'In the Day of Adversity'
I
‘IN the day of prosperity be joyful, but in the day of adversity consider.’ This is the advice on business depressions which was offered by the son of David, King in Jerusalem, and which may still be read, thanks to the Gideons, by any commercial traveler in any hotel room. It is unnecessary advice, however, as far as most of us are concerned, for it is only in the day of adversity that we ever do consider.
The son of David, it seems, was the first man to declare that business cycles are the result of natural law. What goes up, he said, must come down. ‘The sun also ariseth, and the sun goeth down, and hasteth to his place where he arose. . . . The thing that hath been, is that which shall be . . . and there is no new thing under the sun.’
But can’t we create something new? Can’t we foresee a depression, and prevent it?
Not at all, says the son of David. God hath made prosperity side by side with adversity, ‘to the end that man should not find out anything that shall be after him.’ Fair warning to those who engage in the extra-hazardous occupation of business forecasting!
As for attempting to iron out the curves of the business cycle, ‘Consider the work of God,’ says the son of David: ‘ for who can make that straight, which he hath made crooked?’ This was the Biblical warning, no doubt, which prompted a United States Senator to declare: ‘I would rather postpone a panic until the time when God brings it than to have Hoover entrusted with this power and get the panic a year sooner. We had better let God run it, as in the past.’
This is the Economics of Original Sin. It has been expounded by Doctors of Despair ever since the time of David. It is, indeed, a Dismal Science. Shall we escape from it through study of the real causes of depressions? Or shall we, for another two thousand years, put all the blame on God?
To-day, as in every day of adversity, business is like a traffic jam, with the red light against it. Long lines of cars are held up; cars with powerful engines and plenty of fuel. The drivers, eager to go ahead, are craning their necks to see what the matter is. Presently one of the drivers, losing his patience, honks his horn. Impatience is contagious. All the drivers begin honking their horns. The din becomes terrific; but it has n’t the slightest effect on traffic. The red light holds its own.
All winter the drivers of business have been eager to go ahead. They have had powerful machines and plenty of fuel. They have been craning their necks in every direction to find out what the trouble is. They have been holding one unemployment conference after another. Unemployment conferences are contagious. Everybody has made a lot of noise, Congress fully doing its part. Still business is stalled.
How can we turn on the green light? The whole world is perplexed by that question. Concerning the causes of these periodic traffic jams, there is much confusion of thought. Concerning the remedies, there is, therefore, a confusing conflict of advice. Clearly, it is useless to try to agree upon remedies until there is agreement as to causes.
Other perplexing problems, the solution of which depends on a knowledge of facts, have yielded to intensive study. We no longer look upon the plague of yellow fever as a Heavensent punishment for our sins. We do not try to scare it away with the beating of tom-toms. But with regard to the plague of business depressions we still have a chaos of thought and a honking of horns. If all the discussions of unemployment were laid end to end, they would not reach very far. Most of them would curl up and finish about where they started — namely, with the futile assertion that the way to cure unemployment is to put men to work. Even concerning the direction in which we should seek a solution there is no agreement; yet the very first step toward learning significant facts is the choice of the right line of attack.
Everybody knows that there is much unemployment even in times which we call prosperous; and the causes are many. About these permanent aspects of the problem we have nothing to say here. We ask only whether it is not possible to come to an agreement concerning the major cause of periodic slumps.
Already there seems to be agreement that the chief cause of the present slump must have to do with deficiencies of machines, materials, men, management, or money. But surely not of machines. Machines we have in superabundance, and new inventions so productive that we dare not use them. Materials, too, we have in superabundance: cotton, copper, coal, oil, leather, wheat, and the rest; too much of nearly everything. Too many men, as well, and men with the will to work. A little while ago, they actually were producing more wealth per capita than any men ever produced, anywhere in the world. And to-day they are even more willing to work. Management, too, is abler than ever before. To be sure, we blamed management in 1928 and 1929 for neglecting business in order to watch the stock market. But while it was neglecting business it employed more men, and paid more wages, and realized more profits, and created more wealth, than ever before in all our history. No, we cannot ascribe our troubles to poor business management. There is no evidence that managers, as a class, have suddenly become inefficient.
II
What, then, was the chief cause of the depression? General overproduction, we are told, and rightly told. But general overproduction is, of course, nothing but general underconsumption. And general underconsumption is mainly a failure to buy on the part of consumers who are perfectly willing to buy, but lack the money. One need not consult economists on this point; he need only draw on his own experience. Thus the root of the evil of hard times appears to be, not the love of money, but the lack of money; not deficiencies of machines, materials, men, or management, but deficiencies of money.
Approaching the whole subject from another angle, we note that for general underconsumption there can be only two remedies: one is to produce less; the other is to consume more. But to produce less is to declare that we cannot create as much wealth as we have proved that we are perfectly able and willing to create, and eager to consume. By producing less — by keeping prodaction down to demand — we can stabilize poverty. But to stabilize prosperity we must tackle the problem the other way round; we must keep demand up to production. In other words, we must increase consumption.
