatever one's 
views on its economic soundness, the A. A. A. program, with its town- 
ship and county committees, and planning groups, and State and 
regional conferences, has shown that economic programs can be de- 
veloped through democratic processes and that it is possible to plan 
from the o;rass roots up as well as from the top down. The Monopoly 
Control Act similarly provides for planning from the bottom up 
rather than from the top down. The democratic features in the 
bill do insure that such planning will give full voice and full oppor- 
tunity to be heard to each participating interest. 

The bill is so framed that unless the features of it which provide 
for democratic control stand the whole act becomes invalid. This is 
accomplished by a reverse separability clause. And furthermore there 
is no reason why a free democratic people should not be able by their 
own voluntary action to guard against the ravages of unemployment 
and the stagnation of nonproduction. Had a bill of this character 
been ready in 1932 and 1933 the people of the Nation—including the 
business leaders — might have welcomed it and it might speedily have 
brought us out of the depression. 

There is good ground for a very real hope that by a scientific control 
of our monetary system and the flow of buying power to and from 
all groups of oui people such a bill may yet be rendered unnecessary. 
But the bill is offered, primarily as a basis for study, discussion, and 
consideration of the problem of private monopoly in what is sup- 
posed to be a free economy. For private monopoly deprives the 
Nation generally and other producers particularly of freedom quite 
as much as does governmental regulation. And private monopoly — 


though it undoubtedly has contributed much to technological effi- 
ciency — contains within it the germs of destruction for democracy 
unless that democracy can guide the activities of monopoly into 
nationally useful paths. 

The cure for every form of subversive activity in this country — the 
cure for fascism, nazi-ism, communism — is jobs for our workers and 
the saving of the business and property of our other people. This, 
then, is the task of Congress. In a way it is its only task. And it 
is, therefore, the duty of every Member to work diligently at that 
task until at last we succeed. It is in this spirit thai this bill is 

[H. R. 7504^ 76th Cong., 1st sess.] 

A BILL To control monopoly and to encourage and protect commerce among tbe States, 
in order to assure continuous economic prosperity and security, increase the national 
income, and promote adequate and ever-rising standards of living limited only by the 
productive capacity and natural resources of the Nation. 

Be it enacted by the Senate and House of Representatives of the United States 
of America in Congress assembleid, That the short title of this Act shall be 
"Monopoly Control Act" 

Findings and Policy 

Section 1. The Congress, afte^ hearings and investigations, finds^ 

(a) That the natural I'esources, technological processes and equipment, and 
productive capacities of the United States, if fully utilized and required to 
function in the public interest, will produce consumer goods and services suffi- 
cient to provide and maintain a high and more uniform American standard of 
living, will provide a full employment at adequate real wages for all able and 
willing to work, and will yield reasonable pi'ofits to invested capital; 

(b) That there exist widespread involuntary unemployment and undersupply 
of human needs, disorganization of industry, business and finance, and wholly 
inadequate housing facilities for the bulk of our population, accompanied by 
low wages, and low levels of living ; 

(c) That this involuntary unemployment and disorganization of industry have 
diminished the markets for the products of our farms and have thus burdened 
and obstructed the current of interstate commerce in these products. The 
restoration of employment and purchasing power in industry is necessary to 
restore the markets for, and interstate commerce in, our farm products and to 
assure an adequate income to farmers ; 

(d) That these conditions are created, among other things, by the existence 
of monopolies or monopolistic practices in many industries that burden, obstruct, 
and otherwise restrain interstate and foreign commerce, affect and injure the 
national general welfare, and undermine the standards of living of those who 
derive their livelihood from such interstate and foreign commerce; that these 
monopolies or monopolistic practices prevent economic coordination and exact 
excessive profits based upon undue restriction of production instead of reasonable 
profits based upon efficient use of capital invested.; 

(e) That private monopolies, monopolistic practices, and restraints on trade 
have resulted in unwarranted curtailments of production and employment, un- 
warranted advances in prices, unbalanced earnings by both capital and labor, 
the creation of excessive capital obligations, and restraints upon industrial 
developments and activities, all of which have prevented coordinated and con- 
structive action in the public interest; and defeated efforts to promote full 
economic recovery; and 

(f) That these private monopolistic Vactices and restramts on trade have 
resulted in an economy of scarcity and want where full employment and relative 
plenty for all are possible. Due to monopolistic practices of industry, the 
national general welfare is constantly endangered, interstate trade is obstructed, 
and chronic unemnlovment is produced. To promote the national general welfare 
and to remove these obstructions to- the free flow of interstate and foreien 
commerce so as to increase the amount thereof, it is hereby <Je<^ ^j^^ /« be the 
rolicv of tbe Concress to Increase production of the monopolistic Industries 
engaged in interstate commerce, to reduce and relieve unemployment, and to 


promote a balanced ^pansion and operation of such industries and others (1) 
by developing and effectuating a monopoly control and national industrial ex- 
pansion program ; (2) by inducing and maintaining united action of labor, indus- 
try, agriculture, and consumers under adequate governmental sanction and super- 
vision; (3) by assuring opportunity of employment to all, through expanding 
production in interstate commerce and gradually reducing the weekly hours 
of work to the levels made possible by the rising output per man-hour; (4) by 
reducing monopolistic prices, increasing pay, and improving standards of labor ; 
(5) by promoting and expanding the utilization of the productive capacities of 
industry; (6) by increasing purchasing power and assuring its continuance; (7) 
by assuring an adequate and more balanced distribution to workers and owners 
of the earnings of industry; (8) by providing for the orderly development and 
conduct of industry; (9) by conserving and utilizing natural resources in the 
public interest; and (10) by doing all related things which are essential in order 
. to effectuate the foregoing purposes. 


Sec. 2. As used herein — 

(a) "Board" shall mean the Workers' Rehabilitation Board created by section 
23 of this Act. 

(b) "Books and records" shall include any books, records, correspondence, 
papers, documents, memoranda, contracts, and other written matter. 

(c) "Business" shall mean individual entrepreneur, partnership, corporation, 
association, trust, or any business unjt. 

(d) "Commission" shall mean the Monopoly Control Commission created by 
sertion 3 (a) of this Act. 

(e) "Competitive industry" shall mean any industry without evidence of 
monopolistic practices defined in section 2 (q) of this Act. 

(f) "Consumer needs," for the purpose of carrying out the expansion programs 
provided for in this Act, shall mean an adequate level of living as disclosed by 
the budgetary standards of the Departments of Labor and Agriculture, revised to 
date. Where present consumption standards of liigher-salaried workers are in 
excess of such budgetary standards, "consumer needs" shall mean their present 
standard of living, plus such an additional percentage of purchasing power as 
determined by the Commission, as will enable them to obtain the benefits of the 
increased output of the industrial expansion plan adopted by the Commission. 

(g) "Coordinator" shall mean the Coordinator for Monopoly Control and 
Industrial Expansion created by section 3 (b) of this Act. 

(h) "Coi'poration" shall mean the Production Insurance Corporation created 
by section 8 of this Act. 

(i) "Due notice," unless otherwise provided for, shall mean publication on 
two separate days in the Federal Register of the United States within a consecu- 
tive period of thirty days. As applicable to notice by industry councils "due 
notice" shall mean publication in the Federal Register as hereinbefore provided 
and in addition publication on two separate days within a consecutive period of 
thirty days in a newspaper of general circulation within the appropriate area, 
or if no such newspaper be available, in newspapers of general circulation in 
substantially all parts of such area. At any hearing held pursuant to such 
notice, at the time and place designated in such notice, adjournment may be 
made from time to time without tlie necessity of renewing such notice for such 
adjourned dates. 

(j) "Employee" shall mean any individual employed for wages or salary by 
any business subject to license under this Act. or by an agreement authorized 
under this Act, but shall not include any individuar employed in a managerial 

(k) "Employer" shall mean any business subject to license under this Act. 

(1) "Employment" shall mean the quantity of remunerative work in a business 
or industry, based on the daily, weekly, or annual hours put in by employees as 
well as the number of employees. 

(m) "Expansion program" for an industry shall mean the monopoly control 
and expansion program for that industry and individual businesses thereunder, 
as well as voluntary participation under section 6 (d). 

(n) "Industry council" shall mean a body representative of management and 
labor in an industry covered by this Act, consumers of the products of the 
industry involved, and of the Commission, as provided in section 5 of this Act. 

(o) "Interstate commerce" shall mean trade or commerce among the. several 


States, or between a State and any and all foreign nations, or between the District 
of Columbia or any Territory of the United States and any State, Territory, or 
foi'eign nation, or between any insular possessions or other places under the 
jurisdiction of the United States, or between any such possession or place and 
any State, Territory of the United States, the District of Columbia or any foreign 
nation, or within the District of Columbia or any Territory or insular possession 
under the jurisdiction of the United States. To constitute interstate commerce 
it shall only be essential that a portion of the trade or commerce shall affect 
interstate trade. 

(p) "Major industries" shall mean the basic classifications of industries set forth 
in the Census of Population for 19S0 (vol. V, ch. 7, pp. 408 to 410), included under 
the headings : "Extraction of Minerals, Manufacturing and Mechanical Industries", 
and "Transportation and Communication", together with the enumeration of their 
subdivisions thereunder, as well as related industries in each classification engaged 
in interstate commerce : Provided, That in defining and delimiting an industry for 
the purposes of this Act the Commission rday designate subdivisions or combina- 
tions of the above census classifications having regard to their homogeneity of 
product, or raw material, or markets, or other operating conditions : Provided 
furtJier, That none of the provisions of this Act shall apply to businesses wholly 
engaged in industries under the above 1930 census enumeration under the head- 
ings: "Printing, publishing, and engraving", "Trade", "Public service", "Profes- 
sional, domestic, and personal service", or their subdivisions thereunder. 

(q) "Monopolistic practices in an industry" shall include any one of the follow- 
ing prevailing practices, or practices which bring about any one of the following 
prevailing situations In the industry : 

(1) Selling prices which do not correspondingly decline within a period of not 
to exceed six months after a decline in the unit prices of materials, labor, and 
other factors which enter the costs of production ; or 

(2) Average profits by the businesses in the industry over the period of the 
previous twenty years, in proportion to their invested capital, 50 per centum or 
more in excess of the average profits earned by business in competitive industries 
during the same term of years. For the purpose of this paragraph, "competitive 
Industries" shall mean cotton textile manufacturing, men's and women's clothing 
manufacturing, silk stocking production, and wholesale and retail trade ; or 

(3) Control of vital patent rights lodged in the hands of five or a lesser number 
of businesses and not available to other businesses except at excessive royalties 
which make effective competition Impossible ; or 

(4) Reductions in employment due to technological Improvements without cor- 
responding reductions in prices or increases in wage rates per hour ; or 

(5) Control of not less than 75 per centum of the production of the industry by 
not more than five businesses or not less than 60 per centum by not more than two 
businesses; or 

(6) A geographic structure of prices characterized by differentials based on a 
basing point or similar system not based on regional costs, including production 
and transportation costs. 

(7) For the purposes of paragraphs (3) and (5) hereof several businesses, ac- 
tually controlled by a holding company or similar device, shall be considered one 

(r) "Participating Industries" shall mean major industries which the Com- 
mission has found to be (1) engaged in Interstate commerce, and (2) engaged in 
monopolistic practices, as provided by section 3 (k), and which have not been 
excluded under the provisions of section 6 (c), and also competitive major indus- 
tries which have voluntarily elected to operate under an expansion program, as 
provided by section 6 (d). 

(s) "Public hearing" shall mean a hearing, upon due notice, open to interested 
parties and the ■public at the national office of the Commission or other public place 
it shall designate. 

(i) "Used and useful assets" shall mean only such assets as are necessary in the 
operation of the business and in the production of its products, and shall exclude 
investments in other businesses not necessary for such production, inactive cash 
balances in excess of those needed, as well as other assets not essential for the 
conduct of the business. 


Sec. 3. (a) There is hereby created the Monopoly Control Commission, here- 
after called the Commission, an agency of the United States Government, which is 


authorized and directed to administer the provisions of this Act. It shall consist 
of seven members appointed by the President with the advice and consent of the 
Senate. In such appointments the President shall give due regard to securing 
persons having expert knowledge of the problems of consumers, labor, agriculture, 
and large and small business, all of whom have demonstrated disinterested con- 
spicuous, public service. The chairman of the Commission shall be designated 
annually by the Commission. Of the first seven members appointed, twv) shall 
serve for a term of one year, two shall serve for a term of two years, and the re- 
mainder shall serve for terms of three, four, and five years, respectively, but their 
successors shall serve for terms of five years each. Each member shall be eligible 
for reappointment, shall receive a salary of $12,000 per year, and shall not engage 
in any other business, occupation, or employment, and on assuming office shall have 
no direct or indirect business interest in any enterprise subject to the provisions 
of this Act. 

(b) In order to execute their policies, plans, orders, and regulations, the 
Commission shall appoint as an executive officer a coordinator for monopoly 
control who shall be subject to the Commission and who shall receive a salary of 
$12,000 per year. After his appointment he shall not engage in any other busi- 
ness, occupation, or employment, and shall have no direct or indirect business 
interest in any enterprise subject to the provisions of this Act. 

(c) To effectuate the policy of this Act, the Commission is authorized to estab- 
lish such agencies, and with due regard to the provisions of the civil-service 
laws and the Classification Act of 1923, as amended, to appoint such employees, 
and, without regard to the provisions of the civil-service laws or the Classification 
Act of 1923, as amended, appoint and fix the compensation of such attorneys, engi- 
neers, and special experts, as it may find necessary to carry out the purposes of 
this Act. 

(d) The Commission is authorized to accept and utilize the services of such 
Federal officers and employees and, with the consent of the State, such State 
and local officers and employees, as it may find advisable. 

(e) The Commission may delegate any of its ministerial functions under this 
Act to such agencies, officers, or employees as it may designate. 

(f) The Commission shall be guided by the principle that the economic 
resources of the. Nation are to be utilized as fully as practicable in the promo- 
tion of the national general welfare. 

(g) The Commission shall cooperate with industry councils, hereinafter pro- 
vided for, and, in its discretion, with other organizations and associations of 
business, farmers, labor, and consumers, in order to carry out the purposes of 
this Act. 

(h) The Commission shall submit annually to the President and the Congress 
a report covering the work of the Commission and of its agencies for the pre- 
ceding year, and. giving such infoi-mation, data, and recommendations for further 
legislation as it may find advisable. 

(i) The Commission may enter into contracts and agreements which it deems 
advisable for the effectuation of the purposes of this Act. 

(j) Whenever the Commission makes decisions of policy or lays down general 
rules, it shall follow a policy of stating the reasons for or the bases of such 
decisions and fwlicies, and as far as practicable shall publish summaries of the 
memoranda on which such decisions and policies are based. 

(k) Prior to the preparation of industry-expansion programs, the Commission 
shall survey the practices of the major industries and determine which are en- 
gaged in interstate commerce, and are engaged in monopolistic practices, in 
accordance with the definitions of section 2, subsections (o) and (q), of this Act. 
The Commission shall cause public hearings to be held to consider the evidence. 
On the basis of its investigations and these hearings it shall find which major 
industries are engaged in interstate commerce, and are engaged in monopolistic 
practices, as defined in this Act, and shall proclaim them to be participating 
industries. , 

(1) Within thirty days after a proclamation by the Commission that an in- 
dustry is a participating industry, as provided in subsection (k) of this section 
or in section 6 (d) of this Act, each business in such industry shall file a registra- 
tion statement with the Commission specifying in substance the nature of its 
activities; the names of its owner or owners if an individual or a partnership, 
or if a corporation, the names of all stockholders owning more than 10 per 
centum of the stock each ; the average number of employees and the average 
monthly pay roll in the preceding calencVir year; the approximate aggregate 


value of its production in the preceding calendar or fiscal year ; and such other 
pertinent information as the Commission may by regulation require. 

(m) It shall be the duty of the Commission to regulate the activities of all 
businesses in participating industries by requiring them to follow the expansion 
programs for their respective industries with respect to volume of production, 
employment, wages, maximum prices, and other aspects of the programs. 


Seo. 4. (a) To control monopolistic practices, a national expansion program 
shall be prepared annually, or for such other period as the Commission shall 
determine, for participating industries, which program shall cover the United 
States, its Territories, and possessions. The program shall provide (1) for an 
expansion of production which shall be possible within the limits of the indus- 
trial resources of the Nation; (2) for increased employment within the limits 
of the available manpower; (3) for expanded production of each product in 
balance with estimated consumers' demands and capital goods requirements; 
(4) for a gradual expansion in the productive capacity of the country in line 
with long-time plans for capital expansion in each industry; (5) for increases 
in pay rolls, and for increases in wage rates and decreases in prices where 
possible as a result of decreased costs from expanded production or from tecli- 
nological improvements, which will facilitate the movement of the expanded 
products of all industries into consumption. 

(b) The national-expansion program shall be so devised as to provide not only 
for increased production, employment, and pay rolls, but also so far as is prac- 
ticable for : 

(1) The conservation of natural resourced; 

(2) The improvement or elimination of hazardous or undesirable conditions of 
work ; 

(3) The replacement of workers displaced from employment; 

(4) The increasing of wages generally, and most rapidly in the lowest wage 
brackets ; 

(5) Vacations with pay, reduced hours of work, and elimination of child labor 
and home work; 

(6) The prevention of unwarranted increases in prices, the passing of economies 
on to consumers in the form of lowered prices, as specified in section 5 (g) ; 

(7) The reduction of waste in production and distribution; 

(8) A gradually rising assured annual minimum income per worker which will 
avoid the low levels of living found by Congress as recited in section 1 of this 
Act, and which as soon as practicable shall be at a level sufficient to support the 
unskilled and semiskilled worker and his family in decent health and comfort, in 
accordance with Uudgetary standards of the Departments of Labor and Agricul- 
ture, as revised to date, and of other branches of the Government, with the 
maintenance of reasonable differentials, above this minimum, for skill, hazards, 
and responsibilities ; 

(9) The program shall provide, as soon as practicable, for the employment of 
all persons fitted for employment in each industry, either by increasing the 
number of persons employed or by reducing the average hours per week to not 
below thirty hours. 

(c) Where increased prices in competitive industries which elect to participate 
in the program are necessary to provide reasonable and equitable wages in those 
industries, and where such price increases are needed to balance price decreases 
in other industries under this Act to maintain substantial stability of the price 
level, the Commission may include such provisions in expansion programs for such 

Industry Councils and Proposed Industry Programs 

Seo. 5. (a) Within ten days after the Commission finds that certain major 
industries are engaged in interstate commerce, are engaged in monopolistic prac- 
tices, and are not included in the provisions of section 6 (c) of this Act, an 
industry council shall be formed for each such industry, or combinations or sub- 
divisions of such industries as set forth in section 2 (p) of this Act. The Com- 
mission may recommend the formation of councils for regional areas or for 
coordinating purposes and shall designate representatives of the Commission to 
work with, and assist in the organization and operation of, all industry councils. 
Councils for regional or for coordinating purposes shall be formed, and dfetermi- 


nations of the Commission as to combining or subdividing industries shall be 
made, after public hearings called by the Commission. 

(b) The industry councils shall be composed of an equal number of representa- 
tives of management, labor, the consumers of the industry's products, and Con- 
gress, and one representative of the Commission. The representatives of manage- 
ment shaU be selected by the constituent businesses, under a plan approved by 
the Commission, assuring proper- represeqtation of the several classes of the 
constituent businesses, so far as is reasonably possible, on the basis of geograph- 
ical location, size of business, nature of the market, sources of raw material, 
and other operating conditions. The labor representation on each industry 
council shall be selected by those representatives who shall have been chosen by 
the labor organizations in each said industry to represent them under and pur- 
suant to the provisions of the National Labor Relations Act, and if there be no 
labor organization for such industry, the labor representatives shall be selected 
through elections conducted by the National Labor Relations Board. For the 
first two years after this Act goes into effect the representatives of the consumers 
shall be chosen by the Commission from a list of nominees submitted to the 
Commission ,by consumer organizations, including farm organizations, consumer 
cooperatives, and similar groups. Thereafter Congress will provide for elections 
of such consumer representatives by referendum or otherwise. The representa- 
tives of Congress shall be selected in such manner as the Congress may determine. 
If, in the case of a participating industry, the representatives of any of the above 
groups are not duly selected within a reasonable period, or fail to function, the 
Commission is empowered to appoint such representatives until other representa- 
tives are duly selected and function as provided in this subsection. Representatives 
on the industry councils shall be selected for terms of not to exceed two years, 
but shall be eligible to be selected to succeed themselves. 

(c) In addition to the duties specifically provided for herein, it shall be the duty 
of the industry councils, at the request of, and in accordance with rules and regu- 
lations laid down by the Commission, to assist it in the administration of this Act. 
All such administrative action by said councils shall be advisory only, and shall 
become binding when approved by the Commission. 

(d) Industry councils shall not regulate prices, terms of sales, or methods of 
competition, or regulate production : Provided, however, That determinations for 
maximum prices and business quotas made, subject to the approval of the Com- 
mission, as provided in sections 6 (b) and 7 (c) shall be a function of the industry 
councils. Other matters concerning unfair trade practices and fair methods of 
competition shall continue to be the responsibility of the Federal Trade Commis- 
sion and other governmental agencies charged with such duties under existing 

(e) The industry council for each industry shall formulate a tentative expan- 
sion program for its industry, taking into account past and potential consumer 
needs, production, employment, and pay rolls in its industry, and under regulations 
of the Commission shall conduct public hearings for the consideration of said pro- 
gram. Following such hearings, each industry council shall make findings based 
on the evidence produced at the hearings, shall make such modifications in its 
tentative program as the evidence and findings shall warrant, and submit the 
program to tlie Commission for approval or disapproval. In case the Commission 
disapproves any such program it shall state its reasons for such disapproval to the 
Industry council and the industry council shall prepare a modified program and 
submit it to the Commission. 

(f ) In preparing expansion programs for participating industries, the general 
policy of Congress is hereby declared to be as follows : The profits of such indus- 
trial expansion in the industries where production is insured shall be limited to 
the usual per centum return earned by capital invested in industries which do not 
engage in monopolistic practices and which have not voluntarily agreed to come 
under an expansion program in accordance with section 6 (d). The remainder 
shall be apportioned on an equitable basis as decided by the industry councils and 
approved by the Commission to consumers in the form of lower prices, to workers 
in the form of shorter liours of labor in order first to reduce unemployment, or in 
the form of higher wages. 

(g) The annual or other expansion program for each participating industry 
shall include an estimate of the reduction in the average unit cost of production 
which will result from the increased production under the program and from tech- 
nological impi-ovements ; and shall show what part of this reduced cost is to be 
allocated to lower selling prices, what part to higher wages, and what part to 
increased profits. The maximum rate of profit provided for under the program 
shall be based upon the standards provided in section 6. 


(h) If any provision of this section or the application thereof to any person or 
circtimstance is held invalid the remainder of the Act shall also be deemed invalid. 


Sec. 6. (a) It shall be the duty of the Commission, with the aid of the tentative 
industry programs submitted by the respective industry councils, to formulate and 
publish an integrated national-expansion program for participating industries. 
The national program shall not be put into effect until it covers industry programs 
for a range of major industries employing not less than 50 per centum of all em- 
ployees of all participating industries. After public hearings the Commission 
shall make findings based on the evidence produced at such hearings and may 
modify the national-expansion program as vpell as any industry programs. The 
Commission shall then approve the national as well as the industry programs and 
shall find and make them effective within such period or periods not exceeding 
sixty days after date of approval, as in the judgment of the Commission will 
further the purposes of this Act. 

(b) In preparing the expansion program for each participating industry, the 
maximum pi-ices shall be set by recommendation of the industry councils, ap- 
proved by the Commission, at such levels as are calculated to yield, with the 
wages, hours of work, volume of production, and other conditions assured by the 
expansion program, an average return on the used and useful assets of the busi- 
nesses therein (taken from financial reports as submitted to the Bureau of 
Internal Revenue) which shall be equal to either (1) the average earnings of 
businesses in competitive industries over the past twenty years, including net 
losses as well as net profits in the average, as shown by the corporate income-tax 
reports verified by the Bureau of Internal Revenue; or (2) such earnings as 
will be necessary to assure efficient businesses in the industry the availability 
of private capital for their future expansion in capital equipment under the 
program. If the business submitted no reports of used and useful assets to the 
Bureau of Internal Revenue, or if the Commission finds that such rfeports are 
inferior in accuracy or reliability to similar reports accepted by the Securities 
and Exchange Commission or other agency, or submitted to the Commission by 
the business, then the Commission may accept such substitute reports for the 
purposes of this section. In determining what rate of profit on their used and 
useful assets is necessary to provide for futxire investment, the Commission shall 
take into consideration the prevailing yields on stocks and bonds of various 
industries, the prevailing interest rates, and the declining risks under the expan- 
sion program as a result of the guaranties provided in this Act. The industry 
councils and the Commission shall select the rate of return given by rule (1) or 
rule (2), whichever is higher. For the purposes of this subsection, "competi- 
tive industries" shall mean cotton textile manufacturing, men's and women's 
clothing manufacturing, silk stocking production, wholesale trade, and retail 

(c) Whenever the Commission finds that an industry, though engaged in inter- 
state commerce and characterized by monopolistic practices, is of such small 
or declining size, or employs so few people, that it may be excluded from the 
national expansion program without weakening the effectiveness of the program, 
said industry and businesses engaged therein shall then not be subject to this 
Act until the Commission finds otherwise. 

(d) Apart from industries engaged in monopolistic practices, major industries 
which are of a competitive character and which are engaged in interstate com- 
merce may operate under an expansion program. The managements of businesses 
producing 10 per centum of the product of the industry or representatives of 10 
per centum of the employees of the industry may petition the Commission to 
permit the industry to operate under an expansion program. Upon the receipt 
of such petition the Commission shall provide for a secret ballot of the manage- 
ment and the employees of the industry on the question of whether or not the 
industry shall operate under an expansion program. The Commission shall lay 
down rules and regulations governing qualifications of voters and details of elec- 
tions. If the managements representing at least 70 per centum of the product 
of the industry, and the representatives at least 70 per centum of the employees 
of the industry favor participation in an expansion program, then the Commis- 
sion shall proclaim the industry to be a participating industry ; if the Commission 
finds, after public hearing, that the inclusion of the industry under an expan- 
sion program will benefit the employers, employees, and consumers of said indus- 
try, will promote a reasonable growth of the industry and full and continuous 

273442—41 — No. 25 10 


use of its productive capacity, will raise the general standard of living, and will 
promote the general welfare. After the initial participation, an industry coming 
under the provisions of this Act under this subsection (d) sr.all remain there- 
under unless and until the Commission, after hearings, reverses the foregoing 

(e) Participating industries shall base their activities upon the expansion pro- 
grams for their respective industries once these programs have been approved by 
th^ Commission and placed in effect. It shall be the duty of the Commission, 
through the use of the licensing power provided for in section 10 of this Act to 
bar from operation businesses failing to comply with the applicable requirements 
of the programs for their respective industries. 

Production Quotas 

Sexx 7. (a) As a part of the expansion program for each participating indus- 
try, provision shall be made for the expansion in production and employment to 
be made by each individual business in that industry, in accordance with the 
provisions of this Act. 

(b) The expansion programs for individual businesses in each participating 
industry shall be expressed in quotas, originally proposed by the industry coun- 
cil, and determined in accordance with the following standards: 

(1) Quotas for the first year (or other period) for each category of product 
for each business shall be based pro rata upon the average production of the 
businesses during a specified past period of not less than one year nor more than 
ten years, or the existing plant capacity where a previous pi'oduction period 
would be inequitable or would foster monopolistic practices or restraints ou 

(2) The quotas for the first year (or other period) shall be computed by in- 
creasing the bases for each business, established in accordance witli paragraph 
(1) of this subsection, by a percentage determined in such a manner that the 
total resulting production will equal the amount contemplated in the expansion 
program for the industry, each quota being subject to adjustment within a range 
of a specified percentage upward or downward to establish maximum and mini- 
mum quotas. 

(3) No business in industries with approved expansion programs shall pro- 
duce less than its minimum quota for any year or other period, without prior 
approval of the Commission. Quantities within the minimum quota remaining 
unsold at the end of the year or other period may be disposed of to the Corpora- 
tion as provided in section 8 of this Act. If any business is not prepared to 
produce up to its minimum quota it shall give adequate notice thereof, and there- 
after the excess shall be allocated equitably among the remaining businesses. 
No business shall exceed its maximum quota within a given year or other period 
without prior approval bv the Commission. 

(4) A reserve shall be withheld for businesses without previous production or 
capacity bases, amounting to 5 per centum of the total quotas for their industry. 
Any portion of this reserve not applied for by new businesses ninety days subse- 
quent to the final allocation of quotas for the industry shall be allocated 
equitably among the remaining businesses. New businesses applying for quotas 
shall produce evidence satisfactory to the Jommission of their responsibility and 
financial ability to produce the quota requested in accordance with the provisions 
of this Act. 

(5) After the first year's (or other period of) operation of production quotas 
in an industry, the production quotas for the expansion program of each suc- 
ceeding year shall be based upon the estimated sales of each business therein 
during the previous year (or other period). Such estimates of sales shall be 
based upon the actual sales during the first eight or more months of the year 
and the probable sales during the remainder of the year based upon the average 
or trend of sales in the first eight or more months, adjusted for expected seasonal 
variations. Quantities sold to the Corporation under the purchase agreements 
provided for in section 8 (d) of this Act shall not be included in sales for the 
purpose of calculating subsequent quotas. The quotas shall also be adjusted 
downward by amounts approximating the quantities of goods remaining unsold 
in the hands of the Corporation. A new business may retain its status as such for 
three years in order to obtain increased quotas from the 5 per centum reserve 
provided for 'n paragraph (4) above. 

(6) In assigning quotas to businesses, the expansion programs shall di.sclose 
the increases in production, plant expansion, employment, and pay rolls assigned 
to each business for the succeeding year or other period. 


(7) In establishing quotas, the industry councils and individual businesses 
shall at all times make their records available to the Commission, or its duly 
designated representatives, and shall furnish such information and shall pre- 
pare such reports as the Commission may designate. Businesses applying for 
quotas shall likewise make their records available to the Commission, or its duly 
designated representatives, for the investigation of any matter concerned with the 
expansion of production, employment, pay rolls, and related matters arising under 
this Act. 

(8) Where the Commission finds that as a result of acts of God, dangerous 
conditions, strikes, or other causes beyond the control of the business, which 
reasonable diligence could not have averted, a business which has a quota under 
the' provisions of this Act is unable to comply with the terms thereof, in its 
discretion the Commission may allocate such quota, or the unproduced portion 
thereof, equitably to the other businesses in the industry, or otherwise handle such 
matters in a way that will best effectuate the purposes of this Act. 

(9) The acts of the industry councils pursuant to this subsection (b) shall be 
subject to the final approval of the Commission. 

(c) After public hearings, and upon findings based on evidence produced at 
such hearings, the industry council sha ^ suggest a tentative allocation of quotas 
for the businesses in its industry, in accordance with the provisions in this 
section and other provisions of this Act and shall transmit the same to the 
Commission for its consideration. 

(d) The Commission shall hold public hearings on each such tentative alloca- 
tion to businesses in an industry. Where findings based upon evidence produced 
at such hearings disclose substantial differences from the industry council's 
findings, the Commission shall afford the industry council a reasonable oppor- 
tunity to examine same and submit its suggestions thereon. Thereafter, in its 
discretion, the Commission may make any changes which the findings make 
necessary and thereafter announce the allocation for the industry for the year 
or other period. 

(e) All changes in quotas as provided in this section shall be referred first 
to the industry council for its suggestions and thereafter submitted to the 
Commission for its final action. 

Peoduction Insubance Cobporation 

Sec. 8. (a) There is hereby established as an agency of the Commission the 
Production Insurance Corporation (hereafter called the "Corporation"), a charter 
for which is hereby authorized by the Congress. It shall have a board of direc- 
tors of five members, one of whom shall be designated president, and all of 
whom shall be appointed by and be subject to the Commission. 

(b) The Corporation, subject to the approval of the Secretary of the Treasury 
in accordance with the terms of this Act, is hereby authorized to issue and to 
have outstanding its bonds in an aggregate principal amount not to exceed 
$1,000,000,000. Such bonds shall be in such forms, denominations, maturities, 
bearing such rate or rates of interest, and subject to such terms and conditions 
and shall be issued in such manner and sold at such price as may be prescribed 
by the said Corporation with the approval of the Secretary of the Treasury. 
Such bonds shall be fully and uacouditionally guaranteed both as to principal 
and interest by the United States and such guaranty shall be expressed on the 
face thereof, and such bonds shall be lawful investments and may be accepted 
as security for all fiduciary, trust, and public funds, the investment or deposit 
of which shall be under the authority or control of the United States, or any 
officer or officers thereof. In event that the Corporation shall be unable to pay 
upon demand, when due, the principal of, or interest on, such bonds, tll^ Secre- 
tary of the Treasury shall pay to the holder the amount thereof, which is 
hereby autnorized to be appropriated out of the moneys in the Treasury not other- 
wise appropriated, and thereupon to the extent of the amount of principal 
and interest so paid, the Secretary of the Treasury shall succeed to all the 
right, title, and interest of the holders of such bonds. 

(c) The Corporation shall assist and participate as directed by the Com- 
mission in such handling, carrying, warehousing, insuring, marketing, and dis- 
tributing any products and/or services, necessary to effectuate the monopoly con- 
trol, production, employment, and related expansion purposes of this Act. 

(d) The Corporation is empowered to enter into insurance contracts with 
businesses covered by expansion programs under this Act, except where the 
Commission finds the product of the industry not to be suitable for such 


insurance because of perishability or for similar reasons. fSuch contracts 
shall provide, in consideration of the business undertaking to increase its 
production and employment in accordance with the expansion program, that 
if the business is unable to dispose of any part of its production, up to tha 
minimum quota set for it under the expansion program, such surplus will be 
purchased by the Corporation, provided that such unsalable surijluses are of 
acceptable quality, at prices not exceeding 90 per centum of the maximum 
price stated in each industry's expansion program, the rate of discount being 
uniform for each product under each expansion program. The Corporation 
shall have the power, in its discretion, to purchase such from time 
to time within a quota year or other period if sales of a busine,«s are falling 
behind a fair seasonal distribution of its quota. 

(e) The Corporation shall have power to warehouse, hold, grant, market, 
sell, or otherwise distribute or dispose of such surpluses as will best effectuate 
the purposes of this Act. The Corporation shall cooperate with the Com- 
mission to see that these stocks are disposed of in such manner as will involve 
both a minimum loss to the Corporation and a minimum derangement to the 
succeeding programs of expansion. The disposition of such stocks may be 
accomplished by resale to the businesses from which acquired, resale in the 
open market, or otherwise. In connection with such disposition, the addition 
of surpluses to the current production shall be adjusted, as provided in subsec- 
tion 7 (b), paragraph (5), in such manner as will permit the absorption of the 
surplus without undue hardship on producers or undue loss to the Corporation. 

(f) Where indu.stries or businesses thereunder participating in expansion 
program.s render utility or related public services, and agree, with the appropriate 
regulatory agency where required by law, to reduce their rates, due to In- 
creased volume under an expansion program for their industry, the Corporation 
may contract to reimburse any such business up to a maximum of 50 per centum 
of the amount by which its net operating revenue falls below the anticipated 
net operating revenue at a level of operations equal to its minimiun quota. 

(g) To be eligible for insurance under this section, businesses .shall furnish 
the Commission with such Information on present and anticipated production, 
costs, rates of outpiit, prices, or any other related information essential to 
effectuate the purposes of this Act. 

