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Over-Indebtedness and Depressions -- Irving Fisher explains the Kleptastrophe ( Part 2)
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Over-Indebtedness and Depressions -- Irving Fisher explains the Kleptastrophe
Read the first half of this posting here:
III.
THE OVER-INDEBTEDNESS THAT LED TO
THE WORLD DEPRESSION
40
The War and the New Era
To support the most colossal of all wars required prodigies of finance. And after the cost of the war came the cost of reconstruction. In both destruction and reconstruction, private financing as well as public was involved; for, in modern war, non-combatants exist only in name. Almost every private industry is, in effect, drafted into the service. Many of these must borrow, and after the war, many of them require readjustments which also involve borrowing.
After the World War, there was a joyful rebound. Europe appeared to be recovering. There were to be no more wars. Everybody was encouraged about everything. The war, moreover, had promoted endless new inventions, some of which were not merely destructive and could afterwards be applied to peaceful service. So the war gave a great new impulse to the spirit of invention. In America, invention became almost a trade, and something like mass production was brought to bear upon it. Captains of industry who had held the academic life in low esteem began to install laboratories. A questionnaire which was sent to some 600 industrial concerns brought back replies indicating that a majority had such installations. Accordingly, in the decade 1920-1929 more patents were granted in America than in its entire first century -- the peak years being 1926 and 1929.
There were also innumerable technological improvements not recorded in the patent office. Great strides were taken by the electrical, chemical and transportation industries. Road building became active. Scientific management struck a new tempo. Efficiency engineers came into their own. People began to talk of a New Era.
42
Investing in Equities on Borrowed Money
Meanwhile, there was a new trend in corporate financing. From 1921-1929, as the boom developed, the new corporate issues took more and more the form of stocks instead of bonds. This policy of reducing the proportion of bonds had one good effect: It left the corporations less encumbered with debt; so that, despite the depression, many corporations kept in a strong position throughout the whole of the depression. This advantage, however, was more than offset by shifting the debt burden from the corporations to the stockholders. That is, in order to buy the stock, many persons borrowed, so that, instead of being indebted collectively in the form of a corporation, they became indebted individually. Moreover, their borrowing was of the most dangerous type: largely margin accounts with brokers, whose loans were call loans. Thus, upon the corporate equities represented by common stocks was superimposed a structure of equities represented largely by margin accounts and brokers' loans.
This preference for investing in equities instead of bonds was fostered by a number of statistical studies, published in books and articles, which showed that almost always in the past, bonds had produced less income for the investor than had been (or should have been) produced by a diversified assortment of common stocks. [Edgar Lawrence Smith's excellent book, Common Stocks as Long Term Investments, had a great influence. ] Had the idea stopped at that, the effect of these studies would have been wholly good, for the total burden of debts would have been less than if bonds had continued to be the favorite investment; but, as things turned out, the volume of debt was made greater in size and more unstable in kind.
The new trend was further intensified by the formation of investment thrusts whose express business was to invest the money of their clients in diversified stocks. These trusts began to spring up like mushrooms, and presently became a mania. Many of them operated on borrowed capital, leaving precarious equities; and the individual owners of these equities borrowed in turn, thus still further pyramiding the debt structure -- equity upon equity.
43
High-Pressure Salesmen of Investment Bankers
Among the chief inciters to over-indebtedness for investments were the high-pressure salesmen of investment bankers, including bank-affiliates. One of the best informed students of this aspect of the problem writes as follows:
"I should make American investment banking the chief villain of the piece. In just what proportion inexperience, incompetence, negligence and shear bad faith have figured in the ballooning of debts by them I am not prepared to say, but I incline to think they are all well represented in the financings through American houses throughout the post war years. In seeking new issues to feed to a ravenous public, disregard for the debtor's ability to pay, for the possibility of effecting payment by willing and able foreign debtors, and for the existing interests of security holders in concerns to be reorganized or consolidated, mark a major portion of the financing during the period. The governing consideration seems to have been 'can the issue be sold at a handsome profit.' "
And, of course, there was an admixture of fraudulent enterprise, characteristic of boom periods.
