Chapter VII:
A Debtless Economy the Ideal Formula

IF private ownership and management of producers’ goods is to be preserved, even in a modified form, it will be necessary to adopt a formula which can quickly straighten out the worst of the existing maladjustments due to the use of fixed money obligations; prevent, as far as possible, the recurrence of these and other types of maladjustment; and correct promptly in the future any maladjustments which occur in spite of preventive measures. So far as debts are concerned, this would seem to demand, first, equitable and efficient means of reducing debt burdens with a minimum disturbance and a maximum of conformity to economic possibilities; second, a new scheme of legal arrangements to provide for private ownership and management with a minimum of inflexibilities, and maladjustments — this new scheme amounting, as soon as possible, to a debtless economy; and third, a nationalized system of banking which would make. bank credit or deposit money, as well as paper and metallic money, a state monopoly.

A debtless economy, free of fixed interest charges and without legal enforcement of contracts which stipulate fixed money payments regardless of economic results, is the only formula of private ownership and management which can be made to work in anything but a frontier era, when lucky strikes and the steady rise in land values can be counted on to make the number of the victims of usury too small to have cognizance taken of them by ethics, law, or political economy. This ideal, debtless economy, cannot be equitably or conveniently initiated by one wholesale extinction of all creditor rights unless the succeeding formula is to be communism. But any sound reorganization must, in the debt field, proceed on the principle that we have to scrap as fast as possible the theory and practice of interest. With the new principle established, or rather the ancient principle reestablished, the present debt burdens must be drastically reduced in all spheres according to a national formula of equity and redistribution of the debt burden. More explicitly, an ideal scheme of immediate procedure in debt reorganization might work somewhat as follows.: First, state debts would be paid off in full, not with additional issues of paper money of considerably less value than the amount nominally owed, but with good money taken by a capital levy made on the progressive tax formula of the income and inheritance taxes now in force. There would be no liquidation of privately-owned property to provide money to pay this levy. There would merely be an attachment by the State of a certain percentage of privately-owned property, the income from which would go to the State to serve to retire any money issued to purchase the public debt. In this way, many large holders of government bonds would really pay themselves fifty cents of every dollar they were reimbursed on their government bonds. Savings bank and insurance funds, however, would thus be protected one hundred percent against confiscation. There would be no expropriation, either by honest socialism or dishonest devaluation, except, of course, in so far as taxation may be thought to constitute expropriation.

Second, all private and corporate debts would, so to speak, be laid on one table of a National Tribunal of Debt Conversion, which would carry out a number of different plans of conversion for different types of debts. In the case of the railroads and public utilities, there could be a simple pooling of all indebtednesses, and their assumption by state-administered holding companies for all the railroads and public utilities jointly. Then, whatever was deemed a fair and workable total payment of annual income would be distributed among the bondholders and claimants according to their, holdings and claims. This total amount for the railroads and utilities would vary from year to year according to economic conditions and social policy. In the cases of private debts, a great variety of formulas or settlements would have to be worked out, to fit different cases, but always on the principle that the creditor, mortgagee, or bondholder received an interest in obtainable future income in exchange for his old constitutional right of legal action, which gave him power to throw all sorts of monkey wrenches in the economic machinery, from mortgage foreclosure of a poor man’s home to plain blackmail suits in all kinds of reorganization or settlement procedures. Another ruling principle would have to be ample provision for new financing to secure needed working capital for operation and replacements. The proposed formula, possible under fascism but not the present system, would really amount to nothing more than giving the average capitalist money-lender or creditor, in a simple, orderly fashion, all that the situation, efficiently and humanely handled, would allow him.

Under the present system that is all he gets, anyway, on the average; and often he does not get that, because of the legal and procedural fees and costs. But, in order to uphold the Constitution and support the largest army of lawyers per capita of any nation in the world, it cannot be done in a simple, orderly fashion. Under liberal capitalism according to the American constitutional formula, government has to guess at the Constitution, and have its guesses argued over by lawyers for years and finally validated or invalidated after years of confusion. There can, therefore, now be no executive readjustment — the only feasible form of readjustment of debt maladjustments.

The foregoing outline of general principles for a program of reorganizing the debt-credit structure is obviously impossible of realization under the present system. But it, or a much better scheme, is workable, under other conditions. Our present theory and practice in regard to property rights, made explicit by the Courts in the interpretation and application of the Constitution and laws pursuant thereto (always in specific litigations), explain why any debt reorganization formula is impossible under the present system. Legal inventiveness, of course, can get around many constitutional difficulties but, as a general rule, only through recourse to devious expedients which can never be resolved into any scheme of national reorganization. Getting around the Constitution usually means or forces the giving of relief in an expensive and impractical manner.

