Mobilizing For Abundance


Table of Contents

Chapter 1: Lessons From the War
Chapter 2: Guns and Butter
Chapter 3: Wanted: A Healthy Economic Environment
Chapter 4: Why We Have Had Depressions
Chapter 5: Total Spending is the Key to Prosperity
Chapter 6: The Risk is an Investment
Chapter 7: The Power to Tax is the Power to Create
Chapter 8: A Social Security Program for Economic Security
Chapter 9: Exporting for Peace and Prosperity
Chapter 10: Government Spending Can Fill the Gap
Chapter 11: Adding it Up



IT WAS LATE IN THE SUMMER OF 1943 IN THE ARMY’S Walter Reed General Hospital in Washington, D. C. In their gray pajamas and red lounging suits, the convalescing patients wandered about the grounds or in the Red Cross recreation building or through the wards. The weather was hot and the pace of life was slow. In some ways the war seemed far away, but only momentarily. There were too many battle scars and uniforms and disciplines to forget the war for long. 

There were battle casualties from all over the world. Some of the boys had been injured during the various invasions, others in air missions over Europe, and many had been through a number of battles in the steaming island jungles of the far Pacific or the barren desert and ragged mountains of North Africa. Some were near full recovery, while others knew that there were many surgical operations and months or even years of hospitalization ahead of them. There were the armless and the legless, many boys with plates in their skulls, some with bad burns and skin grafts or distorted and rebuilt facial features, and a number of others with mental afflictions. Alongside those who had been injured in action were the boys who had met accidents and suffered ailments before even getting abroad. They were all soldiers. 

It was in such a setting that this book was started, late in August 1943. In the same hospital the book was finished, in November. I was a patient for a back injury and during this period spent nearly three months in Walter Reed Hospital, with an interval on the outside among civilian physicians, seeking an elusive relief from sciatica. While in the hospital, there was plenty of time for thinking and writing. It was much different from the period of basic training, when there was little opportunity or energy for extramilitary activities. 

Many years of research in the fields of national income and unemployment, and of planning our economic mobilization for war while with the War Production Board and its predecessor agencies, provided the background for this report. Association with fellow soldiers in the Army, and especially in the hospital, provided the incentive to write about the postwar economic problems of our country. There must be a future, a bright future, for the eleven million men in the armed forces and for their families and friends. It must be a future of freedom and abundance. Without these we can never justify the sacrifices of the soldiers on the fighting fronts and of the producers on the home front. 

Much of the talk among the soldiers was light and gay. Sometimes, though not often, the troops who had fought at the front would discuss the noises and horrors and weapons and their own behavior under fire. Quite frequently, especially after “lights out,” the discussion turned to the future and there was almost universal concern over jobs and security and peace. After a period of expressing worries and doubts, the tone shifted, with emphasis on what might be done in the way of insisting upon employment for the demobilized soldiers. 

Most of the men are not articulate on economic, social, and political matters, but their views point definitely to the possible emergence of a potent pressure group among veterans after the war. They will be insistent on being “taken care of” in the future, not in the sense of pensions and relief, but in having steady jobs. This pressure can be a constructive force behind the development of sound economic measures which will assure full employment and sustained prosperity within the framework of our democratic, free enterprise system. Or the ex-soldiers may become a dangerous group, if ignored by the leaders of democracy and thereby delivered into the hands of demagogues who have no respect for or desire to follow the principles of democracy. 

This war is not being fought for the past. It is being fought for the future. The determination of the soldiers that the future bring abundance and peace must be recognized and understood. It is the objective of civilians and soldiers alike. This is a war against aggression and dictatorship. Further, it is a war against depression, unemployment, and economic chaos, for out of these unhappy conditions the seeds of war are sown. 

If we will but open our eyes to the tremendous accomplishments of the United States in mobilizing for war, we cannot fail to appreciate its great potentialities for the era after the war. The same can be said for the rest of the world, in view of the production achievements of Great Britain, Russia, and Germany. Even Japan’s industrial efforts for war can give promise of greater abundance in peacetime. It all depends on the determination of man to make the most of his resources and to produce for consumption and peaceful purposes rather than for war. 

The choice between jobs and abundance, on the one hand, and unemployment and deprivation, on the other, will be made, either positively or by default. Democracy will survive if it makes the proper decision. The United States will play a major role in deciding for the world. We may not be able to avoid considerable unemployment in the period of reconversion from war to peace, but even this situation can be alleviated by intelligent planning and courageous action. However, after the period of readjustment we may have serious depressions and a chronically large number of unemployed persons, or we may have sustained prosperity, job opportunities for all workers, and a truly abundant life for everyone. The latter alternative may suggest idle dreaming and wishful thinking. In terms of resources, however, we know it can be done. It has been done for war. If we fail to achieve the same objective in peacetime, it is only because we haven’t the collective intelligence and collective courage as a people to solve our economic problems. 

When we ask eleven million men to leave their families, friends, jobs, homes, and country—to risk temporary or permanent disability—to chance even their opportunity to live, we are asking a truly great sacrifice. They cannot be compensated in full by pensions or a discharge wage or preference in their old jobs. The least that victory should bring to them is a successful and effective democracy with freedom of opportunity and freedom from want for everyone. Priority in job placement is of little value in severe depressions. Much more essential is prosperity and jobs for all. 

In wartime the national interest is recognized above special interests. Men are drafted into military service, industry is restricted from producing specified products, prices are controlled, and goods are rationed. By concession of minor freedoms throughout our democracy we shall be successful in defeating those who would defeat us. Through minor concessions in peacetime we can defeat the economic depressions which threaten our democracy. In many aspects, severe economic depressions are even more threatening to our survival as a democracy than are enemy nations. We must fight this domestic scourge with the same vigor and daring as we fight the Nazis and the Japs. [sic] Furthermore, victory over depressions can be achieved without interfering with our basic freedoms and without modifying our economic system. 

It is the purpose of this book to discuss the vital importance of prosperity and job opportunities to the survival of the free enterprise system in America; to describe the essential features of how our economy operates; and to present constructive proposals for insuring its successful functioning, and therefore its survival, in the future. 

The book has not been written for professional economists. Rather, it has been written for the layman who has a desire to understand and to solve the economic problems which will face us after the war. With this reader in mind, an effort has been made to avoid complex details and to present the picture in broad perspective. Ours is a complex economic system and difficult to understand and describe. The professional journals are much too technical for popular use. Economists have perhaps spent too little time and energy in imparting their knowledge to the public. It is hoped this book will help to introduce present-day economic thinking and policies to the layman. 

For some businessmen and financiers the recommendations in this book may appear extreme. Yet they are in accord with traditional American conceptions. They can be applied to the benefit of all groups in our country. They can make our system work and thereby insure its continuation. 

I start with the belief that the democratic, free enterprise system is the most desirable one, but that it will continue to exist only if it works well. The policies proposed herein are all consistent with the basic tenets of our kind of political and social and economic society. They are not revolutionary. They are modifications of our present set-up which can spell success for us at home. Without success at home, we will be a negative rather than a positive force internationally for a better world. 

As civilization evolves into stages of higher development, fundamental concepts and objectives will, we hope, emerge more clearly with respect to social, political, economic, and material matters. Perhaps in the long run everything will happen for the best, whatever that might be. But we live in the relatively short run and as rational intelligent human beings presumably we can exercise some control over our environment during our brief stay on this earth. 

As an economist, it may be my license to exaggerate the economic function, but it seems clear that the world is in an economic turmoil or revolution. Democracy and freedom are being challenged, internally as well as externally. If we solve those economic problems which will face us after the war we may continue to make progress as a free people. If we fail, then we may lose our freedom as individuals. The success or failure will be of our own making. I, for one, prefer the free enterprise democratic system and am convinced it can function successfully and for the benefit of all mankind. Toward that end this book is written. 

It is impossible to acknowledge the credit due to all of the various individuals who have contributed indirectly to this book. Included would be a good proportion of the writers who have developed the economic doctrines first expounded by John Maynard Keynes. Also, the statistical research work of Dr. Simon Kuznets and many of his followers in the field of national income has enhanced our economic knowledge greatly. A number of friends have read the manuscript and have offered valuable suggestions. To all of them and to Loraine B. Hobday, who did all of the typing, I am most grateful. 

Robert R. Nathan 

Walter Reed General Hospital 

November, 1943

Mobilizing for Abundance

Chapter 1: Lessons From the War

OUT OF OUR RICH, THOUGH COSTLY, EXPERIENCE of the last fifteen years, there are many important lessons for all of us. We have seen what amazing production achievements are possible in the United States and elsewhere under the stimulus of war. Likewise, we have observed what startling waste of resources takes place during depressions and what tremendous military consumption of resources occurs in wartime. If any doubts existed that the United States had the technical and organizational ability to produce an abundance out of our materials, manpower, and managerial capacities, those doubts have surely been dispelled by now. No one can question that we have the innate intelligence to make the most of our economic potential for war. Can we do equally well to avoid the tragedy of unemployment and bankruptcy after the war? Have we the will and determination and, above all, the national courage to do the job? If the free enterprise system is to survive, the answer must be yes. 

Within the past fifteen years we have seen the prosperity of the late 1920’s, the unprecedentedly severe depression of the early 30’s, the slow recovery of the middle and late 30’s, and, more recently, the defense and war years. This period embraced the most extreme fluctuations in economic activity in our history. From the heights of the exhilarating days of 1929, through the broken spirits and bodies and fortunes of the stupid and demoralizing depression, into the painful and disunited struggle of slow recovery— we finally emerged into the great war effort, when sweat and toil and fear brought us to phenomenal new peaks of employment and production. Let us review briefly these fifteen years. 


In 1929 we thought the millennium had been reached when this country produced goods and services valued at nearly $100 billion. It was the culmination of a period of prosperity and relatively full employment, of feverish speculation and “get rich quick” schemes, of frantic search for new markets at home and abroad, of mounting installment debt and large export balances, of smugness and blindness to the distorted and unbalanced conditions which spelled disaster ahead. There were no bread lines, no visible unemployment, and few idle plants. Of course, for many sections of the country and for a large segment of the population, the standard of living was below generally accepted levels of decency. On the whole, however, we were well satisfied with our situation and our progress. 

The late 20’s were proclaimed “the new era” and the gospel was spread that there could be no more depressions. Instead, good times were here to stay. Almost everyone was so busy watching the stock market ticker that little time or interest was given to analyzing the underlying economic trends. New plants and office buildings and other capital goods were produced beyond what was required to meet the gradual but lagging growth in consumption. Our capacity to produce was increasing disproportionately with the financial capacity of most people to consume. Savings were kept from being idle by high pressure promotion of foreign securities, by a mounting installment debt structure, and by precarious accumulations of business inventories. 

These and other methods of maintaining necessary markets for the goods and services being produced could not continue for long. Unfortunately, there was a total lack of awareness of the perilous nature of those important markets which had to be maintained or expanded if prosperity were to be continued. 

Then came the depression of the 30’s, with the incongruous twins, idle resources and unsatisfied wants. By 1932 our national income had fallen below $40 billion. Some 15 million of those normally employed were without jobs and other millions worked on reduced schedules. Plants all over the country were shut down or working part time. Businesses failed, banks closed, mortgages were foreclosed, people suffered from malnutrition and lack of clothing and housing, and suicides increased. There was no actual starvation, but we were near the breaking point, and the very existence of democracy was threatened. Dejected job-seekers walked hopelessly from plant to plant and office to office, observing idle equipment which could readily turn out the goods and services so desperately needed by themselves, their dependents, and their neighbors. It was a period when our best minds struggled in a mire of confusion with a situation which could not persist much longer. 

After dragging at the bottom of the depression, from the middle of 1932 to the spring of 1933, new life was injected into the economy by a number of legislative actions and increased government spending under the so-called New Deal. Slowly, our production increased and employment opportunities improved, but even by 1939 we were still with several million employables out of work. Our total production in the late 30’s rose to approximately the ’29 level, but the continued large volume of unemployment clearly did not justify any satisfaction over having achieved real prosperity. The recovery period saw major legislative reforms, a Federal program of public works and public relief, considerable disunity and dispute over government policies, and growing attention to and discussion of economic problems. 


During the decade from 1930 to 1939, inclusive, the value of our total national production of all goods and services was approximately $250 billion less than it would have been had we continued at the 1929 level of output. Part of this drop in the value of production reflected the lower prices which prevailed after the decline of business activity, starting in 1929, and the balance was due to a fall in the quantity of goods and services produced. Even this doesn’t tell the story of our losses during the 30’s, because it fails to take into account the continued progress which would have occurred had prosperity prevailed throughout the period. 

If we were to assume a constant rate of growth between the actual 1929 and actual 1943 levels of total production, then our lost production during the ten years of the 30’s was, in 1929 prices, well over $400 billion, or about five times what we produced in 1929. In other words, had this nation shown a steady increase in output in each year between what was produced in 1929 and what was produced in 1943, instead of a severe depression, our total production during the ten years 1930 to 1939, inclusive, would have been greater than it was by five times the total output in 1929. Had there been steady progress over that period, we would have produced half again as much as we did during the entire span of the 30’s. Actually, production in 1943 could have been much higher than it was, had there been continuous full employment over the last fifteen years.

This loss or waste of resources was more than enough to rebuild all of the tangible assets of the United States— other, of course, than our natural resources. With the manpower, the management, and the materials which lay idle throughout the 30’s, we could have much more than rebuilt every home, every factory, every office building, every bridge, every railroad, every dam, every power plant, every piece of furniture and clothing, and all other reproducible assets which exist in the United States today. That is a startling fact and a severe indictment of our collective intelligence.

Once production is lost through idle resources, it is gone forever. It is little different from producing useful goods and dumping them into the ocean. To some degree it is even worse, because of the demoralizing effects of idleness upon workers and management. Much attention has been given to increasing efficiency and reducing waste in the processes of production, but unfortunately too little notice has been paid to the biggest waste of all— unemployment of manpower and machinery. 


In 1940, the United States embarked on a modest defense program which later blossomed into a tremendously ambitious war program. The insatiable demands of our armed services soon put to work all of our available resources and initiated the development of vast new re sources. For the first time in over a decade, we began to experience the exhilarating effects of full employment, of shortages of materials and equipment as well as of management and labor. Under the stimulus of war demands, we greatly expanded the supply of steel, copper, aluminum, and other raw materials. We produced tremendous quantities of new machine tools and built new plants all over America. Our railroad facilities were improved and, where necessary, extended. Millions of men went into the armed services, other millions entered factories, and millions of new workers entered the labor market. Hours of work increased. All of the talk about technological unemployment and all of the pressure for a shorter work week disappeared. Given the demand for products and services, American industry and labor responded with greatly increased output. We learned that our productive capacity could be expanded rapidly and considerably.

So great were military needs that it was impossible to satisfy fully all civilian as well as military demands. Yet American industrial, management, and labor resources have come through with flying colors and record production. But it required a war and hundreds of billions of appropriations and government contracts to provide the stimulus.

Our gross national production rose rapidly to the annual rate of $185 billion in the final months of 1943. True, it was necessary to halt production of automobiles, refrigerators, and many other consumer durable goods, but the output of many consumer goods and services increased along with war production, and in the middle of 1943 total consumption by a reduced civilian population was still higher by a substantial margin than in 1939. 

Our rate of production of munitions by the end of 1943 nearly equaled that of the entire rest of the world combined. Probably an even larger production could have been attained, but what has been achieved is phenomenal. By the end of 1943 we shall have spent about $175 billion for war and defense. The rate of production of goods and services for war alone very nearly equaled the peak prewar rate of total production. By the time the war is over, we shall very likely have devoted enough resources to the war to again rebuild all of our reproducible assets.


What does all this signify? The history of the depression and the magnitude of the war mobilization achievement have not been reviewed for the purpose of either condemnation or adulation of ourselves, our country, and our economic system. Rather, it has been for the purpose of emphasizing what we can accomplish when the determination is there, and what we failed to accomplish when full determination was lacking. The outstanding lesson for all of us is the fact that we can produce much more than most people ever thought possible.

When we put our minds and our resources to work, the results are beyond our most optimistic expectations. It must be recognized that unemployment and idle plants in the midst of unsatisfied wants represent an intolerable, undesirable, and inexcusable condition. We can and must have a future of true abundance. Ours is the task of developing and applying appropriate mechanisms to make that objective a reality. 

New inventions, new production techniques, and increased mechanization have all been hailed as evidence of great material progress. We may take great pride in such achievements. However, the real benefits of technological innovations can be measured only in increased production and not in the number of new patents registered nor in the reduction in man-hours per unit of output alone. People work and produce in order that they may consume. Technological development which results in greater consumption and less toil and effort is an indication of progress. New scientific and technical products and processes mean little unless they actually increase standards of living and make work less burdensome. Unemployment and want in the midst of great potential production are not symbols of total progress. There is no question that we have taken great strides forward in the mechanical realm, but there is equally impressive evidence that we have not made the most of the opportunities which these developments offer in the way of a more abundant life.

The war has revealed the wonderful prospects which the future can hold in store for us. The accelerated development in air power affords opportunities for greater national and international unity; for the migration of workers from heavily populated centers to outlying areas; for the ready accessibility of food and other products from distant places; and for the availability of the arts and recreation and travel to more of the population. The use of synthetics has been stepped up considerably and not only offers particularly bright prospects for new products in the future but acts as insurance against depleted reserves of our natural resources. New medical products and techniques offer opportunities for a healthier and longer life. 

Improved machinery and more fully mechanized processes of production will permit sharply increased output per unit of physical effort expended, to the end that the worker can operate under less strain and less fatigue. Workers’ skills have been developed and improved under the impetus of war production. All of these developments can go for nought unless we apply the same intelligence and will to postwar problems as we have applied to the mobilization for war. For without favorable employment opportunities, democracy may perish and the machine may truly become the master of man. 

Two questions come to mind to which we must have affirmative answers. First, if we can so speedily and effectively mobilize our resources for such an immense war production, can we not with equal effectiveness, from both the technical and organizational viewpoints, mobilize our economic resources for peacetime consumption? If we can build vast quantities of battleships, airplanes, guns, ammunition, tanks, and other weapons to kill our enemy, can we not devote the same resources after the war to building houses, automobiles, electrical devices, schools, hospitals, and other goods so much needed to raise the standard of living of all our people? Certainly it has been proved that we lack neither the inventive genius, the industrial management, the skilled labor, the basic materials, or any other resources to do the big job in the post war era. Therefore, the answer must be in the affirmative. That leads to the second question. 

Do we have the courage, character, and vision to bring about the same full utilization of resources in peacetime as in war? Will we shrink behind the mysticism of financial terminology and high-sounding shibboleths and meaningless platitudes after the war is won, and resign ourselves to unemployment and chaos? Or will we develop and adopt policies to assure continuous prosperity? Will our attitude be one of supine acceptance of whatever is offered us, or will we be the masters of our own fate? Can we demonstrate the same degree of initiative and courageous action in raising our standard of living and providing steady jobs for all, as we have shown in producing the armaments to win the war?

If we answer these two questions in the affirmative and determine to bring about the conditions we desire, then we need feel only confidence and optimism about the future. It can be a future of ever-increasing standards of living and of opportunities for employment for all, so that all can share in the abundance which nature and science and effort have made possible. So much can be had if we will but reach forward, through the cooperation of government, labor, management, and capital, and let our vast resources bring forth the good life for all our people.

Chapter 2: Guns and Butter

UNTIL RECENTLY, PLANNING FOR THE POSTWAR years was widely considered incompatible with an all-out effort to win the war. Perhaps most of those responsible for the conduct of the war were fearful that any attention directed toward demobilization problems would detract from the war effort itself. Fortunately, better judgment is beginning to prevail and planning for the future is emerging from the cellars and attics into the daylight, where wholesome and vigorous discussion and study can be undertaken. 

It is obvious that our first task is that of defeating the enemy. Without victory, there will be no future with which the United States and the United Nations can concern themselves. The planning and the execution of plans for the future will be in the hands of the victors. Yet, we need not be blind to the growing indications of defeat of the Axis Powers. As victory for the United Nations becomes more certain, the need for being prepared for peace increases. To ignore completely the challenging problems of the postwar era is certain to bring chaos and disunity after the cessation of fighting, when clear thinking and long-range perspective will be so necessary. The expression “win the peace” should not be taken lightly, and should apply to domestic as well as to international issues.


It is not necessary that postwar planning interfere with the conduct of the war itself. Granted that industries can not be permitted, at the expense of needed munitions, to use large quantities of critical materials to start producing peacetime goods or to prepare their plants and equipment for peacetime production, there is still plenty of hard thinking and creative work required before the physical reconversion gets under way. Surely, advanced thinking and foresight on the policies and procedures for dealing with postwar problems can be developed simultaneously with a major emphasis on war production. This is especially possible now, since the planning phase of war mobilization has passed and the production phase is reaching its peak. 

There is now a shortage of manpower, it is true; but the assignment of some personnel to prepare for what comes after the war will certainly detract less from the war effort than it will add to winning the peace. In fact, the more clearly and quickly policies are agreed upon for the future, the more wholehearted can be the cooperation of all groups in the war effort. Uncertainty as to what is ahead may have a considerable demoralizing effect upon industry and labor and upon the fighting men themselves. Complete confidence in their future freedom and security can not fail to stimulate everyone on both the fighting front and the production line.

It should not be necessary to justify or explain the need for planning for the years ahead. The success of our war mobilization stems in part from military and industrial plans which had their genesis many years ago. These plans were enlarged and refined in the earliest days of the defense program, and made possible the rapid and almost total mobilization of our vast resources for the successful prosecution of the war. There were many mistakes and hasty decisions, but on the whole, advance planning in such matters as conversion, new facilities, expansion of raw materials, priority mechanisms, and conservation contributed greatly to the success of the war production program. 

Everyone who has any conception whatsoever of the nature of the problems which will face this country after hostilities end must have a full appreciation of the need for their intelligent solution. How much of the total planning should be done by Congress, by governmental agencies, by labor, by industry, or by any other group is not the principal question. There is work for all groups. The task is large and unpreparedness will be inexcusable. It can have adverse consequences as serious as those of military unpreparedness in time of war. Certainly, because of the magnitude of government commitments at the end of the war, the important role the government has played in the mobilization for war, and the part which government must play in demobilization, a great deal of planning by the government is required.

Two somewhat distinct categories of postwar problems now require serious attention. The first concerns the period of reconversion and readjustment of our economy from wartime to peacetime conditions. The second, dealing with the longer pull, involves the question of sustained prosperity and economic progress for the future. These two groups of problems are not wholly unrelated, but they differ considerably in significance, in complexity, and in the means for their solution. 

By far the more important phase of postwar planning relates to the long-range period. This is not to imply that the first year or two of readjustment will be simple or that a bad job during this period may not have serious and lasting ill effects. On the other hand, a good job in the period of readjustment will go for nought if the subsequent years bring the same degree of depression and economic chaos as prevailed in the decade before the war. 

The first years after the war will offer a most fruitful opportunity for the development of sound economic policies for the future. The end of hostilities can, in a real sense, provide the basis for a fresh beginning. We shall be faced at once with a great many problems in almost all fields of economic activity. Their solutions can be sounder and better integrated if they are formulated now than were the problems allowed to arise and be dealt with singly and on a makeshift basis. A great deal has been learned during the war, and from these lessons we should be capable of emerging with an understanding and a program which will provide the greatest abundance and thereby the fullest assurance of peace that man has ever known. 

Most of the discussion in this book concerns the longer-run economic problems in the United States. The balance of this chapter is devoted to a consideration of the period of reconversion. Emphasis is placed on economic problems within the United States. There is no independent consideration of foreign policies except in their relation to our domestic economic problems. The development and especially the execution of an enlightened foreign policy for the United States can be achieved only if our domestic policies bring continuous high levels of employment. If we have depression and unemployment in the United States, all of our best intentions and plans for international economic cooperation will fail through internal disunity. 


Fundamentally, the character of the problems in the period of reconversion are independent of the time and circumstances of the ending of the war. However, the complexity of the problems and the difficulty of their solution will depend to a considerable degree on the time and manner in which the war is brought to a close. The longer the war lasts and the more fully our industrial resources are mobilized for war, the greater will be the problems of demobilization. Prewar relationships among industries and within each industry as well as between management and labor and government, have been distorted by war and will be more difficult to re-establish as the conflict is prolonged. The problems of readjustment will be much more serious than after the last war because of the much longer duration this time and the fact that more than twice as large a portion of our total production is now being devoted to the war than during the peak of mobilization in the first World War.

At the time of this writing, in November 1943, it appears probable that the war in Europe will end before the war in the Pacific. Perhaps the majority of the people believe hostilities in Europe will terminate some time during 1944, probably about the middle of the year. On the other hand, the consensus of opinion points toward a continuation of military action in the Pacific theatre of operations for about an additional year.

The problems of readjustment from war to peace will be less difficult of reasonably successful solution under a gradual decline in the scale of military needs and operations than if the entire war should come to a stop at one time. Even a full year of partial demobilization will bring major disturbances and leave difficult situations for the final period of readjustment; but a sudden and practically complete cessation of war production and a simultaneous release of military personnel would bring an inevitable period of severe dislocations and chaos. 

In the following discussion, it is assumed that the war in Europe will end about a year ahead of the war in the Pacific. Should this assumption fail to materialize and the entire war end at one time, the same general policies as proposed will be appropriate, but with increased emphasis and intensity.

There are a great variety of problems to be solved in the period of reconversion, varying from the termination of contracts and disposition of government-owned plants and war materiel or components, to the demobilization of military personnel and the termination or extension of government wartime controls. Some of the more important problems are discussed individually and general principles are suggested for their solution. No attempt is made to develop in detail the precise steps and methods to be followed. The main objective is to propose fundamental principles, from which administrative authorities may develop operating policies.


Insofar as the disposition of government-owned facilities, finished products, components, and materials is concerned, price considerations are perhaps as largely ethical as economic in character. The government could set the highest prices in accordance with costs, or it could be lenient and charitable in disposing of assets at truly bargain prices. From an ethical point of view, it would seem desirable that government get the highest possible price for its assets, in order that the debt and tax burden of the public be enlarged no more than necessary. Unjust enrichment of private management out of war conditions would hardly be in the public interest. On the other hand, it would be undesirable to cause long delays in negotiation, thereby tying up productive assets and financial resources. 

Generally, it would appear preferable to follow the policy of getting the best price that can be obtained within a reasonably short period of time after the decision to sell has been made. In many instances, such a period of time might extend for several years. Any move to force the sale of all government-owned plants and equipment within a few months after the war may well result in distorted competitive relations, unhealthy speculative activity, and public scandal. Sound judgment and attention to the economic consequences should prevail.

More important than the price is the decision as to whom these assets are to be sold. This involves the important question of monopoly and competition. If the government is going to follow a policy of resisting monopolistic tendencies after the war, then many government-owned plants should be sold to other interests than those who are now operating them. This will be strongly resented by the present management. Yet there is little sense in strengthening monopolies through the sale of government property when these same monopolies may be attacked through other governmental procedures at a later date. 

On the one hand, it might be considered unfair of government to alter competitive relations by taking advantage of wartime developments, but on the other hand it is equally unfair to expect the government to strengthen monopolistic control of vested interest groups. Nor will it seem proper to sell these plants to companies which, fearing excess capacity, might demolish the plants. It is suggested that special attention be given to the monopoly question by Congress and by the Department of Justice, for this factor will be most important in the disposition of government-owned plants. In any case, predominant consideration should be given to the public interest.

There are some who believe that the government should retain ownership of most plants built during the war with public funds. Their recommendations cover not only those plants which should serve as stand-by capacity for military purposes, but also plants which can be utilized readily for peacetime purposes. Such facilities could be operated by the government or leased to private operators. It has been proposed that the potential competition which such plants might offer to existing industry would have a healthful competitive effect. However, it is doubtful whether this positive influence would begin to offset the negative effect of the jitters which such a policy would give to business men. Certainly, insofar as stand-by capacity is concerned, it is desirable that the government retain those facilities reasonably required for continued and potential armament needs, but beyond such capacity, an early and total disposition of all government-owned facilities would appear desirable. 

With a precipitous decline in war production and a shift to peacetime production, the United States will have at least a temporary huge surplus of many raw materials which have been extremely tight throughout the war. The supply of copper, aluminum, magnesium, and even steel available in the United States during the war has been expanded greatly through increased imports and the construction of new facilities. The same level of total production and total employment in peacetime may require less metals than in wartime. Probably after a considerable period of full employment and sustained prosperity, adjustments will occur so that uses will be found for most of the supply of these materials, but there is likely to be a rather considerable surplus of many basic materials in the immediate postwar period.

It will be to the interest of the government and of total economic activity to avoid an immediate and total disposal of government stockpiles of raw materials, which would further aggravate a glutted market condition.

In fact, the government might retain stockpiles of some materials for a possible future emergency. The same problem is entailed in semifabricated components and finished products which can be salvaged or used for civilian production and consumption. They should be disposed of gradually, although war producers should be relieved as soon as feasible of the financial responsibility of carrying inventories of these items and of the burden of the physical space they occupy. 

It should be realized that industries will bring pressure against the government to forestall the sale of any goods or equipment which might compete with new production. Even some isolationists will favor giving these assets away abroad to avoid their competition at home. We must be wary of such benevolence, but also we must develop careful plans between government, industry and labor for the orderly sale of the goods which Uncle Sam no longer needs. Preference should be given to existing distributive channels. 


One of the most important and perhaps least predictable problems of the immediate postwar period concerns the technological and organizational difficulties of reconversion of plants, equipment, and labor from war production and military operations to peacetime production. Plants cannot suddenly and totally shift from the production of ships, airplanes, tanks, and ammunition to washing machines, passenger cars, and refrigerators; nor can millions of soldiers and war workers be moved overnight to new jobs. For food and services, most categories of clothing, and many other items, there will be little difficulty in the immediate resumption of the production of civilian goods when war demands fall off or cease. On the other hand, some months will be required to initiate production of heavy durable goods, and mass production will not be achieved for an even longer period.

There are many kinds of estimates as to how long it will take for the automobile and other industries to reconvert and attain maximum rates of output. The period of technical change-over is certain to bring major dislocations, geographically and industrially, which should be minimized as much as possible through advance planning. Also, it is necessary to speed the process of reconversion so as to provide the fullest possible employment opportunities and to meet market demands. Further, in reconversion care must be exercised in anticipating the probable pattern of demands under continuous full employment rather than the distorted immediate demands resulting from the back log of wants during the war. 