Moreover, the inexperienced American public had been prepared for an investment fever by the financing of America's share in the World War. Unlike previous wars, this one was not financed exclusively by bankers and people of wealth. Nearly everybody had invested in it, even if only to the extent of a "baby bond," which was also a new idea. Millions of people, who before the war had never known what an "investment" was, suddenly became the proud possessors of securities, often bought with borrowed money.
Then there was the capital gain tax, improperly included in the income tax. During the rising market, this capital gain tax deterred many a holder of rising stocks from selling then and reinvesting the gains; for the holder knew that if he sold, he would be penalized by having a large share of his increased capital taken away from him by the Internal Revenue office. Here therefore hung on to his stock; and, in order to invest the increased worth, he borrowed -- using his appreciated stock for security.
The effect of this borrowing fever was steadily and enormously to inflate the deposit currency. Corporate profits rose, and the price level in the stock market rose. These were ominous signs.
44
The Steady Commodity Price Level
One warning , however, failed to put in an appearance -- the commodity price level did not rise.
The index of wholesale commodity prices, therefore, is not always an infallible index of monetary and business trends. In 1923-29, an index half-way between the level of commodity prices and the steep up-tilt of stock market price categories, including stock and bond prices, wholesale commodity prices, retail food prices, rents, and wage rates. This is an excellent index, but, necessarily, for the present, it is based on somewhat unreliable data and "weighting." For the present, therefore, the wholesale price index, despite its theoretical imperfections is generally accepted as the best. During and after the World War, it responded very exactly to both inflation and deflation. If it did not do so during the inflationary period from 1923-1929, this was partly because trade had grown with the inflation, and partly because technological improvements had reduced the cost, so that many producers were able to get higher profits without charging higher prices. For instance, from the third quarter of 1925 to the third quarter of 1929, the quarterly profits of 163 industrial and miscellaneous corporations rose by 75 per cent. In such a period, the commodity market and the stock market are apt to diverge; commodity prices falling by reason of the lowered costs, and stock prices rising by reason of the increased profits. In a word, this was an exceptional period -- really a "New Era."
45
Investing Abroad
Meanwhile, the investing and speculating Americans were by no means content with the home market. Foreign countries, European and South American, in the throes of reconstruction and elated like ourselves, were soliciting capital; and Americans furnished much of it -- to governments, to municipalities and to private corporations. Already, in the 60 years preceding 1931, according to a member of the British Parliament, British investors had lost 10 billion dollars by such loans. [ United States Daily, March 16, 1931, "Foreign Lending in 1930." ] Yet after the World War, American investors, with inadequate experience, marched into this field and took the lead. During the war, Americans had lent a great deal to the Allies. After the war, we kept on lending and included Germany, who in effect, borrowed to pay reparations.
In this way, America promoted or aggravated abroad the same unhealthy boom which was putting both our neighbors and ourselves in position for a slump. The reconstruction to which we contributed included much extravagance. Even though the municipal stadiums and swimming pools of Central Europe were not, as often charged, specifically financed with borrowed money, they necessitated borrowing for the other municipal purposes. In 1927, the reparation agent for the Allies, S. Gilbert Parker, protested Germany's excessive borrowing and the raising of governmental salaries; and Dr. Schacht, the head of the Bank of Germany, scolded his countrymen. "With borrowed American money," he said, "you live like rich people. With borrowed dollars you go every winter to the Riviera. If you borrow to improve productive equipment it is all right, but when you use American dollars for luxury expenditure, you act like fools. It would bankrupt private individuals, and it is just the same for the country." [ See What Makes Stock Market Prices, by Warren F. Hickernell. ]
But the lending can be an extravagance, too; and, in this sense, America was extravagant, and our bankers and investors might well have been scolded for it; instead of which our financial and political leaders proudly boasted that New York was supplanting London as the world's financial center.
46
Miscellaneous Borrowing Movements
The American farmer had long been over-extended. Already, on the slogan "Win the war with wheat" and on the tide of war inflation, he had financed his growing operations with borrowed money; and then, on the tide of post-war inflation, he kept on buying machinery and otherwise extending himself with borrowed money.
Finally, installment buying was promoted on an unprecedented scale by dealers in houses, automobiles, radio sets, furniture, refrigerators, vacuum cleaners, washing machines, and even fur coats and other clothing.
