Recovery and Finance

The announced program of the Administration has never presented a complete picture of a road to recovery and beyond recovery into a stable prosperity. Under a democratic government during the early stages of a period of transition, no such complete picture of the future program, is to be expected or desired. If we had a dictator with a pet scheme of his own, we should be in for a predetermined line of progress, regardless of what new facts or new obstacles might appear in the way. What we have is a skipper who knows what direction he wants to pursue, but who sails day by day according to the weather. This nation is exploring along a previously unknown coast, with plenty of guessing among crew and passengers about what will come in sight around the next promontory.

There is abundant evidence that among all groups, from the brain trust down to the lowliest banker, opinions have been divided about what is happening, what is likely to happen, and what ought to be done about it. Trends in the recovery program, like paths in a cow pasture, may be found leading almost anywhere, and as for where they will lead in the future, that is a matter for hopeful guessing and hard pushing between one faction and another. We are at liberty, so far, to pick out any one of the tangled paths and define it as the most significant. This paper is set up around the idea that the most significant path so far is that along which the nation has been slowly bumping toward an understanding of the problem of new investment.

In the beginning most of the experts appear to have believed, perhaps without special examination, that recovery from the existing depression would of course come in a pattern similar to previous recoveries, that is, by a revival of long-term capital investment. Thus the books had taught them back in the dear dead days under the elms, and only the pressure of events that have not yet occurred can teach them otherwise. There have been differences of opinion between conservatives and liberals about the proper form of governmental interference, but to this day few of either party have questioned the desirability—in fact, the necessity—of a large-scale revival of the capital goods industries.

The whole program has been more or less definitely colored by this underlying assumption. The handling of the banks, aside from purely emergency action, appears to have been oriented toward a day to come when the banks would be called upon to support an expansion of the capital market. The President, when he took office, spoke severely about the sins and follies of the money changers, but in the face of a vast preponderance of expert opinion, he could not be expected to chasten the banks otherwise than for their own good. Some day the banks would have to lend money for new capital investment, and so they must be nursed back to confidence and taught to behave at the same time—a problem in finesse fit to puzzle even a master diplomat.

The radicals, of course, had an easy solution right at hand. By abolishing the system of private ownership in business, the Government could relieve itself at once of the bankers and all their works. But if wishes were horses, it would be equally easy, and less disturbing, to abolish folly in bankers and be done with it. The Administration was up against the practical problem of preparing a far from radical people for recovery and prosperity. The recognized experts advised that “confidence” had to be restored, and the Government would have been absurd not to take the best advice that was to be had. The advice happened to be wrong, but that was just what one has to expect in the earlier stages of a period of transition.

The economy program accorded with theory, and, one must not fail to remember, accorded with the desire of most of the American people. The people believed that economy in Federal expenditures would make the country richer, in spite of their experience with the downward spiral of deflation. And nearly everybody believed that a balanced budget would create confidence and preserve the so-called “credit” of the Government—that is, the good will and approval of the banks. For the Government would be wanting to borrow money to refund its short-term loans, and if the banks were to be alarmed about the budget, how could they be expected to lend? The underlying assumption that governments exist by permission of bankers had been pretty well justified by the experience of cities that had been trying to carry the cost of the depression.

The devaluation of the dollar, aimed specifically at raising the relative price level of export commodities, and ultimately at a return to the 1926 price level as a measure of debt relief, carried also with it in many minds the hope that with rising prices there might be a chance to float new capital issues. Especially the assurance of a positive limit to devaluation and of a balanced budget by 1936 was generally understood as an effort to encourage timid capital to come out and buy securities. The Public Works program was in part an attempt to force Federal money into investment in capital goods; its purpose, so it was widely understood, was to “prime” the capital goods market and to stimulate private investment.

The Securities Act and the Securities Markets Bill were stoutly defended by some of their most influential friends on the thesis that they did not interfere with new capital issues, but that in the long run, by building confidence in the soundness of capital paper, they would rather encourage long-term investment.

