Economics and The Public Welfare

Chapter 41

“My Father Also Chastised You with Whips, But I Will Chastise You with Scorpions

When Solomon died Rehoboam ruled in his stead. Solomon had laid heavy burdens upon the people, and the people petitioned Rehoboam for a lighter yoke. The young king consulted with the old men, who advised him to lighten the burdens, but “the young men that grew up with him” (his “brain trust”) gave him the advice which he followed; and he said to the people, “My father made your yoke heavy and I will add to your yoke: my father also chastised you with whips, but I will chastise you with scorpions.” 1

In preceding chapters we have seen the trend in governmental policy toward New Deal measures. The high protective tariff is the mother of the New Deal, though the tariffs of 1921 and 1922 grew, not out of New Deal purposes and ideals, but rather out of a blind adherence to an outworn political tradition. But they created an economic disequilibrium which invited the first conscious step in the New Deal, namely, the cheap money policy of the Federal Reserve System in 1924, which was designed to offset the strangling effects of the tariff on our export trade by making possible a vast volume of foreign loans.

We have seen the personal leadership of the bull stock market by President Coolidge and Secretary of the Treasury Mellon. We have seen the Farm Board legislation designed to give artificial support to farm prices. We have seen the President of the United States, after the Stock Exchange crash of 1929, calling the business community into conference and urging them not to reduce wages, not to reduce prices, and also urging them and the States and municipalities to engage in heavy capital expenditure for the purpose of keeping the business boom going. We have seen the renewal of artificially cheap money by the Federal Reserve System in 1930, with the revival of foreign lending in 1930 on a vast scale, and we have seen the policy, violently contradictory to this, of the further raising of the tariffs in 1930, which choked off the export trade and turned the world toward Autarchie.

Liberal Foreign Trade Policy versus Internal Planning. A liberal foreign trade policy is contradictory to governmental economic planning, and the movement toward governmental economic planning grows rapidly when foreign trade is cut off. This was recognized a long time ago. One of the original economic planners was the German philosopher, Fichte, follower of Kant and a precursor of Hegel, who, in his book, The Closed Commercial State, maintains the following propositions:

The state must adjust in proper proportions the three chief classes of producers—(1) farmers, miners and the like, (2) artisans, and (3) merchants, limiting each to a fixed number of individuals; must insure to each individual a proportionate share of all the raw and manufactured products of the country; must for this purpose fix and maintain the relative value and money price of all these commodities; and finally, as absolutely indispensable to the foregoing ends, must render impossible direct trade between citizens and the foreign world. So far as commerce with other peoples may be deemed desirable, it must be carried on by the state itself.2

The Advice of Professional Economists, Early January, 1933—Restore Foreign Trade and Protect Gold Standard. What was called for in early 1933 was an undoing of the unsound things that we had been doing. The opinion of professional economists was pretty clear on the subject. Early in January of 1933 a group of representative economists sent a letter to President-elect Roosevelt, at the same time giving it to the press, where it was widely printed:

“The following statement is in the judgment of the undersigned economists a minimum program for economic recovery:

“The urgent immediate problem is the foreign trade situation. Lacking an adequate export market, agricultural products and raw materials bring ruinously low prices, and there is an immense unbalance between them and manufactured goods. As a result even the relatively scant output of the factories is marketed with difficulty.

“There should be prompt reciprocal lowering of tariffs and prompt settlement of Inter-Allied debts. Our own tariffs should be lowered to such an extent as will admit enough additional imports of diversified finished manufactures to take out our own agricultural and raw material exports without the necessity of foreign loans.

“We are convinced that such lowering of tariffs on finished manufactured goods will not decrease employment in manufacturing. On the contrary, by stimulating price improvement in agricultural commodities and purchasing power in agricultural communities, and by stimulating recovery in Europe as well, it will produce a very great increase in manufacturing activity and employment in the United States.

“The settlement of Inter-Allied debts should be on a negotiated basis which will probably not be satisfactory to public opinion in any country, but which, promptly accomplished, will be immensely beneficial to all countries.

“The gold standard of present weight and fineness should be unflinchingly maintained. We should also encourage and facilitate the prompt restoration of the gold standard abroad—which settlement of Inter-Allied debts and tariff reductions will do. With adequate movement of goods across international borders, the gold of the United States and of the world is more than adequate for all credit needs. If, however, trade restrictions throw an undue burden on gold in making international payments, then debtor countries have difficulties in maintaining the gold standard and confidence is so low in creditor countries that they cannot make effective use of their own gold in expanding credit.