In this connection it is well to remember that the fundamental aim of economic society is a higher standard of living; and a higher standard of living — on the economic side — is nothing but increased per capita consumption of wealth. When we say, as Paul H. Douglas says in Real Wages, that the standard of living of wage earners in manufacturing in the United States was one third higher in 1928 than it was before the war, we mean that the average wage earner consumed one third more. We mean that for every three oranges, coats, books, baseballs, watches, and other things which the average wage earner used up before the war, he used up four in 1928. We mean that and nothing else. So, also, when we say that the standard of living declined in 1930, we mean that the consumption of wealth declined.
Prosperity does not consist of inventions, laboratories, mills, bank deposits, gold reserves, farms, stores, railroads, or any other capital goods. These things benefit us only if they result in a higher standard of living; and they do that only so far as they result in higher consumption. In other words, distribution must keep pace with production, or some of the money savings which we put into capital goods are not real savings. Idle factories are real waste.
How to increase production, as everybody knows, is for us no problem at all. The problem is how to increase consumption; and that is almost entirely a problem of distribution. Now distribution takes place almost entirely by means of the exchange of money, under which term we include checks on bank deposits as well as other forms of the medium of exchange. This brings us back again to money as the core of the problem. If we could buy goods with our free time, the six-hour day and the five-day week might cure general underconsumption, and the three-day week would be a still surer specific; but leisure is not legal tender. If, with presidential prerogative, we could settle unwelcome bills with a pocket veto, that would do the trick. But we can’t. Everybody knows that without money we can’t buy; and that, with a given quantity of money, we can buy and pay for a given quantity of goods, at given prices, and no more.
This means, roughly, that the volume of goods which we can buy and pay for, at given prices, is determined by the quantity of money in circulation and the average number of times each dollar is used to pay for goods. This means, in turn, that whenever the quantity or the turnover of money is reduced, the volume of trade must be reduced, or the price level must fall; and when the price level falls fast, employment falls, too. That is one statement of the much discussed quantity theory of money which is true — absolutely. This is all common knowledge.
It does not tell us whether changes in prices are caused by changes in money, or the other way round. But for practical purposes we do not need to know. What we do need to know is how we can prevent a rapid fall in the commodity price level and the resultant crowding of the bread lines. The quantity theory of money gives us an essential part of the answer. This was what one of our great business leaders, now in high Federal office, meant recently when he said to the President: ‘I don’t know whether you believe in the quantity theory of money. I don’t know whether I do. But there is no hope for a revival of business unless we do.’
Already there is general agreement that changes in the quantity of money have something to do with changes in the price level, and that an extreme change in the price level is a dominant feature of every depression. Whatever may be the cause of these extreme changes, it is evident that, if they continue, we shall continue to suffer from periodic slumps in trade and employment. In other words, a stable currency — a dollar which changes only slowly in purchasing power — is one of the fundamentals of sustained prosperity.
Now it is common knowledge that a stable currency is impossible if the volume of paper money which is printed and the volume which is retired bear no fixed relation to changes in the volume of business. Everybody knows the danger of fiat paper money. Everybody knows what happened when such a deluge of paper money poured forth from the printing presses in Austria that the thrifty proprietor of Kronen Bier used money for beerbottle labels, in order to reduce his printing bill. What happens, on the other hand, when the volume of paper money contracts faster than the goods volume of trade is equally well known. Since prices keep on falling, everybody is eager to retain his money, rather than to turn it into goods. Production is discouraged; employment falls off; trade thereby suffers a further decline; prices sink further; and so on.
Such fluctuations in prices, trade, and employment actually have taken place in the United States recently, but there have been no large changes in the volume of paper money. The large changes which have taken place have been in the volume and turnover of bank deposits subject to check— what we may call ‘bank check currency’; and it is well known that above 90 per cent of our trade is transacted, not by paper money, but by bank check currency. Less than 10 per cent is transacted by paper money. It is possible that an agreement might be reached that one dollar of business, done with bank check currency, has the same effect on prices and employment as one dollar of business done with paper money. Such an agreement might lead to the further agreement that changes in the currency which is used in more than 90 per cent of our business may cause as great disturbance as changes in the currency which is used in less than 10 per cent of our business.
Unfortunately, increased use of bank check currency does not offset decreased supply : it is precisely when the volume shrinks that the turnover slackens. Each dollar of individual demand deposits was used about five times, on the average, in prosperous 1929, for every three times a dollar was used from 1919 to 1925; but now the velocity has slowed down to the old rate. This decrease in the use of bank currency appears to be roughly equivalent to a reduction of 40 per cent in the volume.
If the volume of paper money in circulation had been largely reduced in 1930, we should have no doubt as to what caused the depression. But an equivalent reduction in the use of bank credit passes almost unnoticed. It is not even mentioned in six lists of the causes of our present trouble, recently published, which are intended to be comprehensive.
Yet it now seems possible to lay down a basis of fact upon which agreement might be reached that the chief cause of business depressions is changes in the volume, and in the turnover, of bank check currency. If such an agreement were reached, the problem of sustaining prosperity would then become chiefly the problem of taking into account changes in the volume and use of bank check currency, beyond the requirements of sound business, and offsetting the influence of such changes.
