agriculturists and householders throughout the world, who have borrowed on mortgage, would find themselves the victims of their creditors. In such a situation it must be doubtful whether the necessary adjustments could be made in time to prevent a series of bankruptcies, defaults, and repudiations which would shake the capitalist order to its foundations. Here would be a fertile soil for agitation, seditions, and revolution. It is so already in many quarters of the world. Yet, all the time, the resources of nature and men's devices would be just as fertile and productive as they were. The machine would merely have been jammed as the result of a muddle. But because we have magneto trouble, we need not assume that we shall soon be back in a rumbling wagon and that motoring is over. SOME LEADING QUESTIONS We have magneto trouble. How, then, can we start up again? Let us trace events backward: 1. Why are workers and plant unemployed? Because industrialists do not expect to be able to sell without loss what would be produced if they were employed. 2. Why cannot industrialists expect to sell without loss? Because prices have fallen more than costs have fallen-indeed, cost have fallen very little. 3. How can it be that prices have fallen more than costs? For costs are what a business man pays out for the production of his commodity, and prices determine what he gets back when he sells it. It is easy to understand how for an individual business or an individual commodity these can be unequal. But surely, you say, considering the community as a whole the businessmen get back the same amount that they pay out, since what they pay out in the court of production constitutes the income of the public, and the public pays this income to the business men in exchange for their products. For this is what we understand by the normal circle of production, exchange, and consumption. 4. No. Unfortunately this is not so; and here is the root of the trouble. It is not true that what the businessmen pay out as costs of production necessarily comes back to them as the sale proceeds of what they produce. It is the characteristic of a boom that the sale proceeds exceed costs; and it is the characteristic of a slump that costs exceed sale proceeds. Moreover it is a delusion to suppose that businessmen can necessarily restore equilibrium by reducing their total costs, whether it be by restricting their output or cutting rates of remuneration; for the reduction of their outgoings may, by reducing the puchasing power of the earners (who are also their customers), diminish their sale proceeds by a nearly equal amount. 5. How, then, can it be that the total costs of production for the world's business as a whole can be unequal to the total sale proceeds? Upon what does the inequality depend? I think I know the answer. But it is too complicated and unfamiliar for me to expound it here satisfactorily. (Elsewhere I have tried to expound it accurately.) So I must be somewhat perfunctory. Let us take, first of all, the consumption goods which come on the market for sale. Upon what do the profits (or losses) of the producers of such goods depend? The total costs of production, which are the same thing as the community's total earnings looked at from another point of view, are divided in a certain proportion between the cost of consumption goods and the cost of capital goods. The incomes of the public, which are again the same thing as the community's total earnings, are also divided in a certain proportion between expenditure on the purchase of consumption goods and savings. Now if the first proportion is larger than the second, producers of consumption goods will lose money; for their sale proceeds, which are equal to the expenditure of the public on consumption goods, will be less (as a little thought will show) than what these goods have cost them to produce. If, on the other hand, the second proportion is larger than the first, then the producers of consumption goods will make exceptional gains. It follows that the profits of the producers of consumption goods can only be restored either by the public's spending a larger proportion of its income on such goods (which means saving less), or by a larger proportion of production taking the form of capital goods (since this means a smaller proportionate output of consumption goods). But capital goods will not be produced on a larger scale unless the producers of such goods are making a profit. So we come to our second question: Upon what do the profits of the producers of capital goods depend? They depend on whether the public prefers to keep its savings liquid in the shape of money or the equivalent or to use them to buy capital goods or the equivalent. If the public is reluctant to buy the latter, then the producers of capital goods will make a loss; consequently less capital goods will be produced, with the result that, for the reasons given above, producers of consumption goods will also make a loss. In other words, all classes of producers will tend to make a loss; and general unemployment will ensue. By this time a vicious circle will be set up, and, as the result of a series of actions and reactions, matters will get worse and worse until something happens to turn the tide. This is an unduly simplified picture of a complicated phenomenon. But I believe that it contains the essential truth. Many variations and fugal embroideries and orchestrations can be superimposed; but this is the tune. THE CREDIT SITUATION If, then, I am right, the fundamental cause of the trouble is the lack of new enterprise due to an unsatisfactory market for capital investment. Since trade is international, an insufficient output of new capital goods in the world as a whole affects the prices of commodities everywhere and hence the profits of producers in all countries alike. Why is there an insufficient output of new capital goods in the world as a whole? It is due, in my opinion, to a conjunction of several causes. In the first instance it was due to the attitude of lenders, for new capital goods are produced to a large extent with borrowed money. Now it is due to the attitude of borrowers, just as much as to that of lenders. For several reasons lenders were, and are, asking higher terms for loans than new enterprise can afford. First, the fact that enterprise could afford high rates for some time after the war while war wastage was being made good accustomed lenders to expect much higher rates than before the war. Second, the existence of political borrowers to meet treaty obligations, of banking borrowers to support newly restored gold standards, of speculative borrowers to take part in stock exchange booms, and, latterly, of distress borrowers to meet the losses which they have incurred through the fall of prices, all of whom were ready if necessary to pay almost any terms, has hitherto enable lenders to secure from these various classes of borrowers higher rates than it is possible for genuine new enterprise to support. Third, the unsettled state of the world and of national