Behind all these personal opinions that were attached to the various measures of the past year by men of influence in the country, there lay a tacit refusal to face the implications of our failure to carry through the deflation to the bitter end. In all previous depressions events were allowed to take their course, banks and financial houses were wiped out, railroads and industries were bankrupted, farms and homes were foreclosed, and property changed hands with a general scaling down of debts of all sorts. When the quantity of debt resting on productive industry was reduced to less than the amount that business could carry, then there was room for a crop of new debts, or as the financial columns called it, an opportunity for “sound” investment. Then there would come a rise in buying, as the survivors began getting new clothes and hiring back the servants. Then a rise in stock prices, an inflation of bank credit, and new flotations of stocks and bonds. The heavy industries would begin to get orders, their employees would have money to spend, and the recovery would be established. That was what had always happened before; why should it not happen this time? It could not happen this time because of the Reconstruction Finance Corporation.

Several new events have occurred since 1873 and 1893. The United States has become a creditor nation, thereby permanently losing its “favorable” balance of trade. The only way to sell more than we buy, if we are not debtors, is to give the surplus away. After the war we tried that method, and found it unsatisfying. The United States has also become a slow-growing nation. The opening for new capital just to take care of the demands of new people is not what it was thirty years ago. As we have grown more productive we have mechanized our industries, increasing fixed charges and reducing labor costs. When hard times come, the attempt to meet the heavy fixed charges requires drastic cuts in wages, destroying the market more quickly than in former times. We have also come to the place where we make and use large quantities of durable goods, such as automobiles and radios. When hard times come we stop buying these things, and the market collapses violently. As technological improvements have thrown men out of mechanical industry, they have found or made jobs in “services,” many of them superfluous. With the first breath of hard times the jobs vanish. By all these changes in the present century the United States has become more unstable, tending to rise to heights of prosperity in good times and to fall violently into a state of dangerous collapse. The business cycle was growing more violent, and some day, if it were allowed to go on, the downswing was bound to crash through the bottom into general chaos. That day came in sight in 1932, and the Government threw the R. F. C. under the cycle to stop the wave of bankruptcy.

The R. F. C. probably prevented a total collapse of our political order; it was the means by which we got a chance to try a revolution without the R. But by the same means we blocked the possibility of an old-fashioned recovery based on new investment and on the construction of new debts. If we are going to go into recovery with the present debt structure, we cannot go by a road that will add a hundred billion dollars worth of new debts to those we have now. We can poke along slowly, adding a billion dollars of new debts to any municipalities that are not yet bankrupt, and perhaps another billion to houses that are not yet mortgaged quite to the ridgepole, and maybe another billion to industries that are too young to have known evil or are too bedraggled to care what happens to them. In the end, though, all this will come to nothing; and the country will have to face the fact that the way to prosperity by new debt formation is blocked,

II

But the new Deal had to go ahead and do something in 1988, even though the inability of the economic experts to move their feet rapidly made it impossible to get any clear idea of where the road might lie.

So the National Industrial Recovery Act came into being as a sort of omnibus wish-dream, collecting into one dramatic picture the incompatible desires of various conflicting groups whose conception of the crisis was as yet inadequately generalized. The Teagle Share-The-Misery Movement was partly rationalized by adding a minimum wage clause, to satisfy those who had hastily concluded that technological unemployment could be met by shorter hours, and those who had the notion that high wage rates were the simple answer to the problem of purchasing power. The result was one of those half truths that are so often a source of disillusionment.

It is true that industry needs a legalized bottom to the exploitation of labor, to protect the decent employers who do not like to be forced into sweating their employees by the pressure of competition. It is also true that a given amount of work will produce more employment on a short schedule. But the idea that technological unemployment can be met by such means is a mistake. Industrial technology is just beginning, and anything that really brings on prosperity will soon bring on unemployment on a scale that is not measured in the difference between a sixty-hour and a thirty-hour week. Men cannot work three hours a week and know their jobs. The final answer to high productivity is a stabilized development of the service fields of labor, not an attempt to keep men in factories that no longer need them.

There is a similar difficulty in trying to enlarge purchasing power by raising wages ahead of the market. The idea that buying power could be pumped into the market by hour and wage laws was largely fallacious. The pump was put in the pockets of the employers, some of whom happened to have money, others of whom happened to have none. There is a quick-acting law of diminishing returns in wage and hour legislation. If the advantage to labor is appreciable, the number of concerns who cannot meet the terms is also appreciable. The marginal concerns will shut down, or they will come to Washington and get an exception or the power to raise prices, or they will chisel. The effect is like trying to lift a weight with a chestnut burr in the palm of your hand. The wage and hour provisions, while they had some good effects on child labor and sweating, did not effectively raise buying power above the rising price level.

