balanced deflation, inflation, or more depression · balanced deflation, inflation, or more...

Balanced Deflation, Inflation, orMore Depression

NIIMBER TEREE

THE DAY AND HOUR SBRIESOr. TEE UNNIERSITY OF MINNESOTA

April 1933

THE DAY AND HOIIR SERIES

[S a part of its own service and educational program the,( I University of Minnesota brings to its campus each yearmany distinguished leaders in all fields of thought. Tlesethinkers together with our own stafi of scholars ofier informa_tion and interpretations that are of more than passing momentand worthy of a larger audience than that which gathers in thelecture halls. This series of papers is intended L a suitablemedium through which such speakers may reach the la.rgerpublic in the state and nation.

It is the business of a real university to stimulate discussionand to do and encourage frontier thinking on social, scientific.economic, and cultural problems. By so doing it commits itselito no one view but dedicates itself to a point of view, that ofthe open mind.

L. D. Corrnrex, Presid,ent.

Balanced Deflation,Inflation,lnnallon, or

More DepressionBY

JACOB VINER

THE I]NIVERSITY OF MINNESOTA PRESS

Tltis lectune is the second, of three in a seri,es enti,tledProposals lor Economic Recoaery, arranged, bg th"eUniuersity in cooperati.on uith certain representatiueciti,zens of Minneapolis ond, St. PauI. It utas d,eliperedin Nortltrop Memoria,l Audi,torium, on Februrwy p0,1933, bg Dr. Jacob Yiner, protessor of econonh,s ,intlw Uniaersity of Chicago, special erpert Jor theUnited States Tariff Com.rruission and, United, StatesShipping Board,, 1916-19; corwuJtant economist forthe United States Tariff Contrnission, 7g1g-20; oi"tit-ing professor, Gradtnte Insti,tute of International

Studies, Geneaa, Suitzednnd, 1gS0-S 1and,1933-3/t.

COPYRIGET 1933 BY TEE UNTVERSITY Or. MINNESOTAPRINTED IN THE UNITED STATES OF AMERICA

Balanced Deflation, Inflation,or More Depression

{<

HAT the existing economic situation is desperately bad isnot subject to question. Whether it is holding its own or

t i r rg worse; rvhether there is anyth ing that can be done aboutt. ancl if so rvhat; what rvil l be the outcome if conditions do notnlplove in the near future; these are questions that everyone is

ing. but to x'hich the most competent persons can give butial and qualif ied answers. Nevertheless, public opinion, the

n on the st reet , rv i l l p la l ' . and has a l readl ' p layed, an impor-part in deciding n hether anything shall be done, and if so

'hat. The crowd, it is true, never rvorks out a definite and de-program, but in a democratic countr; ', and especially in

absence of great leaders, it does, by its favorable or hosti lesule, influence the direction policy shall take.

There is no shortage of advice, either for the government orthe public. The difficulty is rather that of choosing fromng the multitude of counsels. Economists should be best

ipped to give sound advice, since almost alone of all groupsthey have no special axe to grind, and since also almost alone of

groups they have specially devoted themselves to the task of'ttrdying economic phenomena from the point of view of the gen-

public interest. The economist, however-unfortunately, Iieve, for this country - has little prestige with the American

ruoltc, even on those subjects ou which he alone has experttlowledge, and the public prefers to take its economics from

per editors, politicians, bankers, and men who in happierwere able to accumulate or inherit a million dollars or

I concede that the economist is not wholly without a

JulYsQOTe

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DBFLATION, INFLATION, OR 1VIORE DEPRESS

share in the responsibility for this situation, but it isless a regrettable situation. fn any case, f ask you to beenough to listen without prejudice to a lecture on ecoeven though the only qualification which the lecturer has ishe is an economist by profession and training.

Intelligent prescription for a depression is impossible wiknowledge of the nature of the disease. A business deis a mob phenomenon, and the individual as such isstem its tide and, as a rule, is unable to insulate himselfits efrects. Until the downward tide ceases, he is carriedwith the rest. But granted that once a depression is underthere is nothing which the ordinary individual can do eend it or to escape it, the question remains: Is there alsowhich individuals actinE in concert or rvhich theircan do, to abate its severity or even to restore someprosperity? ft is to this question that I will specially diremarks.

There can be distinguished five conceivable lines ofthat can be followed in dealing with a depression, which Ilabel as: (1) the "do-nothing" or "let nature take itsor "painful waiting" policy; (2) the hortatory or ipolicy; (3) the "do the wrong things" policy; ( ) the ibalanced deflation policy; and (5) the inflation policy.

Our policy during the last three years has been an unated mixture of all of these methods. fnertia, painfulfor a turn of the business tide, has been the chief ingredient,resort also to incantations, to errors of commission, andmeopathic doses of inflation - and in recent weeks, with aof induced balanced deflation.

ITrro "Do-NorItrNG" Por,rcy

For the "do-nothing" policy, there is, in ordinarymuch to be said. Experience seems to support it. We havemany depressions before; nothing was done about them, andwe not only successfully emerged from them but \yent oniever-rising standards of economic well-being. This policy,

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pEFLATION, INFLATION, OR MORE DEPRESSION

nver, is naturally adapted to the democratic organization of

.:ciet.v, 'rvhere diffusion of authority, conflicting counsel, and the

.Ush of opposing interests, tend to nrake inertia the rule of l i fe.fhere is a curative, a self-corrective process, in the economic,ec5anism which does tend to bring depressions to an end, andnhi.h hur allvays hitherto succeeded in doing so.