The Supreme Court, in passing the judicial veto on the Frazier-Lemke Bill for farm mortgage relief, made bold to intimate to the Administration that there was open to it a constitutional way of giving relief through allotment of public funds to distressed mortgage debtors. The trouble with the Supreme Court’s view of the economic problems of the present is that the Court insists on thinking of the unemployed, the distressed debtors, and the economically crippled generally, as presenting just so many specific cases for public relief, similar in nature to those created by a big fire, flood or earthquake. It is assumed that the depression does not suspend the Constitution, and that within the framework of what the Constitution sanctions any needed remedy can be properly worked out.

The trouble with this view is that the Government cannot, with safety for the entire system, adopt any of the many policies based on this view. It cannot, for instance, indefinitely provide loan funds to make good the deficiencies in income of the farmers due to low agricultural prices, of the unemployed due to lack of work, of the railroads due to innumerable causes, or of the insurance companies due to interest defaults. Nor can the Government make up the deficiencies in present value of bonds, mortgages and notes held by banks, savings banks, and insurance companies. For only a limited time can the Federal Government stave off food riots, farm revolt, railroad bankruptcies and bank runs by rushing funds to bolster up specific situations which are weak.

The reason why depression problems, like debts, cannot be dealt with in the same way as flood or earthquake relief, can be simply stated as being primarily that of the sheer magnitude of relief required for these weak situations of the depression. The Federal Government could always spare a few millions, or even a few score millions, for specific relief. The theory of the Supreme Court, or, for that matter, of the system of which the Supreme Court is a sound exponent, is that relief needs will never require expenditures in excess of what Government can safely appropriate.

Aside from the magnitude of debt relief demands, there is to be considered the fact that the credit-debt structure of the country is really an integrated whole. It is not a series of separate cases-as liberal law and administration would have it. No readjustment can be effective except as a series of coordinated measures.

At this point it is to be reiterated that the present system provides amply and definitely its own formulas for disposing of bad and slow debts, but that the trouble with these legal formulas is that the staunchest believers in the Constitution are even more opposed to their consistent application in the present situation than I am. What better proof of the unworkability of the system could be wanted?

Mr. Hoover, who questions Mr. Roosevelt’s interpretation of the Constitution, started both the National Credit Corporation and Reconstruction Finance Corporation, the purpose of which was to prevent the orderly processes of constitutional bankruptcy and bank closure from being carried out, in a legal manner, against certain debtors but not against certain others. (The inequity under liberal, constitutional norms-equal justice for all-of using government money to save some debtors and creditors but not others is too obvious to need argument.) One of the chief articles of Mr. Hoover’s economic creed, as we have already seen, was that the Government should do everything possible to save the debt structure involving the big banks and institutional investors. But, as any one who has a nodding acquaintance with the theory of our laws and economic institutions must understand, the system requires that bad debts should be wiped out as quickly as possible by the orderly processes of bankruptcy, foreclosure and reorganization.

In fact, preventing the accumulation of bad debts by the banks is one of the results of correct observance of the system. Impeding these processes has been good Hooverism as well as good Rooseveltism, but it has not been good capitalism. Capitalism, being essentially a complete social system, cannot for its own health put the interests of the lender or unlucky bank creditor and investor ahead of the interests of general financial soundness. But the logic of good capitalism has no way of imposing itself on men in power who are swayed by the logic of good politics or self-interest, as were the Republicans in the palmy, balmy post-War days. It is, therefore, doubtless without point to talk of the logic of a system which makes individual liberty to injure the system one of the values it has to conserve.

In the long run, the logic of the system, brutal and devastating as it might be in action today, and as fatal as its application would be to any politician’s reelection, is better than the logic of the Hoover constitutionalists, who would save debts with government support and yet fail at the same time to end the depression. All of the extraordinary formulas for saving the debt structure are nothing more or less than matters of making bad private debts ultimately bad public debts. The harsh logic of the system says that it is better to foreclose and bankrupt half the people, and maintain the soundness of the credit of the other half and of the State, than to stay the system’s processes of debt adjustment, with the final consequence of wrecking public credit and the foundations of the present system. It may be said that Germany survived the wrecking of her public credit. That is true, but it is true only because the public credit of America and Britain stood firm and was able to finance a fresh start in Germany. When American public credit goes the way of German public credit in 1924, what other great financial power will be able to effect our financial rehabilitation under the old system? The dilemma of the Hoover constitutionalists is really three-horned, for they cannot get votes by giving the Nation the constitutional works in the matter of debt adjustment; they cannot carry out any workable reorganization of the debt situation, such as I outline, consistently with the Constitution; and they cannot stave off indefinitely the day of reckoning for the Hoover or Roosevelt policies of saving the debts.

