Economic Consequences of the New Deal
I
WHAT next under the N.R.A. campaign? Can we consolidate our gains and thrust the line forward in new sectors? Or have we rashly taken territory which we cannot hold? Will the next need of a vigorous offensive find us with most of our shells fired and the rest duds?
The answer to these questions may depend on whether we distinguish in time between those phases of the N.R.A. which can be relied on, year in and year out, and those phases which are effective, if at all, only as emergency measures.
We know, in any event, that the emergency which confronted the new President called for an immediate, bold offensive. Such action was imperative, because the policy of inaction had brought us to the verge of despair. To go forward, however, in accordance with long-range planning was impossible: there were no plans. We had always been content to plan to plan sometime in the planless future. Meanwhile, Laissez-Faire had been the orthodox religion; and the most respectable of economists and bankers had been its high priests. Slowly, reluctantly, we had lost our faith in the Lazy Fairies. We had discovered that, in times of stress, each rugged individual, pursuing his own profit, is not guided by an Invisible Hand to act for the common good. In reality, he acts for the common harm. Each rugged employer, each rugged banker, each rugged short-seller, each rugged consumer, each rugged boss of a tradeunion local, so acts for his own protection, when conditions are bad, as to make conditions worse. That, we found out, is the ragged part of rugged individualism.
We began to realize that bankers, producers, and consumers could have dealt a crushing blow to the depression, any day, by collectively using their fighting powers. That, however, was precisely what they were not able to do. For we had intentionally framed a socalled Federal Reserve System which could not function as a system; we had formed forty-nine banking groups, incapable of collective action, each demanding the inalienable right of having as many bank failures as it pleased. At the same time, we had intentionally forbidden producers to act for the common good by joint agreement; and we had provided ourselves, as consumers, with no agency for collective action except the one agency which had thus far refused to act — namely, the Federal Government.
That is why there was neither programme nor precedent to enable the new President to deal adequately with the crisis which confronted him on the day of his inauguration.
To start recovery, however, nothing more was needed than a programme which would appear sufficiently promising to change the mental attitude of the nation. Every physical necessity was at our command, and had been every day of the depression; every productive resource that we possessed at the heights of prosperity — men, materials, machines, money — everything. We were certain, therefore, to go ahead, at least temporarily, if we thought we could. Mr. Roosevelt first made us think we could. He then proceeded to act on ten basic, permanently sound principles. If he retains the courage and the power to follow through on these ten principles, and if he avoids policies which clash with them, the New Deal may bring a New Era, welcomed even by the most scornful of the Laissez-Pharisees.
II
These are the ten principles: —
1.Every government, in formulating a national economic plan, should start with the needs and capacities of human beings, not with financial statistics. Under the Old Deal, the procedure was the reverse. It began with financial statistics. Then, when the custodians of these statistics incidentally observed the sad spectacle of ten million human beings who were eager to work but could find no work to do, the custodians concluded regretfully that nothing could be done about it. For, behold the statistics! That was the Law, and Mellon was its Prophet.
Under the New Deal, we start with the victims of statistics. We observe that they are eager to work, that there is plenty to work with, and that they are yearning for an opportunity to enjoy the wealth which they could readily produce if they had a chance. Then, and not until then, do we take a look at the paralyzing financial statistics: money in circulation, so much; interest on debts, so much; tax-exempt securities, so much; tax receipts, so much; hoarded money, so much; sterile gold reserves, so much; commercial bank loans, so much; and the rest. Whereupon we conclude: ‘ We made all these statistics; we can change them.‘
2. For, we have discovered, no recovery measures can be even temporarily successful unless they do something to financial statistics. Every major business depression is a monetary phenomenon. It is the result of the wrong volume and rate of flow of currency and bank credit. The flow is right only as long as the money income of the consumers who want to buy is such that they do buy, at the current price level, the increased output of consumers’ goods. Adequate consumer income is the crux of the problem. A business depression accompanied by a sufficient flow of consumer purchasing power is no more possible than a prolonged drought accompanied by abundant rain. Consumption regulates production. This truth was rescued from obscurity about ten years ago. Since then it has become the foundation of the demands of organized labor, the byword of the man-in-the-street, and the second principle of the New Deal.
3. The third principle is that consumer purchasing power is subject to collective control. Neither currency nor bank credit grows on bushes, or falls like manna from the skies. The flow of money is not a result of natural law. Money does not manage itself. Every currency is a managed currency. The only question is whether it is managed intelligently, or the way we have managed it in the past. The New Deal boldly takes the novel position that man, who invented money supposedly for his own convenience, can now make money serve his convenience. He can see to it that money finances consumption, and thereby he can make certain the financing of employment and production.