The central characteristic of a depression is a more rapid rateof decline in the use of spendable funds than in commodity

in.s^ The rate of dechne iine in the use of spendable funds is dispePrlces ' unos ls ol-

lsctly'due to trvo factors: a contraction in the amount of spend-afls funds in existence, ancl the immobilization or non-use ofsuch funds as still exist, which manifests itself objectively in adecline in their velocity of circulation. The primary cause forthis contraction and immobilization of funds is to be found inthe normal response of business men to a declining excess, and$ill nore to a deficit, of prices as compared to costs. This ad-verse price-cost ratio is itself the product of trvo factors: first,& more rapid decline in the prices of the things the producersells than in the rates at which he can hire or buy the factorsof production, and, second, a decline in volume of sales, whichoperates to decrease the number of units of product per unitof the productive factors employed and thus to raise unit costs.I\hen costs exceed prices, the business man rvill not use fundshe ollus or borrorv additional funds from the bank or the invest-ment market to conduct current productive operations, to main-tain inventory, or to extend plant; and the bank would notlend to him under these conditions even if he were rvilling toborrow. The process, moreover, is cumulative or contagious, Ifone business man contracts his operations, his expenditures con-tract; this reduces the florv of spendable funds to others and theycontract their expenditures in turn; this compels other businessmen further to contract their expenditures and production, andso on indefinitely, in a vicious spiral.., In the meantime, however, the prices of the factors of produc-tlon are under pressure, and after a time they break. The prices;l,ral materials and especially of agricultural products are usu-{u} first to give way, followed next by wages. Bankruptcy and

DEFLATION, INFLATION, OR MORE D

receiverships in some measure dispose of fixed interest chaEconomies, selection for retention of the ablest and mostscientious workers on the staff, and technical improvementsstill further in reducing costs to a level rvhere they are oncebelow prices. A profit margin thus eventually reappears forducers; they resume use of their own funds and borrowfrom their banks and the investment market; the increasedof spendable funds raises the price level again and increasesvolume of sales; and industry is again on its way toAs in the downward trend, so now in the expansion phase,process is contagious and cumulative, and the resumption oltivity by one producer works to entice other producers intqfilike resumption of operations. r;:

This curative process has not been wholly absent during,frpresent depression. But factors peculiar to this depressio4iidegree if not in kind, have so far made it insufficient to bffuabout recovery. The disturbed state of international relatirhthas intensified the feeling of uncertainty as to the future. ftpressure on currencies and budgets of the great and rigidof international debt obligations, governmental and prilong-term and short-term, and the strangulation of worldby skyscraper tariffs, import quotas, and exchange controlscontributed to a sharper decline of rvorld price levels than etibefore and to a great disturbance of currency andstability.

fn the domestic sphere, taxes have been an increasing bu!CIton industry and have, moreover, had a perverse flexibility, riduring the depression period when it was peculiarly urgentthey should fall. Of equal, if not of greater importance thantax burden, utility rates have also grown in relative imto the national economy, and in the main have remainedadjusted to the general fall of prices. Railroad freight ratesnot only not decreased in the face of a fifty per cent decliwholesale prices, but unbelievable though it should be, theyactually been permitted to rise since the beginning of thepression, and are pressing down as a crushing weight on alldustries requiring long-distance hauling of bulky

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DEFLATION, INFLATION, OR MORE DEPRESSION

.,,"oes have given way over rvide ranges of industry, probablyl:; rr than in previous depressions. But the reduction of'..ss5 $'as unduly delayed, and its extent probably lessened,l""Hoot.t Administration pressure against wage reductions.

flre increasing extent to rvhich business has organized itself on a

nnxsi-monopolistic basis has resulted also in attempts by impor-

iant sections of industry to resist the dorvnward trend of pricesir Jeliberate restriction of output, rvith results far from uni-

lolrnll' favorable for themselves and uniformly unfavorable forihe rest of industry. A larger proportion of business than for-nerly is norv conducted in rented premises, subject to contrac-tual, inflexible rent charges, instead of in orvned buildings. AIIof these factors have operated to increase the rigidity of costs inthe face of an exceptionally set'ere fall in prices, and much ofthe responsibility for the length and severit;' of the depressionrs to be attributed to them. In a perfectly flexible economywhere money costs and prices quickly adjust themselves tochanged circumstances, there could be price level fluctuations,profit fluctuations, or fluctuations in the real income of labor, butthere could not be substantial fluctuations of employment orproduction. Our system rests upon the assumption of the exist-ence of price flexibility and cannot operate smoothly without it.But in fact the price structure is shot through rvith rigidities,and even. as in the case of tax rates and freight rates, rvith per-rerse flexibilities.

If the apostles of inertia, of painful waiting, have any rationalbasis for their dogma, it must be their assurance that in time,1en tlough no concerted and deliberate measures directed tothat end are adopted, money costs rvill fall sufficiently to restorea.profit margin for business, and thus bring about a resumptionol productive activity. Here and there business men have suc-ceeded in reducing their costs to the level of present prices andare operating at fair profits. But these are rare exceptions. In-f\strl, rvhere it is operating at all, is operating on a restrictedrehedule and at a loss. Dividends paid in 1933 will be but aili.d:* of their pre-depression amount, and even these dividendsnru be paid largely out of surpluses accumulated in the fat years,

l,lil.

DEFLATION, INFLATION, OR MORE DEPRESSI

or with the aid of raids on depreciation reserver, o, ", u*;

sions of hope in the future rather than as manifestations of ;Efaction rvith the actual state of affairs. I stil l believe that efrif nothing is done costs will eventually probably fall sufficiexfrto restore a profit margin. But I am becoming To-re and Uficonvinced that there is serious risk that they won't do so quifi

:t""1*-t:,1:':'j",1"*":i,Y:"""T":""T":"":iT:::,::.rerianccfiplaced wholly on the self-acting processes of recovery.We have already had three years of patient waiting, p.obaldn

three years too much. It is arguable that even dangerou. ,u4i,dies now threaten less risk of disaster than does continuaneg,.tinaction. The advice so rvidely offered that rve should avoid,rllrisky or costly procedures, rvith its implication that rve cau [qso simply by doing nothing, is under prevailing circumstauesabsurd advice. ft would be comparable to advising a man in rburning building not to risk his life by jumping, but rather tofollow the safe and conservative policy of rvaiting for the rrinto put the fire out.

uTsn Honr,c,rony l\fprnoo

I come now to the hortatory method. President Hoover lprlong been a convinced exponent of resort to incantations tl.rmeans of exorcising social evils. During his lrar-time r6le$sfood administrator, he relied on slogans and appeals to patriitism where in other countries mandatory rules and regulati$were applied. Again during the depression President HooveriShis stafi of soothsayers with extraordinary persistence insithat prosperity was around the corner, if nothing werefrighten it away. As a substitute for prosperity he gave usgans, just as a substitute for government relief of theployed he asked the public "to give until it hurts."men and the press have become infected with the sameand the public has been burdened with appeals to "Buyand to "Buy American" and told, in thousands of dollars ofvertising space, that "It's up to you, women" to end thesion.

