These Coils of Debt
I
IN the old days when the securities trade flourished, the financial district in lower New York welcomed notables with showers of ticker tape. From skyscraper windows streamed windblown arcs of thin white paper which, like the booming values of the period, were apparently without end. Some of these graceful ribbons reached the shoulders of paraders; more fell in mazy loops on the black pavement. The habit grew to be a rite and then a nuisance, for the whitewings had to clean the thoroughfare after the captains and the kings had departed. These celebrations occurred so often and entailed such great expense that entertaining became something of an item in the budget of the city, which eventually had to cut the wages of street cleaners in order to remain solvent.
Ticker tape will bear a good deal of watching, not only by investors and speculators, but also by statesmen, for the symbols and figures which it carries as it clicks through the machine represent debts in such staggering sums that rapid changes not only ruin some citizens, but may even do grave injury to a Republic dependent on income taxes. A modernist Laocoön grouping would show Uncle Sam in between his two strong sons, Industry and Agriculture, all three enmeshed in ticker tape and fighting against its coils. When debt grows beyond power to lift and carry, it becomes deadly alike to men and to political systems. Absolute monarchy taxed itself out of existence in France, and since the World War representative democracy has done likewise in the growing company of Fascist states. Democracy is especially vulnerable because it gives greater leeway to debt making than other political dispensations, and a nation like ours, whose values shift with hair-trigger speed, takes a good deal more managing than one that marches to a slower tempo.
The figures passing through the tickers are those at which debts are being bought and sold from minute to minute, with the aid, more or less constant, of borrowed money. When markets are free from pool rigging, the figures register the interested public’s temporary and fluctuating opinion of the value of a certain piece of debt, after due allowance has been made for everything the corporate or institutional debtor owes and owns, and its prospect of collecting what is coming to it and disposing of its merchandise or services.
In flush times what it owes will be almost disregarded and what it owns will be regarded too highly, with a complete reversal of attitude in bad times. Mass emotions are ever present; the ballyhoo of optimism and the numb despair of pessimism overcome the mathematics of cold financial statements. Those profit who buy debts when the public is most eager to sell them and sell debts when the public is most eager to buy them.
This day-to-day trade in debts is so well organized that it is easier to buy shares in paper contracts than it is to buy sand or sugar, and yet in some cases the complications are so many that only a few experts who make the finances of a given corporation their life study can know the whole truth about situations of a single great debtor. When the debtor is a government, the problem is even more baffling, since its whole political and social system is then part of the picture.
I once owned some stock in an English company whose shares were bought and sold daily on the New York Stock Exchange although it did only a tiny fraction of its business in this country. It had ‘stances’ of one sort or another in about a dozen different countries; in some of them it manufactured goods; in others it enjoyed concessions and patent monopolies. It was vulnerable in many directions, since to the ordinary risks of management over dispersed properties were added those of nationalist politics and international exchanges. To assay accurately its chances of profit would have required omniscience rather than mortal wisdom. This is an extreme case of modern commercial complexity, but some domestic holding companies are jumbled enough to defy analysis by any but super-minds. Owen D. Young once confessed that he was stumped by the Insull entanglements.
II
A society which combines private property with lightning celerity in communications and extreme legal acumen in reducing property to sharepaper contracts becomes exposed to all the rigors of the hard truth that debt is the other side of investment. This is what frustrates the present good intention to reduce debt burden without discouraging saving. There is no way of investing money except by putting some person or group or institution in debt to you, either for so many dollars at a fixed rate of return or for a certain share of the profits of the enterprise in which you have invested. Property owes its owner an income in this sense, that it will not long be cared for unless it returns its owner an income, either in money or in use. When the owner becomes convinced that all hope of income from that source has departed he forgets worthless shares, tosses his bonds to a salvaging committee, surrenders title to his mortgagee, or, in the case of marginal land unmortgaged, lets it return to the state for taxes. At least that was the position down to the time the government, under pressure from groups of embarrassed debtors, took to easing their lot by pledging its own credit in their interest.