In establishing policies for terminating war contracts after the victory in Europe, one of the most important criteria should be the matter of expediting the reconversion process. During the period between the end of the war in Europe and the end of the war in the Pacific, military demands on American industry will decline considerably. Manufacturers may be torn between continuing to strive for all of the reduced war business that can be had and getting back into peacetime production. To the degree possible, these two interests should be harmonized.

In this period, first and above all it will be necessary to have, in the required quantities, those items of equipment needed for the successful conduct of the war against Japan. However, there is no doubt that total demands for munitions will shrink materially with the end of the European war. There will be a large stock of fighting equipment which can be transferred from the European fighting fronts to the Pacific, even though a large policing force might remain in Europe. Great quantities of war materiel will be available here at home and in other weapon-producing countries of the United Nations. The pipe lines of production and distribution will be filled with weapons. All of these supply factors, plus a concentration of fighting in one area of the earth, will bring reduced demands. 

This shrinkage will vary for different types of armament. The decline will be greatest for ground army equipment. Continued demands will vary with the type of offensive tactics the strategists adopt and with the stock of available materiel on hand when European hostilities cease. 

In terminating contracts, it is not going to be simple to coordinate the two objectives of insuring the continued flow of necessary armaments, on the one hand, and of facilitating reconversion, on the other. Those companies released from all war contracts will certainly have an advantage in getting back to peacetime production and capturing markets, as compared with those companies whose entire resources are retained on war production. Yet it would be impractical to curtail war production proportionally in all plants, even if the decline in demand were uniform for all kinds of armament.

Reduced munitions output in a given plant may necessitate reduced operations throughout the plant rather than the use of only part of the equipment and space, such as might allow civilian goods to be produced in the released part of the plant. Reconversion may require that the entire plant be relieved of war contracts practically at one time if an early resumption of peacetime output is expected. 

Because of the variable curtailments for different kinds of munitions and the variable adaptability of different plants to the necessary adjustments, it is inevitable that some companies will have a time advantage over others in producing civilian products. If the government is to avoid a rush by industry out of war production, it will have to work with management in minimizing the disadvantage of some producers getting into peacetime production later than their competitors. 

The production of most metal-using consumer goods is now restricted under War Production Board limitation orders. These restrictions will necessarily be lifted gradually as raw materials and manpower are freed from war production. Account must be taken also of which products are needed more than others and which producers can be spared from war production more readily than others. 

Carefully developed schedules and criteria for permitting the resumption of production of these goods are needed, and we should lay the groundwork now. An appropriate central government agency should establish a listing of civilian products in the order of priority for being returned to production, should develop a tentative schedule of the decline in war demands after Germany is defeated while Japan is still in the war, and should study the timetable and technical difficulties of reconversion of parts and of entire plants. Then all of this information should be integrated so that a much more just and much less disruptive adjustment from wartime to peacetime production will be achieved. 

There should be no delay by manufacturers in recon version or in making peacetime commitments merely because of delays in making financial settlements between the government and producers. Substantial financial settlements should be available promptly and final adjustments should be concluded as early as possible. Losses of production because of long litigation can be much more costly to everyone than the amounts involved in the contract terminations. Supplementary devices for financial assistance to firms might be needed, although the banks should be able to handle most demands for business funds. 


Paralleling the problem of overcoming technological difficulties and delays in reconversion is the equally important task of the demobilization of military manpower and the shifting of war production workers. Never before in our history has there been such a shift in the absolute or relative quantity of manpower as has occurred during the war. Since the year 1940, more than 25 million men and women have gone from the ranks of the unemployed or from the ranks of the normal non-workers or workers in nonessential industries, into the armed services or war work. In many ways, the transfer back again is going to be much more difficult, because of the lack of such precisely calculated demands as the armed forces and their production requirements made. Of course, the keen desire of employers, employees, and uniformed personnel to return as quickly as possible to peacetime pursuits will be a powerful stimulating factor, but something more than mere desire will be needed to facilitate the shift.

Only the military strategists know what the manpower demands in the Pacific and the continuing needs in the European theatre of operations will be, after hostilities with Germany have ceased. If the naval building program continues as scheduled, there will be an uninterrupted increase rather than a decline in naval personnel until the very end of the war. Because of the probable importance of air power in the Pacific fighting, no considerable decline in manpower of the Air Corps can be expected. Even if the ground army personnel were cut in half after the defeat of Germany, less than three million soldiers would be returned to civilian life. Therefore, it seems that only a fractional demobilization of military manpower can be expected until the entire war is over. 

With the end of all hostilities, it is doubtful whether all of our military forces, including compulsory training, will aggregate much more than two million men for any extended period of time. This means an ultimate release of about nine million from the present planned military force.

As for those who are to be let out of the Army, first preference should be given to married men whose wives are likely to withdraw from the labor market once their husbands have become re-employed. Next, preference might well be given to those younger men who will return to colleges and other institutions of learning. The demobilization of manpower should also take into account the occupational and industrial background of the personnel, in order that there be an earlier release into those industries and occupations where the prospects of re-employ ment are brightest. For instance, because of the probable large foreign demand for food, it might be appropriate to release farmers at the earliest date.

Selective demobilization is equally important in easing the difficulties of converting from a wartime to a peacetime economy as selective induction into service was in the period of mobilization. Of course, when the final deluge of military releases begins, there will be terrific pressure for speed, and it is questionable whether a system of selective release based on economic considerations can be put into effect as against the claims of such considerations as length of service, dependency, and age. 

It appears that the problem of shifting manpower from war production pursuits to peacetime jobs, during the period of declining war production after Germany is defeated and before the end of war in the Pacific, will not be greatly aggravated by the release of a couple of millions of military personnel. This period, which may be regarded as the first stage of general readjustment, should be dedicated to facilitating technological reconversion, insofar as this is possible and consistent with a minimum interference in meeting continued military demands. Large-scale shifts of workers and some volume of unemployment may be inevitable as war production falls off and preparations get under way for resuming civilian production.

Unemployment can be minimized through the elimination of overtime, which will in turn require careful planning in the termination of contracts so that the overloading of work on one plant while others are almost totally idle is avoided. On the other hand, just such conditions may be necessary if war needs are to be met and at the same time maximum technical reconversion is to be achieved. Encouragement should also be given toward an early exodus from the labor market of those who regard their war work as a temporary expedient or as a patriotic act. Again, it should be noted that an unplanned, ill-considered system of contract termination is likely to result in serious pools of unemployment in areas built up during the war around new plants. Thus, geographic and community considerations must play an important role in curtailing the production of munitions. 

The success of war workers and discharged servicemen in finding jobs will depend not only on well planned and efficiently organized demobilization and reconversion, but on more fundamental economic conditions as well. The demobilization factors include the speed of completing the task of reconversion, which in turn will depend upon the basis laid in the first stage of readjustment; the movement out of the labor market of wartime temporary entrants; the enlarged enrollments in colleges; the existence of training and rehabilitation programs for discharged servicemen; the speed of military manpower demobilization; and the elimination of overtime and reduction in hours of work as a temporary expedient. The basic economic factors include the expansion of consumer demand for goods and services; private investment; the size of foreign markets; and other demands such as public works and continued military needs.

Above all, if a demand exists for all the goods and services that can be produced, then the major limiting factor to full employment in the period of readjustment will be technological in character— namely, the ability of industry to mobilize its resources for a prompt return to peacetime production. The manner of contract termination by the government can greatly facilitate this reconversion. High and sustained levels of demand for the products and services of industry will depend, in large degree, on prospects for the future for producers as well as workers. That is why policies designed to insure high levels of economic activity and ample employment opportunities for the postwar years are so necessary now and during the period of reconversion. 

If the confidence of workers in continuous job opportunities can be established, there will be considerable and immediate re-employment in the service trades as war workers and military men are discharged. Many service industries, which are suffering from lack of manpower today, can absorb large numbers of workers, providing consumers have the buying power and are willing to spend freely. The same applies to many consumer goods industries which, without much technical change, can readily increase output and employment as the market for their products expands. The willingness of consumers to spend freely will only exist if there are prospects for steady employment. Many people look with hope on the savings accumulated during the war as a major source of buying power during the postwar years. The use of these savings by individuals is likely only if a steady income can be expected in the future. If there is no such confidence on the part of consumers, not only is it unlikely that wartime savings will be spent in the immediate postwar period, but there will be a tendency to accumulate even more savings out of current income in order to provide protection against imminent unemployment. 

Therefore, in the period of reconversion, just as in the longer run, measures must be taken to give support to the flow of income and thereby to provide assurance and confidence of continued full employment. Every possible step toward inducing higher consumption is essential, with large exports and, if necessary, public works supplementing the market for output at full employment. Either access to sizable unemployment insurance benefits or a substantial dismissal pay for all service men and for all war workers is desirable also. Unemployment insurance and old age benefits might well be liberalized as a stimulus to sustained buying power. However, there is no substitute for good employment prospects as a source of the confidence needed to induce consumers to spend freely. 


Another very important problem in the period of adjustment relates to the extension of wartime controls after the end of active combat. It appears that some degree of rationing and price control must be exercised for perhaps a year or more after the war, on certain commodities. Irrespective of consumer confidence as such, for some time there is going to be a greater demand for than supply of automobiles and houses and other consumer durable goods. Those who have the means and whose particular economic positions are secure will wish to satisfy their pent-up desires as soon as possible. All of these demands cannot be met quickly and fully. We shall wish to encourage spending for readily available goods and services, so as to provide maximum employment opportunities. However, where the goods cannot be made available to meet all demands, these demands must be controlled.

It will be difficult to appeal to consumers on patriotic grounds to be patient and await an adequate supply of goods which cannot be made available suddenly in mass quantity. If rationing and price controls are lifted, a mad scramble for scarce consumers’ goods and a serious inflation will surely ensue. The public must be educated to the need for continuing such controls for perhaps a year or two. This is not going to be easy, because the need for restraint for the good of the country will be less apparent then than during the war. Anti-inflation measures should apply only to scarce products and should not restrict total spending.

As far as extending other kinds of wartime controls is concerned, it is doubtful whether any restriction on the flow of raw materials will be essential. Of course, there may be exceptions in certain commodities which will be in great demand for foreign relief purposes. For these special products, the wartime mechanisms should be adequate, although here again their application will be difficult. 

As already noted, it is inevitable that a very sharp decline in government procurement of munitions will ensue after the final close of the war. Munitions contracts should be terminated as speedily as possible and there should be no extension merely for the purpose of easing the problems of readjustment. This would be too costly, and other readjustment techniques of the varieties already suggested can be developed successfully and with less cost. If any continued munitions production is essential, it should be concentrated in those communities which would otherwise be stranded and in those war plants least readily adaptable for the production of peacetime goods and most adaptable for stand-by capacity purposes. 

The problems which will be faced in the period of reconversion and readjustment will require clear thinking and speedy action. The details of the policies to be followed should be established at once, without waiting for the end of the war. In many ways, these problems are going to be more difficult than those faced in the period of conversion from peacetime to war production. There are going to be all kinds of pressures from vested interests, and if makeshift, unplanned solutions are adopted, we may find ourselves in a serious crisis. 

Therefore, the government should either establish a new agency or clearly place upon an existing agency the responsibility for determining policies for reconversion. This agency must take into account all of the factors, in order that there may be a single, integrated program. Thus, the termination of the contracts by the armed services, the demobilization of manpower by the armed services, the control over hours of work and the utilization of labor by the War Manpower Commission, the lifting of restrictions on the production of civilian goods and construction by the War Production Board, the extension of rationing and price controls by the Office of Price Administration, the direction of transportation facilities by the Office of Defense Transportation, and other operations by different government agencies must be integrated into a coordinated program of action. 

Through such a coordinated program, the necessarily difficult period of readjustment will be one of minimum rather than maximum disturbances. If the task is well done, it will encourage confidence in the more important planning job for the future. On the other hand, if it is done poorly, the public reaction will be so unfavorable that it will render increasingly difficult the establishment of sound economic planning for the longer run. It is obvious that the plans for the period of reconversion are less important, though perhaps more complex, than the long range plans. No matter how well the period of readjustment is managed, it is absolutely essential that we look forward to a future of full employment and sustained prosperity, and toward the attainment of that objective the rest of this book is devoted.

Chapter 3: Wanted: A Healthy Economic Environment

PARALLELING THE INCREASING INDUSTRIALIZATION OF the United States and the growth in the size of industrial enterprises, there has developed an increasing economic interdependence of all groups within our society. There are diminishing opportunities for individuals to earn livelihoods of a kind which will make them entirely self-sufficient. Orators and demagogues may beat their chests and shout fervently about freedom of opportunity and the independence of the individual, but there is no escape from the growing degree of dependence each one of us has upon the other. Certainly we all wish to insure the maximum freedom of opportunity and dignity for the individual, but at the same time we must appreciate the existence of a community of interest, perhaps more real than apparent, among all segments of our population. 

Most of us are specialists and rely on others to buy the product of our efforts and to supply us with most of our needs. Our individual well-being depends largely on the total well-being of our locality, of our nation, and increasingly of other nations as well. There are very few people among employers or employees today who are not dependent upon others for their livelihood. The farmer relies on the city dweller for his market; the employer relies on his workers for his production and upon consumers for his market; the worker relies on the employer for his job and his income, and upon other workers and managers for the goods and services he consumes. 

Large-scale enterprise and specialization are closely associated with modern technological development. They result in an ever-increasing proportion of all workers becoming wage earners and salaried workers and a declining proportion becoming self-employed individuals. Through long years of habits of work and behavior, employees rely wholly on available jobs for their income and their means of livelihood. It is foolhardy, in our stage of industrial development, to expect or even hope that when unemployment arises on a large scale, all workers can eke out a living through their own initiative. A few can and will do so, but for the vast majority, jobs must be available if they are to have any income and be able to consume. This increase in specialization and reliance upon others makes the consequences of economic depressions increasingly serious and therefore an ever-growing threat to our democracy. 

We talk loosely of labor, capital, government, farmers, industry, and other groups as if each were a distinct and homogeneous entity. We fail to recognize the conflict of many interests within each of these groups and the existence of strong interests which are common to all groups. Within labor, there are the unskilled and the skilled, the apprentices and the craftsmen, the young and the old, males and females, and other categories, which are often competitive. In industry, there is competition between large and small units, between users and producers of identical products, between users of different materials, and between the more efficient and the less efficient. This same competition prevails through all groups and involves recognition, jurisdiction, authority, income, and other spoils of the economic struggle.


There is, however, one interest common to all of our people, and that is a successful, prosperous, well-working economy. Unfortunately, this common interest is not fully recognized by all of us. We have marked conflicts between different groups concerning the share which they receive out of our total wealth and our total production. More attention is generally given to obtaining relatively larger shares of the return than to producing a larger total out of which the shares are to come. In the competition for higher relative shares, no consideration is given the effect which changes in the relative shares will have upon the total. There is need for greater attention to total economic activity and what is involved in enlarging that total. 

In the severe depression of the early 30’s, all segments of the population suffered materially. The impact was not exactly equal upon all groups nor within each group, nor were all the victims equally capable of assuming the burden. But between 1929 and 1932, there was a tremendous decline in dividends, in rents, in bond interest, and in corporate profits just as there was a tremendous decline in wage and salary incomes. Schoolteachers, security brokers, and bank cashiers were unemployed just the same as coal miners, auto mechanics, domestic servants, and railroad employees. There were failures of banks and investment trusts just as there were foreclosures on homes and furniture. There were suicides and fallen fortunes among the wealthy just as there were bread lines and starvation among the poor. No geographical section of the country and no segment of the population failed to suffer the devastating effects of the depression. 

On the other hand, in 1929 almost everyone was better off than in 1933. Of course, some were destitute because of illnesses and other disabilities or family tragedies or stranded industrial communities or old age. There was riotous living by some and substandard subsistence by many. But on the whole, we would all prefer the prosperity of 1929 to the depression of 1932. 

It is to the common interest of all of us that prosperity and full employment be attained and maintained. Only under such circumstances are there good prospects for getting jobs and receiving pay envelopes on the part of all who are able and willing to work. On the other hand, depression brings not only waste of resources and reduced consumption, but it strikes at the very root of a free enterprise system in that the opportunity to contribute and participate is denied to so many workers and employers as well. Obviously, such a state of affairs cannot long endure without leading to government relief or “made work” or some other substitute for private employment as a source of income. 

In conceiving of programs and policies necessary for the attainment of prosperity, too much emphasis cannot be put on the necessity of every segment of the population recognizing the total national well-being. Fundamentally, such an interest is selfish as well as altruistic. The higher the total production, total employment, and total income of the people, the more prosperous and more secure will be the manufacturer, banker, retailer, worker, and consumer. If this obvious but important fact is given due recognition, there will be more thinking and more effort expended on over-all considerations— more statesmanship. This will pay dividends to each of us individually and to all of us as a group. 

Businessmen, above all, should realize that their wellbeing is not exclusively determined by their own actions. When a depression occurs, it is beyond the power of individual business enterprises or of the business community as a whole to ignore it and to go ahead with full production and full employment as before. In the years 1930 to 1932, there was much talk of businesses increasing employment or maintaining their payrolls. This was mere wishful thinking, as was revealed by experience. When the market for their goods was lost, it was not possible for companies to continue employing and producing at prosperity levels. Neither individual employers and individual employees nor trade associations and labor unions can find the markets or the jobs when depression is rampant and severe. Realizing the relative helplessness of any single group in our society to cope with economic depressions, we must look to basic causes and cures of economic ills. 


In order for businessmen as well as workers and farmers to be successful, there must be an economic environment within which exist all of the elements necessary for prosperity. Without such an environment, all the desire of business to employ people, produce goods, and make profits will go for nought. Many business and labor leaders appreciate this fact, but in their great confidence in themselves and their associates, they assume that the proper environment will naturally and in time emerge without any overall planning or direction. They generally believe that depressions are inevitable and if left alone will go away. Yes, depressions have always been followed by good times, but it is also true that prosperity has always been followed by hard times. 

The great challenge before us is to eliminate depressions and provide the environment for sustained prosperity. The operation of our economic system is highly complicated, and cursory observations are not likely to yield constructive and sound policies. We must understand why depressions occur and how they can be avoided. Hard thinking and good judgment on economic matters will be necessary for such an achievement. 

Briefly, the economic environment for the successful operation of a private enterprise, profit economy should include job opportunities for every able-bodied citizen who seeks employment; adequate wages to provide a decent standard of living; incentives for individuals and business enterprises to increase production and assume necessary risks; social security for the aged, the ill, the indigent, and unavoidably unemployed; government regulations to protect individuals against fraud and exploitation; and sound government fiscal and broad economic policies which will bring about continuous prosperity with the minimum interference with the lives of individuals and operations of business enterprises consistent with the social interest. 

How this favorable economic environment can be developed and maintained is the crucial question which must be solved. It is not going to be solved, however, by negative thoughts and resistance to all constructive proposals. Essentially, we seem to be a conservative people when it comes to economic, social, and political matters—conservative in the sense that we do not like to be bothered with changes, thinking about new problems, and adjusting ourselves to new conditions. Will it ever be possible to awaken ourselves from this lethargy on the home front and make democracy work, or will we sooner or later have another debacle of the 1929-32 variety and perhaps even the revolutionary experience of Germany and Italy? 

Economic depression is a fomenter of revolution. Hitlerism in Germany will probably be charged, in history, to the frustration and desperation of a people who went through year after year of unemployment and idle resources, on the one hand, and unsatisfied desires on the other. Hitler blamed the depressed economic conditions of Germany on the Versailles Treaty and the economic pressures which the Allies had presumably exerted on Germany. He aroused the national instincts of the German people in his propaganda until they really believed that their ills resulted exclusively from outside influences and could be corrected only by conquests. 

In terms of resources, Germany could have been a prosperous nation in peacetime had the German Republic been able to function effectively in economic matters. International forces were less favorable to Germany after Hitler came to power than before, and yet he was able to build a mighty military machine and to increase home consumption at the same time. Probably Hitler would never have come into power had there been the prosperity and the high standard of living in Germany which, as her strong war machine proves, would have been possible there. We will defeat Hitler on the battlefront, but if we do no better than before the war in defeating depression permanently and in promoting prosperity here and abroad, other “Hitlers” will arise again and again. We must get to the root of the problem, and that entails providing the economic environment essential for sustained prosperity. 

There is perhaps nothing more distressing than the peddlers of the poison of pessimism. Too many of our people believe that in the postwar years we cannot avoid large-scale unemployment and idle facilities. They merely assume that, after war demands fall off, it will be impossible to do anything to assure that war production be replaced by the production of peacetime consumers’ and producers’ goods. In essence, their hopelessness represents a complete lack of confidence in our democracy. Of course, they would vociferously deny any such lack of faith in our economic system. However, if democracy is not sufficiently dynamic to achieve and maintain full employment, it faces internal threats of a more serious nature than the threat of defeat by a foreign power in combat. The leadership for a future effective, operating democracy must come from those who have the confidence that success is attainable and who have the vision to lead the way. 

Confidence in our future must be based on more than wishful thinking to the effect that if everyone and everything is left alone, we shall somehow come out all right. We won’t. Depressions will return again and again as they have in the past unless we take positive measures to avoid them just as we must take positive steps to avoid chaos and a severe jolt in changing over from war to peace. Compared with the present war, the first World War was puny in terms of the mobilization of resources carried out in the United States. If there were dislocations after the last war, such dislocations will be much larger in magnitude and complexity this time. There will be over-all problems calling for over-all views and policies. The responsibility of developing such policies rests on all of us and can be manifested through the medium of government. Government’s role must be recognized as vital in bringing about the economic environment within which private enterprise can function effectively and fully. 


Because of emotional appeals and political haranguing, it is not a simple matter to determine what the American people think about the functions and responsibilities of their government. As freedom-loving people, we instinctively prefer the least possible interference with our individual choices. We like to think, speak, and act as we choose. Yet we know that people cannot live together peacefully and in a civilized manner without some rules governing their aggregate conduct. There must be some concession of some rights by individuals to a common authority if maximum individual rights are to be preserved. 

In our society everyone is privileged to live in peace and security, and therefore the law prohibits the killing of one person by another. The restrictions placed on would-be murderers will hardly be recognized as limitations on their individual freedom, yet they are just that. The same applies to restrictions on theft of property, speeding on highways, maintaining fire hazards, lack of cleanliness in public eating places, slander of character, and a host of other acts which are almost universally recognized as contrary to the public interest. Some limits upon the actions and choices of individuals must be imposed if the freedom of other individuals is to be safeguarded. In a sense, therefore, civilized society places restrictions on those freedoms of individuals which are contrary to the common interest and which, if not restricted, would truly limit the freedom of most people. 

The ideal objective of government should be the minimum of restrictions of individual action consistent with the common good. At the same time, government must take cognizance of changing conditions which call for increased control in order that continued freedom may be assured. There will always be resistance to new government activities, for they necessarily impinge upon some one’s freedom. Thus, when any law or regulation is introduced to prohibit the issuance of fraudulent securities, the fly-by-night brokers insist that freedom for everyone is threatened. Likewise, sweatshop operators would have us believe that minimum wage provisions amount to confiscation of private property and deprivation of an inalienable right—namely, the right to make profits by paying starvation wages. It is the appeal to emotions rather than reason, the screening of the merits of the issues and principles involved through propaganda and platitudes, which make public decisions on a high plane so difficult to attain. The solution lies in a better understanding of how our economy works and the emergence of a philosophy of government’s role in a working, democratic, free enterprise system. 

As our economy becomes more complex and more interdependent, it appears inevitable that the responsibility of government must grow. It must grow not because there are some who seek greater power and greater control over the general populace, but rather because of the inability of individuals and of business enterprises, trade associations, and labor unions to cope with problems which involve the total economy and which do not lend themselves to piece meal solutions. The activities of government should have the cooperation and assistance of management and labor so that our best minds and best abilities are used for the common good. 

War on depression and upon unemployment might be likened to military resistance to an enemy invasion. The prospects of defeating an invading army would not be particularly bright if every citizen were to offer a defense in any manner he saw fit. Common sense dictates a strong, centralized, and well-organized military army in which the individual subordinates his decisions and choices to a central authority. This concession of individual freedom will, if the defense is successful, insure greater freedom than would prevail were the enemy to be successful. 

If depressions and unemployment, which in reality deprive individuals and businessmen of economic opportunity and freedom, can be averted through intelligent central direction, then an increase in that central direction can give us greater rather than less freedom in the future. The opportunity to work at a job of one’s choice or to engage in business profitably, and thereby to contribute to and participate in the economic activities of the nation, is surely one of the basic freedoms. The inability to get a job or enter into a business venture is hardly to be characterized as freedom. 

All of the legislation of the Federal Government of the past ten years which has been characterized as “collectivist” or “dictatorial” has provided a challenge to free enterprise and individual freedom infinitesimal as compared with the challenge to our system posed by the depression of the early 30’s. What loss of freedom has come from the Social Security Act or the Securities Exchange Act or the Federal Deposit Insurance Act or the Wage and Hour Law? If anything, these government activities have restricted only those who would destroy the freedom of others. Compare any conceivable restrictions arising from these specific measures with the “freedom” of hopelessly wandering from plant to plant reading “no help wanted” signs, or facing closed bank doors where lifetime savings have vanished, or being dispossessed from homes where hope and courage were the foundations. Freedom from want and freedom of opportunity are basic freedoms which command respect and attention. 


There is a growing body of opinion which recognizes that depressions are not inevitable; that depressions and the resultant misery and frustration are not a necessary cleansing device for permitting a fresh start after a speculative spree; and that something can and must be done to insure the economic environment necessary for sustained prosperity. Only a very small proportion of those having such convictions believe that a fundamental change in our economic and political system is a necessary prerequisite. The majority believe it can be accomplished under our existing structure. They recognize that there is only one medium for approaching and correcting the economic ills which we have suffered, and that medium is a democratically chosen government. 

Certainly, if there are any central economic plans and national policies to be adopted and implemented, the responsibility should not be placed in the hands of any special interest group. Hardly anyone, except perhaps some of its members, would grant that the National Association of Manufacturers should direct national economic policy. Similarly with the Congress of Industrial Organization or the American Farm Bureau or any other group which represents and promotes special interests. National policies should be determined in the public interest and therefore are the responsibility of our democratically elected government. Business and labor and agriculture should help formulate policies and programs but the public interests rather than selfish motives should guide our legislative and executive and judicial branches of government. 

Free enterprise can survive and prosper only if there is the proper environment in which everyone has the opportunity to work as employee or employer. Assuring the existence of that environment must be the responsibility of government. On the surface, it may appear inconsistent to state that increasing economic participation by the government is essential to the continuation of our free enterprise economy. Some people believe that all government rules and regulations are inherently antagonistic to private enterprise. The conclusion depends upon one’s concept of how government participation should manifest itself. 

There are many actions having significant economic implications which government alone can take. Taxes and social security and tariffs and patents—all involve important economic measures which affect the functioning of our economic system. These instruments cannot be left in the hands of individuals or groups of individuals with vested interests. Big exporters would eliminate tariffs so that other nations would be able to buy more from us. Manufacturers fearing competition from imports would raise tariffs. Everyone recognizes the necessity of taxes but also believes that someone else should pay. What we need is the adoption of broad economic measures stimulating total economic activity and interposing the very minimum of interference with individual and business freedom. 

Certainly, if the government were to enter into production of goods and services on a wide scale and generally compete with private business, then the existence of private enterprise would be seriously threatened. It is not proposed that government expand its activities into spheres generally accepted as the responsibility of private operators. There are areas of competition between government and private industry to some degree today. Almost no one today believes that government operation of schools is undesirable because it is in competition with private schools. Likewise, no one feels that the government operation of the postal system is undesirable because it competes with other means of communication. The same applies to our police forces as compared with private detective agencies, or our garbage and trash collection system, or the construction of bridges, or the operation of municipally owned water plants. Those opposed to increased governmental responsibility will say that these services have a special public interest. But isn’t it especially in the public interest that we have full employment and prosperity without interruption by depressions? 

Until we recognize both this increased responsibility of government and the necessity for popular support by the people, we may well continue to have the kind of economic disturbances we suffered in the early 30’s. Why should not mobilization for peace and prosperity be as much the responsibility of all of us, through the medium of democratic representation, as is the mobilization for war? Economic disturbances represent as great a threat to the continuation of our democracy as do either military defeats or any individual or cumulative acts by the government. Certainly, the depression of the early 30’s undermined our political and economic foundations much more than did the Sherman and Clayton Anti-Trust legislation, the Federal Reserve Act, the Securities Exchange Act, the government spending in the past decade, or a dozen other maligned government undertakings put together. 

Changes in types of government from democracy to totalitarianism or to collectivism usually do not come about through legislation, but almost invariably through revolution, bloodless or otherwise. Revolution is often made possible or necessary because of the failure of existing government to do an effective job. It should be reiterated over and over again that a prosperous democracy is the best insurance for a continued democracy. Failure to provide opportunities to work and to earn wages and profits and thereby acquire the essentials of life will bring serious challenges to our system. 

It is certainly the responsibility of democratic government to provide the environment favorable to economic opportunity and economic independence, in the same way that it provides protection from criminals, from foreign invaders, and from fire. This responsibility can be exercised intelligently and honestly, with the people’s backing, to the end that private enterprise will be strengthened rather than weakened and that we shall have a successful working democracy rather than one which is threatened by adverse economic developments. 

In a democratic, free enterprise system, the role of government should include the enactment, administration, and enforcement of rules and regulations of business conduct which will not permit fraud and other operations which are inconsistent with the public interest and which exploit individuals. For instance, legislation which prohibits the issuance of fraudulent securities is certainly in the public interest, and if it does interfere with any private enterprise, its interference affects only that kind of enterprise which benefits no one except the unprincipled promoter. The control of monopolies is another type of legislation which may impose restrictions in certain areas, but again these restrictions are imposed in order to prevent unjust exploitation of resources and of consumers. Regulations governing the use of natural resources are likewise restrictive measures for public protection. Control over public utilities is accepted as necessary to insure a continuous supply of essential services, to avoid the abusive use of public franchises, and to limit the wasteful duplication of facilities. To a considerable degree, all of these measures are passive or restrictive types of government control. 