III
Already there is general agreement that a large decrease in the volume and use of bank check currency — in other words, monetary deflation — necessarily decreases consumer income, and that one fundamental of sustained prosperity is sustained consumer income.
‘Why do we have hard times?’ wrote a lady reader to the editor of the Brunswick Pilot.
‘Lady,’ answered the editor, ‘hard times is a period when people quit feeding the cow, and wonder why she gives less milk.’
There are learned treatises on business depressions which say less than that. It sometimes appears that scholars, by close and persistent study, finally contrive to see everything except what is perfectly plain. Nothing seems plainer to the plain people than the fact that they cannot keep on feeding dollars to business unless they have the dollars. And without the dollars, business cannot keep on producing wealth.
Business either gets enough dollars out of the nation’s pay roll to keep from starving, or business does n’t get the dollars at all. To quit paying wages is to quit feeding the cow. Scolding a hungry cow does n’t fill the milk pail. Talking cheerfully to her does n’t help much, either. Petting is n’t any better. Caresses are no substitute for calories. There will be a larger flow of business when there is a larger flow of wages, not before. Urging people to ‘buy now,’ when they have n’t any money, does about as much good as feeding the cow sawdust.
At present, both men and dollars are underemployed. The main difference is that the dollars are slackers. They refuse to take long-term jobs, even at prohibitive wages. They will not even volunteer for the duration of the depression.
Deflation has been under way for the greater part of two years. Little by little, we have reduced the cow’s rations. Total Federal Reserve credit outstanding is the lowest since the summer of 1924. Business, while contending with such malnutrition, has never recovered, in any country. Business will not recover in this country until there is a substantial expansion of bank credit — an expansion beyond the expressed needs of business, on the present low level of business. If that is inflation, there is nothing the country needs right now so much as inflation. The need is advertised by every man who hangs an ‘unemployed’ placard around his neck and tries to sell apples. An increase of money in circulation which opens up blast furnaces, and sets idle machines in motion, and puts men back to work, and restores the confidence of the business world, is not necessarily a calamity. Calling it ‘inflation’ merely gives it a bad name. An increase of money is not harmful, no matter what you call it, as long as it brings about a rise in employment and production, without bringing about a rapid rise in the general level of prices.
Continued deflation, on the other hand, which reduces employment and production and brings about a rapid fall in the level of prices, generates a demand for further deflation. ‘No revival of business is possible,’ said a banker at the meeting this spring of the Chamber of Commerce of the United States, ‘ because we have not yet had enough liquidation.’ Presumably he meant enough bank failures and other business losses. This is an old story. In every depression, men insist that business cannot possibly turn upward without further liquidation; and they keep on saying so for at least two months after business actually has turned upward.
How much liquidation is enough? Last year there were 1345 bank failures and 26,355 business failures. Many of these failures did not cure troubles, but caused troubles. The more failures there are, the lower the price level. The lower the price level, the greater the burden of debts, and the smaller the value of tangible assets. This makes the banks more reluctant to lend money, causing still further contraction of bank credit currency and still further liquidation. If we should allow the price level to fall far enough, and fast enough, most firms would become insolvent; for their debts would remain the same in dollars, but they could not raise enough dollars on their assets to pay the debts.
When we force liquidation so far that we think business cannot get worse and must get better, we proceed to make preparations for improvement, and the improvement comes! It could come sooner if we thought it could. But the apostles of liquidation always insist that further liquidation is necessary. Then they take steps which make further liquidation necessary. Then they say, with much satisfaction, ‘See, we told you so!’
For business as a whole, the basic trouble is extreme changes in the volume and use of bank credit, and consequent extreme changes in the value of the dollar. Over such changes, the United States has not yet exercised the control which is readily within its power.
Everybody knows that it is always within the power of the Federal Government to bring about the needed expansion and increased turnover of money by sufficiently aggressive openmarket operations, or by borrowing money for war, construction, or relief. No other immediately effective plan having been presented by anybody, the enemies of deflation rallied in defense of the bonus-loan plan. It is a poor plan; but evidently many men thought it better than no plan at all. It is one way — though a poor one — of conscripting some of the slacker dollars. It is a more or less conscious demand that they line up in the front trenches and assault the forces of deflation.
At times, private business keeps up a sufficient flow of wages to sustain consumption and prevent deflation. At other times, it does not. Like the unprofitable servant with the one talent, it tries to play safe. It buries its talents in the earth — or in time deposits, which often amounts to the same thing, since time deposits do not take goods off the markets. During the first nine months of last year, merchants lost their markets and men lost their jobs mainly because there was not enough money in circulation. During the same nine months, seven hundred and twelve millions were added to time deposits. Throughout the past year, time deposits were in excess of thirteen billions. The only reason we had any business at all is because there were some five-talent men and ten-talent men who circulated money in such a way that it enabled willing consumers to consume. When we have enough of these good and faithful servants, we shall emerge from this day of adversity into a day of prosperity.
Whereupon, if history repeats itself, we shall follow the advice of the son of David. We shall rejoice with exceeding great joy, and refuse to consider what to do toward preventing another day of adversity until the day arrives.