Of course not all property is held for profit; some is held through pride and affection, returning merely psychological boons, but the amount of such property is relatively small and shrinking under the present pressure of taxation. Like other graces of life, possession of this sort is precarious, and exists by sufferance only. One cannot own antiques, for instance, unless he has income available for their support. In general, property must pay its way, which means that at the very least it must earn reasonable management fees and interest on investment. Otherwise, why bother with it?
Our forefathers grasped this common-sense truth firmly, because they also had a firm grasp of their properties. Their chief holdings were personal and entire; their debt relations simple. They owned mostly goods, buildings, and land; such shares as they possessed were in local enterprises, in the village bank or mill, in the railroad which ran through their town or on which they shipped produce.
But for more than a century the trend has been from direct ownership to share ownership, from tangibles to intangibles, from goods to equities, from things in hand to papers in a strong box. Of your debtors you came increasingly to have little or no personal knowledge. During this time the range of the human will increased through improved communications and the control of share property drew farther and farther away from the small investor. The village bank joined a chain of banks administered from a distance; the mill went into a merger, and the local railroad became part of a mighty system.
One by one all the important economic functions of our society — except agriculture, which for various reasons could not travel fast enough to hit the new pace — slid toward and into big business units, there to rest upon the basis of paper contracts rigidly dependent upon government operating through courts, legislatures, and the police power. To make debts vendible in small packages at will or whim, a trade developed of such proportions that its exchanges seemed at one time to be the very foundation of our social life, and few heeded the danger of letting a nation’s well-being depend on something which quivered from day to day and from minute to minute, like a jelly.
There came a time when those who held the debts of others lost confidence in their investments, many of which were only marginal and hence doubly vulnerable. The holders even lost confidence, for a brief period, in the government’s ability to enforce debt collection. America was like a muddy pond in which a bewildered throng floundered, each pulling the other under as Tom tried to get from Dick the wherewithal to pay Harry. Dick was out of work, Tom in arrears on his mortgage, and Harry was carrying the remnant of his bank account in his wife’s name. The situation had passed the point where the rescuer on the shore could merely thrust out a plank and save a few victims in the hope that they would turn to and rescue others. Mr. Hoover tried that, with the Reconstruction Finance Corporation. No; the rescuer had to use a more inclusive method.
What Roosevelt did was to tell everyone to keep quiet and draw a few deep breaths, while the government shook itself into shape to do something tangible for them. The flounderers needed money and credit and jobs more than they needed good advice, and to get these essentials to them the government itself had to plunge into the debt pond, swallow a good deal of water, and lay itself open to some of the same risks which had ruined its beneficiaries.
To the old uncertainties marking our paper-debt economy are added others. The dollar having been watered once, will there be no more trips to the well? The Treasury gained billions by that move at the expense of some of its citizens and used part of it for the relief of other citizens. It is also borrowing heavily, on no better warrant than an optimistic forecast that the future will be able and willing to pay the bill. Deficit is still with us; unemployment gives way slowly; public relief remains a huge charge. The sovereign giant, the Federal Union, may continue invulnerable, since it has a first lien on all the earnings and property of its subjects under the income-tax laws, but, largely as a result of going into debt to save individuals and corporations from sinking under their burdens, has moved a long way toward state capitalism, bureaucracy, and denial of commercial freedom.
III
Capitalism, as it stands, is an accumulation rather than a system; if it were really a system, it would hardly tear itself apart so recklessly and regularly in the debt spasms which mark the extremes of business cycles. To capitalism, new debts are a necessity; the whole debt structure totters when new debts cannot be contracted; to save basic credit, government had to become a lender when private lenders refused to furnish enough capital to keep labor employed. All capitalist countries face this difficulty sooner or later, and usually meet it as America did, by government lending. But if new debts are a necessity, old debts are equally a menace to capitalism. Periodically there comes a time when many of them must be canceled unless government — deus ex machina! — comes to the rescue.