There are responsibilities of government which require positive action to protect freedom of opportunity. These are at least as pressing as government’s responsibilities to protect individuals and businesses from fraud and from the abusive use of power. On the positive side, measures must implement government responsibility for providing the economic environment which will insure continuous employment opportunities for all workers and, therefore, the market for the products of private enterprise. This does not mean that the government must give jobs continuously to millions of our people. In fact, the more effectively the government provides the proper economic environment and the more private industry responds to this environment, the less will be the direct responsibility of the government in providing jobs. 

This economic environment need by no means discourage private investment and private initiative. Rather it should provide the maximum incentive consistent with the national interest for private enterprise to expand the output of existing products and to develop new products. The greatest incentive to business is a large market, and if broad fiscal and social measures of the government are effective in making for full employment and high purchasing power, this will be the greatest possible single boon to business. 

Not only is it essential that we recognize the responsibility of the government to promote economic activity, but we must also appreciate the fact that not all government measures can have the support of everyone. It may be essential to greatly modify trade barriers, a measure which will be vigorously fought by those whose products face competition from foreign markets. Changes in tax programs will affect certain groups of the population more than others and will be resisted by those upon whom the incidence of taxes will be greater. It should be obvious, upon reflection, that what is in the public interest may be inconsistent with the interest of a small minority. 

If we will try to think in statesmanlike terms and exert our influence at the ballot box and upon legislators in favor of measures consistent with the common good rather than with selfish and greedy purposes, we can have the kind of legislation and administration desired by the vast majority. The objective should be “the greatest good to the greatest number.” Of course this is a Utopian objective, but no more so than is the fundamental conception of a democratic society. 

The people of the United States are proud and jealous of the democratic form of government but also are often indiscriminately critical of their government. Constructive criticism is a healthy characteristic of democracy, and the elected representatives and appointed officials are and should be under constant public scrutiny. However, one sided discussion of government— specifically, an almost exclusive emphasis on adverse criticism and an absence of favorable comments— tends to undermine the confidence of the people in their government. Many citizens are somehow suspicious of the government and tend to regard it as something remote and foreign and even antagonistic to their interests. Part of this feeling no doubt stems from the fact that most government actions impinge on someone’s interests, and the affected party overlooks the merits and makes emotional appeals to the public against the whole government. 

It is to be hoped that the public will not be blinded by these criticisms, but will have increased faith and confidence in our form of government and will exercise its prerogatives at the ballot box toward having a government program and policies which will reflect the true will of the majority. The issue is not so much a matter of more or less government interference and controls, but rather of the quality of governmental policies and the honest execution thereof. Democracy can survive and must survive. It will survive if only the people, through the government, make it work successfully. Democracy without depressions is an economic possibility. Democracy with depressions may be a political impossibility. 

Chapter 4: Why We Have Had Depressions

In developing an economic program for postwar America, we must start with a definite objective. Our economic objective should include continuous employment opportunities for all employable individuals, increasing levels of production, higher standards of living, and ample opportunities for new products, new processes, and new enterprise. We should strive for continued progress, technologically and socially, toward greater abundance relative to toil. Increased improvement and use of machinery should not be a source of alarm, but rather a source of optimism and hope. The more our industries are mechanized, the more production we can have per hour of human effort (or the same production with less effort). 

As has previously been observed, we already have the men, materials, and equipment for a much higher standard of living. Our objective should insure the maximum use of that capacity consistent with the hours of work people wish to contribute. There should be no worry about overproduction, on two counts. First, it is obvious that reasonably decent standards of living are still not enjoyed by a large segment of our population and that we can and should greatly increase consumption among the ill-fed, the ill-housed, and the ill-clothed. Second, as productivity increases, hours of work can be reduced. Total production should be limited only by natural and technical resources and by the amount of effort or toil workers desire to apply to these resources. It should never be limited by depressions and unemployment and reduced hours of work as a device to spread unemployment. 

If we will but learn how to distribute the bountiful production which nature and technological progress have made possible, no doubt all of us could work a full 48- hour week and still not have too much as a nation. On the other hand, if every worker were employed steadily at 40 or even less hours per week on productive activities, we could raise our standard of living far beyond present and prewar levels. The problem is not one of sharing less production and less employment, but rather of increasing output through insuring everyone an opportunity to contribute in production and thereby to participate in the total reward. Depressions deny this opportunity to large numbers of people. 

To ascribe economic depressions to a single, simple cause and to suggest an equally simple and single method of eliminating them would be foolhardy. On the other hand, there are so many theories as to why we have business cycles and so many variations and refinements of eac theory that some selection of the more plausible and factually substantiated explanations is necessary if we aim to emerge with constructive programs. Fortunately, during the past decade or two increased emphasis has been placed on quantitative economics rather than qualitative economics. The former deals with the measurement and analysis of economic activities and the latter with theories of economic causes and effects. 

One need but compare the statistics available during the last war with the information now at hand to appreciate the tremendous progress which has been made in measuring production, income, prices, employment, savings, and other phenomena so vital to an understanding of how our economic system works. We do not know all of the causes of economic fluctuations, by a wide margin, but there are certain fundamental principles which are being increasingly recognized by economists and by indus trial, labor, and agricultural leaders as their statistical knowledge and understanding grows. 


First and foremost, as a basis for study and analysis, there must be an understanding of how our economic system functions. The description can be best and most simply presented perhaps in terms of the national income, which is a measure both of total production and of total claims on that production. On the production side, the national income for a given year is a measure of the value of all goods and services produced in that year. 

It is “gross” if no deduction is made for the plant and equipment and natural resources used or worn out during the year—that is, if no deduction is made for depreciation, depletion, and obsolescence. It is “net” if such deductions are made—that is, if we make allowance for the producers’ goods which were used. The former is generally termed the gross national product, while the latter is referred to as the national income. The gross national product includes all goods and all services produced. The national income includes all goods and services produced during a period, over and above what is needed to replace the capital equipment and resources consumed during that period. The national income is also a measure of the payments for the contributions which labor, management, land, and capital make to the output of goods and services. It includes the compensation to management, investors, landlords, and workers. The two measures of national income are equal. As the economic activities of the nation create goods and services, they also create buying power. Thus, there is a simultaneous and equal creation of products and of the claims over those products. 

On the one hand, buying power derives from production, but on the other hand, production is stimulated when people use their buying power in creating markets. It is a sort of circular relationship, in that income is dependent on production whereas production will continue only if there is a market and that market exists only when income is spent. When income is saved and not spent by the recipient or by anyone else, then further production is discouraged. Income from current production can be augmented by expenditures from past savings or credit expansion or the printing of currency. Or part of total income may be impotent in stimulating further production when it is put into savings which are not used and which are not offset by expenditures from credit or past savings. 

On the production side, the gross national product includes all of the things of value which are produced, including durable goods such as houses, factories, office buildings, farm machinery, automobiles, highways, and hospitals; semidurable goods such as clothing and shoes; perishable goods such as food; and services such as education, haircuts, medical care, amusements, and transportation. It includes all goods and services produced for current consumption as well as for building productive equipment and for export balances. If we could conceive of everything of a tangible and intangible nature produced in the United States in the full year 1943, we would have some idea of what $185 billion of goods and services represents. 

The equivalent volume of buying power takes the form of wages and salaries to employees, interest and dividends to investors, rentals to landlords, net income of self-employed persons, undistributed profits of corporations, depreciation and obsolescence withholdings of businesses, and indirect tax payments to government agencies. All of these likewise add up to approximately $185 billion in 1943. 

Just as production provides goods and services for immediate consumption, higher inventories, durable assets, or export balances, so buying power may be used to buy goods and services for current consumption, or to invest in fixed assets or business inventories, or to finance export balances. The ones who receive income may spend their buying power for current consumption or to buy durable goods or securities, or they may put it into banks or insurance companies or other savings institutions. The savings institutions can then make this buying power available to others who will spend it. It can be made available through loans, purchases of securities, installment credit, and other devices. 

As long as total spending is as large as or larger than total current production, we can expect production to stay at the present level or to increase, for producers will find a ready market for their products. When spending is less than production, declines in output can be expected, for producers will have unsold goods and will take losses. This happens when savings remain idle— that is, when income is saved and not spent directly, and expenditures from other sources do not offset the idle savings. Even from this greatly oversimplified description, it is obvious that the analysis and evaluation of economic forces is complex. 


If all of the goods and services which can be produced in a given period are easily sold, production will strain against capacity. Thus in 1943 the total of demands by the government for war purposes and by civilians for consumption purposes were so great that there was a market for all that could be produced. Actually, the demand was greater than the supply and, therefore, we were producing practically as much as our resources of manpower, materials, and facilities permitted. 

The buying power in the hands of consumers in 1943 is beyond the supply of consumers’ goods and services. The government is trying to get hold of that excess buying power through higher taxes and the sale of government bonds, so as to pay for the tanks and guns and planes the government is buying and to avoid inflation. If all of this excess buying power could be obtained by the government through taxes or sales of bonds, there would be no threat of inflationary price increases. If it were all obtained through taxation, there would also be no increase in the national debt. Actually, a considerable excess of current buying power remains in the hands of consumers and offers an ever-present threat of higher prices. Part of government expenditures must find their source in credit expansion. Total buying power is higher than total production, and that is why producers are currently stepping up their output as rapidly as possible. 

The level of total production, total income, and total employment appears to be controlled more by the ability of our economy to absorb or offset savings than by any other single factor. Expenditures out of current income for consumers’ goods flow directly and immediately back into the income stream and stimulate further production. On the other hand, savings represent a withholding of income and therefore retard and discourage further output unless these savings are spent by someone or are offset by expenditures from previous savings or from credit expansion. 

If all income were spent for goods and services, then production would be stable, except when and if the buying power of the people was expanded through credit expansion, thereby raising demand and production and income. On the other hand, when part of current income is saved, there must be other expenditures to offset these savings if a decline in production is to be avoided. If in a given year the gross national product is $100 billion and $80 billion of the buying power is spent for consumption and $20 billion is saved, it is necessary, in order to maintain production at the $100 billion level, that the other $20 billion of goods and services not sold directly to those who spend their income be disposed of in other channels. 

There are a number of ways in which savings can be activated— that is, spent by someone. Some of these ways are not covered under the normal conception of investments. Usually investments are made either in securities, mortgages, and other claims over existing assets or in the construction of plants, office buildings, apartment houses, stores, and other durable assets. Some economists have coined the term “offsets to savings” as describing the various ways and means of using savings or providing expenditures which neutralize savings withheld from the flow of income. This is a useful and appropriately descriptive term. 


Savings may be defined as income not spent for current consumption. They may take the form of hoarded cash; deposits in banks, building and loan associations, and other savings institutions; insurance premiums in excess of insurance benefits and costs; purchases of new securities; direct purchases of new assets; and loans to others. Offsets to savings may take the form of expenditures for new fixed assets, permanent improvements to existing assets, or replacement of worn-out assets; increases in business inventories; government expenditures in excess of receipts; export of goods and services in excess of imports; and increases in installment credit. All of these offsets may derive their funds for expenditure directly or indirectly out of savings, or these funds may come from credit expansion and thereby offset idle savings elsewhere.

The individual who saves money might spend his savings to build a home or he might buy stock in a new company or he might lend his savings to someone else who will spend them. The corporation can spend its depreciation allowance and its undistributed profits for replacement or expansion of a plant or for increasing its inventories. Or the one who has saved can deposit his unspent income in a savings institution, which in turn will spend it or make it available to someone else who will spend it. Banks can lend funds to business enterprises to build new plants or enlarge inventories. They might make loans to individuals to build houses or buy cars and furniture. Installment sales are, in essence, a mechanism for lending buying power to consumers who haven’t the means to pay in full at the time of their purchase. 

Many economists use the term “investments” as the counterbalance of “savings,” but, as has been noted, not all channels or uses of savings fall into the category nor mally regarded as investments. Of course, terminology may vary with the purposes of the user, but it is believed that the use of the term “offsets to savings” permits a clearer analysis. The commonly accepted concept of investments is encompassed within this category, as well as other ways of making savings active. 


Having observed in a somewhat general way the role of income and production, of savings and offsets to savings, in our economy, we may now look into the how and the why of economic fluctuations. The level of total production and, therefore, of total employment and of total income is determined largely by the market or the demand for goods and services, which in turn means the volume of total spending. Of the two major categories of spending, namely, direct expenditures by income recipients for consumption and offsets to savings, the latter is the more variable category. The volume of savings and of offsets to savings is perhaps the most important single determinant of the level of economic activity. This may be demonstrated with some hypothetical and actual illustrations. 

An analysis during the decade of the 20’s and during previous periods of relative prosperity indicates that total savings tend to average approximately 20 percent of the gross national product in good times. In bad times the ratio of savings to income is much lower. In 1943 the gross national product was approximately $185 billion. Let us assume that a level of $150 billion per year is accepted as reasonably attainable for the first few years after the war. If the old prewar relationship prevails, then there will be a tendency for individuals to spend about $120 billion for consumption, and for individuals and business enterprises to save about $30 billion per year. It should be noted that these savings are net in that losses are deducted. Corporate savings represent the total of all corporate savings less all corporate losses. Likewise individual savings represent the excess of savings over dissavings, which means current spending exceeds current income. 

There has never been a peacetime level of production and income nearly as high as in 1943, and it is difficult to predict with accuracy the volume of consumer expenditures and of savings for such high levels in peacetime. Because of the war and the resulting limited supply of consumer goods, and also government pressure for higher savings, the ratio of savings to total income is now far in excess of the old 20 percent. Whether the high savings habit will carry over after the war is uncertain. The ratio of savings to income for individuals and families rises sharply as the level of income increases. If we are to have anywhere near full employment after the war, the national income will have to be far higher than it ever was before the war. Thus the ratio of total savings to total income in the postwar years is likely to be higher rather than lower than the indicated 20 percent, unless some measures are taken to encourage spending and discourage savings. 

If we will assume an objective of $150 billion gross national product and savings of $30 billion, then the objective must include offsets to savings of $30 billion. The production of goods and services will total $150 billion, of which $120 billion will be purchased directly and immediately by consumers out of their income. The $30 billion of income saved must be used or offset by other expenditures if the residual $30 billion of goods and services are to be sold. If offsets to savings are less than $30 billion, then total demand in goods and services will be less than the supply, resulting in unsold inventories or in depressed prices and business losses, which in turn will discourage further production. On the other hand, if offsets to savings are in excess of $30 billion, there will be a demand for even higher production. 

Increases or decreases in total production are much larger than changes in the volume of savings or offsets to savings. Thus, given the 20 percent ratio indicated above, if offsets to savings rose from $30 billion to $35 billion, the gross national production would tend to increase from $150 billion to $175 billion. This result can be expected because, for every increase of $1 billion in total output, four-fifths would go into increased consumption and onefifth into savings. It is obvious that if an increase of $5 billion in savings is needed to balance the offsets to savings, then total income must increase much more than $5 billion. Similarly, in a period of decline, when savings lie idle to the extent of $5 billion, total production and total income will drop much more than $5 billion. Each drop in total production and total income brings a large decline in consumer expenditures as well as in savings. 

The ratio of total savings to total income varies with the level of activity, having dropped from about 20 per cent in 1929 to somewhere in the neighborhood of 5 per cent in 1932. In periods of depression, offsets to savings are low because business enterprises are not willing to make capital expenditures in face of depressed markets; export balances are low because lenders are cautious; in stallment credit shrinks because of poor repayment prospects. It is the decline in the expenditures which offset savings which causes depressions. As total production and total income decline, the ratio of savings to income falls because there is less income out of which savings can be made, and also the savings of those who have income tend to be offset by expenditures out of past savings by others. It is this decline in the ratio of savings to income in depressions which places a bottom to depressions, even if offsets to savings were to disappear entirely. If our production and our income are dependent on what we spend, and if that part of what we spend called offsets to savings is the crucial factor in causing depressions because it increases disproportionately with other spend ing, then if we reduce the proportion of income which we save, we will reduce the importance of offsets to savings in determining total activity. Thus, if the ratio of savings to total income were to drop during periods of prosperity and of high employment from 20 percent of total income to, let us say, 10 percent, then when the gross national product is $150 billion, we would have only $15 billion of savings and would require only $15 billion of offsets to savings to maintain that level of total output. The other $135 billion of income would not be saved but spent immediately and directly for consumption purposes. 

Certainly such a change would result in a greater stability of economic activity and an immediate higher standard of living for the total population, provided that this reduced volume of offsets included expenditures for new plant and equipment expenditures sufficient to support the higher consumption. However, such a shift could occur only by directing a larger share of the total income into the lower income brackets, because the ratio of savings to income increases as the income is larger. A study in 1936 indicated that there were no savings for all families as a group which received incomes of less than approximately $ 1 500 per year. On the other hand, from that level upward, savings rose sharply in relation to income.


Perhaps an analysis of income, savings, and expenditures in the relatively prosperous years of the 20’s and the depressed 30’s will help clarify the picture and lead to sound policies. In the years 1923 to 1929, inclusive, gross national production varied between roughly $80 billion and $100 billion. Total savings ranged between approximately $15 billion and $20 billion in this same period. Thus, about 80 percent of total income was spent for consumer goods and services and the other 20 percent was spent through channels which make use of savings. It is in this 20 percent of expenditures, those which offset the $15 billion to $20 billion of annual savings, where the key to the depression can be found. Over one-half of the total was represented by expenditures for plant and equipment. Housing accounted roughly for another fourth. Export balances, growth in installment debt, deficits of state and local governments, and other minor outlets accounted for the balance. The important question is why the total of these outlays did not continue to increase rather than fall precipitously after 1929. 

It is easy enough to state superficially that the collapse which began in late 1929 resulted from over-inflated values of securities and a lack of confidence. But there must be something more basic. A lack of confidence must have some basis. Certainly, it wasn’t a lack of confidence in our capacity to produce or in our ability to consume a great deal more. Nor was there any so-called government interference to blame. It must have resulted from forces and weaknesses inherent in the economic situation which could not long endure. 

The cause of the depression seems to lie in the high ratio of savings to total income in the 20’s and the maintenance of that relatively high level of total income only by offsets to savings which were precariously high in volume or in character. Expenditures for new plant and equipment in manufacturing, public utilities, trade, and other industries in the 20’s provided an increasing capacity to produce goods and services relative to actual consumption. In other words, our industrial capacity to produce was expanding much faster during the 20’s than was the actual consumption of goods and services. To some extent this was true of housing as well. After our capacity to produce had for some time expanded disproportionately with actual consumption, the outlook for new factories, office buildings, and apartment houses which could be run at a profit became less bright and there was less new construction. Thus, offsets to savings declined and there were idle savings and reduced total demand, which precipitated the depression. As production and employment and income dropped, there was a rapid shrinkage in new construction and new productive facilities, with resulting further declines in total economic activity. 

It was not that we didn’t need more houses and more of the goods and services we could produce during the 20’s, but those consumers who needed these products didn’t have sufficient buying power to consume them all. There were vast amounts of needs and desires for goods and services, but those having the needs didn’t get enough income to satisfy their desires. Those in the middle and higher income groups had more money than they cared to spend and they saved a substantial part of their incomes. Those in the lower income groups spent all they had but their income was too small to permit them to buy all the things they needed and all that we could produce. 

If more income had been spent and less had been saved, then there would have been a sounder relationship between capacity to produce and actual consumption, with the likelihood that the growth in production would not have outrun the growth in consumption. There would have been as much technological progress, the standard of living would have further increased, and the depression could have been avoided. 

As long as people want to consume more than they are currently consuming, there can be an uninterrupted growth in consumer expenditures, provided consumers have the income. The same is not true of expenditures for producers’ goods, which may be so large as to expand capacity far out of line with consumption. Such excess capacity, with resultant depressions, is hardly to be called “progress.” 

High savings are, at least in part, a function of the way in which income is distributed. If more of the total income had gone to the lower income classes and less to the groups which save considerable portions of their incomes, we would have had less savings and more consumption. But there was at that time no other means of trying to provide for future security than through individual savings and therefore no basis for encouraging people in the middle and higher brackets to save less and spend more. 

Three of the other categories of offsets to savings, namely, export balances, consumer or installment credit, and business inventories, are what might be called precarious offsets to savings. They are precarious in the sense that inherently they cannot continue to expand disproportionately with other factors without occasional declines. Thus, we were lending funds abroad through private channels in the 20’s in order that other nations could buy more goods and services from us than they were selling to us. This can go on only so long as there are good prospects for a return on the loans and a return of the loans. After a few years of promoting the sale of goods abroad and of raising tariffs to restrict imports, it became obvious that ever-increasing loans would be necessary to finance the excess of exports over imports. With this growing realization, foreign loans were reduced and repayments even sought, so that our exports fell and offsets to savings declined. 

The same story can be told about consumer credit. Loans to consumers through commercial and financial channels for the purpose of buying goods and services will be made only as long as there are prospects for repayment. Such loans can continue to increase provided the income of consumers is growing continuously. In the 20’s the volume of installment and other forms of consumer credit rose more rapidly than did total income, so that ultimately prospects for repayment became less bright, with the result that new loans dropped and demands for repayment increased. Offsets to savings thereby declined sharply after 1929. This contributed to idle savings and to the drop in total spending. 

In a sense, consumer credit is a device for shifting otherwise idle savings to consumers who are willing to spend. It is the inherent instability of this category of offsets to savings which helps attain higher levels of activity in prosperity because it increases total spending, but it also causes greater declines in periods of depression because the decline in loans and increase in repayments accentuates reductions in total spending. 

Changes in business inventories have the same economic effect as new construction and new equipment. A rise in inventories is an offset to savings, since business enterprises make expenditures in the process of accumulating the inventories. During the middle and late 20’s business inventories rose approximately $1 billion per year. This rise was proportionately greater than the rise in consumption, with the result that by 1929 total inventories bore a much higher relationship to total consumption than they had earlier in the decade. This overloading of inventories relative to consumption leads to skepticism on the part of the holder of inventories as to the prospects of turning over his merchandise profitably. It also leads to the fear of getting caught with high stocks in a declining or even a stable market. Businessmen strive for higher inventories when higher prices are anticipated, but this incentive was absent under the relatively stable price level of the 20’s. 

All of these offsets to savings did not decline at the same time and thus precipitate the depression, but the accumulation of forces in each one of these and in other less important areas caused the bottom to drop out of business activity late in 1929. The fundamental forces for adjustment and correction in economic relationships were too strong to be stemmed by the speeches and exhortations of public and business leaders. Once the reverse tide set in, the drop in offsets to savings was steep and large, bring ing sharply reduced total spending, total production, total employment, and total consumption. Once the first dam against disruptive forces broke, the rest followed quickly and the pressures were cumulative. 


How could the depression have been avoided? The ratio of savings to total income was so high during the 20’s that the level of business was maintained only by a precariously high level of offsets to savings. The above analysis of the existing offsets to savings shows that they were at a higher level than could possibly persist for long. Of course, the offsets to savings could have been higher for a time, and therefore total production could have been higher too, if there had been even larger expansions of durable goods, larger export balances, or greater increases in installment credit and business inventories. Had these been even larger during the 20’s, probably the depression would have come earlier. Had they been smaller, the depression would have been delayed or might never have occurred if offsets to savings bore a sound and reasonable relationship to actual consumer expenditures out of income. When offsets to savings get far out of line with consumption and consumer spending, they are self-terminating, that is, they precipitate their own decline. 

If out of $100 billion of income per year around 1929, we had spent $85 billion or $90 billion directly for consumption and saved only $10 billion or $15 billion instead of the $20 billion actually saved, then only $10 billion or $15 billion of offsets to savings would have been required to maintain total production at a level of $100 billion. The higher expenditures for consumption would have provided a more stable base for maintaining the more moderate offsets to savings instead of what did happen, namely, too low a volume of consumer expenditures to maintain the high and precarious level of offsets to savings. In other words, offsets to savings of $10 billion per year might have been maintained year after year in relation to $90 billion of consumption, whereas offsets to savings of $20 billion were much too high to persist for long on the basis of $80 billion of consumption. 

Actually we could have been much more prosperous than we were in 1929 with even only $12 billion or $15 billion of offsets to savings, had there been a tendency for all of the people and corporations to save only 10 percent rather than 20 percent of their income in that year. Only $12 billion of offsets under such conditions could have supported a gross national production of $120 billion and the $15 billion could have supported a gross output of $150 billion, if we could have produced that much. 

It is very necessary that we recognize the great importance of corporate savings and depreciation and obsolescence charges as a huge component of total savings. If we are to take steps either to reduce savings or to increase offsets to savings, this category of corporate savings and charges needs special attention. Some devices are needed to tax these reserves unless they are used. Perhaps it would be desirable to allow only very minor depreciation and obsolescence charges except when there are actual outlays for replacement or for additional plant and equipment. It is important to allow the investor to recapture his investment but it is even more important for these funds to be kept active. They represent too large a portion of total savings to be left to the elements of chance. 

If we are to have continuous high levels of production and employment and income, we must take one of two paths. Either we must increase consumption and reduce savings to a level where the offsets to savings are not so high that they cannot maintain themselves, or we must give support to offsets to savings so that they will not decline but will steadily grow and thereby support an increasing total output. This choice is very fundamental to the entire program and must be understood. The former can be accomplished by having more income flow into the hands of those who spend more of their income and less flow into the hands of those who save more of their income. The latter might be accomplished by providing every incentive to private offsets to savings and then, when and if they are inadequate to support full employment, to come forth with large-scale government expenditures out of funds derived from the savings of individuals and corporations or credit expansion. 

There are a growing number of economists and policy-conscious executives who believe that we can never attain and maintain the high levels of production achieved during the war unless savings are reduced or large-scale government expenditures prevail. They point to the disappearing frontier in the United States, the declining rate of population growth, the growing ability of industry to finance replacements and expansions largely out of depreciation and obsolescence allowances without requiring outside savings, and the increasing size of industrial enterprises with less opportunity for new enterprises— they point to all of these as evidence of the likelihood that private investments cannot possibly be of a sufficient magnitude to offset even a substantial part of the savings made when the national income is high. If this contention is correct, then our problem is one not only of avoiding recurring depressions but of avoiding a continuous depression. 

Basically, the choice of economic policies which faces us is not very difficult. First, the people must determine upon the approximate level of total production which is sought. This must be high enough to provide job opportunities for all workers, with hours per week low enough to provide considerable leisure and high enough to insure sufficient production for a substantially higher standard of living. A 40-hour week and a gross national product of $150 billion at 1943 prices would seem to be a reasonable and feasible level. Next, we must forecast the probable magnitude of consumer expenditures and of savings at this level of total income under the tax and social security provisions and general pattern of income distribution likely to prevail after the war. Finally, we must estimate the magnitude of the various offsets to savings which can be expected year after year under a steadily growing volume of total production. Then, as has already been stated, if prospective savings are far above prospective offsets to savings, steps must be taken either to reduce the volume of savings or else to support offsets to savings by large-scale government spending. 

On the basis of past observation and analyses, there is almost total certainty that savings will be too large to be absorbed or offset year after year through normal private channels, and therefore, corrective policies must be undertaken by the government. Admittedly, this is somewhat of an oversimplification in order to make the analysis clear, but the fundamentals are as stated.

Chapter 5: Total Spending is the Key to Prosperity

IN MAKING PLANS FOR THE POSTWAR YEARS, WE MUST above all be realistic. We must recognize that in a capitalistic, free enterprise economy, business enterprises produce because there exists a market for their goods and services or because a market can be anticipated or developed. Production merely for the sake of providing employment or producing for production’s sake alone are not characteristic of a competitive economic system. When he can find no market for his wares, the manufacturer or the distributor faces bankruptcy. Business enterprises cannot long endure without a demand for what they produce, no matter how philanthropic or well-intentioned the management may be. 

Business is operated for profit. Continuing to keep workers on the payroll and to build up huge inventories in the face of declining demand is not profitable. Businessmen cannot and should not be expected to operate that way. We shall have solved our economic difficulties only when there is sufficient demand to absorb all of the goods and services which private enterprise can produce when all of those able and willing to work are employed. We should look to the businessman for initiative and drive and efficiency in production, but we cannot look to him for actions which are incompatible with his competitive relationships. 

We have all heard a great deal in recent years about the term “spending.” Unfortunately, there are two common uses of the word “spending,” which causes a great deal of confusion. First, there are many who associate the word exclusively with government spending. Those who are in favor of government spending are usually referred to by the opposition, in a rather critical sense, as “spenders.” Because of loose thinking and loose terminology, this title is often applied to all people who recognize the importance of total spending as the key to economic prosperity. 

The second derogatory use of the term “spending” applies to large and perhaps indiscriminate outlays by individuals for the satisfaction of their desires, lavishly above and beyond reasonable levels. Maybe criticism of such spending is justified on ethical grounds when some people are starving and others are spending for luxuries; but generally, from an economic point of view, there is little basis for such criticism. Sociologically, it is no doubt to the benefit of the nation’s total welfare that funds be available for the underprivileged to purchase milk and meats rather than the same funds being spent for liquor or a yacht or a beautiful estate; but from the economic aspect, the expenditure in either case creates a demand, which in turn stimulates production and jobs and income. Some expenditures tend to provide more immediate employment opportunities than others, but all spending for goods and services is important in our type of economy. 

Anyone who is critical of spending as such is thereby critical of the economic system under which we operate. Without spending, there would be no markets, therefore no demand, and therefore no production except for the immediate consumption by each producer of his own product or the products which he can barter with other producers. Under our economic way of life, people work in order to produce goods and services and to acquire claims over that production. They receive income or buying power for their efforts, and that buying power gives them the right to acquire the goods and services produced. Unless that income is exercised through spending by the recipient or someone else to whom he transfers or loans or entrusts his income, further production will be discouraged, and this will in turn bring reduced employment, lower incomes, less spending, and less production. 


Out of production, buying power is generated. The activation or use of that buying power is the mainspring of continued production. For society as a whole, the more we spend the more we have, for the greater the spending the greater the production, provided there are available resources. Of course, this does not mean that money can be printed in unlimited quantities and spent and thereby create more output. Rather, it applies to spending the income, or its equivalent, which is received for engaging in productive activities when all resources are fully employed. Any attempts to spend for goods and services which are beyond the productive capacity of the country will merely cause higher prices. But up to the point of maximum capacity, increased spending means increased output and therefore more jobs and more income. 