investment habits has restricted the countries in which many lenders are prepared to invest on any reasonable terms at all. A large proportion of the globe, is for one reason or another, distrusted by lenders, so that they exact a premium for risk so great as to strangle new enterprise altogether. For the last 2 years, two out of the three principal creditor nations of the world; namely, France and the United States, have largely withdrawn their resources from the international market for long-term loans. Meanwhile, the reluctant attitude of lenders has become matched by a hardly less reluctant attitude on the part of borrowers. For the fall of prices has been disastrous to those who have borrowed, and anyone who has postponed new enterprise has gained by his delay. Moreover, the risks that frighten lenders frighten borrowers, too. Finally, in the United States the vast scale on which new capital enterprise has been undertaken in the last 5 years, has somewhat exhausted for the time being-at any rate so long as the atmosphere of business depression continues the profitable opportunities for yet further enterprise. By the middle of 1929 new capital undertakings were already on an inadequate scale in the world as a whole, outside the United States. The culminating blow has been the collapse of new investment inside the United States, which today is probably 20 to 30 percent less than it was in 1928. Thus in certain countries the opportunity for new profitable investment is more limited than it was, while in others it is more risky. A wide gulf, therefore, is set between the ideas of lenders and the ideas of borrowers for the purpose of genuine new capital investment; with the result that the savings of the lenders are being used up in financing business losses and distress borrowers, instead of financing new capital works. AFTER THE DIAGNOSIS At this moment the slump is probably a little overdone for psychological reasons. A modest upward reaction, therefore, may be due at any time. But there cannot be a real recovery, in my judgment, until the ideas of lenders and the ideas of productive borrowers are brought together again-partly by lenders becoming ready to lend on easier terms and over a wider geographical field, partly by borrowers recovering their good spirits and so becoming readier to borrow. Seldom in modern history has the gap between the two been so wide and so difficult to bridge. Unless we bend our wills and our intelligences to find a solution along these lines, and are energized by a conviction that this diagnosis is right, then, if the diagnosis is right, the slump may pass over into a depression, accompanied by a sagging price level, which might last for years with untold damage to the material wealth and to the social stability of every country alike. Only if we seriously seek a solution will the optimism of my opening sentences be confirmed-at least for the nearer future. It is beyond the scope of this article to indicate lines of future policy. But there is no one who can take the first step except the central banking authorities of the chief creditor countries nor can any one central bank do enough acting in isolation. Resolute action by the Federal Reserve banks of the United States, the Bank of France, and the Bank of England might do much more than most people, mistaking symptoms or aggravating circumstances for the disease itself, will readily believe. In every way a most effective remedy would be that the central banks of these three great creditor nations should join together in a bold scheme to restore confidence to the international long-term loan market-which would serve to revive enterprise and activity everywhere, and to restore prices and profits, so that in due course the wheels of the world's commerce would go around again. Even if France, hugging the supposed security of gold, prefers to stand aside from the adventure of creating new wealth, I am convinced that Great Britain and the United States, like minded and acting together, could start the machine again within a reasonable time-if, that is to say, they were energized by a confident conviction as to what was wrong. For it is chiefly the lack of this conviction which today is paralyzing the hands of authority on both sides of the channel and on both sides of the Atlantic. [From the Forum, September 1932] THAT ELUSIVE EQUILIBRIUM (BY RICHARD A. LESTER) A century ago Carlyle said: "Teach a parrot the phrases 'Demand' and 'Supply' and you have made a political economist." Were he living today he would probably say: "Teach a parrot the phrases 'Readjustment' and 'Equilibrium' and you have made not only an economist, but 6 businessmen, 16 bankers, half a financial page, and practically the entire economic programs of both our leading political parties." Readjustment and equilibrium. Will our financial page prophets never tire of telling us their bedtime stories? How often have we read of that "period of liquidation" we are passing through, that "readjustment" which is taking place "all along the line,” and that "equilibrium" which is so rapidly being restored? Back in June 1931, B. M. Anderson, economist of the Chase National Bank, wrote in the Chase Bulletin: Readjustment is now in process. *** Men released from work in one field are seeking work elsewhere. Businessmen, finding certain lines unprofitable, are looking eagerly for other lines which may be made profitable. * The process of reequilibriation is going on. Needless to say it is still going on; that is, if it ever got started. "The revival of our industry depends not only upon balancing the budget in our own industry but also on the reestablishment of equilibrium in the total economy of commerce. *** We and the rest of the world are the victims of a lopsided deflation. If at one stroke it had been feasible to deflate prices, security values, realty, wages, taxes, earnings, debts, and credits, all to the same degree and all at one time, the disturbance would have been relatively negligible, because the interrelationship of all the factors would have remained the same. In actual practice a uniform deflation never occurs, because some costs occupy a protected position, while other items yield more easily to economic upsets." And Mr. Schwab ended his address with this delightful observation: "Not fearing the future, ready to face every issue, and determined to fight for what we believe, we are on the path toward equilibrium." One is tempted to add an "Oh yeah?" to that last sentence. But instead, let us look at a few facts and figures to see what Mr. Schwab's own industry is doing to help reestablish this so-necessary equilibrium, to prevent this "lopsidedness" which is prolonging our distress. A few days before his speech, the entire iron and steel industry adjusted wages 15 percent downward, making a 25-percent cut in wage rates since the fall of 1930. The day he made his speech the papers announced: "Steel producers throughout the country are considering an advance of $2 a ton on steel slabs and billets to be delivered after |