When, however, money has been mismanaged, and the country has suffered from rapid deflation, it is a proper function of the government to bring about counter-deflation — thus reducing the real burdens of debtors and preventing wholesale repudiation of debts; restoring, in the process, the dollar values of most of the assets of banks, building and loan associations, and insurance companies; protecting consumers’ savings; and at the same time establishing the only conditions under which business as a whole can operate at a profit.
Early last May the President said in a radio address, ‘The administration had the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed.’ Early in July the President reiterated that purpose. ‘Revaluation of the dollar in terms of American commodities,’ he said, ‘is an end from which the government and the people of the United States cannot be diverted.’ The policy was sound. The subsequent slump in business and in confidence did not occur until it became clear that the government had, in fact, been diverted from its announced policy.
4. There are two chief means of getting the additional purchasing power into the hands of consumers: gifts, in the form of charity, doles, and bonuses; and wages. Of these two ways, wages is far the better, because that is the only way to strengthen morale and increase production. Wages can be paid out only through private works or public works. When there is no hope of an increase of private works, through private initiative, the only possibility is increased public works, or public aids to private works.
5. The volume of currency and credit used for this purpose should be large enough to meet the needs of a country with a proved productive capacity of ninety billions. The objective is to create additional real wealth to the value of at least thirty billion dollars a year, wealth which we are now losing, solely because we are not employing the productive resources at our command; in other words, to produce each year enough additional real wealth to pay off the total national debt. No smaller objective is defensible.
After wages have fallen off nine billion dollars, federal appropriations of a few hundred millions cannot be expected to restore consumer buying. That fact was emphasized before the Senate Committee on Finance when it was timidly considering the first feeble R. F. C. bill. The aim of the whole counter-deflation programme is to prime the pump of private business. Half priming the pump is useless. A bold programme costs less than a timid programme. As a matter of fact, in so far as the programme results in the creation of public works through the use of labor and materials which otherwise would be wasted, the public works cost the country nothing. Such a programme, it is true, requires additional bookkeeping work on the financial statistics; but this work, also, can be performed by men who otherwise would be idle.
6. There are various ways of bringing about the necessary increase of currency and credit. For psychological reasons, if for no others, those ways should be used which are not commonly called ‘inflation.’ The programme should be flexible, for it is impossible to tell in advance precisely what effect upon the price level and upon employment any one measure will have. But, whatever measures are employed, the government should not hesitate to follow through because of the current scare propaganda, in which the printing-press fiascoes of Russia, Austria, and Germany are cited as sufficient reasons why this country should do nothing at all. These are false analogies. Every government which plunged into the chaos of riotous inflation was on the verge of collapse, and used the printing press as the only available means of keeping in power a little longer. Every government which made this fatal mistake was heavily in debt to other countries; had exhausted its taxable capacity; possessed scant gold reserves or none at all; and had no definite, logically chosen reflation goal. In not one of these five essentials is the United States to-day analogous to those countries which are constantly held up as horrid examples.
7. Recovery from a major depression through government leadership involves an increase of public debt. No attempt should be made to balance the Recovery Budget. Public debts should be increased in hard times and paid off in good times. The budget of current expenditures should be separate from the budget of capital expenditures, as it is in the soundest of private business enterprises. In following this policy the worst that can happen to a nation which owes nothing to the rest of the world, and finances its entire programme internally, is that all of its people incur debt to some of its people for a fraction of its demonstrated annual productive capacity. And no nation ever fell from such a cause.
8. Each major industry should be encouraged, and if necessary required, to plan production, distribution, and conditions of labor in the public interest, subject to such federal regulations as are necessary for the protection of consumers. The programme of each industry should be an integral part of a comprehensive, coördinated national plan.
9. An essential part of the New Deal programme is the recovery of private business. The incentive of private business is profit. The New Deal must, therefore, establish conditions under which private business has sufficient prospect of profit.
10. Finally, we can carry out an adequate national industrial plan, regardless of what the rest of the world does, or fails to do. It is not true that every industry can recover, regardless of what happens abroad; but it is true of industry as a whole. This country can restore its volume of trade and employment, if need be, without the aid of increased foreign trade. Before the crash of 1929, it is true, our so-called ‘favorable’ balance of trade enabled other countries to acquire a large volume of American products for which American investors paid. We became victims of the universal trade obsession that it is more blessed to give than to receive. But our excess of giving never did go far toward offsetting the deficiency of consumer buying at home. The statistics make this perfectly clear. At present we owe nothing to other countries on net balance, and we require nothing of them except what they are eager to supply and we are abundantly able to pay for.
This does not mean — Heaven forbid!— that isolation should be our goal. International coöperation in the spirit of good will is highly desirable at this critical moment; ultimately it will be not only desirable but imperative, if civilization is to survive. Nevertheless, in this emergency the United States, single-handed, can achieve a betterdistributed and more durable prosperity than it has ever enjoyed, merely by using the resources now at its command. Some of us are old enough to remember when the Technocrats excited the country. Let us hope that we are not too old to remember the chief lesson they taught: that our productive powers — powers which we can use without permission from abroad — will enable us to abolish poverty, as soon as we use these powers.