47
Reparations
[On German reparations, see Keynes' Economic Consequences of the Peace and A Revision of the Treaty; James W. Angell, The Recovery of Germany (Yale University Press, 1929); New York Times, June 14, 1931, "German Reparations and Allied War Debts" by Edwin L. James; November 1, 1931, "The War Debt Puzzle" by Charles Merz. ]
After the armistice in 1918, as the time approached for the peace conference at Versailles, the plan most popular among the Allies was to take all that the defeated powers could pay; and "defeated powers" meant, to all intents and purposes, Germany,whose wealth and resources were so much greater than those of Austria, Bulgaria and Turkey. It was rumored that one British financier predicted a German indemnity of between 100 and 200 billion dollars. [ See Keynes, J. Maynard, Economic Consequences of the Peace, p. 141 (American Ed.). ] Even after the treaty, but before the assessment by the Reparations Commission, Allied finance ministers talked of 74 billions. [Keynes, J. Maynard, A Revision of the Treaty, p. 39 (American Ed.). ] The actual assessment (in 1921) was 33 billions -- still a mammoth amount and one which, according to Mr. Keynes, involved a breach of the armistice agreement. It proved unmanageable; and after several conferences between the Allies and Germany, and then after the several consultations of the Dawes and the Young Commissions, a schedule of payments was drawn up to begin with 1939 and last 58 years. The total payments, if made, would come to about 27 1/2 billion dollars. At 5 percent the discounted value would be about 9 billion dollars as of 1930. [Large confiscations and payments in kind had already been taken from Germany. ] Down to 1932 Germany borrowed in order to pay; and even so, a moratorium was required. [On July 12, 1932, at Lausanne this situation was changed (after the Reparations had helped to build the crisis). ]
48
Inter-Governmental Debts Payable to America
[See Annual Report of the Secretary of the Treasury, 1927, p. 630, and subsequent reports; also in New York Times, June 14, 1931, the article by Edwin L. James on 'German Reparations and Allied War Debts," and New York Times, November 1, 1931, article by Charles Merz on "The War Debt Puzzle." ]
Up to 1920, the loans by the American government to 22 nations aggregated nearly 10 billions. In 1929, the principal and arrears (counting out five nations with which no debt "settlements" have been made) amounted to about 11.6 billions. By spreading both the principal and interest -- 22 billions -- over a period of 62 years (and also by reducing the interest), we have, in effect, reduced the debt to a much smaller present value -- about 5.9 billions, if discounted at 5 percent. But nominally the principal remains unchanged at about 11.6 billions, as of 1929.
The reparations and these inter-governmental debtors could be paid only in goods; but America deliberately and intentionally made such goods-payments enormously difficult, if not impossible, by erecting tariffs against hem -- and then granted a moratorium!
The condition in 1932 was that American private interests had lent Germany the money with which to pay the Allies the money with which the Allies were supposed to be paying the American government.
49
International Debts
These were loans made by American private interests to foreign borrowers, both private and public, American foreign investments of this sort began their phenomenal growth about 1912, increasing eight-fold from 1912 to 1931, and 89 per cent from 1922 to 1931. The total grown of these foreign debts did not stop with 1929. In 1931 they passed 15 billions. In 1929, however -- the crisis year -- the amount was about 14 billions, which, added to the lendings of our government, made a total foreign investment in 1929 of well over 25 billions.
50
Public Debts in the United States
These not only grew but went on growing after 1929. The total federal, state and local debts increased from 1915 to 1919, 5 1/2 fold, and then, up to 1932, they further increased by 14 per cent. [ Measured per capita, however, the increase was finished in 1919. ] At the end of 1931, the sum was nearly 34 billions, or over $271 per capita. But in 1929, the crisis year, it was about 30 billions: the state and local debts amounting to 13.4 billions; the federal, to about 16.9 billions.
Other countries also had great public debts, largely left over from the war. Even the neutral countries were not free of such debts.
51
Private Debts in America
From 1910 to 1928, farm mortgages rose over 2 2/3-fold; and in spite of a net increase in farm valuation for that period (including an inflation as well as a deflation period) the net equity of both the mortgaged and the unmortgaged farms descended from 90 percent of the gross valuation, in 1910, to 78 percent in 1928; the aggregatge burden being (in 1928 and 1929) about 9 1/2 billions.