In the postwar years, we are not going to have full employment, full utilization of our productive resources, and prosperity without an unprecedented level of spending. This is not to say that large volumes of government spending will provide the only solution after the war, but it is to say emphatically that new high levels of total spending must be reached and maintained. We have seen the results of huge war expenditures in bringing full employment and record production. We know that if total spending after the war is as large as at present, then we can have jobs for all and a very high level of total production. Likewise, we should recognize that if total spending is far below wartime highs, then there will be unemployment and wasted resources and needless poverty. Other spending must take the place of war outlays if we are to continue to make anywhere near the same use of our manpower and equipment as at present. 

If we were to adopt the level of production in 1943 as our minimum goal in the postwar era, then we would set as our objective a gross national output of $185 billion per year at present prices. We know that such a level can be attained in terms of productive capacity, but we also know that it can be reached and maintained only if we have an equivalent market for the goods and services which this level of activity implies. Even if we set as our goal a gross output of only $150 billion at 1943 prices, we shall have a volume of production far beyond any previous peacetime record. The economic implication of this larger volume of output must be clearly understood.

The physical quantity of goods and services produced, valued at $150 billion in 1943 prices, would be more than one-third again as large as in 1929. What kinds of goods and services will comprise this enlarged output in peace time? Must a substantial armament program be continued to maintain the current high level of production? Must we look for tremendous new foreign markets as a means of attaining full employment? Or can we find the means by which our standard of living will rise commensurate with our productive capacity, so that we not only can solve the problem of unemployment but also benefit thereby in better living standards at home? Let us review the possibilities of increased expenditures which will support such a level of production. 


First and foremost, we all know that there is a tremendous expansion possible in our standard of living. One need only observe the large slum districts in all our large cities. The low standard of living of large segments of the population throughout the United States, and especially in large cities and in the southeastern area of the country, even in our best peacetime years, is nothing of which to be proud. The need for housing is particularly great. There is unnecessary overcrowding and there are still large numbers of houses without electricity or running water or sanitary facilities. Beyond the basic necessities, the potential demand for modern kitchens and bath rooms and air conditioning and new electrical equipment is very large. 

Inadequate supplies of food when incomes are increased is amply demonstrated at the present time, when the available supply, even after exports, is at new peaks and short ages still prevail. More and better food is needed and will be consumed if only the income is available to the mass of our people. In the service industries output could be increased tremendously without concern about oversupply. Much more medical care, education, recreation, transportation, and other services are needed by large numbers of our people. 

There need be no worry about our producing more than we need. If increased buying power can be gotten into the hands of consumers who will spend it for goods and services, American industry need not worry about finding markets for all it can produce, and produce profitably. Only an insignificant proportion of our people could admit to having everything they wanted in 1929, a year of relative prosperity. As long as there are unemployed persons who want to work and demands which are not satisfied, means must be developed whereby these people can work and their wants can be met to the maximum permitted by our productive capacity. This demand, however, can only express itself in the market if there is the actual buying power in the hands of consumers and if that buying power is used. 

Everyone recognizes the need and desirability of raising standards of living, especially at the lower extremes of our income scale, but its achievement is not easy. It is not only a matter of increasing the total income so that those in the lower brackets can have more, but also of increasing the share of that higher total for those who have the greatest needs for more goods and services and who will spend their higher income. Those who point with pride to the living standards of the higher income groups are often blind to the squalor and poverty of millions of families, and these same people are the first to raise the cry of “un-American” and “radical” against any suggestion that an increased share should go to those having the lowest incomes. Not only may this be socially and morally desirable, but it is economically necessary if more drastic measures are to be avoided. It will result in higher total spending and less total saving and therefore in a higher total production with less likelihood of depressions. 

Many are in favor of increasing the relative share of the lower income groups through higher wages. Anything that can be accomplished in this direction through ever increasing minimum wage requirements is desirable, but history reveals that prices increase when labor costs increase. It is then suggested that prices be arbitrarily held down while wages are arbitrarily raised. This is a most difficult administrative task and one which can disrupt competitive forces, with unfortunate consequences. Rather than expect from businessmen a benevolence which is incompatible with vigorous competition or impose arbitrary controls by government on prices, it would seem better to rely on tax and social security measures in directing a larger flow of income to those who will spend it. Further consideration is given to this problem in subsequent chapters. 


The second important peacetime market relates to expenditures for the capital equipment necessary to expand our total productive resources and for keeping our industrial facilities modern. During the present war, we have engaged in the output of machine tools, new plants, and general industrial equipment on such a large scale as to raise questions concerning the magnitude of the demand for these in the immediate postwar years. Nevertheless, there is certain to be a considerable market for capital goods in the United States, provided that businesses can anticipate the market for their products and are willing to assume the risk. Certainly, the most important single factor in the domestic demand for capital goods is the potential market for the products which this capital equipment can. produce. This potential market in turn depends upon consumer buying power and the translation of this buying power into real consumption. 

There are many people, especially businessmen, who contend that, given the proper environment (usually meaning less government activity), industry will spend vast funds for productive plants and equipment— so vast that all savings will be absorbed. This contention deserves further appraisal. In the relatively good years of the 20’s, total expenditures for industrial replacements and for all new facilities, including factories, mines, power plants, railroads, office buildings, trade establishments, farms, and all other business enterprises, averaged almost $10 billion per year. A major portion of such expenditures was financed out of depreciation and obsolescence reserves and undistributed profits rather than the savings of individuals. 

Even this level of capital expenditures resulted in an excess of productive capacity relative to consumption, with the result that further expansions were curtailed because of poor prospects for profits. During the 20’s, the so-called interference by government was absent. Taxes were low and the Federal debt, which is regarded as a menace, was declining. Unless consumption increases greatly, can we anticipate an industrial outlay of $10 billion per year, let alone a much higher volume, without frequent interruptions because productive capacity has gotten out of line with consumption? As was noted in the preceding chapter, if the high ratio of savings to income persists after the war, we shall require a much larger investment in capital goods, unless other offsets to savings, particularly government expenditures, are much larger than heretofore in peace time. 

Many economists, following classical economic principles, believe that much higher volumes of capital expenditures can be attained if only the forces of competition will be given freer play. Elimination of monopolistic practices will permit the easier entry of new enterprises, and new products, new processes, and increased efficiency will elim inate the inefficient enterprises more rapidly. Consequently, there will be a more rapid total replacement of plants and machinery. 

But in order for such expenditures to absorb a larger share of a much larger total of savings, the turnover or replacement of plants and equipment would have to increase so sharply as to bring continuous unprecedented numbers of business failures. Both new entries and failures would have to rise far beyond any known levels. Even under such circumstances it is doubtful whether productive capacity could be kept from getting so far out of line with actual consumption as to cause recurring declines in capital expenditures and, therefore, depressions.

Certainly, every consideration should be given to stimulating expenditures for capital goods after the war. Policies should point toward minimum restrictions, maximum incentives, and increased competition, so that private investment in plant and equipment will be encouraged. More rapid replacement of obsolete equipment should be stimulated through appropriate tax measures. However, we must not lose sight of the fact that unprecedented quantities of industrial facilities have been created during the war and much of this capacity can be used for peacetime purposes. Nor must we lose sight of the need for maintaining a reasonable relationship between total productive capacity and actual consumption if recurring depressions in producers’ goods output are to be avoided. All in all, it surely seems unlikely that business expenditures for plants and equipment can provide a major outlet for the higher savings likely to result when the gross national product is $150 billion as compared with $100 billion in 1929. The following chapter is devoted to this problem. 


The third important potential market in the postwar years is in foreign countries and depends on our foreign economic policy. The destroyed productive capacity of the European and Asiatic nations, the pent-up demands of consumers in belligerent and occupied countries, and the low standards of living of large segments of the world’s population, all lead to the conclusion that there can be vast outlets abroad for America’s productive capacity. However, these needs will be difficult to translate into actual demands and actual consumption.

In the first place, most of the belligerent nations will be impoverished and will not have the wherewithal to buy our producers’ and consumers’ goods. Second, even if they could produce goods and services for trade with the United States, our own tariff policy is such as to seriously restrict their buying power here in the United States. We are now a major creditor nation and are likely to continue so for a long time to come. If we are to open large-scale foreign markets for our products, we must do so either on the basis of long-term investments or on the basis of relief or outright gifts, or we must import more goods and buy more of their services. 

Our position as a creditor nation and our policy toward high protective tariffs, taken together, reflect the degree to which we have failed to consider that the end purpose of all economic activity is the production and consumption of goods and services. There has been a tendency to forget consumption as an objective. On the whole, the rest of the nations of the world owe the United States Government and its people many billions of dollars. Having accepted gold as payment until we have most of the world’s gold, we close the channels of payment for current needs in goods and services through raising tariffs on imports. The United States desires to sell goods abroad but buries its head in the sand in regard to providing the mechanism whereby payment can be made for such goods. 

When most foreign nations defaulted on payments to the United States Government on debts from the first World War, the people of this country were indignant. Yet we made it impossible for them to repay the debts. It would seem to be more sensible to accept goods from abroad and use them for home consumption, but that would mean added competition for domestic producers. Therefore, some of our business community vigorously seek foreign markets and the same or other businessmen successfully bring pressure on Congress for higher tariffs. The potential foreign market is unlimited, but as yet elusive. If we are to anticipate large foreign markets we shall probably have to accept considerable government as well as private financing. Therefore this prospective source of spending should be considered largely in relation to government spending. It is discussed in greater detail in a subsequent chapter. 


The fourth and final major market for consideration in the postwar era is government. This includes Federal, state, and local governmental agencies. Government spending in the postwar years may be large either because of the increased demand for governmental facilities and services by individuals and business enterprises, or because government spending may be necessary in attaining full employment if demands from other sources are inadequate. Its level will depend on how well other outlets provide markets. Public pressure may require a considerable expansion of public education, public health activities, new roads and bridges, large power developments, and similar work. 

Should other expenditures be too small to bring full employment, or should a severe depression develop, it will be necessary to pursue a huge domestic public works program, probably far larger than anything tried heretofore. Also, world conditions might require the maintenance of a relatively large peacetime Army, Navy, and air force. Government demands for goods and services are likely to be much larger than in any previous time of peace. Through housing and food subsidies and through providing more services to people, the government spending can serve to increase the standard of living of the lower income groups. A later chapter is devoted to this whole area. 

Again, it is emphasized that we must understand the two-sided aspect of the national income, namely, production on the one side and the generation of buying power on the other. If all of the buying power generated at full employment flowed promptly and wholly into the market and manifested itself in the consumption of goods and services, we would have no concern about maintaining full employment. On the other hand, if any large sum of buying power generated out of production at a level of full employment is not translated into effective demand, then full employment cannot be maintained. This simple understanding is a basic prerequisite in any attempt to develop intelligent postwar economic policies. 

The buying power of the people and of business enterprises is either spent directly or saved. If savings are wholly spent, or offset by other expenditures for new capital equipment, consumers’ durable goods, export balances, increases in installment credit, government deficit financing, or accumulation of business inventories, then full employment will continue. However, these offsets to savings must be able to continue to absorb total savings year after year if depressions are to be avoided. It is a double-edged proposition— the higher the total income, the higher the savings, but higher levels of total income cannot be attained or maintained unless total offsets to savings are at least as large as total savings. 

If, in the postwar period, a large volume of the income of individuals and businesses is saved and these savings cannot be effectively translated through private channels into expenditures, then we are inevitably faced with either lower levels of production or with large-scale government spending. We cannot and must not resign ourselves to reduced production and to large-scale unemployment. Only if we can guide the flow of buying power so as to translate it promptly into market demands through private channels will there be no need for large government expenditures. This can be accomplished only by increasing consumer expenditures and reducing savings or by somehow raising the levels of private nonconsumer expenditures so as to absorb or offset total savings. The latter appears to be a very remote possibility. If that is a correct observation, then our only alternatives are increased consumption and less savings or else large government expenditures to offset the otherwise idle savings. 

As already noted, with a gross national production of $150 billion in peacetime and the present distribution of income among different levels of income recipients, and with prewar savings habits, it is almost certain that at least $30 billion will be saved annually. This is certainly the minimum of savings which can be expected at the suggested level of total income. It is the same ratio of savings to total income as prevailed in 1929. With higher total income, savings increase disproportionately, and that is why an estimate of $30 billion of savings under general peacetime circumstances for a total national production of $150 billion may be too conservative. 

Of course, because of the pressure of war conditions at the present time, we are saving much more than 20 percent out of our national income. This is necessary because such a large proportion of our total production is directed for government use for war rather than for civilian production, and therefore a substantial part of the income of individuals must be transferred to the government either through taxation or savings. In peacetime, however, there will be no such magnitude of war production and war expenditures, and the pressure for individual savings to finance the war and to avoid inflation will have been lifted. It is very doubtful, however, that the tendency to save will be reduced spontaneously after the war, even though there may be considerable spending out of wartime savings. 

Irrespective of almost any kind of incentives to private enterprise, it is inconceivable that we can find anywhere near $30 billion of offsets to savings through private channels year after year. No sane and sober analysis reveals that the possibilities for such large investment are present or in prospect. Conceivably, but improbably, they might be found for two to maybe four or five years, but not for longer, and if they are relied upon as the only basis for prosperity, we are sunk thereafter. Those who preach “Do nothing” and “Let business alone and it will provide the necessary spending” are either wholly unaware of the magnitude of the task or are living in a world of pipe dreams.


This brings us to the very important question of individual consumption and the standard of living in the United States. If we recognize, first, that there is a tre mendous potentiality of expansion in our standard of living, and second, that production and prosperity are based on large demands for goods and services, then we must conclude that an ever-increasing standard of living for the entire population is one of the main prerequisites to a postwar prosperous and healthy America. It means that we must do everything to encourage total spending and to discourage total savings beyond the level necessary to provide for sound, healthy investment demand. 

This does not imply in any sense that a considerable volume of savings is not desirable. In fact, savings are necessary if we are going to provide for new productive assets and increase our wealth, but savings beyond that level which can be effectively and continuously used are economically harmful. In fact, not only do such excess and idle savings fail to result in greater wealth, but they cause much less production and employment than would be achieved had these idle savings been spent for consumption. Also these are largely washed away during periods of depression. 

Ever since the days of Benjamin Franklin, we have been taught over and over again that thrift is a great virtue. It is probably good for the morale of individuals to abstain from spending all of their income, and some volume of savings is absolutely essential from an economic as well as a social point of view. But it certainly is not good for the country as a whole to save beyond economically feasible levels and thereby bring about depressions, reduced production, and lower incomes as well as the dissipation of earlier savings. When we as a whole tend to save more than can be soundly and continuously offset by other expenditures, we are, in a real sense, not saving but fooling ourselves with monetary terms. 

How many people are economically independent in their old age, despite their frugality year after year? People and corporations save money and invest that money for a reasonable return or for an appreciation in value. Then a depression comes along, resulting in bank failures, mortgage foreclosures, bankrupt businesses, bond defaults, and similar catastrophes which wipe out a large part of the so-called savings. Individuals cannot understand what has happened, since the plants, the railroads, and the houses still exist, but suddenly, through circumstances beyond their control, they find themselves with no more claim to these. Lower prices and reduced assets have wiped out their savings. What actually happens is a decline in financial values because of depression. The offsets to savings were of such character or magnitude that they could not continue at the same high levels for very long. When offsets to savings decline, depressions ensue and values disappear. Lower savings relative to total income, and therefore lower offsets to savings, would bring greater stability, and in the long run people would have greater claims over assets because they would not have suffered the recurring losses of depressions. 

Depressions are not the result of some divine determination but rather of our own economic folly. During prosperity we save a disproportionate part of our income. Easy funds result in investments beyond what is justified by current consumer demand. Plants and office buildings and apartment houses and inventories are built far beyond what is justified by the continued consumption, and finally there are excess productive resources relative to actual consumption. Then there occurs a “lack of confidence,” which may be attributed to all kinds of reasons, from sunspots to political administrations. In reality this “lack of confidence” is an inevitable consequence of a growing distorted relationship between production capacity and other offsets to savings, on the one hand, and actual consumption on the other. The solution lies in reducing savings or in giving some arbitrary support to offsets to savings, such as large government expenditures. 

Would we not be much better off with a lower volume of savings, higher consumption, sustained high levels of economic activity, and continued employment? Might we not be much better off if, instead of saving $20 billion out of a $100 billion gross national production, or more than $30 billion out of a total income of $150 billion, we saved $10 billion out of $100 billion or $15 billion out of $150 billion— assuming that such totals were sufficient to provide for all new sound investment demands? 

A substantially lower volume of savings need not, as many people contend, slow up progress. There is nothing more retarding to progress nor more wasteful than a severe depression. A steady growth in total activity and new investment geared to increased consumption will not only bring greater development, over the long run, but also eliminate the great losses which occur in depressions. 

Paralleling the lesson that thrift is a major virtue, we have also been taught that spending and indulgence in luxuries are undesirable and even immoral. Increased consumption is certainly consistent with sound economic principles, for it is the key to higher production and employment. Only if we have large demands can we expect large production. Therefore, it is important that in planning for the postwar period, we give adequate consideration to the need for ever-increasing consumption on the part of our people as one of the prime requisites for prosperity. Mass consumption is essential to the success of a system of mass production. We can get reduced savings if more income goes into the lower income groups and less to those who save. In peacetime, perhaps not over one third of the persons receiving an income get enough to save. Most savings are made by a minority of income recipients. 

It may be that, when increases in income are made available to the poorest classes, their selection of goods and services runs counter to what moralists would dictate; but certainly the answer, from a social point of view, is in better education rather than continued substandard in comes and subsistence, with consequent unemployment and depression. Some people claim that too much money is bad for people— usually having in mind an increase in the income of the lowest brackets to moderately higher levels, such as a rise from $10 per week to $25 or even $40 per week. These same critics would defend with equal or greater vigor the desirability of some incomes of $10,000 or $100,000 per year or more. Maybe slum dwellers won’t know how to use the “nice” things of life intelligently, but they can learn only by application. It is certainly better to continue to provide them with luxuries rather than keep millions of people out of work and plants closed, thereby undermining the very pillars of our democracy. The continuance of our economic system will probably depend more on a rapidly rising standard of living to provide the demand necessary for full employment than upon any other single factor. 

If, as it appears, in assuring prosperity we must choose between more spending and less saving by individuals, on the one hand, and large-scale government spending on the other, the decision is not easy. If the total population can be induced by education, by tax reforms, by more adequate social security provisions, and other means to spend a larger proportion of its total income, then the composition of increased production will be largely determined by the choices of the people. Production will be guided by their demands. On the other hand, if the choice is government spending, then the pattern of increased output will be determined by the chosen representatives of the people. While the direction is in different hands, the final results might possibly be the same. Government spending could include the purchase or subsidizing of consumer goods such as housing, food, and clothing for the lower income groups. However, large public works would surely account for a substantial amount of any large government expenditures designed to stimulate economic activity. Therefore, the choice of government spending rather than reduced savings would mean more bridges, roads, dams, schools, hospitals, and the like, as opposed to more consumers’ goods. On the whole, probably both approaches will and should be followed. 

The remaining chapters suggest positive programs and policies for attaining that level of economic activity which will help insure the preservation of the free enterprise democratic system and provide a more abundant life for the people of the United States, as well as a sound basis on which we can develop and implement intelligent for eign policies. If we have depression and unemployment and chaos here at home, the chances of carrying out a constructive foreign policy are hopeless.

Chapter 6: The Risk is an Investment

AS HAS ALREADY BEEN NOTED, IT WILL PROBABLY require a gross national product of at least $150 billion annually at 1943 prices, in the years after the war, to provide job opportunities for almost all able persons seeking work. This is about one-sixth below the 1943 output. It may not provide absolutely full employment, but it will offer jobs to most workers and should give us a much higher standard of living than we have ever before attained. Therefore, it may be accepted as a reasonable goal. After the war we shall have millions of workers released from military duty and available for productive pursuits. On the other hand, there will be some exodus of temporary wartime workers from the labor market and hours of work will decline substantially in most industries in the postwar period. Also, there will be a shift of some workers from the more mechanized, highly productive armament industries to less mechanized and less productive agriculture, trade, and service industries. 

It has been observed that the prewar general pattern of income distribution and relationship of savings and expenditures at different levels of income will bring gross savings of at least $30 billion out of the nation’s income each year. This total includes individual and corporate savings as well as depreciation and obsolescence charges. The pressure for greater savings during the war may initiate habits which will bring a continued abnormally high level of savings after the war. However, the presence of accumulated savings in the hands of many individuals may induce greater expenditures out of current income than would normally be expected in peacetime. Also, the backlog of demand for consumer durable goods and the existence of large liquid savings may encourage spending more freely out of such savings as well as from current income. 

The willingness of people to spend their wartime savings will depend in large measure on the prospects for continuous income in the future. Generally, it may be concluded that, without positive measures designed to reduce savings, we shall certainly have at least $30 billion of savings per year at levels of income and production which will provide relatively full employment. 

We have already reviewed the various categories of expenditures which absorb or offset savings and expressed the conviction that there is no possibility of private offsets totaling as much as $30 billion year after year for any considerable period of time. It is conceivable that such a volume may be attained for two or three or even more years, but not for long. Then, without government support a serious depression would surely follow. 

The challenge is to determine how to avoid depressions and to insure sustained prosperity. There are two general approaches to the solution—first, to increase direct expenditures by individuals and reduce savings, and second, to provide outlets or offsets to all savings at high levels of production. In this chapter, the discussion deals with the possibilities of increasing offsets to savings through private channels. The balance of the book is devoted to probing the prospects of reducing savings and to supplementing private outlets for savings through government channels. 

The largest single private offset to savings is the expenditure for replacement and new productive capacity. This includes all industries from agriculture, trade, and utilities to manufacturing and mining, and comprises equipment as well as buildings. Funds for such expenditures are derived from depreciation and obsolescence allowances, undistributed- profits of corporations, the flotation of corporate stocks or bonds, and loans to and equities in unincorporated enterprises. 

The second largest private outlet for savings is expenditure for consumers’ durable goods. The major item in this category is housing. Also included are outlays for automobiles, furniture, and other goods of a relatively lasting nature. These expenditures are, in substantial part, made out of past savings or by borrowing from banks, building and loan associations, personal finance companies, or from business concerns in the form of installment sales. We must keep in mind that expenditures for both capital goods and consumers’ durable goods are ultimately dependent upon the flow and utilization of buying power by consumers. If total productive capacity increases much more rapidly than consumption, a surplus of capacity will result, and then a decline in private capital expenditures is certain. Likewise, the production of consumer durable goods cannot long increase disproportionately with consumer buying power. 


The United States was endowed with an abundance of raw material resources, fertile soil, and good climate. Throughout the nineteenth century, the economic growth of the country consisted of both the extensive agricultural and industrial development of new areas and the intensive industrialization of the settled regions. The extensive frontiers with rich resources played a major role in the unparalleled material achievements of the United States. Yet, despite the excellent investment opportunities offered in the newly opened territories, we have evidence of recurring depressions of varying severity throughout our history. However, the extensive possibilities in the opening of the West helped us to reach new levels of prosperity after each depression. In general, the large, unexploited territories of the United States had substantially vanished by the end of the last century. 

The first World War and the automobile industry, with all of its related demands such as petroleum, garages, highways, and suburban development, stimulated economic activity in the first three decades of this century. Perhaps there has never been a single product in history which has offered investment opportunities so large and in so many industries as has the automobile. It certainly has had revolutionary effects on all aspects of our economic life. Another positive influence in our rapid economic growth was the rapid population increase, especially large-scale immi gration, which required additional housing and community facilities and productive capacity to meet enlarged demands.

Now, we have no more vast new geographical frontiers and we have a much slower rate of growth in the population. This change has already had and will continue to have some adverse effects upon the demand for investment funds. The absence of such favorable investment factors need not result in stagnation and retarded progress. Rather, it can and should result in a more intensive development of our vast resources and an unprecedented rise in our standard of living. 

Those who have recognized and discussed the maturity aspects of our economy have been charged with expounding a philosophy of pessimism about the future development of the nation. In reality, they are focusing attention upon the increasing difficulty of finding investment out lets large enough to utilize all of the savings which will come forth at high levels of production and employment. Every encouragement should be given to private investment, but we must not blind ourselves to facts. We can and should have a future of abundance and of greater industrial progress and development than in the past, but this can and will be achieved with much less investment than is needed to offset all savings. The prospects suggest an intensive development of our resources in the years to come as compared with the extensive development of the past. This development can yield an even greater output and higher standards of living than ever before. 

Let us review the prospects for domestic capital goods expenditures after the war. In the mobilization for war, we engaged in the largest and most rapid expansion in industrial plant and equipment in our history. New factories have been erected from one end of the country to the other. Machine tools have been produced at an unprecedented rate. Expansion has taken place in raw material extractive and primary fabricating capacity as well as in the metal-product industries. There is a general tendency to look upon this tremendous new capacity as a major deterrent to capital expenditures after the war. However, this depends on a number of factors. 

While a goodly portion of the new facilities and new equipment will not be adaptable for peacetime purposes, undoubtedly a large portion of the buildings and much of the machinery can be used in the postwar years for peacetime productive purposes. We shall end the war with a great deal more industrial capacity than existed prior to the war or at any other time. This is particularly true in the metal and metal-product industries. However, the rate of industrial operations during the war has been so high as to cause an abnormal rate of depreciation of both new and old industrial equipment. On the whole, it would appear that the domestic demand for capital plant and equipment in the metal-working industries after the war will be somewhat depressed for a period of years. This will be aggravated by the fact that in peacetime metal products will play a less important role than at the same level of total production in wartime. 

Despite all of the expansion in productive capacity during the war years, there are many areas of economic activity in which capital expenditures have been purposely restricted. Thus, in the consumer goods and service industries, there would have been large capital outlays in the last two or three years, had there been an unlimited supply of materials and manpower. Expenditures for farm equipment, commercial trucks, textile machinery, and construction and fixtures in trade and service establishments have been severely curtailed during the war. If general economic activity remains at high levels in the postwar years, demands upon consumer goods industries should be far above any previous peacetime levels, and there will be a substantial investment in these areas. 

Furthermore, the railroads have been held to moderate replacement requirements and should spend large sums for new equipment and ways and stations, if traffic prospects remain favorable. The same applies to other utilities. On the whole, postwar prospects for capital goods expenditures are favorable for nearly all industries except the metal-products group. Yet, the magnitudes of likely spending for plant and equipment in these fields are relatively moderate in comparison with total savings. Most, if not all, of these expenditures can be financed through accumulated depreciation charges and undistributed earnings of all business enterprises. Of course, there will be many new firms requiring investment funds, as well as old firms which will have to seek outside funds for expansion purposes. However, there will be many existing companies whose expenditures will be less than their receipts and will thereby contribute to idle savings. 


If private investment in productive plant and equipment is to reach unprecedented high levels after the war and be maintained at such rates, it is essential that there be a much greater rate of dissipation or elimination of old productive capacity than in the past. Because of peculiar aftereffects of the war, we may get a postwar spurt in private investment, but if this results in excess capacity to produce relative to actual consumption, the spurt will be of brief duration. If total productive capacity runs far ahead of total consumption, a decline in new investment is inevitable, because the prospects for profits will diminish as the productive capacity increasingly exceeds consumption. If we ever attain large-scale new investment of the magnitude which is needed to offset all savings at full employment, it will surely bring about a distortion in the relationship between productive capacity and consumption, unless it is accompanied bv substantial removal of old capacity from the market. 

In a freely competitive society, presumably the introduction of new products and new processes and new equipment should result in a relatively rapid replacement of older and less attractive and less efficient goods and machinery. However, there are many forces within the sphere of private enterprise which retard new investment and the discarding of obsolete capacity. Effective resistance to replacing older equipment and processes is especially strong in a system of large-scale enterprise and of inter-locking financial relationships among our producing and financing interests. 

Large investments in existing capital equipment will discourage companies and investors from entering into ventures which may render their old investments a total loss. A corporation will think carefully before it will discard equipment which is still in good condition and replace it with new machinery which is much more efficient. The new machinery may be so efficient as to more than compensate for the loss incurred in scrapping the old. Yet companies may be hesitant about replacement, especially if there are no competitors using the new equipment. The greater the economic power and economic control of those who own existing assets, the less rapid will be the replacement of existing facilities. 

There are a number of specific ways in which invest ment in industrial plant and equipment is retarded in our present society. As already noted, companies with large holdings of machinery will be slow in discarding it in favor of new machinery, particularly when innovations are coming forth almost continuously. Investment bankers and other financial institutions are inclined to be cautious in directing funds into new enterprises which will compete with their client companies. Then, there are many fields of activity in which the firms are all very large and there is very little opportunity for new enterprises to enter, especially when large financial institutions which could finance the new operation are probably already interested in the existing large corporations. Further, corporations tend to buy up new products, new processes, or new firms and thus remove threats of competition which might render their existing assets obsolete. In other instances, companies will purposely take huge capital losses for a time in order to undersell and eliminate threatening competition. These and other devices have modified the virility of competition in our system. 

The absence of vigorous competition in the railroad industry is no doubt an important factor in the failure of railroads to keep up to date and modernize their equipment and their facilities. There has been hesitance in replacing fixed assets and rolling equipment as new developments have occurred, even though there have been numerous bankruptcies, defaults on obligations, and reorganizations among railroads. Had the industry been one which lent itself to free competition and the easy entry of new firms, the railroads today would have been much more efficient and there would have been a much greater elimination of old equipment and plant over the years. When competition is lacking, we cannot normally expect the replacement of assets to keep up even with fundamental technological developments. Of course, there are many presumably competitive industries in the United States which are not much more modern than the railroads, despite the tremendous technological advances which have been made. Vested interests and concentrated economic power are usually at the bottom of such situations. 