(h) Where, in the discretion of the Commission, a business is essential to 
the execution of the quotas established by the Commission, and where such 
business requires bank credits to initiate or expand production as prescribed 
by this Act, the Corporation may certify to any bank or other lending agency 
that said business has a definite quota under the industrial expansion plan, 
and that the Corporation will assist in distributing and/or purchasing any 
unsold surpluses. Where such a business is unable to obtain bank credit, and 
after finding that such a loan is in accordance with the purposes of this Act, 
the Corporation may approve the application of such business for the neces- 
sary bank credit. Under conditions prescribed by the Commission, the Corpora- 
tion may endorse notes and guarantee payment of such loans : Provided, how- 
ever. That the proceeds of such loans shall be applied solely to the payment 
of the actual and necessary costs of production and shall not be used for the 
payment of any salaries in excess of $10,000 per year : Provided further, That 
such business shall be required to establish a prior lien on the business fn favor 
of the Corporation, including the products thereof, until they are sold and the 
proceeds thereof are applied to the repayment of the bank or other credits: 
And provided further. That no guaranty shall be made as to any loan or loans 
In excess of $100,000 to any one business in any one year. 


Sec. 9. (a) There is hereby authorized to be appropriated, out of any money 
In the Treasury not otherwise appropriated, such sums of money as are essen- 
tial to carry out the purposes of this Act. 

(b) The Commission is authorized, from such sums appropriated, to make 
expenditures for personal services, supplies and equipment, lawbooks and books 
of reference, directories and periodicals, travel expenses, rental at the seat of 
government and elsewhere, the purchase, operation, or maintenance of passen- 
ger-carrying vehicles, and printing and binding, and all other expenditures as 
are appropriate and necessary to carry out the purposes' of this Act. 

(c) For the purpose of administering this Act, and for the purpose of making 
Ihe studies, investigations, publications, and reports herein provided for, there 


is hereby authorized to be expended from the appropriation designated in this 
section, such sums as shall be necessary. 

(d) All moneys of the Commission and its agencies not otherwise employed 
shall be deposited with the Treasury of the United States, or in any Federal 
Reserve bank, subject to check by authority of the Commission. As authorized 
by the Commission, such moneys may be used, among other purposes, in the 
purchase, redemption or retirement of any notes, debentures, bonds, or other 
obligations issued by the Corporation or by the Commission. 


Sec. 10. (a) After a business agrees in writing to comply with all the appli- 
cable requirements of the program of its industry, as approved by the Commis- 
sion, and with all the applicable rules and regulations issued by the Commission, 
the Commission shall license said business to operate in interstate commerce. 

(b) After the expiration of thirty days following the approval of an industry- 
expansion program by the Commission pursuant to section 6 (a), no article, 
commodity, or goods shall be sh.ipped, transported, or delivered in interstate 
commerce which have been produced, manufactured, processed, or distributed 
by any business within said industry unless the business has been licensed by 
the Commission under the provisions of this Act. 

(c) In issuing licenses and amendments thereto under this Act, the Commis- 
sion shall prepare a tentative draft thereof for each industry, after public 
hearing: Provided, hotvever, That amendments involving ministerial functidns 
shall i-equire only an order of the Commission. Unless otherwise specified, 
every condition in a license shall become effective immediately upon its issuance 
by the Commission. Upon the issuance of any license the Commission may pro- 
vide that any or all of its conditions shall become effective on any date or 
dates within three months after such issuance. 

(d) Where, after public hearing, the Commission finds by evidence that a- 
licensee has violated any of the conditions of its license, or any orders of the 
Commission relating thereto, the Commission may bar the licensee from opera- 
tion of its business by suspending or revoking such license. 

(e) When the Commission is presented with evidence which it deems satis- 
factory that a licensee whose license has been suspended or revoked, and who 
has applied for its reissuance, will comply with the conditions contained in 
such license, and with orders of the Commission relating thereto, and will 
make restitution to parties adversely affected by the violation for which said 
license was revoked, the Conunission may restore or reissue any such suspended 
or revoked license after due notice and public hearing. 

(f) Any party aggrieved by any action of the Commission in suspending of 
revoking, or failing to issue, restore, or reissue a license, may petition any circuit 
court of appeals of the United States (including the United States Court of 
Appeals for the District of Columbia) in the circuit in which said party resides 
or has its principal place of business, for a review of said action of the Commis- 
sion. A copy of said i>etition shall forthwith be served upon the Commission and 
thereupon the aggrieved party shall file in the court a transcript of the entire 
record in the proceeding, certified by the Commission, including the pleading and 
testimony upon which the action complained of was .based and the findings and 
order of the Commission. Upon such filing, the court shall have jia'isdiction of 
the proceeding and of the question determined therein, and shall h.'ive power to 
make and enter upon the pleadings, testimony, and proceedings set forth in such 
transcript a decree alfirming, modifying, or setting aside in whole or in part the 
action of the Commission, or directing it to issue, restore, or reissue the license 
suspended or revoked. No objection that has ,not been urged before the Commis- 
sion shall be considered by the court, unless the failure ov neglect to urge such 
objection shall be excused because of extraordinary circumstances. The findings 
of the Commission as to the facts, if supported by evidence, shall be conclusive. 
If either party shall apply to the court for leave to adduce additional evidence 
and shall show to the satisfaction of the court that such additional evidence is 
material and that there were reasonable grounds for the failure to adduce such 
evidence in the hearing before the Commission, the court may order such addi- 
tional evidence to be taken before the Commission and to be made a part of the 
transcript. The Commission may modify its findings as to the facts, or make 
new findings, by reason of additioiial evidence so taken and filed, and it shall file 
such modified or new findings, which, if supported by evidence, shall be conclu- 
sive, and shall file its recommendations, if any, for the modification or setting 


aside of its original action. The jurisdiction of the court shall be exclusive nnd 
its judgment and decrees shall be final, except that the same shall be subject to 
review by the Supreme Court of the United States upon writ of certiorari or 
certification as provided in sections 239 and 240 of the Judicial Code, as amended 
(U. S. C, titie 28, sees. 346 and 347). 

Cooperation by Government Departments and Agencies 

Seo. 11. (a) The Interstate Commerce Commission ; the Post Office Department ; 
the Bonneville project, National Bituminous Coal Commission, Petroleum Con- 
servation Division, and the United States Housing Authority of»the Department 
of the Interior ; the Securities and Exchange Commission ; the Federal Power 
Commission ; the Agricultural Adjustment Administration and the Rural Electrifi- 
cation Administration of the Department of Agriculture; the Federal Worlds 
Agency ; the National Resources Board ; the Tennessee Valley Authority ; the 
Federal Communications Commission ; the National Mediation Board ; and other 
Federal agencies regulating, administering, controlling, or otherwise having rela- 
tions with the industrial or economic activities of the industries affected by this 
Act, shall cooperate with the Commission in the preparation of expansion pro- 
grams. When requested by the Commission they shall aid industries under their 
jurisdiction in establishing their expansion programs in order that the activities 
of these Federal agencies shall be coordinated with the expansion programs for 
their industries. Such coordination may be effectuated under their dwn Acts, or 
under this Act, where approved by the Conamission, 

(b) Each national-expansion program shall be coordinated with the Federal 
program of public works, self-liquidating projects and other Federal, fiscal, and 
investment activities, in order that such programs may be properly adjusted to 
each other. The Commission, the Fiscal and Monetary Policy Committee, and all 
Government lending agencies shall consult upon all such matters and coordinate 
their activities as they shall deem essential to effectuate the purposes and provi- 
sions of this Act. 

(c) The Interstate Commerce Commission is hereby emi)owered and directed to 
cooperate with the appropriate industry councils to assist in preparing expansion 
programs. Where it finds that the increases in traffic and the resulting readjust- 
ments in working conditions will result in such increases in revenues or such 
reductions in unit costs as to warrant reductions in rates, it shall order such 
reductions in existing freight and passenger rates as wUl further the national- 
expansion program and tend to effectuate the purposes and provisions of this act. 

Programs foe Higher Farm Income and Increased Farm Production 

Sec. 12. (a) It is hereby declared to be the policy of Congress that the Secretary 
of Agriculture, in cooperation with the Commission, shall adjust all the programs 
of the Department of Agriculture which affect the production or marketing of 
farm products in such manner as to assure that there will be an adequate supply 
of agricultural raw materials, and that the increase in the national income which 
will result from the programs under this act shall bring about a concurrent expan- 
sion in ihe income of farmers and their buying power for industrial products to as 
rapid a degree as is' possible until such time as full parity incomes for farmers 
have been established, as provided in the Agricultural Adjustment Act. There- 
after agricultural programs shall be so adjusted to industrial expansion progra«is 
as to provide incomes for farmers increasing in due proportion to the increase in 
income of other members of the community. In adjusting the agricultural pro- 
grams in view of the increases in national income, the Secretary of Agriculture 
shall be guided by the policy of increasing the volume of sales of existing market- 
ing agencies, decreasing the unit cost of operations on such sales, thus making 
possible a reduction in the distribution margin between producers and consumers. 
The programs shall be administered, so far as possible, to provide increased in- 
comes to farmers and at the same time assure reduced prices of farm products to 
ultirhate consumers. 

(b) In the furtherance of the policy in the above subsection, the Agricultural 
Adjustment Act of 1938 (52 Stat. 31) is hereby amended by adding the following 
subsection (17) at the end of section 301 (b) (16) : 

' (17) In estimating the current trend in consumption of any product covered 
by this Act, the Secretary shall take into account not only the previous trend in 
consumption heretofore in effect, but the prospective increase in buying power 
of industry and consumers and in their demand for various products in view of 


their increased buying power which will be in effect as the result of the progroma 
pro'^ided for under the Monopoly Control Act." 

Accounts ajmd Records 

Sexx 13. (a) Every business in a participating industry, as defined by section 2 
of this Act, and every licensee, and others subject to the provisions of this Act, 
sh.'^ll make, keep, and preserve for such periods, such accounts, records of cost- 
accounting procedures, and of prices, correspondence, memoranda, papers, books, 
and other records, as the Commission mny by rules and regulations prescribe as 
necessary or appropriate for purposes of the administration of this Act, includ- 
ing production, capacity of plant and extent utilized, employment, wages, hours, 
and other conditions of employment, prices, and marketing of products, together 
■??^ith receipts and expenditures with respect thereto, and all such other accounts, 
records, and related information as the Commission may deem essential to effec- 
tuate the purposes of this Act: Provided, however. That nothing in this Act shall 
relieve any business or licensee from keeping any accounts, records, or memoranda 
which it may be required to keep under the laws of any State or political sub- 
division thereof, or the District of Columbia or any Territory or possession of the 
United States, or under any other Act of Congress. The burden of proof to justify 
every accounting entry questioned by the Commission shall be on the person mak- 
ing, authorizing, or requiring such entry. The Commission shall at all times have 
access to and the right to inspect and examine all accounts, records, correspond- 
ence, memoranda, papers, books, and other records of participating industries and 
businesses therein, licensees, and others subject to the provisions of this Act. 

(b) When in the judgment of the Commission, the disclosure of such infor- 
mation would be in the public interest or the Interest of producers or con- 
sumers, the information contained in any statement, application, declaration, 
report, or other document filed with the Commission shall be available to the 
public, and copies thereof may be furnished to any person at such reasonable 
charge and under such reasonable limitations as the Commission may prescribe: 
Provided, however, That nothing in this Act shall be construed to require, or to 
authorize the Commission to require, the revealing of trade secrets or processes 
in any application, declaration, report, or document filed with the Commission 
under this Act. 

(c) It shall be unlawfiil for any member, officer, or employee of the Com- 
mission to disclose to any person other than a member, officer, or employee of 
the Commission, or to use for personal benefit, any information contained in 
any application, declaration, report, or document filed with the Commission 
which is not made available to the public pursuant to paragraph (b) of this 


Seo. 14. (a) The Commission may require any business subject to any license, 
quotas, or orders, issued under this Act, to submit accurate reports, truthful 
and responsive answers to interrogatories, and to keep such accounts or sys- 
tems of accounts, and to permit such access to all books and records within 
the control of such business (including books and records of any affiliate or 
subsidiary), as the Commission may deem necessary to effectuate the purposes 
of this Act. 

(b) The Commission may make such investigations as it deems necessary 
to determine whether any business has violated or is about to violate any pro- 
vision of this Act or of any license, agreement, or rule or regulation thereunder, 
or whether any license or agreement under this Act is effectuating the declared 
policy of this Act, and may require or permit any business to file with it a 
statement in writing, under oath or otherwise, as it shall determine, as to all 
the facts and circumstances concerning the matter to be investigated. The 
Commission is authorized, in its discretion, to publish information concerning 
any such violations or to investigate any facts, conditions, practices, or matters 
it may deem necessary or proper to aid in the enforcement of the provisions 
of this Act, in the prescribing, approval, issuance, or enforcement of any license, 
agreement, rule, or regulation thereunder, or in securing information to serve 
as a basis for recommending further legislation concerning the matters to which 
this Act relates. 

. (c) The Commission for the purpose of any such investigation of any other 
proceeding under this Act, and for the purpose of exercising their functions 
and powers under this Act, is empowered to administer oaths and affirmations. 


subpena witnesses, compel their attendance, take evidence, and require the pro- 
duction of any books and records which they deem relevant or material to any 
proper inquiry. Such attendance of witnesses and the production of any such 
books and records may be required from any place in the United States, its 
Territories, or possessions, at any designated place of hearing. 

(d) In case of contumacy by, or refusal to obey a subpena issued to any 
business, the Commission may invoke the aid of any court of the United States 
within the jurisdiction of which such investigation or proceeding is carried on, 
or where such person resides or carries on business, in requiring the attendance 
and testimony of witnesses and the production of books and records. Such 
court may issue an order requiring such person to appear before the Commis- 
sion, there to produce books and records, if so orderfed, or to give testimony 
touching the matter under investigation or in question, and any failure to obey 
such order of the court may be punished by such court as a contempt thereof. 
All processes in any such case may be served in the judicial district whereof 
such person is an inhabitant or wherever he may be found. Any person who 
shall, without just cause, fail or refuse to attend and testify or to answer any 
lawful inquiry or to produce books and records, in obedience of a process so 
issued, shall be guilty of a misdemeanor and, upon conviction, shall be subject 
to a fine of not more than $1,000 or imprisonment for a term of not more than 
one year, or both. 

(e) No person shall be excused from appearing and testifying or from product 
ing books and records, in obedience to a subpena, or in any cause or- proceeding 
instituted by the Commission, or their duly designated representative, on the 
ground that the testimony or evidence, documentary or otherwise, required of 
him may tend to incriminate him or subject him to a penalty or forfeiture: 
Provided, however, That no individual shall be prosecuted or subject to any penalty 
or forfeiture for or on account of any transaction, matter, or thing concerning 
which he is compelled, after having claimed his privilege against self-incrimina- 
tion, to testify or produce evidence documentary or otherwise, except that such 
individual so testifying shall not be exempt from prosecution and punishment for 
perjury in so testifying. 

(f ) The several departments, bureaus, and agencies of the Government, except 
as otherwise provided by law, upon request of the Commission or its duly desig- 
nated representative, shall furnish all records, papers, and information in their 
possession relating to effectuating any of the provisions of this Act. 

Suspension of Antitrust Laws 

Sec. 15. While this Act is in effect, and for sixty days thereafter, any license, 
quota, order, or agreement formally approved by the Commission under the 
terms of this Act, during the period designated by the Commission, shall be 
exempt trom the provisions of the antitrust laws of the United States. 

Nonpartisan Administration 

Sec. 16. This Act shall be administered entirely on a nonpartisan basis, and 
in the appointment of officials, the selection of employees, and in the promotion 
of any such officials or employees, no political test or qualification shall be per- 
mitted or given consideration, but all such appointments and promotions shall 
be given and made on the basis of merit and efficiency. If any presidential 
appointee herein provided for is found by the President of the United States 
to be guilty of a violation of this section he shall be removed from office by the 
President, and any appointee, or selection of officials or employees made by such 
appointee, who is found guilty of a violation of this section, shall be removed by 
the Commission. 

Oath of Office 

Seo. 17. (a) Each Commissioner, officer, and every other employee of the 
Commission appointed jjursuant to the provisions of this Act before taking office 
shall take an oath of office swearing tliat he believes firmly in the principles 
enunciated by this Act and that he will execute faithfully all his duties in 
accordance therewith. In addition to removal from office for malfeasance or 
misfeasance of duties, every Presidential appointee appointed pursuant to this 
Act may be removed from office by the President whenever this oath of office 
is violated. Prior to all such removals the President shall provide such ap- 


pointee with a public opportunity to be heard, to hear the charges preferred 
against him, and be afforded a reasonable opportunity to reply. 

(b) In addition to removal from office for malfeasance or misfeasance of 
duties, all other officers and employees appointed under this Act may be removed 
from office by the Commission whenever their oath of office is violated. No 
removals of officers or employees shall be arbitrary or capricious but shall be 
based upon facts supported by substantial evidence, 

(c) In changes of position or reappointment, only one oath of office shall be 

Employees' Personnel Adjustment Board 

Seo. 18. In matters other than violations of the oath of office there shall be 
established an arbitration board within the Commission, whose sole function 
shall be to serve as a board of appeals whenever an employee of the Commission 
desires to have" his personnel matters reviewed. It shall be composed equally of 
officials designated by the Commission and employees. Said representatives of the 
employees shall be selected from an organization that represents a majority of 
all the employees, and if none such exists, then by representatives selected by a 
majority of all the employees. Hearings shall be open. Employees shall have an 
opportunity to hear the charges preferred against them and be afforded a reason- 
able opportunity for reply. The conclusions established by such board shall not 
be arbitrary or capricious. Appeal may be had to the Commission whose majority 
vote is final. 

Practicing Before the Commission 

Seo. 19. No Commissioner, officer, or any employee of the Commission who 
resigns or otherwise leaves the services of the Commission, shall practice, or 
otherwise engage in any activities in behalf of private clients before said Com- 
mission, directly or indirectly, for a period of five years from the date employ- 
ment with the Commission was terminated. This proviso shall not apply to those 
who go from one branch of the Federal Government to another, nor to those who 
are employed by a State or any branch or political subdivision thereof. 

Administrative Powers of Commission/ — RuIles, Regulations, and Ordsrs 

Sec. 20. The Commission shall have power to perform any and all acts, and 
to prescribe, issue, make, amend, and rescind such orders, rules, and regulations 
as it may find necessary or appropriate to carry out the provisions of this Act. 
Among other things, such rules and regulations may define accounting, technical, 
and trade terms used in this Act ; and may prescribe the form or forms of all 
statements, declarations, applications, and reports to be filed with the Commis- 
sion, the information which they shall contain, and the time within which they 
shall be filed. Unless a different date is specified therein, rules and regulations 
of the Commission shall be effective thirty days after publication in the manner 
which the Commission shall prescribe. Orders of the Commission shall be 
effective on the date and in the manner which the Commission shall prescribe, 
unless otherwise provided in this Act. For the of its rules and regu- 
lations, the Commission may classify persons and matters within its jurisdiction 
and prescribe different requirements for different classes of persons or matters. 
All rules and regulations of the Commission shall be filed with the secretary of 
the Commission and shall be kept open in convenient form for public inspection 
and examination during reasonable business hours. 

Modification and Cancelation of Licjenses and Orders 

Sec. 21. After due notice and public hearing, the Commission may modify 
or cancel any order, rule, or regulation issued pursuant to this Act, and, in case 
of outbreak of a war affecting the United States, or in the case of drought, 
plague, or other calamity, the Commission may modify or cancel any license or 
quota under the Act, without the consent of the licensee or holder of the quota, 
provided the Commission finds such modifications or cancelations to be necessary 
to effectuate the purjwses of this Act. 

Laws REa'EiALED and Not Repealed 

SiBc. 22. Nothing herein contained shall be construed to repeal any provision 
or part of the National Labor Relations Act of 1935, the Pair Labor Standards 


Act of 1938, the Agricultural Adjustment Act of 1938, the Securities Act of 1933, 
the Securities and Exchange Act of 1934, the Public Utility Act of 1935, and the 
National Bituminous Coal Act of 1937. All other Acts, or sections thereof, or 
orders and regulations relating thereto, in conflict with the provisions of this 
Act, or orders and regulations thereunder, are hereby repealed. 

WoEKERs' Rehabilitation 

Sec. 23. (a) There is hereby established a "Workers' Rehabilitation Board 
(hereafter called the "Board"), composed of five representatives, one each being 
designated by the Works Progress Administration (or its successor agency )_, 
the Federal Employment Service, and the Department of Labor, the Social 
Security Board, and the Commission. The Board shall select its own chairman, 
and in addition to services supplied by said agencies, the Commission shall pro- 
vide the Board with such an administrative staff as is, in the judgment of the 
Commission, reasonably necessary. 

(b) It shall be the duty of the Board, through arrangement with its con- 
stituent agencies and State relief agencies, or directly; (1) to provide for income 
payments to workers displaced by .technological improvement or increase of 
efficiency in industries operating under any expansion program, at a rate equal 
to at least 60 per centum of the earnings received by said workers prior to their 
displacement. Expenditure of relief funds, to provide supplementary payments 
to bring unemployment comjiensation payments to said workers up to the above 
specified earnings, is hereby authorized; (2) to survey the prospective needs 
for workers under subsequent expansion programs, and to determine the best 
capacities and potentialities of displaced workers on its rolls for retraining in 
such new occupations; (3) to retrain workers employed by it for the highest 
occupations for which they are suited in industries where they are most likely 
to find employment in future expansion programs, and to aid them in finding 
such employment when retrained; (4) to cooperate with the CJommission and 
Industry councils and others in determining the prospective needs for workers 
in each occupation in each industry and to aid in keeping the displacement of 
workers to a minimum and the retraining and replacement of workers as rapid 
and effective as possible ; (5) to assist in the establishment of an occupational 
outlook service in the Dep&rtment of Labor, and to do all the related things 
iiecQssary to achieve the purposes of this section. 

(c) The Board shall submit to Congress an annual report,' summarizing its 
operations and its recommendations. 

Insttbanob of Housing Construction 

Se30. 24. (a) In the event the Commission shall determine that an expansion 
program is necessary for the residential-construction industry, the program formu- 
lated for such industry, and the undertakings of the Production Insurance Cor- 
poration with respect thereto shall be in accordance with the following con- 
ditions :\ 

(b) In preparing the expansion program for such industry, pursuant to the 
provisions of section 5, the Commission, in collaboration with the Industrial 
Council, shall — 

(1) consider the material and labor requirements for building construction 
involved in the expansion programs formulated for other basic industries, 
and in the construction programs of Federal, State, and local agencies for 
roads and other public projects, including slum clearance and low-rent 
housing undertakings; 

(2) consult with and adopt, so far as practicable, the findings and recom- 
mendations of Federal, State, and local administrative planning and research 
agencies as to local residential housing needs and the share of the total 
volume of residential construction to be undertaken under such expansion 
program which should be distributed among the respective States and the 
geographical subdivisions thereof on the basis of such housing needs ; and 

(3) apportiori, with respect to each locality, the quantity of j-esidential 
construction to be allotted, on the basis of local requirements, between 
medium-cost housing construction and low-cost housing construction as here- 
inafter defined. 

(c) As used in this section, the term "mediu'm-cost housing" shall include all 
private residential construction costing not less than $4,000 nor in excess of 


$10,000 per dwelling unit which is constructed for sale on the terms set forth 
in paragraph (d) of this section, and the term "low-cost housing" shall include 
all private residential construction costing not in excess of $5,000 per dwelling 
unit which is constructed for sale or rent on the terms set forth in paragraph (e) 
of this section. Out of the total allotments for such construction in each locality 
quotas shall be determined for each individual business in accordance with the 
provisions of section 7 (b) of this Act. 

(d) The insurance contract entered into by the Corporation with each busi- 
ness for the construction of medium-cost housing shall provide — • 

(1) that the business shall agree not to dispose of any dwelling at a price 
in excess of that stipulated in the insurance contract, which shall in no 
event exceed the actual cost thereof by more than 10 per centum ; 

(2) that any dwelling constructed by such business, within its quota, and 
not disposed of by it within one year from the date construction thereof is 
completed, shall be purchased by the Corporation at a price equal to 95 i)er 
centum of $6,000 of the appraised value of the dwelling and 90 per centum 
of such value in excess of $6,000 and not in excess of $10,000: Provided, 
That the price paid by the Corporation shall in no event exceed the total 
actual cost of such dwelling. 

(e) The insurance contract entered into by the Corporation with each busi- 
ness for the construction of low -cosf housing shall provide — 

(1) The business shall agree — 

(A) to invest a total of at least $100,000 and shall undertake to construct 
at least two hundred dwelling units per year; 

(B) to submit to the Corporation detailed plans and specifications and 
contracts or commitments covering labor and material costs assuring that 
the costs per dwellihg unit will not exceed $5,000 per unit and that full 
advantage has been taken of all possible economies through large scale con- 
struction undertakings, including, where practicable, annual wage agree- 
ments covering the cost of labor ; and 

(C) not to dispose of any dwellings at a price in excess of that agreed 
upon in the insurance contract which shall in no event exceed the actual 
cost thereof by more than 5 per centum, nor to rent any such dwellings at 
rentals jn excess of those agreed upon in the insurance contract, which shall 
in no event exceed, after deductions approved by the Production Insurance 
Corporation for management, depreciation and like charges, a net return of 
5 per centum per annum, or 5^ per centum per annum in the case of a 
project constructed for rental on public-owned land, on the actual investment 
of the business: Provided, That, for the purpose of determining such in- 
vestment, no credit shall be given on account of any expenditures for land 
unless acquired through a bona fide purchase within not more than one 
year prior to the date of the insurance contract. In the event that the cost 
of construction shall be less than that stipulated in the insurance contract, 
the business shall be entitled to include 10 per centum of any such savings 
in the amount of its investment for the purposes of calculating the maximum 
sales prices and rental charges provided above. 

(2) In consideration of the above agreements, the Corporation shall agree 
with the business or its approved assignee (hereinafter called the "business") — 

(A) that any dwellings constructed by such business for sale, within its 
quota, and not disposed of by it within one year from the date construction 
is completed, shall be purchased by the Corporation at a price equal to the 
actual cost thereof determined in accordance with (1) (C) above; 

(B) That, as to any dwellings constructed by such business for rental, 
within its quota, the Corporation will pay annually, for a period not to 
exceed thirty years, such amounts as may be necessary to bring the return 
to the business up to a net revenue of not in excess of 3 per centum per 
annum, or Si/o per centum per annum in the case of a pro.1ect constructed for 
rental on public-owned land, on the amount of capital actually invested by 
the business, less depreciation, which investment shall be computed subject 
to the limitations specified in subdivision (C) of subparagraph (1) above. 

(f ) If. as to anv locality, the contracts entered into with the Corporation shall 
be insufllcient to meet the residential housing needs of the locality, as determined 
pursuant to paraeranh (h) of this sectio;!. the Commission shall be authorized 
to undertake such cons<-ruction either by force account or bv contract. The 
Reconstruction Finance Corporation shall make available to the Commission such 


sums as the Commission shall determine to be necessary for such purposes. Any 
housing constructed by the Commission pursuant to this paragraph shall be 
entitled to the benefits and shall be subject to the restrictions hereinabove 
provided in paragraphs (d) and (e). 


Sec. 25. If any provision of this Act, except the provisions of section o, or 
the application thereof to any person or circumstances, is held invalid, the 
remainder of the Act, and the application of such provisions to other persons or 
circumstances, shall not be affected thereby. 

Effective Date 

Sec. 26. This Act shall take effect on approval by the President of the United 




Field Representative, National Economic and Social Planning 




Tlie subject assigned me is a large ajid difficult one. Many books have 
been written about it. In the space allowed me I can only hit the high 

We all recognize that unemployment and its solution is our tran- 
scendent domestic problem, A Trojan horse within our gates, it owes 
no allegiance to a foreign power. The persistence of widespread idle- 
ness in all walks of life is a serious threat to our economic, social, and 
political structure. Upon its successful solution depends not only the 
reduction of relief expenditures and the balancing of public budgets 
but also the welfare of a third of our fellow-citizens, the preservation 
of democratic institutions, and the character of American civilization. 

In this talk I want to deal with what seem to me to be the six main 
aspects of our unemplojmrient problem : Its extent, its causes, its conse- 
quences, the lessons of the last decade, proposed remedies, and finally 
the relation of employment to economic progress. 

Several months ago the Fortune magazine held one of its round tables 
on the question : How can the United States achieve full employment? 
Underlying their discussion were four assumptions with which I also 
begin. They are — 

1. That the democratic system thrives only by the creation of indi- 

vidual opportunity. 

2. That unemployment is a denial of opportunity. 

3. That the greatest domestic problem with which the United 

States is now confronted is tlie problem of unemployment. 

4. That there is no conflict between employer and employee, capital 

and labor, farm and city, that cannot be solved by peaceful 
democratic means. 

The Extent of UneTn'ployinent. 

Even during the piping days of prosperity there has always been 
more or less unemployment in the United States. In 1918, a war year, 
for example, 51/2 percent of the workers in manufacturing, trans- 
portation, building trades, and mining were out of jobs; 23 percent 
of them were out of work in 1921 during the first post-war depression. 
In 1929, just before the crash, the average volume of unemployment 
was 1.8 million. In 1933, our worst year, 25 percent of the labor force 
was unemployed. This percentage dropped to 12 in 1937 when 6.8 
million were out of work, and rose to 17 percent in 1939 when the 
average volume of unemployment was 9.8 million. 

Corrington Gill, author of Wasted Manpower, estimated last Sep- 
tember that the combined total of the unemployed and their depend- 
ents was greater than the population of all the New England States 
plus New York and New Jersey. 

While estimates vary from year to year, all the estimates agree on 
one central fact : The number of people who are out of work today is 
some 8 to 9 million greater than in 1929. There lias been an increase 



since 1929 of 6.6 million in the total labor supply due to population 
growth and the change in its age composition. 

Last March Miss Dorothy Tliompson created a controversy in the 
press by contending that only 2,000,000 were out of work. She at- 
tempted to conjure away the existence of unemployment by leaving 
out of her calculations the W. P. A. workers and by underestimating 
the increase in the labor force. She failed to take account of the 
fact that there are relatively more people of working age now than 
there were in 1929 because of the change in the age composition of 
the population. Estimating unemployment is a hazardous occupation 
for laymen. 

Last April the Brookings Institution published a book which con- 
tains some interesting figures on changes in employment in major 
groups of industries from 1923 to 1937. During this period, accord- 
ing to the Brookings study, man-hours of employment declined in 
manufacturing, mining, and railroads, and increased in electric light 
and power. Meanwhile, the number of wage earners declined in min- 
ing and railroads, and increased in manufacturing and electric light 
and power. 

In a recent pamphlet published by the W. P. A. some important 
facts about unemployment are revealed. Between a fifth and a fourth 
of the total labor supply is unemployed. The young worker and 
the old worker are the hardest hit by unemployment. Only about 
one-fourth of the jobless have W. P. A. jobs; another fourth are tem- 
porarily inactive so far as the labor market is concerned ; the remain- 
ing one-half are active job seekers. W. P. A. workers, consisting 
principally of family heads, are older and have been without jobs 
longer than unemployed workers not on W. P. A. Temporary illness 
or disability keeps a substantial number of workers out of the labor 
market at all times, thereby introducing a special problem of unem- 
ployment that is frequently overlooked. Almost half of all employed 
persons, according to this study, are working more than the 44-hour 
limit set by the Wages and Hours Act for industries covered by the 
law. The average length of time employed workers have kept their 
present jobs is well over a year ; but the jobs of from 7 to 10 percent of 
the workers have lasted less than a month; and 11 to 14 percent are 
working less than 30 hours a week. There is thus a problem of under- 
employment as well as of unemployment. 

Types and Causes of Unemployment. 

Even in prosperous times, then, experience shows that there is an 
irreducible minimum or "hard core" of unemployment. The volume 
of employment rises and falls above this minimum under the impact 
of changes in economic activity. Students of the problem have identi- 
fied five different types or causes of unemployment produced by these 

(1) Frictiondl wiiennployment. — This type is due to the imperfect 
meshing of the parts of our economic machine. By itself this type 
raises no grave social problems, as the period of unemployment is apt 
to be short. Droughts, break-downs of machinery, accidents, short- 
ages, bottle necks, and similar maladjustments are examples of con- 
ditions that give rise to frictional unemployment. 

(2) Seasonal unemployment. — Industries dependent on the seasons, 
like fruit picking and canning, cannot offer steady employment. 


Though some seasonal workers are employed at high wage rates, the 
vast majority receive far too little to carry them over periods of un- 
employment. Those of you who have readT Grapes of Wrath are 
familiar with this type of joblessness. 

(3) CyclicoJ unemployment. — The ebb and flow of the business cycle 
causes wide fluctuations in the volume of unemployment, but every 
depression leaves behind it a residue of victims of human erosion who 
have become unemployable. 

(4) Stnwtural, mcluding technological unemployment. — ^This typa 
is caused by basic changes in the structure of our economy and by the 
onward sweep of the machine process. The disappearance of the 
geographic frontier, the decline of competition, the spread of price 
administration, the growth of monopoly, and the displacement of men 
by machines are some of the structural changes that are taking place 
in the American economy. Although many claim that new machinery 
creates more jobs than it takes away, it is indisputable that production 
has expanded faster than employment. A man thrown out of work 
by technological change often loses his occupation as well as his job. 
Stranded communities like the coal and steel towns in western Penn- 
sylvania are also the result of this sort of change. Current develop- 
ments in technology are more apt to improve existing equipment and 
to perfect methods of operation than to expand production facilities 
which would create new jobs. 

(5) Secular unemployment. — This is the chronic type of mass un- 
employment that results from the failure of new investment and the 
prolonged stagnation of the capital markets. In the past, a rapidly 
expanding economy offered great investment opportunities. Since 
1930, however, because the volume of real investment has not been 
large eiiougli to offset the volume of savings, the national income has 
been reduced and unemployment has resulted. The 1935-37 recovery 
was due primarily to a rise in consumption stimulated by public spend- 
ing; investment followed consumption. 

In addition to and independent of these five main types or causes 
of unemployment in the United States, there are a number of factors 
in a dynamic economy that also affect the unemployment problem. 
Among these changes are the increase in the working population which 
amounts to some 600,000 annually; managerial improvements; the 
development of new products and processes, like Nylon stockings, 
Birdseye frozen foods, and the Dy-Dee Wash; changes in consumer 
tastes; tariffs and other legislation; the loss of foreign markets for 
our farm surplus after the first World War and the acquisition of new 
markets in Latin America duiing the present conflict; the discovery 
of new resources and the depletion of old; the erosion of soil, as in 
the Dust Bowl region; changes in transportation reducing railway 
traffic and employment ; the migration of industry, like the movement 
of textile factories from New England to the South; and the migra- 
tion of workers from farms to cities and from the Great Plains to the 
west coast. All these shifts and maladjustments influence the em- 
ployment problem in complicated ways. 

Thus we see that mass unemployment in the United States is not 
a local but a Nation-wide plienomenon, and that it is due not to 
personal laziness or shiftlessness but to economic and social factors 
and changes over which the individual and industry have little or no 

273442— 41— No. 25* 11 


control. These contributing factors are numerous and the share of 
each in the total cannot be accurately measured. But it is correct 
to say, I believe, that the waste of manpower in this country today is 
mainly due to the decline in capital investment, to technological dis- 
placement, and to the failure of output to expand with our capacity to 

The decline in investment is attributed in turn to (1) the increased 
eflSiciency of capital as a result of improved methods that tend to get 
more output for the same dollar of capital invested; (2) the invention 
of capital saving devices such as multiplex telegraphy which enable 
cheaper machines to do more work; and (3) the excess of productive 
capacity over effective demand. If an industry is operating at only 
60 percent of its capacity, there is little incentive to install new plant 
and equipment. 

Meanwhile, the mechanization of industry, which is a main cause of 
at least temporary unemployment, is proceeding apace. In 1933, 43 
men produced the same volume of goods that required 118 men in 1899. 
Prior to 1914 the benefits of technology were on the whole passed on to 
consumers and farmers in the form of lower prices. As a result, 112 
men were hired for every 100 men displaced. But after the World 
War a chang-e took place. In the period from 1923 to 1929 only 91 
new men were employed for each 100 displaced. And this tendency 
continued without diminution during the 1930's. 

T/ve Oonseqttences of Unemployment. 