Other agrarian debts in 1929 came to about 1.9 billions.
As roughly estimated on the basis of incomplete data, urban mortgages, from 1920 to 1929, increased more than three-fold, reaching, in 1929, about 37 billions.
Debts on life insurance policies in 1929 were about 2.4 billions.
Corporate long and short term debts in 1929 came to about 76 billions.
As to installment buying, only the roughest guesses are available. Professor Seligman guesses about 2.2 billions outstanding in 1926. The 2.2 billions would be about 3 billions by 1929.
Bank loans and discounts for all banks in the United States increased from June, 1914, to October, 1929, by nearly three-fold; from June 1917, two-fold; from 1922, 50 per cent; from 1926, nearly 15 per cent. Deducting brokers' loans from the total loans and discounts reported by the Comptroller of the Currency, we have 39 billions for the peak of commercial bank loans, in 1929.
52
Brokers' Loans
The year 1921 was the trough of a shot depression. The stock market was full of bargain prices. About 1923, the bull market began its unprecedented climb. An ideal investor, buying an average assortment of stocks in 1926 and holding them till September 7, 1929, could have turned every $100 investment into $200 -- all in three years. By starting in 1913, he could, by the same policy of holding on, have turned every $100 into $400. It was during substantially this period that investment trusts, having been a mania, became a full-blown bubble. During the first nine months of 1929 they rose from 200 to 400 in number, taking in a billion of their clients' money, to add to the two billions previously absorbed. During July they issued 222 millions of securities; during August, 485 millions; and September, 643 millions.
Naturally, brokers' loans kept pace with these opportunities. From October, 1928, to October 4, 1929, they increased by 50 per cent, reaching the record peak of nearly 9 1/2 billions. This included "bootleg" loans which at the peak were by far the larger part. [All security loans increased from October 3, 1928, to October 4, 1929, by 36 per cent and reached on that date a peak just under 17 billions. ]
53
Totals in 1929
Brokers' Loans 9.5 billions
Commercial Bank Loans 39
Total of all separable debts which
(mostly) create credit currency 48.5 billions
Other domestic private debts 129.8
Total domestic private debts 178.3 billions
Our public debts and all foreign
debts owing in America 55.6
Grand total owing in America 234. billions
As to the rest of the world, their domestic and international debts, including reparations, were vastly more burdensome than our own.
54
Gold and the Debts
But mere totals do not tell the whole story. It will be remembered that over-indebtedness may be alarming to the debtors or the creditors (the chief creditors for our purpose, being commercial banks). The important signal that may alarm the debtors is a fall in the price level which limits his ability to pay; the important signal that may alarm the creditor-bank is a curtailment of the gold supply which limits the bank's lawful ability to extend the debtor's time. Gold is the only international money; and during the war the inflation of paper and credits drove gold out of these paper currency countries and forced them to abandon the gold standard, while a serious gold inflation was produced in the United States by the flood of gold driven from Europe by the "cheaper" paper currencies. The complaints of a gold shortage which began to be heard soon after the war really meant that the price level had not sufficiently receded to permit a general return to the gold standard. Indeed, the attempts to return caused a "screaming for gold" which kept it scarce, or made it scarce, in many countries -- especially in the debtor countries.
The creditor countries were more fortunate; and one of them, at least -- France-- doubtless became possessed of a gold surplus. here is a prevailing opinion that the same was true of America. But this was only partly true, through it was fully believed by many Americans, including some American bankers. Gold came to America during the war because other countries were off the gold standard. But upon this gold we speedily built such a credit structure and raised the price level so high as to require almost all of the gold as a base. It is true that after the price level fell in 1920-2 there was temporarily an excess of gold in the United States, but soon both our business structure and our credit structure expanded so much as to make our unused or so-called "sterilized" gold more or less of a myth. The fact that we were a creditor nation was offset by the fact that we had collected very little from our debtors, and, on the contrary, had made new loans to them in excess of what they had paid us. Much of the gold in America was either ear-marked as belonging to Europe or was at any rate known to be subject to sudden withdrawal, as the result of short term credits held abroad.
If all this money, which had fled from Europe to America but was destined to return, could have been segregated as "refugee" money and sent home or even ear-marked, they myth of American excess gold would not have arisen. We would not have done so much financing of Europe, to the disadvantage of both parties -- or else we would have done it under contracts properly safeguarding us against gold withdrawal.