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pEFLATION, INFLATION, OR MORE DEPRESSION

It is by no means certain that full response to some of thesequpeals rvould have been aids rather than hindrances to recov-,ri.. Bt.o if there were no ground for doubt on that score, it is,,,e of the characteristics of a depression that the types of actionnhich would be beneficial if followed in concert by all are suici-

dal for the individual who follows them alone. Mankind cannotbe irrduced by exhortation to do en masse what is patently in-

iurious to individuals if done singly. You can't socialize ruggedindividualists by rvaving a wand at them, and the chief efiect of1|re hortatory policy is undue postponement in the formulationand execution of a program of genuine action by the only agen-cies rvho have the Power to do so.

mDorNc rnn WnoNc Tnrxcs

Sane persons, of course, would not deliberately adopt a policyof doing the wrong things, but they may do so through enorsof judgment. To give and defend a detailed list of the errors ofcommission of which the government has been guilty wouldrequire more time than is at my disposal and probably wouldserve no useful purpose. I will concentrate, therefore, on twonajor errors of commission of the Hoover Administration indealing rvith the depression - its treatment of agriculture and itscampaign for maintenance of the boom level of wages.

The most important contributions to recovery from pastworld-*'ide depressions were made by farmers and workers inquickly reducing their charges for agricultural products andlabor. These reductions, of course, were not made out of publicspirit but from necessity, but we need not rvorry about motivesiI only the actions to wtrictr they give rise are commendable.Agriculture has in this depression been the only major.portionof the national economy which has continued to operate and toltodu." to the limit of its capacity. There could be no businessaepressions if all sections of the national industry were as readilyto adjust their demands to the level at which the market wouldobsorb their full output.

DEFLATION, INFI"ATION, OR MORE DEPRESSIgS'

There are many who argue that it would have been better forthe community as well as for the farmers themselves if they \iresponded to falling prices by allowing their lands to lie idh'which is what, in efrect, manufacturers do during a depressiof,They overlook that if farmers followed the urban model, depretsions would mean not merely distress but wholesale starvatiotr.They fail to see that you can't increase the prosperity of a 4,tion, even though you may increase the wealth of selected individuals, by sabotage, by deliberately restricted productio,trWhen one section of industry keeps on operating at full stea,qwhile other sections lay down their tools, the section that coatinues to operate may be keeping the whole economy from goiqto sruash hut' thereby assumes a disproportionate portion of ttndepressiorr burden. That section of the community is not on$nffa,ily entitied tp relief, but it becomes in the general intertstthat it receiVe-it before it also is forced to stop production.

But instead of relief the farmers were given the Farm Boai$Act and the Smoot-Hawley tarifr; the former disorganized thcirmarkets and got them more deeply into debt, and the lattc,through inciting retaliatory and defensive measures abroad, ihprived them of their foreign markets. There was no excuse, €bcept unworthy political excuses, for either of these measurliThere was no lack of warning as to how they would opersfr.It is true that the farmers themselves were largely responsib$for the enactment of both measures. But a competent govenrment's duties do not consist merely in giving to its citizensthey think they want, but also in restraining them fromfools of themselves.

In past depressions wage reductions have contributed tocovery by making possible a restoration of profit marginsindustry in spite of the fall in commodity prices. DuringNew Era, the Hoover Administration became apostles ofhigh-wage fallacy, the doctrine that high wages are aand an essential of prosperity. At the beginning of thesion, Hoover pledged industry not to cut wages, and for atime large-scale industry as a rule adhered to this pledge.is not time for an adequate exposure of the errors of

x 1 2 * * 1 3 *


analysis from which this high-wage doctrine derives its plausibil-;r\.. But its basic fallacy, to which, unfortunately, many of myorof.ssio.tal colleagues have succumbed, can be made clear in a

isln' ruords. All that is guaranteed by wages higher than em-oloyers can aflord to pay and still give employment to theayailable supply of labor is unemployment. The doctrine assertsthat high \{ages mean high purchasing power, but an unem-ployed laborer has no purchasing power at all, however highrnal' be the wage rate he would get if he had a job. Large pay-rolls do mean high purchasing power, but high wages may andoften do reduce rather than increase the size of the total pay-roll. l\foreover, $100 in a pay envelope constitutes no morenurchasing power than $100 in dividend coupons, unless thepoor hoard a smaller proportion of their income than do therich, rvhich I doubt. It would be very nice if simply by doublingor tripling all wage rates overnight we could end the depression,but its efrect would be rather to make unemployment completeinstead of partial. President Hoover would have rendered aservice instead of a disservice to labor if instead of pledgingemployers to maintain their wage rates he had obtained fromthem a pledge to maintain their total payrolls, with freedom toreduce wages as circumstances made necessary.

wIxoucno Bar,arvcr,n Drrr,.s,rror,r

Next for the policy which I have labeled induced balanceddeflation. If costs fell as rapidly as prices, there would be nodepression in the sense of unemployment and impaired nationalreal income. If prices were stabilized al their present level andeosts rvere to decline in the same proportion from their pre-depression level, the depression would end, as the result of whatI would call balanced deflation. Assuming that there are norneans, or no adequately safe means, of raising price levels, andassuming that costs had not fallen sufficiently to ofrer induce-rnents to business men to carry on their operations on somethingaPproaching to normal capacity, is it not possible to force or

DEFLATION, INFLATION, OR MORE DEinduce costs to fall until there is again a balance between cor*^and prices? In other worcls, cannot the rigidity of the

"l"mujfentering into costs be broken dox'n through governmental ,ltion? This question can best be approached by dealing ssilrately with the major items constituting costs of productiJolraw materials, wages, interest, rent, freight and uiility

"harg;and taxes.In the main the prices of rarv materials, and especially of anl

cultural products, have fallen in greater degree than have ilprices of the more advanced products into which they entiThe problem for these is how their prices can be raised ratfrthan how they can be further lowered. But there

"." *4ilinrportant raw materials, notably steel and steel products, q;:thracite coal, cement, and brick. which through the qus*monopolistic organization of their industries have ru"""ud.ihlargely in resisting the general downward trend of prices. Th6have been aided in this by the deliberately slack enfoof the anti-trust legislation by the federal govemment dthe depression. There are valid criticisms to be made of thetrust legislation, especially in so far as it presents anto reduction in costs of production through mergers, elimiof competitive expenses, and so forth. But when thement during a depression lends its moral support tomaintenance and output-restriction, it is operating indito lengthen and intensify the depression. price mainihrough restriction of output means price maintenance thintensified unemployment. There should be vigorous cotion and prosecution of all concerted endeavors tooutput.