I need not describe to you the appalling consequence* of this con- 
tinuing unemployment, for they have been visible on all sides. In all 
our communities we have seen much individual suffering, much social 
and political unrest. 

It has been estimated that over $130,000,000,000, or twice the national 
income of 1938, has been lost through unemployment since 1929. Busi- 
nessmen, farmers, and property owners cannot be prosperous when a 
large segment of the consuming public has no money to buy their 
products and services. According to the Brookings study referred to 
earlier, the effect of unemployment, together with the shortening of the 
work week, reduced the aggregate dollar income of all workers attached 
to the industries mentioned by more than 13 percent. 

It is possible to estimate the loss in dollars through unemployment, 
but in human terms the loss is incalculable. Illness and disability 
growing out of undernourishment, worry, and poor housing take their 
toll of the jobless. The resultant burden on hospital and welfare 
agencies, as well as the cost of policing the crimes that are bred 
by destitution, must be met by society as a whole. History teaches us 
that sooner or later a neglected mass of unemployed, constituting be- 
tween one-eighth and one-fourth of the population, will be willing to 
trade their civil liberties for anything that looks like security. Those 
of you who have visited the ghost towns in the coal-mining areas of this 
State, or have seen the human effects of unemployment in your own 
communities, are quite familiar with the seriousness of this problem. 

Lessons of the Last Decade. 

It seems to me that the last 10 years have taught us certain lessons 
about the unemployment problem. We have learned (1) that unem- 
ployment is a permanent and not a temporary problem which must be 


dealt with on a long-range basis insti^ad of by a mere succession of 
emergency measures; (2) that a pi-oblem that has grown to such pro- 
portions in 10 3'ears is not solving itself automatically; (3) that our 
present efforts to meet the problem are expensive ; (4) that our present 
methods of dealing with the problem are ineffective; (5) that the wel- 
fare of the entire body politic will become jeopardized unless a better 
solution is found; and (6) that reemployment rather than relief must 
be the goal. 

I am sure that few of you will disagree Avith these conclusions from. 
the experience of the last 10 years. Any problem that persists for 
a decade at such a magnitude has plainly ceased to be a passing 
emergency. We have spent billions of dollars on unemployment re- 
lief. But despite these huge expenditures, the unemployed are still 
with us, while the $54 a month received by the average family on 
direct relief does not enable them to maintain an American standard 
of living. Ten years of widespread unemployment and the feeling of 
insecurity which permeates all groups have caused certain dangerous 
tendencies to manifest themselves among old and young. Age grow& 
preoccupied with unworkable plans for pensions like the ham and 
eggs scheme in California ; youth turns to ill-conceived plans for the 
complete reorganization of society. It is just as senseless for us to 
denounce youth for losing its economic balance as it is to denounce 
age for turning to impractical pension plans. If society cannot give 
employment to youth, it is natural that youth should endeavor to set 
up a system of society which can give it employment. Under exist- 
ing conditions youth becomes fertile soil for the planting of seeds of 
revolutionary fascism or communism. The history of the part 
played by ''youth" movements in the growth of totalitarian states 
should convince all of us that we must not permit an American 
"fifth column" to recruit its members from disillusioned young people 
out of work. 

The past 10 years have further demonstrated that private enter- 
prise alone and unaided cannot assume responsibility for capacity 
operation and full employment of our productive resources. Private 
enterprise has long been aided and implemented by governments in 
various ways. By itself, it cannot maintain abundant and continuous 

There is a lesson for us, I believe, in the experience of Germany 
since 1933. In that country the rise of fascism to power, as Max 
Lerner has pointed out, followed upon economic collapse, political 
paralysis, and psychological hysteria. Applying these tests to the 
American scene, we find our own country in a condition of economic 
stagnation relieved temporarily by a war boom in certain industries, 
and political stalemate, but with a better psychological climate in 
the face of -foreign aggression. If we are to convert stagnation into 
expansion and stalemate into united action, and achieve a genuine 
democracy in America, we must conquer our Public Enemy No. 1 — 

Unsu^cessfid Expedients. 

Coming now to the question of remedies, we leave the field of facts 
and figures and enter the debatable ground of opinion. Let us ap- 
proach this difficult terrain Avith o|)en and inquiring minds. 


There .are three methods of solving the unemployment problem 
that I think we should reject. The first is an expansion of the dole 
system. This is no answer to the problem because it does not create 
jobs, but leaves the jobless outside the economic system, destroys then- 
desire to work and debases their levels of living. 

The second method is to draft the unemployed into the processes of 
war. This is the method of the totalitarian states which are said to 
have eliminated unemployment by putting the idle in the army and 
in concentration camps. Making cannon fodder out of the jobless 
only disguises the unemployment problem which breaks out anew in 
the inevitable post-war depression, as we saw in 1921. Our new 
■national defense program will provide work for only a small per- 
centage of all the unemployed. 

The third method is that of communism. This method has been 
tried by Soviet Russia with its authoritarian controls, its appalling 
purges, and its dictatorial deprivation of civil liberties. I am sure 
you will agree with me that this is not the American way of solving 
the problem. 

There are some who believe that private enterprise can absorb a 
majority of the country's unemployed. Between 1933 and 1939 it is 
estimated that American industry reemployed about 8.5 million work- 
ers. This was a real achievement, one that is frequently forgotten in 
the heated debate about the responsibilities of business. It shows that 
private industry can reemploy men and create new jobs over a period 
of years. But it is almost equally certain that private enterprise 
cannot employ the vast majority of the idle workers within the next 
year or two. Only once in American history have we put as many as 
3,000,000 people to work within a period of 1 year. That wa,s from 
1933 to 1934. It would take 6 yearg for private enterprise to absorb 
all those out of work today at the rate of recovery we experienced 
from 1933 to 1937. Private industry alone cannot solve the problem. 

Nor is there much real promise of solving the problem in the trivial 
expedients offered by some politicians and economists, such as minor 
changes in taxation and in the Labor Relations Act, the revival of the 
gold standard, the mere cessation of "interferences" with business, or 
the decentralization of relief administration. These superficial 
changes would not reach the root causes of wasted manpower which, 
as we have seen, lie deeper. 

Types of Actimi to Be Eaxiluded. 

In our quest for an American answer to the challenge of unemploy- 
ment, there are at least four types of action that I think we must leave 
out of our calculations. (1) Revolutionary changes, because they are 
imdemocratic in method and because modern history shows that vio- 
lent revolutions do not take place in industrial countries, but onlv in 
peasant nations. (2) Wholesale socialization of basic industries,' the 
Socialist solution, because this would precipitate a struggle in which 
democracy would probably be destroyed and fascism would come to 
power, as it did in Germany. (3) Crackpot panaceas, like ham and 
•eggs or $30 every Thursday, because they are economically unsound 
u J?^J^*^^^^^y unacceptable, judging bv the defeat of this\scheme at 
the Cahtorma polls last year. (4) A return to laissez faire, because 
under existmg world conditions this is a lost cause, however fondlv 
we may hope for its resurrection. 



After we have dismisged the schemes that seem imsuccessful or un- 
democratic or impractical in the present climate of American opinion^ 
what other remedies remain ? Scores of proposals have been put forth 
in recent years to solve the unemployment problem. I have made 
a hobby of collecting and classifying them. Some are economically 
unsound or administratively^ unworkable. Others are beyond the 
realm of practical politics or incompatible with democratic principles 
and American traditions. I could give you a list of these proposed 
remedies if time allowed, but I am afraid it would only confuse you. 
There are so many of them. In order to clarify and simplify the pic- 
ture, I have classified all these proposals into seven groups of 

The first group consists of measures on the financial level. Under 
this head come four types of action. (1) Monetary and credit poli- 
cies designed to provide the right amount of money, to control its 
supply and distribution, and increase its velocity. Plans to improve 
credit and capital facilities for small business, like Mr. Berle's capital 
credit banking plan, illustrate this kind of action. (2) Tax reforms, 
such as higher taxes on incomes, inheritances, and land values; lower 
taxes on consumption; the taxation of idle savings and- undistributed 
corporate profits ; and the repeal of tax deterrents. (3) Fiscal policies, 
such as pump priming, deficit financing, balancing the Federal 
Budget over the business cycle instead of each fiscal year, and segre- 
gating capital expenditures in a capital budget. (4) Measures to 
increase buying power such as public works and relief expenditures, 
more liberal old age pensions and other forms of social insurance, 
wage subsidies, and properly timed public purchases. All these are 
examples of proposals on the financial level designed to increase, 
stabilize, and regularize employment, directly or indirectly. 

A second approach to the unemployment problem calls for a group 
of measures on the investment level. The purpose of this type of 
proposal is to balance savings and new capital investment. When 
these two factors are out of balance, you either have over-saving or 
under-investment. There are proposals to prevent over-saving by 
taxing idle money to reduce the percentage of the national income 
that we save and increase the proportion consumed, as England has 
done since 1913. And there are proposals to prevent under-invest- 
ment either by stimulating new private investments in plant and 
equipment or by expanding public investments in productive public 
works and social services, like low-cost housing, schools, hospitals, 
parks, and playgrounds. 

The problem of achieving full employment is said to be the prob- 
lem of securing sufficient outlets for savings. During the early years 
of our history, we always had more opportunities for investment 
than we had funds to invest. Today our savings amount to 
$69,000,000,000 and there is no free outlet for them. Our great cor- 
porations are producing within themselves sufficient capital to supply 
their future needs without recourse to the savings of individuals, 
while small and intermediate businesses are unable to get the capital 
they need from private sources. If private outlets are lacking, these 
funds nuist be consumed or absorbed by public investments. Some 
believe that private savings will come out of hiding if encouraged to 


venture forth by public subsidies or tax concessions or by the removal 
of deterrents to business confidence. Others argue that we should 
channel our surplus savings into useful public works and into equal- 
izing social services between the different regions of the country so 
as to raise the levels of education, health, and economic well-being 
in those backward rural areas from which our population is being 
replenished. Such public investments would be financed either by 
borrowing or by a hoarding tax on idle money or by public credit. 

One interesting suggestion for stimulating new private capital 
investment takes tlie view that, as industries leave the adolescent stage 
and become mature, they seek security and become less venturesome, 
less willing to assume the risks of youth. It is suggested, in such cases, 
that Uncle Sam, perhajDS through the Bureau of Standards, might 
investigate the commercial feasibility of new products and processes 
that have been invented or have appeared on the technological horizcm 
and himself assume the risks of their development by underwriting 
their production or application by private industry for an initial 
period. Prices Avould be set at levels to assure a market and a profit 
to the industrj' and Uncle Sam would assume any losses. It is also 
suggested that the same inducement might be used to stimulate price 
reductions on existing goods and services like electric power. Advo- 
cates of this idea of government subsidies believe it is preferable to 
public competition with or regulation of business. It emphasizes the 
psychology of cooperation rather than conflict. It aims to purchase 
better production and employment policies by public subsidies and 
guaranties to private industry. 

A third type of attack on unemployment consists of measures on the 
production level. Three types of proposals are being advanced on this 
level. One aims to reduce unemployment to some extent by the regu- 
larization of business. Tliis means the adoption of measures by busi- 
ness to reduce the ups and downs of unemployment from, one month 
to another. This would iron out some of .the seasonal changes which 
account for considerable. joblessness. Manj' of our present systems of 
State unemployment compensation are based in part upon the idea of 
stimulating regularity. Under such systems, the more a businessman 
can stabilize his operations, the more steady will be the number of 
persons on his pay roll, and therefore the less will be his contributions 
for unemployment compensation. The change in the date of the, 
annual automobile show was an attempt to regularize production in 
that industry. 

A second method under this head aims to increase employment by 
developing new manufacturing industries. The advance of science, 
invention, and technology is constantly creating new industries and 
services which are sources of new opportunities for the employment 
of men and women. Eighteen new manufacturing industries which 
have come into existence since 1879 have absorbed almost one-seventh 
of all the labor employed in manufacturing since 1929. Among them 
are electrical machinery, apparatus, and supplies, motor vehicles, 
rubber tires, gasoline, rayon, manufactured ice, typewriters, mechani- 
cal refrigerators, cash registers and adding machines, aircraft, phono- 
graphs, and motion-picture apparatus. 

The third measure on this level proposes a concerted program of 
expanded production in the key industries to achieve full production 
and em.ployment and increase buying powerv Tliis type of action 


has been urged and programmed by Mordecai Ezekiel in his two 
books — $2,500 a Year and Jobs For All. It has been endorsed bv 
businessmen, by the American Federation of Labor, by Mary Beard, 
a leading American woman, and many others. And it has been era- 
bodied in legislation introduced in the current Congress by Repre- 
sentative Voorhis, of California, and Representative Keller, of 
Illinois. This measure aims to create new wealth and jobs in the 
interstate monopolistic industries through their voluntary and 
planned cooperation as an alternative to Government regulation or 
ownership of the basic industries of the country. The American 
Federation of Labor estimated last March that 2,700,000 new jobs 
would be created by the adoption of this industrial expansion pro- 
gram. Mary Beard writes that she believes women should seek 
inclusion of a plank in the 1940 party platforms pledging the Presi- 
dent to call a White House conference after the November election 
composed of representatives of government, agriculture, industry, 
labor, and consumers to frame such an industrial expansion program. 
And the A. F. of L has made a similar suggestion. 

A fourth set of weapons in the war against unemployment consists 
of measures on the labor level. These include (1) reorganization of 
the employment services to reduce frictional and seasonal unemploy- 
ment and the duration of idleness; (2) vocational retraining pro- 
grams for workers whose skills have been made obsolete by new ma- 
chines or by migration of industry; (3) payment of wage subsidies 
to all who employ labor instead of machmes; (4) giving every worker 
a property right in a job in an industry of his own choosing; and 
(5) further shortening of the hours of labor. Peace between the 
C. I. O. and the A. F. of L. should also help in the fight against their 
common enemy. 

The fifth type of action embraces a variety of measures on the 
anti-monopoly level. Advocates of this school of thought favor '^he 
adoption of effective measures to protect small-scale competitive 
enterprise and to widen the area of genuine free competition — the 
free zone where the market mechanism operates. They would restore 
competition and flexible prices by more vigorous enforcement of the 
antitrust laws in order to eliminate restrictive labor and marketing 
practices and reduce costs, for example, in the building industry 
where the Department of Justice has launched a series of suits 
against labor unions, contractors, and the suppliers of building ma- 
terials. They would repeal profiteering tariffs and end the "patent 
racket." They would revise governmental subsidies to reward good 
competitive behavior and penalize bad monopolistic practices. They 
would extend public competition as a yardstick in the utility and 
other fields and encourage consumers' cooperation as a method of 
sweetening competition. They would try to stimulate better price 
policies on the part of business, labor, and agriculture. They would 
employ a variety of strategic or environmental controls designed to 
employ competition as a tool to keep the economic system working as 
efficiently and fully as possible. In short, this school . of thought 
would reshape and release competition from restraining practices in 
the hope of making the economic machine work more or less auto- 
matically instead of trying to operate it, as it were, by hand. 

Then there is a sixth set of measures on the consumption level. 
These aim to increase our capacity to consume by maintaining the 


open door at home, developing our domestic markets, and cultivating 
our own gardens. Advocates of this approach led by men like 
Charles Beard, Stuart Chase, and Jerome Frank, argue that there 
are greater potential markets for the output of our farms and fac- 
tories here at home than abroad. They are firmly convinced that the 
solution of our unemployment problem is to be found in opening 
up new channels of consumption and in higher levels of living at 
home rather than in the vain quest for permanent outlets for our 
putative surpluses in foreign sales aided and abetted either by sea 
power, or export subsidies, or imperialist adventures. Under this 
head also come measures like the food-stamp plan being tried in 
several cities, the efforts of the Brookings Institution to persuade 
businessmen to pass the benefits of technological progress along to 
consumers in the form of lower prices and to workers* in the form 
of higher wages, as well as proposals for bigger pensions and for 
the extension of producers' and consumers' cooperation. Agricul- 
tural experts told the monopoly committee in Washington a few 
weeks ago that 1,500,000 unemployed farmers displaced by power, 
machinery cannot find work until entirely new channels of consump- 
tion are opened. Tractors, combines, harvesters, and mechanical 
pickers are rapidly changing the whole pattern of life and labor in 
American agi'iculture. 

Finally, the attack on w^asted man-power includes a number of 
measures on the management level. Among them, the greatest need, 
I think, is to strengthen the planning boards at all the levels of 
government — city, county. State, and region which are in a position 
to function as coordinating and integrating agencies for combating 
the menace of unemployment as well as for planning the conserva- 
tion, development, and use of our physical and human resources. 
The National Eesources Planning Board in Washington, whose main 
function mder act of Congress is the stabilization of employment, 
should be given a permanent place in the Federal structure. To 
mention just one other proposal under this head, Mr. Owen D. Young 
and the American Youth Commission have urged the establishment 
of an effective public agency to provide employment for young people 
between the ages of 16 and 24. 


What may we conclude from this sketchy review of our unemploy- 
ment problem — its extent and causes, its consequences and suggested 
remedies ? 

We have seen that the problem is serious in size and of such con- 
tinuing duration as to be considered permanent in character. We 
have seen that there are five main types of unemploj'ment and that 
the causes are multiple. We have noted that the most serious types 
of idleness, from the standpoint of number and duration, are those 
resulting from cyclical fluctuations, machine displacement, and the 
decline of investment. We have observed the human, and economic, 
and social effects of wasted man-power and have outlined the seven 
main types of action designed to provide jobs for all. 

Most observers are agreed that there is no simple, single solution 
of this problem, that it will not be won by a blitzkrieg, but that it 
will require a many -ided attack in a long, hard campaign on many 
different fronts. We have seen and probably been bewildered by 


the many varied weapons in the arsenal of government and business 
available for a joint attack on the thorny problem of full employ- 
ment. Which of these devices to use, and when and where, are 
questions of high significance in the strategy of enduring recovery. 
Meanwhile, the repercussions of the European war upon our economy, 
and the new defense program complicate and confuse the whole 
problem in ways difficult to calculate. 

Any one of the proposals I have mentioned, if tried, might make 
some contribution to the reduction of joblessness. We will never 
know how well they might work until we have tried them. The 
biochemist in his laboratory conducts hundreds of experiments before 
he finds a specific cure for some disease. But to find a specific cure 
for unemployment may require more experimentation than society 
is willing to sanction. Not all the suggested plans are equally prom- 
ising. Perhaps lew of them 'will ever be tried, or at least not soon 
enough to help in the present situation. 

Full many a plan is born to blush untried 
And waste its potence on the desert air. 

The American people have not been in the mood since 1938 to try 
new schemes. People grow^ weary of change and reform and would 
rather put up with the evils they have than fly to others they 
know not of. But the terrifying developments abroad may work 
sudden changes in American psychology. 

Out of all the conceivable recipes in the cook-book of recovery, 
I have least confidence in industrial self-discipline or further exten- 
sion of negative public regulation. I have greatest confidence in 
positive action designed to stimulate and supplement private enter- 
prise. Specifically, I think the most promising steps toward pro- 
moting jobs for all at the present time are a joint public- works, in- 
dustrial expansion program. Of all the measures I have mentioned 
the most promising method of getting jobs for all the able-bodied 
unemployed, in my judgment and in the present circumstances, is for 
the Federal Government to launch a large-scale program of public 
investments in productive public works and useful social services, 
and to couple this with a concerted program of industrial expansion 
in the basic industries along the lines described in Ezekiel's Jobs 
for All. 

Growing recognition of the permanent character of the relief prob- 
lem in a contracting economy is leading to a consensus of oj)inion 
in favor of a permanent long-range program of useful public works 
and activities. The members of the Fortune Round Table on Unem- 
ployment, to which I referred at the beginning and which included 
several conservative leaders of American business, unanimously 
agreed (1) that the social gains of the past few years must be kept; 
(2) that Government expenditure should make provision for the 
unemployed even if this involves deficit financing; and (3) that the 
Government should invest its money so as to increase employment 
opportunities rather than merely spend it to increase buying power. 

The kinds of work to be undertaken consist primarily of those 
which are vital to national welfare and defense, but are not being 
adequately taken care of by pri^^ate enterprise and do not fit its 
normal pattern. The most important of these are low-rei)t housing, 
shipbuilding, airplane plants, rural electrification, flood control, high- 


way development, reforestation, soil conservation, health, educa- 
tional, and recreational facilities, scientific research, and similar 
activities contributing to the welfare of the country as a whole — 
fields which private business has not found it profitable to enter. 
Any program which produces socially useful assets or creates utili- 
ties or conserves human and material resources or yields income 
makes for economic progress. 

Of all the proposals suggested for a solution of wasted man-power, 
I place greatest hope in this long-range public works and investment 
program coupled witli measures to stimulate new private investment 
and a program of general industrial expansion. These programs 
supplement rather than jeopardize each other, and each is directed to 
the same objective of increasing the national income and promoting 
fuller use of the nation's material and human resources. They 
should bear the brunt of the main attack on unemployment. 

In addition I would endorse find carry on the following supplemen- 
tary steps : 

1. An integrated system of employment offices which would be the 

source of information on available employment and labor. 

2. A program of job training for youth and vocational guidance 

for displaced workei-s. 

3. The adoption by business of measures to regularize employ- 

ment from month to month. 

4. A program of loans and subsidies to key industries. 

5. The measures proposed to restore flexible prices wherever pos- 

sible and eliminate monopoly. 

6. Liberalization of the old-age benefit system. 

7. Continuation of the N. Y. A. and C. C. C. youth programs on 

a permanent basis. 

8. Expansion of the existing unemployment compensation 


9. Extension of rehabilitation of rural areas through the activities 

of the Farm Security Administration. 

The potential of plenty for all in the United States has become a 
commonplace. Almost everyone knows that for the first time in 
human history we have here the natural resources, the plant and equip- 
ment, the labor force, and the industrial arts to create an "America 
Unlimited" with an average annual family income of from $2,500 to 
$4,400. Until now the obstacles to this achievement have been man- 
made institutions and habits of thought, and ignorance of how to 
organize our resources so as to attain an economy of abundance. 

In the light of recent scientific research and social invention, we 
can no longer plead ignorance of methods of maximizing the national 
income. A wide variety of techniques for releasing the potential 
plenty of our economic system have been devised during the past 
decade. We have been bewildered to know which of these remedies 
to employ andMn what combination. As a people we are substan- 
tially agreed on the ends to be sought: Peace, plentv, and freedom. 
It only remains to attain agreement on the means to be applied. 

After 10 years of searching and fumbling, the best thought of 
experts on this problem is beginning to focus on the few concrete 
remedies I have recommended. They recognize that unemployment 
and most of our other economic and social ills will disappear in pro- 


portion as we are able to increase the national income and distribute 
it more equitably/ We measure our national income in terms of the 
annual output of goods and services by private and public enterprise. 
It is estimated that a national income of $88,000,000,000 in 1936 
dollars would make a fuller use of our manpower and eliminate 
unemployment. It is also estimated that with our present resources 
we can produce an annual income double that of last year when it 
amounted to about $68.5 billions. The acid test of economic progress 
is an economy in which production, employment, and income are 
steadily expanding. 

The chief obstacles to prompt adoption of an adequate reemploy- 
ment program are political, not economic. In the present climate of 
congressional and public opinion, it seems unlikely that any fresh or 
more vigorous attack will be made upon unemployment, aside from 
the rearmament program, until after the November elections, if then. 
Solution of the problem is also handicapped by lack of understanding 
of it, by the influence of pressure groups which tend to take a sectional 
view and resort to restrictive palliatives like resale price maintenance, 
the 30-hour ^eek, and crop limitation, and by the absence of fully 
developed programs of action. Further obstacles are to be found in 
the i-esistance of autocratic economic power to change, in monopolistic 
practices, in vested rights in the status quo. These obstacles can only 
be overcome peaceably by public education and by democratic plan- 
ning and experimentation. 

Thus you will see that the art of economics has no certain cure of 
this social malady. But efforts to solve it must not be postponed until 
economic science has been perfected. On the contrary, economic prob- 
lems must be attacked as they arise with as much insight as men 
possess. Just as every industrial invention passes through a long 
period of trial and adjustment before it wins general acceptance, so 
must social engineering proceed by trial and error and experimenta- 
tion. Social planning cannot skip this long process of gradual per- 
fecting before it passes into successful operation, nor can it quickly 
change the ingrained habits of the American people. "The social 
inventions that have paralleled the technological progress of recent 
times," says Wesley Mitchell — "for example, the joint stock company 
with limited liability, trade unions, progressive taxation, central bank- 
ing, social insurance, installment buying, chain stores — liave been 
gradual developments, and few would claim that any one of them is 
thoroughly satisfactory in its latest form." 

In a recent address in Los Angeles, Roy Bessey summed up our 
situation as follows: "If we are to go ahead in America — if we are 
to add constantly to our national income, improving and broadening 
our standards of living, and diminishing our unemployment of capi- 
tal and labor — we must have plans for capital outlay in public and 
quasi-public works as well as in productive industry. Such expan- 
sion in industry alone is not possible for obvious reasons. The growth 
of industry is dependent upon the parallel development of public 
works, utilities, services. The full employment of resources — men, 
science, technology, money, plant, machinery, materials — is not pos- 
sible without construction and reconstruction of public works and 
quasi-public works." 

Lewis Mumford pointed out in a recent issue of the Survey Graphic 
that "the United States is now entering a period of economic sta- 


bility. The era of piij^sical growth lies behind us, as it lies behind 
any adult organism. We are now about to enter a period of matu- 
rity, where the problem is to maintain a dynamic equilibrium, as in 
the human body. Mere physical growth can no longer be our main 
activity. We can no longer expand physically by adding to our area. 
We must expand vertically, by cultivating our resources better. W^e 
can no longer expand industrially by creating wholesale our new phy- 
sical equipment; we must reorganize our productive mechanism for 
the purpose of using it more continuously, more intensively, above all, 
more purposefully. We can no longer add to our market just by 
Increasing our numbers : we must add to it by increasing the standard 
of living for a relatively fixed population." 

The women of America can help mightily in preparing the public 
mind for these necessary changes. You can help to make these changes 
peaceful, orderly, and democratic by using your influence to over- 
come the institutional obstacles and habits of thought that impede 
the solution of our economic and social problems. By conferences like 
this you can strengthen the fabric of democracy and enhance the 
prospects of its fuller achievement. 










[Copyright, 1940, by Irwin S. Joseph] 

Ecouomic preparatiou. 
The debt problem. 

Paht I 

Economic depression. 

Importance of capital flow. 

The debt burden brings on depression. 

The debt burden prevents recovery. 

The New Deal and its drawbacks. 

The old system and its drawbacks. 

The impasse. 

The obviousness of our problem. 

The responsibility of government. 

Cooperation of creditors. 

Part II 
Necessity of short term debt. 
Kiinger in long term debt. 

Misconception of long term loans. 
Benefit from elimination of long term debt. 
Undiminishing purchasing power and se- 
Program of long term debt elimination. 
Efifect on economic freedom. 
Public debt. 

Effect on institutional investment. 
Increasing realization of the debt problem. 
Considerations as to the future. 

The relationship of debt to wealth. 
The relationship of production and prices 

to the cost of sustaining debt. 
The flow of new capital investment before 

and during the depression. 

This booklet in dedicated to you and to your fellonunen hi whose interest it has 

been icritten 


Most of US own property in some measure or other. 

If this country should unfortunately go the way of the totalitarian 
states — if we should lose our property as happened in Russia — or if 
we should retain our property, yet be divested of its control and of 
the greater part of its income, as happened in Germany and Italy — 
then you will wonder what might have been done to have prevented 
this changer from occurring. 

Individually, it is difficult for us to check the totalitarian surge. 
Cojlectively, however, we ought to be able to avert such a catastrophe, 
il willingly and without prejudice, we face the problems now con- 
fronting us and act deliberately to solve these problems in a logical 
and practical -manner. 

Enjoying the ownership of property and other democratic liberties, 
we in America today still control our own destiny, and through it, 
perhaps, the fate of world civilization. Should freedom be lost and 
democracy extinguished as a result of unsound practices in our econ- 
omy we can but look to ourselves for the responsibility for such 
failure. That we may not fail, let us make every effort to find what 
may be wrong in .our present economy. 



It is necessary to do more than prepare ourselves on the material or 
military front by building up our national defense. Against totali- 
tarian aggression from without that sort of preparation is self evident, 
but against aggression from within, arising from discontent, it is equally 
sound and important to prepare ourselves on the social, or what might 
be properly called the truly democratic, front. That involves build- 
ing our economic defense by solving unemployment, under-consump- 
tion, investment stagnation and other kindred economic maladjust- 
ments which give rise to discontent and possible internal aggression. 
For want, idle capital, and idle labor no longer make sense in a world 
of abounding resources. 


In this country, in which genuine democracy seems more nearly to 
exist than in any other nation in the world, we have long been ex- 
periencing these economic maladjustments and know how vitally they 
are affecting our democracy. Much has been said of late about the 
effect of debt on the body economic, and much consideration has been 
given to the problem of the mounting national or public debt. This 
booklet is concerned with private debt as well as public debt, and 
particularly with that kind of private and public debt known as long 
term debt. 

Debt has been used as an instrument of finance for many centuries. 
It has been a valuable tool, through which men and nations have at- 
tracted the investment of funds for the permanent improvement of 
productive facilities, and through which banks and financial institu- 
tions have expanded credit to bring about increases in the production 
and consumption of goods. 

As we know, the debts that we incur are contracts which call for the 
payment of specific charges for the use of money, and the repayment 
of the funds loaned at some stipulated point of time. As long as the 
economy is prosperous, credit can be maintained and loans can be paid 
when due merely by incurring new debts to pay off the old. When, 
however, credit is contracted by reason of a deflation in values, as in an 
economic depression, loans cannot be paid off in this manner, and a 
great deal of economic maladjustment results. 

We have been witnessing a condition of this character since 1929. 
Considerable similarity exists between our experience of the last 10 
years and the famous fable of the goose that laid the golden eggs. 
Industry has been like the goose of that fable, for under favorable 
conditions it has been able to supply the golden eggs in the form of 
regular periodic payments out of the profits that it was capable of 
earning. However, industry can only do what is reasonable. And if 
through unsound practices, like the greedy owner of the goose, we 
demand more from industry than it can supply under unfavorable 
conditions, we will kill industry as the owner killed the goose, and 
there will be no eggs at all. 

The author is very much concerned about the effect of debt upon 
industry and eventually upon democracy. It is his belief that there 
is something inherent in thij nature of debt, with its cancerous tend- 
encies, that can make debt as destructive an instrument of society 
as it has been a useful instrument. He fears that debt may develop 


into so great an obstacle to economic recovery that faith in the polit- 
ical system of democracy may give way to the demand for a more 
authoritarian form of government. 


In order to discuss the effect of debt upon democracy, it is advisable 
to start out with acceptable definitions of the economic conditions we 
have been experiencing. It is well, therefore, to have a correct under- 
standing of economic depression. 


We might define depression as a state of the economy in which the 
total national income has substantially declined — that is to say, a 
state in which the production, exchange, and consumption of goods 
have fallen to a marked degree. This condition is accompanied by 
unemployment and a low mass purchasing power. The factors that 
make up the economy are thus all operating in low gear. 

To correct this state of maladjustment and to achieve recovery, it 
is obvious that the level of jjroduction and consumption must be 
laised. To expand consumption, mass purchasing power must in- 
crease. In a democracy this should occur in a natural way. Pur- 
chasing power increases in a natural way when the unemployed are 
put to work. To put them to work, production must be expanded. 
But the expansion of production requires money or capital which 
must be made available. 


Our economic system is monetary and is therefore logically called 
capitalism. For capital is its lifeblood. Capital must circulate in 
sufficient quantity and at sufficient velocity in order that our system 
may live. When all our capital is flowing, production and consump- 
tion of goods are near a maximum. Under such conditions, it is vir- 
tually impossible for depression to exist. It is when capital substan- 
tiallv is withdrawn from the system that depression becomes evident. 
And we might properly say that the extent to which the flow of capital 
is restricted is itself a measure of the degree of depression. 

For 10 years we have witnessed a restriction in the flow of capital. 
For 10 years, therefore, we luive not experienced the prosperity of 
which this country is capable. The solution of our problem might 
be found w^ere we to discover what is responsible for the slowing down 
of the flow of capital. We must therefore inquire why our reservoir 
of funds lies idle and is prevented from irrigating and sustaining 
the economj'. 


Let us make this inquiry properly by going direct to the source. 
Let us ask those who own 'capital, for they are the potential lenders 
and investors. They control the opening and closing of the flood-, 
gates of the reservoir of our economy. They have the final say as to 
whether capital is to be released. 

273442 — 41— No. 2S 12 


One o;f the motives that influences the release of capital is the 
motive of profit. For only when there is prospect for profit will 
investors permit their capital to be employed. If lending and invest- 
ment prove precarious, then prospect for profit changes into prospect 
for loss, and capital is not released. 

But what exactly can this mean ? If lending and investment prove 
precarious one of the reasons for such a condition can be attributed 
to the fact that previous investments are going wrong. That loans 
that have been made are not being serviced. That contracts of debt 
are not being met. 

Wlien the economy proves incapable of servicing an appreciable 
amount of the debt it has incurred, it is natural for investors to pause, 
to change their attitude from one of confidence to one of anxiety. 
Therefore, investors not only are unwilling to release capital under 
these conditions — they actually call in loans wherever possible. They 
thereby drain off a portion of the capital that is irrigating the econ- 
omy and store it in the already rising reservoir of funds. 

This is the picture of credit contraction. The depression of the 
30's from which we have not yet recovered is a repetition of this 
sequence of events. It followed a curtailment of lending and invest- 
ment in the final months of 1929 because confidence had received a 
telling blow from the major international debt defaults of Loewen- 
stein in Belgium, Hatry in England, and later the Kredit Anstalt in 

Apparently the weight of debt plays a major role in all depressions. 
It is the fixed and rigid contracts that do not permit of compromise 
that create a lopsided relationship between the amount of debt and 
the earnings from which it may be serviced. 

As a result, industry strives to increase its earnings that it may 
strengthen its financial position in order to continue to service its 
debt. But the procedure followed seems to produce the opposite 
effect, decreasing earnings and increasing the debt burden. 


If there were an adequate flow of capital, as in prosperous times, 
we could expand production and thereby increase earnings. In the 
absence of this flow of capital, industry resorts to the reduction of 
operating and production costs. But any portion of the cost of ma- 
terials or cost of labor that industry might be able to save is eventually 
lost because it is offset by a corresponding reduction in puivhasing 
power which depresses the selling price of the goods produced. 

This procedure results in a spiral of deflating prices which further 
reduces earnings and intensifies the debt burden. Bankruptcy and 
foreclosure ensue and spread throughout the economy. Instead of 
arresting the situation and bringing about recovery as most people 
would expect, bankruptcy continues to deflate the economy. 

The attempt by those who are still burdened with debt to reduce 
costs of production continues adversely to affect industry. Employ- 
ment, purchasing power, consumption, and production decrease in 
turn, one after the other. The factors of the economy are thus forced 
;to lower and lower levels and conditions become so critical that they 
tend, to invite drastic action. 



In 1933 conditions were so critical that drastic action was applied. 
The New Deal was born. One measure after another was enacted: 
subsidies were paid to the farmers, relief to the unemployed, Federal 
work projects were authorized, and the pump was thus primed at 
the expense of increasing the Federal debt. 

One of the questions of the day is whether the measures of the New 
Deal have brought about recovery. We have enjoyed recovery, if by 
"recovery" we infer an improvement in the material welfare of the 
people. But we have not attained recovery, if by "recovery" we 
would infer that that improvement can be maintained without con- 
tinued government spending. 

The validity of our recovery was tested in 1937. For we found that 
curtailment of government spending at that time brought on an imme- 
diate recession, because the now of capital that government spending 
created was unfortunately not replaced by a similar flow of caj)ital on 
the part of private industry. We failed to realize that the still pre- 
vailing inability to service private debt and the strain imposed by 
higher taxes due to increased Federal debt would prevent the necessary 
flow of private capital. Government expenditures accordingly had to 
be resumed. 

