Can We Resume Consumption Financing on Credit?
IN THIS chapter I shall take up the question, Can we resume the financing on credit of large scale consumption? In the next two chapters we shall continue the discussion, with attempts to answer the questions. Can the present system go on carrying the depression? and Can we effect reorganization under the present system?
As to whether financing consumption on credit is a workable formula, it should be enough to state the question to have answered it in the negative. But, thanks to the material achievements as well as the fallacious propaganda of the late new era, and thanks also to the numerous and influential money and credit management schools of thought, the consumption-credit formula needs refuting. The case for the consumption-credit formula is made appealing by the statement of three indisputable facts: The first is the enormous increase in our material equipment and productive capital between 1914 and 1929; the second is a great increase in the productive efficiency of man and machinery; and the third is a rise in the average standard of living and a 32 per cent increase in the real wages of the employed between 1914 and 1928.
These achievements were, of course, marred by a slow but sure growth of technological unemployment and an increasing tendency for real wages to lag behind the rise in productive efficiency and the total output. But these defects, which the Technocrats and most schools of social critics used as good talking points against the system, did not suffice to discredit it greatly with the masses or to prove it unworkable. The only thing effective that can be said against the prosperity of 1915 to 1929 is that it could not be kept up.
President Hoover’s Committee on Recent Economic Changes, in a report drafted in 1929, just before the crash, reassured the country that as human wants were nearly insatiable, we should be able to keep up and even enlarge indefinitely our production. But the depression has taught that the insatiability of human wants has little to do with the volume of effective demand for goods and services.
After the insatiability of human wants, the excellence of the latest financial machinery and techniques was generally supposed to constitute the next best guarantee of continued prosperity under the formula of credit financed consumption. Yet all that the excellence of the financial institutions and their operation served to do was to enable a bigger inflation bubble be blown than the world had ever seen before, with this difference between the ensuing sequel and that of all previous bubbles — when the bubble burst the explosion was bigger.
Before 1929 it would have seemed necessary to argue the point that the volume of production could not be maintained indefinitely by lending people money to pay for consumer goods which they could not otherwise afford to purchase. This argument, stated more fully in my previous book, Is Capitalism Doomed? (see pages 17-30), runs somewhat as follows: First, the buyers whose added consumption is financed are, in a short time, borrowed up to their limit, and thereafter they are forced to buy and consume less by the amount of interest they have to pay than they could buy, pay for and consume had they never borrowed. Second, the receivers of the interest will not consume or reinvest their full interest income because, among other reasons, the payers of the interest are consuming less and so furnishing less incentive for the investment of new capital. All this has now been demonstrated practically by depression experience. In this connection it is not amiss to remark that Professor E.R.A. Seligman, the dean of American economists, wrote The Economics of Installment Selling at the peak of the boom, this work being subsidized by General Motors Finance Corporation, as an objective study of consumptive credit. The most interesting thing about this voluminous work was that it devoted less than a page to the barest mention of the only important feature of installment buying, namely, the interest cost to buyers and its implications. Professor Seligman might have shown, but did not show, that installment buyers never pay less than fourteen per cent interest, and in some cases pay over fifty per cent. The high actual interest charge, of course, is somewhat concealed by a nominal rate like six per cent on the initial amount borrowed, which may amount to an average of fourteen or eighteen per cent on the money actually in use, for the borrower goes on paying six per cent on 100 for ten or twenty months, though he may have that amount of debt outstanding only during the first month.
Today, the simple plea to lend people money to pay for goods they cannot afford, though common enough, is less often heard than during 1914 to 1929. The consumptive credit fallacies are by no means dead, but they are less blatantly proclaimed. The main reason, probably, is that so many influential people, including notably the rich and the bankers, are now preaching economy, retrenchment and a balanced budget to the richest government in the world, all of which makes it a little inconsistent for them publicly to exhort poor people and or cities in the next breath to buy and spend on credit.