“Credit rests on the movement of goods as well as on the gold supply. Agitation for currency experiments would impair confidence and retard recovery.”

Those signing the letter were:

Frank A. Fetter, Princeton University

Benjamin H. Hibbard, University of Wisconsin

Davis R. Dewey, Massachusetts Institute of Technology

E. W. Kemmerer, Princeton University

Ernest M. Patterson, University of Pennsylvania

Abraham Berglund, University of Virginia

Francis Tyson, University of Pittsburgh

George Heberton Evans, Jr., Johns Hopkins University

M. B. Hammond, Ohio State University

George E. Barnett, Johns Hopkins University

B. M. Anderson, Jr., Chase National Bank

E. L. Bogart, University of Illinois

Bernhard Ostrolenk, College of City of New York Morris A. Copeland, University of Michigan

F. A. Deibler, Northwestern University J. F. Ebersole, Harvard University

Claudius Murchison, University of North Carolina

Willard E. Atkins, New York University

Joseph H. Willits, University of Pennsylvania

Broadus Mitchell, Johns Hopkins University 3

The Democratic platform of 1932, largely written by Senator Carter Glass and Cordell Hull, had taken a similar position, so far as tariffs and currency were concerned. This platform had protested, moreover, against the growth of bureaucracy and had promised rigorous economy in governmental expenditures.

Vital Need for Lower Tariffs, Restoring Export Trade. Prompt action in the restoration of foreign trade would have straightened out rapidly most of our domestic difficulties. Prompt lowering of the tariffs against the imports of manufactures would have led to a radical revival, an almost explosive revival, of domestic trade in the United States.

There was no reason to fear even temporarily adverse effects from a drastic downward revision of the tariff on manufactured good in the winter of 1932-1933. Our industries were out of equilibrium largely because of the high tariff. Lowering the tariff would have gone far to restore the equilibrium. Our export industries, above all agriculture, were appallingly depressed, and their depression had reacted in an extreme way on all industry. The first effect of reducing the tariffs, well before any goods could be loaded on ships on the other side to come to the United States, would have been a great upswing in the prices of farm products and raw materials in the United States. It would have been manifest that European buyers of our farm products and raw materials had earning power once more and consequently they would have had credit for purchases.

Even before the first cargo of manufactured goods came from the other side, we should have had a better domestic market in which to receive it. Cables work faster than ships, and speculators work faster than merchants. Moreover, prices of foods and raw materials move faster than prices of manufactured goods.

Europe could not have sent a heavy volume of manufactures to us immediately in the spring of 1933. Europe had been under cruel pressure to liquidate for the preceding three years or more. Stocks of raw materials and stocks of imported foods were very low in Europe. Stocks of finished manufactures were low in Europe. She would have needed to import a great deal of raw materials before she could have sent out a great volume of manufactures.

In the winter of 1932-1933, this question was put to Jesse Livermore, one of the most active and alert speculators of the country: “If you woke up tomorrow and found the tariffs down so that Europe, including Germany, could send us manufactured goods, and you wanted to make some money out of that, what would you do?” He said, “Well, I might buy some German bonds.” And then suddenly he said, “No. I’d buy commodities.” “Which commodities would you buy?” “I’d buy the ones they have to have and the ones that they would be buying in that situation. I’d buy copper. I’d buy lard. I’d buy cotton. I’d buy wheat.”

Financing a Round Trip. At about the same time a different question was put to the head of the foreign department of a great bank, a bank which had large credits in Germany frozen by the Standstill agreement. The question was, “If our tariffs on manufactured goods were reduced so that Germany could easily send manufactured goods to the United States, would Germany have additional credit with you for the purchase of raw materials and necessary foods?” He answered, “Of course she would. I am always ready to finance a round trip. I don’t intend to finance a one-way passage any more.”

Low Tariffs Would Have Meant Radical Rise in Farm Products and Raw Materials. With an adequate reduction of our tariffs, Europe would have had credit for buying foods and raw materials in our markets. A moderate increase in demand for foods and raw materials in a time of acute depression means a radical upswing in food and raw material prices. A moderate increase in activities in the manufacturing centers means very large changes in raw material prices, especially at a time when they are greatly depressed. The further away goods are from the consumer, the more radical are the swings, up and down, in their prices. With a radical rise in the prices of farm products and raw materials, our own manufacturers would immediately have found an expanding domestic market, and, sharing that domestic market with foreign competition, they would have sold far more goods and would have made far more profits than was possible when they had a dwindling market all to themselves.

The full restoration of foreign trade called, moreover, for a clarification of the Inter-Allied debt situation and called for sound gold money that international commerce could trust.

