Knowledge that Transforms

A,N author may rightly be asked to define his subject clearly, and he should also be required to define himself a little bit, so that all have a better chance to criticize his interpretations. Therefore, I will expose what faiths or prejudices of mine have a bearing on my subject. I have a basic faith in the essential soundheadedness of the United States. I do not believe that what we are living through is a crisis of the system, of the mode of life that has made the United States the great nation that it is. I think it is a crisis within the system. This means that I believe that, when policies clearly threaten the system, the policies will be forced to change. Therefore, all my conclusions are colored by a basic faith that the nation's difficulties will finally be worked out only along the pattern of life which has made the United States what it is. Having defined my own prejudices, the subject of inflation, I find, hardly permits of a coverall definition. Moreover, in order to bring my discussion in line with the actualities of the present situation, I must not confine myself to inflation in a restricted sense, because we are faced not only with that inflation which is classically the method by which governments meet an insolvency of their treasury. We are faced with it also as part of a planned recovery. It is therefore necessary to consider the widely conflicting schools of money management and economic planning as a part of my subject.

NINETEEN thirty four, like nineteen thirty three, closed with business improving after a temporary recession. Both years showed alternate periods of advance and contraction, but in 1934 business volumes averaged higher and the fluctuations were less violent than in I933, when the dominant influences were the banking crisis and the initiation of a far-reaching program of economic legislation. The business curve of our Index of General Economic Conditions (page 25) reflects the improvement of the first half of I934, the subsequent recession as the effects of the drought and loss of confidence in the business outlook became evident, and the recovery late in the year. Business at the end of I934 was higher than at the beginning, and but little below the best of the year or the extraordinary peak of mid-I933 at the culmination of the movement arising from the nation's leaving the gold standard and the effort of business to act before government regulation became a fact. Speculation at the year end was at almost exactly the same level as a year earlier; it reached a peak last February, declined into the summer, and then advanced to somewhat above the summer's lowest level. Money remained extremely easy during the year, with a slight tendency to decline: a potentially stimulating influence for both speculation and business which failed to produce any great effects for reasons relating primarily to the unsettlement of business opinion during much of the time. Commodity prices rose as the result of increases in agricultural products and foods. The chief legislative measures of the year related to the currency (including silver as well as gold), though the law for control of the stock exchanges, the amendment of the Securities Act, and housing legislation were important. In respect to legislation dealing directly with industry and agriculture, the record of the year is of interest in what it shows regarding the working out of the Administration program rather than for new measures looking toward control or recovery. The Gold Reserve Act at the end of January and the accompanying presidential proclamation brought to a close -so far as I934 was concerned the episode of the depreciation of the dollar which began with the stoppage of gold exports in April I933 and had its most dramatic incident in the gold buying operations in the fall of I933. The Gold Reserve Act of I934 has been discussed from time to time in this REVIEW;1 and for our present purpose it is sufficient to point out that the undervaluation of the dollar in terms of foreign exchange has had the inevitable result of adding substantially to our gold holdings, thus tending to continue the maldistribution of gold among the various countries of the world. Devaluation could not have had such an effect if there had been widespread or persistent lack of confidence in the position of the devalued dollar, but, because it brought to an end the rapid depreciation of our currency, it was viewed in many quarters as a conservative measure. The most disturbing element in the currency situation was the action undertaken in regard to silver. The passage of the Silver Purchase Act before the adjournment of Congress and the nationalization of silver in August both unsettled confidence for a time, while the operations of the Treasury in the silver markets of the world produced serious financial disturbance in China. Concerning the effects of the recovery legislation in its non-monetary aspects, certain conclusions may be safely drawn from the record of the year. Undoubtedly the agricultural program has contributed to improvement in the condition of the farmers, though the severe and destructive drought of I934 meant that it operated under conditions far from normal. It was anticipated that economic improvement in the farming districts, by increasing demand for industrial products, would act favorably upon urban industry, while direct stimulus was to be furnished by the public works program and the measures taken under the National Industrial Recovery Act. These measures did not produce sustained industrial recovery in I934 2 The manufactures index in October was only two points higher than in the preceding November, when the I933 recession

IT is not possible to forecast changes in currency and in bank deposits in this country. Some inkling of the future may be obtained, however, by making a survey of recent developments and of the mechanical possibilities of expansion, using approximate figures for gold, circulating bank deposits, federal reserve issues, silver coin or certificates, and greenbacks. Some attention should be devoted to the methods available for control when and if currency and deposit expansion should pass any limit thought by the Administration to be satisfactory. At the very heart of the present problem, we find the policies of the Treasury as to gold and the financing of the federal deficit by sales of bonds to banks. For the time being, the Administration has suspended the established and recognized central bank method of facilitating and encouraging expansion i.e., the creation of new bank reserves by increased open market purchases or rediscounts by the federal reserve banks and has fallen back upon the method used for the financing of the War. To be sure, we did not then have gold devaluation nor the seizure of gold stocks by the Treasury, but otherwise the method is the same. Gold devaluation, as applied at the outset to that portion of the gold stock which was commandeered by the Treasury, resulted directly in a mark-up or bookkeeping profit of 2.8 billion dollars in terms of the new money of account. Thereafter, to the end of I934, domestic gold production plus devaluation profits on coin and old gold certificates dribbling in added 0.2 billions. Further, as an indirect result of devaluation at a mint price which undervalued the dollar, there was a large import of gold which was turned over to the Treasury. The net gold imports, including net release from earmark, between January 3I and December 3I, I934 amounted to I.2 billion dollars, in terms of the new money of account. Thus, in the aggregate, 4.2 billions were placed at the disposal of the Treasury for manipulation.

W. L. C., London and Cambridge Economic Service, R. A. G., Institut fuer Konjunkturforschung, Current Economic Conditions, The Review of Economics and Statistics, Vol. 17, No. 6 (Nov., 1935), pp. 151+154-156