Once again our material welfare has improved, but the increasing 
amount of debt arising out of this procedure is further weakening the 
possibility of permanent recovery. 


In principle the author opposes the continuation of government 
spending. But he does not share the idea of those who believe that 
recovery can be attained merely by curtailing government expenditures 
to balance the Budget through the elimination of certain New Deal 

Recovery apparently depends upon a substantial flow of capital 
which itself depends upon the re-establishment of confidence — not just 
confidence in government, but confidence in business — conuaence based 
on prospect for profit. Since earnings are evidently insufficient at this 
time to service a considerable portion of our current debt at the existing 
levels of prices and production, confidence does not exist. Investors 
obviously are not desirous of risking capital, nor do producers wish to 
borrow capital. Balancing the Budget, instead of stimulating capital, 
as some people claim, would in all probability frighten capital. It 
would create confidence in government, but hardly in business. For 
the curtailment of government spending would decrease purchasing 
power, andj;hereby adversely affect either the consumption or the price 
of goods, and therefore, business profits. Accordingly, recovery would 
not appear to be attainable by budget balancing alone. 

What must we do, then, to attain recovery ? 

Some people claim that we shall attain recovery without planning it. 
They claim that this depression, like every other through which Amer- 
ica has passed, will disappear through the operation oi natural forces. 
The author, however, does not share this opinion. 


If we look back upon the depressions through which capitalism has 
passed, we find that there are two phases, one of which the economy 
tifaverses before prosperity again recurs. 

One such phase can be the cruel destruction of values arising from 
monetary inflation, in which the economy experiences a virtual i)reak- 
(ibwn followed by a complete reconstruction on a new basis of values. 
This is what occurred in Germany after the World War of 1914-18. It 
is generally the result of a gigantic and unbearable national debt which 
is liquidated through currency devaluation. Through the unbridled 
printing of paper money, currency becomes less and less valuable. 
Prices soar skyward, and through this rise debtors profit to an extent 
great enough to enable them to pay off all their indebtedness rapidly. 
It then becomes necessary to re-establish a sound currency. The process 
is speedy but cruel. 

The other phase which may be traversed by the economy is the more 
natural phase. It is a slower process, and because of its slowness ap- 
pears to be less hurtful. It is not, as most people want to believe, the 
phase of merely liquidating debt through bankruptcy. We have al- 
ready noted that this in itself not only accepts the condition of deflation 
but assists in further intensifying deflation as long as a substantial 
portion of debt remains. What happens is, that at some point of time, 
as deflation and bankruptcy are taking place, entirely new industries 
appear on the horizon, of such importance and so full of prospect for 
profit that the amount of capital thej^ are able to attract starts a flow of 
investment sufficient to invigorate the entire economy, and stave off 
further bankruptcy. Those industries fortunate enough to have re- 
tained their solvency are saved by the new set of conditions. Their 
debts, on the verge of being defaulted, are once again able to be serviced. 

In this connection we may recall how favorable was the influence of 
the growing railroads on the welfare of this country, how American 
prosperity was enhanced tlirough the expansion of the electrical in- 
dustry, the production of automobiles, and the consumption of petro- 
leum. Today, however, no new industries appear presently capable of 
attracting a flo w of capital sufficient to extricate the economy from its 
present stagnation and ?iuge debt involvement. 

Must we wait for such industries to develop ? It might mean another 
10 yearb. In waiting, would we not be aggravating unemployment, 
and might not the resulting discontent invite revolt and so threaten 
our present way of life ? With much of the world already spiritually 
beaten, such an influence upon our people makes further delay pre- 


Have we not, therefore, come to the point of the road where the path 
to recovery under democracy can no longer be traveled in safety with 
the equipment of former days ? In other words, since recovery appears 
unattainable by debt reduction through bankruptcy, and since it also 
appears unattainable by debt expansion through Federal subsidies, is 
it not obvious that some other procedure must be considered to achieve 
this goal ? 


The problem seems self-evident and yet probably suffers from that 
very fact, for generally nothing is dismissed so quickly or receives so 


little consideration as does the obvious. The problem, in 
so far reaching that almost everyone is fearful of touching it, afraid" 
that an attack upon a practice once useful, despite its present destruc- 
tiveness, might not produce the cure. But this is very much a matter 
of a'pproach. For many people who are fearful of hospitals and dis- 
trustful of surgical or medical attention avoid operations and remedies 
until too late, and so permit their afflictions to spread to fatal pro- 


Then, again, the far reaching nature of this problem may explain 
the lack of debt discussion on the part of Congress. "Wliile in almost 
every quarter the urgency of attacking the problem is admitted, noth- 
ing of substantial importance has yet been done in this direction. 

Should not Congress by now ap[)reciate the momentous necessity of 
considering this question ? Congress has already taken many forward 
steps in the regulation of labor, industry, and agriculture in the inter- 
est of the general welfare, steps that may even have been accepted 
reluctantly by some of us but which ultimately should prove beneficial. 
Why, therefore, should Congress not now consider constructive regu- 
lation of finance, of capital, of long term investment — of debt? 

Such constructive regulation of debt and finance as may be worked 
out should of course adapt itself to a free economy in which the profit 
motive continues to be the moving force. Virtually all of us are com- 
mitted to the validity of the profit system, yet the system is presently 
not particularly successful and apparently needs the very type of con- 
structive regulation suggested, that we may in the future pursue a 
course of intelligent selfishness rather than a selfishness that is unco- 
ordinated and badly balanced. 


Any satisfactory solution of the debt problem Avould evidently 
require cooperation on the part of the creditor bondholders. The bond- 
holder of today is very much like a passenger on an ocean liner. Pas- 
sengers have the right to service and passage until the ship is endan- 
gered by storm, and thereupon it becomes their interest, in fact, they 
are even compelled, to participate in all actions necessary to save the 
ship. Smooth sailing, clear sea, the bondholder rides. These are 
turbulent days, these are not clear seas, and the economic ship is ad- 
mittedly in grave danger. 

It becomes time for the bondholder to do his part and if out of 
tradition and conventional attitude, he takes a stand, unintelligent for 
himself and the rest, it becomes necessary perhaps to force him to 
participate more. There is a fair wage due to bonds, but the fair wage 
of today, so that it may not be destructive, is not the fair wage of yes- 
terday. And in terms of police power and good of the public and the 
public safety, it becomes desirable for Congress to more equitably and 
justly allocate among bondholders and active creditors and producers 
the earnings of production. Arithmetically, the bondholder will seem 
to have lost a right in terms of bond interest, and seem to have been 
deprived of his technical due. We are offered the choice of the present 
market value of bonds supported by business, too choked by its bonded 


indebtedness to be able to be solvent, as against the value of those same 
bonds attached or aflSxed to successful going concerns. We cannot fail 
to realize that bonds can only be serviced by industry out of production 
and profits, and if bonds by their demands frighten away the partici- 
pation of active capital there will result neither profits nor interest, 
nor, in the last analysis, bonds. 


It is not the purpose of the author to exclaim "Eureka" and to make 
the extravagant claim of having found an infallible remedy for our 
economic maladjustments. What is most vital in his opinion is to 
stress the importance of seriously thinking about the debt problem — 
of discussing it intelligently among ourselves — that we may impress 
upon Congress the necessity for coming forward with a constructive 
program to master this issue. 

While a solution of the debt problem may not and doubtless cannot 
provide the complete answer of the whole problem of depression, no 
one can assume that any solution of our economic maladjustments can 
leave out the consideration of this one and very j)rimary question. 
And since the author has spent many years and given considerable 
thought to this subject, it would perhaps not seem out of place at this 
juncture to submit to those who may be interested the analysis and 
conclusions he has reached — to submit these for acceptance, modifica- 
tion, or rejection. 

We have found that debt possesses within itself certain rigid char- 
acteristics that produce deflationary effects and repercussions which 
help bring about economic depression and prevent the return of re- 
covery. It would appear.natural, tlierefore, to explore the possibility 
of eliminating debt as one of our financial practices. The question 
therefore arises as to whether such a program could be practical. To 
answer this question we should examine the various types of debt that 
we are now in the habit of incurring, and determine the degree of 
safety or danger of these obligations, and the degree of their im- 


There are in general two types of debt — short and long term debt. 
Commerce is based almost entirely on short term debt. Without short 
term credit, which sets up short term debt, trade would dwindle to 
such small proportions that there would be very little exchange of 
goods. The public would have difficulty without its credit from the 
local store, the gas and electric company. Retailers in their turn re- . 
quire credit from producer and wholesaler. Society could not get along 
without this type of credit — sufficient reason that its elimination must 
not for a moment be considered. This is also the type of credit which 
is provided by banks in the form of short term commercial loans to 
industry, and by business, in the form of short term installment loans 
to individuals. Credit and debt in this form are both healthy and 
sound. Short term loans do not tend to cause depression, because they 
are so amply secured by liquid assets that thev are practically never 



The kind of debt that tends to be unsafe and cause depression is 
long term debt. The danger in this debt lies in its susceptibility to 
default, which comes from the greater degree of speculation in a long 
term contract as opposed to the speculation in a short one. Promises 
are made which frequently cannot be fulfilled because of unpredictable 
(Hi-onoinic conditions. These promises guarantee interest payments 
over a long period of years at a fixed rate, and because no escape is 
possible from the agreement once made, the debtor is obliged to make 
these payments irrespective of his ability to earn them, and continues 
until he is forced to def aidt. When default becomes general, as occurs 
in a deflation of prices and production, the elements of depression 
set in. 

Since long term debt is that type of debt that tends to bring on 
depression and prevent recovery, the question is Avhether, if elimi- 
nated, something else can be substituted in its place that Avould be as 
useful as long term debt without possessing any of its disadvantages. 

An analysis of the concept of long term debt will help furnish the 


We think of long term loans in the same sense as short term loans, 
as being repayable in money at the date of their maturity. This can 
rarely bs accomplished in a true sense, because debtors seldom possess 
sufficient liquid assets for conversion into money. They thei-efoi-e 
resort to refunding operations, incurring new long term debts in order 
to pay oflf the old. Railroad, utility, and real estate loans, which 
make up the vast majority of private long term debt, are virtually 
all paid off in this manner. Therefore, long term loans are truly not 
loans at all, because they have to be extended indefinitely. They are 
permanent investments, and as such ought not be guaranteed to yield 
a fixed rate of interest. As permanent investments, they ought have 
only the right to a return commensurate with earnings, as in the case 
of equities. Long term loans, excepting for their priority, are the same 
as equities in the sense that the values in buck of them are the fixed 
or "frozen" assets of the corporation into which the funds of the 
original loans were converted. 

If, therefore, to eliminate long term debt we set up a procedure 
under which all private long term loans might be ethically transformed 
into equities having priority on assets in the event of corporate liquidar 
tion but having no claim to interest or dividends in the absence of 
earnings, the question then arises whether such limitations would help 
bring money out or keep it from being invested. 


Let us compare the old and new set of conditions and logically 
reason what could happen. 

We kn^w that a curtailment in the flow of capital is largely due to 
a falling off in the prospect for profit. Today, with fixed charges of 
debt as a burden on industry, the prospect for profit is diminished 
Avhen the price level falls. For a fall in prices Avill cut dollar earn- 


ings. As a result fixed charges become a greater proportion of those 
earnings, reducing profits and unfavorably affecting prospects for 
profit. Wlien earnings are so cut by deflation as to barely cover the 
interest on debt, we witness a serious stagnation of new investment. 

In the early stages of a general price deflation, bondholders who are 
the recipients of the "fixed charges" receive a cumulatively growing 
proportion of the national income, larger than their percentage of par- 
ticipation warrants, while business gets a continually diminishing 
share.^ This unbalanced situation gives rise to a cost cutting pro- 
gram, applied to the wrong part of the circle of production, tending 
ultimately to reduce production. And since production reflects in- 
come, this unbalance reduces national income and the extent of our 
security and welfare. 

If long term debt were no longer a financial practice, the fixed 
charges of long term debt would not exist, and a drop in the price 
level would have an entirely different effect upon, the economy. A 
drop in the price level would naturally reduce dollar earnings, and 
the return on capital would be- smaller. But that smaller return would 
now be distributed in proportionate parts to a cooperating group of 
owners instead of being disproportionately distributed to a conflict- 
ing group of interests. And though the return be smaller, it would, 
nevertheless, retain the same degree of purchasing power as the pre- 
vious larger return by reason of the very drop in the price level. 
That is to say, the purchasing poAver of the economy would be con- 
stant, even if prices dropped. Accordingly the standard of living 
would tend to be maintained and the general level of production would 
thus tend to continue. And, by the same process of reasoning, an 
inflation in the price level, though increasing dollar profits, would not 
change the purchasing power of those profits. 


The net result would be that despite fluctuations in dollar earnings, 
the constant value of those earnings would give the investor class a 
fixed income, measured in goods and services, the kind of income and 
security that bondholders have always wanted but never received. 
Today, their fixed "money income" has a fluctuating value measured in 
goods and services. In this a double paradox becomes evident, first, 
that the practice of seeking security through guaranteed returns on 
investment has given bondholders insecurity, and, second, that a re- 
versal of this attitude, of not demanding a guaranteed return, would 
actually gi^^e them security. This means that there is more value in 
participating in an enterprise that is active than having a lien on one 
that is inactive. In other words, the use of wealth, not its possession, is 
our real security. 

Since changes in the price level would not affect the income of goods 
and services in an economy freed from long term debt, the investor 
group as a whole would continually enjoy a true sense of security. In- 
vestors would have confidence in the economy and, therefore, would not 
hesitate to invest available funds, because they would know that new 
investmient in needed projects under good management must necessarily 

1 According to figures of New York Federal Reserve Bank and Survey of Current Busi- 
ness (June 1939), respectively, the general price level fell by one quarter from 1929 to 
1932 while interest paid rose proportionately one half from 6.7 to 10.7 percent of the 
national income. 


improve production and thereby produce an increment of goods and 
services in which they will share. 

The statements that have just been made apply to the economy as a 
whole, and so represent an average. Naturally no two investments are 
alike in degree of risk. Projects of a speculative nature would exist in 
the new economy just as they exist in our present economy. And just 
as capital has always been provided for such projects, capital would 
continue to be furnished by those M'ho speculate. Should a speculative 
investment meet with failure it would disturb confidence only in the 
project itself or in other projects of a similar character. The effect 
would be localized. It would not be likely to spread through the 
economy as it is able to do today. It would not disturb confidence in 
general investment because, as just stated, new investment in needed 
projects would produce an income of goods and services in which the 
investor class would necessarily share. 


If majority opinion is inclined to believe that society would enjoy 
security, prosperity, and freedom by eliminating long term debt, the 
practical program to accomplish this becomes the next important 

It seems that such a program might consist of two steps. The first 
step would be to prohibit, by proper legislation, any new investment 
in the form of private long term loans of a corporate or business 
natui'e. This would allow the granting of modest loans to millions of 
prospective home owners, a category of long term debt the retention 
of which could work no injury upon the economy. For these loans 
would be individual and small and would be safeguarded by amorti- 
zation features. 

The second step would be more difficult. That would involve the 
transformation of current outstanding private long term loans into 
equities which would have priority on assets in the event of corporate 
liquidation, but no claim to interest or dividends. 

Such a transformation ought to be ethical with respect to present 
debtors and creditors. To make it ethical the author believes that 
money ought to possess the same purchasing. power that it had when 
the debts were at their peak. For at that time, the debtor-creditor 
relationship was acceptable. 

At the current price level, which is considerably under that of the 
peak days, money has too high a purchasing power. Some adjust- 
ment accordingly ought to be made for the difference. Psychologically 
this might prove painful to creditors. And in that case we might con- 
sider working out the transformation after attaining a higher price 
level through a final government spending progi-am on public works. 

The author has already said that, in principle, he opposes the Con- 
tinuation of government spending. And he believes that the public 
holds the same view. But if this were te be the final spending program 
to bring about a return to prosperity that we could actually retain, the 
public might accept such a program. Such a program would increase 
employment and simultaneously raise the volume of production and 
the price level. This would make business generally profitable ; and 
existing private long term debts and loans would approach their rela- 
tive position of the days prior to the depression. 


The foregoing represents certain suggestions on debt transforma- 
tion. It is evident that practical plans for the transformation of 
loans into equities can best be developed through study and inter- 
change of ideas by those entrusted with the enactment of this 
legislation. As we are today witnessing a good deal of corporate 
reorganization in which various forms of securities are being ex- 
changed fqr others in order to lessen the fixed charges of operation 
and in this way to make possible the contiiuiation of many corpora- 
tions, we might consider following a procedure of the same character, 
going the "whole way," however, by exchanging present bonds not 
for new bonds bearing reduced interest charges but for an equitable 
amount of new securities participating proportionately in earnings. 


The elimination of private long term debt through Federal legisla- 
tion might lead some of us to ask whether such enactment would deprive 
us of a form of economic freedom it should be our right to enjoy. Here 
arises the question as to the safe limitation of freedom. We must re- 
member that the task of good government is "to combine that degree of 
liberty, without which law is tyranny, with that degi'ee of law, with- 
out which libert}^ becomes license." Restriction of investment 
through invalidation of long term loans might be viewed in the same 
light as restrictions imposed upon present day traffic. 

In late years the congestion of traffic has made necessary the regula- 
tion of its circulation fc«" the public safety. While the individual is 
deprived of a certain form of freedom through such regulation, in the 
final analysis he is the gainer because the elimination of congestion per- 
mits him to circulate more rapidly and therefore more freely. In like 
manner, regulation of investment through the elimination of that form 
which is unsound might deprive us of a certain type of freedom, but 
in the final analysis it would enhance our total economic freedom by 
making all investment more secure and therefore new investment 
generally attractive. 


So far we have discussed the elimination of private long term debt. 
Though the amount of private long term debt outstanding in this coun- 
try is considerably greater than the amount of public debt, it is impor- 
tant that we consider also tlie problem of eliminating public debt. 

It is true that public debt differs in certain respects from private debt. 
In the event of default, the creditor of a private corporation can 
place the corporation in bankruptcy and foreclose the corporation's 
property in satisfaction of his claim. The creditor of a municipality, 
state, or government cannot, -however, satisfy a claim on a defaulted 
bond in a like manner. In the case of municipal or state loans that 
are defaulted, there is no property which can be taken f)ver, and 
therefore some settlement is generally agreed upon under which new 
bonds are exchanged for those that have been defaulted, with an 
extension of maturity date and a lowering of the interest, rate. In 
the case of Government bonds, payable in the Government's own 
currency, a way is always open to meet payments through the power 
of the Government to devaluate its currency. 


Although there is this difference between private and public debt 
where default is concerned, the fixed charges of public debt are neverthe- 
less a burden on the economy as are those of private debt. The fixed 
charges of public debt are met through taxes which, in the final analysis, 
are. paid by industry. And so it is important that the burden of these 
charges be removed. 

The burden of public debt is properly removed by gradual amortiza- 
tion. To accomplish this without resorting to measures of currency 
inflation, tax revenues must exceed fiscal expenditures. Therefore, we 
should not expect any reduction in the public debt until our national 
income is large enough to provide a tax surplus. It would appear, there- 
fore, that the sooner we achieve the elimination of private long term 
debt, the sooner may we achieve the conditions of a prosperous economy 
and expanded national income under which we may be able to amortize 
public debt and move toward a still higher level of prosperity. 


The change in long term investment procedure would, of course, 
transform the portfolios of insurance companies, savings banks, and 
trust companies. As holders of equities, these institutions would be- 
come part owners and have a voice in the managemer^ of their prop- 
erty, resulting in a more efficient supervision of enterprise. Today they 
have that voice only after their loans have been defaulted. 

Over the past decade insurance companies have been experiencing 
gradually diminishing yields on their securities. They are becoming 
aware of the inlierent character of long term bond investment that 
prevents this type of investment from being expanded indefinitely. 
For the mathematics of compound interest makes evident to them 
that the cumulative piling up of funds into loans creates a mountain 
of debt that eventually cannot be serviced without interest rates gradu- 
ally falling to zero or inflation wiping out the value of money. 


Since the crash of 1929 a number of investigators have assembled 
considerable statistical information on domestic debt. Many writers 
have come to the conclusion that long term debt presents a serious 
problem in our economic life that must be faced and met. In 1933 
Prof. Irving Fisher wrote a paper on this subject entitled "The Debt- 
Deflation Theory of Great Depressions." Within the last 2 years the 
Twentieth Century Fund subsidized a comprehensive research into 
debt problems, which resulted in the publication of the book, "Debts 
and Recovery, 1929-1937." This book discloses in a factual manner the 
extent to which our economy is burdened with long term debt, the 
danger that this situation creates, and the necessity for forward action. 
It concludes with the statement : "For a durable recovery, the com- 
mittee is convinced means must be found to make equity investment 
more attractive to investors." The author believes that the most prac- 
tical means is the elimination of long term debt itself. 

The financial structure of the capitalist economy, to be useful, must 
be strong enough and sound enough to support the economy. When 
we discover thatr bridges, adapted to the traffic of the past, can no 
longer sustain the heavier load of modern transportation, we do not 


bemoan the situation, but forthwith condemn those bridges as no 
longer safe, and set out to adapt them for the heavier traffic. We, who 
are tlie architects and engineers of finance, should in like manner con- 
demn the weakness of the old financial structure and set out to 
strengthen it for present needs. 

if! 5p V "1* 1* V "P 


And so we are faced with a composite of idle men, idle land, idle 
machines, and idle money, while a large part of the Nation is ill-fed, 
ill-clothed, and ill-housed. If we should fail to take the necessary 
measures to cure unemployment while democracy is still enjoyed, we 
shall tend involuntarily to promote unrest and discontent upon which 
dictatorship can feed. 

Everyone knows how much more rapidly the unemployed can be 
given jobs under dictatorship and the effect that this has on their 
morale. As a result, dictatorship usually wins a strong following in 
the first years of its power. And though we believe that men will 
eventually demand the freedom that dictatorship denies them and 
start revolution to terminate enslavement, the author does not see 
how we can be willing to let civilization take this long, inhuman course 
when we might avoid it. 

To overthrow democracy for dictatorship and then in turn to over- 
throw dictatorship for the reestablishment of democracy would be a 
cycle of government that would cost us dearly. In much the same 
manner do we pay for the cycle of business when we suffer depression 
between periods of prosperity. Both cycles result from impractical 
human behavior, and both might be corrected by the application of 
a little common sense. 


The relationship of debt to xoealth 


Billions of dollars 

National | long 
wealth term 
I debt 



debt in 

debt in 


263. 6 





Sources of above figures: 

On national wealth and private long term debt: "Private Long Term Debt and Interest in the United 
States" (p. 58), a publication of the National Industrial Conference Board. 

On total debt: Author's computations based upon "Seven Kinds of Inflation," by Richard Dana Skinner 
(Whittlesey House (McGraw Hill, 1937) ). 





y *>v 

\^ — 

-^ J' 


1914 16 











This chart, based on the statistics appearing above, discloses the growth of debt ex 
pressed in terms of national wealth. It i.s to "be noted that the physical wealth of the 
Nation, though permanent, fluctuates in value because of changes in the price leve\, where- 
as price changes do not affect the dollar value of debt. 



The relationship of production and prices to the cost of sustaining deJ>t 
























86. Ou 


















The above table gives values of total debt, general price level, and physical production expressed in per- 
centages of 1920 values. Indexes for general price level and physical production are those compiled by the 
New York Federal Reserve Bank, adjusted to 1920=100. 

240 r- 

The above chart and the statistics disclose the Influence of production and prices on the 
burden of servicing debt. The debt strain is an index figure which is calculated by 
dividing the total debt index by the price level index and again dividing this quotient by 
the index of physical production. 



Neto capital issues in billions of dollars 



— 3. 6 

— 3.6 
__ 3. 6 
__ 4.3 

— 4.3 
_- 5. 6 

— 6.2 

— 6.3 

— 7.8 
-_ 8.1 
__ 10.2 

Year — Continued. 











— 7.0 



Source. The Commercial and Financial Chronicle. 

The flow of new capital investment hefo^re and during the depression 




7 - 




- 5 

1919 21 

23 25 27 29 


33 35 



This chart is based on statistics appearing above, which disclose the amount of new 
capital issues financed iu this country as reported by The Commercial and Financial 





273442— 41— No. 25 13 



Our present economic system has failed to function. It has failed 
to function several times in the past, but its behavior since 1929 makes 
it rather obvious that something basic is wrong with our economic 

Probably the most satisfactory method of study of a problem with 
as many variables as this one is to postulate a theory, and then check 
how close the behavior of various variables fits the theory and the facts. 

Thus we propose to postulate that the basic trouble of our system 
consists of dependence of production of consumer goods upon capital 
goods ("capital goods" shall mean such wealth as is used for purposes 
of production of goods or services with view of making profits) 

In other words, development of automobile industry has not only 
served the purpose of giving us automobiles but also enables many of 
us to have shoes, clothing, and food. 

Realization of this dependence of consumer goods production on 
production of capital goods has suggested policies leading to encour- 
agement of production of capital goods. 

We will show that quantitative consideration of data on the subject 
proves that it is impossible to solve the problem of production of 
consumer goods by stimulating production of capital goods. 

The only solution is to make possible production of consumer goods 
and capital goods as needed and independent of each other except 
Avhere technological dependence exists. 

As an example, the development of aviation and television industry 
is necessary in order to have more airplanes and more television sets, 
but there is no basic logical reason why we should develop these two 
industries in order to produce more shoes, shirts, or food. Also it is 
not necessary to build armaments, roads, bridges, or houses to have 
food, medical care, and clothing. 

We will endeavor further to show that breaking of this dependence 
of consumer goods production on production of capital goods can be 
achieved under a democratic political system and by retaining the 
basic features of capitalistic system. 

Once the capitalistic system is modified so that consumer goods pro- 
duction is not dependent on capital expansion, we at once open an 
unlimited market for goods, servicing of which is only limited by our 
resources and ability to produce. Under such conditions labor scarcity 
will result and most of our urgent economic problems become solved 
without economic planning or dictatorship. 

To evolve a true democracy under capitalistic system we must over- 
come one more fault of the system. We must stop the tendency of 
capitalistic system to concentrate capital wealth in a few hands. Of 
course, this phase involves "redistribution of wealth" through taxation, 
and is more of a social than economic problem. However, economic 
system must be such as to lend itself to necessary social control. 




For the purpose of this discussion the years 1850 to 1929 will be 
called normal, that is, a period during which the country was making 
economic progress with no tremendous amount of unemployment and 
only brief periods of depression. The capitalistic state is the economic 
state which existed in the pre-New Deal era with little Government 
interference and only a slight admixture of any system other than the 

Under this normally functioning capitalistic system we have made a 
tremendous economic progress as shown by available data (cliarts 

Chart 1. Our national wealth increased from seven billions in 1850 
to four hundred sixty billions in 1929, making a smooth progress by 
doubling itself ever^ 12 years. 

Chart 2. Our national income increased from seventeen billion in 
1900 to eighty-two billion in 1929, and the value of our manufactured 
products increased from 3.4 billions in 1869 to seventy billions in 1929, 
the rstte of growth in both cases being that of doubling every 12 years. 

Chart 3. Our yearly saving increased from two billion in 1909 to 
thirteen billion in 1929, again making a smooth progress of doubling 
every 6 years. 

Chart 4. Data for expansion of deposits in national banks show 
deposits of seven hundred million in 1870 and twenty-three billion in 
1930, making smooth progress of doubling itself every 12 years. 

Chart 5. Data for national capital growth are not available, al- 
though it would follow closely the growth of national wealth in rate. 
Increase in capital invested in manufacturing industries in the United 
States of America was from five hundred and thirty million in 1849 
to twenty -five thousand million in 1914, and capital invested in manu- 
facturing industries in the State of New York was one hundred mil- 
lion in 1849 and six thousand million in 1920, making a smooth prog- 
ress of doubling itself every 12 years. 

From the above it appears that the capitalistic system, functioning 
as it has from 1850 to 1930, or "normally," has caused our capital 
wealth to grow geometrically, or, in other words, double periodically 
(in our case roughly every 12 years). To fully realize the magni- 
tude of this rate of growth we may copipare it with a man's wages 
of $2 a day which are to be doubled ever;^ year: then he' would receive 
$1,024 a day after 10 years, over $1,000,000 a day after 20 years, and 
should he live to work 30 years he would receive over $1,000,000,000 
« day. 

The consideration of the statistical data proves a historical fact 
that normal functioning of capitalistic state resulted in geometric 
growth of our capital. By considering further the normal operation 
of the system we can see that this geometric rate of growth of capital 
must go on indefinitely if the system is to function normally. First 
we must be certain that we are familiar with some of the basic facts : 

(a) When the capitalistic system is functioning normally, national 
income rises and average family income rises. 

(b) As family income rises a larger proportion of income is 
diverted into savings. 

(c) When capitalistic system functions normally, savings are 
largely represented by capital goods. 

Chart I 



Billions of 
Dollars r 

800 - 
700 - 









Unlted States, 1850 to 1929 

K^ Actual Growth 

Growth to Double 
Every II '/z Yeors 


1870 1880 1890 1900 

National wealth in hUlions 







_ 88.5 
_ 107 
_ 186 
_ 320 
_ 460 

lKU9^°&1el*?tl6?Sooto% SSd from H. G. Moulton "Formation of Capi- 
tal." Brookings Institution, Washington, 1935, p. 187. 


Chabt II 


Billions of 

United States, Income 1900 to 1938,^ Manufactures 1869 to 1929^ 

80 - 
70 - 
60 - 




National Income 

Value of Manu- 
factured Products 


I860 1870 1880 1890 1900 1910 1920 1930 1940 

1 Maurice Leven, Harold G. Moulton, and Clark Warbufton, America's Capacity to Con- 
sume, Brookings Institution, 1934, p. 152. 

a Harold Loeb, The Chart of Plenty, Viking, New York, 1935, p. 180. 

Income in Mlliona 



__ 19. 1 
__ 32. 5 
__ 35.2 
.__ 48.2 



__ 70. 2 
_- 60. 6 
— 84.0 
__ 91. 9 

Value of manufactured products in Mllions 



__ 3.3 
_- 5.4 

— 9.4 

— 13.0 
__ 20. 7 





— 24.2 

— 62.2 

— 43.6 

— 60. 5 
__ 70. 4 


Chaet III 


1909 to 1929 

1905 '10 

'20 "25 '30 '35 

Saving in hillions 

— 2.0 
__ 2.3 
__ 3.0 
__ 3.9 




— 5. 7 
__ 6.6 
__ 7.3 

— 12.4 

Source : John M. Blair, Seeds of Destruction, Covici-Friede, New York, 1938, p. 171, 


Chabt IV 


Billions of 



United States, 1865 to 1929 








Deposits in Millions 




__ 3.6 
__ 7.3 
_- 17.1 

1930_^ 23. 3 

,ooK°'''^®%S*^°rJ^ ^' Moulton, Formation of Capital, Brookings Institution, Washington, 
Ivao, pp. 194—195. 


Chakt V 



Billions of 

80 - 
70 - 
40 - 



Years : 

Unlted Stotcs, 1849 to 1914 
State of New York, 1849 to 1919 

Average Rate of Growth 
Double Every 12 Years. 

State of 
New York 









For New York 

0.1 - 
0. 51- 

Capital in Hllions 

For United 

. 0. 53 

.-__ 1.0 

. 1,7 

. 2. 8 


Years : 

For New York For United 
State States 

1.65 9.8 

2.78 18.4 

. 22. 8 

6. 01 

Source : United States Bureau of the Census. 



{d) Capital investments, under normally functioning capitalistic 
system, must yield profit. 

(e) Making up depreciation and obsolescence is not profit. 

Taking all of the above we may summarize as follows: Capital 
wealth yields profit which, augmented by savings, yields more capital 
wealth. Then profit results from so increased capital to yield again 
more capital. In other words, we have compound profits. Mathe- 
matically, this means a geometric growth of capital wealth. Similar 
growth has occurred in other countries under normal functioning of 
the capitalistic system. An indication of this will be found in figures 
on rates of increase in production : ^ 



of years 
for pro- 
to double 



of years 
for pro- 
to double 

United States . . 






South Africa.- 


Canada . .- 



These are gain in terms of annual percentage increase in production 
as follows : 









of net 
value of 



of net 
value of 

United States America. 






United Kingdom 

South Africa 


Canada .. 





6. a 


Now we must consider by what mechanism the capital wealth has 
managed to expand at this rapid rate under normally functioning 
capitalistic system. We must get the concept that total national income 
is equal to total value of production. Thus there cannot be lack of 
purchasing power to buy all goods produced nor can there be over- 
production from point of view of lack of ability to buy. We can 
explain the above no better than by quoting from "America, Capacity 
to Consume," a Brookings Institution publication, page 137: "From 
the national standpoint, production and income are what may be 
called simultaneous equivalents. Production generates income and, 
measured in terms of money, the two are exactly equal ; the net value 
of the parts distributed as wages, salaries, profits, rents, interest, divi- 
dends, and such undivided profits as are retained in a corporate busi- 
ness. The national income may, therefore, be defined as the money 
equivalent of the goods and services produced within a given period 
of time, or, stated another way, the goods and services equivalent of 
purchasing power disbursed in process of production." 

Now we must get one more very fundamental and obvious concept. 
For goods and services to be created and consumed, two factors are 
essential : 

iJohn M. Blair, Seeds of Destruction, Covici-Friede, Ne.w York, 193)8, p. 13, 


(a) Purchasing power in the hands of potential buyer or consumer. 

(b) Need or desire must exist for those goods in the mind of the 
buyer or consumer who has the purchasing power. 

Now let us take hypothetical case 1 : Only consumer goods produced, 
purchasing power all among consumer group, no savings, no increase 
m reserves. 

Case 1 


Income Use 

Goods Use 

10 Units 



10 Units 




10 Units 



The result of this condition is obvious, but under a normally func- 
tioning capitalistic system could only arise at the depth of depression 
such as would be hard to conceive, and if every individual in the 
society received such meager income that he had to spend all for living 
expenses, or if he were to conserve some of it, would lend it to another 
to buy goods for consumption or for upkeep of his capital goods. 

Now, let us take hypothetical case 2 : 


Case 2 

Income Use 

Goods Use 

Old Industries 


20 Units 

20 Units 

Capital Goods 
20 Units 



80 Units 




80 Units 



80 Units 

This condition could arise only if no technical developments took 
place, and substantially all productive capacity were being utilized so 
that capital would be in the frame of mind to visualize eveh greater 
consumer goods demand. It could not arise if the production were 
at much less than capacity. There could be no profits if industry were 
operating at much less than capacity and on a competitive basis. With 
no profits and excess capacity, capital could not be induced to further 
expand such industries. If profits were being made in spite of exces- 
sive capacity, then a non-competitive condition would exist and exist- 
ing interests certainly would not still further overexpand their 

Case 3 


Income Use 

Goods Use 

New Industry 
5 Units 

15 Units 

Capital Goods 
5 Units 



50 Units 




40 Units 



40 Units 

Inventory Gain 
10 Units 



This represents a condition of going into a depression. Savings 
cannot be fully utilized in capital production. People who have these 
savings either have their consumer desires satisfied, or prefer security 
-derived from savings to additional consumer goods, or cannot use con- 
sumer goods at all (insurance companies' reserves). However, in spit« 
of the tact that capital cannot be invested in old industries, capital can 
and does find profitable employment in new industries and processes. 


Case 4 

Income Use 

Goods Use 

New Industries 


20 Units 

Savings 10 Units 



20 Units 



35 Units 




45 Units 



35 Units 

Inventory Loss 
10 Units 

This condition represents recovery period. Use is greater than pro- 
duction because reserves are being transferred to consumer and inven- 
tories are falling. 

Case 5 


Income Use 

Goods Use 

New Industries 
5 Units 

Savings 20 Units 

Capital Goods 
15 Units 

Old Industries 
10 Units 



80 Units 



80 Units 



85 Units 

Inventory Gain 
5 Units 

This represents a condition of prosperity. Tbs growth of new in- 
dustries is enough to cause a consumer goods demand which in turn 
causes demand for capital for further expansion of old industries. 
However, in the above diagram savings are greater than production of 
capital, and thus seeds for next depression are sown in form of result- 
ing consumer goods inventory gain. 