It is too easy to say that the marginal concerns ought to die anyway. But how about their employees? It is the same as saying that we ought to go back and take the deflation to the bitter end. The nation has decided not to try to get out that way.

The real difficulty is that the missing buying power is not in the hands of employers as a class, but in the hands of a different class that cuts across the category of employers and employees. The missing buying power is in part gone completely, that is, it is in the vanished bank deposit money that no longer exists. The rest is in the hands of those who have more money than they can or will spend, whether they be corporation executives or stockholders or movie stars or successful kidnappers or unusually fortunate landlords. Before the workers can get any effective increase in real income, part of the missing money will have to be supplied by selling bonds to the Federal Reserve in return for new money, regardless of conservative financial opinion, and spending the new bank money on public works and services. The rest of the missing money will have to be extracted from those who refuse to spend it, by taxation of incomes and estates. There is the primary problem of purchasing power; until it is solved the dispute between workers and employers is premature.

In order to sweeten the wage and hour provisions of the N. R. A. the industrialists were promised a sort of release from the anti-trust laws. The idea was that since the market could not absorb the product of industry, the industries ought to control production so as to avoid overstocking the market. This, the cartel idea, is an appealing will-o’-the-wisp that haunts the dreams of harried business executives. And yet the economists know that freezing the price system is one of the best known ways of causing an explosion. Control of production, in plain English, means that if the price tends to fall, it shall be pegged by cutting production, firing men or putting them on short hours and reducing their buying power. The idea is to make somebody else take the losses on the downturns and keep anybody else from sharing the profits on the upturns. An economic system in which there are cartels is therefore prone to exhibit the phenomena of instability to an extreme degree—high profits in good times, slow adjustment to slight depressions followed by a sudden collapse of the market as the pegged prices collide with the rising unemployment.

The fact is that if production is to be regulated by the law of supply and demand, prices have to be free to rise and fall without artificial interference. On the other hand, if production is to be regulated by centralized planning, the effort to protect profits leads to intolerable fluctuations of the business system. Theory and experience indicate that if any industry has to be centrally planned, it has to be owned by the only corporation that can disregard profit and loss—the Government. Everybody interested in economics, except some of the leaders of industry, knows that the only alternative to public ownership is decentralization. Under the N. R. A., the leaders of industry tried to set up a form of planned production that is practical only in a communist state, but without being willing to adopt communism. The sign of an irrationality of this type in any line of activity is the appearance of what some of the N. R. A. people call the “hydra,” a series of problems where each solution brings on two new problems worse than the first. There are two ways out. One is to decentralize and give up all attempts at allocation, “open” prices, and controlled production generally. The other is to drift into the hands of Uncle Sam. Both ways will probably be adopted. Power, oil, and railroads for technical reasons are not suitable for decentralization, and are apparently drifting at various speeds toward public ownership. In the majority of businesses and industries, on the other hand, the turn of the tide of centralization is already visible, and the Administration is definitely interesting itself in the possible methods of promoting decentralization. The N. R. A. is furnishing a mass of useful experience that will be of value in the further development of both these trends.

The industries that are destined for public ownership appear to be the strategic natural resources such as oil, the natural monopolies such as power and transportation, such existent monopolies as it may be impossible to unscramble, and certain activities unsuited to businesslike operation such as public health and flood control. Industries that serve industry rather than personal consumers tend to be in this class.

Industries suited for decentralization and “free initiative” appear to be those that produce consumer’s goods, particularly the less necessary goods, and those that provide cultural or recreational services. The borderline between the industries suited to centralized public planning and ownership and those suited to free operation is broad and vague at present, but that there is a definite distinction between the two types appears to be clear.

III

The fourth part of the N. R. A. was a promise to labor of the right of collective bargaining. The labor leaders probably believed that recovery could be brought about by the N. R. A., and naturally felt that the time was appropriate for improving the legal status of labor. The radicals were in favor of any action that would stir up the class conflict, since they believed that the final solution was in the destruction of the profit system. The Administration, being still confused as to just what its relations to the capitalists ought to be, was obviously sympathetic to the aspirations of labor, though not to those of the wilder radicals. The result has been an unfortunate state of confusion on all sides.