In any event, nothing we could promptly achieve by international conferences, in the present inflamed condition of Europe, would do so much for the world outside our borders as for us to achieve, within our borders, the permanent success of the New Deal.
The New Deal was an initial success because it was based on these ten principles. It must carry through on this basis or fail. There is no alternative. It was not the emergency which justified the government in adopting these principles; it was the emergency which enabled the government to gain support for principles which should have been adopted long ago. Chief among the economic consequences of the New Deal, if it is a success, will be increased faith in these principles in the years to come.
III
The New Deal will not be a success, however, unless it renounces most of the errors which are implicit in some of its acts and in some of the pronouncements of its official leaders.
Most fundamental of these errors is the notion that the aim of the New Deal — increased wealth for all the people — can be attained by reducing the output of wealth. The fallacy is an old one. Limit production — so runs the argument — and prices rise. Then we have a larger dollar valuation of wealth. Therefore we have more wealth. The flaw in this argument is plain. A higher standard of living is increased per capita consumption of wealth; but no way has yet been discovered of eating oranges which have not been grown, or wearing shoes which have not been made, or redistributing the national income so that the total shall be more than its parts.
The contention that we must reduce output — not merely the output of certain commodities, but output as a whole — is usually all mixed up with another mistaken argument: namely, that the depression was caused by general overproduction. The fact of the matter is that nowhere in the world has there ever been production of wealth in general beyond the desires of the people to consume it. There has merely been more wealth than willing consumers were able to pay for. Prior to this depression, there was not even an increase in the rate of growth of world production. The astounding increase following the World War which we heard so much about, said to be caused by technology and mass production, is a myth. It is not to be found in the statistics.
Out of these two fallacies grows a third: that the material well-being of the people can be improved by discouraging investments in capital equipment. If we did not believe that, how could we regard so complacently a National Securities Act, and other restrictions upon free investment, which have had some part, at least, in all but stopping the growth of our physical means of increasing our standard of living? Our complacence rests comfortably on the conviction that in the last decade our productive capacity, considered as a whole, increased far beyond the wants of the people. That is far from the truth. A few industries — to be sure, a very few — were able to turn out more goods than the people would buy at any price. But all that industry as a whole could do was to produce more goods than the 98 per cent of the people who wanted to buy were able to pay for. In no other sense was there ‘general overproduction’ of capital facilities.
All these fallacies combined implanted in us the mistaken notion that we are obliged to reduce the hours of labor throughout industry, because this is the only way to prevent ‘general overproduction.’ If we could once grasp the truth that ‘general overproduction ’ is precisely the same thing as ‘general underconsumption,’ and that ‘general underconsumption’ can always be cured by an adequate flow of consumer buying power in the right channels, we should see that all talk about the economic necessity of the thirty-hour week is nonsense. A social necessity it may be. Like the badly advertised ‘Share the Work’ plan, it distributes a given amount of suffering over a larger number of persons, and thus tends to allay social unrest. More leisure we should have, eventually, as a reward for good management of industry, not as a penalty for bad management. But leisure does not reach the cause of ‘overproduction.’ Leisure is not legal tender. Shorter hours do not make larger pay rolls.
IV
‘One of the superb assurances that the President has given the country,’Professor Moley once said, ‘ is that the plan is frankly experimental. He will inform the country, if it fails, with the same straightforwardness with which he asked the country to adopt it.’ The time has come when he should advise the country that certain parts of the emergency programme are unworkable. Chief among these is the fixing of commodity prices. This device cannot work in a profit economy, based as it is on the freedom of choice of consumers and the individual responsibility and reward of producers.
A sharp distinction must be drawn between the control of individual prices (prices of wheat, shoes, motor cars, and the rest) and the control of the price level (that is, the purchasing power of the dollar). The control of the price level should be the paramount purpose of the government, as far as monetary matters are concerned. Indeed, this is merely another way of saying what has already been said: that we should endeavor, by collective action, to see to it that the flow of purchasing power to consumers is such that their buying exactly keeps pace with the production of consumers’ goods. This is the only way to prevent both deflation and inflation of commodity prices, considered as a whole.
The control of individual prices involves entirely different principles. The function of price in a profit economy is to move the goods. When goods move, prices are right. Goods are moved and prices are made by buyers, in the process of competing with each other for the same goods. Through controlling individual prices, buyers determine, for the most part, what is to be made, how much is to be made of each commodity, and who is to be privileged to do the making. If price is not to be allowed to fill these functions, the government must take them over.