From the above diagrams we may note the following : 

(a) When production of capital goods is equal to savings, consumer 
purchasing power is equal to consumer goods production (cases 1 
and 2). 

(b) When production of capital goods is smaller than savings, over- 
production of consumer goods is the result (cases 3 and 5). 

(c) When production of capital goods is greater than savings, con- 
sumer goods demand becomes greater than consumer goods produc- 
tion (case 4). 

Also we may conclude that increase in capital wealth occurs because 
physical opportunities for it exist and not because purchasing power 
IS available for that purpose. On the other hand the consumer goods 


expansion occurs because purchasing power oecomes available for this 
purpose as the physical need for consumer goods growth always exists * 


In the previous section we have shown that for normal functioning 
of the capitalistic system it is necessary for our capital wealth to 
increase in geometric proportion. 

Thus development of capital wealth under the capitalistic system, 
like all things showing an ever increasing rate of growth, must 
finally grow to absurdity. This can happen in several ways: 

Absurdity 1. 

Capital wealth would -reach such rate of increase that no labor or 
materials would be available for consumer goods. Under those con- 
ditions there would be no reason for capital wealth increase. 

Ashsurdity 2. 

Capital wealth would reach such magnitude that we would run out 
of raw material and even land. 

Absurdity 3. 

In the section on formation of capital we have discussed the fact 
that new capital wealth will take the form of expansion of old indus- 
tries only- when these are operating practically at capacity, but will 
expand in the form of new industries at any time. As a matter of 
fact, old industries expand only under the stimulus of growth of new 
industries as already discussed. Certainly under present conditions 
capital expansion is only possible in new industries and services (rural 
electrification, new electrical appliances, new chemical products, air 
conditioning, new alloys, television, etc.) 

The capital wealth in 1929 was two hundred billion. If we pro- 
ceeded with normal operation of our system, in 1941 it would have 
been iowv hundred billion and in 1953 eight hundred billion. Total 
capital expansion since the World War amounted to one hundred 
billion. During that period we saw development of the automobile 
industry, petroleum industry, road building, talking pictures, radio, 
and the major part of the chemical industry. 

Now we are asking the engineer, chemist, and inventor to do twice 
as much in the' next 12 years. They can not do it ! And if they 
should, they must do twice as much again in the next 12 years, and 
so OH. They certainly cannot do it! Before this they would find 
that absurdities 1 and 2 would nullify their efforts. 

Thus it is absurdity number 3 which has brought us to the end of 
normal operation of the capitalistic system. The human mind can- 
not keep up with geometric growth of the capitalistic system. 


Conspicuous by its absence, as one of the necessary ingredients of 
production or distribution, is money. Money is basically only part of 
a complex accounting and bookkeeping system. The accounting 
methods used in the system are subject to change, and the various 

2 For sake of simplicity (which does not detract essentially from accuracy), the specu- 
lative price rises have not been considered. Under actual conditions in time of prosperity 
due to this factor, the savings are larger than capital wealth increase. 



proposals for rectifying the functioning of our capitalistic state in- 
clude proposals for change in accounting methods. Thus we are 
forced to discuss some of the instruments and methods of our account- 
ing system. 

(i) Currency. 

By currency we shall mean the paper money and coins that is any 
national legal tender. This type of money has been described as 
medium of exchange, but its function is more than that. 

{a) Currency type of money first of all is a measure of wealth ; it 
is a common denominator of all wealth ; it is a yardstick. 

(6) Currency is one of the mediums of exchange largely used for 
minor transactions; personal checks, personal notes, securities, and 
bonds are mediums of exchange in other transactions^ 

((?) Currency in itself is a form of credit. It enables the seller 
to receive his reward in goods or services at any future date. 

{d) Nationally, gold is only another commodity for which cur- 
rency is a common denominator. The main function of gold is its 
use as an international currency. The relative change in the two 
common denominators has some effect on our foreign trade. How- 
ever foreign trade plays a very unimportant economic part in a 
country which is practically self-sufficient. 

{2) Bank Deposits. 

Bank deposits are by far the largest source of our medium of 
exchange ; they serve as the basis of our system of payment by check. 
They are also the basis of our commercial credit system. Thus it is 
interesting to inquire just how they are formed. The commonly held 
idea that bank deposits grow through savings is not true. Let us 
consider the following tables : 

Table 1 




buys $700 










from other 








"A" sells 

the goods 


"B" and 

for $900 









"A" pays 
"B," "C," 
and "D" 
$100 each 






they save 





Bank Deposits Stay Constant at Total of $8,000 

From the above table we can see that regardless of whether deposi- 
tor3 lose, save, spend, or profit, the total deposits remain the same. 
Bank's capital can be considered as one of the depositors, and varia- 
tion of money in circulation under ordinary conditions is a small item. 
Therefore the above is not the mechanism of growth of bank deposits. 


Now let US consider table 2 : 

Table 2 


Deposits $12,000 












$4,000 from 

the Bank 












Deposits $16,000 

d o 

Deposits $16,000 

Bank $4,000 
Invests on 



from "D" 


I I 




-\ 1- 




"A" and 

"D" buy 

goods and 


from "B," 

"C," "E," 

"F," "Q." 


a S 
1-3 4^ 



-+ f-- 



-f h 




Thus, from these two gets of tables we can conclude that deposits 
grow from borrowings and investments and not from savings. 

Unfortunately this process is irreversible. We see that as a result 
of the transaction^ in table 2 the average size of the deposit increases 
and in practice the number of deposits would have increased also. 
Now, if we consider depositor "H" as bank's own account, the bank 
could stand $4,500 in depreciation of its securities and loans and after 
that it would become insolvent. 

Also we can gee that only a part of the value of deposits is repre- 
sented in cash. If we look back at table 1, it will be obvious that this 
matters little as far as ability of the depositors to withdraw. If no 
hoarding takes place, withdrawal for any purpose will cause reappear- 
ance of wiat amount as a deposit in some other account. 

Federal bond,s have exactly the same effect on the growth of bank 
deposits as any other form of investment. Thus, sale of Government 
bonds increases the bank deposits, increases the size of average bank 
account, or, in other words, certain of the depositors are very much 
richer, due to the outstanding national debts. 

(S) Federal Internal Debts. 

The subject of Federal internal debts has been more discussed than 
any other economic topic of our day, and probably no discussion has 
ever produced more muddled thinking. Federal debts are nothing 
more than a guaranty by the Federal Government that the bond- 
holders will have interest and principal on these bonds paid by the 
people of the couhtry. 

Furthermore, Federal bonds represent transfer of excess purchasing 
power from the purchasers of the bonds to the group which lacks pur- 
chasing power. 


Following table shows analyses of savings as function of income for 
year of 1929 : 

Table 8 

nonfarm families ' 

Income group 

Number of 




per family 

$0,000 to $5,000 - -- 

$5,000 to $10,000.-. 

$10,000 to $100,000. 

$100,000 to $250,000..- 

Over $250,000 


to 10,000 







2, 267, 000 
5, 004, 000 








15, 139, 000 


' From Maurice Leven, Harold G. Moulton, and Clark Warburton, America's Capacity to Consume 
Brookings Institution, Washington, 1934, pp. 260-261. 
' Farm families with income of o^er 10,000 in non-farm table. 

From the above table we can see that 2.3 percent of our families 
account for 68 percent of our national savings, and 90 percent ac- 
count for less than 10 percent under normal conditions. 

Let us now analyze how the various classes of population are 

(a) We will assume for the moment that the direct recipient of 
the Government expenditure is benefited, as he certainly is, in as far 
as he is saved from many physical and mental hardships. 

(b) We have a second class which is neither the direct recipient of 
Government spending nor directly or indirectly owns any appre- 
ciable amount of Government bonds. Ninety percent compose the 
first two groups, and since the first class is still a minority, the sec- 
ond class is a majority of our population. This class gains indi- 
rectly from Government spending through increased business activity 
and increase in jobs. However, this is the class which may con- 
ceivably be called upon to pay taxes in the future in excess of tem- 
porary present benefits. We will show shortly that this supposition 
is not based on facts and will never occur to any such degree as 
could be any problem to this class. 

(c) The third class are the bondholders or those who through 
their savings are indirect holders of these Federal Government bonds. 
This class is largely composed of the 2.3 percent who furnish 68 
percent of the savings. Now we can consider the situation of this 
class as bondholders from three points of view : 

What has this class lost or gained by buying these bonds ? 

What value have these bonds ? 

Can these bonds be redeemed by the Government ? 

When the normally functioning capitalistic system has reached the 
point where savings and profits could no longer find use for crea- 
tion of capital goods, these savings and profits remained in the only 
form possible, and that is the consumer goods. The existence of 
these profits and savings in the form of consumer goods is simply 


overproduction. A sufficient amount of Government bonds creates 
enough consumer demand to cause consumption of these surplus goods 
and prevents drop in price of these goods. This also prevents defla- 
tion of capital wealth by giving capital again an opportunity to 
operate at a profit. 

We have shown that when banks invest in bonds their deposits 
rise. Therefore, the average bank account rises. To summarize, this 
group has preserved its existing capital assets and acquired addi- 
tional reserves in form of Government bonds. 

It is obvious that real wealth has not been increased by the above 
transactions, and that although the gains so far shown are real, they 
are what may be called "technical." 

Now we must answer the question : Can these bonds be redeemed 
in real value? They can be redeemed in the only value that this 
group is interested in. Should it ever happen that the current profits 
and savings become insufficieiit for creation of capital goods needed, 
the Government is in a position to tax groups (a) and (b) to redeem 
the bonds and furnish the needed capital. This would amount to 
saying that so much of our resources were being used for production 
of consumer goods that taxation of consumer goods was necessary^ 
to make these resources available for capital expansion. 

Since such rate of growth is very unlikely ever to occur, the only 
way the Government issues can be kept from growing indefinitely is 
by taxation of the very group which is buying the bonds. 

(d) Now we shall consider the Government. Can the Government 
go "broke" by borrowing from its own people? Since .s shown by 
our analysis, the various groups of the population will not go "broke," 
the Government cannot go "broke" either. 

The Government bonds are not only expense to the Government 
but also a source of income. This income may very readily be greater 
than the amount of interest paid : 

A. We have shown that national savings increase by the amount 
of Government borrowing. These savings are part of increased in- 
come of the higher income groups and subject to high income tax. 
Thus the amount received by the Government is appreciably greater 
than the face value of the bonds. 

B. As the direct beneficiaries of Government spending dispose of 
their benefits, these are subject to consumer taxes, and profit from transactions is subject to income tax. 

C. Since the Government bonds become additional savings, the 
average size of individual estates is increased in value. These addi- 
tional savings are a continuous source of income to the Government, 
especially since they are largely part of the savings of the higher- 
income groups. These additional savings produce extra income to 
the Government through additional inheritance and gift-tax 
receipts. Also, as these savings change hands through being spent, 
they are, in the process of change, part of the income of the new 
recipient of these savings and are subject to the income tax. 

(4) Taxes. 

Two kinds of taxes are in existence : Consumer taxes and taxes on 
savings or capital. 

The first includes all "consumer" taxes such as sales tax, cigarette, 
liquor, amusement, gasoline taxes, etc. For our purposes we should 



also include in this group all taxes which are easily passed on to 
consumer such as taxes on pay roll, processing, corporation, real 
estate, etc. 

In the second group we may include personal income tax, gift tax, 
and inheritance tax. 

The first group of taxes serves the purpose of cutting down the 
production of consumer goods. 

The second group of taxes cuts down the amount of savings and 
makes less available for capital expansion. 

The kind of taxes which should be in effect depends on whether 
the need is for capital goods or for the consumer goods. Of course, 
if need exists for both and the Government expenditures are neces- 
sarily large, as in case of war, it may be necessary to tax by all avail- 
able methods. 

Under present conditions when there is a lack of consumer pur- 
chasing power and Government is resorting to subsidization of the 
consumer goods demand, the consumer taxes are harmful, the Gov- 
ernment kills a part of consumer purchasing power with these taxes, 
thus increasing unemployment and then returns the taxes to the con- 
sumer through the channel of relieving the unemployment it caused. 

(5) Savings. 
Reward for economic contributions is paid by society in two forms : 

(1) Payment with goods and services. 

(2) Promise to pay with goods and services at some future date. 

The second method of payment results in savings. Thus savings 
represent a purchasing power to be used to satisfy needs which may 
arise in the future. 

To clarify this point, let us take a case of an individual receiving 
$1,000 for his services. He spends $900 and saves $100. Thte hundred 
dollars saved becomes part of reserves of this individual for the 
purpose of giving him security. Some time in the future this indi- 
vidual expects to be able to receive for these savings food, clothing, 
or perhaps a trip to some vacation land. Thus his savings from the 
point of view of the rest of society are something it owes him. From 
the point of view of the rest of society these savings are a debt. 

The ideal savings possess the following characteristics : 

(1) They are non-perishable. 

(2) They are negotiable. 

(3) They yield a return. 

Actually savings can take following forms : 

(1) Currency. 

(2) Capital goods: 

Ut) Direct ownership. 
(b) Stocks and bonds. 

(3) Loans: 

(a) Notes. 

(h) Mortgages. 

(<?) Government bonds. 

(4) Bank deposits. 

(5) Consumer goods. 


Bank deposits are indirect ownership of the other forms of savings. 

Consumer goods are least desirable form of savings and are used 
for this purpose when other forms are not available. Another time 
when savings take the form of consumer goods is when, due to de- 
pression, producer of consumer goods finds himself without a suitable 
market for such goods. 

The most desirable form of savings are Federal Government bonds. 
We have already fully discussed characteristics of these. 


The analj'sis presented leads us to some of the obvious objectives 
which must be reached if we are to continue economic progress on a 
permanent basis under a democratic political system. 

(a) The ability to utilize the existing productive capacity must not 
be allowed to remain dependent on further capital expansion, but 
must be governed by consumer needs. 

(b) The reserves or savings produced by government and other 
indebtedness must give security to all and not be allowed to accumulate 
in a few hands. To preserve the democratic political system as well 
as the capitalistic economic system, our methods of attaining the 
objectives must — 

(a) Preserve profit as an incentive for practically all of our 

economic activities. 
(h) Provide necessary amount of security in form of reserves for 

our business and personal life. 

(c) Base such regulation as is necessary on law, and not on judi- 

cial powers delegated to executive bodies. 

(d) Provide for a stable economic system capable of a balanced 


Any modifications of our present system which will conform to 
general rules outlined will accomplish the purpose of giving us a 
capitalistic system workable under a democracy. 

However, to prove that the task is capable of achievement, and, to 
put the discussion on a concrete basis we will make specific recom- 

(i) Taxes. 
The purpose of taxes should be two-fold. 

(a) The taxes should defray the cost of the necessary government 

(b) The taxes should prevent our capital wealth — wealth which will 
in all probability greatly increase — from concentrating in a few hands. 
By the latter we do not mean to prevent creation of millionaires, but 
to prevent a creation of a group comparable to Indian Maharajas. 

Since we are especially concerned with promoting consumjer pur- 
chasing power, all taxes on consumer goods and all taxes which might 
be passed on to the consumer must be eliminated. Thus, the only taxes 
that should be allowed to remain are : 

(a) Income taxes without loopholes, and which would not exempt 
securities of any kind. 

(b) Inheritance taxes without loo]pholes. 


If the unforeseen should happen, and it should become necessary ta 
expand capital goods at the expense of consumer goods we recommend 
but-one consumer tax — a sales tax. Other taxes, such as liquor, to- 
bacco, gambling and racing taxes, may have some social value, but 
no economic value. However, such other taxes as taxes on undistrib- 
uted corporation profits and gift taxes may be necessary in order to 
make impossible the avoidance of payment of income and inheritance 

Since all local taxes are directly or indirectly consumer taxes, they 
should be eliminated. To preserve local self government, without 
local consumer taxes, part of Federal tax revenue should be allotted 
to local government agencies on a basis of population and capital 

{2) Savings. 

The inevitable drop in the rate of growth of capital wealth, caused 
a lack of private investments for savings. The Government is forced 
to maintain outstanding bonds to provide the necessary investments 
in order to prevent these savings from taking the form of consumer 

As already discussed in section on "Capital Formation," lack of in- 
vestments will automatically limit savings to the amount of invest- 
ments available through curtailment of consumer goods production. 

To avoid such condition we should — 

(1) Provide necessary investments through use of Federal bonds. 

(2) Limit amount of savings through — 

(a) Taxation, 

(b) Substituting wherever possible msurance for sav- 
'^ ings to provide security.. 

To accomplish the first pait, we recommend a legal limit on unin- 
vested bank funds. Idle bank funds in excess of the legal limit to be 
deposited only with a Federal central bank whose investments should 
consist of low interest bearing Federal bonds. 

To limit the amounts of reserves necessary, we should make use of 
all possible insurance on a national scale. By reinsuring with the 
Government the contracts written by private insurance companies, 
the insurance business could be placed practically on a pay-as-you-go 
.policy with elimination of the present huge insurance reserves. Of 
course, this would involve Federal guaranty of contracts. 

Such insurance as old age pensions, unemployment insurance, and 
other forms of Government insurance should be put on a pay-as- 
you-go basis, since in such cases there is no way of Government main- 
taining any real reserve, as has already been discovered, 
■ The private corporation reserves to be considered legally as reserves 
for depreciation of obsolescence, unforeseen losses, bad debts, or ex- 
pansion should be allowed only in the form of non-interest-bearing 
Federal bonds. Cash i-eserves should be limited. 

(3) Maintahmig Consuiner Purchasing Potcer. 

The taxes suggested transfer the purchasing power to the Govern- 
. ment from a group which has excess of it. Deposit with the Govern- 
ment of the reserves, as suggested, loans to the Government a 
purchasing power which is not needed by the depositor at the moment. 


In the past the Government transferred such acquired purchasing 
power to the consumer through public works construction, soldiers^ 
bonuses, C. C. C. camps, W. P. A. projects, "regular" Governrneht 
expenditures, etc. 

This method of distributing purchasing power has -«t least two 
serious faults: 

(a) It keeps people on relief. 

(h) It does not result in production of goods most desired or needed: 

Consumer taxes under present conditions mean only so much more 
consumer purchasing power to be distributed through this unnatural 

There are at least two methods of transferring Government acquired 
purchasing power to consumer which would keep business moving in 
natural channels: 

(a) By distributing Government income directly in form of gradu- 
ated income bonus. Lower increments of income getting higher per- 
centage bonus and higher increments of income getting lower percent- 
age bonus. The total bonus, however, being larger, the larger the 
income. In other words, this plan would be a profit sharing on a 
national scale, unusable income being divided among all on the basis 
of higher percentage bonuses going to low income groups. 

(b) By distributing Government income by subsidizing business. 
Distribution of Government income by this method would result in 
lower prices to consumer. 

The first method, in our opinion, is more in keeping with principles 
underlying our present system and is more direct in its mechanism. 

(4) Gavermment Debt. 

The national debt should be considered to serve only one purpose, to 
provide additional liquid reserves for individuals and corporations, 
and its size should be governed by the needs for such a reserve. 

Fluctuations in the size of debt can only serve one other function, 
and that is of correcting a wrong estimate of tax receipts. 

{5) Balanced Budget. 

Once reserves in the form of Government bonds become sufficient to 
provide reasonable security to private capital as well as personal 
security, income and inheritance taxes must be depended upon to 
prevent further growth of these reserves. 

To make balancing of the Federal Budget possible, two conditions 
must be fulfilled. 

(a) Federal bonds must not be exempt from income, gift, or in- 
heritance taxes. 

(6) Total taxes collected directly or indirectly from such bonds 
must be more than interest paid on these bonds. 

We have already pointed out that outstanding Federal debt increases 
the individual wealth, and thus is a source of Federal income through 
taxation. Furthermore, if successive increments of income are taxed 
at higher rate, each successive bond issue yields more in taxes. 

Thus we can see that as the Federal debt increases we approach 
equilibrium between tax receipts from the national debt and the Gov- 
ernment expenses in excess of other tax receipts. 

The lower the interest rate and the higher the rate of taxation, the 
sooner this equilibrium is reached. 



(6) Fvmctional Check. 

For purposes of comparing the functioning of "normal" capitalistic 
system and the proposed modified form, let us consider a state of affairs 
at some time in the future with the following figures : 

National income, one hundred billion. 

Capital wealth, two hundred fifty billion. 

New industries being developed at a rate of six billion. 

Old industries expanding at a rate of four billion. 

Depreciation and obsolescence at a rate of twelve billion. 
Now, let us look at table 4 and consider what would happen under 
"normally" functioning capitalistic system. 


Source of 


Change in 




10 Billion 


Dividends and 
15 Billion 

20 Billion 

Capital Goods 
22 Billion 

12 Billion 


68 Billion 

Upkeep of Old 
12 Billion 

12 Billion 


68 Billion 


78 Billion 

Salaries and 

73 Billion 

Infentory Rise 
10 Billion 

With national income being one hundred billion, it would not be 
unreasonable to expect savings of twenty billion (we saved fifteen bil- 
lion out of eighty in 1929). Thus only sixty -eight billion of con- 
sumer purchasing power is left to buy seventy-eight billion of con- 
sumer goods, leaving over-production of ten billion. Of course, 
curtailment of production would follow with accompanying unem- 
pJoyment, etc. 

We have now a condition represented by table 5. Production and 
income fell from one hundred billion to seventy-five billion, but 
even under these conditions unused depreciation reserves, interest, 
dividends, and savings from consumer group might result in total 
savings of fifteen billion. This would result in consumer purchasing 
power of fifty billion to consume sixty, billion of consumer goods, 
leaving additional over-production of ten billion. 


Source of 

Table 5 

Change in 




New Industries 
5 Billion 

— p — > 

Dividends and 
10 Billion 

15 Billion 

■ » 

Capital Goods 
15 Billion 

Upkeep of Old 
10 Billion 

10 Billion 


50 Billion 

12 Billion 


50 BUlion 


60 Billion 

Salaries and 


53 Billion 

Rise in 
10 Billion 



Now let us consider operation of th,e proposed modified capitalistic 
system under the same conditions. 

Table 6 represents a condition where receipts from income, ^ift, 
and inheritance taxes are 10 billion. We will assume that distribu- 
tion of that amount of purchasing power from primarily high income 
groups to primarily low income groups will be-just enough to furnish 
the consumer purchasing power to consume all consumer goods. 
Table 6 is now self-explanatory, we enter next period with no rise 
in inventories and slightly larger capacity for further production. 


Source o[ In- 

Table 6 

Change in 




10 Billion 

Dividend and 
15 Billion 


10 Billion 

Capital Goods 
22 Billion 


12 Billion 


7S Billion 

Upkeep Of Old 
12 Billion 

12 Billion 

10 Billion 



78 Billion 




Goods and 


78 Billion 

Salaries and 


73 Billion 

Table 7 assumes taxes of five billion when used to distribute 
purchasing power are insufiicient and fivA billion of bonds are sold 
to provide additional purchasing power. 


Source of In- 

Table 7 


Change jn 




Capital Ex- 
10 Billion 

Dividends and 
IS Billion 

15 Billion 

Capital Goods 
22 Billion 


5 Billion 

12 Billion 

5 BLMon 

Upkeep of Old 
12 Billion 

12 Billion 





78 Billion 

^ \l 


78 Billion 


78 Billion 


5 Billion 

Salaries and 


73 Billion 

— "T 

Table 8 assumes taxes of fifteen billion which are in excess of 
amount needed to maintain consumer purchasing power, and Gov- 
ernment is able to retire five billion of Federal bonds. 



Table 8 


Source of 

Change in 


Pow er 




10 Billion 

Dividends and 
15 Billion 


5 -Billion 

5 Billion 


12 Billion 

Upkeep of Old 
12 Billion 

12 Billion 





22 Billion 


78 Billion 




78 Billion 

Salaries and ■ 
73 Billion ' 

<y^ \ 


78 Billion 

Table 9 indicates a condition where excessive fifteen billion tax is 
distributed to consumer which results in reduction of inventory of 
consumer goods by five billion. Of course, if such policy is con- 
tinued inflation would result. 


Source of 

Table 9 

Change in 




10 Billion 

Dividends and 
15 Billion 

— >k. 

10 Billion 



22 Billion 

15 Billion 



12 Billion 

Upkeep of Old 
12 Billion 

12 Billion 



83 Billion 

With Loss of 

5 Billion of 





83 Billion 


78 Billion 

Salaries and 


73 Billion 


The consideration of above tables indicates again that under "nor- 
mal" capitalistic system we cannot maintain production consisting 
largely of consumer goods. Under proposed modified capitalistic 
system, production consisting largely of consumer goods can be main- 
tained and a large degree of flexibility exists in the control 

The figures we have used in this discussion are for purposes of 
illustrating, but we have tried to keep them at least of right order 
of magnitude. This brings up the point that if we are really to 
control our economic behavior we must begin to think in much larger 
amounts than w^e have up to now. 

(7) E-ffect on Various Groups. 

, (a) Wage and salary group.— The wage earner and salary group 
would obviously benefit by modification proposed through high real 
wages, abundance of work and labor scarcity. 

(b) Farm group. r-Fsim\ group would benefit through better de- 
mand, especially for the higher priced agricultural products. Also 
undoubtedly the transfer of agricultural labor would occur on 
account of scarcity of labor in industrial fields. 


(c) Management group. — Management will be able to devote itself 
to its logical function of providing quantity and quality. Under 
proposed modified capitalistic system, management will still have 
to fight to show all profit possible, but it would have a small chanc". 
of showing losses. 

(d) High inccyme group. — High income group would have the bene- 
fit ot capital security, high social position, and high income moder- 
ated by high income taxes. However, this group Avill not become a 
closed self j)erpetuating group. High inheritanc€ taxes will keep 
each succeeding generation fighting to prevent slipping out of the 
group and give a chance for new entries into the group. 

{e) Goveimment. — The proposed modified capitalistic system 
simplifies the operation and functioning of the Government. It is 
simple enough to be controlled by law and therefore capable of being 
operated under a democracy. Furthermore, it is a stable system 
capable of a balanced Federal budget. 

8. Putting the Proposed System, in Operation. 

In order to put the proposed modified capitalistic system into 
operation, it is not necessary to change everything at once. As each 
feature is put into operation, additional benefits will occur, but one 
feature at a time can be adopted. 

{a) We can begin by dropping direct and indirect consumer taxes, 
also make Federal funds available to local governments to eliminate 
local consumer taxes. This action would reduce the drain on con- 
sumer purchasing .powder reduce amount of relief needed, reduce the 
size of Government budgets, but will leave defiicits unchanged. 

(6) We can eliminate leaks in the collection of inheritance and 
gift taxes and thus balance the Government budget and prevent 
dangerous growth of personal money power. 

(c) We can begin ta redistribute purchasing power through bonuses 
on incomes, with higher percentage bonus going to lower incomes, 
and eliminate Government relief and unemployment. 

{d) We can reduce various reserves by re-insurance on National 
scale with Federal Government guarantee and reduce our national 


To summarize the main points : 

A. Normal Capitalistic System. 

(1) The functioning of normal capitalistic system includes a fatal 
prerequisite that capital wealth must double every 12 years. 

(2) This leads normal capitalistic system to maldistribution of 
purchasing power. 

(3) This fault leads to break down of the system through — 

{a) Unemployment. 
{h) Overproduction, 
(c) Underconsumption. 

B. Modified Capitalistic System. 

The modified capitalistic system can rectify this fault by the follow- 
ing changes being made in our present system : 

(1) Limiting accumulations of purchasing power by high income 
groups through income, gift, and inheritance taxes. 


(2) Elimination of direct consumer taxes and taxes which can be 
easily passed on to consumer. 

f3) Elimination of unnecessary insurance reserves. 

(4) Direct re-distribution of purchasing power through national 
bonus system with high percentage bonus going to low income group. 

The advantages to be gained are — 

(1) Benefit to all groups — wage earner, farmer, management, capi- 
tal, government. 

(2) Capitalistic system with its individualism and profit incentive 
will be preserved. 

(3^ Political democracy is capable of handling the system. 

(4) Economic functions of the Government will be simplified. 

(5) Unemployment will be eliminated. 

(6) National Budget will be balanced. 

(7) Modifications are capable of gradual adoption. 

It is of interest to analyze various proposals for modification of our 
system from the point of view of the theories discussed. 


There are still many people who feel that if we returned to what we 
called "normal" capitalistic state, we would resume the progress we 
were making up to 1929. As we have shown, this plan requires such 
rapid and continued expansion of capital goods that it now seems un- 
believable that it could have continued until 1929, but it is not possible 
to say that it could not be resumed for another few years. 

However, we must realize that nothing has been done since 1929, to 
prevent resumption of capital expansion. Certainly all technical eco- 
nomic factors necessary for such expansion were never more abundant. 
The only reason we have not seen this expansion take place is because 
the country at the moment is in need of consumer goods and in little 
need of new capital goods, and it is highly improbable that it will again 
need capital goods at any such rate as a normally functioning capi- 
talistic state must produce. 

The only other point that has been raised is the question of con- 
fidence and encouragement of capital. 


The argument is being advanced that capital needs confidence to go 
on with capital expansion to pull us out of depression. We have 
already discussed the facts which prove the fallacy of this argument. 

(a) Capital will not expand facilities which are already too great 
for present consumer demand. 

(b) It is a physical and mental impossibility to continue to absorb 
sufficiently large amounts of capital by creating new industries. We 
estimated that $100,000,000,000 worth of these would have to be created 
in the next 12 years to keep the system functioning. 

From a psychological point of view one thing that builds up a busi- 
nessman's confidence is orders, and one thing that kills it is lack of 
orders. Orders will have to start where need for goods exists, with the 
consumer goods. 

Nineteen hundred and thirty-six election results certainly could not 
be interpreted as victory for a group looking for recovery through re- 


turn of confidence. But through Government spending consumer de- 
mand began to tax our productive capacity and "capital" showed its 
confidence in the future by overtaxing the capacity of our capital 
goods producing industries. 

Nineteen hundred and thirty-eight election results showed that the 
"New Deal" was not as firmly entrenched as was believed. However, 
despite optimistic reports from the^confidence" group, when consumer 
confidence in the future by overtaxing the capacity of our capital-goods 
became discouraged. 

Confidence may enable a man to jump a 6 foot fence, but no amount 
of confidence will enable him to jump a 2 story building, and that is 
about what we are asking capital to do through confidence. 


The theory of recovery through "pump priming" is based on the idea 
that if we can bring consumer demand to the point where further capi- 
tal expansion becomes necessary, the capitalistic system will resume the 
forward march as before depression. 

However, as we have shown earlier the forward march can only be 
sustained as long as capital growth proceeds in geometric progression 
and that cannot be continued indefinitely. This is just what happened 
in 1937. When pump priming stopped, recovery stopped. 


Inflation or rapidly rising prices can be caused only by having both 
the purchasing power and the need for goods greater than the supply 
of goods. 

There is greater need for consumer goods than the existing supply, 
but the purchasing power, available for these goods, is insufl&cient. 

If the purchasing power for consumer goods were increased above 
the available supply, inflation would occur. It does not matter how 
this condition is produced. Printing of money and its distribution to 
consumer, or Government spending based on Government borrowing, 
are equally effective.- However, Government debt is a record of past 
spending and has nothing to do with inflation, since the resulting 
reserves are not in the hands of the consumer goods buyer. 

In the case of capital goods, sufficient reserves have been built up 
to cause inflation, if the second factor, that of need for enormous 
amounts of capital goods, were present. Thus it is obvious that it is 
impossible to cause inflation by further increasing the purchasing 
power for capital goods. 

Since it is impossible for us to produce enough consumer goods to 
satisfy consumer demand,^ inflation could be caused by increasing the 
purchasing power of the consumer. We must realize, however, that 
if consumer purchasing power is increased through Government 
spending, only for a period, it will drop as soon as spending stops. 
Consumer purchasing power will dissipate itself through spending 
unless the source of this buying power is continuous. 

Thus, if controlled inflation is to be achieved, continuous Govern- 
ment spending is iiecessary. The money spent in keeping up the 

3 Edwin G. Nourse, America's Capacity to Produce, Brookings Institution, Washington, 


condition of controlled inflation will pile up as idle capital, creating a 
small tremendously wealthy group which will again make existence 
of democracy unlikely. 


High real wages, of course, mean high standard of living, and how 
to achieve them is what we are trj'ing to discover. 

A. Rise in monetary wages produces beneficial economic effect only 
for a brief period because — 

(1) It temporarily increases consumer purchasing power on 

account of ability to buy goods produced at lower wage 
level with new and higlier wages. 

(2) It causes a flurry of speculative buying in expectation of rise 
in prices. 


Shorter working hours do not affect the basic trouble of maldis- 
tribution of purchasing power, although they may correct the social 
evil of working more hours than is healthy. For a moment shortening 
of the working hours may cause a speculative rise in production, due 
to rise in costs of production. Excessively short hours do definitely 
limit the capacity to produce. 


"New Deal," besides being responsible for some excellent social re- 
forms, has managed to keep us economically afloat. In view of the 
difficulties and lack of precedent for solving the problems encountered. 
we believe much credit is due to the "New Deal" group for the ground 
work laid toward building of a sounder economic system. 







Sterne Morse 

Olir present economic system operates with profit, or the hope of it, 
as a motive power and other toay. Economic Surpluses ^ ^ 
poison and clog its action. It tends to slow up when they are present 
because such a Surplus makes the most profitable operation impossi- 
ble. In self defense, the system endeavors to neutralize or destroy 
them. In general, such a possible Surplus of a commodity is con- 
verted into a real surplus of labor. But technological advance in- 
creasingly tends to produce such Surpluses. The only present 
remedy, which the system has, is to throw out of function sufficient 
of the productive equipment and labor which is available to rees- 
tablish the scarcity potential on which it works. 

A nation at war, or with a war like economy, has what may be 
termed a two-component economy — one, the ordinary private econ- 
omy, the second the purchasing of the Government. Since there are 
never enough materials to fight a great war actively, all surpluses 
are at once removed by Government purchasing. The Government 
always, in one way or another, sets up sufficient purchasing power 
so that it is able to purchase all available war materials and all 
services necessary for the prosecution of the war. All these are 
completely removed from the private market and consequently can- 
not compete in the latter for the available purchasing power in it. 
No clogging of the productive mechanism can therefore occur from 
the existence of economic Surpluses. In view of the great destruc- 
tion of wealth in war, it has always been a puzzle to economists that 
more discomfort of the people has not occurred, at least where a 
blockade was not present. This was notably the case in the United 
States and in England ^ during the "World War. 

As regards the physical production of such an economy it is always 
very large. The physical production of Germany, according to 
League of Nations statistics, has been some 130 percent of her 1929 
production for the last 3 years or more; that of the democracies in 
the same period has been of the order of 80 percent of their 1929 
production. The ratio is 5 to 3. 

As a schematic description, it is proposed that a two-component 
economy be constituted of this general type. In it will appear our 
private economy as it now is, together with a second economy or 
market, noncompetitive with the private economy. In this second 

1 Terms used in special senses are capitalized as a reminder of the fact throughout 
this paper. 

^ Economic Surplus, that portion of a possible production, which if produced, will force 
the price below tlie point of maximization of profit. 