The conservative labor leaders were mistaken in their hopes for early recovery. The only measures that could bring on recovery were in 1933 still beyond the horizon of American thought. A long period of education and experimentation had to be endured, during which there would still be eight or ten million unemployed to glut the labor market. The strategic situation was unfavorable for labor. Its only advantage was the sympathy of the Government, but the facts were mostly on the other side. The market was so poor that any industry faced with a strike could stock up and then tell the strikers to go to it. The Government was so sensitive to the business curve that it could not encourage industrial warfare, or try to penalize industry and trade, lest “confidence” be weakened, and the anticipated growth of private investment be chilled and blighted. The weather was altogether not favorable for a complete acceptance by industry of the principle of collective bargaining.

Fundamentally, the collective bargaining clause was at odds with the New Deal. The New Deal is not merely a device for getting everybody his desire, but is quite definitely a living organism, with a destiny of its own apart from the plans and theories of its various conflicting exponents. The American people have set out to find a stable prosperity in a system that will allow a fair amount of individual freedom of initiative. They are not headed for fascism or communism, and if they fall into either of those systems it will be only after their present quest has ended in disappointment. In its earlier stages, however, the New Deal is befogged by the unfortunate illusion among the economic pundits that prosperity can be found along the road of new capital investment. There is on the other hand a wide realization among Government officials and among the people that Wall Street must be curbed before prosperity can be made safe for business. These two ideas are in conflict, and temporarily, therefore, the New Deal is confused and erratic in its orientation. Already, however, the events are shaping that will blow away the fog from the minds of the experts and of the people, leaving the New Deal face to face with public enemy number one, the power of high finance.

Finance is the influence by which money is withdrawn from the business market and passed through the finance market. The money goes back to business only through loans, that is, only through building new debts. Finance lives on the instability of business. Finance lives by pumping up the stock market, “distributing” stocks to the people, pulling the plug, and selling the market down. Business pays the cost. Finance lives by forcing little businesses into big mergers where they can be peacefully milked. Business, labor, and the consumer pay the cost. Finance grows fat by reducing income taxes and laying taxes on the customers of business. Business pays the cost in lower sales and higher capital overhead. Finance digs the hole and business falls into it. The New Deal is the quest of the American people for a way to free themselves from the octopus of finance that has been strangling their free business for several generations. The essence of the New Deal is that some day the lines shall be drawn for a battle between the American people and the Lords of Finance. Everything that interferes with the coming of the Day and the drawing of that battle line is an obstacle to the New Deal.

The conflict between labor and employers is an obstacle to the clear definition of the New Deal. If the American people are to destroy the power of finance, the Government must have the support of the intelligent part of the business and professional group. However bankrupt intellectually the conservatives may be, they cannot be dislodged from their financial stranglehold on business if the middle class chooses to take the conservative side. The only outcome of such an alignment must be a fascist regime, incapable of solving the problem of distribution, and loaded by its very nature for an explosion similar to, but worse than, that of 1929.

The New Deal is a liberal revolution against the disastrous rule of high finance, and its relation to labor and to radicalism needs to be kept clear. If high finance can be destroyed by the middle class, with the help of labor votes, the national income will be greatly increased, and opportunities for employment will be numerous. Under those conditions, in a democratic state where free speech is permitted, the chances are that labor will be able to obtain an increased share of the spoils. The experience of 1918 indicates that when profits are high and labor is scarce, the employer prefers to share with labor rather than jeopardize the operation of his plant. In this sense, therefore, labor can fairly be asked to postpone its demands until better times.

From the radical viewpoint, however, the case is quite different. Labor, in the radical sense, does not want higher wages, shorter hours, and collective bargaining, but the destruction of private business. A liberal revolution that will provide security and a high standard of living without destroying private business is repugnant to radical ideals.

From the conservative viewpoint, the notion of a temporary truce between labor and small business while both gang up against the financial group is as repugnant as it is to the radicals. Hence we see, in San Francisco, the general strike welcomed by radicals and conservatives as a means of alienating labor and the middle class. According to press reports, there was heavy pressure from men of wealth for the declaration of martial law. There is evidence that business houses that were not stopped by the strike were closed with the idea of making the public suffer and throwing blame on the strikers. The general strike ceased because the moderate part among labor and the “public” did not hate each other enough to make a good fight.

The leaders of the New Deal, therefore, are more or less clearly aware of the need for soft-pedaling the labor issue. Many business men have interests that depend on the destruction of high finance, and other interests that depend on .the preservation of high finance. During the next year or two, while the lines are being drawn, it is poor policy to encourage labor troubles that will cause business men to believe that their true interests lie on the conservative side.