The most appealing current arguments for an attempt to resume the consumption-credit formula for capitalistic prosperity come from the money and credit cranks, and are strangely interwoven in their various schemes of inflation, managed money and managed credit. In effect, what they say amounts to something like this
You have had your fingers burned playing the Wall Street and high pressure sales schemes of credit uses. Now try our new system, which can’t lose. It is different.
Some of these apostles of more money or cheaper money or lower interest rates by the Central bank are eminent, erudite and disinterested believers in their scheme. Keynes, Cassel and Irving Fisher may be named as distinguished examples of this art. The vast majority, however, have a personal interest to serve, even if it is only reëlection, in getting the government to buy silver, gold, cotton, wheat, government bonds, commercial bank paper, preferred stocks of banks or anything else with paper money at a price in excess of market value. The simplest set of interests served by the inflationists is that of the Congressman who wants the votes of the people to whom the Government gives the money, as well as the votes of the people who don’t want to put up this money in additional taxes.
Practically all the money and credit panaceas involve an increase in the quantity of paper money or central bank deposit credit, on the following line of reasoning: The central problem of any depression is getting more goods paid for; getting more goods paid for is a matter of getting more money spent; getting more money spent is a matter of getting more money into circulation; getting more money into circulation is a matter of getting more money printed by the Government printing press or created by the Federal Reserve Banks in the form of loans to member banks of the Federal Reserve System, or purchases by the Federal Reserve Banks with their simple notes or credit of gold, silver, bank paper or anything else Congress, by law, may authorize them so to acquire.
These reasonings, of course, completely disregard many simple and obvious facts. First, there is always enough money in circulating currency, plus bank deposit credits, to permit enough buying to put every idle man to work on overtime and to keep him busy indefinitely, provided there were the requisite disposition to keep on spending and investing. There was no decline in the total volume of bank deposits in the United States until the third year of the depression. As for currency circulation, its total volume has varied little except during the run on the banks in the early part of 1933.
Second, money does not get spent or invested merely by reason of being deposited in banks, whether by the Government depositing newly created money or whether by private individuals depositing their genuine savings. If the banks do not find that the state of business justifies lending out the money deposited with them, or, rather, using such money as a reserve base for the creation of new loans and deposits, the banks can receive no end of new money from the Government, or savings from private individuals, without, in consequence, increasing total deposits or loans. This statement is now established as a fact by the holding of nearly three billion dollars of surplus reserves by the banks of the United States, or reserves enough to support thirty billion dollars of new loans and deposits, the. investment of which in new capital goods would give us a boom for four or five years.
Believers in money and credit panaceas generally fail to perceive that the uses made by the banking system of genuine savings and the instrument of bank credit determine more than any other group of factors the beginning, duration and end of a depression. It is the use and not the quantity of money savings or money reserves that counts. And quantity of money does not determine its use. In the case of a vast majority of the people, sheer need determines the use made of 100 per cent of the money which passes through their hands — this money gets spent by them as fast as received. If the poorest half of the population received ten per cent increase in money income, they would, it is fair to assume, spend the entire ten per cent. But if the richest two per cent of the people received ten per cent increase in money income today, it is fair to assume that hoarding would be increased to this extent. In the case of the surplus money held by those who can save, or the surplus money held by banks, quantity has little to do with use. Only the general business situation, or the prospects of making a return with safety for the principal, determine the bulk of decisions made either by banks or individuals as to the use made of surplus money.
Only during the past year or two have professional economists come to recognize that a dollar saved and deposited in a bank is not, necessarily, a dollar invested in new capital goods. Up to five years ago, it was dogmatically asserted in every respectable economic text book that a dollar saved was, necessarily, a dollar invested. Making this assumption served a useful purpose as propaganda. For instance, extreme conservatives could reason from this premise or axiom that the greater the inequalities in income, the larger would be the savings and, hence, the greater the increase in productive capital for the general enrichment of mankind. With this fallacious axiom firmly planted at the outset of the discussion, any attempt to open up the question of the effects of unequal distribution of income could be completely crushed.