'Sir Arthur Salter. Security, and can we regain it? Reynal and Hitchcock, New 
York, August 1939, pp. 58-59. 



economy the function of the central organism will be reversed. 
Instead of being the only consumer, it will be the only producer. 
For thisi purpose we propose to set up a Government owned corpora- 
tion which we shall call the Surplus, for the purpose of taking over 
all production, beyond that capable of being carried out by the 
private economy, that is, all production; which would otherwise* 
constitute! an Economic Surplus.* Such production would be sold 
to consumers for a special form of purchasing power, additional 
to the purchasing power developed in the private economy, although 
our present money would be the only currency ; the money purchas- 
ing power could only purchase goodsi produced in the private 
economy. Notwithstanding these limitations all production would 
be in the present plants, under the present supervision, with the 
present organization and skills, both for production and distribution. 
The Surplus would supply all the direct factors of production, mate- 
rials, labor, power, and the like, for that portion of the production 
which could not be produced under the private economy. It would 
have an equivalent equity in the product. For example, if the private 
owners of a factory did not have private orders for the production of 
more than 80 percent of their possible production of a commodity, 
they would have orders in the Surplus Ecoijomy for an additional 
amount, perhaps for the remaining possible 20 percent,^ If so, they 
could look to the Surplus to supply 20 percent of the materials for 
the manufacture, they paying for the other 80 percent. They would 
pay their labor force 80 percent of the pay roll, the Surplus paying 
the other 20 percent, not however in money. The Surplus would have 
an equity of 20 percent in the product. 

Such operation, while giving the private operators of the business 
a better situation than that which they now have, in that today, 
when business decreases, direct expenses generally cannot be pro- 
portionately decreased, and pei-mitting an organization to be kept 
together and the costs of labor turn-over to be kept at a minimum, 
would be very profitable to the Surplus, as profits are apt to in- 
crease faster than production, as maximum practical production is 

In order, however, to prevent competition of the products pro- 
duced by it with those produced by private industry, the Surplus 
would nol sell its products for money, but for a special form of 
instrument, constituting a general claim on goods produced by the 
Surplus, measured by their retail value in dollars. It would pay 
its salaries and wages in these claims, which we shall call Surplus 
Credits. Goods produced by the Surplus Avould have a retail value 
much larger than the amount of salaries and wages paid in Surplus 
Credits in their production and distribution. Accordingly, a series 
of Distributions of Surplus Credits would be made, sufficient to 
insure that sufficient jnirchashig power would exist to absorb the 
goods produced hy the Surplm. Surplus Credits could be set up to 
the credit of individuals, corporations not for profit, and Government 
bodies, but not for partnerships or for other corporations. 

* Capitalization of a term in this paper denotes a restricted or special meaning as 
herein defined. 

''Total production would not be set or guaranteed by the Surplus, but would depend on 
orders as today, but orders partially in the Surplus Economy. See below. 


A retail store would sell its goods for money as now but would 
be ready to return to a customer what we shall call Discount Stamps, 
to any amount desired by the customer, a small fee in money, perhaps 
5 percent, being charged for them. 

The only way in which a possessor of Surplus Credits could realize 
on them would be by turning in Discount Stamps^. to the authority 
which cared for his Surplus Credit account, which might be his bank, 
employer, or an office of the Surplus. When so turned in, he would 
receive an equal amount of money, and this amount would be debited 
against the account. He could only receive money in this way up to 
the value of his account. 

In general, all goods possessed by any firm would be subject to a 
lien, this lien representing the equity of the Surplus in them. As 
regards a given firm, this lien would consist of two portions, a lien 
on the goods and services purchased by the firm, corresponding to 
the equity of the Surplus therein, and secondly an additional lien, 
due to the services contributed by the Surplus in the course of the 
operations of the firm. We shall call the formal evidence of the first 
a Goods Memorandum, and the formal evidence of the second, a 
Sei-vice Memorandum. The second would be an acknowledgment of 
obligation to the Surplus, in dollars, but without maturity or interest, 
being on exactly the basis of a bank or government currency note. 
Looked oil as currency it would have the particular character of a 
check, and like a check would not be legal tender. If accepted by 
the bank of the maker, it would be accepted by the bank as the agent 
of the Surplus. Formally such action by the bank would set up 
an obligation of the maker to the bank and a corresponding obli- 
gation of the bank to the Surplus. Since such an obligation on each 
side would be without maturity, the liabilities under a number of 
them could be totalled and transferred, exactly as in the case of a 
bank currency. A Goods Memorandum would be in form an assump- 
tion of such a liability. It would in theory be an assumption by 
the buyer of a good or service of the entire liability of the seller 
to the Surplus, incurred in the production of the good or service. 
If the seller had bought raw materials he would usually have assumed 
a certain liability of the seller of the raw materials. This would 
have been totalled with whatever Service Memoranda he had made 
out in the course of the production of his product. The buyers of 
the goods would assume this liability in toto. Actually the situa- 
tion would be precisely that existing in the -production of goods 
today, in that the seller of goods or services totals his costs and 
expects to sell for at least the total of such costs. Under the pro- 
posed system his costs would be divided into two portions, his money 
costs and his Memorandum costs, which would be initiated and would 
remain separate. We thus obtain the necessary element of noncom- 
petition between the two portions of our economy. 

The amount of Service Memoranda which would be executed by 
a firm would belhat portion of the Service Revenue ^ of a firm which 

• Durinsr the period of initiation of the plan until all retailers were a part of it. the 
percent of stami^s being returned vould probably be limited to the amount which would 
give retailers usin^ the plan a' decisive competitive advantase over those who did not. 

' The term "service revenue" here means the diflference between the costs of good, and 
services bought from other firms, and the amount received for goods and services ren- 
dered to all customers, plus the net addition to inventory. It is therefore substantially 
the "value added by manufacture" in the case of a manufacturer, the mark up in the 
case of a trading firm. 

273442— 41— No. 25 15 


would accrue to the Surplus. In theory it would be that portion of 
the Service Revenue of the firm to which the Surplus would 'be 
entitled by reason of its silent partnership in the business of the firm 
and to which it would be thus entitled on account of the underwriting 
by it of a portion of certain costs of production. The relation which 
Service Memoranda bore to total Service Revenue would determine 
the proportion to which the firm could expect the Surplus to under- 
take the payment of its salaries and wages. If a manufacturer, for 
example, in a given accounting period, sold goods in which the 
value added by manufacture was $100,000, his salaries and wages in 
the interval might be. $55,000, an average figure for the last Census 
of Manufactures. If now he executed a Service Memorandum for 
$20,000, 20 percent of the "value added," he would be entitled to 
discount his salaries and wages $11,000, 20 percent of $55,000. He 
would also be under no cost for 20 percent of his costs for physical 
depreciation, depletion, taxes insurance, and a few other costs. 

It may be asked why he should sign an obligation for $20,000, in 
order to obtain these advantages. The answer is that he actually 
receives orders, not for goods to the value of the total sale value of 
the goods delivered, but to some less value. If, for example, in the 
above case, his material costs had been $40,000, and he had given 
$10,000 in Goods Memoranda in part payment for them, selling ac- 
cordingly for a total of $140,000 of which $30,000 was in Goods 
Memoranda, he actually only received orders for $110,000 worth of 
goods, the Surplus really receiving the order for the other $30,000 
worth. Orders which he receives, owing to the division of consumer 
purchasing power between money and Surplus Credits, will always 
be specific in the amounts ordered in the two portions of the total 
economy, as regards amounts of each. If the purchasing power in 
a certain town, available to buy consumers' goods is divided 80 per- 
cent and 20 percent, the retailers will be asked on the average for 
Discount Stamps to an amount, 20 percent of the total retail value 
of the goods purchased. This will be greater than the wholesale 
value of the same goods to the extent of the retailers' total mark up,, 
or nearly so. As we have seen, this is their Service Revenue. 

It is planned that the only way in which retailers may obtain 
Discount Stamps will be for them to pay off their Mernorandum 
accOimts in money. These accounts will amount to the sum total 
of their Goods and Service Memoranda. They will obtain this 
money, of |COurse, from the money paid by their customers for goods 
really owned by the Surplus. 

It will be observed that these Memoranda accounts will have much 
the characteristics of money balances, but with a reversed credit. It 
will also be seen that it will be necessary at each stage of commerce, 
that a seller preserve an adequate Memorandum account, just as today 
a buyer is required to preserve adequate money balances to buy the 
goods which he may require. As far as he could, an operator would 
endeavor to buy with as much Memorandum and as little money as 
possible, in order to bring his Service Memoranda to as low amounts^ 
as possible. The larger his Service Memoranda, the more his par- 
ticular portion of the total, economy passes for the moment from his 
hands to that of the Surplus. His profits are diminished accordingly.. 


Ordei-s to him would however nearly always carry the provision that 
a certain amount of the payment should be in Memoranda. If he did 
not assent to as large a Memorandum as the buyer desired to- give he 
would probably lose the business if the buyer could deal anywhere else 
on the t«rms which he wanted. In the projected economy, prices would 
probably remain much more stable than today and present haggling 
on prices would be very largely transferred to haggling on the per- 
centage of Memoranda to be accepted. Present price competition 
would be altered to a competition both on prices and on the percentage 
of Memoranda. There would be a new degree of freedom looking at 
the matter mathematically. 

We should find that business firms would carry two bank accounts, 
one in money, as today, the other a Memorandum account in which 
they would be debited the amount of the account instead of being 
credited as with their money account. A business transaction would 
involve the payment of a sum^ of money, and the coincident assump- 
tion of an obligation of the seller to the Surplus, the Goods Memoran- 
dum. The latter, as in the case of the check in payment of the money 
portion would be expressed in dollars. Pi'esumably both would oe 
combined in one instrument. Deposit of it by the seller in his bank 
would increase his money account and decrease his Memorandum 
account the respective amounts stated. The combined instrument 
would be cleared as now, each successive possessor being similarly 
credited in the two separate senses, unto its final payment bj' the 
buyer's bank. His money account would be debited and the amount 
of his Memorandum account increased (i. e., he would be debited) the 
amount of the Memorandum. In terms of absolute figures, it would 
be as though a deposit had been made in the Memorandum account of 
the buyer, a negative account in a negative balance. The continual 
separation of these two types of debiting and crediting, in all financial 
t)ransactions involving the transfer of and payment for, goods and 
services, would preserve the underlying necessary absence of competi- 
tion between the two portions of the total economy, while making it 
unnecessary for the Surplus to take cognizance of any individual 

It is obvious that such a mechanism will require more clerical work 
by the banks. But such work will not be doubled. While a double set 
of balances will be required, the process of looking up an account 
and other such work would be done with respect to both accounts of 
a given customer at the same time. The process of issuing evidences 
of Surplus Credits, if performed through the bank of an employer, 
would be identical to the issuance of wage and salary checks; the 
drawing against them, by the presentation of Discount Stamps, much 
like th^t of paying checks, with a further detail. All in all, if banks 
are allowed to prorate their salaries and wages according to the 
amounts of Memorandum accounts which they carry, or alternatively 
according to the Memorandum credits cleared (corresponding to debits 
in checking accounts) , they will presumably be sufficiently recompensed 
for the extra work which they will be called on to do. If, for example, 
a bank debited money. items amounting to $800,000 to the accounts 
of its customers in a given wage ipterval, and in the same interval 
credited items amounting to $200,000 to its customers' Memorandum 


accounts; it could pay its wages and salaries 80 percent in money and 
20 percent in Surplus Credits. The exact basis on which this adjust- 
ment might be made might vary from this in any equitable way but 
the principle is clear. 

It is interesting to consider what really happens in such a mechanism 
with change in a firm's Memorandum account. This account is in 
theory a statement of a lien of the Surplus on the inventory of the 
firm, and a Memorandum offered to it in payment of goods or services 
an assumption by the buyer of a part of this lien. This lien was 
initiated when the firm assumed such a lien on the materials which it 
bought. It was increased when the firm allowed the Surplus to act 
as a silent partner in the furnishing of the service, for which the 
Service Revenue of the firm is the reward. It was extinguished (as 
regards these particular goods), when the buyer of them assumed 
the total lien, the Goods Memorandum given in part payment being 
the evidence of this assumption. 

Such a Memorandum account would be initiated, whether in the 
case of a new firm, after the system was in operation, or in the case 
of the commencement of the system, by a firm buying for the moment 
more goods than it expected to sell, that is, increasing its inventory 
and paying for the increase with Goods Memoranda, also usually by 
working up such goods into final form, and executing Service Memo- 
randa whereby the Surplus undertook a proper share of the costs 
of fabrication. It might do either or both and the increase in its 
inventory might be in raw materials or in finished goods or both. 

A firm would never be interested in decreasing the amount of 
Goods Memoranda received below the amount given for the goods 
and services which it bought. Its most favorable position in this 
regard would be when it was able to buy for a considerable propor- 
tion of Memoranda and to sell for a purchase price which was no 
larger in Memoranda than the amount of the latter given. In such 
a case its goods would be relatively salable, since a smalt proportion 
of Memoranda would be accepted, but no Service Memoranda would 
have to be given to balance the Memorandum account. The Surplus 
would not share in the profits of the business. If, however, the total 
capacity of the productive equipment were not being used, it would 
always be to the advantage of the firm to broaden its market by 
accepting larger Memoranda and executing a Service Memorandum. 
A portion of the increased Service Revenue would be in the private 

While it would be wise for a firm to have a Memorandum account 
of sufficient size for working purposes, it would not usually be wise 
to make it uiiduly large. Such an account would represent increased 
inventory, over what would be the situation when no such account 
existed. Accordingly the firm would be justified in decreasing its 
money inventory to at least a part of its Memorandum account. From 
the accounting standpoint, the total inventory would in part be paid 
for with money, in part held against a liability to the Surplus through 
the banks. For a given total output, a lesser working capital would 
accordingly be necessary. Since, however, the ownership of stocks 
would be wholly in the private operator, he would have the same 


interest in preventing their deterioration or obsolescence which he 
now has. His obligation would be one measured in money 

Tracing the responsibilities involved, between the Surplus, the 
banks, and their customers, they would be precisely like those set up 
by money balances but reversed. When a man deposits a $100 bill in 
a bank, he transfers an obligation of the Government to him, to the 
bank. He accepts a similar obligation of the bank to him.. The same, 
mediately, is the case when he deposits a check. The banK looks to 
the Government, he looks to the bank. Each obligation continues 
until demand is made for its discharge. In the case of Memorandum 
accounts, the Surplus would look to the banks, the banks to their cus- 
tomers. Both individual firms and banks could transfer such obli- 
gations among themselves. Such transfers would, however, only aflfect 
Memorandum accounts. Wlienever a firm desired to discharge such 
an obligation in money, it would have to do so through the Surplus. 
It would receive a Satisfaction * for such a money payment, together 
with an equivalent amount in Discount Stamps. It would deposit the 
former to the credit of its Memorandum account. 

Such transfers of Memorandum obligations would require the. same 
faith in the ability of the drawer of the instrument to perform, as 
would be necessary in the case of the coincident transfers of money 
by check. As regards the obligation of the customer of a bank to the 
bank on a Memorandum account, he would always have a money bal- 
ance larger than the Memorandum account. In the case of a firm 
in active business, the account would always be tending to vanish and 
would have to be increased by the making of Service Memoranda. 
The problem of such accounts becoming so large as to force the bank 
to take a risk would hardly ever arise. It would be proper for a 
bank to inquire into the reasons for unduly large Memorandum 
accounts in comparison with the money accounts of the same cus- 
tomers. It w^ould usually be due to large inventories. As the latter 
were built up, money balances would fall and Memorandum accounts 
rise, and conversely. The remedy would, of course, be to decrease the 
amount of inventory. Actually, the situation would not seem to be 
very different from that where a bank lends money today to a cus- 
tomer to permit him to increase his inventory in a way in which he 
otherwise would be unable to do. If the Memorandum account ex- 
ceeded the money account, the bank would be guided by similar con- 
siderations to the above situation. It might be proper to specify that 
the Memorandum account should never exceed the money account. 
Under such an arrangement, the firm w^ould have to increase its money 
account, by borrowing from the bank in the usual way, to the point 
where the Memorandum account was the smaller. This appears to 
be. an unsatisfactory solution, as it requires use of the firm's credit to 
aid the Surplus Economy. On the other hand, such inventories would 
be the unquestioned property of the firm, and it would profit or lose 
from changes in the value of them. Some method of hypothecating 
a portion of such inventories with the Surplus, thus removing the 
bank's responsibility in the matter, may be the solution of choice. 

* Satisfaction : A release of obligations under Memoranda. From a banking point of 
view, essentially a Memorandum of the Surplus. 


A bank's relationships with the Surplus would be of several types. 
The Surplus would always be a heavy money depositor, owing to the 
fact of Memoranda being constantly paid off in money. The total of 
such deposits would not tend to increase, as these funds would tend to 
flow back to the consumers where they came from, in the redemption 
of Discount Stamps and debiting of Surplus Credits. Additionally, 
the Surplus would have large balances in money derived from the sale 
of goods in foreign ttade under a special mechanism later to be de- 
scribed. The banks would act as agents of the Surplus in receiving 
Service Menjoranda and in setting up the latter in Memorandum 
accounts. All such accounts would start with such Service Memo- 
randa, and Goods Memoranda would simply be assumptions of the 
responsibilities of the makers of such Service Memoranda. It follows 
that the total Service Eevenue of the country would always be larger 
than the total amount of Memorandum accounts. The banks, how- 
ever, as above noted, would be wholly responsible to the Surplus for 
the total amount of their Memorandum accounts. In theory and in 
practice, the amount of the Memorandum account of a firm would 
represent an increment to the amount of its inventory, which would 
not exist if our system did not exist. It is, therefore, proper to specify 
that the Memorandum account of a firm would be a prior liability on 
its current physical assets. In ease of receivership or bankruptcy of 
a finn, its current assets, if sold en masse, could be sold for a sum 
including a Memorandum to the extent of the Memorandum account 
of the bankrupt firm plus whatever amount of money was considered 
to be a fair price. If sold at retail, the money received would first go 
to setting up a fund sufficient to extinguish the Memorandum account. 
As Discount Stamps were demanded by the retail customers, money 
would be taken from this fund to pay off the Memorandum account of 
the bankrupt finn and Stamps furnished to the receiver to the same 
amount. Any money received by the receiver after the fund was con- 
stituted would go to the creditors of the firm on the money accounts 
owed them by it. 

It will have been observed that under such a system we would have, 
as today, an increasing value in goods and services as they were elabo- 
rated on until they reached the final consumer. At each transfer, 
however, this value would be represented, not by a single money pay- 
ment, as today, but by the sum of a payment in money and an assump- 
tion of obligation to the Surplus, also measured in money units of 
value. In general, both elements would increase from transaction to 
transaction, but at entirely independent rates, depending on the 
amounts of the Service Memoranda, and for that part of the Service 
Revenue of each firm over and above the amount of Service Memo- 
randa which it executed. We might represent this state of affairs by 
the diagram in Chart I. The resemblance to two parallel water- 
courses, where each tributary of the one watercourse is represented 
by a tributary of the other, is obvious. At each point the cross sec- 
tion of the main stream is the total value of the goods and services so 
far contributed, while that of the portion of the stream coming from 
each side is the portion in one or the other economy. 

In each portion of the economy but especially in the Surplus 
Economy the amount of salaries and wages issued will be less than 



the retail value of the goods or service produced. The same is true of 
Producers' goods. The result would be that if this situation were not 
adjusted for the amount of wage and salary Surplus Credits issued 
would not be enough to extinguish the total amount of Memoranda 
issued in the production of consumers' goods produced in a given in- 
terval. Moreover producers' goods would in general never be pur- 
chased by Surplus Credits. It is necessary therefore, that first con- 
sumer purchasing power in the Surplus Economy be supplemented 
by an additional purchasing power to that afforded by wage and salary 

Chart I 



Surplus Credits. As above briefly noted it is planned that this should 
be done by the issuance of additional Surplus Credits in a way which 
we shall term the Consumers' Distribution. Just how this Distribu- 
tion should me made is a matter of sociological interest rather than 
of economic interest. We shall, however, assume that such a distribu- 
tion would be made on a per capita basis. The only requirement from 


the economic point of view would be that such Credits be expended for 
consumers' goods and services, in the main. It is, however, believed 
that the best sociological basis would be a per capita distribution, 
or perhaps a large proportion distributed in this way, and a smaller 
portion as a dividend on salary and wage Credits already issued. As 
unemployment was taken up to a larger and larger degree by the 
operations of the Surplus, it would seem proper to increase the pro- 
portion of the Distribution, allotted in the latter way. It is thought 
that for every dollar of Surplus Credits distributed in this way, from 
two to three dollars, and perhaps more, would be issued in salary and 
wage Surplus Credits. It is not important what the actual proportion 
would be, but it is important to realize that a proportion would exist, 
and that, therefore, the total amount of salary and wage Surplus 
Credits issued could be controlled by the amount of Credits distributed 
in the Consumers' Distribution. We might, however, venture on an 
estimate. It is thought that when the system was in full operation, 
the total national income in 1929 prices might be around 150 billions 
of which perhaps 90 might be in money, leaving 60 billions as the 
income in the Surplus Economy. This would mean that the return to 
capital would be as large or larger than it was in 1929. It would mean 
perhaps a doubling of the income of the lower income groups. 

The total amount Distributed would perhaps be of the order of 
15 to 20 billions of Surplus Credits and of Satisfactions issued in 
additional Distributions the latter for the purpose of balancing the 
productive capacity for producei-s' goods against the amounts avail- 
able to purchase such goods. 

It may be remarked that the Consumers' Distribution would not be 
charity any more than the dividends of corporations are charity. It 
would be made for a set economic purpose, namely to insure that Eco- 
nomic Surpluses would not develop in the Surplus Economy. If they 
did not appear in it they could u.ot appear in the private economy, 
owing to the free variation in volume between the two economies. 

As noted, we have a method of controlling the total amount of 
Surplus production and consequently the total production in this way. 
We have accordingly the full power of steadily reducing the amount 
of unemployment by increasing the amount of the Consumers' Dis-. 
tribution until it has been brought to any amount deemed to be de- 
sirable. If it (the Distribution) is increased to an undesirable degree, 
production will begin to lag behind the total amount of national 
income, and prices will rise. Since, however, the money income of 
consumers would not be increased in this process, a lower amount of 
goods would be sold in the private portion of the economy and the 
income to capital would be diminished. At first thought, this power 
of what would be in reality unfairness to the owners of capital might 
be dreaded. It might be thought that by it the have nots and the 
improvident might victimize the provident and the prudent. But we 
may well expect that the fact that the income of the low income groups 
might very possibly be doubled will result in these groups becoming 
small holders of capital and of securities to a vastly greater extent 
than is today possible. If this should be the case a large group 
politically would arise not at present in existence, which would be 
highly concerned in the preservation of the rights of capital. This 


group would oppose an undue amount of consumer Distribution, as 
soon as the elements of causation were appreciated by it. 

We would accordingly expect that the best administrative pro- 
cedure would be to increase the total amount of Distributions to 
such a degree as would permit coincident increase of production, but 
to stop when such increase in production no longer occurred a^ a 
result. The "hard core" of physically or psychically unemployables 
should be left unemployed and can be taken care of by some form of 
work relief similar to present methods but, of course, on a vastly 
smaller 3cale. 

The fact that large "profits" could confidently be expected by the 
Surplus would make it possible for the system to be initiated purely 
on a voluntary basis, no compulsions but economic ones being relied 
on to force all business elements into the system. The system of the 
Surplus would be initiated by a Distribution of Surplus Credits, the 
Consumers' Distribution of which we have been speaking. Since 
these Credits could only be utilized by turning in of Discount Stamps, 
buying pressure would inmiediately arise seeking to buy goods with 
which Discount Stamps could be obtained. Initially, retailers, wish- 
ing to enter the system wquld be permitted to limit the amount of 
Stamps which they would give back to a considerable degree, per- 
haps to 20 percent or so. In the eyes of the customers of such stores, 
even such a return of Stamps would amount to a 20 percent discount of 
the price, and tli«y would tend to patronize such stores to the exclusion 
of stores refusing to enter the system. The pressure would be sufficient 
to force all retailers into the system in a very short time. Ketailers in 
the system would exert the same sort of pressure on their sources of 
supply. Every dollar which they could pay in the form of a goods 
Memorandum would be one less dollar which they would have to give 
as a Service Memorandum. The smaller they could make the latter, 
the larger would be the proportion of the profits of their own business 
which they would be able to keep for themselves. The smaller ones 
might not be quite so insistent in this matter as the larger, as it 
would make comparatively little- difference to the small retailer 
whether his drawmg account was in money or in Surplus Credits. 
This would confer a certain advantage on small enterprises of all 
kinds, which is probably a desirable thing. 

It is to be especially noted that all purchases made for Surplus 
Credits, that is, all purchases for which Discount Stamps were de-. 
manded to be returned would be in addition to purchases which would 
have been made, if our system were not in operation. Perhaps a 
slight qualification of this statement should be made. It is true that 
almost undoubtedly savings would be larger by the lower income 
groups than is the case today, even at times of greatest prosperity. 
These savings would be in money. On the other hand, the greater 
security of tlie profits of the private portion of the economy and the 
fact that wages would be relatively high would cause the rate of pri- 
vate investment both to be greater than today and to vary less. A 
mechanism later to be described would increase this tendency, it is 
hoped. It should be emphatically stated — nothing in the plan, as far 
as can be determined, would tend to make proper business enterprise 
any less profitable' than now. It is true that it is believed that de- 
fenses against monopolistic practices would be set up of a very power- 
ful nature which do not at present exist. They will later be spoken of. 


Let US return for a moment to an inspection of Chart I. We have 
just seen that the entire flow of vahie representing the Surplus Econ- 
omy is additional to that which would have occurred if our system had 
not been in operation. Actually the whole flow will be determined 
by the cro^s-section of our purchasing power at the base. Rather than 
a water course or two water courses, our better simile is the part of 
a tree above ground, or two such trees. That is the whole flow of 
nutritive substances in our tree toward the roots is determined by the 
volume of other nutritive substances away from the roots. Starting 
with our total purchasing power, it flows back from producer to pro- 
ducer, at each point buying the services of the producer and so con- 
tributing to him his Service Revenue. If, as we proposed, we divide 
this purchasing power into two streams, we must of necessity divide 
our total Service Revenues similarly. In individual cases, the division 
may be different from the proportion of the two total streams of pur- 
chasing power, but the total of the parts cannot be different from the 

Faced therefore with such a demand for Stamps, the retailer would 
find an increase in business substantially equal to the demand for 
Stamps, his cash receipts being proportionally larger. To obtain 
the Stamps he would generally find it necessary to execute Service 
Memoranda, in order to make the increase in his Memorandum account 
in a given period, equal to the amount of Stamps demanded from him 
in that period. This would permit him to pay part of his wages and 
certain other expenses in Surplus Credits, or receive Satisfactions per- 
mitting him to pay in Memoranda. He would also probablj' at once 
increase his total orders, offering Memoranda in payment for the in- 
crease. His money payments to his sources of supply would not be 
lower, as the money income in the town would not be less than before, 
except for some increase in saving. He would also build up his inven- 
tories, again paying for the increase in Memoranda, and this would 
give him what might be termed a Memorandum account of working 
size. Similarly the wholesaler, faced with the offers of Memoranda 
from his customers, would find it necessary to establish a Memorandum 
account in the same way, against which they could be drawn, or, more 
properly, to which they could be credited. This he would do in part 
by executing Service Memoranda, in part by giving Goods Memoranda 
to his sources of supply, again mainly in payment for increases in 
orders. The flow of money to him would not be appreciably lessened. 
All the way through each firm would find it necessary to increase their 
pay rolls, such increase being mostly or wholly in Surplus Credits. 
All such Credits issued would increase the total market in the Surplus 
Economy but would not decrease the market in the private economy. 

It might, at first thought, be assumed that the very considerable 
addition to the total purchasing power afforded by the increased volume 
of purchasing power, particularly that furnished by the Consumers' 
Distribution, would cause a large increase in prices. This would, of 
course, be the case if such an increase in purchasing power were made 
in money. We have an interesting illustration of such a mechanism, 
almost pure enough in its characteristics to be of pure experimental 
value, in the phenomena which occurred on the payment of the Sol- 
diers' bonus in 1936. There was seen an addition to national income 
several times the size of the Bonus distribution. There was, however, 
so great a rise in prices as probably to make certain the slump in the 


latter part of 1937. There was also, of course, the addition to the 
national debt with the consequent worsening of the way in which the 
national income in the future would of necessity be divided. In the 
case of the outlined mechanism, however, we could rest assured that 
s'uch a rise of prices could not permanently occur. In fact, there is 
considerable reason for believing that the course of prices mi^ht be 
in the opposite direction. This is because the entire determination of 
prices would be by the private economy. While the actual payment 
of money to individuals would not be less under our plan than before, 
expenditures by them for consumers' goods might well be somewhat 
less, due to the increased saving. More or less fall in prices might 
therefore be expected. Private expenditure in producers' goods might, 
however, rise correspondingly. 

So far we have suggested no way in which the producers' goods 
industries would be maintained at full production. This would be 
done by a series of what we shall call Industrial Distributions, together 
with the obligation of the Surplus to bear its fair share of the physical 
depreciation of the productive facilities of firms of which it was the 
silent partner. The same proportion which has been used above, 
namely, the proportion between total Service Memoranda executed by 
a firm in a given period and the Service Kevenue in the same period, 
which it is convenient to call the Operating Discount, would be used 
to determine the extent to which the Surplus would be liable for the 
physical depreciation of the physical assets of the firm in the same 
period. Assuming a given business to have set up a depreciation fund 
of $100,000 in the period in question, and assuming that its Operating 
Discount was 15 percent in the period, it would only have to lay aside 
$85,000. As it made replacement purchases with this fund, it would 
be entitled to give 15 percent of the purchase price of the producers' 
goods bought in Goods Memoranda, receiving an equal amount of 
Satisfactions from the Surplus when the purchases had been made. 

The first Industrial Distribution would be made in those cases 
where it would be primarily to the advantage of the Surplus Economy 
that increases in the productive facilities of a given firm should be 
made. Suppose, for example, that a given producer was in the fortu- 
nate position of being able to sell his entire production for so small 
a proportion of Goods Memoranda as to make it unnecessary for him 
to execute any Service Memoranda at all. Assume him unable to fill 
all the orders for his product. He would of course select those orders 
carrying Memoranda of the lowest proportions. Under such circum- 
stances he would be in line for an offer of an award under the first 
Industrial Distribution to permit him to increase his plant. If he 
accepted it, which he would be under no obligation to do^ but which 
would nearly always be greatly to his advantage to do, he would put 
in the new equipment, paying for the latter wholly or in part, in 
Memoranda. He would then be given Satisfactions to the amount 
awarded, but would be required to execute in return what we shall 
call Surplus Bonds. Tliese would be similar to Memoranda in that 
they would have no maturity and carry no interest. They would be 
an evidence, however, of a lien held by the Surplus on the productive 
assets of the firm. No effort would ever be made by the Surplus to 
realize on this lien, except when the business was wound up. It would 
then become a first charge on the capital assets of the firm. But the 
proportion which the amount of such Surplus Bonds bore to the book 


value of the productive assets of the firm would determine what we 
shall call the Equitable Discount. This would be a sort of normal 
figure for the Operating Discount. It would of course be zero when 
no such Bonds were outstanding. In such case, the firm would be 
entitled, in case orders had to be refused, to select those orders tending 
to make the Operating Discount as near zero as possible, as in the case 
of our fortunate producer instanced above. If, on the other hand, 
the Equitable Discount was a positive figure, orders would have to be 
accepted which brought the Operating Discount as near to the Equita- 
ble Discount as possible. The choice would only have to be made, of 
course, if the firm was forced to reject certain orders on account of 
being in full production. Unless this was the case, the firm might 
have an Operating Discount above or below the Equitable Discount. 
In the latter case the profit on the private capital invested would be 
apt to be very high, as it would correspond to the condition today, 
when a firm is operating above- 100 percent capacity, but without the 
extra production costs which such very large proportions of the maxi- 
mum production are apt to entail. 

We might here briefly consider the question of monopoly, exer- 
cised in the predatory way ; the monopolist has a product which is 
necessary, he limits production to a large degree, and exacts an ex- 
orbitant price. He is intrenched, in one way or another, to prevent 
other producers from coming into the field. He refuses to accept 
Memoranda of sufficient size to cause his Operating Discount to be 
more than zero. Under such circumstances the Surplus would offer 
awards from this Distribution to other capital, to a sufficient degree 
to make it attractive to enter the field against the monopolist. It is 
probable that it would be advisable to modify the patent laws in the 
direction of the English "Licenses of Eight" system, by which anyone 
would be permitted to take out patent licenses under a royalty set by 
the Commissioner of Patents. Such an offer of award could be made 
sufficiently attractive to make capital always willing to take the 
chance. Suppose, for example, that an award of this sort should be 
offered, such that the amount of private capital, which would have to 
be put in, would be only 25 percent of the whole. The Equitable 
Discount of the new firm would be 75 percent. But the Operating 
Discount might be only 30 percent. In this case the new firm would 
be using in its private production capital assets amounting to 70/25 
percent or 280 percent of the private capital in the enterprise. If 
its operation were profitable at all it would be very profitable to the 
owners of the private capital. Such a procedure would not usually 
be necessary as such awards would be first offered to the monopolist. 
The possibility of it would usually induce him to avail himself of the 
award. If he took the award and still exacted prices which were too 
high, he would be offered more and more productive facilities until a 
large part of his busin&ss was in the Surplus Economy. 

It will be noted that such procedures, while they would be very 
successful against a monopoly in which exorbitant prices were ex- 
acted, would not be effective or harmful against a monopoly which 
brought the price of its product down to a proper figure. Such a 
monopoly would always accept an award under this Distribution 
if offered. If the award were injudicious, all the facilities might 
not be used. It would not pay any other firm to enter the field 


unless they have some real productive advantage over the monop- 

Taking up now the second Industrial Distribution, it would be 
junior, both the necessities for the makeup of physical depreciation 
and to the first Industrial Distribution. The sum of all three cate- 
gories would be dependent on the unused productive capacity of the 
producers of producers' goods. As regards the capacity for pro- 
duction of the latter, the same procedures would be used, if it was 
felt that larger capacity were necessary. 

The second Industrial Distribution would be awarded under the 
same conditions of setting up of liens and of Equitable Discounts 
as the first. The initiative, however, would lie with the private 
producer. If he wished to improve his plant, as, for example, by 
the installation of labor saving machinery or a new process, he 
could apply for as large an award as he wished, choice lying abso- 
lutely with the planning division of the Surplus. This choice and 
that under the first Distribution would in fact be the chief central 
planning agency of the national economy. It is to be emphasized 
that private choice would not in any way be affected by the choice 
of awards. On the contrary awards would never be made unless 
the planning office was convinced that (1) the improvement was na- 
tionally desirable; (2) private capital was not available to carry 
it out; (3) idle equipment capable of furnishing the improvement 
was or would be available. Various other considerations would, of 
course, be iuxportant. They would include the state of the labor 
market. If shortage of labor was apparent, awards for labor sav- 
ing machinery would be favored. Processes favoring economy in the 
use of national resoCirces would be favored and in the present dis- 
tressed state of the world, facilities for the production of material 
for national defense. 

A firm could at any time decrease the amount of Surplus 'Bonds 
outstanding against its assets, by executing what we may term a 
Bond Memorandum, similar to a Service Memorandum but not con- 
sidered in the calculation of the Operating Discount. Its only 
reason for doing this would be to reduce the amount of the Equitable 
Discount. This it might well wish to do at a time of profitable 
operation when it was operating at, or close to, capacity. The proc- 
ess would be essentially similar to the provision of new facilities 
today, except that the facilities would already be in place and their 
necessity apparent. The funds to do so would be provided as today 
from earnings, or from the capital market. Actually, what would 
happen would be that the Operating Discount would be smaller than 
it would otherwise be, and consequently a certain amount of the 
production would be privately produced, but would enter the Surplus 
Economy, the firm getting credit on its capital account from the 
Surplus for the amount of such goods. 

There are fairly good reasons for believing that the amplitude 
of business cycles under the plan we are examining would be greatly 
lessened ; if this should prove not to be the case, the mechanism just 
described would be a powerful agency in equalizing real investment 
over the period of a business cycle. Under it, capital investment 
would proceed at a fairly even rate, and would not be subject to 
tlie wide swings which at present exist. The total income of con- 


sumers would also not tend to vary with the business cycle, except 
in the case of those individuals, where income was chiefly or wholly 
derived from dividends, or in the case of entrepreneurs. Even in the 
latter case, certain classes, such as professional men, could be as- 
sured of a relatively stable income, whatever the state of the busi- 
ness cycle. We can consequently predict that the purchase of con- 
sumers' durable goods, houses, automobiles, etc., would proceed at 
a fairly even rate. 