It is important to appreciate the fact that the urge for security and protection of investment and for a predominant position in the industry may be equally forceful or more forceful factors in business than the quest for profits. Keen competition and relatively free opportunities to enter into business operations are sure to bring many business failures as well as many successes. It is the imminence of bankruptcy and failure in a free competitive struggle that causes established firms to strive so hard to discourage new entrants and to limit competition. To most members of the business community, the “survival of the fittest” principle is more acceptable in theory than in practice. Often those who speak most freely in favor of free enterprise and open competition strive in their own business activities to attain monopolistic positions. It is the old story of insistence upon opportunity for themselves and then insistence upon the exclusion of others. Even the most monopolistic enterprisers favor the competitive system— competition in other industries. If we are to stimulate private investment, we must have competition, and we must appreciate the inevitability of losses and failures as well as profits and successes. 

Some people will deny that the existence of monopolies and the economic power of large corporations tend to reward new investment. They will cite the amount of research and development work of such corporations as evidence of innovations and progress. Such research is directed primarily to develop new products and new processes. But if it suggests displacing capital equipment, the displacement will not be spontaneous, but will come only when in the interest of the particular corporation. When the development has been accomplished within a corporation, the introduction of the innovation will be made at the discretion of the corporation and not always in the public interest. The research and development work of corporations and other institutions is most valuable and will con tinue to contribute greatly to the material progress of our country. However, it will not solve the problem of lifting private investment high enough to offset most of the savings at high levels of income and employment. 

It cannot be emphasized too much that productive capacity bears an important relationship to consumption. If total capacity to produce goods and services increases at a much greater rate than does the actual consumption of goods and services, then new investment will surely fall off at some point. However, if a large volume of new plant and equipment is produced, and simultaneously there is a large disappearance from industry of obsolete capacity, then total capacity may not get dangerously out of line with consumption. Of course, the more rapid displacement of capital goods resulting from more intense competition means more business failures, and the increase in failures may in itself discourage new investors. 

Thus, it is likely that reliance on a very much enlarged private expenditure for plant and equipment in the future over what we experienced in the late 20’s cannot be anticipated without bringing recurrent depressions. Full employment will require a very much higher level of total production after the war than we experienced in the late 20’s, and more capital goods will therefore be necessary. On the other hand, the level of capital goods expenditures in the 20’s was too high to be maintained. After this war, with high total output and vigorous competition we may be able to spend $10 billion per year in industrial channels for new and replacement purposes. This was the magnitude which prevailed just before 1929. It might even be exceeded, but not very much, without sowing the seeds for another depression. 

There are ways of inducing greater industrial expenditures and they should be adopted, but with an appreciation of the important relationship between total productive capacity and total consumption. The government taxing authorities might permit much larger depreciation allowances where equipment is actually replaced before the normal depreciation period has expired. This would tend to increase private investment through more rapid replacement of obsolete facilities, but it would also increase gross savings, so that there would be no greater absorption of savings. Other taxation devices might be developed to give benefits to savings which were used in making new investments, as compared with idle savings. This is difficult to apply in the case of individual savings, where the flow of funds is not usually direct and immediate between the saver and the user of the funds. However, tax incentive schemes may be applied on corporate savings and on depreciation and obsolescence charges. 

Tighter enforcement of anti-trust provisions should bring increased competition and, therefore, increased investment. The constant pressure for higher wage rates should serve to stimulate the greater mechanization and improvement of industrial facilities. If there is a natural or a forced decentralization of business after the war, as is now being discussed in many circles, expenditures for new plant and equipment will be given a considerable stimulus. Freer access to new patents and processes under licensing devices could bring enlarged investment opportunities as well as extra rewards for inventive efforts. Finally, all possible steps must be taken to avoid the development of new restrictive measures and to eliminate or modify present retarding influences in the field of cartels, patents, interstate trade barriers, restrictions on labor utilization and labor mobility, and the like.

THE WAR CREATES A RESERVOIR OF DEMAND Now let us -review the prospects for expenditures on consumer durable goods after the war. This is the area in which spending has been heavily depressed during the war. Shortages of materials, manpower, and facilities necessitated a restriction in the production of consumer goods. Some production was administratively curtailed through government directives, while in other categories the supply of labor and materials could not be made available to permit full production. Consumers were urged to abstain from spending for unnecessary goods, and this probably helped in holding down the production of consumer goods. 

Administrative limitations on production were especially severe on consumer durable goods, since they were in such direct competition with munitions production. The limits on production extended to practically all consumer durable goods, including houses, automobiles, electric refrigerators, and similar products. Even some kinds of furniture have been affected by military demands. These curtailments were paralleled by a tremendous flow of buying power into the hands of consumers, which certainly would have established record production and sales had there been an adequate supply. The net result is a substantial backlog of demand for such goods, and the size of the backlog will increase with the duration of the war. 

In at least the first year or first two years after the termination of hostilities, it is unlikely that the supply of consumer durable goods can possibly meet the demand. It will require many months for the industries producing these products to get into production once again, and for many products the goods may not be flowing to consumers at a full capacity rate for perhaps a year after reconversion is initiated. Houses and cars cannot be produced over night, especially when equipment must be released and reconverted from war production, and components and parts must be produced first. Therefore, in the immediate postwar period, expenditures for such goods will not solve the problem of excess savings. 

We may attain phenomenally high levels of consumer durable goods expenditure for several years, if all of the backlog of war demands as well as new current demands are translated into actual purchases. This will depend in large measure upon the prevailing and prospective level of income and employment. If the outlook for jobs is favorable, people will buy houses and cars and electrical equipment not only out of current income, but also out of their wartime savings. On the other hand, if there is uncertainty about the future, people will be hesitant about spending and obligating themselves for new houses and automobiles, irrespective of their war savings. Thus, after the reconversion job is over, expenditures for consumer durable goods, given an extra impetus by huge war savings, may help greatly in avoiding idle savings. In turn, however, this depends on full employment being assured. Policies designed to assure prosperity will therefore make its attainment more feasible. 


Over the longer term, the prospects for a continued large volume of consumer durable goods expenditures will depend in large measure on the flow of buying power to the masses. We have already noted that productive capacity bears a marked relationship to consumption and that new investment will not continue for long if productive capacity gets far out of line with consumption. Similarly, expenditures for consumers’ durable goods bear a direct relationship to consumer buying power. If the flow of income to individuals does not increase substantially, there cannot be a sustained rise in durable goods outlays for any long period of time. 

In the past, periods of prosperity have been characterized by a much more rapid rise in the construction of homes and the sale of automobiles and other consumer durable goods than the increase in consumer income. As a result, the market for consumer durable goods became glutted relative to the ability of people to buy such goods, and further construction or production was discouraged. Too large a segment of the populace did not have high enough incomes to buy these goods. 

The decline in residential construction in the late 20’s cannot be attributed to a lack of basic need for more and better housing. There were dismal slums in every large community in the United States, and in the South housing conditions were unsatisfactory for a very substantial portion of the entire population. Likewise, the drop in production of new cars in 1930 and thereafter was not caused by an excess of transportation facilities. Over half of the cars in the country were four or more years old. 

Declines in the demand for houses and cars and similar goods were both a result of the general economic collapse and at least a partial cause of that collapse. The rise in buying power of the mass of consumers during the 20’s was not sufficient to support the continued increase in consumer durable goods. The wants of those who had the money were satisfied and they saved large portions of their income, but the largest portion of the population neither saved nor could buy new houses and new cars. 

Expenditures for consumer durable goods either absorb or offset total current savings because purchasers do not pay for the goods entirely out of their current income. Instead, they either make the payment out of past savings or by borrowing funds from other individuals or from financial institutions. In any case, they are augmenting their current buying power in order to make such expenditures, and therefore they offset or absorb otherwise idle buying power. It is important to appreciate the fact that a substantial portion of consumer expenditures for durable goods involves credit transactions. That is, the consumer borrows funds or savings from others in order to make his purchase. As we have already noted, loans will continue to be made only when the prospect for repayment is favorable. 

Loans on homes or on cars or for installment sales will continue to be made only so long as consumer income is high enough to give confidence to the creditors that the debtors will be able to repay the loan. It should be obvious that if such loans increase disproportionately with consumer incomes, the prospects for repayment will become less favorable as time passes. In the later stages of a depression and during most of the boom period, credit is granted freely to consumers because the employment and income outlook is favorable, and the better risks are the earliest customers. As the period of prosperity evolves, the higher income groups, which are relatively small in size, have their needs largely satisfied. Then the middle and lower income classes are given credit to procure durable goods. It is obvious, as this process progresses, that the risks become greater, because credit tends to be granted increasingly to the lower income groups whose income may not warrant such purchases. Ultimately, there is a cessation of new loans and there are many defaults on existing loans. There follows a period of mortgage foreclosures and reclaimed goods. An understanding of this sequence of events and of relationships should make clear the dependence of consumer durable goods expenditures upon the flow of consumer buying power. 

It should be noted further that expenditures for consumer durable goods will only serve to offset savings if these expenditures currently are greater than repayments. In other words, if new mortgages or new installment credit extensions or other loans are greater than the amortization payments on mortgages and the repayments on other loans, then savings will be absorbed or offset by consumer durable goods expenditures. On the other hand, if repay ments are equal to new loans, then there is no contribution to the solution of the excess savings problem, and if greater than new loans, the volume of idle savings is increased. Installment sales and mortgages tend to aggravate cyclical fluctuations. In good times, they afford an outlet for higher savings. In periods of depression, there is little extension of new loans and great pressure for repayments, thus contributing to the difficulty of idle savings. 

There is a somewhat similar retarding influence in consumer durable goods, especially housing, as in producer goods. It is the desire and effort of owners to protect existing investments. Those who own houses and cars are never inclined to purchase new ones and destroy the old ones. Instead, the old assets are sold to others. Thus, there is no rapid replacement of consumer durable goods as new goods are produced. The elimination of obsolete and worn goods would be speeded if the incomes of the lower groups were raised so that they could afford better houses and automobiles and other durable goods. A substantial proportion of all houses, and practically all apartment buildings, are owned by investors who lease the property to tenants. These investors are especially interested in protecting their principal. They will vary their rental charges, cutting down on their profit in order to compete successfully against new buildings which are destroying their market and therefore their investments. It is very difficult to eliminate slums when those in the lowest income brackets rent old, dilapidated, unsanitary places at lower rentals than can be charged for new or reasonably decent residences. Vested interests will always be somewhat of a deterring factor to new investments. 

One of the main areas in which the standard of living of the people of the United States can and should expand materially is the consumer durable goods field. It is here that the basic needs of most consumers are still far beyond their financial ability to purchase these goods. It is here the masses characterized as ill-fed, ill-clothed, and illhoused can provide a tremendous market. However, this market can only be developed and exploited if much larger buying power flows into the hands of the lower income groups. 

We should do everything possible to stimulate expenditures for durable goods after the war. One way to accomplish this is to eliminate all restrictions and restrictive measures such as exist so widely in the construction field. Community regulations, labor restrictions, and other measures have put arbitrary barriers in the way of reducing costs of housing and must be removed. A continued policy of low interest rates will reduce the financing and rental costs of houses and other durable goods. Reducing property taxes on residential buildings will reduce the cost of housing and bring better facilities within the range of the poorer people. There are so many people in the lower income levels who cannot afford rentals on new houses that a vast potential market has never been tapped and can never be tapped until the incomes of these people are raised or until the government subsidizes part of the building costs and perhaps the operating costs as well. 

While measures to increase competition in business or measures to arbitrarily support the sale of consumers’ durable goods will be helpful, it must be emphasized over and over again that the real solution to supporting large investment demand lies in a larger flow of income into the hands of those who spend their income. It is only through such an increased flow of buying power and through the maintaining of a stable relationship between durable goods expenditures and consumer income that we can attain and maintain high levels of production and consumption in such goods. 

There is a tremendous need for new homes and new cars and other durable goods, but this need cannot be translated into sustained actual sales and consumption without the buying power in the hands of those who have the need. With our vast resources, no one should be living in old, dilapidated homes. Instead, there should be new homes and cars and refrigerators for all, with frequent replacements as new developments appear. Certainly, a considerable degree of the future prosperity of America depends on prosperity in the consumer durable goods industry, but this in turn depends on getting more buying power into the hands of the masses. 

Chapter 7: The Power to Tax is the Power to Create

If we are determined to expand consumption to provide an adequate market for our vast industrial capacity and to provide job opportunities for all workers, perhaps the most fruitful and yet most difficult reform which must be undertaken in the postwar years is a major change in our entire tax system. Taxes can serve not only routinely as a source of revenue for government operations, but may be a most potent instrument for economic control. While it is true that “the power to tax is the power to destroy,” it is equally true that the power to tax is the power to do great good. 

It is not only the size of the total tax bill which makes it such a forceful device for economic direction, but the types and sources of taxes offer a wide latitude for effective policy-making. If we accept increased government responsibility for overall economic conditions, and if we wish to minimize government interference in the free play of competitive forces, then the tax mechanism is ideal for control purposes. It can be used effectively without distorting normal competitive relationships, while helping to correct the conditions which cause depressions. 

From the earliest times, levies have been imposed on individuals for the purpose of providing government with revenues to finance the commonly accepted operations of government. It is costly to maintain an army and a navy, to operate a police force and a fire department, to build roads and bridges, to provide free education and courts of law, and all of the other manifold activities of government. 

In many ways, the operation of government is like the operation of a business. Private enterprises engage in producing goods and services, whereas production by government comprises mainly services. A wide variety of services is created by government and made available to business establishments and to consumers. It also builds durable assets such as roads, hospitals, museums, naval bases, and the like. Government has payroll, fuel, transportation, communication, machinery, material, and other expenses to meet. Taxes are the primary source of funds to meet these costs. If the government spends more than it receives, the deficit is normally financed by the issuance of bonds. 

Because individuals and business concerns do not clearly perceive the direct and immediate benefit of government services, taxes are never popular. When one goes into a store to buy a pair of shoes or into a barbershop for a haircut, he transfers his buying power to the shopkeeper or the barber and the shoes or the haircut is received at once. The consumer can see what he gets for his money. On the other hand, when taxes are paid, the taxpayer is not inclined to associate his payment with the education his children are receiving in public schools, the protection which the armed forces and the police and fire departments afford, the streets and roads that are made available, the sewage and trash collection services, the public parks, and the thousand and one other services which governmental executive and judicial branches provide for him. There are, of course, some taxes, such as special assessments for new streets and other improvements, which are directly related to the provision of certain services; but by and large, the assessment is not immediately related to a service. 

It is questionable whether we shall ever be able to divorce from our emotions and our thoughts. The attitude that taxes are just a nuisance and a burden. The public wants more and better public services but resists higher taxes. Without somehow developing on the part of our people a greater respect for the function and importance of taxes, it is going to be extremely difficult to emerge with a sound and appropriate system in the postwar era. Less politics and more courage is desperately needed in formulating tax policies. 


There have always been disputes as to what kind of taxes should be levied and, more important, upon whom the burden or incidence of taxation should fall. Historically, the major concern over kinds of taxes has been with the ethical considerations as to who should pay the taxes. It has always been debated whether taxes should be levied in relation to the benefits received from government or whether they should be levied on the basis of ability to pay. Those having great wealth or receiving large incomes naturally resisted the application of the “ability to pay” principle. Most higher income and wealthy individuals prefer property, sales, and excise taxes to income and estate or inheritance taxes. On the other hand, the masses of poorer people resist taxes levied upon them. The net result is a mixture of all kinds of taxes, some based on ability to pay (income and estate), and many hidden taxes (property and excise), which are often not recognized by the taxpayer. 

To date, little consideration has been given to the overall economic implications in assessing taxes. In recent years, however, there has been a growing appreciation of the economic effects of different kinds of taxes. It is hoped that this understanding will be increasingly reflected in future tax policies. We are beginning to understand more clearly that some taxes have serious economic repercussions while others are beneficial. 

There are two broad categories of taxes, direct and in direct. Direct taxes are those levied against the incomes of individuals and the profits of business and against estates or inheritances. Generally, the incidence of such taxes cannot be shifted. In other words, the one paying the tax must assume the entire burden of assessment and cannot pass it on to someone else. The other category, indirect taxes, includes sales and excise taxes, property taxes, and the like, the burden of which can be passed on to others. For instance, cigarette taxes are paid by the manufacturer of cigarettes, but he does not assume the burden of the tax. Instead, it is included in the price which the consumer pays for cigarettes. Similarly, while the landlord pays taxes on property, he sets his rental rate so as to cover taxes, just as it covers insurance, maintenance and repair, depreciation, and a return on his investment.

By and large, direct taxes tend to be progressive— that is, higher rates are paid by those with higher incomes or larger inheritances. These are assessed on the principle of ability to pay. One outstanding exception is the employee tax provision in the social security scheme, which applies a given rate to all wages and salaries up to a given level, beyond which the tax is not assessed. Thus, for the highest salaried workers the ratio of total social security taxes to total earned income is lower than is the rate for those whose entire earnings are taxed. 

Most indirect taxes tend to be regressive in that, while the same rates apply to all who are assessed, the relative burden is greater on the lower income groups than upon those in the middle and higher income brackets. A person earning $20 a week pays the same tax rate on cigarettes as the person who earns $1000 a week. However, the proportion of his total income going for indirect taxes will be greater for the person earning $20 a week than for the person earning $1000 a week. This is true because the poorer people spend practically all of their income, where as in the higher income brackets a substantial portion of the income is saved, and there is no tax on savings. 

A study made for the Temporary National Economic Committee indicated that in 1936 the burden of taxes was higher for those with very low incomes than it was for the middle income classes. The ratio of total taxes, direct and indirect, to total income was very high at the lowest income levels, tended to decrease up to nearly the $5000 income level, and to increase above that level. In other words, the burden of taxes in terms of percentages of income spent as taxes was high for the very low incomes and was progressively smaller up to the $5000 income levels. This rather startling condition prevailed because income taxes before the war did not apply heavily to the middle income classes and because most of the Federal, state, and local taxes were indirect taxes which bore little relationship to ability to pay. Of course, because of the high rates which prevailed even before the war for the very high income group, their taxes in relation to their incomes were heaviest of all. These findings would be considerably modified at the present time, because of the much lower exemptions and much more steeply graduated income tax rates set in the last two years. Nevertheless, even today we have a far from progressive tax system— progressive in the sense that the burden of taxation varies directly in accordance with ability to pay. 

In formulating a tax program which will help the free enterprise system to function more effectively, two major impediments must be recognized. One relates to the political situation and the other to the jurisdictional conflicts between different taxing authorities. As for the political aspect, the elected representatives of the people know that taxes are unpopular and therefore the relation of tax measures to reelection is given too much consideration. Instead of seeking to establish an economically sound tax program and discussing it openly with the electorate, legislators and other elected officials look for the least distasteful and most obscure taxes. Of course, the will of the majority should determine the tax policy, but our leaders must take the lead in spreading understanding and acceptance of those policies which are in the public interest. Every voter cannot be an expert on every subject and the citizens need to be told the true facts rather than fed a lot of platitudes and soft words. Courage and guidance by our chosen representatives are prerequisites to better tax programs. 

Our entire tax system is particularly complicated because of so many taxing jurisdictions. Individuals pay taxes not only to the Federal Government but also to state, city, and county units, as well as to a wide variety of special taxing authorities such as school districts, conservancy districts, and the like. Until some steps are taken to unify our taxing authorities into one integrated system, there is not much hope for bringing order out of the present chaos. Therefore, one of the first steps which should be taken in the postwar period is the development of a coordinated national tax program into which the taxing activities of all jurisdictions will fit. Of course, there will be the old howl of states’ rights and usurpation of local authority, but after all, we are a united nation and the principle of the greatest good to the greatest number within the United States should prevail over provincial interests. 

A unified national tax system need not endanger the individual identity, autonomy, and authority of local governmental agencies, but rather should serve to unite them more effectively. If a unified tax system will have beneficial effects in helping to bring about continuous prosperity rather than periodic severe depressions, every state and every community will benefit by such a united action. The Federal Government could, after the war, maintain high tax assessments and make direct allocations to state and local governments on the basis of population, or according to the amount of Federal taxes collected from each jurisdiction, or on some other basis. These contributions to states and localities could be contingent upon the local taxing authority reducing or eliminating selected local taxes. 


In proposing changes in the tax system in this book, major consideration is being given to the economic impacts of taxes. What is here proposed may or may not be consistent with ethical or moral or spiritual standards, for in making these suggestions particular emphasis is placed on the economic good which can result from a constructive tax program. From an abstract economic point of view, in a free enterprise system there is absolutely no objection to one person receiving a million dollars a year for little or no effort and another person earning ten dollars a week for hard labor. However, if such a disparity in income has adverse economic influences and does not permit the competitive system to function effectively, then there is need for corrective action. The real test comes in appraising what happens to incomes received by persons at different income levels. It is apparent that at the very lowest levels, incomes are spent promptly and wholly, thereby creating markets and inducing further production. In the higher brackets, the total income does not return so speedily and directly to the marketplace. 

A study of consumer incomes and expenditures in 1936 by the National Resources Planning Board revealed clearly, as one would expect, that the ratio of savings to income increased sharply as the size of income rose. Those with earnings less than approximately $30 a week tended, on the whole, to have no savings, but to spend their entire income on consumption. Similarly, those with earnings under $5000 per year tended on the whole to save a considerably smaller portion of their income than did those with incomes in excess of $5000 per year. Not only were the absolute savings per person higher for the larger income brackets, but the ratio of savings to income rose sharply in each higher bracket. 

If it is correct that, as a people, we tend to save more out of our total current income than can be absorbed continuously in sound and profitable investments, then unduly large savings are undesirable in that they bring about unemployment, idle resources, bankruptcy, and all of the other adversities of economic depression. A well-considered tax program can help alleviate the problem of excess savings and can therefore help to assure continued prosperity. 

As a people, we cannot save as large a portion of our total income in the future as we have in the past and still have sustained prosperity, without having huge government expenditures to absorb or offset those large savings which private channels cannot absorb year after year. No doubt there will be many who will refuse to accept the proposal that there can be too great savings. They will insist that under conditions favorable to business we can absorb into private, domestic, and foreign investments all of the savings of all the individuals and business enterprises of the country, even at peaks of prosperity. Neither past experience nor realistic expectations lend support to this view. 

It has already been pointed out time and again that unless some steps are taken to direct more of our income into expenditures and less into the savings after the war, we shall, at a level of gross national production of $150 billion, save voluntarily at least $30 billion annually. Every conceivable device should be used to expand and encourage investment opportunities, but the record of the 20’s, when there were the most favorable circumstances for private investment, clearly reveals that there isn’t a ghost of a chance of finding private investment channels for $30 billion a year in the United States or abroad. It isn’t likely that such a magnitude of investment can be sustained for more than a very few years. Even if investment channels could be found for a short period, we would soon find ourselves with such large industrial facilities relative to the ability of the people to consume the products of this capital equipment, that a severe depression would inevitably occur. Nor would large-scale private foreign investments be likely to endure for long, especially were we to continue our protective tariff policy. 

Our economic salvation lies either in more spending and less saving by the people as a whole or in large-scale government spending. As said before, perhaps a combination of the two will be necessary. Certainly, everything possible consistent with the democratic free enterprise system should be done to increase the standard of living of our people to the level justified by our large industrial capacity. The attainment of that objective requires more income in the hands of those who do not now have the means for attaining a decent standard of living. Bluntly, it means that a larger share of the total income must flow into the hands of those who will spend it and a smaller share must flow into the hands of those who will save so much that private investment channels cannot absorb it all. It is a sane and sound path to sustained prosperity for everyone. 

Fundamentally, it doesn’t mean a redistribution of a given total income, whereby the more prosperous yield part of their income to the less prosperous. Rather, flowing more income into the poorer classes will result in a higher total income, to the end that even the more prosperous among us will have more, rather than less, income. If through a moderate redistribution of income we could reach and maintain a much higher total production, all classes of society would benefit. If, for instance, through taxation and social security measures, we effected a shift in income distribution so that the highest 10 percent of income recipients received, let us just assume, 25 percent instead of 35 percent of all the income and the poorest third received 10 percent more of the total income, with the result that the national production rose to $150 billion rather than $100 billion as in 1929, all groups would be better off. The highest 10 percent of income recipients would have $37.5 billion rather than $35 billion. Further, it would be a sustained income, rather than one which faced precipitous declines because of depressions. 

Actually, if we could somehow at a level of annual total production of $150 billion induce $10 billion more of consumer spending and $10 billion less of saving, we could have much greater assurance of maintaining that level of production. Sometimes the most effective medicine is the most pleasant, but people usually prefer the bitter medicine. Actually, the solution of our economic ailments can be most palatable. Higher consumption is the real solution, and a higher standard of living is certainly an easy medicine to swallow. The more we consume, the more will we produce. More income in the hands of those with the greatest need will inevitably result in more spending. Therefore, it is proposed that tax and social security programs be designed to increase the spendable incomes in the lowest levels. This is not a demagogic type of “share the wealth” proposal. Rather, it is a proposal to substitute the public interest for self-interest to a necessary degree, to the end that all groups will benefit. 

Consistent with these objectives, early and determined steps should be taken to eliminate the tax-exempt features of all bonds of all governmental jurisdictions. Most of these bonds are held by the higher income groups and the interest thereon is probably largely saved. It should be taxed under a progressive tax system. 

Our tax policy in the postwar years should have four significant purposes, all of which must gear into the objective of full employment and uninterrupted prosperity. First, insofar as is possible and economically sound, total taxes should be large enough to keep the government on a pay-as-you-go basis, at least for all current outlays, and for as large a portion of expenditures for capital assets as is feasible. Second, taxes should be so levied as to bring about greater expenditures by individuals and less savings. Third, taxes should be so designed to give maximum incentive to new investments on the part of individuals and businesses. Finally, the system should be flexible, so that taxes can be shifted from one type to another, depending upon existing and prospective economic conditions. These points will be discussed individually. 


Total tax receipts should be set in accordance with the needs of government, the ability of the total population to pay, and the economic effects. All other factors being equal, a balanced budget is desirable. If substantial governmental expenditures are necessary for public works or for a continued sizable military force, a pay-as-you-go basis may not always be possible. The choice of a larger national debt or of higher taxes is up to the public. There are some who contend that the higher taxes proposed in October 1943 are too heavy for the public to bear. This is obviously absurd, as the government is borrowing billions of dollars every month from individuals or from institutions into which people are depositing their current savings. Certainly much higher total taxes could be borne by the public. 

In fact if the political leaders were willing to pass the necessary legislation and the public were willing to pay all of their income in excess of what they are spending for consumption, as taxes, the war would be paid for currently and the national debt would not increase. The public should understand that government expenditures must be paid through taxes or enlarging the public debt or through fiat currency. In any case, the public must pay. If a large debt is feared, then higher taxes are necessary, unless the government is to print money. Even if the government met its obligations by printing extra money, under full employment the public will pay through higher prices and therefore reduced value of their money. 

In setting an objective of continued high taxes after the war, we should note that higher taxes out of sustained high incomes are much better than low taxes and economic depressions. Small tax assessments are a heavy burden in periods of depression when jobs and payrolls are shrunk. On the other hand higher taxes can be paid much more easily when income is high. It is preferable to pay a $1000 tax on a $5000 income than a $50 tax on a $1000 income. If our tax program is designed to stimulate total economic activity we can have a large tax bill and the capacity to pay it. 


From an economic point of view, in order to encourage total expenditures and decrease total savings, taxes should be assessed increasingly on the basis of ability to pay. That means a marked shift from indirect taxes to direct taxes —more income and inheritance taxes, and reduced property and excise taxes. Tax burdens should be lifted insofar as possible from the lower income levels. Certainly, any relief from taxes for those with incomes of less than $1500 per year will result in greater expenditures for consumption goods. On the other hand, higher taxes at the middle and higher income brackets will, at least in part, come from income which would otherwise be saved. Thus a shift in taxes from the lower to the higher income groups will bring greater total consumption and less total savings. It is not necessary that those in the lower income levels pay absolutely no taxes, but the rate of taxes relative to their incomes should be very low. 

If, as some moralists claim, taxes are good for the soul and create a strong sense of public responsibility, then a very modest income tax should be assessed on even the lowest income. Even small direct taxes will make the lower income recipients much more aware of their financial responsibility to the government than the heavy but hidden burden imposed through high indirect taxes. Usually the patriot who claims that taxes are necessary to instill the proper sense of public responsibility also favors indirect taxes which fall heavily on the poorer classes without their being aware of them. Small direct taxes which these people know they are paying will instill a greater sense of responsibility than large taxes which they do not know they are paying. 

Most of the tax receipts by the government should come from direct taxes, namely, income and inheritance or estate taxes. They should replace property and excise taxes and thereby release considerable buying power in the lower income levels, which will be spent for consumption. Direct taxes which can be levied on the basis of ability to pay will decrease total savings on the part of individuals and businesses. Income taxes as well as inheritance taxes should start at low levels of income, with moderate rates for the lowest brackets. The rates should be accelerated especially at income levels where rates of savings and total savings become large. We can be sure that all of the extra money left in the hands of those with incomes of $1500 per year or less through eliminating all indirect taxes, will be spent for consumption. On the other hand, not all but certainly a substantial portion of the higher direct taxes on the middle and higher income groups will come out of funds which would otherwise have been saved. Payment of higher taxes by reducing savings rather than reducing consumption can be expected especially if continued jobs and good incomes are assured. 

In establishing the tax rate structure, more must be known about our income distribution, the number of recipients, and total income as well as patterns of spending and of saving of those at each income level. For instance, there would be almost no economic benefit to be derived in imposing a 100 percent tax rather than, let us say, a 60 percent tax on all incomes in excess of $100,000 per year. The total of all incomes received in excess of $100,000 a year is, in fact, a very minor percentage of all incomes of all individuals, and only a slight curtailment in savings and moderate revenue would be derived from such a rise in rates. It would be a punitive tax. The rates must be so set as to obtain the most revenue from those income brackets where there are both a large total income and large total savings. This means that the middle income groups, starting around $2000 up to about $10,000, will have to pay much higher direct taxes than they did before the war. 

Just as indirect taxes are not readily apparent to the taxpayer, so the lifting of such taxes will not be immediately appreciated by the taxpaying public. On the other hand, higher direct taxes will be immediately recognized and resisted by those upon whom the increased burden will fall. It will take great courage to undertake such a program, but we have already laid the groundwork for this program during the war. Income taxes provide a much larger portion of our total Federal taxes and even of all government taxes today than before the war, and the rates are much more progressive. As reductions are made in total taxes after the war, all such reductions should be made in indirect taxes rather than direct taxes. In this way, the change-over will be less painful and less difficult politically. 