The rôle of credit is decisive in modern social life; easy credit creates jobs and commodities which tight credit changes into lay-offs and surpluses. Since the state must act to protect life itself in these crises, and since it must pay when others cannot, it is under bond to control credit for the sake of enhancing social stability. In the modern world this amounts to a mandate of sovereignty. The Federal Reserve System was created to do this very thing, but proved unequal to the task.
Good management of our huge, crisscrossed debts over a long period is impossible unless a government acts firmly and responsibly with regard to credits, looks as far ahead as human knowledge can penetrate, and plans for future balance and stability. This duty has been forced upon it by the sweep of events, legal, political, social, and scientific, since the passage of the first general incorporation act. The longer business, to use the word describing the old go-as-you-please world of trade, hesitates in accepting this conclusion, the worse bargain it will make in the end.
Whoever resents government interference in business — and I am one of that large company by training and habit — should ponder well this dilemma.
On the one hand, since property has been so generally subdivided and reduced to contract, owners are unable themselves to protect their scattered and piecemeal holdings, and only a strong government can do it for them. Simple policing and formal justice no longer serve to do this. For instance, strikes, more costly to stockholders than bandit raids and incendiary fires, require prevention through machinery set up in advance for the settlement of disputes.
On the other hand, a government running a deficit and urgently in need of funds must look sharply, not only for new henroosts to rob, as Lloyd George put it, but also to the regularity with which income eggs are laid in those roosts. The producers may have more fun foraging for themselves; but what about steady output? Suppose they find the loco weed and start running wild again; suppose they overdo egg laying for a while and then go into another three-year moulting spell.
The government, to maintain its solvency under the present and growing debt burden, is under stern compulsion to keep its ambitious subjects from tearing values to bits in another depression following too rabid speculation and profit seeking. The state’s first interest must ever be security; and economic recovery without steadying reform invites future disaster.
Under the circumstances, increasing government control of business is inevitable. Furthermore, to make control effective, government patrol is certain to be more rigid than it ever has been. These issues can be considered settled; there is no use fighting about them any more. The issue of the future will be neither government control nor government patrol, but rather how far government will undertake to initiate, finance, push through, and operate projects that have hitherto been left for private initiative.
IV
Banking, simply because government control of money is an ancient prerogative of the Federal Union, is farther along this road than any other branch of American business. Government performed a life-or-death service for bankers when it shut their doors instead of leaving them to endure the runs of their depositors to the bitter end. The immediate beneficiaries of that decisive action were directors and stockholders subject to assessments in favor of depositors in case of closure. Even the owners of banks which did not reopen received a respite, since values rose before they had to pay. This service to banks and bankers exceeds in timeliness and importance the aids since given to other business interests, but no objection to it is heard, for the sufficient reason that such aid also assisted depositors and the public, and the government itself already had so large a stake in the banking business that rescuing banks was almost like saving itself.
Since that crisis the government has moved farther into banking in most of its important aspects. It is a heavy lender, borrower, and guarantor. It is also a regulator, liquidator, examiner, and adviser of all the banks in the Federal Reserve System, which represents three quarters of the nation’s banking power. All these are official, legislated functions; unofficially, the government influence goes farther.
The power of the government over banking has reached its highest point coincidentally with the devaluation of the gold dollar. In strict banking logic, the credit of the Federal Government should have suffered when it voided the gold clause in its debt contracts. But logic flies out of the window when power comes in the door; actually the government could borrow as cheaply after that abstractly unethical transaction as before. Whatever bankers may think of government credit and the economic adventures of the administration, they cannot escape lending the government whatever it needs, since banks cannot live without government, and any government which they did not accommodate would soon take them over. Under the circumstances the difference between a forced loan and a consent loan is merely one of rhetoric: in the first case, the money is handed over to a dictator with a gun in his hand; in the other, to a statesman with a broom behind the door.