In sober retrospect, of course, it is apparent that a most important deviation from the system’s debt theory and practice was made when, during the War, our Federal Reserve Act was revamped to authorize the Federal Reserve Banks to issue money and credit against long term government bonds, instead of only financial and commercial paper payable within ninety days-except for agricultural paper which was allowed to run nine months. A second breach in the system’s debt theory and practice came in a long series of failures of national bank examiners to do their duty, presumably in accordance with the instructions of the Secretary of the Treasury. In the period from 1921 to 1929, had bank examinations been correctly made and sound standards for liquidity of bank loans and uses of bank funds been enforced by the bank examiners, the major credit and speculative abuses could not have continued for six months, instead, as they actually did, for nearly a decade. The two largest banks in New York could not have used their own funds for speculative operations in their own bank stocks, for instance, if bank examination had been faithful to public interest. The National City Bank, under correct national bank examination, could not have used twenty-five million dollars of new money from a sale of bank stock to bail out, through the National City Company, a bad loan to a Cuban sugar company instead of writing it off surplus.

As soon as a Congressional Resolution in January, 1933, forced disclosure of the names of the borrowers of the R.F.C., the banks of the country began folding up like jackknives until the bank holiday closed them all. It was asserted in the Myers-Newton article in the Saturday Evening Post of June 15, 1935, entitled The Origins of the Banking Panic of March 4, 1933, that With the nervous public temper of the time, the publication of these borrowings would be apt to subject these institutions to the suspicion that their borrowing was because they were weak when, as a matter of fact, they were not. The writers, however, adduce absolutely no evidence to support their assertion that the institutions borrowing from the R.F.C. in January, 1933, were not weak. If they were not weak, why could they not borrow from the large New York banks which had surplus funds and were reducing all the while loans to American country banks, though they had huge outstanding loans to American and foreign speculators who were selling borrowed dollars short or buying our gold for export? What better borrower could a New York bank have than a country bank or insurance company, which is not weak, than the Dawes Bank of Chicago, for instance, which needed an eighty-million-dollar loan from the R.F.C. and could not get it in New York though it was not weak at the time?

No one can convince an intelligent person that any American bank is not weak as long as that bank fails to publish a statement of its security assets at market value, or to make certain statements about the nature of its loans and loan policies. Most of the banks in the United States in January, 1933, were weak, and the best proof of their weakness then, as in 1935 is the fact that national bank examiners allow them to carry in published statements their bonds at cost price rather than market value. Moreover, the examiners allow them to carry frozen loans which good bank inspection would have purged from the bank portfolios years ago.

It is idle even to talk about the possibility of financial reorganization in this country under the old system as long as it is impossible to have the truth published about the condition or operations of the banks without starting a run, and as long as it takes a billion and a half dollars of advanced Government funds to keep them open. It is idle, also, to try to divide the banks into the sheep and the goats, or the strong and the weak. If the Government were to withdraw its support from the weak banks and to impose on them high standards of bank examination, their closing would only precede and precipitate the runs which would close all the banks, as in March, 1933 The banks of the country must stay open or close together. Professor Parker Willis, one of our most influential banking authorities, in an address on June 1o, 1935, to the New York State Bankers Association, advised the member banks to withdraw from the Federal Reserve System in protest against the governmental despotism over banking which he said would be established by the Eccles Bank Bill. This piece of academic advice, of course, was not, and could not be, taken any more seriously than most other advice from similar sources of unrealistic social philosophy. Yet Professor Willis will doubtless prove to be right in his warning that the doom of private banking is spelled out in the Eccles bill.

The debt situation in the United States, however, is such that the banks, the principal merchants of debts, can operate only as long as the people feel that deposits are guaranteed by the Government. This being true, the bankers cannot break with the Government, nor can they allege any good reason for their further existence once they fail to command enough confidence to operate without government support. The only possible reorganization of this debt situation would have to include nationalization of banking, from which, on the Roosevelt itinerary, 1935 is not far removed. With the nationalization of banking in either the United States or England, it can be said that liberal capitalism is at an end. The logic of it all is that the country needs money and credit, and the private bankers have shown themselves incapable both of financing recovery and of administering a money and credit system when times are good, within the framework of liberal law and with common sense and common decency. To substantiate this drastic statement it is necessary only to read from the record of the Senate investigations of Wall Street, whether in 1913 or 1933.

With the debt problem is interwoven the fate of the insurance companies, college and charitable foundations, and life savings of private investors, as well as the fate of the commercial, savings, and investment bankers as a class. Strange as it may appear, it is still true that in high banking and insurance quarters there are many who maintain the attitude that if inflation takes the dollar the way of the mark, the ruble and the franc, it will be a good lesson to the middle classes for having supported Mr. Roosevelt. Little do they realize that the discomfiture of the middle classes can turn into a Roman holiday at which the big bankers will be supplying and not enjoying the fun. The big business leaders and bankers never would be missed, while the middle classes cannot be liquidated. In this moment of crisis, it is amazing that so many business leaders should be rallying around the Constitution instead of around a leader and a workable formula for their own salvation, as well as for the future preservation of social order. But such has been the blindness of the dominant class in more than one crisis of world history.