With rvages f have already dealt somewhat. Thedepression wages have given way to a considerable degreethe last eighteen months, and in small-scale industries andsmall towns they have frequently been drastically reduced.cept here and there in the few industries in which trade unstill retain an influence, or rvhere employers with more sentthan wisdom are showing a preference for high wages overemployment, there are visible to me only two important

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of labor rvhose rvages should be further reduced in the interest0f economic recovery, namely, the wages of railroad labor and of,rsr-€rnm€nt employees. If freight charges and tax rates are toierrre dorvn, it is necessary that rvages of these groups of laborps further reduced. Without a reduction of freight charges andtar rates, and in the absence of a general rise in prices, there isro reason to expect early recovery from the depression. In bothjpstances the government has a deflating r6le to play, since itstands as protector of raihvay u'age schedules and is of coursedirectly and immediately responsible for the level of salaries andrr.ages paid to its own employees.

During the seven fat .vears 1923 to 1929, industry in generalfreed itself largely from bonded indebtedness, and in this respect1'as in a favorable position u'hen the depression began. The re-yerse rvas true, hou'ever, of agriculture, of urban real estate, ofthe railroads, and of state and local governments, which duringthese years accumulated a great load of fixed bonded and mort-gage indebtedness, a load rvhich has become intolerable rvith thedecline in prices and in volume of business, and which leavesthose struggling under it .rvithout adequate credit for bank loansrith which to finance current operations. Assuming as beforethat prices will not rise, this debt load must be drastically re-duced. For farmers and private business, provided no net equityremains or such equit;' as remains can be concealed from or isnot insisted upon by the creditors, a remedy lies through bank-ruptcl' or receivership proceedings, and this remedy, whilecostl;. ' . is salutary. But as long as some equity remains, and some-times long after it has all vanished, the debtor struggles to avoidthe stigma of bankruptcy, and thus merely postpones the in-evitable and increases the damaEe done., There should be little stigma atiached to bankruptcy proceed-rngs in a time like this. Some of our best cit izens have qurvivedthem without Ioss of caste. fn the urban real estate field, thesituation would in large measure have been cleared up by thistirne if the legal profession and the politicians, often in collusionIt'tth the courts, had not grasped the opportunity to fatten, likevultures, on the distress of their fellow citizens. fn the case of

DEFLATION, INFLATION, OR MORE D

the railroads and of farm mortgages, the situation remains tqdealt with. fn other countries, less costly procedures anddies are possible which, by deflating but not wiping out S,creditors' claims, render reasonable justice betrveen debtor a$creditor and permit the debtor to resume operations with lo5interest and capital charges, and with rehabil itated credit fonew borrowings. In this country, constitutional provisions stein the way, unless voluntary consent is given by both parth.but the governments can, and apparently are about to, aid,{;iiprocess of rnutual agreement to deflate indebtedness. The l;construction Finance Corporation, by its loans to railroads, f,gpostponed this necessary task of deflating debts, and has thgl6by served to lengthen and deepen the depression rather thantshorten and moderate it. Unless prices rise, time will in {pcourse take care of all these private debts, through bankruptcihforeclosures, receiverships, defaults, and compositions. But spc$is urgent, and it is urgent, therefore, that governrnents-l$especiall;' the federal government, u'hich is so hostile to mopures tending to raise price levels - should hasten the proceser$debt deflation by every means, legal or nearly so, at their dnposal.

Government debts are important as a factor in the depressfonchiefly through their contribution to the tax burden, and hdtthere is no easy remedy of a deflationary type. Reduction ifrfederal debt or interest by fiat is to most Americans unthinkahb,and would undoubtedly for some time seriously disturb cddence. Reduction of the federal interest burden by conven&at Iower rates of interest is possible to some extent, but it wdrequire skillful management and whole-hearted cooperatiou,f,the banking system. There is little ground for anticipating 16stantial relief to the federal budget therefrom unless a patrioffiappeal such as the British for voluntarv conversion at lower rttFrvere made and were successful. The experiment should be tril#Lhowever.

The state and local debt burdens are less manaseable than &federal, and I see no means of relief. The credit Jf lo"ul govet*ments is already sadly impaired, and successful conversion op4

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I


gi6ns are out of the question. There are no legal barriers to state

"ooudiations, but in most states local governments must con-

iin,r. to carry out the letter of their bond contracts as long as

iaxable property still exists within their jurisdiction, and as long

as there sti l l remain schoolhouses which can be closed, and school

t...h.r. who $'ill rvork rvithout pay. Local governments have

iouncl it necessary to pay the interest on their bonds even after

ihey could no longer find the funds with rvhich to provide relief

for the unemployed. IJnder the American legal code, local gov-

ernnrents have sacred obligations to their bondholders but ap-oarentlY to no one else.

The rent problem is closely similar to the private debt prob-lem, but apparently there is less sacredness about a rent con-tract than a bond, and rent contracts, moreover' usually haveshorter terms than do bond contracts and therefore are morequickly adjustable to changed circumstances. fn any case, thereha.,e been rvholesale rent concessions irrespective of the termsof the leases, and it is only corporations of great rvealth whofind landlords obdurate to appeals for rent concessions.