Those of us who wish to see what the broad pattern of big business is likely to be when the government has made its full force felt under the new urgencies will do well to analyze the present situation in banking. The government is not operating banks of a general character, but is operating, and with apparent success, certain banks such as the Postal Savings Bank and special import and export banks which are considered necessary for non-profit reasons. It is offering to home owners mortgage money at low rates, thereby relieving many savings banks of undigestible, distress items. And it is also providing funds for house repair. It is guaranteeing deposits within certain limits. It is financing a number of projects which would ordinarily be financed through banking channels. It is putting pressure on the corporate banks to lend liberally on long terms to manufacturers of capital goods and to small business men who are not quite eligible borrowers on their present statements.
In these and other ways the government endeavors to relieve the banks of certain risks inherent in recovery, and equally to bring them to accept slow paper of certain sorts instead of concentrating on short-term loans. But the government, far from showing desire to operate banks, does its enormous business largely through commercial banks. What it has done is to brush off and brighten up certain old standards of banking conduct, establish certain new standards, and dictate certain conditions for the trade in money and credit, leaving the field open for private agencies to operate on those terms under rigid inspection. Because of the tremendous credits placed at the disposal of speculators, both through direct loans to marginal buyers and through the call-money market, and the strain which developed in getting those credits off the books, the whole investmentbanking and security-vending system is put under new restraints in the Stock Exchange bill.
In the end, when the government’s rescue loans have been funded in an orderly enough manner to permit their entry into the banking system, it is altogether likely that the net result from the present experiments will be a substantial gain in long-range credit planning, with government financing only such projects as seem beneficial but unprofitable. Even though bankers sometimes go astray in their calculations under pressure of popular enthusiasm or gloom, they are rather good planners in their own right; in fact, the larger banks, like the large industrial corporations, plan scrupulously and intelligently for the future as far as they make bold to read it. There may be rogues left in banks and big business, but they are rare specimens, and there are no rogues among their statisticians, who are held in deservedly higher respect than of yore. But these carefully drawn corporate plans are always at the mercy of political events, over which government has at least some measure of control. Put it this way: a long-range plan in which the government is interested may not work, but without the government’s favor and coöperation it is almost certain not to work.
The contest between a business world accustomed to older liberties of action and a government not yet thoroughly at home in its new powers, but wide awake to its increased responsibilities, narrows down to this practicality : —
Is the long-range planning, which is so obviously necessary to ease credit strains and social distress, to be done by the government or by industry? If by industry, in what units — by corporations, or cartels, or trade associations? And, once a plan is arrived at, how is it to be enforced or otherwise matured in a society with our traditional initiatives and incentives?
V
The Marxians say that economic planning must fail in a profit-seeking society. That is true, if the production and distribution of commodities continue to be merely a dog fight for profits. Probably economic planning in America will always be less effective than in Russia. Nevertheless, some excellent results have been achieved by planning in countries which have not thrown capitalism overboard, notably in Denmark, Sweden, Italy, and Great Britain. Probably the British method, in which trades govern themselves with relation to their futures under loose government supervision and prompt financial aid, is the one most suited to America.
We have followed its lead in currency management and the creation of a stabilization fund; and, with due allowances for national differences, our NRA is not as far off the British line as many imagine. Labor unionism is so well developed there that it is no longer an issue, unemployment insurance is an established institution, and the steadiness of the British people is such that their leaders do not need to use catchwords and propaganda in quite our pushing manner. When we have settled those highly controversial points which are the heritage of delayed adolescence, the prospect is that economic planning in America will find its raw material in corporate planning, its refinements and correlations in trade-association planning, its critical review, coördination, and final authority in government planning, with credit control as the backbone of the whole effort.
All along the line, of course, there will be the old, old quarrels in new vocabularies, their essence being, Who shall control the planners? There you have an unplannable item; leave it to the future.