The conservatives are in favor of labor troubles and contribute all they can to encourage them. They believe quite correctly that if enough disorder can be fomented the middle class will be made hostile to labor, and neither party alone will be powerful enough to destroy the power of finance. They are unaware that a victory for finance must mean a recurrence of the conditions of 1926-28 on a larger scale, and a probable destruction of the social order when the boiler explodes.

The radicals agree with the conservatives that disorder will mean a conservative victory in this country, but they believe that such a victory will be the quickest road to chaos and to a new crystallization of the social order in a communist form. Among the three parties, the conservatives have the advantage of prestige and financial control over industry. The liberals have the advantage of a large preponderance of numbers among small business men, the professions, labor, and the farmers. The radicals have the advantage of being free from responsibility: they hope that the others will make enough blunders to eliminate themselves.

IV

Under these circumstances, the importance of the capital investment illusion is manifest. It is natural that a banker should favor thrift, and that he should believe that the only respectable way to dissipate capital is to invest it in “sound” securities. But it is contrary to all common sense that a business man should believe any such doctrine after the lessons of the New Era. When the country was new, capital was scarce and the market was hungry for goods. Then the business man, hard pressed to meet the demands of his customers, could view his customers with approval when they restricted their purchases and offered a supply of new capital funds for expanding the business. The business man needed new capital more than new customers, and so he might well believe in thrift and “sound” finance. Now, however, we have reached a stage when the spontaneous rate of saving in good times far exceeds the need for new capital. The business man needs customers more than he needs additional overhead or new competitors. If he could change his mind quickly to adapt his ideas to changed conditions, he would no longer be in favor of thrift.

Such a change, however, takes time, and the slowness of the economic experts to learn new tricks makes it all the harder for the simple business man whose knowledge of facts outside his business is apt to be vague. There are, of course, all kinds of economists, but unfortunately all too many of them are victims of overindulgence in statistics. Only men with unusual vitality can carry a daily load of statistics without losing all consciousness of what the object of their studies ought to be. The weaker vessels are soon distended into potato-shaped creatures fit only to be kept by bankers as bogies to frighten the unlearned. Thus by a combination of normal human inertia, the deadening effect of statistics on the mind, and conservative boring from within, the supporters of the New Deal are generally convinced that capital investment is the way out of the depression.

If there were no escape from this fog, then the transition of the New Deal into one of the forms of fascism would seem to be inevitable. As Carmen Haider points out in her recent book, “Do We Want Fascism?” the easy road for middle-class revolt is through mental obfuscation into a “totalitarian” state where no discussion is allowed and the financial group still owns the show. The radical contempt for middle-class revolution is based largely on that fact, well illustrated by Italy and Germany. The American manifestation of the pitfall into which our foreign friends have tumbled is exactly this illusion of the “soundness” of a policy of capital expansion. Unless we can free the New Deal of this illusion, the ways are greased by which it will slide into the pit. There are two possible factors in the situation that may suffice to accomplish in America what failed of accomplishment in Germany and Italy—the successful establishment of a free social order in a condition of high productivity.

Human beings in large numbers are not exactly rational creatures. We have flashes of reason, but in the main we are moved by emotion and by the effect of butting against hard objects. If we are going to get into the straight path all three stimuli will probably be needed.

Reason has its place, especially among the leaders of public opinion and of government. There are literally thousands of people who are capable of understanding why a mushroom growth of new debts is not the way of salvation, and of comprehending what is the true way to a stable prosperity. That is the justification for discussing these problems. Other thousands are able to observe the discussion and later on to admit the validity of its conclusions, after they have been severely bumped by running into stone walls. The stone walls are now appearing at the proper points in the landscape, and an educative process seems to be preparing for the American people and for the still unenlightened experts.

Curiously enough, the N. R. A. is the agent through which the educative walls are being prepared. The code authorities are becoming sensitive to the unpleasant effect of new competition that might appear in their fields if new capital plant were to be constructed. They feel a vested interest in excluding new equipment while the existing equipment is running at less than capacity. The generalized implications of such an attitude are apparently not yet consciously understood by most of the business men, but the attitude exists, and it is distinctly vocal.