In the case of freight and other utility charges, governmentsare in a position to act rvithout need of new legislation or pow-ers. Freight and utility charges should be flexible, should bereduced during depressions, and should be permitted to rise dur-ing prosperity. The utilities should expect a "fair" return ontheir investment on the average over the good years and bad,and not in every particular year urhatever the consequences tothe rest of the community. Rate reductions now should be ac-companied by pledges of rates during the next prosperity periodsufficiently high to offset any losses resulting fron present re-ductions. The freight rate structure is so absurd that it wouldbe amusing were its efiects not so tragic. The notions of railwayexecutives that they can survive the depression and the newcornpetition by charging rates so high that they are patentlystrangling industry and agriculture and suppressing traffic onlyserve to heighten the common impression that the difrcultiesof the railroads are not wholly unrelated to the quality of theirrnanaqement. But if the railroads cannot survive lower rates

DBFLATTON, INFLATTON, OR MORE DEPRESSIONTI

without assistance, it would be rnuch better for both the rafiroads and the public if government subsidies were devoted 11.,rate reduct.ions rather than to liquidation of ancient debts. f,is curious that the metropolitan press, rvhich is so convinefrthat the high tax burden is the chief obstacle to economic 1jcovery, shows no interest in the high utility rate structutg, whiclfalls more directly on business operations, and is, dollar for doilar, an equal burden rvith taxes on whomever it falls.

Reduction of taxes, and especially those taxes rvhich prssdirectly upon production is, however, an essential part of a pp-gram of balanced deflation. The difficulties are great, and shouhnot be minimized. During a depression the tax ba"se, whether i1be income or property or commodity sales, shrinks, and to maintain the same tax revenues it is necessarv to increase the hrrates. But an increase in tax rates operates further to comprqsthe tax base, and from this vicious circle there is no escape e[-cept through a drastic cut in government expenditures or throughfinancing a large fraction of the expenditures during the depnrsion through borrowing. For state and local governmenttimpaired credit and constitutional debt limits are obstacles,brecourse to bonotving. For the federal gor-ernment, the cap-paign for balancing the budget has made it dangelous to increagthe debt substantially, because of the adverse efiect it wofl0have on the morale of a scared public taught to measure thstability of government by the financial record for a single ycltor short period of years.

Had it not been for this campaign of fear, horvever, ithave been sound policy on the part of the federal governdeliberately to permit a deficit to accumulate duringyears, to be liquidated cluring prosperity years from the hiproductivity of the tax system and from increases in taxrvhen they rvould clo no harm. The outstanding though unitional achievement of the Hoover Adrninistration in counting the depression has in fact been its deficits of the lastyears, and it was only its own alleged fears as to the illof these deficits, and the panic which the big business world

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DPFLATION, INFLATION, OR MORE DEPRESSION

fessed to foresee if these deficits should recur, which have madeihis method of depression finance seriously risky. Had the gov-

elrl lrent and the business magnates retained their mental bal-61ce, there would have been less cause to fear net ill efiectslrrring a depression than during the rvar from even a ten billion,loilar cleficit.

Given the necessity, holvever, for reducing government expen-ditures, it is much more desirable that this should be donethrough temporary recluctions of salary and rvage scales to alevel *'ith prevailing conditions than by cutting down importantsovernment activit ies. Both methods have the same beneficialeffect on the taxpayer as such, but the latter method adds tothe number of unemployed, deprives the public of the benefitof valuable governmental services, and disorganizes and demor-alizes governrnental rvorking stafrs rnuch more than lvould rea-sonable wage reductions accompanied by assurance of continuedemployment.

In order to have its maximum beneficial efrect, it rvould benecessary that a program of induced balanced deflation shouldbe pursued vigorously and simultaneously along the whole frontof undeflated costs. Such deflation rvould inevitably involvehardships and inequities in individual cases. It is to be regarded,horvever. as a surgical operation, effective only if done quicklyand to the full extent necessarl'. Procrastination in executing itor its execution in a half-hearted rvay might well result in itsfailure to accomplish its purpose. In several respects, it couldbe so managed as to deprive it of its harshest features. Wagereductions could be made temporary in form; in bankruptcysettlements and compositions of debts there could be includedProvisions to the efrect that, in the case of early business recov-ery, the surrendered claims of the deflated creditors would be-eorne reinstated in part. Such contingent provisions would notressen the degree of immediate relief to business and agricultureand rvould give some basis for hope to creditors and wage earn-ers that the impairment of their economic position would notue permanent.


V

fxu,arrou ls l MnaNs or Rrcovsnv

I come finally to the policy of inflation as a means ofabout a recovery of prosperity. Here peddlers of nostrumsa promising field for their operations, and here also apostlesinertia, dispensers of chloroform, tend to rely upon ridiculea substitute for reasoned argument and find that it works viwell. "fnflation" is an old rvord and during its long historyaccumulated a wide range of meanings, many of themdictory. I will use the term inflation to mean an increase intotal amount of spendable funds, rvhether consisting of qpape rmoney ,o rbankdepos i t ssub jec t t ocheck .

The basic argument for inflation is that it rvould operaise product-prices more than cost-prices, would in thisrestore a profit margin for business, and thus rvould bringan increased volume of production and of employment.inflation many things are urged. It is said, for instance,(a) it can't be done; (b) if attempted, it would drive usgold standard; (c) all previous attempts at inflation havein disaster; (d) inflation involves a violation of contractmorally reprehensible.

I can see little force in most of these objections. fnflationbeen accomplished many times, especially in times of war.flation as I have defined it has more often been practicedthe gold standard than ofi it. We had a generation of ion the gold standard after the discovery of the CalifornianAustralian gold fields in the middle of the nineteenthand again twenty years of it after the discovery of theand the invention of the cyanide process for extracting goldore at the end of the nineteenth centurv. fnflation. rvor on the gold standard, is much safer, much more easilylated, if practiced on an international scale than if broughtsingle country, and if practiced internationally all of the ianyone could reasonably ask for would be possible withoutdangering the gold standard in the slightest.