It is from this same fallacious premise that the money and credit believers, and the quantity-theory-of-money believers, have invariably reasoned to the conclusion that more money, rather than merely more money for people who have not enough for decent living, is the acute need. The crux of the problem, so far as getting money spent is concerned, is that two-thirds of our savings are made by 2.3 per cent of the families of the country, or those having incomes in excess of 10,000 a year, and that our total savings do not get invested new capital goods as fast as accumulated.
It is not the fact that savings are made, but the fact that savings are not promptly converted into demand for new capital goods that is responsible for the initial decline in total production and consumption. The reason why savings are not continuously and fully invested, of course, is that consumption does not increase fast enough. And, one of the chief reasons why consumption does not increase fast enough is that so much of the national income is being withheld from consumption or saved. This dilemma is fully explained in the series of the Brookings Institution, on America’s Capacity to Produce, America’s Capacity to Consume, and The Formation of Capital. The dilemma is in no sense a monetary one.
The monetary and credit theorists never propose anything quite as simple as having the Government print and give away so much money to so many poor people just for the sake of getting the money spent. If they did, their case would be much stronger in logic though not in political discussion. And, of course, they never propose anything as obvious and sensible as having the Government take so much money from so many people who are not spending or investing it and give that much money to people who are so poor and needy that they would be sure to spend any money they received as soon as they got it. It takes a mind as intelligent as that possessed by the late Senator Long to think of anything as simple and sensible as that — simple and sensible if the real purpose is to get more money spent.
No, the monetary and credit crank schemes work on a theory which is much more complex and silly. The basic assumption is that the whole system works inevitably, and would work better if it got a little monetary or credit shot in the arm. The government accordingly puts out more money, or causes the Federal Reserve Banks to put out more money — which is the same thing. This is done in such a way that the Government is said to be giving no one something for nothing. And no one having anything taken from him for nothing. Everybody, including Uncle Sam, gets his money’s worth. When it is all over, there is supposed to be more money and more goods to buy with that money.
Most of these money theories and policies for getting more money into use (or really into the banks) have been, and are actually being, tried out by the Roosevelt Administration. Chief among these policies is that of having the Government offer to buy in theoretically unlimited, though in practically quite limited, amounts 22 grains of fine gold for 1.67, whereas it used to pay 1 for that much gold. Thus, the Government puts out 67 cents more for the same quantity of gold, which it does not have any earthly use for, as it already has more gold than it requires. But almost every monetary theorist felt that if the Government paid 67 cents more for a given quantity of gold it did not need, prosperity would follow. This measure was also supposed to help the debtors, who, obviously, have no gold and who have had just as hard a time getting a paper dollar since 1933 as they had before. Of course, had the yearly gold output of the United States been increased several thousand per cent as a result of the higher buying rate for gold, the Government could have put out a great deal more money.
But doubling the American yearly output of gold for the new price would not mean putting out much more than an extra hundred million new paper dollars, a mere trifle for a Government which is spending six times that much paying the C.C.C. boys to chase caterpillars and play around in the woods. If the inflationists had only authorized the Government to buy all the peanuts tendered at sixty-seven per cent above the market price of June, 1933, we might by now have half the United States in peanuts, with a resulting crop that would take several billions of paper dollars to pay for, thus giving the country a real dose of inflation. Moreover, the peanuts so produced in car loads might possibly find uses which the gold being acquired by the Government and buried again under the earth certainly does not find.
It is only fair to the monetary and credit believers to say that their theories, as well as the underlying assumptions as to dollar saved being a dollar invested, and as to banks being forced by increasing reserves to increase loans and deposits — assumptions common to orthodox economics as well as heterodox monetary systems — did not appear as mad in the 19th century, or even up to 1929, as they now seem. During the 19th century there were usually more good borrowing risks at high interest rates than the banks had reserves to take. And so it happened, to cite but one conspicuous instance, that in 1879, following several years of depression, recovery was greatly assisted, if not actually started, by a few hundred millions of dollars being added to our cash and gold reserves by reason of the happy combination for the United States of a bumper wheat crop and a drought over the major wheat producing areas of Europe. Today, pumping two or three billion dollars new money into the money stream or the reserves of the banks, may be compared to forcing heavy doses of food on a man whose chief complaint is an inability of the stomach to retain or digest food.