The Federal Government should retain high income taxes and offer reimbursements to states and localities if they will reduce their indirect taxes. Under such an offer, public pressure will force state and local governments to reduce property and excise taxes and replace these sources of funds with receipts from the Federal Government. Some excise taxes on liquor, tobacco, and the like might be retained in order to induce less expenditures on these items and more expenditures on food, clothing, medical care, and other essentials. 

No doubt, there are going to be many people who will object to such a tax program on the grounds that it is designed presumably to redistribute the income of the United States and that it is un-American. It is not the purpose of this tax program to effect a redistribution of income as such. The program is designed primarily to provide a tax system which will help make our democratic and free enterprise economy work more effectively for the benefit of all concerned. By releasing more buying power into the hands of the lower income groups and by inducing greater spending, it will raise standards of living and will provide American industry with the larger markets necessary for profitable operations at higher levels of production. It will tend to provide economic stability and continuous economic progress, and in the long run we shall all be better off. If only we will look back to the days of 1932 and realize the great waste and losses of that period, we will have some appreciation of the need for policies which will permit us to avoid such debacles. 

There is one other aspect of tax rates. This concerns the matter of taxes on corporate incomes. It is obvious that a tax on corporate incomes cannot be based on ability to pay. By and large, it is a direct tax, in that the burden of the tax cannot be passed on to the consumer but falls equally on all stockholders, whether in the lowest or in the highest income levels. Certainly it would appear desirable to eliminate taxes on corporate incomes and assess the stockholder on his accrued share in the company’s profits. However, if all of the profits are withheld by the corporation and not paid in dividends, then the stock holder might be forced to dispose of some of his holdings in order to pay the tax. 

The famous, or perhaps infamous, legislation to apply a graduated tax on undistributed profits of corporations was repealed under pressure by corporations, which contended that the tax would discourage the building up of reserves and thereby discourage new investment. The validity of this argument is questionable, but certainly it is unjust for the business community to ask also that all corporate income taxes be removed and therefore undistributed earnings be tax free. The distributed earnings are subject to taxes imposed on those who get the dividends. 

The corporate income tax seems to have two purposes, namely, to tax the undistributed profits and to tax the distributed profits in such a manner that the stockholder does not feel the burden personally. The latter is a political purpose. Although not entirely satisfactory from the point of view of the principle of ability to pay, it would appear desirable to eliminate the corporate income tax on the corporate earnings which are paid in dividends and to maintain the present or even higher rates on only the undistributed portion. The only other alternative is the one suggested above, to eliminate the corporate tax entirely and assess the stockholder on his share of the entire income of the corporation, whether or not it is paid out in dividends. 


Stimulating investments is important if we are to continue to grow and prosper. On the one hand, there are those who believe that the depreciation and obsolescence charges of business are now so vast that they alone can serve as an adequate source of all necessary industrial investments. At the other extreme are the people who believe that there is no limit to the amount of investment funds private industry can absorb. Irrespective of what the investment demands of business are or can be, there is need in our type of economic system to provide maximum incentives for individual initiative and individual enterprise. It has already been observed that the very best incentive for business development and expansion is a ready market for the goods and services which industry can produce. To the extent that consumer expenditures can not be increased sufficiently, it is desirable to maximize the market for producers’ goods. If savings continue large, then private investments must be large, or we must resort to government spending. Some incentives to private investment can be provided through an intelligent tax program. 

Income taxes should never be increased to a point where so small a portion of income is left to the individual that further investment of funds with any risk whatsoever is foolhardy. For instance, let us assume that a 90 percent top income tax rate applies to all income over $100,000 per year. Admittedly, anyone with an income already in excess of this amount would be foolish to make additional investments in any kind of a risky enterprise when he can only keep 10 percent of the earnings thereof. Of course, if he lost on his new investment, he might have to bear only 10 percent of those losses. His losses would be offset by his other income, on which he would have paid 90 percent in taxes. However, there is little incentive to assume risks under such tax rates. Perhaps no rate should go beyond 60 percent or thereabouts. It is difficult to determine at what maximum tax rate “risk” capital will be withheld, but this factor should be given consideration in the setting of rates. 

Another device for providing incentives has to do with variations in tax rates according to the use which is made of income. Conceivably some device might be developed for taxing savings, especially those savings which are idle. Thus, a tax could be placed on bank deposits or on insurance premiums or on purchases of existing securities, as distinct from savings used to build new homes or to buy bonds and stocks in new business enterprises. More rapid replacement of industrial plants and equipment would probably be induced by special depreciation allowances on replaced buildings and machinery. New enterprises might be encouraged by providing lower tax rates for the first year or two of operations, or losses could be averaged with profits over several years. Such taxes are very difficult to develop and to enforce, but it is important that the matter of incentives be carefully considered at all times. 


Flexibility in taxation covers not only flexibility of tax rates but also flexibility of types of taxes. During periods when savings are especially greater than investment opportunities, it would be desirable to step up the rates even more progressively than at other times, so as to discourage savings. On the other hand, if sound investment demands or war conditions require greater savings than are being currently accumulated, it would appear desirable to lower the rates at the income levels where savings tend to occur or increase the rates in the lower brackets where most of the income is spent for current consumption. Or, if there are unavoidable shortages in selected consumers’ goods, temporary excise taxes might be placed on such goods in order to discourage consumption. 

Special tax incentives might be granted to industries whose rapid development is in the interest of the national security or well-being. These and a variety of other uses of the tax authority can be developed to assist the economic development of the nation and to assure progress and continued prosperity. Flexibility of taxation should work in both directions, either increasing or reducing taxes as conditions dictate, rather than only increasing them. Flexibility can be a source of great abuse if changes derive from the selfish motives of pressure groups rather than in the public interest. 

Undoubtedly many observers will feel that the use of the taxing power to exercise economic control both abuses the taxing power and places too much authority in the hands of the government. The answer to such claims lies in a recognition of the responsibility of the government for producing the proper economic environment and of the fact that the government represents the people. If the critics of such a proposal deny these two principles, then they would strip our democracy of the strength essential for its successful operation.

Chapter 8: A Social Security Program for Economic Security

ANOTHER MAJOR PROPOSAL FOR PROVIDING THE economic environment essential for sustained prosperity in the postwar era relates to social security. The United States was one of the lagging industrial nations of the world in developing a social security system. State employee compensation laws covering loss of time and medical costs resulting from industrial accidents have a reasonably long history in this country. However, legislation providing for unemployment and old age insurance was not enacted in the United States until 1935. This followed by several decades the development of similar systems in some of the industrialized countries of Europe. To date, total benefit payments under the old age insurance system have been negligible, because a considerable period of contributions is required before beneficiaries are eligible to receive benefits and many older workers have remained in their jobs during the war. Disbursements under unemployment insurance have been made for a few years. 

Basically, social security measures are designed to provide what their title suggests, namely, security for individuals from the economic consequences of hazards over which they may have little control, and further, for income in old age when working capacity has ended. Obviously, if these measures are to accomplish this objective, there should be universal coverage, and the benefits should be sufficiently large to provide at least a minimum standard of decent living. Provisions short of this objective reflect an inherent defect in the system itself. 

Hardly anyone will contend that our existing system of social security is adequate, either in terms of size of benefits or of coverage. For unemployment insurance, both the level of benefits and the duration of benefits are grossly inadequate. If one is going to be insured against unemployment, he should be covered for the entire period of unemployment, not just a short period, after which he must look to relief assistance. For old age insurance, the benefits now in force are far short of providing security for anyone, except possibly those accustomed to living in the most destitute circumstances. Therefore, before a real social security system can be said to exist in the United States, it is essential that the coverage be expanded and also that provisions be made for larger benefits. 


There is a secondary use or purpose to which the social security system can and should be directed. It can be a most valuable device for stimulating economic activities. It has great potentialities as an instrument of economic control, of a variety which will interfere in no way with the functioning of the free enterprise system. Certainly, if our social security program can be extended or modified so as to beneficially affect the operation of our economy, consideration should be given to such an extension or modification.

The greatest security to all persons, barring unforeseen individual and family hardships, is continuity of employment. Every device conceivable, consistent with true democracy, should be enlisted in providing that security. Social security measures can be so designed as to promote prosperity and thereby decrease rather than increase the burden of taking care of the beneficiaries. Thinking in real, rather than monetary, terms, those who are not employed are living on the production of those who are employed. Irrespective of whether the unemployed use relief funds, unemployment insurance benefits, or previous savings to purchase food and clothing and other goods, they are consuming the output of those who are employed. Social security measures which help insure employment opportunities provide the best economic security of all, for they will thereby result in larger production and larger consumption. 

As has already been pointed out, full employment, full use of our resources, and sustained prosperity can only be had when there is a continuous demand for all of the goods and services which can be produced at levels of full employment. The largest single outlet for the production of our economy is consumption by our own people. If measures can be taken to stimulate higher consumption by the people of the United States, we shall have gone a long way toward overcoming our economic difficulties. Consistent with this objective, it is essential in the postwar years that a larger portion of the total buying power generated at high levels of production be spent for consumers’ goods and services and a smaller portion be saved. 


In view of our long period of training in the importance and desirability of saving, it is not going to be easy to induce individuals to spend a larger share of their income without providing some other means of security to take the place of the more apparent than real security derived through individual savings. People find it hard to believe that if they spend more they will have more. Actually, this is true, for, on the whole, greater spending will result in greater production and therefore greater employment and greater income. By refraining from spending, there is less production and therefore less income. Further, as has already been noted, the so-called savings of individuals are often lost in periods of depression because the investments failed under adverse economic conditions. Not only is there no continuous return on investments, but the actual principal itself is often dissipated. 

Classical economics teaches that people save and abstain from spending their income when they choose to have something in the future rather than in the present. This may be a good explanation, for theoretical purposes, but as a basis for developing policies, it is necessary to understand in more realistic terms the factors which influence savings. By and large, people tend to save for two purposes: first, to provide against contingencies and unusual expenditures for unemployment, illness, old age, child education, and the like; second, to accumulate wealth, both in the form of houses and other desirable goods which are related to a higher standard of living, and in the form of claims over producers’ goods. There is no way of appraising the relative importance of these two factors, but certainly a very substantial portion of total savings is made because of the desire to protect against contingencies which cannot be foreseen. Adequate social security protection would tend to remove the fear of many such contingencies and would therefore serve as a strong stimulant to greater spending. 

There is no point in merely educating the public on the economic consequences of excess savings and expecting this education or exhortation to result in increased expenditures and reduced savings. An individual cannot be induced to lead the way, on the assumption that everyone else will follow the same course, with resulting continuous prosperity. If the others do not follow and depressions do occur, those who spent larger portions of their income in anticipation of uninterrupted employment may suffer more thereby. There must be some worthwhile inducements to greater spending and less saving which will operate universally on all persons. 

Saving for the purpose of accumulating wealth will materialize in real wealth only if the savings are used in creating assets. Savings which are not spent or which are not offset by other expenditures do not eventuate in real wealth, but sooner or later will be dissipated through bank failures, bankruptcy, or declining values. If total savings at full employment levels were reduced by one-third or possibly one-half, those who did save could look forward to a high degree of security in these savings instead of facing periodic depressions which wipe out savings. Wealth comprises valuable assets. Savings which eventuate in higher inventories and new industrial facilities which can not be sold or operated because of inadequate consumption, are lost when the value of such inventories and facilities declines in periods of depression. Savings made only for the purpose of accumulating wealth probably will not be materially curtailed by providing more adequate social security benefits, but certainly total savings can be expected to decline measurably if job opportunities are always available and substantial social security benefits are assured. 


If a social security program is designed not only to provide security benefits for the individual, but also to stimulate economic activity, the size of benefits must be considerably larger than at present. Only through adequate protection can a social security program induce individuals to reduce their individual savings designed as protection against unpredictable hazards. The largest portion of total individual savings comes from those with incomes between $1500 and $10,000 per year. Those earning less than $1500 per year save little of their income. On the other hand, only a moderate portion of our total income is received by those in the brackets above the $10,000 level. Even though the ratio of savings to income is highest among those having incomes in excess of $10,000 per year, most of their savings are prompted more by the desire to accumulate wealth than to provide protection against fortuitous circumstances. At this high income level, it is doubtful whether savings would be greatly reduced because of larger social security benefits. 

A person receiving $5000 income per year obtains no comfort or sense of security out of the benefits provided by either unemployment insurance or old age insurance today. The benefits are wholly inadequate to encourage him to spend more and save less. Actually, the benefits are so small as to hardly permit continuation of an absolutely minimum standard of existence for those in the lowest income groups, let alone for the middle income classes. If there were assurance of benefits which permitted at least some semblance of present standards of living while unemployed or when too old to work, there would be less inclination to save than at the present time. The program should be revised so as to cover the entire period of unemployment rather than a limited number of weeks or months. There should be a minimum scale of unemployment insurance and old age benefits related to past earnings, running up to perhaps $200 per month or even more. 

Our social security system today provides no coverage for self-employed individuals, government workers, or employees in a number of non-covered industries. Thus, a government employee, a doctor, a merchant, or a prosperous farmer has no other way of trying to protect himself against contingencies except through personal savings. There is no reason, except an administrative one, why social security should not provide for these persons, who can benefit through being included and whose participation in an adequate system can have wholesome economic effects. As experience is gained in the administration of social security, the requisite knowledge should be developed for effectively administering a scheme which covers the self-employed as well as the workers. If deduction at the source is too difficult for self-employed persons, contributions can be put on a quarterly or annual basis, as with income taxes. Contributions by domestic servants or farm workers might be collected at the source with considerable effort, but are of such minor magnitude that they could well be exempt. It may be difficult to define unemployment among the self-employed and the casual workers, but some arbitrary definitions can provide a starting basis. 

There are contingencies other than unemployment and old age, such as sickness, accidents, and hospitalization, which can be covered under social security legislation. Private accident and health insurance policies have great merit, but for a majority of persons the existing rates in private policies are prohibitive. A government system, with part of the cost defrayed from taxation, would require only moderate contributions and, above a standard minimum benefit, could offer variable benefits based on past levels of income. It is not here proposed that medical service should be socialized and all doctors and nurses be placed in the employ of the government. Rather, some provision should be made for providing benefits to individuals when they are unable to earn their regular income and cannot procure adequate medical care. 

Perhaps the greatest assurance which the medical profession can have against socialized medicine is the provision for adequate health and accident insurance under a system of social security. People will become increasingly dissatisfied with inadequate medical and dental care as they see, on the one hand, growing need for such services together with lack of buying power to acquire them, and on the other hand, restrictions imposed on the number of doctors and dentists being admitted to training or to practice. The system can operate like workmen’s compensation programs. 

There are many people who contend that individuals will take advantage of social security benefits and will feign unemployment and illness in order to avoid work. Of course, there will always be some who prefer not to work and to be supported by others. But as experience is gained, it should be possible to provide constantly improved checks and tests which will eliminate abuses. As the United States Employment Service becomes more efficient and more important in job placement, abuses of unemployment insurance can be reduced through better enforcement of the obligation to accept appropriate jobs as a condition to the receipt of benefits. Perhaps greater abuses would be encountered in sickness insurance, but even here the administration can be tightened gradually so as to minimize abuse. 

The instances of abuse are probably less prevalent than is popularly believed. Abuse by some persons does not justify eliminating the benefits for everyone. Those who have taken undue advantage of unemployment insurance are probably in a very substantial minority, but everyone seems to discuss and exaggerate these cases. There were many who contended that the FERA and the WPA had developed millions of loafers who would never again be able to work in private industry. Our experience of the past two or three years gives the lie to this contention. Of course, benefits must be at least moderately lower than the previous income of the insured, in order that there be a financial incentive to continue working as long as employment is available. 


A social security system not only can be economically beneficial in stimulating consumption, but its scheme of financing can also provide a mechanism whereby the economic operation of our society is benefited. The existing program is wholly devoid of any major contribution toward making our free enterprise system work more successfully. The present system of social security is entirely contributory— that is, the funds are derived from payroll taxes on the employees and employers. Taxes paid by employers are ultimately paid by consumers, since they are included in the prices of goods and services. Benefits are dependent entirely upon the size and period of contributions. In this way, those in the lowest income levels receive the smallest benefits and those in the highest income levels receive the largest benefits. Actually, the contributions at the low income levels are made at the expense of current consumption. 

The present system imposes forced savings upon those who already suffer from a deficiency in buying power and, in effect, aggravates rather than alleviates our economic difficulties. The payroll taxes on the higher income levels are based on only a portion of income and merely divert savings from one channel to another— namely, savings through social security instead of investment in securities or bank deposits or private insurance. The effect of the present system is largely that of increasing savings and postponing consumption rather than of increasing total consumption and reducing total savings. 

The old age features of our present social security program definitely reduce expenditures and increase savings and will continue to have this result until and if benefits equal or exceed current contributions. Thus, in a situation where we already save more than is economically healthy for the nation, we adopt a social security program that has further adverse rather than beneficial effects. It is nonsensical to build up a huge reserve of funds which can find an outlet only in larger government spending. It would be much more rational to put the system on a pay-as-you-go basis, with the young people providing the funds for the aged. As has already been pointed out, the old people who no longer work are actually consuming part of the production of those who are working. It makes little sense to set up a complex system of huge financial reserves which makes the attaining and maintaining of prosperity much more difficult, when the financing scheme can be as simple as the producing scheme— namely, those who now are employed should provide the funds and the products for those who can no longer work. 

The unemployment insurance portion of the present social security program is likewise defective in its financing provisions. In periods of relative prosperity, there is a siphoning off of consumer buying power into larger total savings. Thus the excess of savings relative to expenditures is accentuated. Consumption is thereby throttled. The expansion of productive capacity in relation to consumption is aggravated and depressions come more quickly. True, depressions will be cushioned through disbursements from the reserve, which will help maintain consumption. But in essence the program is negative or defeatist in being designed to cut off the peaks of prosperity so as to 611 in part of the troughs of depression. Instead, we should strive to remain at prosperous levels at all times. This can be accomplished not by building up reserves in prosperity to be disbursed in depression, but rather by providing the environment for sustained prosperity. 

Revisions in the methods of financing all social security programs through increased contributions from those in come levels where savings occur, and reduced contributions from the lower income levels, will help achieve continuous prosperity. With uninterrupted prosperity, unemployment insurance can be placed largely on a pay-as-you-go basis, with those working providing the funds for benefits to the unemployed. 

If the social security system is recognized as a measure to stimulate economic activity as well as to provide protection for individuals, it would appear desirable to deviate considerably from an exclusive contributory system and to rely on progressive taxes as a major source of revenue for the operation of the system. There is nothing divine or sacrosanct about the insurance aspect of social security, namely, the definite requirement of contributions made by each person in relation^ to the benefits received. Enlightened people recognize that unemployment is generally not the fault of the worker who can’t find a job. If he has a right to a job and if our society should guarantee that right, then he has a right to unemployment benefits. If financing those benefits by other than his own contributions or contributions by his employer will help make our system work more effectively, then surely we should change our methods of financing. The greater the prosperity, the less the unemployment and the less the burden of unemployment insurance. 

Social security might be considered in the same category as public education, wherein costs are met from taxes assessed upon everyone, old and young, those with children and those without children alike. In the same manner, social security benefits could be disbursed as a matter of right, with the greater part of the funds coming from general taxation. Moderate employee contributions can be continued, as a concession to the belief that workers should feel a sense of responsibility for the financing of the system. Also, moderate contributions by employers will put them on guard against abuses. 

If the revenue for social security benefits comes primarily from direct taxes, in effect the system serves as a mechanism for a moderate redistribution of income. That is, the middle and the higher income recipients will be financing a considerable portion of the benefits received by those in the lower income brackets. Instinctively, many in the middle and higher income groups will rebel at such a proposal and claim that it is communistic or socialistic in principle. On the other hand, of course, many would favor such a development on ethical or humanitarian grounds. 

Irrespective of political or moral contentions, if through such measures we can insure greater prosperity, then everyone will be benefited, even though the immediate benefits will seem to accrue only to the lower income levels at the expense of those in the higher incomes. As has been repeated again and again, depressions play no favorites and unemployment and deprivation are paralleled by corporate losses, passed dividends, bankruptcies, and lost fortunes. If these adversities can be avoided through moderate concessions, every class and group in society stands to gain. 

The attainment of continuous prosperity will surely make the costs of unemployment insurance insignificant in comparison with losses in recurring periods of depression. It is recognized that the costs of old age insurance will be substantial, but again insignificant in comparison with the real cost of depressions and their hundreds of billions of dollars of wasted resources. The middle and higher income groups would be paying more than their “share” of the cost, but they will reap big dividends in the assurance of continued high levels of income rather than sharp drops in income and loss of past savings during periods of depression. 

At best, a wholly contributory system has a neutral economic effect, but more probably it has the adverse effect of levelling production and consumption at far lower than prosperity figures. This is contrary to our basic objective. Greater stability is desired, but not stability at depression levels. It may be repeated that we should strive for continued prosperity rather than assume that depressions are inevitable, and therefore that we must restrict consumption in prosperity in order that we may be better provided for in periods of depression. This type of thinking may be appropriate in an agrarian economy, where adverse weather and other conditions beyond human control might bring famine, and where therefore some abstinence of consumption and stockpiling in good times is necessary for survival in bad times. However, in a highly developed industrial economy such as ours, where depressions are not of divine origin, such thinking is wholly defeatist. Those who sincerely believe that the democratic, free enterprise system can work successfully must, as a corollary, believe that continued prosperity is attainable, rather than stability at levels halfway between prosperity and depression. 

To summarize, a social security system with higher benefits, greater coverage, and a much greater reliance on direct taxation rather than contributions will have two beneficial economic effects, aside from the more adequate social and economic protection for individuals and families. First, it will encourage greater expenditures and consumption and less savings, because of the decreased need of the individual to save. Second, it will tend to derive revenues from those income levels where substantial portions of income are saved. These funds will come largely from income which would probably be saved, and will be disbursed through channels where they will be readily spent. The redistribution of income which will result from this proposal will be relatively small compared to the benefits at all levels of income resulting from continuous prosperity. It will certainly not pauperize the higher income brackets nor greatly enrich the poor. Rather, it will help insure favorable opportunities for higher and uninterrupted earnings for all.


There is one other aspect of social security which must be given serious attention. That is the need for putting the entire system on a national rather than a state basis. At the present time, unemployment insurance provisions vary from state to state, with the result that the size of benefits, merit ratings, waiting periods, and duration of benefits are by no means uniform. 

The basic principle of social security is to distribute the cost or burden of protection against contingencies and undue hardships. When the system is on a state basis, there is at least partial failure to accomplish this objective. Certain states are more highly industrialized than others and are thereby subject to greater economic fluctuations. Under such circumstances, advantage is not taken of balancing the more stable areas against the more variable areas. The same criticism can be applied to merit ratings, wherein companies which, because of the nature of their production, have fairly stable employment records contribute less than do other firms which are in less stable industries. This assumes that employment stability is wholly a responsibility of the employer. Actually, however, the employer who finds the market for his product substantially reduced because of general depression is unable to maintain employment. Thus, the producers of automobiles have experienced much wider employment fluctuations than have the producers of food. If the risks of these two industries are not integrated, then the principle of pooling risks under social security is abandoned. 

Because of the integrated nature of our economy, because of the interdependence of one industry and another and of one geographic area and another, and because of the dependence of all industries upon the proper economic environment for continued prosperity, it is essential that all social security measures be developed on a national basis. Sectional interests must give way to the total national interest.

Chapter 9: Exporting for Peace and Prosperity

aS THE WAR PROGRESSES TOWARD A SUCCESSFUL conclusion, it is necessary that the United States be fortified with sound policies on the international front. We shall need to develop joint policies among the victorious nations on policing conquered countries and the determination of national boundaries; we shall need general agreement on spheres of influence of the various allies and on recognition of types of government in liberated and defeated countries; and we must agree on measures against future aggression. Equally important, we must adopt a foreign economic policy geared into our domestic economic program. It is essential that the United States deter mine its economic role among the family of nations. This involves setting forth clearly and firmly our objectives in exports, imports, foreign investments, and methods of financing. Without such an economic program, all of our international efforts on political and social matters will go for nought. 

Before considering an international economic policy for the United States, emphasis should again be placed on the prerequisite need for a sound domestic program. Without the latter, it is unrealistic to expect the emergence of constructive programs for the United States on the international level. A depressed, chaotic economic situation within the United States will certainly minimize the prospects of arriving at an intelligent program of foreign policies and relations, and even if arrived at, would absolutely defeat its fulfillment. If we are hopeful of seeing democracy practiced in most of the nations of the earth, then we must set the example and show that democracy can be made to work effectively at home. Should the United States have sustained prosperity, high levels of production, and full employment, then the job of selling the free enterprise democratic system to the rest of the world will be relatively easy. Further, we shall be able to help other nations develop their resources and industries on the basis of sound, well-considered objectives. 

If the United States is beset with unemployment and depression, then our position of encouraging the existence of a democratic form of government and free enterprise economy elsewhere is most untenable, if not ridiculous. It will be evidence of confusion within the United States, and we can be certain that our international program as well as our domestic program will have little acceptance abroad. With widespread unemployment, we shall be so disunited internally and so preoccupied with our domestic ills as to negate any constructive thinking on the international level. Further, we shall be able to do very little to implement constructive programs designed to maintain peace and prosperity throughout the world. 

After the war, democracy in other countries where it now exists or might be reintroduced will be even more seriously challenged than in the United States. These countries haven’t the reserve, or “fat,” on which to live while unemployment of manpower, machinery, and raw materials prevails. Unless full employment and maximum production can be achieved and maintained, the people in most countries will be receptive to all kinds of economic and political philosophies and the demagogues will enjoy a heyday. New “Hitlers” can be expected to come to the fore again if there are depressions and idle resources under the democratic form of government. We must give proof that our system can work effectively before we can expect its survival elsewhere. 


If in the postwar period we do not achieve substantially greater expenditures and less savings by individuals, then we must seek outlets for the excess savings which cannot be absorbed by private investment channels in the United States, if we are to have continuous full employment. Such outlets can be developed either through large-scale export balances of goods and services or through large-scale government expenditures, or both. When we sell more goods and services to foreign countries than we buy from foreign countries, the difference or balance absorbs savings. The term “export balances” is used to denote primarily the excess of exports over imports, although other foreign uses of United States savings, such as expenditures abroad by American tourists, might be substantial after the war. A large export balance can help attain prosperity at home and abroad. 

If there persists the same pattern of income in the United States as before the war, the same tendency to spend too little and save too much, and further, if large-scale domestic spending by the government is frowned upon, then the only prospect for sustained prosperity lies in unprecedented levels of export balances. Under these conditions, we will not be able to maintain full employment in the United States without exporting many billions of dollars’ worth of goods and services more than is imported. The level necessary to serve the purpose of offsetting all idle savings would be startling in view of our export balances during the 20’s of only about $1 billion per year. 

If there is no change in habits of saving and no unusual government spending, it is doubtful whether private out lets for savings will be adequate to support a gross national product much beyond $100 billion in the better years, and probably less in other years. However, if we were to have an export balance of about $10 billion per year, our total national production could rise to the average of about $150 billion per year. Such a level of exports or imports is entirely unlikely, but if such an export balance were possible we might thereby increase our national production by perhaps $50 billion. Even if the exports were regarded as gifts, we would be better off, because we would have produced about $35 billion or $40 billion more in goods and services for domestic use than we would have produced if there had been no such exports. 

To contend that the more we give away abroad the better off we might be at home may sound strange, but it is true if we have not the common sense to find domestic outlets for excess savings. Our total national production depends on the total demand, both investment and consumption. Because of the tendency of our people to save such a large segment of their income, the total level of production depends largely on total investment outlets. If large-scale foreign investment outlets represent the only medium for using and spending our total savings at full employment, then these outlets should be exploited. It is beyond question true that if we cannot find the investment outlets at home, we shall be improving our position by seeking large sales of goods abroad, irrespective of the prospects of repayment. In developing these investment outlets, we shall be expanding our production much more than by the amount of the exports. We will be enlarging our own consumption simultaneously and as a result of the export balance. 

While a substantial export balance is desirable for helping world peace, no such magnitude as $10 billion per year is recommended as being feasible. We would be much more rational to spend more for consumption and thereby save less, or to rely on government spending for domestic assets which will add to our own standard of living. 


The big economic question to be answered on our foreign economic policy concerns our balance of trade in the postwar years. Irrespective of exports as investment opportunities and outlets for excess savings, as discussed above, we must anticipate substantial export balances of goods and services in the postwar years for other reasons. The United States is the one large industrial nation of the world which will emerge from the war with not only no impairment to its industrial capacity but with an enhanced productivity. Certainly Russia, Germany, Italy, Japan, and the occupied nations will have suffered considerable damage to their industrial equipment as a result of land, sea, and air combat. In England, the outright destruction of capital equipment has been moderate and probably more than offset by new productive capacity, but considerable depreciation of old plant and equipment will have occurred. On the other hand, the United States has experienced a tremendous expansion in new plant and equipment, much of which will be usable for peacetime production. 

The great damage to industrial equipment in most countries of the world will bring tremendous replacement demands for new productive machinery, much of which only the United States will be in a position to provide. Similarly, there will be huge pent-up demands for consumer goods in belligerent nations throughout the world— not luxury items for higher standards of living, but the basic necessities of life which cannot be produced in various countries because of the destruction wrought by war. Further, there will be demands for industrial equipment and supplies to build up the productive capacity of the less industrialized nations. Finally, there are the areas of very low standards of living. Countries where low living standards prevail can lift these standards only slowly through industrial development and, in the meantime, will look to other nations for assistance. 

Surely, there will be no scarcity of need throughout the world for whatever goods and services we are willing to export. Nor will there be any lack of desire on the part of American manufacturers to find foreign markets. Because of our rich resources and advanced industrial development, the United States has a distinct responsibility and one greater than other victorious countries in helping meet these varied demands. 

If there is to be an international community of interest among nations, then the United States has a great responsibility in providing some help to most of the rest of the world for many years after the war. It is not suggested that we must feed and clothe and provide all of the needed industrial equipment for all nations in which supplies are inadequate. In the first place, we haven’t the resources to undertake such a commitment, and in the second place, it would hardly be in our interest or in any one’s interest for us to become the paternal source of goods and services for the world. 