Returning for a moment to the subject of what might be called 
trading between the economies, ^ve would have a case similar in 
mechanism to Bond Memoranda, but in the opposite sense, where, 
for one reason or another, the private operator was put to extra 
expense from the presence of the Surplus Economy. Extra book- 
keeping expenses would be a case in point. In such cases the extra 
expense would be taken care of simply by a Satisfaction. This 
would make the actual Operating Discount larger than the apparent 
Operating Discount. Surplus produced goods would be sold for 
money, or more exactly, the extra labor would be paid for by the 

As has been seen, the magnitude of the total economy would be 
determined by the extent to which the Consumers' Distribution was 
increased. This Distribution would determine total consumer pur- 
chasing power in the Surplus Economy but would not affect total 
purchasing power in the Surplus Economy but would not affect total 
purchasing power in the private economy. The extent of Distribu- 
tion in the Industrial Distributions would, with their allocations, per- 
mit planning of the course of technological change. But as regards 
each control, it would not affect the right* or the opportunity of the 
private producer to produce to any amount or in any way which 
appeared to be most profitable to liim. Prices would be wholly deter- 
mined *by the private operator ; total production would be determined 
by total manpower ; together with the existing level of technological 
skill and productive facilities. Increase in the Industrial Distribu- 
tions, at the expense of the Consumers' Distribution, would decrease 
the latter for the moment but would ultimately increase it; the rate 
of such increase could be adjusted to the situation at the moment. 
During the period in which unemployment was being taken up, the 
Industrial Distributions would only be made large enough to keep 
the facilities for production of producers' goods reasonably busy. 
When unemployment was at an end, larger Industrial Distributions 
would be made, as increase in the average standard of living from 
then on could only be made by technological improvement. 

The problem of foreign trade under such a system would have two 
aspects, according as the economy of a given country using the system 
was, like our own, a relatively balanced one, from a physical point 
of view, or whether a large amount of import and export trade was 
a necessity. The former problem is a relatively simple one. Its chief 
problem is the disposition of products of the country produced to a 
point of true national excess — that is, to such a degree that they 
could not be entirely disposed of within the country at any price. 
In this country cotton is such a commodity. In Brazil coffee is an- 
other, a special mechanism, consisting of a quota of a new type would 
be a way of handling this situation. The physical production of 


sucli a commodity would not be limited, as at present is done. But 
the amount which could be sold for use in domestic consumption 
would be limited. The cotton produced by a given producer above 
his quota could only be sold for export. Whatever a cotton house 
wished to buy for its own interest for export it could do. The Sur- 
plus would buy the rest. If the producer was an individual, the 
cotton would be bought by the cotton house for money, as regards 
its share, for Surplus Credits, as regards the share actually bought 
by the Surplus. Such a payment, as regards the accounting for the 
Operating Discount of the cotton firm, would be on exactly the same 
basis as its salary and wage payments. In calculating the Service 
Revenue of the. firm, only its purchase of goods and services from 
other -firnis would be subtracted from the value of goods and services 
sold, to obtain the Service Revenue of the firm. Consequently, in 
this particular case, the Service Revenue would include the entire 
value of the cotton sold, both for domestic and for foreign use. As 
in the case of other producers, the firm would make out Service 
Memoranda. As regards the cotton going into domestic trade the 
buyers would assume a portion of this obligation by the Goods Memo- 
randa which they offered as part of the purchase price. As regards 
the rest of the amount of Service Memoranda executed by the firm, 
the Surplus would be ready to issue a Satisfaction for the entire 
amount when paid a certain proportion of the amount in money by 
the firm. A numerical example worked out, on what might be con- 
sidered to be practical assumptions for the difference between the 
foreign price for cotton and the domestic price, shows of course a 
loss to the Surplus, which would have to come out of the total of 
Distributions. It would be, at most, a few tenths of a percent of 
the total amount of such Distributions when the system was in full 

We have thus a general method of disposing of national Surpluses 
of this type, whenever the political situation is such that export may 
actually be made. Any foreign price can be met. The question as 
to whether it should be met in this way is another story. In the 
case of cotton, we have today a large population, which, economically, 
practically nmst raise cotton. From the national point of view, it 
would be much better that the Surplus accept a moderate loss in this 
way, than that this population, be unemployed. Under our plan, the 
appetite and ability to pay, ~for a more costly diet, would be much 
increased. We could expect that many cotton growers would turn 
to fruits and fresh vegetables from this reason. In general we could 
look to see this mechanism tend to decrease the production of any 
commodity, whether agricultural or manufactured, which had to be 
.largel}'^ exported at an insufficient price from the domestic point of 
view. Profits in the production of those goods which could be used 
internally would be enough to diminish the production of goods pro- 
duced to a national excess, and which could not be sold in the foreign 
market for a price which would satisfy the domestic producer. 

The picture is somewhat different in the case of an unbalanced econ- 
omy, in which a considerable amount of imports must occur, to supply 
raw materials and food for the people; in the case of a country like 
Argentina, a similar need will exist for manufactured goods. In 
each case, goods to national excess mmst be exported, goods which are 
in national deficiency innmt be imported, whatever the foreign .prices. 


If, however, the foreign price is enough higher than the domestic 
price to bear the costs of carriage, no problem will exist. But, if the 
reverse is the case, whether naturally or by reason of tariffs, the use 
of the Surplus Economy would greatly facilitate the securing of the 
necessary f oreigu trade. 

Taking first me goods to be exported. As in the exporters' hands 
for export, it will usually have been acquired, partly for money and 
partly for Memoranda. If now a low foreign price must be met, the 
Surplus would agree to a payment of the Memoranda setup, at any 
necessary discount. -If, for example, a given stock had been acquired, 
50 percent for money and 50 percent for Memoranda, agreement of 
the Surplus to issue a Satisfaction for the amount of tlie Memorandum 
account for a payment of 50 percent of its amount in money, would 
permit the exporter to cut his price to 75 percent of what he would 
otherwise have to charge in the foreign market. Similarly in the case 
of a necessary import, the Surplus might furnish a certain propor- 
tion of the foreign exchange necessary to obtain the goods, but require 
the importer to furnish a Memorandum of less amount than the 
amount nominally equal to the amount of foreign exchange furnished. 
Both these procedures would of course require the expenditure of 
money by the Surplus. This money would have to be obtained from 
the sums used to pay down Memorandum accounts of retailers. There 
would consequently be less of such funds for the redemption of Sur- 
plus Credits. To this extent it w^ould be necessary to decrease the 
amount of the various Distributions, mainly, that of the Consumers- 

If it were considered that the Surplus Economy should not bear- 
the entire- weight of the unfavorable foreign trade conditions which 
we have supposed to exist, the entire economy could be caused to as- 
sume the burden by measures similar to those used by Germany, with 
a variable foreign exchange ratio. Or a combination of the two 
systems would be possible and perhaps desirable. 

An important consideration to be kept in mind is that under such 
a system any possible value to a country of a protective tariff would 
be at an end, except from an autarchic standpoint. It would be 
clearly recognized, that if the physical production of a country can 
be maintained, all goods which can be imported will raise the average 
standard of living while all goods which must be exported, if not 
produced to national excess, will decrease it. Today it is distinctly 
possible for imports of a good to decrease the domestic production 
of that good, and for the total volume of imports to decrease the total 
volume of domestic production. Under our system the latter wo\ild 
never be possible, though the former might be. Such decrease of the 
domestic production of a given commodity because the foreign coiits 
of production were lower, would from the pure economic point of 
view be advantageous, although considerations of national defence 
might make it unadvisable. Wherever the latter intervened, it would 
be possible for the Surplus to use precisely the same mechanism which 
we have just described in the case of the necessity of a given export 
or import, to equalize the situation between the domestic and tht 
foreign producer. That is, Memoranda set up in the production of 
the good which it was deemed necessary to produce at home for 
reasons of national safety would be discounted to a certain degree by 
the Surplus at the cost of the Distributions. This would enable, such 


goods to be sold on the domestic market at a lower price than other- 
wise would be the case. The advantage to the consumers of the 
low price for the good, rendered possible by the low foreign costs 
would not be lost. 

Appropriations would be made for the support of the various Gov- 
ernment bodies as today and in dollars. An individual taxpayer would 
be able to elect what proportion of his taxes he wished to pay in the 
private economy, that is in money, and what proportion in Surplus 
Credits. He would demand the return of Discount Stamps to the 
extent to whicli he desired to pay in the latter. The corporate tax- 
payer could Discount its taxes to the extent of its Operating Discount. 
Practically this would be accomplished by permitting the payment 
of taxes from Service Revenue, under precisely the same conditions 
under which wages were paid. That is. Surplus Credits would be 
issued to taxing bodies, as to individuals. Like others rendering serv- 
ices, taxing bodies would be required to buy any stamps required of 
them for their amount in money; such a purchase would set up an 
equivalent Surplus Credit. A taxing body, purchasing goods and 
services, would pay for them as would an individual ; if the purchase 
was from a retail establishment, stamps would be demanded to a pro- 
portion demanded by the proportion which the income of the taxing 
body was in Surplus Credits ; if buying from a wholesaler, it could pay 
in any desired proportion in Goods Memoranda. Such Memoranda 
would be extinguished by direct diminution of its Surplus Credits to 
the necessary amount. It would pay its wages in money and in Surplus 
Credits, according to its income in the two economies, setting up the 
necessary Service Memoranda to secure the latter. 

Under such a system there would be great advantages to certain 
businesses, particularly those with a large productive investment such 
as the railroads or the public utilities. At present such enterprises 
have to pay taxes on their total property; when they are operating 
under considerably less than full capacity this may become very oner- 
ous. In the case of the railroads, at all times the amount of taxes paid 
usually exceeds the amount of dividends paid. Under our system, if 
the private share of the Service Revenue (the "net operating revenue," 
in railroad accounting terms) of a railroad was 75 percent its present 
tax bill might be reduced 25 percent or an amount equal to a percent 
or two on the capital stock. 

It is believed that the factors which tend to cause business cycles 
would be largely or wholly neutralized, as regards their periodic char- 
acter, if our system went into effect. As above noted, capital invest- 
ment, the total income of consumers, the general business confidence, 
and otlier characteristics of our present business system, which tend 
to vary with the business cycle, would no longer have much of their 
periodic variation left. Earnings of capital, while not so large, prob- 
ably, as in the late twenties, would be larger than in 1936-37. They 
would probably be relatively stable, and savings in money, which 
would tend to go into investment, would accumulate more regularly. 
Stocks would accordingly probably not tend to rise or fall abruptly. 

It is thought, therefore, that if the money purchasing power for con- 
sumers' goods was insufficient to purchase tlie amount of such goods 
produced privately, as is the case today at the time of a business re- 
cession, the proportion of the privjite ooonomy Avoiild slowly fall, with 

27;M4L>— 41 — Mo. 25 10 


resulting: more rapid fall in the return to capital, until a proper balance 
was obtained, when conditions would bexi'-ome stable at this point. In 
terms of physical analysis of vibrating systems, the business cycle 
might become nearly or entirely "critically damped." If later on, for 
example, conditions changed through a general rise in wages, the 
proportion of the priA'ate economy would increase to a new balance. 

While the physical production, fantastically large, according to our 
present ideas, would take place to a considerable degree in the Surplus 
Economy, the production under private auspices would probably be- 
come stabilized at some figure, larger than our largest previous pro- 
duction, and would increase from there with increase in technological 
equipuTjnt. The private portion of the production would have the 
entire benefit, as far as its proportion was concerned, of the economies 
of production made possible by the high and stabilized total produc- 
tion. The earnings per dollar of invested capital, as noted, v.ould 
probably be lower than the average of 1929. The total income of 
capital would be much larger, it is believed. Large incomes would be 
just as possible as today, though perhaps not quite so common as in 
1929. Low incomes would probably at least be doubled, and medium 
mcomes would be much larger on the average. Prices would seem 
destined to be perhaps a little lower than in 1929, on the average, and 
unquestionably would be far more stable. Monopolistic control of 
(hem would be distinctly less profitable, owing to certain powerful 
defenses against monopoly, inherent in the two component economy. 

At this point reference should be made to the work of Graham.^ It is 
matter for marvel that Graham's book, one of the most pregnant of 
our time, has received so little attention by economists that it was pos- 
sible for the present pai)er to be substantially in its present form, 
before the writer knew of the great resemblance between the direction, 
in which his thought had gone, and Graham's suggestions. In fact, 
about 2 years ago, his ideas were practically identical with those which 
Graham had advanced 6 years previously. It is a matter of some- 
what melancholy interest to wonder to just what extent the present 
condition of the world might have been improved had the democracies 
availed themselves of this instrument ready to their hands, with which 
to combat the superior productive power of the German economy. At 
least, it would seem men might have actively discussed the proposals 
instead of relegating them to the half contemptuous silence which they 
so little deserved. 

Graham's proposals then, are to consider the basis of the present 
plan. Several differences, believed to be important, differentiate them 
from the mechanisms advocated herein. Among the more important 
of these are the following : 

(1) Our proposals are not intended to be temporary, or of emer- 
gency nature, but to be permanent additions to the economic 
structure. A two component economy has an additional 
degree of freedom to any one component economy. This 
renders possible various adjustments to a situation which 
cannot be made in a one component economy. For example, 
the additional bargaining dimension, offered by the pro- 

; 'The Abolition of Unemployment. Frank D. Graham. Trinceton Univer.sitv Pi ess, 
Princeton, N. J., 1932. 


portion which the amount of the Memorandum would bear 
to the total purchase price, permits prices to be maintained 
at profitable levels without the seriously deleterious results 
seen today when prices are held similarly fixed. 

(2) The Consumers' Distribution offers a method of quotizing 

consumer purchasing power, and consequently of regu- 
lating the total vohime of the economy, which seems to be 
nnich more simple and direct than that suggested by Gra- 

(3) It also offers so pov/erful a method of energizing the mecha- 

nism in a purely economic way that every economic unit 
would be forced to enter the system, the compulsions being, 
however, purely economic in nature. 

(4) No reward is consequently necessarily offered to capital for 

the use of the capital facilities used by the second economy. 
This maRes our system automatically able to regulate the 
proper proportion of the total income of the society paid 
to capital. If the return to consumers is too small, and that 
of capital too large, to permit a stable situation, whether 
from too high prices or too low wages, or both, the private 
portion of the economy will shrink in proportion to the 
total economy until the return to capital is sufficiently di- 
minished to make the situation stable. 

(5) All men are on an equal basis as regards their relationship to 

the two economies. All will be partially employed in each. 

(6) The Surplus, in contrast to Graham's Emergency Employ- 

ment Corporation, has no more direct a concern in indi- 
vidual transactions than does the Treasury today. All 
goods are privately owned, the Surplus only preserving a 
lien in money in the form of the Memorandum accounts of 
each business. 

(7) The Memorandum system, a kind of debit bank currency as 

opposed to the present credit bank currency, is apparently 
new. It gives an automatic control in various directions 
having tlie same logical bases as our present bank currency, 
and liaving the same convenience, safety, precision, and 

(8) Discount Stamps are apparently a new device. They permit 

division of the purchasing power between the two econ- 
omies while only a single currency is used. They have the 
further important property, in conjunction with the Memo- 
randum system, that the proportion of ownership in a given 
good, in the two economies, is determined only at the in- 
stant of sale. In the case of sale to ultimate consumers, the 
proportion of ownership of all goods sold, as regards totals. 
Is determined by the proportion of income in the two econ- 
omies available to buj^ consumers' goods. The same is also 
true of the purchasing power for capital goods in the Mem- 
orandum system. 

(9) Complete qualitative control of the total character ot the 

producing facilities is afforded by the Industrial Distri- 
butions. This control, as in the case of the control of 
total volume, mentioned above, is effected without the 


least invasion of the present freedoms of a free enterprise 
capitalistic society. 

The extent to which acknowledgment should be made to the theories 
of "social credit," as advanced by Maj. C. H. Douglas, is consider- 
ably more difficult to determine. Certain superficial similarities exist 
between some of his ideas and proposals and those in this paper. 
His statement of his views is so unsystematic, that one of his own 
followers has felt the necessity of assembling his important pro- 
nouncements into an ordered arrangement .^'^ Even when so ordered » 
his terminology appears to be so vague that it is very difficult to 
know what is meant. By "money" he often appears to mean "in- 
come," for example, His "A + B Theorem" is incorrect as he states 
it, but has a substratum of truth if "B Expenditures" are held to 
mean not what he states, but a certain proportion of the return to 
capital which is either held as reserves by corporations or hoarded 
in other ways. In other words, the "liquidity-preference" of Keynes 
is the essential magnitude. If so defined, he is correct in saying that 
the defect in consumer purchasing power should be adjusted in some 

It is not necessary to consider his theories of banking and bankings 
credits, as they appear to suffer from all the disadvantages above 
noted and some others. They emphatically do not prove his points 
or any of ours. But it is felt that with all these aspects which can 
be criticized, his work has elements of suggestion which make it of 
very real value in the present discussion, although here again the 
ideas here advanced were an-ived at in complete independence of 
bis work. 


It is believed that the main results of the operation of such a 
system would be — 

(1) The production of wealth, after a i^easonable period of op- 

eration should be of the order of 150 percent of the best 
previous production. The average income of the lower 
income groups should be more than doubled, on an annual 

(2) All men willing and able to labor should have reasonable 

assurance of a steady job throughout the year, and in all 

(3) Nearly all difficulties of foreign trade, not attributable to- 

national political rivalries, would be greatly reduced. 

(4) Taxes would be a greatly reduced part of the burden of 

industry, as they would proportionately be paid in the 
Surplus Economy. 

(5) It is believed that business cycles would largely disappear. 

If they persisted, practically the only way in which they 
would affect the total economy would be that the return 
to capital would vary cyclically with them. In particular 
the total production of neither consumers' goods nor capi- 
tal goods would vary with them. 

* The Douglas Manual, being a recension of passages from tbe works of Maj. C. H.. 
Douglas outlining Social Credit. Philip Mairet. Coward Mcrann, New York ; no date. 


(6) An entirely new flexibility, espex^ially needed where certain 

present rig^idities exist, notably of prices and wages, would 
appear in the economic fabric, and would greatly facilitate 
operation of the whole economy, whether private or sec- 

(7) An important magnitude of our present economy, the proper 

division of the national income between those who will 
predominantly hoard or invest it, and those who will pre- 
dominantly expend it for consumers' goods, would be 
automatically regulated by the change in the proportion 
between the two e-conomies. If the portion going to the 
first category was too large, the private economy would 
shrink and the secondary economy expand, and vice versa. 
At present this magnitude is only regulated by the costly 
process of a depression. 

(8) As far as can be seen no economic class would fail to benefit 

from the introduction of the system, although the wage- 
earning class would benefit most, as regards standard of 
living, constancy of employment, and economic security. 


A two-component economy, such as is seen in the German, or any 
warlike economy, has a secondary economy, in addition to the pri- 
vate economy, capable of absorbing all Surpluses. Such an economy 
is capable of operating continuously at the highest limits of pro- 
duction which the available manpower and technology permit. 

If this procedure is adapted to conquering unemployment and rais- 
ing the standard of living in a democratic and peaceful society, it is nec- 
essary that the secondary economy, in supplying the goods which it pro- 
duces to consumers, shall not compete with the private economy. It is 
also necessary that the purchasing power in the secondary economy shall 
be so regulated that it is always sufficient to acquire the goods produced 
in that economy. 

There is proposed a Government-owned corporation, called "The 
Surplus," which will enter into a silent partership with any economic 
unit, paying certain direct costs, such as salaries, wages, taxes, and 
depreciation, in a continuously variable proportion, and acquiring 
thereby a corresponding lien of the Service Revenue ^^ of the firm. 
These liens, carrying no interest and without maturity, are called Mem- 
oranda ; they are assumed by the purchasers of the goods or services pro- 
duced by the firm as part of the purchase price, and become thereby a 
sort of bank currency, having a debit, rather than a credit basis. In this 
way transactions in them, while parallel with the money transactions 
involving the same goods, may be kept entirely separate from the money 
transactions. The proportion of salaries and wages paid by the Sur- 
plus, as part of its obligation as a silent partner, is paid in a form of 
credit called a Surplus Credit, which can only be held by ultimate con- 
sumers, individuals, and taxing bodies, etc., not by producers. All pur- 
chases by consumers would be for money, as now, but holders of Surplus 
Credits could obtain the return of money paid for goods and services to 
the extent of their Surplus Credits, the Credits being accordingly deb- 

" See p. 215, note 7. 


ited. Sellers to consumers would pay off their Memoranda by money 
payments to the Surplus, receiving an equivalent amount in Discount 
Stamj)s. They would turn over the latter to their customers for a small 
fee, and their customers would present the Stamps to the Surplus in the 
process of realizing on their Surplus Credits. Memoranda would ac- 
cordingly reciprocally extinguish, and be extinguished by, Surplus 
Credits, without ultimate change in money balances. Consumers would 
accordingly purchase to a variable degree, dependent on their income, 
in the secondary economy. 

Purchasing power in the secondary economy in Surplus Credits 
would be equated to the amount of Memoranda set up, by Distributions 
of additional Surplus Credits to individuals, and of capital goods to 
producers, a long term lien remaining on such goods unless extinguished 
by the producer receiving the goods. This lien would affect the extent 
of partnership with the Surplus, where complete utilization of the facil- 
ities was necessary, but not otherwise. 

Total volume of the secondary economy would be controlled by the 
volume of the Distribution to consumers; this Distribution would be 
gradually increased until unemployment was reduced to a satisfactory 
amount. I'he character of the total productive equipment would be 
determined by the character and amount of the Distributions to pro- 
ducers, which would be on an award basis. 

The Distribution to consumers would offer a method of energizing 
the whole procedure, so powerful in nature as t permit of the compul- 
sions being exclusively economic. They would be sufficient to force all 
economic units into the system. However, such compulsions would be 
exclusively economic, and in the ordinary acceptation of the terms, all 
present freedoms would be fully mainti ined. 


It may at first be thought that si a warlike ecor imy, under 
which, willy nilly, we must now live lor an undetermined period, 
has in it inherently the property of securing full physical produc- 
tion, there is, o'r will be, no need to consider such a system^ as we have 
described, until the world has again returned to some measure of 
sanity. To an extent this is true. It is true, in that the full bene- 
fits of our system cannot be obtained, when a very large part of the 
physical production of the country must go to the purposes of war, 
and not to improving the standard of living of all men. But it is 
not true that ctertain of the mechanisms which have been described 
would not be of very great value in various ways in initiating and 
carrying on the effort at preparedness for attack. 

In the first place, all such effort at preparedness would be much 
easier if the peacetime economy were at full production. If such 
were the case we would have many more skilled workers than we 
have now. We would have much more productive equipment to 
keep them busy. To be sure some of this equipment would not be 
useful in the prosecution of a war or in preparing tor such an even- 
tuality. But much of it would be just as useful for the production 
of munitions and other equipment of armies, as though it had been 
specifically provided for that purpose. 


The army behind the lines also is just as much in need of organiza- 
tion, of providing superintendents and foremen, as the army on the 
lines is in need of captains and noncoms. If we have 10,000,000 un- 
employed, many unskilled, many rusty, most, more or less under- 
nourished, disheartened, with diminished morale, and as regards 
many of them with a very justified distrust in democratic institutions, 
any means by which they can be rapidly brought into the industrial 
organization, fed, clothed, brought out of their despondency and dis- 
trust, will make the physical effort of the country to defend itself, if 
and when that shall become necessary, at least 20 percent more 
effective. And we need desperately that 20 percent. A longer jump 
can be made from a nm than from a walk or a standing start. 

Technically, it would be proper to carry on nearly all of the war 
industries in the Surplus Economy if we had such an economy. In 
this way, the national debt from the war effort could be minimized. 
Indeed it would be possible to organize a two-component economy 
in such a way that there would be no addition to the national debt of 
any consequence. The methods by which this would be done would 
be similar to those briefly outlined for the facilitation of foreign 
trade, plus a change in the Consumers' Distribution. For the period 
of the war, the entire Consumers' Distribution, which we have stated 
would probably be of the order of from 15 to 20 billion a year, when 
the system was in full operation, would be placed to the credit of the 
national government. In addition, such other credits would be placed 
at the disposal of the government in the Surplus Economy, as would 
make it able substantiall}^ to buy what it needed with these credits 

Heavy taxation in the private economy would contract the con- 
sumption of this portion of the economy to any desired amount, 
although the amount of contraction caused by this taxation would not 
be as great as might at first thought be expected. Indeed, the private 
economy would itself become a two-component economy of the usual 
warlike type, and would itself expand as a whole, at the expense of 
the Surplus Economy, the final result being a total economy nearly all 
technically of the private type, but of the private warlike type, that 
is itself two-component. This expansion would be far easier than 
would be the case where the expansion was from a relatively inactive 
total economy such as our present one. 

The matter is naturally in not nearly so favorable a position, if we 
should have to start today, both to set up the Surplus Economy, and 
to erect thereon a w^arlik'e economy. Since, however, the Surplus 
Economy is concerned simply with an increase in the present econ- 
omy, the procedure would be more easy from a technical point of 
view. It might give a good many headaches to accountants and the 
staffs of banks, but the engineer and the industrial worker would find 
little to puzzle him. The vast army of youth seeking employment 
would be more rapidly trained, and the vaster army of workers, onc« 
skilled, but for long years unable to practice their skills, would again 
become competent. Suppose reemployment in this way to be but 6 
months in- advance of the reemployment due to war industries. This 
6 months would be an immense gain. 


Submitted by 




[Presented as a fair means of providing for "Security from Want" for all citizens] 

Time and again in every known language it has been said that the 
basic human desire is for "Security from Want." 

Considering the tremendous resources and means of production 
available in the United States, no citizen should be deprived of ample 
food, clothing, and shelter. 

It should be possible for all able-bodied citizens with but a reasonable 
expenditure of time and energy to provide the essentials of life for 
themselves as well as for those who are unable to work. 

Any form of restriction placed upon the free movement and ex- 
change of foodstuffs and commodities defeats the ideal life for all 

It, accordingly, reasons logically that the fimdamental plan or pro- 
gram to benefit alike all citizens must provide — 

First. For the most economical distribution of such portion of the 
Nation's wealth as is represented by food, clothing, fuel, and shelter. 

Second. To make available at low cost in all homes modern lighting, 
heating, plumbing, and refrigeration. 

Third. To make available to every family through inexpensive radio 
reception the educational as well as entertaining features presented 
through this medium. 

Fourth. It should provide that any family with but a small outlay 
could enjoy the conveniences of a telephone in the home, also make use 
generally of other forms of rapid communication. 

Fifth. It should aid in placing within reach of every family the 
privilege to own and operate a modern safety equipped automobile. 

It reasons that only through a move in these directions will the 
standard of living be raised to the plane which should prevail in this 
land of plenty, and provisions made for the greatest possibly health, 
happiness, and a more sincere feeling of good will among all citizens. 

With the foregoing ideals in mind, would urge that you investigate 
thoroughly, then consider seriously, the presentation to the public by 
every possible means at your command, the advantages of the appli- 
cation nationally to all forms of transportation of what might be 
termed the Cleveland Plan. 

You will find there was set up in Cleveland twenty-five (25) years 
ago a plan under which the Cleveland Kailway Co. has since operated 

The Tayler grant or franchise in question was the consummation of 
an idea of the late Mayor Tom L. Jolyison, developed by the Honorable 
Newton D. Baker, then city solicitor, approved by the late Judge 
Tayler of the Federal court "in the Cleveland district, and was grate- 
fully accepted by the people. 



Under this plan excellent Street railway service is being rendered 
the public at "service at cost" rates, equitable remuneration for both 
executives and employees; also an uninterrupted fixed return quar- 
terly to the stockholders is provided. 

The amount of the stock outstanding represents the approximate 
physical value of the property used in this service. 

The present precarious financial position of the majority of trans- 
portation companies, notwithstanding liberal legislation devised from 
time to time, also the free use of the taxpayers' money through the 
Reconstruction Finance Corporation, is such that drastic action seems 
necessary to protect the interests of the pub)lic as well as holders of 
the various securities issued by these corporations. 

With this thought in mind, as well as the many other economic ad- 
vantages to be derived, it seems logical that the entire transportation 
facilities of the Nation should be brought to operate under a grant 
similar to the Tayler grant, which is not an experiment but has proved 
its worth for the past twenty-five (25) years. 

A non-partisan movement should be started to acquaint the public 
with the many advantages they will derive through a co-ordination of 
all steam and electric railways, highway motor and bus lines, airway 
lines, pipe lines, railway express, Pullman, refrigerator and other spe- 
cial rolling stock, all freight and passenger carriers operating on 
canals, rivers, lakes and coastwise, in fact, every form of transporta- 
tion including local bus, taxi, subway, elevated roads and surface 

A Nation-wide distribution of facts concerning the Cleveland Plan 
would bring about a general discussion of its advantages and disad- 
vantages, all of which should in time result in the forming of public 
opinion to a point where everv political candidate for all legislative 
bodies and other governing oflEices would sense the will of the people 
and declare for the fundamentals of the Cleveland Plan: also work 
diligently for the enactment in an orderly form such necessary Na- 
tional and State legislation as would provide for the adoption of the 

After proper provision has been made by law, the procedure would 
be similar to that worked out in Cleveland years ago. 

Each property in question would be appraised separately, the ap- 
praisal to be based only on the approximate physical value, no con- 
sideration to be given set-up values of grants or franchises. 

Basic data for appraisal purposes are already available in the files 
of all State public utilities commissions, in the offices of auditor's of all 
States, counties and cities, also very definite information must be avail- 
able in the records of the Interstate Commerce Commission in Wash- 
ington, D. C, 

Appeals or questions raised by holders of equities in these properties 
for revision of the appraised values would be submitted to the supreme 
court in the respective States, and if necessaiy their findings would be 
reviewed and final decision made by the United States Supreme Court. 

Upon determination of the fiscal value of each property the holders 
of the various types of securities outstanding (no treasury stock to be 
considered in the exchange) would be entitled to receive their pro-rata 
share of the common stock (with a guaranteed fixed interest rate) of 
the National Transportation Co. 


The issue of common stock of the National Transportation Co. at 
time of exchange would represent the aggregate value of all existing 
properties as determined by the courts. 

From time to time additional common stock would be issued, only, 
however, in the amount of actual additional capital investment made to 
extend services and to improve or replace obsolete equipment. 

Provision would be made for research and experimental work to 
cover development recommendation and adoption of every device or 
facility which would provide for the public the safest and best possible 

To provide necessary working capital, also funds for extension and 
improvement of services, short term bond issues would be made at a 
pre-determined fixed annual rate of interest, this rate to be somewhat 
lower than the fixed return on common stock (i. e., jjiesuming return on 
common stock was set at 6 percent) , then a rate of 4 or 5 percent might 
be considered fair on the bonds. 

Such portion of these bonds issued to provide for actual physical 
property or capital investment would at date of maturity be exchanged 
for equal amount (based on par values) of common stock of the com- 
pany which would then provide that practically at all times the amount 
of common stock outstanding would represent physical value of all the 

The tariff rates on all commodities as well as on passenger haul 
would be set up similar to schedule shown in the Tayler grant to the 
Cleveland Railway Co. (i. e., graduated from lowest rate of 3 cents per 
haul per passenger to 10 cents per haul per passenger, the highest 
rate provided). 

The commodity and passenger rates on all forms of national trans- 
portation would in this form be clearly understood by the public. 

The particular set of rates applicable for any given period of time 
would be determined as in the Cleveland RailAvay Co.'s grant by the 
amount or balance shown in the control fund. 

This principle is brought out clearly in the Tayler grant under which 
the Cleveland Railway Co. has operated for 25 years. 

The people as a whole would eventually realize tliat the greater use 
they make of all transportation facilities the lower these costs would be 
from time to time. 

The entire country would be divided into districts or zones (i. e,, 
similar to present parcel-post system) and tariffs set up would provide 
for rates per mile on each classification for carload, ton and hundred- 
weight within a given zone, also show what additional percentage of 
the zone rate must be added according to the number of zones entered 
or crossed. 

A similar prepared schedule or tariff covering passenger rates per 
mile or within a given zone or any number of zones would also show 
the additional rate or charge made for use of space in Pullman cars, 
airplanes, staterooms on boats, and all other special accommodations 
provided for convenience and comfort of travelers. 

Continuing this same line of thought or procedure all public utilities 
might consistently be financed and operated along practically the same 

This would create another national service unit consisting of all 
electric producing and distributing companies embracing municipal 


plants, also such projects as are now being financed or developed by 
State or national governments. 

Another national service unit would include all concerns controlling 
natural gas developments and distribution as well as manufacturers 
and distributors of artificial gas. There would also be brought into 
this group all municipal gas plants and distributing units. 

Another national service unit would bring together all private and 
municipal water pumping stations, reservoirs, dams, irrigation projects 
and their distributing equipments, also such water supply and distribu- 
tion as is now operated or is in course of construction by State or na- 
tional governments. 

Following further the thought of service at low cost to the public of 
essentials, the same plan would be carried out through combining and 
operating all telegraph, telephone, wireless, and cable facilities as a 
national service unit to make available the use of these services to 
millions of people now denied this privilege due to the prevailing high 

The employees of all national service units should wherever possible 
be classified and selected under civil service rules and regulations 
(similar to Postal Service workers) to provide for the developing or 
building up of groups of highly trained employees who would render a 
most dependable service to the public unhampered as little as possible 
by politics or trade union encumberances. 

The supervision of all public service units also to insure ample pro- 
tection for the stockholders as well as the public being served would be 
placed in the hands of a State commission of five or nine members 
same to be elected by direct vote of the people in given districts in each 

These selections to be made at each regular State election every 2 
years, of two or more commissioners elected alternately to serve for a 
period of 6 yeai^ subject to provision of recall or removal (through 
direct vote of the people) from the commission due to incompetency 
or for other good and sufficient cause. 

The National Government would be represented by a similar com- 
mission elected by a direct vote of the people in given districts on each 
4-year national election day. 

The National Commission would replace the present (now appoin- 
tive) Interstate Commerce Commission. 

Protests or complaints regarding conduct or improper action of State 
Commissioners would be filed with the National Commissioners who 
would decide if charges warranted a vote on recall by the people in any 
given State district, and if so decided would be empowered to have 
this question placed on ballot at the next following State election. 

Similar protest against a National Commissioner would be heard and 
passed upon by the cabinet at which meeting the Secretary of Public 
Service would preside, and if charges were considered sufficiently seri- 
ous they would be empowered to place this question of recall on ballot 
for action by voters at any given national election. There would be 
no restriction regarding the reelection of any commissioner upon ex- 
piration of a given elected term. 

The nomination or placing on ballot of names of applicants for office 
of commissioner, both State and National, would be by petition signed 
by a reasonable percentage of the legal voters residing in the district 


or section of State or Nation in which the commissioner would be 

All applicants would be required to show at hand of each petition, 
a halftone reproduction of a recent photograph, name, address, also a 
statement as to vocation, such as engineer, executive, or other line of 
endeavor which might qualify them for this important position, also 
show a brief record of actual service or business experience. All of this 
would provide information for the signers of petitions to consider and 
aid them in the forming of a reasonably fair opinion as to the type of 
person they were petitioned to nominate. 

The nomination for National Commissioners would be made along 
identical lines provided for nomination of State Commissioners. 

There would be a cabinet member known as Secretary of Public 
Service, appointed by the President, who would preside at all meet- 
ings of the National Commission and at all joint meetings of the State 
and National Commissioners, to be held at stated regular periods to dis- 
cuss problems of service and to exchange ideas relative to improvement 
of same. 

All meetings of commissions would be open to the public and records 
of proceedings be available to public inspection at all times. 


Limitation of space does not permit publishing in full the great 
volume of material received by the committee from individuals and 
organizations throughout, the United States. A listing of those who 
wrote letters or submitted plans to the committee, relating to the 
general subject of recovery and how it might be achieved, is given 
below : 

Abell, W. W., 424 Equitable Building, Baltimore, Md. 