No government is wise enough to do that. In order to fix prices that would regulate production schedules, and distribute the products as closely in accord with the desires of the people as the prevailing system of price bidding, the government would have to devise some means of measuring the almost infinite number of daily changes in the needs and desires of millions of people, and also some means of measuring the almost infinite number of daily changes in the goods offered by the markets of the world for satisfying these changing needs and desires. These measurements are made at present with amazing precision by millions of buyers as they cast their dollar votes in millions of markets.
To repeat, no government is equal to such a task. The New Deal, as the first cards in hand reveal it, is an attempt to retain the profit motive as the main incentive to business enterprise, and at the same time not allow price to function as it must function in a profit economy. That is why, theoretically, government fixing of individual prices should not be expected to work. Actually, it never has worked. Examples are legion, and they cover the world: rubber, sugar, tin, coffee, silk, wheat, zinc, and all the rest. In a recent exhaustive study, Professor M. T. Copeland of the Harvard Business School records the collapse of individual prices which has followed, rather promptly, every attempt of every government to prevent a collapse.
Government price fixing, including the cost-plus-ten-per-cent feature of the Retail Trade Code, is certain to cause either the piling up of goods which cannot be sold at the fixed price, or the collapse of price fixing. If sufficiently broad exceptions are made for special sales, obsolescent goods, perishable products, and so on, and if tens of thousands of sellers are left to determine costs in their own way, there will be price fixing in name only. If, on the other hand, there is effective price fixing, stability of prices will be achieved at the cost of instability elsewhere in the economic structure. The relationships are so delicate among prices, wages, profits, and volume of production that rigidity in one place inevitably causes disturbances in other places.
Government wage fixing is easier to control, but that is sure to cause the failure of many concerns which have signed under the Blue Eagle but cannot keep their pledges, because the money is not forthcoming from consumers wherewith to pay the fixed wages. The economic consequences of price fixing and wage fixing, therefore, if the programme were effective, would be increased unemployment, palliated by increased doles, followed by the demands of Congress for money inflation of a really dangerous kind.
V
In any event, the fixing of wages and prices, with reliance on the profit motive as the driving force of business, cannot restore prosperity; for prices must be higher than wages plus all other costs, or there will be no profits. Prices and wages are like the ceiling and the floor of an elevator: anything that lifts the floor lifts the ceiling. That is why Henry Ford’s favorite prescription for prosperity — high wages and low prices — cannot cure our ills. If prices are high enough to yield profits, wages are not high enough to enable wage earners to pay the prices. The gap must be bridged in some way. Unless the gap is bridged, N.R.A. parades, Blue Eagle posters, and ‘Buy Now’ campaigns are futile.
In the past, the gap has been bridged for a few years at a time by the expansion of bank credit, and the payment of wages in connection with war or the development of new industries. The reason why new industries and increased equipment of old industries bridge the gap is plain enough. New capital expenditures involve advance payments to consumers. The wages are paid and spent before the new equipment adds supplies to the markets. Thus the growth of the automobile, radio, motion picture, and electrical refrigerator industries did much to bridge the gap and make possible the prosperity of the last decade.
This brings out a truth which capitalism has never faced, and which, unfortunately, the government is not facing at this time. We prosper in the present only when we are preparing to be more prosperous in the future. It is only the preparation for a better tomorrow that enables us to do tolerably well to-day. This means, specifically, that there is no hope of further rapid recovery until there is a substantial increase of construction, especially in the heavy industries.
VI
Such an increase, however, depends entirely upon the prospect of profits. But the administrators of the New Deal seem rather doubtful about the necessity of profits. They seem committed, at any rate, to arbitrary regulation of wages and hours, and such regulation is inconsistent with reliance on the profit incentive to restore employment and production.
Even when wages were unregulated, the funds invested in private business probably did not earn, year in and year out, a larger percentage return than the deposits of wage earners in savings banks. The net earnings of business as a whole have been, as a rule, no more than sufficient to induce the new investments upon which larger output, and therefore higher standards of living, depend. At the present time, certainly, corporation earnings are not sufficient to cover large increases in pay rolls. In any event, the rewards of labor will continue to bear a fairly definite relation to commodity prices. Government regulation can do little toward changing that ratio.
If the profit incentive is not the most effective one, we should find a better one. But, until we do find a better one, we should use the old one for all it is worth. If the Harvard Bridge is not the best way to get across the Charles River, we should find a better way; but, as long as we rely on the bridge, it is stupid to hammer away at its foundations, weakening first one support and then another, until we find out how much weakening the bridge will stand without collapsing.
Perhaps the chief economic consequence of the New Deal will be the discovery that a profit economy, when we maintain conditions under which it can work, makes possible higher standards of living than any other, but that a profit economy cannot work without profits. Let us trust that we shall not make the discovery too late — after the last support has been demolished, after the entire bridge has collapsed.
(For further economic consequences of the New Deal, see the Contributors’ Column)