There have been a few previous attempts at inflationconducted without restraint and under abnormal circu

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pEFLATION, INFLATION, OR MORE DBPRESSION

^.;ed in disaster. There have been dozens, perhaps hundreds of1"..r, hotu.n"r, n'here it 'was kept rvithin bounds, and while notl.","..ratily beneficial, did not have disastrous efrects. As far..J tno*, it has never unti l the present depression been used

l.titr..ut"ty as a means of ending a depression, and has generallyieen unintentional, or has been used to help finance a war, a use

"orilst which much can be said, since in ' lvar t ime rvhat is ordi-

nirilf needea is not an artificial stimulus to business, but rather

restrictions on over-expansion in directions not contributing to

the attainment of military victory' There is no lack of knowl-edge as to the technique of controlling an inflation, and if it

involves risk, the risk lies not in ignorance as to methods ofcontrol but in lack of determination on the part of government,central bankers, or the public, to exercise such control.

Deliberate inflation may involve violation of the letter or ofthe spirit of contracts, but the only visible alternatives are simi-lar modification of contracts through forced deflation or throughbankruptcy, or else economic collapse. IJnder inflation thereis no need for reduction of the real income of the creditor classbelorv the level that they had cause to anticipate when the con-tracts rvere made, and even creditors would be rvell-advised toprefer inflation with its reduction from present nominal purchas-ing power to inability to collect anything because the debtorswere breaking under an undeflated debt load.

It is often said that the federal government and the Federal Re-serve system have practiced inflation during this depression andthat no beneficial efiects resulted from it. What in fact happenedwas that they made mild motions in the direction of inflation,which dicl not succeed in achieving it, did not succeed even inaccomplishing "reflation," but which probably did slow up some-what the rate of price decline. The loans of the Reconstructiont'inance Corporation, in so far as they involved new tredits in-stead of substitution of sound for unsound credit, the open-Inarket purchases of the Federal Reserve banks, have been in thehain but two diflerent aspects of a single operation. The Recon-Itru.tion Finance Corpo.ation obtains its funds from the federaltreasury. The treasury obtains its funds mainly by sale of short-


term securities to the banks. The banks recover the funds whidlthey have thus lent to the treasury by sale of government secqities in the open rnarket to the Federal Resen'e banks. The loaUof the Reconstruction Finance Corporation and the open-ma*itpurchases of the Federal Reserve banks are not to be added {5each other, therefore, as is often done, in order to estimate tfoextent to rvhich government and central banking agencies hgilpumped new funds into the credit market. At no time, 6sI;over, since the beginning of the depression has there been f&as long as four months a net increase in the total volume of ba*credit outstanding. On the contrary, the government and I,{eral Reserve bank operations have not nearly sufficed to cottttervail the contraction of credit on the part of the member arylnon-member banks. There has been no net inflation of bai*credit since the end of 1929. There has been instead a fairly coiitinuous and unprecedentedl-v great contraction of credit duriftthis entire period. , ia c r r l l r g P c r r u u . , , . . :

Many of the methods of inflation currently advocated worilnot, or rvould not necessarily, accomplish it. Increases inmoney rvould increase the total amount of spendable fundsif they were not offset by corresponding decreases of bankposits subject to checks. In any case, an increase of paperin greater proportion than that in rvhich the public wishedhold its cash balances as between currencv and bankwould rapidly be converted into bank deposits, and conceiits only efrect would be to increase the cash reserves ofbanks or decrease the indebtedness of the member banks toFederal Reserve system. The initial form of the inflationspecial significance and would soon change if not inwith public customs and habits.

Similarly, proposals for periodic stamp taxes on paperin order to speed up its rate of circulation, sound sensiblethey do-only because it is overlooked that if there is atax on holding cash balances in one form but not ineveryone will learn to use the taxed form of monev inpayments and to do his hoarding in the untaxed form.measures would increase the velocity of circulation of the

x q q x

DEFLATION, INFLATION, OR }IORB DEPRESSION

pron€)', but onl;' by decreasing to a corresponding degree thevelocity of circulation of bank deposits and coin. In order to

hale the desired efiect, such taxes rvould have to be levied onall forms in rvhich cash balances can be held, including coin and5a1k deposits. What rvould thus be accomplished would be aSzclihanded form of inflation, where the velocity of circulation6f spendable funds u'ould be increased, but not its amount. Thedifrculties of administering such a measure rvould appear to beenofnlOUS.

Another comrnon proposal, namely, to devaluate the dollar0r reduce its gold content b5,', say, 25 per cent would, in theabsence of other concomitant measures, operate to raise theorice level in trvo ways. First, exports rvould be stirnulated be-cause of their lower prices in foreign currencies, and importsrvould be restricted because of their higher prices after conver-sion into the devaluated American currency. This n'ould resultin higher prices for the export industries, and in larger gold re-serves for the banking system. Second, the devaluation of thecurrency rvould increase the dollar value of the present goldreserves of the banks without increasing the dollar value of theirpresent demand liabil i t ies, rvould thus increase their gold re-serve rates, and would enable them to increase their loans withgreater safety in so far as adequacy of reserves was concerned.But tarifis and the depression have reduced our foreign tradeto a srnall fraction of its former proportions, and it now seemsto be insufficient to be an important short-run regulator of ourprice level. Countries on the sold standard, moreover, wouldbe likely to apply import quotas and administrative restrictions0n our products in order to protect their domestic producersagainst increased inflows of American goods, and countries ofithe gold standarcl might furth.. depr"ciate their currencies tocountervail the efiect on their trade of our devaluation. Ourbanks also might welcome the additional liquidity which theneasure gave them, without hastening to use it as a basis forerpanding their loans. Finally, the gold clause which appears ina great part of our bonds, mortgages, and long-term leases, andls no\Y being included in even ordinary short-term promissory

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DEFLATION, INFLATION, OR MORE DEPR

notes, would present an embarrassing legal problem for whidno satisfactory solution has yet been suggested. T

There are many advocates of remonetization of silver 41 ,mint price greatly in excess of its current market price as Imeans of raising the price level, but there is even less to be srtfor it than for most inflationary proposals. If the gol

".orxs;wishes to inflate, there is no reason why it should not retain t[immediate profit from the fiat currency for itself rather thrngive it to the silver-mine operators. The total available stdof free silver in the u'orld is not sufficient to make any greStimpression on the price level unless silver were overvalued malifold for currency purposes. The rise in the nrarket price of silviwould operate to extend to the sih'er-currency-using countriq.the destructive deflation from ivhich the gold standard cou&.tries have been sufiering, but from which they have largdl,escapedbecauseo f thedec l i ne in thego ldp r i ceo fs i l ve r .