Meanwhile the financial group has carried on a powerful, brilliantly managed campaign of propaganda against the securities acts. It has reached every business man with its argument that recovery must depend on new investment, and the business men have in general agreed to the orthodox theory. In spite of the propaganda the Securities Markets Bill was passed, with enough teeth to make the good old technique of pool operations at least difficult, perhaps impossible. On the other hand, the Securities Act was modified, its teeth were filed enough to force the financial world to pretend satisfaction. The result is a strategic situation that may be of crucial importance.

On one side stand the bond houses, prepared to prove that each new issue they offer has an excellent chance of paying back interest and principal. The criterion of soundness is an opportunity to compete in the industry, to steal somebody’s customers and run away with a lion’s share of the business. That is a banker’s idea of a “sound” security. On the other side stand the industrialists whose customers it is proposed to steal, and their idea of “sound” procedure is to be left alone to fight over the existing market with no new and improved plants to worry their already distracted minds. Both sides are incorrect in their economics, but the shock of their impact will be instructive to all.

As a matter of fact the bankers’ idea that “progress” by modernization of plant is always good is an error, and the industrialists’ new discovery that progress is never good is another error. The optimum rate of progress is neither large nor zero. In a profit system the legitimate uses for new capital are two. One is to take care of the growth of the market for goods—which is almost nothing just now because the market is too small to strain the existing plant. The other is to improve the efficiency of an industry by building a new plant and bankrupting an old and inefficient plant. The rate of such improvement, or “progress,” should be such that the cost of building the new plant, writing off the old, and taking care of the displaced men, will be less than the savings due to improved efficiency. This optimum rate of progress is easily exceeded in the later stages of technological development. When it is exceeded the effect of excess capital investment is a positive lowering of the standard of living by the effects of forced capital losses and unemployment. Essentially, that is what happened before 1929, and the standard of living was not only less than it might have been at that time, but owing to the poisonous effects of panic the lowering of living standards was out of proportion to the quantitative excess of capital.

At the present time, then, there is a small legitimate opening for new capital, where the corresponding losses of existing capital would be more than compensated by the savings, with enough surplus to take care of placing the displaced men. But the opening is small—its relation to any such matter as finding jobs for eight million men is nothing. The business men who say there is no opening at all are theoretically mistaken, but as between them and the financial group, they have the better of the argument. Also, they have the power to make themselves heard.

The field is set, and the fundamental fallacy that has confused and bedeviled the New Deal is about to go up against the hard cruel world. The bond houses would like to sell bonds. The investors would like to invest. The experts give their blessing. All the conservatives and many of the liberals sit on the same platform. The business man at his Rotary Club applauds warmly. This is the answer. The Securities Act has been made “practical” now, and all we have to do is to go ahead and stimulate the heavy industries.

Then the business man goes across the street to his code authority office, and barricades the door lest any bond man get in and stimulate the heavy industries.

The effect is similar to one in which the town pillar of respectability is about to take the chair, in which fate has placed a large tack. Those who are in a position to observe the proceedings may well take satisfaction in the prospect that the fog now hanging about will soon be dissipated.

Within the minds of thousands of practical business men two incompatible ideas now exist, and both are in chemically active form. One side of the brain is all in favor of stimulating the heavy industries; the other is violently opposed to being personally sacrificed for that worthy cause. When the two ideas meet, the spark of understanding is likely to snap, Sauce for the goose is sauce for the gander, and what you don’t want in your own industry the other fellow doesn’t want in his either. Education by contact with hard objects is one of nature’s most successful devices. There are die-hards who cannot be educated by this or any other method. But business men, and liberals, and economists whose development since college has been accidentally arrested, are most of them educable, and this collision between theory and fact may do the trick.

There was one possibility of an escape from the dilemma of investment, but apparently that avenue has been closed by the Securities Markets Act. The good old medicine was a bull market, well watered with pool operations and wash sales. The price of stocks, as few people realize, is a form of money, and a rise in stock prices is a form of inflation of the volume of money. When a man owns a stock certificate worth half a million dollars, and a bit of hocus-pocus goes on (all unknown to the President of the Stock Exchange) and the certificate is worth a million dollars—where did the other half million come from? Any piece of paper that can be instantly exchanged for any chosen form of wealth at a certain rate is a sort of paper money, and any stock that has an immediate market is therefore money at the market rate of exchange. Paper profits are just as real as any other kind of paper money, and they have the pleasant feature of appearing out of the everywhere into the hands of the people who happen to own stocks at the moment when the price goes up. This type of inflation is popularly entitled “sound money,” where the Government keeps hands off and Wall Street does all the inflating. It is naturally popular with those who would get the new money.