Banks do not lend money, or use their surplus cash reserves to increase loans and deposits, merely because they have such surplus cash. Banks lend money only if they see a good chance of getting it back with interest. Making money easy, cheap or abundant, as one may care to word it, does not, of itself, create the conditions which make a profit possible. The liberal economists have assumed, always without proof, that such conditions are inherent in the natural order of things. This assumption merely adds proof that liberal economics was essentially a system of propaganda, for, as far back as recorded history can enlighten us, it has been the custom of the rich to hoard their wealth in gold, precious stones, and treasure rather than t invest it in new capital goods.
It has only been a feature of a special world situation to have surplus income or wealth continuously reinvested in more productive capital. If there is a natural order in respect of saving, it would appear to call for hoarding what is saved, as is now being done and as was done for thousands of years. The return to hoarding is a return to what was traditional for thousands of years in all parts of the world. The return to hoarding is something to be explained not as unusual or extraordinary, but merely as a sign that the era of modern capitalism is approaching its end and that we are getting back to a normalcy with respect to the disposition made of surplus funds which prevailed for thousands of years all over the world.
Inflation, of course, if and when carried far enough to induce a state of panic about the future value of the currency (as happened in Germany in 1923 and 1924) certainly does stop money hoarding by producing a flight from money to goods. But, while acute inflation stops money hoarding, it intensifies credit hoarding. This is true because, while inflation makes the holders of surplus money want to exchange it for goods, inflation certainly does not make any one want to exchange money or create new bank credit money for promises to make future payments in money which will be worth less.
Now, if one stops to reflect that the supply of currency is around six billion, whereas the supply of bank deposit money has been reduced during the six years of the depression by over twenty billion through the curtailment of bank loans, one must see that an acceleration in the velocity of spending of the forty billion of bank deposit money still outstanding, plus six billion of currency money in circulation, would have to make up for the loss of twenty billion of bank deposit money extinguished since 1929, plus the further loss of now outstanding bank money which would follow the outbreak of a real inflation panic. There is no doubt, however, that a real inflation panic could, for a brief moment, accelerate spending to such an extent that all our stores and warehouses might be emptied overnight of goods, so to speak. But it could not last.
The dilemma of inflation is that it must either stop, thereupon leaving the patient worse off than before, or else lead to disaster. The boom on rising prices can last only as long as the purchasing power of the currency can fall, and this can only fall to zero. Many reputable economists and statesmen have been preaching the fallacious doctrine that conditions can be improved and stabilized at a higher level of prosperity simply by having prices stepped up so much and then stabilized at a higher level. Prices can be put up but they cannot be stabilized.
Simple logic as well as the most exhaustive study of economic history indicate that if all prices are moved up so many points and kept there, no one is any better or worse off, and that, if certain prices are raised more than others, certain persons will profit on the losses of others. It is, however, always easy to whip up enthusiasm among farmers and business men for a price rise, because through it they can at once figure a quick and sure money profit. They do not pause to reflect that the profits from such price rise must be lost when they turn around to restock or to consume their wealth. A study of price movements over a hundred-and-twenty-year period shows an almost even division of total number of years into years of rising prices and years of falling prices. Good times, of course, went with rising prices, and hard times with falling prices. These periods of rising and falling prices resulted from the play of relatively freely acting economic forces and not planned price manipulations.
Nothing in sound theory or actual experience warrants the hope, on which the early New Deal philosophy leaned heavily, attaining anything like price stability under the present system. Nor is there any reason to imagine that price stability is ever desired by business men as a whole. The price raising advocates never say to the people
We offer you a limited period of rising prices and good times which must be followed by either (1)
an approximately equal period of falling prices and hard times such as characterized our 19th century business cycles or (2)
a disastrous currency and credit smash when our inflationary bubble bursts as occurred in Germany in 1924. On the contrary, they say,
We offer you immediate profits and increased business on the price rise and stabilized prosperity when we get prices where we want them.