Assuming for the moment that a deliberate policy of inflatipshould be adopted, the simplest and least objectionable prs,cedure would be for the federal government to increase its qppenditures or to decrease its taxes. and to finance the resulta$exc€ss of expenditures over tax revenues either by the issue:dlegal tender greenbacks or by borrorving from the banks. It si*be remembered, however, that this would not actually renftin inflation as f have defined it, if the nerv greenbacks wd$hoarded, or if the nerv borrowings rvere of private funds whfob,would have been used in any case, or if the banks in their oifftinued search for liquidity reduced the amount of their loans.ifitothers to an equal d"g."". In order to bring about in-flation,,Swould be necessary to increase government expenditures sufitlciently to more than ofrset for some period of time anymeasures of a deflationary character by banks or indivCan this be done, and rvhat would be the consequences?

Theoretically, it is clearly conceivable that it wouldextraordinary amounts of government expenditures toplish this end, if banks continued to liquidate their loansprivate individuals to hoard their bank funds as aagainst future needs and to hoard government money as

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pDFLATION, INFLATION, OR MORE DEPRESSION

once against bank closures. This procedure could work only if, dia not cause general fear of an early departure from theoo16 standard and therefore a flight from the dollar into foreignisgnrities and foreign currencies, and if upon the first signs of aninrpending price rise business men actually began to buy com-nrodities and to resume productive operations in order to profitfronr the low prices while they still continued to be available.I cannot see any justification for confidence that an aggressiveinflationary policy of this sort would not immediately result ina fligb,t from the dollar, in panicky anticipation of the effects inbusiness circles of a grossly unbalanced government budget, andtherefore in more injury than good, at least as long as we re-nained on the gold standard.

But 'rvhat if rve rvent ofl the gold standard? Once off, indi-viduals rvould have nothing to gain by fleeing from the dollarto foreign currencies, since the exchange market would probablyimmediatel;, over-discount the prospective fall in the internalpurchasing power of the dollar. There rvould still be an incentiveto flee from the dollar internally, but the internal flight from apaper currency does not take forms restrictive of business ac-tivity such as hoarding of money, but on the contrary leads torapid expenditure on commodities, building, and so forth, inorder to profit from the anticipated price rise.

If going off the gold standard were as simple a matter for usas for England and Canada, I would not only advocate it, butif the mere cessation of gold payments did not suffice to lowersubstantially the internal purchasing power of the dollar I wouldrecommend its accompaniment by increased government expen-dttures financed by the printing press or by loans. You have nodoubt been told that unemployment has not decreased and pro-duciion has not increased in Bneland and in the other countrieswhich rlent ofi the gold standara in tg3t, and that thesp coun-tnes as a result of their departure from the gold standard have*st in prestige and have sufiered from an unstable currency.uut these countries made one mistake when they went ofi thei,old standard. Their mistake lay in their too restrained use oftne freedom which the departure from the gold standarcl gave


them. Instead of attempting to raise prices, they tried ito stabilize them at the then prevailing level, relying uponstimulus to their exports of the fall in the foreign exchangeof their currencies to bring them an increased measure ofperity. They failed to foresee that the progress of the dthe eontinued deflation in the gold standard countries, andmultiplication of tarifr and other restrictions on foreignwould more than neutralize the tendency of the deptheir currencies to increase their exports. Although,half the world went ofr the gold standard with England,of it has actually inflated, has actually increased its totalof spendable funds.

The countries which went ofr the gold standard havetheless weathered the economic storm much better than wedone. ff they did not restore prosperity for themselves bydoning gold, they at least escaped the furtherwhich we have sufiered since the autumn of 1931. Infor example, prices, production, employment, have heldown since 1931, which is much nore than we can say forselves. England has even balanced its budget during thisfiscal year, whereas operating under the supposedlygold standard we achieved the greatest peace-time budgetin history. f doubt whether in comparison with uslost in prestige since the autumn of 1931. ff so, I rvouldknow on what grounds. fn any case too high a pricepaid for prestige. Nor has our gold standard currency beenstable than the English paper currency. The contrary hasthe case. In internal purchasing power, the Englishremained practically stationary, whereas our dollar has,sorrow, substantially appreciated' On the exchange mdollar has of course fluctuated exactly as much in itsbuy sterling as sterling has fluctuated in its power to buy dThe only stability our currency has had has been stabilityexchange value for gold.

The gold standard is to many men a sacred instituherence to which rests on faith, on devotion, if necessarysacrifice, but not on reason and calculation. f do not

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DBFLATION, INFLATION, OR MORD DEPRESSION

llese religious convictions, but I nevertheless am firmly con-r.inced that, because of special circumstances prevailing here,fe1 the time being at least it is impossible for us to consider de-liberate abandonment of the gold standard or even any serioustarnpering with it. The actual process of going off the gold5tarrdard, while it is under way, is extremely painful, costly,oanic-breeding. England was able to go ofi over a rveek-end. Inihis country, it would undoubtedly require rveeks, if not months,of public and congressional debate, during lrhich utter confusionrvould be likely to prevail. The gold clause in contracts, peculiarto us, lvould be an additional complication persisting even afterwe had formally abandoned the gold standard, and even if thegold clause were eventually nullified by judicial decision to theeflect thal it was unenforceable, or that it was not binding dur-ing an emergency, it would in the interval before a final decisioncould be rendered cast doubt on the solvency of all railroadsand other corporations having such clauses in their bonds. l\[auypersons also would question rvhether ll,e can safely trust ourlegislators to exercise rvith due caution, sobriety, and intelligencethe power of price regulation which they would have if our cur-rency s; stem were no longer tied to gold.