Thus, through our gold was great in quantity, the amount of it that was free was not great enough to justify much more than the credit currency erected upon it.
In 1924-5, the Federal Reserve authorities adopted a policy which had the effect of deliberately sending some of our gold away. Britain wanted to get back to the gold standard from which the war had forced her; and to do this, the Bank of England tried to attract gold by raising its interest rates; and the Federal Reserve authorities obligingly cooperated by lowering interest rates in this country. In this way, from 1925 to 1928, America lost 422 millions of its gold, and it the same period increase its ear-marked gold from 13 to 35 millions.
Moreover, this lowering of our interest rates stimulated speculation on the New York stock market. In a word, we dismissed some of our gold foundation and at the same time built a debt structure over the place where the gold had been.
Billions of debts and a gold base that was slippery -- these two conditions had now set the state for the collapse of 1929.
55
Contents of the omitted remainder of this book
The World Depression of 1929-32
In General
The American Stock Market
The Panic
Preliminaries in the Commodity Market
The Commodity Market
The Currency
Trade and Profits Upturns
International Accelerators of the Vicious Spiral -- 1931
Balancing the Budget
Summary as to the Nine Main Factors
The Real Dollar
Palliatives vs. Remedies
When Form is Substance
First Aid
Reducing Cost
Retarding the Debt Disease
Replacing Inflexible Bonds
Other Measures of Debt Flexibility
Debt Sealing
The International Debts in 1932
Remedies
Credit Control
The Mandate to Treat the Dollar Disease
The Equation of Exchange
The Quantity Theory
Adjusting Credit to Business
Reflating and Stabilizing the Price Level
Regulation Through the Rediscount Rate
The Federal Reserve System
Regulations Through "Open Market Operations"
What is Traded in Open Market Operations
Automatic Regulation of Reserves
Adjustments to Facilitate Open Market Operations
Conflicts of Function
A Unified Banking System Stabilization Properly a Government Function
A Bond Secured Deposit Currency
Gold Control
The Surplus Reservoir Plan
The Lehfeldt Plan
The "Compensated Dollar" Plan
Velocity Control
Confidence in Banks
Stimulating Borrowers and Buyers
The World Movement for Stable Money
Not Altogether New
The Present World Movement
The American Legislative Movement
The Federal Reserve Efforts
The Goldsborough Bill of 1932
Opposition ot the Goldsborough Bill
"What's in a Name?"
Our Dollar's Bad Record
War, a De-stabilizer
Can We Keep Capitalism?
56
Summary as to the Nine Main Factors
From 1929 to 1932, the nine main factors which have been discussed in this book behaved as follows:
1. Debts: The liquidation of brokers' debts had cut the figures by 94 per cent; of commercial bank loans by 22 per cent; of all debts due in America, by 23 per cent, except those (like public debts) which increased.
2, 7, 8 Money; its velocity; pessimism: Judging by the records of the Federal Reserve member banks, deposit currency had lost 21 per cent of its volume and 61 per cent of its velocity; the remaining efficiency for business purposes being only 31 per cent of its efficiency in 1929. The growth of pessimism is sufficiently indicated by this record.
3. The price level: industrial stocks had lost 77 per cent; and the descending commodity price level, instead of righting itself, lost 35 per cent. By the third week of June, 1932, this loss had become some 38 per cent.
4. Net worths: Their behavior is best indicated by the record of commercial failures, including bank suspensions. In 1929, 1.04 per cent of our firms had failed (22,909 in number); in 1931, 1.33 per cent (28,285 in number) -- in increase of 28 percent in the yearly rate of failures. Bank suspensions, in 1929 were 642 in number, in 1930, 1345, and in 1931, 2,550.
5. Income: the net profits of 163 industrial and miscellaneous corporations became a loss.
6. Production, trade and employment: All kept falling. According to a Federal Reserve index, industrial production [adjusted for season changes ] having fallen from June, 1929, to October 1929, by 5.6 per cent, instead of righting itself, registered 39 per cent additional fall from October, 1929 to January 1932.
The indexes show the construction fell earlier than out-put and much faster, just as indicated in Part I.
