DEPRESSION INVOLVES great economic loss: because of idle labor and equipment, goods are not produced. During the decade of the depression following 1929, the United States lost at least $350,000,000,000.
But the loss of physical goods and services as a consequence of depression is slight when compared with the effects of unemployment upon human personality. The social ostracism of the unemployed, the characteristic of being "unwanted" by a society to which he wishes to belong and in which he wishes to play a constructive part, often produces frustrations and emotional maladjustments the evil impact of which may be felt beyond the existing generation.
Economic instability undermines democratic government. There are many who inwardly fear or openly charge that democratic government is no longer adequate to the tasks confronting the twentieth century and that it must be supplanted by some form of dictatorship. The usual assumption is that democratic government has proved inadequate in the face of our dominant economic problems, notably unemployment, A glance at recent history will raise disturbing questions in the mind of any friend of democratic government. From the depression of 1920-21 Mussolini rose to power. From the depression of 1929 rose Hitler and a host of lesser dictators. In modern society there seems to be a close connection between depression and dictatorship.
At the present time no question is more disturbing than the question of international peace. Any program of peace must be built around some form of organized international cooperation. In this cooperative effort the United States, because of its position, must assume a leading role. The United States today is the greatest military and economic power in the world. As such, it tends to attract many nations by both its might and wealth. And yet many nations which are drawn to us nevertheless shrink from close collaboration because they fear the consequences of our erratic economy. Already the possibility of a severe American depression or depressions is giving grave concern to England and to other countries as they ponder the question of how to insulate themselves.
The depression of 1929 resulted in the breakdown of a system of international trade and finance which had been two centuries in the building. In its place developed an intense form of economic nationalism, the precursor of war in the modern age.
The world watches the differences between the United States and the Soviet Union with fear and nervousness often close to panic. Though it would be a gross simplification to suggest that these complex differences could be resolved by greater economic stability in this country, nevertheless economic stability here could make an important contribution to better understanding. The Russian Communists follow the Marxian tradition in thinking that the capitalist countries are foreordained to continuing booms and depressions and that in such depressions they are forced to seek foreign markets because the system does not supply adequate markets at home. This drive for foreign markets brings about imperialism and from a clash of imperialist powers will come war. In such imperialist wars Russia will either be attacked directly or drawn into an inevitable conflict. In the light of this type of social theory the Russians today, as Stalin has frequently said in recent years, look forward to an attack from the capitalist powers as inevitable.
Even though one may not accept the Marxian theory which serves as the basis for this dark suspicion, a prolonged period of economic stability in this country, the greatest of capitalist nations, would serve as a convincing demonstration that such inherent compulsion to war is not a part of Our political being. Such a demonstration should do much to lessen suspicion and provide an environment conducive to greater tolerance and understanding.
The problem of economic stability in this country is not merely our major domestic problem; it is a problem of world significance.
Any comprehensive analysis of the problem of economic instability must be as broad as the economic and political structure of society. This analysis will focus attention on one significant aspect of economic instability which until recent years has been neglected: the savings and investment problem. Emphasis will be put not on the immediate problem of postwar readjustment but with the long-run problem of economic instability over the coming years.
Historically there have been two approaches to the problem in the United States. The first is that of laissez-faire, which denies the existence of such a problem and maintains that the automatic responses of a competitive price system will bring about a reasonable stability, or at least a tolerable instability. The second is that of central bank control undertaken after the establishment of the Federal Reserve System. Both approaches have proved inadequate, so there is a renewed search both for the causes of instability and remedies for this major weakness of modern economic society.
Our economic system produces a multitude of goods and services, which may be classified as follows:
1. Non-durable consumers' goods, i.e. essentials such as food, clothes, and fuel. The outstanding characteristic of such goods for our problem is that they are quickly used up and so must be constantly replaced.
2. Durable consumers' goods, i.e. washing machines, radios, vacuum cleaners, electric toasters, refrigerators, etc., goods which do much to lighten the burden of domestic labor. Their outstanding characteristic is that, once constructed, they last for a considerable time and so their replacement is postponable.
3. Producers' goods (often referred to as capital goods), i.e. tools, machines, factory equipment, etc. Such goods give to the economy a greater productivity but also a greater instability, for their production or reproduction is postponable.
4. Building and construction. The outstanding characteristic of this type of good is its durability. Hence it is postponable in production.
A recent analysis shows that the degree of instability varies for the different categories in the order in which they have been mentioned: Non-durable consumers' goods are most stable, and building the most erratic. Employment is more stable in industries producing non-durable consumers' goods and increases in instability as the durability of the product increases or as the product finds itself used farther away from the ultimate consumer in the several stages of the entire productive process.
The problem of economic instability may also be approached through an analysis of the spending of money. Goods are produced in response to the spending of money. The spender receives it in the form of income from the production of goods and services. The money which he spends in turn becomes income for some one else. Thus we seem to have a circular flow of money in which for the community as a whole the costs of production of all goods and services is equal to total incomes received. Why then don't we have continuous full employment of our productive resources?