The first four months of Mr. Roosevelt’s administration were brightened economically by a mild flight from the dollar to merchandise and manufacturers’ inventories of goods and speculative holdings of securities at higher prices. This flight from dollars to goods or securities was induced by the devaluation of the dollar — first by the belief or rumor that devaluation was intended, and then by the White House announcement that it was intended. Devaluation was stage managed with perfect technique to secure the desired effect. The same measure of devaluation could have been carried out in our situation without affecting prices if no prior announcement of had been made and if it had been suddenly proclaimed to be accomplished fact. Every one then would have had exactly as much money the day after as the day before, as of course actually happened in 1933, except the few people who had gold coins or bullion — not much over 500,000,000 at the time. And no one would have had any good reason to act differently as a result of the devaluation except owners of gold mines.
Of course, the Federal Reserve Banks, after the devaluation, could lend more paper dollars and so enable the member banks to lend a great deal more. But they have done the opposite. The gold reserves of the Federal Reserve Bank since the war have always been far in excess of requirements, and so also have been the cash reserves of the member banks. Foreigners can buy our goods cheaper than before because of the devaluation, but they don’t buy more on account of the lower gold price because their tariffs and other economic policies prevent them from doing so. Consequently, the devaluation of the dollar has been a dud as an inflationary measure. We shall get inflation only by reason of direct government spending in excess of revenues. We shall get such inflation by government deficits inevitably but slowly — and with the usual debacle at the end.
No doubt, however, Mr. Roosevelt was relieved that the mild flight from the dollar to goods induced by his announcements of devaluation purposes did not go very far. For, as we have already pointed out, the proponents of deliberately planned policies of price raising always find themselves sooner or later on the sharp horns of this dilemma: Horn one, when prices stop rising the boom collapses; Horn two, if prices don’t stop rising, everything collapses. This New Deal dilemma is not the way to avoid fascism, as the New Dealers have hoped, but rather to make it inevitable.
And, even while prices are rising, every one is not on the bandwagon. The high cost of living is not an empty phrase for the worker whose wages do not rise as fast as the food and clothes he has to buy. It is always easy to infer, when one sees newly-rich profiteers on price rises giving champagne parties during an inflationary boom, that all is well. But this inference is only possible if one fails to observe the misery caused by the wage lag behind prices.
The question whether the present system could resume use of the consumption-credit formula of 1915-1929 was posed for discussion in this chapter. The theoretical impossibility of operating on that formula for any length of time, due to the consequences of increasing debt charges, was pointed out, and brief allusion made to the practical demonstration of this impossibility furnished by the depression. Then we took occasion to pay our respects to the monetary cranks who would increase the supply of money in the hope that the newly created money would get spent and lent. We have seen that new money gets spent and lent when Government actually spends or lends it, but that it does not get lent or spent merely by reason of being put in the banks, whether by direct Government loan or gift to the banks, or by deposit by private individuals. The banks could today use their surplus reserves to make large loans to consumers for consumption. Such loans are rightly deemed unsound by the banks and are not being made. This banking judgment pretty well answers the question whether we can restore prosperity by financing additional consumption on credit — if it needed any other answering than that furnished a good theory and the post-war experience with spending beyond income.
This conclusion, however, must not be mistaken to involve in any way the notion that, during the credit boom, we were spending or consuming too much. On the contrary, we were not spending on consumption goods enough to provide a market for the capital plant we were then expanding, which, as we have already seen, was the reason why the further expansion of capital goods was checked, this checking of new investment constituting the depression. We were not consuming enough, but we were consuming too much on credit. To be self-sustaining, consumption must be on a pay-as-you-go basis. And, obviously, production can only be sustained in a volume equal to that of consumption. The best interests of ownership and management now require a new formula which is antithetical to that of modern capitalism. The new formula must recognize that ownership and management can take a cut of total production as a wage of management, or a reward saving, if such a reward be found necessary, only for use not for compounding the investment. The new formula will seek maximum total production and consumption with long-run stability. The new formula will, therefore, make no use of credit financing of consumption.