9. Interest: The various rates acted according to type. For instance, the rediscount rate, the call loan rates, and the 60 to 90 day time loan rates on mixed collateral, all rose with the boom and fell with the depression. The chief misfortune is that the rediscount rate rose too late to restrain those who borrowed in order to speculate on the bull market, and fell too late to check the stampede of liquidation by the same borrowers. That is, the real rate had been allowed to get so far away from the money rate -- so light on the way up and so heavy on the way down -- the borrowers were insensitive to the nominal rates.
57
The Real Dollar
The whole tragedy is summed up in what happened to the Real Dollar. From 1929 to March 1932, by reason of the lowering price level, the real dollar measured by 1929, became $1.53 -- later (third week of June, 1932) 1.62.
Thus all the liquidation that had been accomplished down to 1932 left the unpaid balances more burdensome (in real dollars of 153 cents apiece) than the whole debt burden had been in 1929, before liquidation began. Only one category of debt seems to have been reduced in fact as well as in name. This was brokers' loans, which were reduced, in name, 94.4 per cent, and in fact, 91 per cent. On the commercial bank debts of 39 billion, though 8 1/2 billions had been paid to 1932 -- nominal a reduction of 21.8 per cent -- the burden had not decreased but actually increased by 20 per cent. On the intergovernmental debts of 11.6 billions, 400 millions had been paid up to 1932 -- nominal a reduction of 21.8 per cent -- the burden had not decreased but actually increased by 48 per cent. On farm mortgages of 9 1/2 billions, 1.9 billions were paid -- nominally a reduction of 20 per cent; yet the real burden had increased by 22 per cent; If we exclude public and other debts which grew even nominally after 1929, the total is 187 1/2 billions on which the payments of 43 1/4 billions were made -- nominall a reduction of 23 per cent; yet the real burden had increased by 17 per cent. If we take everything, the grand total is 234 1/4 billions, on which net payments of nearly 37 billions were made -- nominally a net reduction of 15.7 per cent; yet the net real burden had increased 29 per cent.
In a word, despite all liquidations, the 234 1/4 billions of 1929 became over 302 billions in 1932, if measured in 1929 dollars. [ Of course, the figures merely compare valuations at two specific dates. They do not and cannot compare the various dates when loans were contracted and the dates when they were paid. ] By the end of the third week in June 1932, the business dollar had grown to $1.62 in terms of the 1929 dollar debts, the total would be equal to 319.8 billion of 1929 dollars, or an increase of 36 per cent. Even assuming liquidation by failure and foreclosure amounting to 10 billions, the real debts would have remained stationary at 302.9 billion dollars in 1929. ... This growth of real debt burden, despite huge efforts at liquidation, which, in my opinion, constitutes the master fact of the depression of 1929-32.
58
Our Dollars Bad Record
The greatest absurdity of all, however, is the claim ... that sound money is the kind of money we have been having for all these tortured generations. The first requirement for soundness is stability; and the purchasing power of a dollar is stable in proportion as the price level is stable. How stable that has been may be judged from the following chart of its history from 1860 to 1932 ...
This crooked line should some day serve as an inscription on the gravestone of unstable money. It is largely responsible for countless gravestones of children starved and of men killed in wars between capital and labor; for these wars were generated in large part by this crooked line. Every dip in the line, including the numberless minor jogs, means thousands of debtors cheated (unconsciously) by their creditors; and every climb of the line means thousands of creditors cheated (unconsciously) by their debtors. In both the debtor and the creditor camps there have been both rich and poor. A poor debtor, for instance, builds a cabin with the help of a mortgage. He borrows $1,000 in 1865; and in 1869, having paid all the interest, he pays the principal -- $1,000 that are worth over 3,000 of the 1865 dollars which he had borrowed. And for an example of a poor creditor, take a person who in 1896 put $100 in a savings bank, and in 1920 draws out (including compound interest) $256 that are worth 77 of the 1896 dollars which he had deposited.