If rve are to have inflation, therefore, $'e must have it withinthe gold standard and without resort to budgets badly enoughunbalanced to terrify Wall Street. 'fhese trvo conclitions sufficeto make impossible any policy of deliberate inflation on a largeseale through unilateral action on our part. If it is to be accom-plished at all, it must be accomplished by intemational agree-ment, as a part of the general economic settlement which wehust hope and pray rvill be the outcome of the Internationaloconomic Conference. ff aI, or even a substantial number, ofthe important commercial nations ,will agree that they will en-qeavor to raise their internal price levels within trvelve rhonthsDJ-say fifteen per cent, will pledge themselves by pegging opera-;;:I "",1 international loans to maintain the exchange values of;l,e|

curr.:ncies at approximately their then prevailing levels,"'tt -contribute to the process of balanced deflation by writing

"wn pre-depression international debts, public and private, anj


will pledge themselves to restore tariff walls to their 1929or lower and to abolish the administrative baniers towhich have accurnulated during the depression, I arn optienough to be confident that the prospects of early prosperityseem promising enough to business men and banks throuthe world to lead them of their own accord to put theirable funds into use to finance production, to restore emploand to bring about the needed rise in price levels rvithoutsitating substantial additional expenditures on the part ofernments or abandonment of the gold standard by countriesadhering to it.

A full return to the 1929 price level is not essential forrecovery of prosperity. The decline in the prices of the fof production which has already occurred, together witheconornies ancl the technological improvements rvhich haveintroduced under the pressule of three years of fallingrvill make a moderate increase in prices suffice forEven if the important participants in the Internationalnomic Conference should only pledge themselves to prefurther decline in commodity price levels, economlcmight still take place, although after a longer delay, through'progressive operation of the process of balanced deflation,out the assistance of an artificially induced rise in priceWithout speedy balanced deflation or induced inflation, orerably a combination of both, prospects are extremelyIf the International Economic Conference should fail tosubstantial results in one or the other or both of these directithen we must fall back on drastic balanced deflation withinown country as the only hope for relief. If this should alsothen we must steel ourselves to withstand morewhose final outcome for our civilization, and especially forpresent mode of economic organization, no one can asforesee.

OPEN DISCUSSION

QuosrroN: Is Dngland on the sih'er basis?Mn. VrNpn: No, England is on a paper basis,

altogether discovered it yet and is still retainingx 2 8 x

but has

DBFLATION, INFLATION, OR MORE DEPRESSION

rne gold standard psychology. I may say in this connection.ln,ethirg I intended to say in my talk: although I concedeit at England has not increased her prosperit;r, the reason why;" that England has not used to full advantage the freedom sheoot. She has merely held her olrn. There has been no expansionlf prp.r noney or bank credits. The gold reserve requirementsare sti l l as binding now as if she 'w'ere sti l l on the gold standard.

eursrrox: If England is on the paper basis, what is ba.ckof it?

trfn, Vrxpn: All that is necessary to give value to the cur-rency is to keep the quantity restricted sufficiently. It doesn'thave to have anY intrinsic value.

QursrroN: What reasons are there for supposing that any ofthe proposals for limited inflation now before Congress rvouldaccomplish any more than the Bland and Sherman acts of thelast centurY?

l\fn. VrNpn: There are trvo kinds of history of Americanmonetary experiences. There is the history rvritten by thosewho believe that strict adherence to that nowadays most pro-found of our religious institutions - the gold standard - was all-important, and who would put as the great periods in ourhistory the dates when Congress resisted the temptation to tam-per with the gold standard. I think myself that a lot is to besaid for \\'illiam Jennings Bryan and his 16 to 1 campaign of theI890's; and that the country itself rvould have come to that con-viction if the process which was then crushing the farmers hadcontinued for three or four ;-ears. The only thing that has savedus in previous severe deflations has been a series of miracles.In the middle of the nineteenth century, the discovery of goldfields in California and Australia came after forty years of verysevere deflation comparable to what we are sufiering now. Again,toward the end of the nineteenth century, came the discbvery ofgold in the Klondike and the Transvaal and the cyanide pro""r,of extracting gold, which itself raised the price level so that thelfmer. got relief through rising prices. People talk of similar^'qtracles being in prospect now. They may come. But f wouldn'tSaurble on it.too

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DEFLATION, INFLATION, OR MORE DEPRBSSI

Quosrrox: fs there any kind of an inflationary proposalvolving an expansion of money that would not be diby the banks and in a way which would result in a shriof currency?

Mn. Vrwr,n: The banks have no means whatever ofvailing an inflation if you are not on the gold standard.the gold standard they can flee from the dollar. Ofi thestandard, hoarding doesn't do any good. Under a paperrency the only practicable mode of insurance against losgrvalue of one's cash holdings is to buy commodities, buildand so forth-not a very undesirable consequence.have no personal cause to fear inflation. If they are thestalwarts against inflation, it can't be because of self-inbut it is their feeling of what is good for the country.

QursrroN: Is it not likely that most of the so-calledtionary proposals now before Congress. if passed, wouldserious an efiect upon the bond market and banking systemthe effects would be deflationary rather than inflationary?

Mn. Vrlvrn: Under a paper currency there is no partireason why inflation should have an adverse efiect on themarket unless you expect'ivild inflation. In England bondsnot fallen in price since England went off the goldOn the contrany, they have risen. The British have moredence in their present economic status. ff you mean by iwild unregulated inflation - such as has happened in sometries-that would hurt not only bonds but many otheras well. And, as I have already said, the process of goinggold standard would be very costly altogether apart fromaccompanying inflation.

* 3 0 *

THE DAY AND HOUR SERIEScCIENCE AND CMIZATIONgy Gur Sr.rnrox Fono, Dean of the Gra.&nte School, Unfuersitg ol Minncsota

FABII RELIEF AND TIIE DOMESTIC ALLOTMENT PLANBu \1. L. \Yrr,sor,I, ProJessor of Agrialltural, Economits, Montann AgriailhtralVLtLrse

BALANCED DEFLATION' INILATION, OR MORE DEPRESSIONBy J*on Vrxon, Profassor of Ecanotwics, Unioersitg of Chicago

NTERNATIONAL ECONOMIC RECOVERYS, H. G.Mour,rox, Pred.dent of Brookings lwtitutiott

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