Ackerman, P., 4078 Kingston Avenue, Montreal, Quebec. 

Allen, Harland A., 10 South La Salle Street, Chicago, 111. 

Allen, James R., 722 Bennett Street, Wilmington, Del. 

Allen, L. W., 190 Waverly Place, New York City. 

Andrus, W. T.. 2140 Dickerson Avenue, Detroit, Mich. 

Appleton, Allen L., 334 Maple Street, Springfield, Mass. 

Association of Liberal Free Masons, 1337 West Seventy-seventh Street, Los 

Angeles, Calif. 
Association of Unemployed of America, Inc., 342 Madison Avenue, New York City, 
Bab, Herbert, 1060 Bush Street, San Francisco, Calif. 
Bachman, C. F., Decatur, 111. 
Baldwin, W. W., Millersville, Md. 
Barber, Robert E., Miami, Fla. 

Barnstone, Robert C, 21 Maiden Lane, New York City. 
Beggs, J. D., Orlando, Fla. 

Beisser, C. G., 1463 Southwest Seventeenth Street, Fort Dodge, Iowa. 
Beitz, F. W., 1S5 Heath Street, Buffalo, N. Y. 
Benz. Fred, 282 Belmont Avenue, Paterson, N. J. 
Bergeron, Lorenzo. 2711 Spuyten Duyarl Drive, New York City. 
Berry, Paul B., 125 North Seventeenth Street, Camp Hill, Pa. 
Betts, Col. Edward C, West Point, N. Y. 
Bistor, J. E., 612 North Michigan Avenue, Chicago, 111. 
Bond, Jesse H., 1100 Blackshire Road, Wilmington, Del. 
Bowde, Paul W., 1243 North Third Street, Milwaukee, Wis. 
Bowen, Edward J., 410 Broadway, New York City. 
Bradley, Riciiards M., 60 State Street, Boston, Mass. 
Braseh, Arthur H., 465 West End Avenue, New York City. 
Briskman, J., 110 West Forty-second Street, New York City. 
Brodie, J. C, Superior, Ariz. 

Brokaw, W. E., The Equitist League, Del Rosa, Calif. 
Brown, A., 487 Victor Street, Winnipeg, Canada. 
Brown, C. F., Route 1, Box 217, Ventura, Calif. 
Brown, F. M., Weston, W. Va. 

Brown, George O., 143 Baumer Street, Johnstown, Pa. 

Bruno, Jacob, 601 West One Hundred and Thirty-seventh Street, New York Ct' v, 
Burkland, Stewart A., 1150 East New York Avenue, Brooklyn, N. Y. 
Burnett. Ferd, Post Office Box 100, Cunningham, Kans. 
Bu!t, Charleg, 150 Broadway, New York City. 
Buyukas, George, 301 West Forty-first Street, New York City. 
Caldwell, Robert, 166 East Sixty-sixth Street. New York City. 
Callmann, Rudolf, 23 Hammond Street, Cambridge, Mass. 
Carahoff, Simon T., R. H. 2, Gary, Ind. 
Cavanaugh, F. G., 106 Broadway, Long Branch, N. J. 
Chamberlain, J. B., Kensington, Md. 

Chasan, Louis A., 44 Washington Street, Providence, R. I. 
Chatfield, Ruth H., Baldwin, N. Y. 
Chichester, LeCount, 40 Perry Street, New York City. 
Chilberg, Charles K., 1205 Southwest Eleventh Avenue, Portland, Greg. 


273442 — 41 — No 95 17 


Christensen, George C, 1732 South Third East Street, Salt Lake City, Utah. 

Clark, James E., 14 Court Street, New Haven, Conn. 

Cleland, S. "C, Suite 1201, Old First Bank Building, Fort Wayne, Ind. 

Clinton, Guy, 124 Willow Avenue, Takoma Park, Md. 

Commonwealth Federation of New York, 315 Fourth Avenue, New York Oity. 

Corser, J. B., Scranton Private Hospital Building, Scranton, Pa. 

Craig, O. P., 1012 St. Marys Avenue, Fort Wayne, Ind. 

Dartney, A., 2 West Forty-lifth Street, New York City. 

Davis, Eugene, 2714 Walnut Street, Alton, 111. 

Dawf on, Albert, 415 East Tenth Avenue, Tarentum, Pa. 

DevrJes, Arthur G., Post Office Box 182, Reno, Nev. 

Doane, Edward, 505 Congress Building, Miami, Fla. 

Dover, Marcus L., 2640 Longview Avenue, Louisville, Ky. 

Downie, John, 2114 Fifth Avenue West, Keattle, Wash. 

Drekolias, Adam T., 3150 M Street NW., Washington, D. C. 

Duggan, J. W., Room 400, 709 Pine Street, St. Louis, Mo. 

Dunn, Arthur, 45 Prospect Place, New York City. 

Durham, C. K., Box 1444, Waco, Tex. 

Dwyer, Thomas, 1808 West Genessee Street, Syracuse, N. Y. 

Eaton, Warren S., 1636 Cicero Drive, Los Angeles, Calif. 

Eckstein, Henry J., 233 Broadway, New York City. 

Elliott, Fred, 134 East Coronado Avenue, Phoenix, Ariz. 

Ellison, W. M., 923 West Johnson Avenue, Harlingen, Tex. 

Emerson, Kenneth, 42 Aberdeen Road, Milton, Mass. 

JSvensta, E. G., 3307 North Sixth Street, Minneapolis, Minn. 

Fahey, William, 213 Nicolet Avenue, Minneapolis, Minn. 

Fennell, Harry T., 414 East One Hundred and Tenth Street, Chicago, 111. 

Ferolie, A. Joseph, 2301 Avenue Y, Brooklyn, N. Y. 

Fisher, D. H., New Paris Slate Bank, New Paris, Ina. 

Fisher, Harry G., 34-19 Ninetieth Street, Jackson Heights, N. Y. 

Fisher, L. A., 1130 South Spaulding Avenue, Los Angeles, Calif. 

Fisher, Wager, Pennswood Road, Bryn Mawr, Pa. 

Flanders, William H., Chamber of Commerce Building, Indianapolis, Ind. 

Forman, Albert F., 2812A West North Avenue, Milwaukee Wis. 

Fowler William F., Lynbrook, N. Y. 

Franchot, Richard, Mun.sey Building, Washington, D. C. 

Fraser, Stuart A., 419 St. Clair Road, Grosse Pointe, Mich. 

Frease, Harry, Harter Bank Building, Canton, Ohio. 

Freeling, Joseph, 1769 Townsend Avenue, Bronx, New York City. 

Freyermuth, E. G., South Bend, Ind. 

Friborg, J. Robert, Sixteenth and Telegraph Avenue, Oakland, Calif, 

Fulcher, Gordon, 219 Raymond Street, Chevy Chase, Md. 

Fullilove, J. P., 1825 Fairfield Avenue, Shreveport, La. 

Gadden, Oscar, 382 Springfield Avenue, Newark, N. J. 

Galloway, George B., 1721 1 Street NW., Washington, D. C. 

Gamble, Howard E., Waltham, Mass. 

Garpner, E., Box 591, Woodward, Okla. 

Geiger, Juseph. 412 East Wrighf Street, Milwaukee, Wis. 
Gibson, C. W., Corpus Christi, Tex. 

Goodman, J. D., 611 Upsal Street, Philadelphia. Pa. 

Green, D. O., Route No. 3, Jasper, Mo. 

Greerberg, J., 110 Belmont Avenue, Newark, N. J. 

Greene, R. L., Notre Dame, Ind. 

Greenhut, Eugene, 250 Park Avenue, New York City. 

Hally, Francis, Middlesex, N. J. 

Hamlii'. Scoville, 11 East Thirty-second Street, New York City. 

Hannei s, Bruce, 1206 Longfellow Street NW., Washington, D. C. 

Hansen, C. M., lOolO Michigan Avenue, Chicago, 111. 

Hazelott, C. W., 51 Forty-second Street, New York City. 

Hemphill, Edward A., 42 West Fifteenth Street, New York City. 

Heyenga, Henry, 6639 South Kingfs Highway, St Loni.«:. Mo. 

Hildebraiul, Andrew N., Tower Building, South Bend, Ind. 

Himes, Timothy, 657 Fourth Avenue, San Francisco, Calif. 

Hoag, C. 0.. Haverford, Pa. 

Hoenes, Gustave, Post Oflice Box 365. Memory Gardens,- San Fernando, Calif. 

Hoffman. Herman B., 42-16 One Hundred and Fifty-sixth Street, Flushing, 
Long Island, N. Y. 

Holder, Herbert, 67 Broad Stueet, Boston, Mass. 


Holdridge, H. C, 60 Florida Avenue NE., Washington, D. O. 

Honest Money Founders, 612 Nortli Michigan Avenue, Chicago, 111. 

Hopkins, George, t)enton, Tex. 

Horwitz, Harry, 204 Indiana Avenue, Washington, D. O. 

Howard, W. R., 4401 Vincent Street, Fort Worth, Tex. 

Howe, Irving H., 305 Boston Building, Denver, Colo. 

Hull, George H., Short Kills, N. J. 

Isaacs, Myer, 348 Bedford Avenue, Broolilyn, N. Y. 

Javits, B. A., 165 Broadway, New York City. 

Jenkins, Delbert W., Danville, Calif. 

Johnson, George, Port Hope, Mich. 

Joseph, Irvin S., 132 West Thirty-first Street, New York City, 

Kata, Maxwell C., 120 Broadway, New York City. 

Keeler, Howard L., 2336 University Avenue, Bronx, N. Y. 

Kenrick, R. S., 506 South Wabash Avenue, Chicago, 111. 

Kershaw, F. E., 138 Guthrie Street, Dallas, Tex, 

Killough, John M., Waco, Tex. 

KitsE, Conrad J., 616Mj Irving Avenue, Syracuse, N. Y. 

Kramer, Louie, 202 East Fifty-fifth Street, Brooklyn, N, Y, 

Kurre, H. A., 283 Fifth Avenue, Brooklyn, N. Y. 

Lake, Simon, Milford, Conn. 

Landry, Bertrand, 4800 Forbes Street. Pittsburgh, Pa, 

Lang, James H., 35 Beach Avenue, Larchmont, N. Y. 

Lang, John G., 3213 Frisby Street, Baltimore, Md. 

Lange, L. C, 400 New York Life Building, Kansas City, Mo. 

Lapatin, H., 954 Jackson Street, Denver, Colo. 

Latimer, Walter E., 724 Northwest Eighteenth Street, Oklahoma City, Okla, 

Levery, Charles J., Aberdeen, S. Dak. 

Learned, Paul A., National Military Home, Los Angeles, Calif. 

Leister, Mortimer, 101 West Fifty-fifth Street, New York City. 

Lockwood, Charles B., 1 Wall Street, New York City. 

Levering, Phillips H., 523 West One Hundred and Twenty-first Street, New York 

Lurie, Joseph M., 12 Libbey Avenue, Lewiston, Maine. 
MacKenzie, Charles, 120 Broadway, New York City. 
Macnamara, Gerard, 1616 Southwest Laurel Street, Portland, Oreg. 
Mahler, Robert, 12 East Thirty-first Street, New York City. 
Manley, P. G., Ill North Payson Street, Baltimore, Md. 
Mann, C. R., 744 Jackson Place NW., Washington, D. C. 
Mason, J. Rupert. 1920 Lake Street, San Francisco, Calif, 
Massey, Homer E., 629 North Van Buren Street, Dallas, Tex. 
Maurer, A. J., Seely, Wyo. 
Mayer, Ed. E., 8 Bridge Street, New York City. 
McAdoo, Victor C, 329 McAdoo Avenue, Greensboro, N. C, 
McAllister, Otis, 2231 Galber Avenue, Overland, Mo, 
McCliutic, A., Sixth Floor, Occidental Building, Indianapolis, Ind, 
McDill, W. H.. 1230 East Atchison Street, Jefferson City^ Mo. 
McGregor, A. G., Selection Trust Building, Coleman Street, London, England. 
McGuire, Eugene, Bp.nkers Trust Building, Des Moines, Iowa. 
.AIcKee, Frederick C, 2215 Oliver Building, Pittsburgh, Pa. 
McMichael, L. D., Oakdale, Pa. 

Meeker, F. G., 311 West Front Street, Mount Morris, 111. 
Meinshausen, Charles, 11 West Forty-second Street, New York City, 
Menchini, Louis, 415 Jackson Place, San Francisco, Calif. 
Miller, L. J., 25 Beekman Avenue, North Tarrytown, N. Y. 
Moffeet, Robert L., 5709 Rippey Street, Pittsburgh, Pa. 
Monningh, C. P., 161 South Berkeley Avenue, Pasadena, Calif, 
Moore, G. L., 80 Eighth Avenue, New York City. 
Murphy, B. A., 1600 Walnut Street, Philadelphia, Pa. 
Nason. R. A., 1235 Gaylord Street, Denver, Colo,. ^ 
National Prosperity Council, 5307 Ravenswood Avenue, Chicago, 111. 
National Recovery League, 50 State Street, Albany, N. Y. 
Neal. Thomas W., Supreme Court Building. Santa Fe, N. Mex. 
Neary, Edward H., 273 Main Street, Port Washington, N. Y, 
Neill, W. C, Carrollton, Miss. 
Newby, H. G., 701 Onate Street, Santa Fe, N, Mex. 
Nicolay, G., 3495 Boulevard, Jersey City, N. J. 


Nienstaedt, L. R., 420 West One Hundred and Sixteenth Street, New York City. 

Noren, Hugo W., 546 Greenfield Avenue, Pittsburgh, Pa. 

O'Brien. Joseph J., 226 West Fiftieth Street, New York City. 

O'Dea, Bernard J., 1453 Bast Tenth Street, Brooklyn, N. Y. 

Ogon, Ernst, Post Office Box 576, Grand Central Annex, New York City. 

Osburn, John E., 42-02 Layton Street, Elmhurst, Long Island, N. Y. 

Osgood. Putnam, 1022 Forest Street, Reno, Nev. 

Page, C. E.. Route 5, Boise, Idaho. 

Palm State Oil Co., Tampa, Fla. 

Palmer, Chai'les R.. 2501 Norwood Avenue, Cincinnati, Ohio. 

Palmer, John E.. 342 Madison Avenue, New York City. 

Palmer, W. B.. 781 Park Avenue. West Mansfield, Ohio. 

Pape. A. H.. Box 401, Kenrfield, Calif. 

Parker. J. W.. 712 Chambers Building, Kansas City, Mo. 

Pasternak, M., 590 Kosciusko Street, Brooklyn, N. Y. 

Patterson, ^. R., Nashville, Tenn. 

Patty, J. E.. 1227V:; South Plymouth Street, Los Angeles, Calif. 

Pearson, Mowbray F., 131 Augusta Avenue, Spokane, Wash. 

Pearson, Tyson, 970 W^ilshire Boulevard, Los Angeles, Calif. 

Perkins, H L., 66 Pearl Street, Hartford. Conn. 

Pollack, Orant, Post Office Box 58. Clinton, 111. 

Porter, Stanley W.. Room 8, Professional Building, Elgin, 111. 

Potter. Alden. R. F. D. No. 3. Bethesda. Md. 

Potts, C. A., 89-31 One Hundred and Sixty-first Street, Jamaica, N. Y. 

Price. P. A., 415 Jackson Street, San Francisco, Calif. 

Pugb, A. U., 419-20 Paramount Building, Des Moines. Iowa. 

Randall, Harris K.. 37 West Van Buren Street. Chicago, 111. 

Raymong. F. I.. 629 West Washington Boulevard, Chicago, 111. 

Rehak, Paul, Box 65, South Vineland, N. J. 

Rhodes, William A., 1965 Broadway, New York City. 

Richards, Halson. Houlton, Md. 

Richardson. Edward, 1102 Linden Street, Bethlehem. Pa. 

Ritter, L. A.. Post Office Box 1505. Los Angeles. Calif. 

Roberts. Roderick G.. 4015 Ninth Avenue NE., Seattle. Wash. 

Robbins. S. C. 8747 Brandt Avenue, Dearborn, Mich. 

Robson, Kernan, 912 deYong Building. San Francisco, Calif, 

Robe. S. Thurlow. 2470 India nola Avenue, Columbus, Ohio. 

Rosenbaum, Herman. 119 East Eighty-fourth Street, New York City. 

Ross, John M.. Somerset, Ky. 

Ross, John P., 838 Poplar Street, Cincinnati, Ohio. 

Rudnick. Albert, Beaver and Grand Streets, Albany, N. Y. 

Rnthven, Albert, post-office box 626, Denver. Colo. 

Ryan, Rhoa, 3604 Pleasant Avenue, Minneapolis, Minn. 

Saft, Charles, Seneca, Mo. 

Samson, Sam. Stevenson, Wash. 

Scherbak. H., 15 East Sixty-ninth Street, New York City. 

Schmid, Emil, 1401 Twenty-second Street SE.. Washington, D. C. 

Schroeder. Louis J., 459 Sixth Street, Brooklyn. N. Y. 

Seifert, C. A., 201 Laflin Avenue, Waukesha, Wis. 

Selbert. Frida. 10525 Carnegie Avenue, Cleveland. Ohio. 

Shearer. Sam D., 3214 Berkshire Road, Cleveland Heights, Ohio. 

Shibley. George, 1530 Grant Street, Denver, Colo. 

Sisco, R. J., 2950 North Damen Avenue, Chicago, 111. 

Smazel, Clarence, 500 Mutual Building, Lansing, Mich. 

Snyder. Mil.j, 208 East Mason Street, Milwa'okee, Wis. 

Spence, Paulsen, Walden, N. J. 

Stoke. H. F., 1420 Watts Avenue, Roanoke, Va. 

Stola, Rocco, post-office box 33, Stratford, Conn. 

Strom, Fred H., 16 North Washington Avenue, Minneapolis, Minn. 

Sullivan, R. E., 418 Fountain Court, Louisville, Ky. 

Sun.aers. James C. 6017 Eighth Street NE., Seattle, Wash. 

Szmak, G., 101 Park Avenue, New York City. 

Taylor, Merritt F., Cuylerville, N. Y. 

Tenney. Alonzo C, 25 East Washington Street, Chicago, 111.. 

Thien, L. H., 169 High Street, West Orange, N. J. 

Thornton, Ward L., 610 North Hobart Street, Los Angeles. Calif, 

Tisdale, James W., 16 Technical Building, Asheville, N. C. 

co^'CE^■TRATIO^: of economic power 251 

Tomlin, Morell, 6711 Avenue J, Houston, Tex. 

Van Dalsam, Newton, 1337 West Seventy-seventh Street, Los Angeles, Calif. 

Walker, H. O., 1042 Madison Avenue, Memphis, Term. 

Warren, C. E., 177 Oakland Park Avenue, Columbus, Ohio. 

Watson, Frank H., Jonesboro, Ark. 

Watson, L. W., 942 West Seventh Place, Los Angeles, Calif. 

Weber, F. G., 86 East Merrill' Avenue, Fond du Lac, Wis. 

Webster, John E., 523 North Negley Avenue, Pittsburgh, Pa. 

Weiss. Frederick, 70 Chenery Street, San Francisco, Calif. 

Wilken, Carl H., 203 Trimble Building, Sioux City, Iowa. 

Williams, Charles, 5330 Main Avenue, Norwood, Ohio. 

Williams, Ernest W., 1921 Kalorama Road, Washington, D. C. 

Williams, J. H., 77 Spring Sreet, New York City. 

Wittstein, H. L., 54-62 Grant Street, New Haven, Conn. 

Wood, Homer W., Porterville, Calif. 

Wray, Albert B., 2140 North Moody Avenue, Chicago, 111. 

Zirn, Samuel, 217 Broadway, New York City. 



A. A. A , 107-114,128 

ACADEMY OF POLITICAL SCrENCE: Proceedings (1939) ; cited 71 



ALLEN, ROBERT G ix, 103, 109, 111 

Remarks 103^109 



Papers and proceedings (1939) ; cited 68 



Monthly survey of business (1939) ; cited 127 


AMLIE, THOMAS R ix, 103 

Remarks 1C9-118 




BAKER, JACOB 96, 97 





BAUER. JOHN ^ 36, 41 




BERLE, A. A 25,28,48,57,58 



BISTOR, J. E 50 


BLAIR, JOHN M. : Seeds of destruction (1938) ; cited 189,192 

BORROWING. -See Government spending. 


Bt'CIII, JO HENRY: Free money (1933) : cited 67 


prices outlook chart book (1940) ; cited 42 


BUSINESS WEEK (October 1, 1938) ; cited 72 



CAPITAL - 192-195 



Changes recommended 201-207 

Decline 195 

Functioning 186, 204. 206-208 

National vs^ealth 187-192 

Nature 185, 207, 208 

CHASE, STUART 17, 28, 30, 38, 158 

Behind the budget (1939); cited 33,37,41 

Saving and spending (1939) ; cited ^0 


254 INDEX 



CLARK, EVANS, and GALLOWAY, GEORGE B. : The internal debts of the 

United States (1933) ; cited 97 

CLARK, JOHN MAURICE : Economics of planning public works (1935) ; 

cited 32,71 



COLLIER'S (Mar. 11, 1939) ; cited 1 43 






CONGRESSIONAL RECORD ; cited 37, 48, 60 


41, 46, 47. 86, 98, 99, 158-162, 201-210 232-236 



CREDIT , 59-63 


of (1937) ; cited 48,49 

CURRTE, LAUCHLIN 1 28, 29, 31 

CZERWONSKY, HUGO E., joint author. See Cromwell, J. H. R. 

Jobs, machines, and capitalism; cited ix 

When capital goes on strike; cited ix, 17, 67, 68, 71 


DEANE, ALBERT L., -and NORTON, H. KITTREDGE : The Deane plan 

(1933) ; cited 23 

"DEANE PLAN • 23, 24 

DEBT . 92-99, 165-181 

Burden 167.168 

Government responsibility 169^171 

Growth 33, 34 

Long term 1 173-175, 179 

Problem____ 166-171,177 

Public 169, 176, 177, 197-199, 203 

Short term : 172 



DESPRES. EMILE : The proposal to tax hoarding (1939) ; cited 68 


DISTRIBUTION. See Consumers; and Industrial distribution. 

The Douglas manual, being a recension of passages from the works of 

Maj. C. H. Douglas outlining social credit ; cited 234 

Social credit (1933) ; cited 48 49,61,62 


DUNN. ARTHUR: Thirty million jobs (1938); cited 42 

DYNAMIC AMERICA (November 1939) ; cited __ 90 







EXTER. JOHN E __ 35 


Jobs for all; cited . I57 

$2,500 a year; cited 108, 109, 157 

FACH. HUGO: Secret of Money Power; cited 50 67 

FAsnSM ^ :;_ "lie. 117 

FEDERAL RESERVE BULLETIN : citpd 12 38 48 49 69 

FJSHER, IRVING: Stamp scrip (1933) : cited 1__^__^ 68 67 

FLYNN, JOHN T. : Scared dollars (1939) ; cited __ 43 





FREE ECONOMY (October, 1939) ; cited __ 90 


FORTUNE ; cited- _ __ ___ 149 159 



GALLOWAY, GEORGE B-, joint author. See Clark, Evans. 


GESELL, SILVIO: The natural economic order (1934) ; cited 66,67 

GILL, CORRINGTON : Wasted manpower ; cited 149 

GOODBAR, JOSEPH E __ __ _ 78 





Borrowing 21^1 

Costless money 47-63 

Credit r,9h-63 

Loans 24-28 

Methods 20-63 

Problems 20-63 

Pump-primirig 21-23, 209 

Summary 40, 41 

Taxation 41^7 

GRAHAM, FRANK D. : The abolition of unemployment (1932) ; cited 232 



HANSEN, ALVIN H 28, 32, 41, 43, 98 

Full recovery or stagnation (1938) ; cited ^ 76 

HARDY, CHARLES O. : TTie recovery problem in the United States 

(1936) ; cited 73 


Incentive taxation (brochure, 1939) ; cited 80, 81, 85 

Incentive taxation (1939) ; cited 80, 84, 85 



HOAG, C. G 67 



Distribution 82-84 

National 110,111 



INDUSTRIAL EXPANSION ACT 103,104,106.109-117 

INFLATION 38, 39, 209 

INTEREST 39, 40, 43, 72-77, 92-96 


INVESTMENTS 31-33, 176, 177 




JOSEPH, A. W. : The A plus B theorem; cited 62 


The debt problem (1940) ; cited 93 


KEYNES, JOHN MAYNARD 21, 37, 65. 2.34 

General theory of employment, interests, and money (1936) ; cited- 19.66,67 





LA RUE, .lESSE: The truth about interest; cited 60.67 

LEVEN, M.. MOULTON, H. G., WARBURTON, C. : America's capacity to 

consume (1934) ; cited 31,109,189.192,198 

LOANS 24-28 

LOEB, HAROLD, et al.: The chart of plenty; cited 105,108,189 

256 ^^^^^^^ 


MACKENZIE, CHARLES S. : Mackenzie plan (1939); cited 78,79 




MAVERICK, MAURY ix. 103, 109 


McWILLIAMS, CARY: "Ham and Eggs" (1939); cited 47 







Capital 192-195 

Control 12-19 

Credit 59-63 

Delayed use 14-18 

Evolution : 50-54 

Government spending 20-63 

Idle 82-84,86 

Income 82-84, 110. Ill 

Inflation 38. 39, 209 

Interest 39. 40, 43, 72-77. 92-80 

Investments 31-33. 176, 177 

Loans ^ 24-28 

Nature 13, 54-58 

Private spending 04-91 

Quantity 48-50 

Savings 34-36, 43, 44, 196, 197, 200-202 

Supply 77 


Accounts and records 141 

Antitrust laws 125, 142 

Appropriations - 138, 13& 

Commission ---- 123, 131-133 

Definitions 122, 130. 131 

Departmental cooperation 140 

Effective date 1,46 

Effect on previous laws 143, 144 

Employees' personnel adjustment board 143 

Expansion program i 123, 124, 133 

Farm income and production 125, 140, 141 

Industry councils 124, 133-135 

Industrial-expansion program 135. 130 

Insurance 125, 144-146 

Investigations 141, 142 

Licenses 125* 139, 140, 143 

Nonpartisan administration 125, 142 

Oath of office 142,143 

Policy 123, 129, 130 

Practice before Commission- ^ 143 

Production Insurance Corporation 125, 137, 138 

Production quotas 124, 125, 130, 137 

Rules, regulations, orders 143 

Validity— 146 

Workers' Rehabilitation Board 125,144 


MORSE, STERNE- I x, 211 

MOULTON, H. G. : Formation of capital (1935) ; cited 187,190 

MOULTON. H. G., joint author. See Leven, M. 


NAMES, LIST OF 247-251 

INDEX 257 

NATIONAL CITY BANK OF NEW YORK: Bulletin (June 1939) ; cited— 29 

debt and interest in the United States; cited 179 

national planning board 127 

national recovery administration 98, 108-115 

national resources committee 44,106,107 

national resources planning board 158 

National socialism 112, 113 

national survey of potential product capacity 105, 109 

national transportation co i242, 243 

NEW REPUBLIC; cited 17,47,70 

NEW YORK TIMES ; cited 21, 34, 35, 60, 68, 87, 88, 97 

NEW YORK ffORLD-TELEGRAM (October 26, 1937) ; cited 87 

NORTON, H :ITTREDGE, joint author. See Leven, M. 

NOURSE, r 7IN G. : Amsrica's capacity to produce (1934) ; cited- 105, 109, 209 





Control 38, 39 

Monopoly 8^86 


Confidence 86-91 

Taxation , 64-86 

PRODUCTION 110, 111, 120, 125, 126, 192-195, 213 


unemployment and to establish a stable economy of abundance (1939) ; 

cited 36 


PUBLIC WORKS - • 36-38 

PUMP-PRIMING ^ ^ 21-23, 209 

PURCHASING POWER 174,175.202,203 

RANDAm HARRIS K 30,96,97 

RAYMOND, F. I „ 78 

RECOMMENDATIONS. See Conclusions and recommendations. 
tember 1939) ; cited 24 

RECOVERY PLANS 6-19 an^ passim 

Persons submitting „ 247-251 


1. Academy of Political Science: Proceedings (1939) ; cited 71 

2. American Economic Association: Papers and proceedings (1939) ; 

cited 68 

3. American Federation of Labor: Monthly survey of business 

(1939) ; cited . 127 

4. Atlantic monthly; cited 33 

5. Blair, J. M. : Seeds of destruction (1938) ; cited 189,192 

6. Biichi, J. H. : Free money (1933); cited 67 

7. Bureau of Agricultural Economics: Demand, credit, and prices 

outlook chart book (1940) ; cited 42 

Chase, Stuart : 

8. Behind the budget (1939) ; cited 33, 37, 41 

9. Saving and spending (1939) ; cited 30 

10. Clark, E., and Gallovpay, G. B. : The internal debts of the United 

States (1933) ; cited 97 

11. Clark, J. M. : Economics of planning public vporks (1935) ; cited— 32 

12. Collier's; cited— 43 

13. Commercial and financial chronicle; cited 181 

14. Congressional record ;- cited 37,48,60 

15. Cromwell, J. H. R., and Czerwonsky, H. E. : In defenseof capitalism 
a937) ; cited 48,49 

Dahlberg, A. : 

16. Jobs, machines, and capitalism; cited ix 

17. When capital goes on strike; cited ix, 17, 67, 68, 71 

258 INDEX 


18. Deane, A. L., and Norton, H. K. : The Deane plan (1933) ; cited 23 

19. Despres, E. : The proposal to tax hoarding (1939) ; cited 68 

Douglas, C. H. : 

20. The Douglas manual . . . ; cited 234 

21. Social credit (1933) ; cited 48,49,61,62 

22. Dunn A.: Thirty million jobs (1938) ; cited 42 

23. Dynamic America; cited 90 

Exekiel, Mordeoai : 

24. Jobs for all; cited 157 

25. $2^500 a year; cited 108,109,157 

26. Fack, Hugo: Secret of money power ; cited-, 50, 67 

27. Federal Reserve bulletin; cited 12,38,48,49,69 

28. Fisher. I.: Stamp scrip (1933); cited 6G, 67 

29. Fiynn, J. T. : Scared dollars (1939) ; cited 43 

30. Free economy (1939) ; cited 90 

31. Fortune; cited 149,159 

32. Gesell, Silvio: The natural economic order (1934) ; cited 66,67 

33. Gill, C. : Wasted manpower ; cited _. 149 

34. Graham, F. D. : The abolition of unemployment (1932) ; cited 232 

S\ Hansen, A. H. : Full recovery or stagnation (1938) ; cited ^76 

36. Hardy, C. O. : The recovery problem in the United States (1936) ; 

cited 73 

Hazelett, C. W. : 

37. Incentive taxation (brochure, 1939); cited 80,81,85 

38. Incentive taxation (1939) ; cited 80,84,85 

39. ,To.seph, A. W. : The A plus B theorem; cited 62 

40. Joseph, I. S. : The debt problem (1940) ; cited 93 

41. Keynes, J. M. : General theory of employment . . . (1936); 
cited 19, 66, 67 

42. La Rue, J. : The truth about interest ; cited 60, 67 

43. Leven, M., Moulton, H. G., Warburton, C. : America's capacity to 
consume (1934) ; cited 31,109,189,192,198 

44. Loeb, H., ct ul. : The chart of plenty ; cited 105, 108, 189 

45. Mackenzie, C. S. : Mackenzie plan (1139) ; cited 78,79 

46. McWilliams, C. : "Ham and eggs" (1939) ; cited 47 

47. Moulton, H. G. : Formation of capital (19.35) ; cited 187,190 

48. National City Bank of New York : Bulletin (June 1939) ; cited 29 

49. National Industrial Conference Board : Private long-term debt 

. . . ; cited 179 

50. New republic; cited 17,47,70 

51. New York Times ; cited 21, 34, 35, 60, 68, 87,' 88,' 97 

52. New York World-Telegram (Oct. 26, 1937) ; cited 87 

53. Nourse, E. G. : America's capacity to produce (1934) ; c!ted__ 105, 109, 209 

54. Program of the Commonwealth Federation . . . (1939) ; cited 36 

55. Reconstruction Finance Corporation : Quarterly report (Sent 
1939) ; cited 24 

56. Salter, A. : Security, and can we regain it? (1939) ; cited 213 

57. Saturday Evening Post (June 17, 1939) ; cited 87 

58. Seven Harvard and Tufts Economists: An economic program for 
American democracy (1938); cited 33,40,43 

59. Skinner, R. D. ; Seven kinds of inflation (1937) ; cited ' 179 

60. Smazel, C. V.: We can abolish depi'essions (1940) ; cited 68 76 

61. Soddy, F. : The role of money (1934) ; cited ' 50 

62. Stone, J. F., Jr.: Compulsory spending (1934) ; cited - 78 

63. Survey of current business (June 1939) ; cited 174 

64. Survey — graphic ; cited 30 lei 

Tax Policy League : ' 

65. The Townsend plan analyzed (1936) ; cited 45 46 

66. Where the sales tax fails (1934) ; cited '45 

67. Temporary National Economic Committee: Hearings; cited 13,14, 

^o m ., , ^ 29, 32, 4f-43'; 48, 71, 75 

58. Terborgh, G. : Durable goods expenditures in 1939 (1940) ; cited__ 38 

INDEX 259 


United States Congress : s -^ i oc 

69 Public resolution No. 113 (75tli Cong., 3d sess.) ; cited 86 

70. Senate report No. 610 (76th Cong., 1st sess.) ; cited 88 

Wall<er, G. R. : „„ 

71. The case for monetary reform (1939) ; cited avj 

72. Set America free (1939) ; cited 90 

73. Willkie, Wendell L. : Idle money— idle men (1939) ; cited 87 



ROGERS, R. R „_ '^ 


SALTER, ARTHUR: Security, and can we regain it? (1939) ; cited 213 

SATISFACTIONS 219, 222, 225 

SATURDAY EVENING POST (June 17, 1939) ; cited 87 

llviNGS 34-36, 43, 44, 196, 197, 200-202 

SCHEARER, SAM D >^' 239 



SCRIP 66,67 





for American democracy (1938); cited 33,40,41 

SKINNER. RICHARD DANA: Seven kinds of inflation (1937) ; cited 179 


SMAZEL, CLARENCE V.: We can abolish depressions (1940) ; cited 68,76 





SODDY, FREDERICK: The role of money (1934) ; cited 50 


SPENDING, GOVERNMENTAL. See Government spending. 
SPENDING, PRIVATE. See Private spending. 

STOKE, H. F 27, 34, 92, 95, 96 

STONE,' JULIUS F., Jr. : Compulsory spending (1934) ; cited 78 

SURPLUS 213-237 


SURVEY OF CURRENT BUSINESS (June 1939) ; cited 174 

SURVEY GRAPHIC ; cited ^ -— 30. 161 

TAXATION - 41-47, 96-98, 110, 199-201 


The Townsend Plan analyzed (1936) ; cited 4.3,46 

Where the sales tax fails (1934) ; cited 45 


Hearings ; cited 13, 14, 29, 32, 41-43, 48, 71, 75 

TERBORGH, ' GEORGE : Durable goods expenditures in 1939 (1940); 









Public Resolution No. 113 (75th Cong., 3d sess.) ; cited 8b 

Senate Report No. 610 (76th Cong., 1st sess.) ; cited Z'^^^o ooo 

UNEMPLOYMENT ^^^"■^■^^' fH~^n 

Causes ^ lgO-152 

Consequences f*^f' ^"I'l 

Extent 149,150 

Remedies j^^^ X^ 







VOORHIS, JERRY IX, 103, 109, 111, 157 

Remarks 119-129 

Monopoly Control Act ; 129-146 




The case for monetary reform (1939) ; cited 90 

Set America free (1939) ; cited 90 



WILLKIE, WENDELL L. : Idle money — idle men (1939) ; cited 87 



YOUNG, OWEN D 127, 158 




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