If we treat the 1913 dollar as 100 cents, then the following schedule shows the various buying powers which the dollar has had at various times since 1860.
in 1860, it was 96 cents
in Jan. 1865, " " 47 cents
in 1896, " " 150 cents
in 1913, " " 100 cents
in May 1920, " " 45 cents
in 1922, " " 72 cents
in 1923, " " 81 cents
in 1924, " " 70 cents
in 1929, " " 71 cents
in 1930, " " 81 cents
in 1931, " " 98 cents
March 19,1932, " " 111 cents
third week of June, 1932, " " 118 cents
Or, if the 1929 dollar was 100 cents, then the dollar of the third week of June, 1932 was $1.62.
Nor does this take into account what happened abroad, in and after the World War, in the way of "calamity booms," as the Germans called them -- which wiped out the middle classes -- many by death, including suicide, because their incomes (consisting on salaries or of interest on bonds) did not rise when the price level did. In Britain, between 1913 and 1920, the price level rose more than 3 fold; in France, ore than 5 1/4 fold; in Italy, more than 6 1/2 fold; in Austria, between 1914 and 1922, more than 17,000 fold, which in 1925, became more than 21,000 fold; in Russia, by 1922, over 4,000,000 fold, and this, in 1923, became more than 6,000,000,000 fold. In Germany, for 1920, the rise was only 15 fold, but at the peak of inflation in 1923 it want far above the astronomical figure of a trillion fold.
59
War, A De-Stabilizer
In its relation to monetary derangements (which are themselves almost as cruel as war) war is the greatest obstacle to the movement for stable money. There is no money device which war will not wreck. War debts, war inflation, and post-war deflation are all on too large a scale to be checked by delicate machinery.
But there is no reason why the same cure that was effectively applied to war -- that is, judicial machinery; for war, like the frontier gun-play, is a crude form of litigation, which must always go on so long as there is anything to litigate and nothing else to litigate it with. War guilt is not my department, but I believe that no scholar now assigns entire guilt of the World War to any one nation. Some assign it almost or quite entirely to what G. Lowes Dickinson calls "The International Anarchy," under which nations had to conduct their commercial rivalry. To avoid war, the balance of power became a sort of insurance policy; and, for a time, it did preserve the peace; but sooner or later it had to turn bad -- no balance of power can stay put; and, when it began to slip, all the great powers of Europe, according to this view, reluctantly chose war as the less of two evils.
Since the international forms of litigation are a thousand years behind the municipal forms, the first step for the purpose of superseding war must, of course, be quasi-judicial -- not yet fully judicial.
60
Can We Keep Capitalism?
The threat of Socialism (if it deserves to be called a threat) is, of course, often made by those who would stir people to the need of making things better. But the threat seems to become more logical very year; witness Russia since 1919, and Chile in 1932.
Both war and the unstable dollar (with its hunger and its strikes) play into the hands of Socialism. What we call the Capitalistic System might better be called the System of Private Profits; and a depression, being a profit disease, is one to which Capitalism is peculiarly liable. So typical an exponent of Capitalism as Nicholas Murray Butler has recently affirmed that the system is on trial today. His remark, if he is right, can only portend that, unless Capitalism shall clean house by taking the dirt of depression out of profits, some form of Socialism may tear the house completely down. For profits are always at the mercy of the unstable dollar, -- always in danger of disappearing en masse whenever the price level shrinks, while debts and debt service do not.
Socialistic thinkers of all degrees make common cause against private profits, and add that, without such profits, crises would disappear. Accordingly, in 1929-32, the plight of the capitalistic world drew a good deal of derision from the Russians, who, though not prosperous, were apparently going up while we were going down. I shall not here debate the comparative merits of the two systems. Capitalism boasts of its rewards for initiative; Socialism claims a less selfish stimulus for the same virtue. But, for the present purpose, suffice it that each system has been compelled to borrow from the other. The capitalistic system, for instance, is not wholly capitalistic: witness government itself; witnes public schools, the post office, and the Panama Canal. On the other hand, Russia, which furnishes the only large-scale example of a socialistic experiment, has, in ten years, drifted perhaps as far toward Capitalism as we, in a thousand years, have drifted toward Socialism.
Meanwhile, -- to close this book with the quotation with which it began -- Sir Josiah Stamp, in the introduction which he was so kind to write to the English edition of my little book, The Money Illusion, buts it thus: "Money, as a physical medium of exchange, made a diversified civilization possible . . . and yet it is money, in its mechanical even more than its spiritual effects,which may well, haveing brought us to the present level, actually destroy society."