The record of American government as a planner is not at all impressive. We have never been well prepared for any war we entered, even when long bickering preceded the appeal to arms. Farmers are worse off than before the Department of Agriculture was established. As an international lender and debt collector Uncle Sam rates zero, having loaned $15,000,000,000 without security to belligerents obviously insolvent when the loans were made and now so little disposed to pay that Mr. Chamberlain blithely lowers British taxes without providing for American debt service. Internally the government’s planning record is even worse. During the boom it was decided to push public works, notably government buildings, when private building fell off, yet when that occurred few detailed plans and specifications were ready. Its plan for stabilizing wheat prices scored an impressive failure. The management of the Federal Reserve discount rate has at various times had unfortunate results. You will hardly find an important government plan, from the birth of the nation down to 1932, which has been a distinguished success
There are several reasons for this discouraging record. In both foreign and domestic policy the American habit has been to live from hand to mouth. The psychology was lacking to make either government or the people take long-range programmes seriously. Also, our recent hastily improvised plans were always somewhat at the mercy of foreign traders and governments. Our national budgets might include installments and interest on Treasury debts from creditor nations; their non-arrival meant deficits. Our heavy private investments abroad were in jeopardy from foreign legislators as well as from the normal risks of international trade and investment; result, lower incomes and less income tax. Attempts to stabilize wheat at a figure bearable by American farmers were offset, in the give-and-take of international trade, by crop pressure from Canada, Argentina, and other wheatgrowing areas. As regards the public building programme, the prevalence of high land prices discouraged the acquiring of sites far enough in advance of need to make prompt operations possible after the storm broke.
Nearly all of these efforts were defeated by unforeseen factors; it was discovered, too late, that the economic situation is like a balloon in this respect — put your fist into it in one place and it is certain to bulge out elsewhere, and perhaps at the very point where you least expect it to bulge. Continuity is at the mercy of elections; one administration can destroy what another has set up, and localism can riddle a national programme by boring into it with the auger of special interest. Moreover, any government plan is at the mercy of war.
VI
What warrant is there for expecting any significant improvement in these respects? How can government acquire a prescience it has never possessed?
Well, certain factors in the old equation have been removed and others substituted, The most important of these changes is the achievement of a managed currency, protected by a stabilization fund, which is intended to limit the play of world forces as they affect American economy. For some years, at least, domestic wages and prices will be less at the mercy of fluctuating international currency quotations than they have been.
Also, once the fact of a managed currency has been established and accepted by the people and their corporations, long-range funding operations will be simpler than they were when gold was the only element in the standard measure of value. Before the crash one of the larger American corporations studied seriously the problem of insuring its employees against unemployment. Because their plan would affect a definite group, with a long history of high labor morale and small danger of malingering, the investigators concluded that actuarial soundness could be achieved, up to the point of investing the proceeds of their fund. At that point they were blocked. Only through hoarding gold could this corporation be certain of recovering its full investment for employee relief at the time and under the circumstances when that relief would be needed. Its own business was basic; when it was down all others would be down also; and, with trade generally depressed, government securities would likewise fall, owing to the difficulty of tax collections. Meantime, while prosperity lasted, investment of its insurance funds in the projects of others would encourage those others to overdo in expansion. To some extent, therefore, the effort to assist one group might increase future unemployment risks for other groups. All this could be avoided by hoarding gold; but, although gold holding was not yet illegal, it was clear that if the practice were begun in a large way, and followed by other corporations from similar motives, the government and the banks might be embarrassed. Unable to solve this riddle, the corporation was forced to drop the plan. Under a managed currency it would be entirely feasible to work out, through the coöperation of government, a guarantee of future purchasing power for such a fund, as any loss incurred would be far less than government expenditures for relief of the same corporation’s workers once they were thrown out of employment.
The question may be raised, in passing, whether our currency is really a managed currency on the new gold basis. Two facts seem to establish it as such. One is that free trade in gold is suspended; the other, that the effect of foreign-exchange fluctuations on domestic affairs is subject to restraint. Whether the stabilization fund is large enough to afford the desired protection in a hurly-burly world, and whether the population is well enough disciplined to abide by its operations for long, are practical considerations open to doubt; but for the time being the currency is managed. Probably it wall continue to be managed somehow. Neither of the two great political parties is likely to lay domestic recovery open to the shocks of the foreign-exchange fluctuations.