The answer seems to be that in a society with a high standard of living the entire amount of income received does not have to be spent; some portion of income may be saved. This saving, however, will cause no difficulty if savings are promptly invested. [Savings refers to the negative act of refraining from spending money income. Investment as used in this analysis, refers to the spending of money for new capital goods whether machines or buildings. Investment may be made by the individual who saves or by another to whom the money is entrusted, a bank or insurance company, for example.]
Although saving will cause no difficulty for the economy if the savings are promptly invested, it is also true that the savings need not be immediately invested. We do not have to buy durable consumers' goods, producers' goods, or buildings at any one time. If such postponement in the spending of income takes place, the production of goods, and so the amount of employment, diminishes. On the other hand, it is possible, because of the credit expansion possibilities inherent in the commercial banking system, that investment may exceed saving. In this case, there will develop a business expansion or a boom, depending on the amount by which investment exceeds savings and the time during which this relation continues. The major economic problem of this age can be stated in the following language: How can saving and investment be kept equal under conditions of full employment?
There are two parts to this problem, one related to savings and the other to investment. The amount of "savings depends chiefly on the size of the national income, custom, and the degree of inequality of incomes. The pattern of savings is fairly well fixed over long periods of time, because savings are made at a somewhat regular rate by a great many people. On the other hand, investment, the spending of money for capital goods, is carried out by a relatively small group of people, the business men of the community. Such investment is much more variable than the accumulation of savings, and, as a consequence, fluctuations in the degree of economic activity occur.
The savings pattern shows that the proportion of income saved increases as incomes increase. A society with great inequalities in the distribution of incomes is likely to save a higher proportion of its total money income than a society with less variations in the size of individual incomes.
Investment, the second part of the problem, depends upon a wide variety of influences, in particular upon the outlook for business profits. The key to prosperity is the spending of the savings of the community by business men.
But such investment is likely to vary much more than savings for various reasons. A simple economic society with a low standard of living, i.e. one which can produce only necessities such as nondurable consumers' goods, is likely to be stable except for natural disturbances such as droughts or storms. A society with a high standard of living involving specialization and roundabout methods of production making use of much capital equipment will be more unstable. The wealthier a laissez-faire society becomes, the more unstable it is likely to be.
Can anything be done to achieve greater stability along with a rising standard of living? Two approaches may be helpful, a direct and an indirect. The indirect would attempt to create an environment in which the problem of keeping investment equal to savings would be less acute because a higher proportion of the total output of the economy would be consumers' goods and services and so proportionally less savings would accumulate. Such a program would have two different aspects: first, the encouragement of devices which would increase low incomes such as education, minimum-wage legislation, unemployment insurance, old age pensions, family allowances, strong and responsible labor unions, and farmers' organizations; and, second, an expansion of existing modes of community consumption paid for out of progressive taxation and involving an extension of such services as education, health and hospitalization, parks and playgrounds, recreational, and artistic activities. The effect of this indirect approach would be an increase in the proportion of total economic output of consumers' goods and services, i.e. an increase in the proportion of output which is relatively more stable.
The direct approach to the problem would be concerned with short term cyclical movements and would have a three-fold aspect.
First, the continued use of traditional techniques of central bank control insofar as they may still be effective, supplemented by new instruments of central bank control appropriate to the new conditions brought about by the existence of a vast public debt.
Second, the' direct stimulation or discouragement of investment and spending through fiscal policy of the government. This policy would take the form in depressions of an unbalanced budget for public works and relief and in boom periods an overbalanced budget in which the public debt would be reduced.
Third, the development of a flexible program of taxation in which tax policy is consciously related to the problem of booms and depressions. For example, such taxes as the social security tax, income tax, and consumption taxes might be increased during the upward swing of the cycle and lowered during the downward swing.
I have attempted to focus attention on what seems to be the most significant single aspect of economic instability: savings and investment. Though there may be disagreement as to the basic analysis and as to the proposals for achieving greater stability, there can be no disagreement as to the gravity of the situation. Next to the problem of war, economic instability is without doubt the greatest problem of this age.
ECONOMY, REGARDLESS OF STABILITY, is achieved by Professor Cusick by means of his flourishing vegetable garden, in which he poses informally.
PROFESSOR OF ECONOMICS
Professor Cusick is a popular speaker on economic subjects and has twice appeared on Hanover Holiday. His courses in "Business Cycles" and "Money and Foreign Exchange" indicate something of his special fields. A native of Maine, he graduated from Amherst in 1921 and later took his M.A. and Ph.D. degrees at Harvard. In 1930 he returned to Amherst to teach economics and was a member of the faculty there for five years before coming to Dartmouth as instructor in industrial society. He became Assistant Professor of Economics in 1937 and in 1944 was made a full professor. Professor Cusick is on the national panel of abitrators of the American Arbitrator Association and is a member of the advisory committee of the Consumers Union.