One would scarcely contend that the first and foremost international responsibility of the United States is to share its wealth and current production freely and equally with the less prosperous countries. Nor is it proposed that our prime objective be the immediate and total industrialization of backward nations irrespective of the cost to ourselves. On the other hand, we must recognize that peace cannot be maintained for long except either by enslavement of the “have not” nations or by helping them to help themselves. 

In the postwar years we can and should give the less fortunate nations some relief and help them develop their productive capacity toward the end that they, too, can have a much higher standard of living. We can accomplish this and thereby help insure peace. At the same time, we can aid our own economic development by using export balances as an offset to savings until we can bring about higher expenditures and consumption and reduced savings in the United States. 

If the United States displays any sympathy for the destitute, war-weary people of the world (and if history repeats itself, we certainly will do so), then exports after the war will be higher than before the war. It is unrealistic, on three grounds, to anticipate that for many years to come we shall import as much as we export. First, even if we were willing to import more from abroad, many countries will be too impoverished to be able to send us enough goods to pay for all we will export to them. Second, in order for a trade balance to be attained under conditions of greatly increased exports, our tariff rates would have to be subjected to revolutionary declines. Because of the impact of such a change in tariff policy upon our industrial structure, only a gradual shift in this direction is feasible. Third, since it will probably take some time to attain much greater consumer expenditures and less savings in the United States, we shall be faced with idle savings, which should in part be absorbed by planned and programmed export balances. 

If larger foreign markets for American goods and services are to be developed, we must either accept a larger quantity of goods and services from abroad or else provide foreign nations with the funds to buy the excess of our exports over our imports. An examination of these alternatives indicates that each must play an important role in our program. It has already been observed that, because of the impoverished condition of most foreign nations, it will be difficult for them to increase substantially their exports to the United States. Further, it has been noted that a sudden sharp increase in imports into the United States of goods which compete with our own products would cause serious economic dislocations. 

There are some products and commodities which can be produced more efficiently elsewhere than in the United States. However, tariffs have been imposed against the import of these goods, either because of our desire to be increasingly self-sufficient or because of the pressures of vested interests. The latter consideration has probably been predominant. During the war we have developed new products and new industries, such as synthetic rubber, which have made us even less dependent on imports than before the war. Were the United States suddenly to embark on a complete free trade program, many industries operating under the protection of a tariff wall would fail, and the resulting chaos might be as disastrous as an almost complete collapse of export demands. Our objective should point toward greatly increased bilateral trade with lower tariffs and gradual domestic adjustments to avoid severe consequences of great haste and great disruption. 


Cognizance should be taken of the fear on the part of many of our people concerning the industrial development of other nations of the world. This fear stems from the conclusion that if the less industrialized, low-standard-of-living nations of the world were to become industrialized, they would compete with us and thereby depress our own industries. This is a foolish conclusion, especially when one realizes the tremendous needs and potential demands of the people of these countries. As their production increases, their standards of living will also increase. To assume that industrialization abroad will harm us is somewhat like saying that improved production processes and technological developments are bad because they might result in overproduction or unemployment. Actually, they can, should, and must result in greater consumption or in shorter hours of work. Free trade among nations does not mean a uniform standard of living for all countries, any more than does free trade within a nation. Standards of living will vary with natural resources and industrial productivity, in both of which the United States is rich. We can benefit rather than suffer from economic improvements in other countries. 

If China were to become highly industrialized in the next twenty-five years and increase its trade with the United States, there need be no fear of unemployment and a lower standard of living here merely because China would be producing more goods and services. Actually, through this development and increased bilateral trade with the United States there can result not only a sharp rise in the standard of living of the Chinese people, but also a continued rise in our standard of living. Certainly it would be wise and mutually beneficial to develop an increased amount of trade between the United States and China, wherein China would export to the United States those goods and services which can be produced more efficiently there and the United States would export to China the commodities which can be produced more efficiently here. 

People derive buying power out of production, and therefore increased production in foreign countries will enlarge their domestic markets for their own goods and for our goods as well. The more we produce, the more we import. Higher production and higher standards of living will stimulate trade. Through expansion of home markets and increased imports as well as exports, sound bases for higher standards of living everywhere in the world can be established. In terms of maintaining peace and good will, it is desirable that the United States give every possible assistance in the industrial development of other countries of the world. Our standard of living will not decline through foreign competition but rather through unemployment and idle resources in the United States. 


If, in the long run, the United States is to look forward to repayment of its foreign loans or even to receiving interest on increasing new investments, consideration must be given to gradually clearing the way for higher imports. Therefore, as an ultimate postwar objective, it would seem necessary to provide for a planned reduction of tariffs, both in terms of rates and coverage. This should be our national policy, and it can be implemented through reciprocal trade agreements or other mechanisms. It is going to be a difficult policy to carry forward politically. If we haven’t the courage to do this, and still desire large foreign markets, then we must look forward to an ever-growing foreign debt or to direct ownership of foreign assets. 

When the war is over, there will be a mad rush by the American business community to find foreign markets. The needs and demand will be found, but not the buying power. Some private funds will be loaned so as to create part of the necessary buying power. Sooner or later, if the policy of restricting imports is followed, prospects for repayment will diminish or disappear, repayment will be demanded, defaults will occur, markets will shrink, and exporting businesses will fail. Blame will be placed on “lack of confidence,” which in reality is the inevitable outcome of our own nearsighted policy of selling without permitting a method of repayment. 

All this does not mean to imply that we must set up as our goal the ultimate complete elimination of our creditor position. Nonetheless, it is unrealistic to expect that we can endlessly finance exports by continuous increased loans through private channels. Such a development can not persist without serious fluctuations and large-scale defaults. Ability to pay interest and repay principal governs decisions as to the granting of new loans. Sooner or later, private investors will tend to tighten up on credit extensions abroad when the prospects for repayment disappear because of the impossibility of sending us goods and services. The private investment function is one which implicitly requires the prospect for a return and repayment or liquidation at some future date. 

If, as it should, the United States sets up an immediate postwar goal of large exports of goods and services relative to imports, then we must accept certain conditions. We should ultimately contemplate lower tariffs and higher imports. As already noted, this will be a slow and painful process. We may have to encourage private investments abroad in the form of direct ownership of assets or equities rather than loans. This is feasible for big corporations, but individuals prefer investments which are easily disposable or are not too far away for personal supervision. We should undertake to finance export balances increasingly through government channels, either by direct government loans or by underwriting private financing which is consistent with national policy. Government financing is proposed in order to give stability to foreign loans rather than permitting them to vary with the optimism or pessimism of the financial community. 

A large public interest exists in the matter of foreign trade. It isn’t reasonable to leave it entirely in private hands, with some manufacturers and exporters always seeking foreign markets and the same or other manufacturers seeking to restrict imports. The net result is a dilemma which precipitates recurring crises with losses to investors, and which helps bring on depressions. The government must recognize that foreign investments by a creditor nation such as ours must be long-term. Exports and imports should be undertaken by private enterprises and not by government, but there should be established a government corporation which will make direct loans abroad, procure foreign equities, and underwrite private loans abroad. Reasonably definite goals should be established for each country, based on soundness, needs, competitive relations, and prospects of exports to the United States. Above all, a long-term view should be adopted so as to avoid wide fluctuations in loans and other financing and therefore in exports.


If it is agreed that for many years, at least, after the end of the war a large export balance is desirable, consideration should be given to the probable magnitude of that balance. Viewed from the point of view of potential markets, the volume of exports may be considered as almost without limit. Disregarding payment, the rest of the world can certainly absorb all of the capital equipment and consumption goods that the United States can possibly export. Therefore, criteria other than total need must be appraised in setting objectives. In terms of economic and financial ability to procure goods and services from the United States, it has already been noted that current repayment for large exports through large-scale imports is unlikely. Thus, criteria other than either total needs or ability to pay must govern our level of exports. That leaves two determining factors: first, the quantity of goods and services we must export in order to help meet reasonable needs of foreign countries and thereby establish some basis for peace and good will, and second, the export balance which will help us maintain full employment and prosperity at home. 

The first consideration is somewhat political and will depend upon the role which the United States is going to play among the family of nations. If we are going to prevent starvation, if we are going to assist in the industrial development of backward nations, and if we are going to help restore the productive capacity of belligerent countries, then we shall have to send forth unprecedented peacetime quantities of goods and services. Goals should be set, country by country and product by product, taking into account the relative needs of other nations and our capacity to meet these needs after taking into consideration our home demands. As to capital goods, our productive capacity expanded so greatly during the war that it should permit an unprecedented level of exports in the postwar years. On the other hand, we shall have an inadequate supply of many foods even to meet our own demands. Therefore, the task is one of working out the details for each country and each commodity. 

Insofar as the relationship between our export balance and our domestic economy is concerned, it may be repeated that unless measures such as the proposed revisions in the tax program and in our social security program are taken, so as to increase domestic consumption and reduce savings, large-scale export balances or large-scale government spending will be a prerequisite to full employment. It is very likely that, without domestic reform measures, we shall have to look forward to export balances or government deficits of perhaps $10 billion or $15 billion a year on the average in order to maintain full employment. For short periods private offsets may absorb all savings but, when these channels have been saturated, export balances and government spending will have to absorb much more than $10 billion or $15 billion per year if full employment is to be maintained. 

From a purely selfish point of view, it would seem preferable to favor government investments in the United States over export balances, because we would thereby be enlarging our public assets for our own pleasure and benefit. But this might be nearsighted and certainly is not conducive to improved international relations, especially if foreign nations could not afford to buy their bare minimum needs from us, let alone the capital goods for their own development. Therefore, it is proposed that we plan large-scale export balances in the postwar period, aggregating as much as $5 billion a year. Because of the limited prospects for early repayment, it is recommended that such an export balance be financed largely through government channels. 

In a sense, such a program would not vary greatly from a huge public works undertaking, except that as a result the government would have claims on foreign countries rather than on our own public assets at home. For purposes of relief and possibly in the early stages of reconstruction, it might be just as well that the United States regard some of its excess exports over imports as gifts, similar to LendLease. In other words, just as the United States has “given” weapons to her allies, so she might give relief and capital equipment to other countries and charge it up as the cost of war. The period of rehabilitation is just as much a part of the war as is the period of mobilization and of active combat. We have been fortunate in not having any of our productive capacity destroyed. Except for some natural resources, we shall probably come to the end of the war with greater total wealth than when the war began. It is not unreasonable, then, for our allies to expect outright assistance for relief and rehabilitation purposes. 

There is considerable doubt that it would be politically feasible in the United States to provide for the “lend lease” of large quantities of goods and services abroad for many years after the termination of hostilities. It is perhaps more realistic to propose a government corporation whose avowed purpose is the extension of loans and the making of direct investments abroad. It must be clearly understood that these investments be, of necessity, of a long-term nature. Perhaps it would be better if more foreign investments took the form of equity holdings— that is, outright ownership or shares of ownership— rather than loans. This would reduce the likelihood of default of interest and principal because of premature demands for repayment. Likewise, it would provide a medium for a growing community of interest between the United States and other countries, instead of the strained relationships which usually result between debtors unable to repay and creditors demanding repayment. On the other hand, there are complicating circumstances in ownership of assets, which so often create international incidents and ill will. Care must be exercised in the types of equities owned. Monopolistic control of local resources by foreign persons or corporations and exploitation of natural resources and of labor by foreign interests are hardly conducive to good foreign relations. 

The only solution seems to be in an international government program which will guide and direct and in a broad sense control exports and imports through private channels, with loans made on a long-term basis to different nations.

Chapter 10: Government Spending Can Fill the Gap

GOVERNMENT SPENDING AS A DEVICE TO ATTAIN prosperity and full employment is perhaps the most controversial of all economic controls. In the years from 1933 to 1940, total government expenditures were far larger than at any peacetime period in our history. Those who argue against the efficiency of government spending point to the continued large volume of unemployment throughout the 30’s as evidence of its failure to achieve prosperity. The proponents of government spending point with pride to the gains after 1933 which brought total production in the late 30’s back to the 1929 level, and contend that substantially higher government outlays would have raised total production and total income to much higher levels, where unemployment would have vanished. Finally, the war production achievement is offered as proof that full employment and maximum production can be attained through government spending. The opponents concede only that the prime necessity of winning the war over shadows the objections which they offer to public spending.


What are the arguments for and against government spending as an economic control? Unquestionably, given large enough expenditures by the government, there can be jobs for all. Therefore, it must be recognized as a powerful instrument of economic policy. There is thus posed the important question as to whether ever-increasing government spending is compatible with maintaining a private property, free enterprise, profit system. 

If government spending takes the form of producing goods and services which compete with private business establishments, there is cause for concern over the competitive economy. Government competition may be real and direct, as in the case of electric power or street railways, or it may be indirect, through causing uncertainty and instilling fear into private business of potential government participation in business activities. Then, of course, emerging from government spending on a big scale is the matter of the growing government debt, which has been a source of major concern to so many people. Further, there is great power in the hands of those who have billions of dollars to spend and consequently great fear of the abuse of this power. These and other considerations call for careful appraisal in resolving the issue of government spending for increasing employment and income. 

If we accept the view that continuous job opportunities and prosperity are essential to the survival of our economic system and that government spending can bring full employment, then this technique can be ruled out only if there are other and more desirable means of achieving the objective. Those who object to government spending therefore have a responsibility to offer counter-propos als of equal or greater effectiveness. Much of the difficulty of finding the proper niche for various constructive measures lies in the stubbornness and lack of vision of those who resist any government measures whatsoever which are designed to provide the economic environment for continuous prosperity. 

It is unfortunate that spokesmen of business almost universally insist that the economic function of government role be a negligible and passive one. In fact the government’s economic role is already established in taxation, social security, tariffs, public works, and the like. The task is one of guiding these inherently governmental functions in the most constructive direction. 

Of all the government controls which have been suggested, there is perhaps none which can be less disruptive and more helpful to business than government spending. This calls for no rules and regulations over the conduct of private business activities. It provides markets for the products of private industry. Public works result directly in demands for the goods produced by durable-goods industries. The increased wages and salaries of workers and management result in a larger demand for consumer goods and services. Expansion and improvement of public facilities, such as highways, power dams, and schools, are beneficial to business enterprises as well as to consumers. There is no condition which offers better employment and profit opportunities than a ready market for the products of industry. Government spending can and will fill in the demand for the goods and services which can be produced at full employment when private demands are inadequate. 

All of us who favor the free enterprise system prefer to have the largest possible proportion of total production and total employment encompassed within the sphere of private business. Equally, we must recognize the need for avoiding depressions and mass unemployment if the present system is to survive. However, when depressions occur or persist because of inherent weaknesses in our economic structure and when private industry cannot provide job opportunities for all workers, then government must be responsible for giving jobs to those whom private industry cannot employ. Government spending should be accepted as a residual economic control, to be used only when and if private business falls short of achieving and maintaining full employment. At such times, the magnitude of government spending should be determined not by political compromise, but by the amount needed to attain that level of economic activity where all who wish to work can have the opportunity. When the need for large government spending is nil, then it should be eliminated; but when there is a need, any argument should not center upon whether government spending is desirable but rather upon how much spending is necessary. 


Some magnitude of public spending is obviously essential at all times if there is going to be any government at all. The expenses of maintaining and operating the legislative, executive, and judicial branches of the Federal Government are normal costs of government. Similar costs are also required for state and local governmental units. In addition to operating expenses for personnel, heat, light, power, paper, office equipment, communication, and transportation, there are large capital outlays which are also in the “must” category for government. These include not only substantial maintenance and repair expenses for publicly owned administrative buildings, schools, museums, highways, parks, bridges, and military posts, but also capital outlays for new buildings, new bridges, new highways, new recreational facilities, and other developments and improvements essential for the daily life of individuals and business enterprises. 

Normal operating and normal capital expenditures of government will offer no greater problem in the postwar period than before, except perhaps that some backlog of demand will have accumulated because of wartime restrictions. It is most unlikely that in the future these outlays will shrink in relation to their prewar level. Rather, a steady increase is more likely as the public makes greater demands for more of those services which only the government can provide. 

There will always be arguments regarding how essential various government activities are, and therefore investigations and pressures to decrease costs for particular purposes. No matter what effort is brought in this direction, it is doubtful whether it can possibly offset the public pressure to increase and improve public services such as more and better education, extension and improvement of roads, increased welfare service, and more adequate military defense. 

As the wealth and income of the United States grows, people will demand a greater amount of services to parallel the growth in their physical well-being. As automobiles improve in speed and comfort and in number, much better highways will be sought. With increased appreciation of education, enlarged enrollments in secondary schools and colleges will require more and better facilities and instruction. As technological developments result in more output and in shorter hours of work, the greater leisure time available will bring demands for more recreational facilities. It appears inevitable that normal government spending will tend to increase in the future. Then, of course, there is the prospect of the maintenance of a larger peacetime armed force than ever before and of compulsory military service, which will entail large government disbursements. 

Government spending for public services and public assets represents expenditures by all of the people collectively for their common good. Thus, the operation of the public school system is in essence a collective venture, from which most people receive benefits and to which most people contribute in taxes. When the government builds schools or recreational facilities or highways, it is as though a large group of people organized together and spent their money collectively for houses or automobiles or clothing, except that most government activities and assets are of a kind which can be provided only through joint or cooperative action of all of the people. It is impossible to measure and compare the total satisfactions which the community derives from public assets as compared with those which it receives from a like quantity of private assets. Beyond question, people derive satisfaction out of sending their children to comfortable, attractive, fireproofed schools, driving on good roads, and enjoying beautiful parks. 

If somehow the desires of the people could be determined concretely, we would find that the people prefer some public services and assets over private goods and services. At certain times and under certain conditions, the public will prefer new schoolhouses or new bridges or new recreational parks for their children to additional new cars. They may not be more enthusiastic about paying higher taxes. Nevertheless, they will insist on expanding services and new facilities, even though this will bring higher taxes and may limit resources for the consumer goods and services produced by private business enterprises. Such pressure results in increased government spending, not as a basis for economic control, but because of public desires. 


When manpower stands idle, plants are closed or used only part time, and raw materials are available, every thinking person who understands the problem and is given the choice would surely prefer having these resources put to work on public works rather than letting them stand idle. Unemployment and idle resources are wastes and losses never again recovered. Far, far better than allowing such wastes to persist is the use of these resources in creating public assets which are beneficial to the interests of the people. Even though the efficiency of public spending may be lower than private spending— and this is by no means established— there is no inefficiency and no waste which compares with unemployment. Therefore government spending should be accepted as a residual device for stimulating employment and production, but it should be a “must” when the need prevails. 

Large-scale, extraordinary government spending beyond the amount necessary to provide the services and facilities the public demands is recommended only as a residual or final mechanism of economic control. It is a residual device on the assumption that people would prefer other methods of assuring full employment, so as to retain in their own hands decisions as to what kind of expenditures are to be made rather than to transfer increased responsibility into the hands of public officials. If, through a revised tax program, an expanded social security system, and education, we can succeed in attaining a level of individual consumption and private investment which will provide the necessary markets for sustained full employment, the only government spending will be that necessary to meet the normal demands of the people for public services and facilities. On the other hand, if full employment cannot be attained and maintained through private channels by any other policies, then an amount of government spending necessary to provide full employment will be essential. 

At this point it might be well to distinguish between government spending as a pump-priming device and as a continuing economic force. When public works and relief expenditures began to increase in the early 30’s, almost everyone regarded them both as necessary relief measures and also as stimulating economic influences. The expenditures were expected somehow to prime the pump of private spending so that government spending could soon be eliminated. The prosperity which was to have been stimulated was supposed to bring such high total income that total taxes would be large enough to permit the government to pay off the debt incurred during the period of pump priming. Actually, when government spending was contracted in 1937, a decline in business activity ensued and a renewal of spending was necessary. 

Basically, government spending can never be looked upon only as a pump primer if it is to be a technique for insuring continuous full employment and if our savings habits remain unchanged. Consistent with the pump-priming concept is a balanced government budget over the period of the business cycle. In periods of depression, presumably the government would spend more than it receives, thereby offsetting or using savings which would otherwise be idle. In prosperity, it would take in more than it spends and thereby would add to the total volume of current savings. Over any considerable period of years, government spending would offer no net outlet for savings. 

It has already been noted that at full employment we shall have as much as $15 billion of savings per year on the average beyond what can be absorbed or used through private channels. Of course, in some years private outlets or offsets to savings may be higher, as in 1929, and leave little or no idle savings, but that will result in a subsequent depression, when they will be lower. If we can average only $15 billion of private investment or offsets to savings year after year, then our gross national product will average even less than it was in the late 30’s and we shall have a tremendous volume of unemployment. The combination of government spending for pump-priming purposes and a balanced budget over the duration of each business cycle will not lift this average. It will merely serve to cut down the peaks of prosperity and fill in some of the troughs of depressions. It will not lift the level of total production and total employment over the entire cycle. 

This all assumes, of course, that there is no change in the pattern of income distribution or in saving habits. If we do nothing about increasing expenditures and decreasing savings to the level where private investment or offsets to savings can absorb all of the savings, then continuous large-scale government spending is the only way to assure full employment. Government spending to provide jobs might decrease or disappear when there is a private investment spree for a few years, but it will have to rise to very high levels when this spree is over until such time as consumption has caught up with the excess productive capacity which was built during the boom period. 

Government spending must therefore be a continuous device rather than a temporary stimulant, if savings are not reduced substantially. It cannot be looked upon as a balancing device alone, unless we are willing to resign ourselves to stability at levels of production which might be characterized as mediocre at best. The only alternative to government spending is private spending, and to achieve adequate private spending for sustained prosperity, there must be more spending and less saving by individuals and businesses. More spending by individuals will support more spending by business enterprises.


In evaluating the economic effects of government expenditures, it is especially important to consider the source of the funds which government spends. The sources of all government funds, whether taxation or borrowing or currency inflation, importantly influence the economic effects of government spending. As a matter of fact, the source of funds for public outlays is more important than the size of the outlays. If government expenditures are financed exclusively from taxes which are taken from people who would otherwise spend the money, then such government spending will not stimulate additional economic activity. Let us say that the government undertakes the expenditure of $5 billion for public works, and the funds to pay for these public works come from taxes on consumers or money borrowed from consumers which would otherwise be spent by these consumers for goods and services. Then such a public works program can in no real sense be regarded as enlarging total production or total employment. It would merely result in a shift of production from consumer goods to public works. 

On the other hand, if the $5 billion came from taxed or borrowed funds which would otherwise have been entirely saved, and these savings could find no other outlet for expenditure, then the entire government outlay could be regarded as an addition to total investments or offsets to savings. Similarly, if the funds necessary for the public works were derived from the expansion of credit and there were idle savings and idle resources, the entire expenditure could be regarded as a stimulant. 

Under these circumstances, total expenditures in the United States would be increased not only by the $5 billion of government outlays but by as much as $20 billion of other consumer and capital expenditures induced by the government disbursements. We would have $5 billion of public assets, and, besides that, all employees, employers and investors to whom this $5 billion of expenditures ultimately flowed would spend it for other goods and services. Their expenditures in turn would induce other outlays. Thus, at a time of unemployment and idle resources, any government expenditures which arise out of savings or offset idle savings will add substantially to total expenditures and therefore to total production and total employment. 

Under the prewar tax structure, the government expenditures financed from taxes were only slightly stimulating to total production and total employment, because a substantial portion of tax receipts represented a transfer to the government of funds which would otherwise have been spent for goods and services. A very substantial portion of taxes before the war were regressive and fell heavily upon consumption. On the other hand, all government expenditures of revenues from borrowing foster further economic activity, unless there is already full employment. However, government spending will not enlarge total production and employment if the expenditures are of such a nature as to discourage or reduce private expenditures by an equal amount. Thus, if the government chose to build a power dam which would otherwise be built by private industry, no net economic effects would result. Large-scale government spending is desirable, then, when there are idle resources, when the revenues come from funds which would not otherwise be spent, and when the public spending does not discourage private spending. 

Government spending, in order to absorb or offset idle savings, can be financed in one of three ways. First, the revenues can come from direct taxes at those income levels where large savings are made; second, there can be a continued increase in the government debt; and finally, there can be the printing of paper money irrespective of reserve requirements. The preference in the sources of funds is in the above order. If all savings at levels of full employment which could not find outlets through private channels were taken in taxes by the government, then we would have large government expenditures, continuous full employment, and no increase in government debt. 

It will be noted that this is a different proposal from that suggested in Chapter 7. There it was recommended that taxes be revised so as to induce increased individuals’ expenditures and decreased individuals’ savings. Here it is proposed that if idle savings persist, the government should tax them away and spend them for public works. It is recognized that this would be a most difficult matter politically. People dislike the idea of a growing national debt, but they seem to dislike higher taxes even more. If the government spending is to come from borrowing, then an increasing national debt is unavoidable unless we can reduce the volume of savings or resign ourselves to unemployment. The matter of government debt is discussed in some detail later in this chapter. 

Those who favor the printing of fiat money to finance extraordinary government spending recommend its use only when there are unemployment and idle resources. Otherwise, increasing the supply of buying power when production cannot be further increased would merely result in higher prices. They suggest that there is no reason v why government should pay interest to the public when the entire purpose of government expenditures for large-scale public works or relief is for the good of the people. Further, the printing of money removes the psychological disturbance of a large public debt. Such money would be used to inject purchasing power to offset idle purchasing power in the form of idle savings. The amount of money to be printed would vary in accordance with the magnitude of idle savings. Money would continue to be printed until full employment is achieved. Then when private demand absorbs all that is produced at full employment, currency could be retired through an excess of tax receipts over disbursements. 

The printing of money always holds a danger in that it is easy and simple to continue once it is underway and difficult to halt, at least without great courage. It is dubious whether our government, with all of the pressures of various interests, could stop the printing of money once it was initiated on a large scale, and this is a serious defect. Therefore, it appears that if we must look to government spending for the assurance of prosperity and if all excess savings cannot be garnered through taxes, then we must anticipate continued borrowing by the government. 


The subject of the public debt is another one of those issues on which discussion and debate have shed more heat than light. All of us remember the great concern felt in the middle 30’s by many who thought that the nation faced certain bankruptcy when the national debt threatened to reach the level of $50 billion. It was generally believed that such a large public debt would place an unbearable burden on the nation, with the inevitable result of chaos and collapse. Actually, the national debt is well over three times that amount already, and we shall be fortunate if this war is successfully concluded without the Federal debt rising to $250 billion or $300 billion. Even at this high figure, there is no certainty of bankruptcy facing the nation. 

Considerable discussion has taken place about the highest feasible or maximum size of the public debt, with estimates varying from slightly higher than present levels to astronomical figures. It is impossible to arrive at any approximation of the magnitude to which the national debt can rise, because of the many imponderables and variables to be considered. The decision depends on such factors as public confidence, the national income, the source and size of tax revenues, the interest rate, and the future trend of savings. Under some conditions the present debt or a much lower one might be untenable. Under other circumstances it might safely rise to many times its present size. 

An important limiting factor in the size of the national debt is the continued confidence of the people in the government, so that there will be no concerted effort to liquidate holdings of government securities suddenly and in large quantities. A large-scale cashing in of government bonds would be likely to occur only in case of a wide spread feeling of panic and loss of confidence. Otherwise, there will probably be a plentiful supply of buyers of government bonds in the future, willing to purchase from those who wish to sell. 

We hear considerable talk about the ability of the government to redeem the bonds on demand of the holders. This implies that there will be a larger number of sellers than buyers of the bonds at some future date. Short of a panicky run on government bonds, there will be a continued demand for the bonds. This is true because the supply of new savings will be far more than adequate to meet investment demands for savings. An individual or a business enterprise may liquidate savings to provide the means for current spending, but for the nation as a whole there is always some volume of new savings. Only if private outlets for savings can absorb all new savings and if those who cash in their bonds spend the money, can we have a decline in the government debt without causing depressed economic conditions. 

Business enterprises, in the same way as the government, would have to default on their obligations if large-scale repayments were demanded. Thus, if all of the holders of railroad bonds, assuming they were redeemable, suddenly decided that they preferred cash and therefore sought repayment from the railroads, it would be necessary for the railroads to borrow from other sources or default on their bonds. Obviously if the move to cash in all industrial bonds were universal, it would be impossible to borrow elsewhere and defaults would be inevitable. 

Liquidity of investments stems from a ready market rather than from the ability of the corporation or government to pay off all of the investors. In other words, one must rely largely on the willingness of other investors to make the loan or purchase the equities if he expects to get cash for his investment. As long as prosperous conditions prevail, there is no great likelihood of mass liquidation of government bonds by the people. A lack of confidence of the people in the government will certainly stem more from depressions and from chaotic economic conditions than from a large national debt. 

There is another point to be made on this subject. If people insist on saving much more, year after year, than can be invested with any degree of security in private channels, government bonds provide the only outlet for these excess savings. For some years before the war, people were experiencing difficulty in finding sound investments for their savings. This applied not only to individuals but also to collective savings institutions such as banks and insurance companies. Unless savings decline or govern ment borrowing continues, some savings will either be idle continuously or will flow into precarious or self-terminating investments during short boom periods and then be wiped out in depressions. Government spending can insure against depressions and government bonds offer secure prospects for those who save. 


Another limiting factor on the size of the national debt is the carrying charge to be paid to bondholders. When interest on government debt is paid out of revenues from property, excise, and other regressive taxes which are a burden on all levels of income, there results some flow of income from those in the lower income brackets to those with higher incomes, because the latter own most of the bonds. This aggravates the problem of excess savings. Of course, if taxes were made more progressive, that is, increasingly based on ability to pay, then the “burden” of government debt charges would be less onerous. The middle and higher income recipients would be paying more of the taxes, out of which they in turn would be receiving the interest on their bonds. 

Basically, if the taxes used to pay government bond interest could be so assessed as to fall directly on the bond holders, there would be no real burden on the nation, in the sense that there would be no shift in income. After all, the government can only pay interest on its bonds and pay off its liabilities by taxing the people. If the debt is owed internally, the process is one of collecting from the public and paying to the public. If the taxes come from those who hold the bonds, then a purely financial transfer has occurred. On the other hand, if the persons who pay the taxes are not the same ones who receive the interest payments, there will be economic consequences which will vary with the spending habits of the two groups. Certainly, if consumption is to be stimulated, the revenues for paying bond interest should come as largely as possible from those who save rather than from those who spend most of their income. 