Now, an inflation of twenty or fifty billion dollars would be a grand stimulus to business. Many business men are also finance men on the side, and if they were to find a few thousand dollars in the Times some bright morning they would naturally tend to care less about business and more about finance. Moreover, a few billion dollars of fiat purchasing power in the hands of the lords of high finance would be useful for buying elections and carrying “preferred lists” and generally mending their somewhat dilapidated entrenchments. If there could only be a good bull market, the combination of propaganda and intoxication might well break down the resistance of the business world to more capital. Bank credit could be inflated on high-priced collateral, and new flotations of securities would be easy. Confidence, or temporary forgetfulness of the lessons of experience, would blossom on every branch. Then foreign trade could be “financed”: the American workman would get the money, the foreigners would carry away the goods, and the bondholders would, of course, get the bonds and the experience. There would be a new flock of skyscrapers, and the cheerful music of the riveter putting up frames for the sunsets of the next depression to shine through. More oil wells on Mr. Ickes’ doorstep, more coal mines and paper factories and everything else. Another last long swig of the grand old predepression stuff, and then the deluge.

If only they could get a bull market! The trouble seems to be that Mr. Roosevelt knows a bear trap from a swanboat.

The Markets Act, with all the faults pointed out by its critics, just seems to stand in the way. If the Administration can hold that ground, there seems to be no way to escape the necessity of coming at last to grips with the problem of boom- proof recovery.

V

But without a large volume of new investment, how can the New Deal bring on prosperity and find jobs at good wages for ten million surplus men? The objection to new investment is that surplus income is passed over to the surplus labor by way of jobs on capital construction and with the formation of debts that business cannot carry. The alternative is to force surplus income into expenditure that does not create excess capital plant and does not form new debts. In its simplest form the program is to build public works and charge the bill to surplus funds through the income and inheritance tax. In practice the Public Works program has a limited usefulness. The intellectual difficulty of setting up Public Works so that they will not be charged to the consumer through self-liquidation, sales taxes, or local taxes is so great that little has yet been accomplished in this way. Moreover, the quantity of Public Works available is inadequate to adjust a system that in 1929 was building unpayable debts at perhaps ten billion dollars a year. The most practicable line of attack appears to be through the measures of economic security—old-age pensions and various kinds of insurance. If these measures can be adopted on a scale that will affect moderate sized incomes, the total volume of savings will be reduced definitely, and the problem of redistribution will be partly relieved. After the problem of security, which the President has proposed for discussion this year, will come the problem of income taxation. Heavy taxation of the upper brackets will reduce the excessive investment habits of the holders of large incomes, as well as directly redistribute part of the surplus through public works and services without the formation of debt. The habit of corporate saving will need to be broken up by taxation of undistributed profits. The prevention of Wall Street, or “sound money,” inflation will need to be buttressed by a sufficient control of the banks to make them expand and contract short-term loans as directed. Whether public ownership of the banks is necessary remains to be seen. In any case there can be no doubt that bankers will in future play the game as they are told, “or else—”

Along these lines the New Deal will have to fight its way toward a new social order capable of handling high productivity. Much progress has already been made. The Gold Standard, sacred calf of Finance, has been violated and the heavens did not fall. The parts of N. R. A. that were supposed to increase buying power are no longer regarded as the solution of the problem of distribution. The parts of N. R. A. that lead to monopoly and irrational forms of planning are already well tangled and losing popular approval. The irrelevant labor conflicts are serious, but may not be fatal if the President’s influence continues to prevail. The banks have been closed and opened by order, and if they try to hop aboard recovery and run a private inflation, the means of control are easily available. The Securities Markets Bill was passed with enough teeth to make a bull market hard to run, and Wall Street has had to pretend to like it for fear of losing all its business. The Securities Act has been modified so that it will be hard to blame the failure of new flotations on the Act. Business is organized to ward off new capital on the grand scale. The idea that economic security will have to be guaranteed is growing rapidly, and the income tax is making converts among the middle classes. The more desperate parts of the journey are still to come, but the tide of destiny is setting strongly in toward the new land of plenty. If the country can keep its nerve while the present boomlet dies away, and if the leaders of the New Deal can think fast enough, the chance of arriving successfully appears to be good.