VII
More meaningful than any isolated fact, in support of the belief that government planning may improve in quality, is a changed point of view. The recent depression had many forerunners in America’s three centuries of settlement, and some of its factors are as old as man himself; but this last decline in values also had elements new to us as a people and perhaps combined for the first time in human history.
Never before had sovereign powers been in debt to our Treasury on large, long-term obligations. Science and organization had reached new peaks in multiplying man power in the satisfaction of creature wants. The scarcities caused by war had been quickly overcome by goods production, yet the possibility of erasing the huge debt figures on the ledgers seemed hopeless.
For the first time there was no free arable land for out-of-work Americans to run to when jobs failed them. In no other prolonged depression were two thirds of our population living in towns, chiefly on the proceeds of pay rolls and dividends. Never had life been so completely dependent upon contracts and confidence in contracts. Never before had labor entered a depression so deeply in debt, as a result of installment selling. And never before, at least in modern times, had any great nation (Russia) managed to maintain itself on a no-profit and no-debt basis for more than ten years after outlawing private property.
The calmness of Russia, which is apparent even at a distance, is far more impressive than her progress, concerning which not two visitors seem to agree. This demonstration of a new social order affects the public mind in all other countries. Its planning activities are especially well advertised. Although Americans have borne their ills patiently, and remain individualist by habit and preference, they have apparently become converted to letting politics disburse a large and expanding share of the national income. Henceforth the division of wealth will be a political problem in America, as it was during the American Revolution and for some time afterward. As never before, the American masses are hoping that their government will lead and dominate and plan, to the end that the vast resources and energies of the nation can produce more jobs and more security, more leveling of incomes, a better life for the masses. They are prepared to weather disappointments in the pursuit of that grand objective, and they are not yet ready to ‘ rush the gate,’ but neither are they likely to lose sight of the goal.
Another facet of the hope for more efficient planning is this: better minds are doing the planning; and they give every sign of being able to learn as they go along. The brain trust has withstood one determined attack, and emerged from it both stronger and more conservative than it was. No one need be surprised if business, which is supremely adaptable, comes soon to appreciate the advantage of having brains well represented in a government with which it must deal directly more and more.
The higher type of business executive is more comfortable among professors than among local and sectional politicians; one of the dangers is that business, always on the alert for brains, will hire the government’s bright young men away from it, as S. Parker Gilbert was lured away after acting as a oneman brain trust during the Reparations entanglement.
The war risk must be faced; one can only hope that a government seriously at work on economic welfare will be increasingly averse to jeopardizing the future of its people by appeal to arms. But full internal peace cannot be expected or deserved by any industrialized people whose government does not seek to reduce, as far as may be, the costly fluctuations in value into which a society falls which is geared to the profit-and-debt economy. The task is difficult but imperative; the risks it involves are great, but far less than the risk of avoidance. Like finance itself, planning is a matter of collecting accurate statistics, eliminating all possible risks beyond foreseeing. If there were no risks, there would be no financiers. The difference is that finance plans for near-by profits instead of for continuous social welfare. Theoretically the latter has always been the goal of government; but until recently no American government has given that ideal much more than lip service. Our way is to rush government in as a last reserve to cope with crises after they have developed through the debt dealings of its impatient citizens. Another such effort and the old Republic is undone.
Americans enmeshed in ticker tape lack both strength and will to break free by a single convulsive effort. We are still a capitalist nation by conviction, but with important reservations recently added. Uncle Sam understands now that he will have to put his accounts in order for a long siege. Thus far in his meteoric rise he has been on a political honeymoon in the midst of resources so abundant that waste was a small matter; now he is deeply in debt and must begin housekeeping, which is the fundamental economics. He has idle sons to put to work and to keep at work. To do this the activities of the shrewder members of his large family require discipline, in order that they neither defeat themselves nor penalize their brothers by swift ambitions too strenuously and cunningly applied.