Plans for International Conference on Tariffs, Debts, and Currency Stabilization. These things were well understood in informed circles. An international conference had been planned to deal with them. The agenda for this conference had been prepared under the Hoover Administration, and President Roosevelt in the very beginning of his Administration manifested great interest in the plans for the conference. He was visited by various distinguished foreign representatives, among them the Prime Minister of England, Mr. Ramsay MacDonald, and a high official of the Italian government, Signor Guido Jung. Communiqués were given out following certain of these visits. Of particular interest were the joint statements of President Roosevelt and Prime Minister MacDonald of England, issued late in April,4 and the joint statement of the President and Guido Jung, Italy’s Finance Minister, issued early in May.5 Both statements recognized the necessity of a moderation of tariffs and other trade restrictions. With respect to gold MacDonald did not commit himself. The statement regarding money in the Roosevelt-MacDonald document is the following: “We must when circumstances permit re-establish an international monetary standard which will operate successfully without depressing prices and avoid the repetition of the mistakes which have produced such disastrous results in the past. In this connection the question of silver, which is of such importance in trade with the Orient, was discussed and proposals were tentatively suggested for the improvement of its status.” The statement in the Jung-Roosevelt document, however, is explicit: “We are in agreement that a fixed measure of exchange values must be re-established in the world and we believe that this measure must be gold.”

The difference between these two communiqués is significant. MacDonald was not prepared to take England back to the gold standard. Continental Europe was strongly for the gold standard. Apart from England’s reluctance to go back immediately to gold, the scene was set for the restoration of international trade, and for the restoration of sound foreign exchange relations.

But the “Young Men” Wanted Neither Foreign Trade Nor Gold. But the “young men” who advised the President did not want either foreign trade or gold. They wanted internal regimentation. It takes economic imagination and economic understanding to look beyond the particular industry or particular trade in dealing with the tariff problem, and the “young men” lacked economic understanding, though it cannot be denied that they had a good deal of imagination regarding economic matters.

They wanted direct action. They wanted to deal with the symptoms of the economic disorder. They wanted the Government, not merely as back seat driver, but actually in the driver’s seat. They were not content with having the Government clear away from the highway the barriers which the Government had itself erected.

Some direct action by the Federal Government dealing with the most acute symptoms of the crisis was also needed. Bankruptcy laws were moderated even before the new Administration came in. In addition there was need for emergency measures to bring relief in the farm mortgage situation.6

In addition there was necessity that additional Federal funds be granted to the hardest pressed States and municipalities for the direct relief of the unemployed. But these measures should have been temporary things, and the need for them would have quickly disappeared with the revival of business which the restoration of economic equilibrium would bring about. The prompt restoration of a two-sided foreign trade would have been the major factor in restoring this equilibrium.

Internal Regimentation Triumphs Over Foreign Trade. The New Deal is far too complex to be described in any simple terms, but the conflict between a liberal foreign trade policy and the policy of internal regimentation is one of the clues to much that follows. Internal regimentation policy triumphed completely in 1933, as we shall see. But the President came back to the other policy in 1934, and is entitled to credit for doing a good deal in behalf of the foreign trade policy of Secretary Hull.

In May of 1932 I had studied the farm mortgage situation at first hand in Boone County, Missouri, where in many cases I not only knew the farmers, but also had known their fathers before them. I had found the banks and other local creditors showing great forbearance to embarrassed farmers. In one case, for example, a good farmer had come in, proposing to deed his farm to the two banks to which he owed money, to save them the expense of foreclosure. He was unable to pay interest. The bankers told him that of course he could not pay interest with farm prices as they were, but that he could run the farm so much better than anybody else they knew that he should go back and run the farm. There would be no interest in 1932, and the next year the interest would be half of what the contract called for. The farmer walked out with his head high. In another case, where a farmer was incompetent, the creditors had reluctantly taken the farm over, but had told the farmer and his wife to stay in the house, and had given the farmer employment on the place.

Such discrimination was much more difficult for the great life insurance companies operating from a distance, and the writer had made a point of talking with the heads of certain life insurance companies in New York upon his return, urging closer coöperation with local bankers in dealing with defaulted loans.

In personal conversations in my office in New York with bankers from rural regions, and in correspondence with country bankers in many parts of the country, I accumulated a great deal of information as to the actual farm mortgage situation and rural bank situation. It was distressing in the extreme, and in many cases the banks themselves were under such pressure that they could not show forbearance. There was need for relief from the immediate pressure of farm indebtedness.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
• 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.
• 6War Industries Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, p. 550.