Government debt charges vary not only according to the size of the public debt, but also according to the interest rate. If excess savings continue to prevail in the United States after the war in the same degree as before the war, we can anticipate a continued decline in interest rates. Excess supply of savings over the demand for investment funds will naturally depress interest rates. Under these circumstances, the government can refund its debt at lower rates as rapidly as bond provisions permit, with the result that interest payments by the government will not increase to a degree parallel with increasing public debt. The rates might fall so low that total interest charges may decline even with an increasing debt. 

It is even possible that interest rates on public debt may tend to disappear if there are continued high savings. Those who insist on saving may eventually be willing to pay a premium to be absolutely sure of receiving the principal back at some later date I This is not a fantastic possibility by any means if we continue to have high levels of savings and if those who save are interested primarily in the security of their savings. Those who do the saving may realize that the security of the principal is the most important factor, and that forgoing interest in favor of security is worthwhile. Those who save through institutions, such as insurance companies and banks, appear to be looking increasingly for security of principal, even at lower returns, rather than investing in risk ventures at higher returns. 


It is desirable to reduce the national debt after the war if this can be accomplished without having depressions and unemployment. This can be accomplished only by an excess of tax receipts over expenditures. There will be a sharp and very substantial decline in government outlays as soon as the war is over, but it is certain, in view of probable military demands and interest charges, that the level of government disbursements will not fall to prewar figures for many years, if ever. That means that to secure a balanced budget together with a surplus which will permit a reduction in the debt will require very high taxes. The important question is whether the public prefers higher taxes or a high public debt. Perhaps it is not which is preferred but rather which is less distasteful. It must be one or the other, and the answer is a political one. 

Beyond the political aspects of high taxes necessary to reduce the public debt after the war, there is the more important economic implication. We must set as our goal a high level of economic activity, so that employment opportunities are available for all who are able and willing to work. This will not be possible without government spending and government deficits, unless all of the savings at high levels of national income are absorbed through private channels. This is attainable year after year only if there are substantially less savings and greater expenditures by individuals and business enterprises. If we do accomplish a sound and persisting balance between savings and private investment after the war, it may be upset by ill-conceived attempts to reduce the public debt. 

A policy of debt reduction should be designed so as not to aggravate the difficulties of attaining and maintaining full employment. If the taxes are derived in any substantial degree from incomes which would be spent anyhow and if the debt repayments are made largely to those who are not likely to spend the funds, then the reduction of the national debt will render the problem of excess savings more difficult of solution. Only if the reduced expenditures of some consumers, resulting from the taxes, are at least fully offset by increased consumer expenditures made by others redeeming their bonds, will the debt reduction have no adverse economic effect. Under the regressive tax structure which prevailed before the war, a program for reducing the national debt would surely result in greater savings and less consumption, and therefore further distort the relationship of savings and private offsets to savings. 

Thus, while a reduction in government debt after the war is desirable, we must be realistic in recognizing the difficulties of both accomplishing this goal and at the same time assuring full employment. It can be done only through high taxation, a very substantial decline in savings, and the derivation of funds to pay off the debt from highly progressive taxes. Only if current savings fall below private investment demands can we justify debt repayment from taxes which bear heavily on consumption. All in all, a tough-minded and politically difficult set of policies will be needed if the public debt is to decline rather than increase. 


There is one other aspect of government spending to be discussed. It concerns the purposes for which the funds are to be spent and the efficiency of government outlays. As for efficiency and integrity, the criteria should be stricter for government than for private enterprise, because of the public interest involved. Graft, favoritism, and squandering must have no place in public spending. Nor should there ever be any laxity in permitting those in charge of disbursements to abuse their authority for personal or political power and advantage. Government spending can be a vehicle of great merit in economic matters and in providing valuable facilities and services to the public. On the other hand, it can be a source of great abuse and waste. The best guarantee of wise and beneficial exercise of this powerful device is the more intelligent use of the voting privilege. We do not fully appreciate the tremendous privilege and equally large responsibility the right to vote gives us. We must cherish it and select officials who will act honestly and intelligently in the public interest above all else. 

The purposes for which government funds are spent should be determined by the desires of the people and by the economic effects sought. Government outlays for the purchase of land and other existing assets or for the redemption of bonds in the hands of the higher income groups will have little or no stimulating economic effect and, depending on the source of tax revenues, may even have an adverse effect. On the other hand, relief disbursements and public works outlays will bring higher incomes and production and employment, varying again with the source of the funds. Expenditures for public works provided markets for durable-goods industries and considerable direct employment, stimulate further consumption and production and employment as a secondary influence, and result in the creation of valuable assets for the benefit of individuals and business enterprises. 

Relief expenditures may take the form of direct grants of cash or goods to individuals in need or they may take the form of subsidies on food or housing, as was tried in the food stamp plan and government housing projects where rentals were set below costs. Although the ultimate effects on total economic activity may be the same for public works and for relief, it would seem preferable to rely increasingly on public works so as to have individuals work for their income and also to produce valuable public assets. However, greater consumption among the lower income groups may be more desirable socially than public assets, and therefore direct relief grants and consumer subsidies may be preferable to public works. The choice should be determined by the wishes of the people as expressed at the ballot box and by the policies promulgated by democratically elected leaders. 

There will be no dearth of public works projects for a long time to come. Superhighways are desperately needed all over the country. The Inter-American highway will be a great asset to trade and travel. New and better schools and hospitals and other public buildings are required. Slum-clearance projects on a large scale will depend upon government assistance. Public power projects have proved their worth and additions may be desirable. More adequate defense provisions at home and at outposts are necessary for security purposes. There is plenty to be done and done efficiently, and without subordinating the public interest to politics and vested interests. 

We cannot leave this subject without taking cognizance of the proposals made from time to time that government expand its area of control to those fields where private ownership and operation somehow does not provide investment outlets. The railroads are usually given as an example. In many countries the government owns the railroads. This certainly is one field in which tremendous expenditures for renovation and modernization are possible. Perhaps the government could somehow provide the funds and have some claims over the railroads’ income so that such expenditures could be made without direct government ownership. Other fields for similar consideration include power, communications, forests, and other public utilities and natural resources. 

As to the magnitude of public spending which must be anticipated in the postwar years, there is need for much study. As has been noted, if at full employment we continue the patterns of income, savings, and consumer expenditures which prevailed before the war, we shall have large excess savings. It is certain that private investment outlets, including installment credit and foreign investment through private channels, cannot absorb or offset all of our savings year after year. Therefore, government spending which derives its source from savings through taxation or borrowing may have to aggregate $15 billion per year after the war. This is a huge sum even if we maintain a fairly sizable military establishment in peace time. It will mean an unprecedented scale of public works. We must now decide whether we are going to have full employment or not. If we are to choose full employment—and that certainly must be the choice— then we must either adopt taxation and social security reforms, as already suggested, or decide upon large-scale public spending, either of the magnitude indicated above or a smaller volume, depending upon how much savings can be reduced.

Chapter 11: Adding it Up

In summarizing the conclusions and policies presented in the preceding chapters, attention is given first to the major premise which underlies the entire analysis. It is that full employment opportunities for all who are able and willing to work and sustained high levels of production are prerequisites to the continued existence of our democratic free enterprise system. Recurring or persistent large numbers of unemployed persons cannot be accepted as inevitable. Instead, widespread unemployment is recognized as a most serious threat to our economy and one which can and must be avoided. 

In attacking the problem of unemployment, particular emphasis has been placed on the fundamental necessity of providing markets for the goods and services we can produce. This must be the basis of all our economic planning. A market for their output is the prime need of all producers. Analysis of total demand and of the flow of income provides the focal point not only for understanding how our system functions, but for developing constructive policies to insure its successful operation. It is not intended here to depreciate the importance of profits, prices, wages, hours of work, credit, speculation, monopoly, and other significant factors which affect demand. But basically, total demand and markets are the bloodstream without which private enterprise cannot operate. 

Corporations are doing a great deal of planning for the postwar period these days, with a view toward expanding markets for old products and developing markets for new products. Businessmen appreciate only too well that the cornerstone of success is demand for the goods and services which they produce and they constantly strive to find markets. Without markets there can be no prosperity, no profits for individual employers or for the business community as a whole, and no jobs for workers. However ingenious and intensive the efforts of business firms in conducting market research and promoting sales, favorable results are often elusive. If businessmen will look back over their personal experience as well as the history of American business, they must appreciate the fact that frequently the failure to locate markets for their goods is not the fault of any individual employer or corporation. There are times when the business enterprises of the country, as a whole, find it impossible to sell all that they can produce or have produced. The result is unemployment and depression. 

During the depression years of the early 30’s, it was impossible to sell all of the commodities which industry could produce. No matter how attractive the product nor how much advertising and sales pressure was exerted, there just wasn’t the buying power in the hands of most consumers to pay for all or even a large part of what industry could have produced. The same situation existed in the depression of 1920-21 and the depression of 1914, as well as in 1907, 1897, and other periods of depressed economic activity which the United States has suffered. In each of these periods of waste and hardships and retarded progress, there was no lack of productive resources or shortage of manpower, and certainly there was no saturation in the fulfillment of human wants. The people desired and had need for the goods which they and the idle plants could have produced. These wants went unsatisfied despite the efforts of the best business brains and the best promoters and best advertising copywriters. 

During 1942 and 1943, almost any business establishment which could secure manpower, raw materials, and facilities for the production of armaments or consumers’ goods had excellent prospects of success and profits. There was plenty of buying power and demand for all of the goods and services which private enterprise could produce. One hardly had to advertise or use imagination in marketing consumer goods and services. Likewise, there was no problem in selling munitions, because the demands of the armed services are practically insatiable. We are in a war and military demands are large, but in peacetime the basic wants of the civilians are also large. Surely our total peacetime wants are as large as our total production in 1943. 

Apparently there are some powerful phenomena and forces in our economic system which have brought recurring periods of business depressions of varying severity and which hold us back from making the most of what nature and science and machinery have made possible. These attacks of economic illness have taken a serious toll from all groups of our society in the form of wasted resources, unemployment, deprivation, bank failures, business bankruptcies, lost fortunes, and retarded progress. These adverse conditions obviously have not been avoided or even ameliorated by the good intentions or actions or power of private business enterprises. Adequate de mands and markets just were not available and there wasn’t much that businessmen could do about it. 

It is not intended here to suggest that imagination, initiative, and efficiency on the part of businessmen are not important factors in the attainment of profitable operations. Certainly, given equal circumstances, the businessman who can turn out a better product for a lower price will have the advantage and tend to be more successful than the producer who is less efficient. The manufacturer who can make a more attractive product and is a better promoter will be more successful than his conserva tive and less imaginative competitor. However, in periods of prosperity a much larger proportion of business firms are successful than in periods of depression. Many an efficient, industrious, and dynamic employer has failed and suffered serious losses in times of depressed economic activities. A favorable economic environment within which there is a market for all the goods and services which industry can produce is the most important single factor in determining whether business operations will be successful and profitable. Individual companies or even associations of companies can plan their production and marketing with the greatest care, but if total economic forces tend to bring about depressed markets, then losses, bankruptcy, and idle resources on a wide front are inevitable.

It is vitally important to the free enterprise system that businesses should plan new products, improve old products, perfect new and more efficient production and marketing techniques, and see to the more efficient utilization of resources. There should be substantial profit incentives for such efforts, because they are essential to industrial progress and they give strength and virility to a competitive economy. But at the same time, there is a vital need for overall total planning which will provide the economic environment within which business operations have the best opportunity of being successful and within which our total resources are fully utilized and our wants most fully satisfied. Both types of planning are needed. Without broad, effective, national planning, the efforts and individual plans of industry are at recurring intervals stifled and made fruitless. Without industrial planning and foresight and initiative, the rate of industrial progress will decline. 

There can be no doubt that in the United States we have the abundance of natural resources, of skilled man power, of inventive genius, of productive efficiency, of capital equipment, and of efficient industrial management to provide good living conditions for everyone in the country and in addition to assist the less bountiful and less developed nations. It has already been noted that by the end of 1943 the rate of armament production of the United States alone will nearly match that of the rest of the world put together. 

The average standard of living in the United States has been higher than that of any other country for many years. We have made phenomenal material progress. Of course, an abundance of readily available natural resources, fertile soil, and favorable climate helped greatly in this development. However, our progress has not been without serious setbacks accompanied by great losses and waste of idle resources. Our progress could have been immeasurably greater had we’ been able to avoid recurring depressions. If only we can achieve the economic environment within which there is an uninterrupted market for the goods and services which America’s industrial genius and organization can produce, there can be abundance for all. We have too large a portion of our population at subsistence or even lower standards of living to sit back and smugly gloat over our past progress. 

If we are realistic, we will appreciate that our free enterprise system has tremendous advantages over any other system but that it also has serious limitations which can and must be overcome. The free enterprise system is one which offers material reward for superior performance. The outstanding contribution which competition offers is the constant improvement of products and of productive processes. It stimulates management to develop new products, new techniques, better working conditions, and more efficient use of basic resources. Dynamic and virile competition stimulates creative and technical abilities, hard-hitting and aggressive leadership, daring and shrewdness in the assumption of risks. The competitive system is often cold and cruel, but it tends to root out the inefficient in favor of the more efficient. 

The premiums which the free enterprise system offers are given for services rendered, irrespective of whether these services are in the public interest. Under a competitive system, we can hardly expect competitors to make the interest of the public and the total good of society their first consideration. It is unreasonable and inconsistent with the spirit of competition for a manufacturer or distributor who is in competition with other producers to be so benevolent or philanthropic or public-spirited in his operations as to consider the welfare of all the people or of all his customers or even of all his employees above and beyond the profitable interests of his own business. He cannot hire workers where there is no market for his products, nor can he sell to consumers at prices dependent upon their needs and their buying power rather than his costs. Were he to do so, his business would not long survive. 

Therefore, while competition should be encouraged to constantly improve products and production techniques, there must be some other instrument to insure the maximum benefit of our economic operations to the people as a whole. Obviously, this instrument is the government, which in a democracy is the only agency representing the people. Government should give the fullest latitude to the free play of competitive forces except for practices which are contrary to the public interest. 

For the postwar years, there is need for an appreciation and implementation of the growing responsibility of government to provide the proper economic environment within which the free enterprise, private property, profit system can function effectively. Government has the responsibility to insure the greatest good to the greatest number and business has the responsibility to produce those goods and services which the people desire. These two objectives must be reconciled as fully as feasible. Government policies should be designed so as to interfere to a minimum degree with private business operations and so as to leave the door open for profits adequate to induce risk-taking and new ventures. 

There are some activities of business which are patently contrary to the public interest, such as fraudulent security sales and food adulteration, and these must be prohibited. Self-policing through better business bureaus and similar associations is fine but inadequate. Other business operations, such as price agreements, withholding patents, and buying up all potential competitors, are less apparently against the social good, but they interfere with the more vigorous forces of the competitive system and likewise must be controlled. Beyond such restrictive measures, the government’s role should be a positive one in establishing an economic climate favorable to full employment and continuous prosperity, with private business enterprises given the fullest free rein consistent with the social good. 

Government controls should take the form of fiscal policies and other broad measures which will enhance rather than restrict the opportunities of private enterprise. For the conduct of government we need understanding, fearless, fundamentally honest, and public-spirited leaders, whether they come from the ranks of industry or labor or universities or any other area. Statesmanship rather than vested interests and pressure groups is the first requisite for government’s legislative, executive, and judicial functions. 

There are altogether too many people who feel that everything must run in cycles and that economic depressions are inevitable. This obviously is a defeatist and negative attitude. There is no divine and overpowering cause for unemployment and unsatisfied wants. It makes absolutely no sense to have plants closed down and 15 million people out of work, as we had in 1933, and at the same time the people frantically wanting the goods and services which could be produced by applying this idle manpower to the idle equipment. To say complacently that depressions are inevitable is tantamount to saying that the demo cratic free enterprise system cannot function satisfactorily. If a less respectable person were to express bluntly and publicly that our system is hopeless and cannot work, he would be damned far and wide as a communist or a fascist. Yet, many of our citizens who regard themselves as unimpeachable patriots throw up their hands in despair when economic matters are concerned and resign themselves to mass unemployment when the war is over. That is not the spirit and attitude which helped develop America. We need understanding and determination in attacking economic depressions. With appropriate actions, they can be overcome. 

The absolute necessity of eliminating business depressions is increasing all the time because of the greater dependence of growing portions of our population upon continuous employment for their livelihood. When the United States was a less highly industrialized nation, the continued economic well-being of the individual was much more the result of his own initiative than at the present time. As long as there were frontiers where people could migrate and produce and live by their own efforts, the problem of adverse general economic conditions was not as serious as it is today, when so many of our people have no other possible source of income than that derived from working for others. 

As the size of our business enterprises increases, there is less and less opportunity for the individual to assure himself of continued income through his own initiative. Although exceptions might be cited, the possibilities for an enterprising man to enter into the production of automobiles or of steel or of aluminum “on his own” are very remote. When there is large-scale unemployment, it is foolhardy and wholly unrealistic to believe that by some means or other these men and women, who always have worked for others, can now by their own efforts somehow earn a livelihood. They must have jobs and wages in order to survive. 

When there is an economic depression, the factory worker can do very little except walk hopelessly from one employment office to another in search of jobs which do not exist or of the few jobs for which there are thousands of applicants. As this development of working for others grows, depressions will become increasingly difficult to accept blandly as inevitable. Businessmen must come to realize that in a highly industrialized state there must be continuous opportunities for all employables to work. This, competitive industry itself cannot guarantee. Under the proper economic environment, which government can provide, industry can offer continuous job opportunities for all who can work. The utter helplessness of the individual to provide for himself and the resultant hardships will surely make more and more people realize the utter stupidity and absurdity of unemployment, idle resources, and unsatisfied wants. 

If this analysis is correct, then the very existence of the democratic form of government will be threatened if serious depressions are permitted to occur. The world is in the midst of a social, economic, and political revolution, the major factors being economic in nature. Beyond a doubt the United Nations will win the present war. But in so doing there is no guarantee that totalitarianism, with its imperialistic tendencies, has been crushed and defeated or the reasons for its existence eradicated. Hitlers and Mussolinis will arise again and again if the inherent forces of democracy are not strong enough to create in the minds of the people the desire for no other system but a democratic one. 

A strong and determined desire for the free enterprise system will not emerge from Fourth of July speeches and flag waving alone, or from bread lines and the sight of ranks of the unemployed. Democracy as a form of government is being seriously challenged. That challenge is not going to be successfully met for very long through war or through platitudes. Rather, it must be met through a vigorous, dynamic application of the principles of democracy, to the end that the democratic free enterprise system becomes the system most successful in guaranteeing not only individual political, social, and religious freedom but also economic freedom. This can only be achieved through the maintenance of full employment and continuous prosperity. 

Apparently there are certain forces inherent in our economic system which cause recurring periods of depression. A number of prominent economists believe not only that we will be faced in the future with frequent declines in economic activity, but that influences are at work which will hold production continuously and substantially below those levels where there will be jobs for all workers. If we are so threatened, we must certainly determine the causes of depression and of stagnation, and provide the solutions. The extreme reactionaries oppose doing anything, on the assumption that nothing can be done or that any change will interfere with their vested interests. The extreme radicals also oppose corrective measures, on the ground that the system is no good and a different system is necessary. Both extreme policies spell doom for the free enterprise system. 

We must understand how our economy works and what causes it to break down, and then courageously pursue policies which will overcome the deficiencies of the system. 

As we produce goods and services, we simultaneously generate income or buying power. As long as that buying power is fully spent to buy what is produced, production will be maintained. If that buying power is augmented by expenditures out of credit expansion or out of past savings, increased production can be expected. On the other hand, if any substantial portion of the current flow of income is saved and these savings are not utilized or offset by expenditures from other sources, a decline in production will occur. 

At higher levels of total production and total employment, the volume of current savings becomes quite large in relation to total income. Therefore, to maintain prosperous conditions, the outlets for savings or offsets to savings must be large enough to keep total spending in line with total production. If such a large volume of offsets to savings through private channels is not available year after year, then prosperity can be maintained continuously only by increasing direct consumer and business expenditures and thereby reducing savings, or by large-scale government spending. 

Historically, large savings during periods of prosperity have found private outlets in precarious or self-terminating investment channels which sooner or later dried up and resulted in depressions. Investments in productive assets tended to expand capacity to produce disproportionately with actual consumption, with the consequence that sharp declines in new investments ensued. Likewise, investment in new housing tended to result in more new units than consumers’ expenditures of the masses of our people could justify—not more than consumers needed, but more than the income of the masses of the people could buy or rent. The result was a decline in production. 

Other offsets to savings, such as the accumulation of business inventories, foreign loans, and increases in installment credit, would increase only for a limited time before they got out of line with consumption or with prospects for repayment, and caution then brought depressions. We would have been much better off over the years had we saved less and consumed more and if the offsets to savings had borne a more stable relation to consumption. Our standard of living would have been higher, we would have had steady progress, and we would not have wasted tremendous quantities of resources during periods of inactivity. 

In order to provide job opportunities to all workers in the postwar years, our gross national production will have to total $150 billion or more per year. On the basis of past and prospective patterns of income distribution and of spending-saving habits, a minimum of $30 billion of that total income will be saved. An analysis of private investment channels and of other private offsets to savings give no hope of absorbing $30 billion per year for any considerable period of time. It is possible that for a very few years after the period of reconversion such a large quantity of savings might be absorbed, but it is inconceivable that this could persist for very long before a serious depression occurs. 

The solution to our economic problems lies in bringing about a continuous balance between savings and offsets to savings at levels of full employment. This can be accomplished either by reducing the volume of savings to a point where private investment and other private outlets can absorb all savings year after year under prosperous conditions, or else by augmenting private offsets to savings with government spending. 

In order to rely on private enterprise for the maximum portion of all economic activity, it is recommended that policies be adopted to encourage more spending and less saving. Private investment should be given every encouragement through incentives and through removal of monopolistic and other restrictions on competition. However, the excessive expansion and contraction of investment and other offsets to savings relative to consumer expenditures either must be recognized and controlled, or government spending must fill in the gap when private offsets to savings decline. Above all, we should set as our objective a level of total production and total income which will permit of no substantial volume of unemployment. 

What has been proposed in this book is a series of major devices which will aid materially in providing the economic environment essential for a successful working democracy. These recommendations are broad in nature, comprising the basic principles rather than all of the minute details which must be developed for their implementation. There is nothing in any of the proposals inconsistent with the continuation of our free enterprise system. In fact, they are entirely compatible with economic and political democracy. Much more drastic and much more radical proposals are being suggested by some groups, but the economic problems of our democracy can be solved without resorting to extreme measures. 

Endless numbers of pet economic theories and panaceas have been peddled in recent years, some having great merit, but all being in conflict with the basic tenets of free enterprise. Within the framework of the fields of policy discussed herein, effective results can be obtained with the minimum of interference with the existing structure. If we, as a people, will have the courage and initiative to undertake such reforms, then the continued existence of our system is much more fully assured than if we sit back and engage in wishful thinking. It cannot be stated too often that the greatest threat to democracy will arise not from economic pressures and military defeat by the fascist states, but rather through a failure of democracy to function effectively on the home front.

If broad economic measures can be adopted so as to avoid depressions, there will be no need for dealing with each and every economic problem which is highlighted during a depression, resulting in piecemeal solutions. The more resistance there is to comprehensive corrective steps, the greater will be the need for makeshift patchwork— and therein will arise the difficulties of clashing with vested interests and of greater interference with the free operation of our economic system. Overall reforms which will allow the system to operate are much preferable to con stant encroachment in every detailed aspect of private economic activity. Therefore, while it may appear that many economic problems have been overlooked, this has been done consciously, in the belief that correction of the more basic difficulties will remove the million and one sore spots. The corrective measures have been developed and discussed primarily on an economic level, but not without consideration of their political implications and their relation to a competitive, free enterprise system. 

It is first proposed that steps be taken to stimulate competition in all areas of economic activity. This will involve the elimination of such restrictive forces as monopolistic control of resources, processes, and distributive channels by industrial enterprises and monopolistic practices of labor organizations. Further, a modification of patent law and practices is essential to more vigorous competition. Resistance to new and elimination of existing interstate trade barriers is also essential. Taxation incentives to new investments and the more rapid replacement of existing equipment are desirable. These and similar measures are proposed for the purpose both of adding virility to the competitive system and of increasing investments or offsets to savings. 

There will be strong resistance to many such measures by the economically and politically powerful monopolies and giant business establishments. They favor the competitive system much more in word than in practice. Also, it should be noted that any marked increase in competition which will stimulate investment will likewise increase business mortality; there will be more business failures as well as more new establishments. Whether we can eliminate depressions by stimulating stronger competition is dubious, but it will surely bring new products, new industrial techniques, and increased productivity. 

Taxation is an established area of government responsibility which lends itself to the development of constructive economic controls. It is proposed that a much more progressive and nationally integrated tax system be adopted. It should be more progressive, in the sense of increasingly assessing taxes on the basis of ability to pay and lifting most of the tax burden off the low income groups. If the burden of taxation is removed from the lower income levels their demands for goods and services will be enlarged. These taxes should be borne by the middle and higher income levels, where taxes can come from funds which would otherwise be saved. Such a reform in our tax system will result in more income being spent and less being saved. This will bring a larger market for consumer goods and we shall not have to rely as in the past upon large investment outlets which can only continue for short periods of time and then collapse. 

The more people spend, the more production and more employment and more income there will be available. The more they save above and beyond what is needed for meeting sound and maintainable investment demands, the more likely we are to experience instability and depressions. A more progressive tax program will appear to be more directly burdensome on the middle and higher income recipients, but the immediate hardship will be much more than offset by the maintenance of incomes during continuous prosperity, as compared with reduced incomes and losses of equities during periods of depression. 

A significant proposal for increasing spending and reducing savings deals with social security. This is another area in which the responsibility of government is clearly established and in which policies can be directed to greatly stimulate economic activity without interfering with private enterprise. It is recommended that there be social security coverage for all people in the country. Further, the benefits should be sufficiently large to provide true social security, both in case of unfavorable contingencies and for old age, among practically all classes of income recipients, from the lowest to the relatively high income groups. Such a program will encourage spending and consumption and discourage large savings. Therefore, the program will have the double-barrelled effect of insuring security and at the same time helping set in motion those forces which can provide the greatest of all securities, continuous job opportunities and sustained high levels of economic activity. 

Consistent with this objective, it is recommended that progressive taxes become an increasingly more important source of revenue for social security benefits and that contributions by employers and employees become relatively less important. This will mean less taxes from those who spend their money for consumption purposes and more taxes from those who save. The net result will be more spending and greater prosperity. 

Another proposal deals with our foreign economic policy. It is recommended that we plan for a substantial excess of exports over imports for many years after the war, for the double purpose of promoting prosperity and peace abroad and stimulating economic activity at home. Large exports by the United States will be necessary for relief and rehabilitation purposes and for helping to raise the productivity and standard of living of the rest of the world. Modifications of a revolutionary nature in our tariff policies will be necessary to permit foreign nations to repay us currently for large exports. Tariff revisions must be moderate and gradual, and therefore, if we are to have large-scale exports after the war, we must expect to sell much more than we buy. The immediate economic effects of an excess of exports over imports are approximately the same as new domestic investments, increased installment credit, or any other offset to savings. Therefore, an export balance will help solve our problem of excess or idle savings. 

Even an economically ideal tax and social security program will take considerable time for development and implementation before savings are reduced to a level where they can be wholly or largely absorbed through private and domestic channels year after year. During that time, an export balance will help make for prosperity here at home. It must be recognized that if export balances are financed through private channels, they can continue at a substantial level for very few years, because the prospects for an early repayment will be anything but bright. Therefore, it is recommended that the government be the instrument of financing a considerable portion of our export balance in order that it may continue without serious disruption. The government can finance loans directly or guarantee private loans, but the loans must be of long duration. 

Finally, it is recommended that public works and other forms of public spending be regarded as a necessary device for filling in the gap when and if private spending is inadequate to provide prosperity and full employment. It is proposed that this device be adopted as a reserve policy to be used only when other devices have failed to provide the necessary economic environment for prosperity. However, when conditions require government outlays, the magnitude and speed of initiation of such expenditures should be commensurate with the need and not half hearted gestures. 

With a proper selection of projects and efficient operations, public expenditures can add materially to our national well-being in terms of higher living standards and increased wealth. The government spending program should comprise both public works and the direct stimulation of consumption through relief and through subsidies for housing, food, medical care, and other essential goods and services. 

The effect of government spending on the public debt will depend to a considerable extent on the size and source of tax revenues. The choice will be between higher taxes out of those incomes which would otherwise be saved or the borrowing by government of these savings and consequently a growing national debt. Declining interest rates, resulting from a large supply of savings relative to private investment demands, and continuous prosperity will make a larger national debt less burdensome. The public debt can be reduced, but only when economic conditions are such that the debt repayment will not further aggravate the problem of excess savings. If the increased taxes needed for debt retirement bear heavily on consumption and if the money is paid to the wealthier bondholders who will save the money, then the process of reducing the national debt will result in less spending and more savings and in depressions. The debt can be reduced but only with care and consideration of the economic consequences of alternative methods. 

It may be mentioned again that there are countless problems dealing with wage rates, maximum hours of work, profits and other incentives, monopolies, new corporate financing, new products, corporation depreciation and obsolescent policies, agriculture, and hosts of other fields which now have important economic influences. They are not discussed in this volume because it is believed that if the overall economic environment essential for full employment is present, many of these problems will diminish in importance. Those that continue to be significant can be handled much more efficiently and soundly under prosperous conditions than under an unsound economic environment. In other words, it is much more important to establish overall economic conditions essential for prosperity than to attack particular problems in particular areas, which cannot be solved individually because they are all interrelated and dependent upon the total picture. 

Not only has there been no treatment of many particular problems, but even the major proposals included herein are not developed in great detail. There is much research and study required to fill in all of the pieces and patterns even in these major steps. But if the fundamental precepts laid down herein are accepted, we shall have taken a major step toward the preservation of the democratic, free enterprise system, the elimination of the scourge of unemployment, and the assurance of abundance for all.

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