Democracy and Economic Life in The United States


By BENJAMIN M. ANDERSON, Ph.D., Professor of Economics, University of California at Los Angeles

Delivered before the University of California at Los Angeles, April 14, 1941

Vital Speeches of the Day, Vol. VII, pp. 472-480

MY theme is democracy and economic life in the United States. I emphasize the words "in the United States." I do not wish to bring you merely theoretical speculation about democracy in general or about economic life in general. Our democracy has been and isa turbulent and restive democracy, impatient of governmental restraint unless fully convinced that the restraint is necessary. It is a democracy which is perfectly capable of imposing a sweeping restraint in an impulse of strong idealism or at a time when it is strongly moved by anger.

We saw this, for example, in the adoption of the Eighteenth Amendment to the Constitution imposing a sweeping Federal prohibition on alcoholic beverages. That same democracy, testing prohibition and finding it distasteful, increasingly tolerated and sympathized with violation of the prohibition law and finally swept away the prohibition amendment.

Attached to Local Liberty

It is a democracy with strong attachment to local liberty, a democracy in which whole States and whole regions have more than once set aside or evaded Federal laws which seem to them inappropriate to their local conditions. The most conspicuous case of this, of course, is the attitude of the States of the old South toward the Fifteenth Amendment to the Constitution, an attitude which on the whole, though sometimes grudgingly, is acquiesced in as a more or less necessary thing by the rest of the country. But it will not be forgotten by Californians of the earlier generation that from 1862 to 1879 the Legal Tender Acts of the Congress of the United States were deliberately set aside by the people, the Legislature, and the courts of the State of California. Irredeemable Greenbacks could pay debts in New York and Illinois, but they could not pay debts in California. Californians refused Greenbacks and demanded gold—and got it. The State Government of California refused to receive Greenbacks in payment of taxes and demanded gold—and got it. In October of 1862 the Board of Supervisors of San Francisco voted to pay the interest on city and county bonds in gold coin. California adhered to the gold standard while the rest of the country was on a paper money basis, and Greenbacks did not become current in California until after specie payments were resumed in January, 1879.

Democracy and individual liberty are terms intimately associated in the thought of the American people. It is, of course, possible to have a democracy which leaves little room for individual freedom. The majority can be very tyrannical and, at times, has been. But our democracy has its historic roots deep in English political tradition and legal tradition. The political philosopher whose thought dominated the very language of the framers of the Constitution was, not Rousseau, but rather John Locke, the great English thinker whose writings were concerned with the justification of the English revolution of 1689 which overthrew the last of the Stuarts and definitely established the supremacy of the Parliament over a limited monarch, bound by a Bill of Rights.

Locke's philosophy of the state finds no room for absolute sovereignty anywhere. Locke does not find "the state of nature" in the absence of government so intolerable that men will surrender all of their liberties to get out of it. Locke finds the chief necessity for government in settling disputes among men when they get into one another's way or when they jeopardize one another's life, liberty, or property. And the most serious need for settling these disputes appears to come in his thought where property relations are involved. Parenthetically, I may say that those who have interpreted the frequent references to property by the framers of the Constitution, as meaning that it was the propertied class that made the Constitution and that it was an economic interest which controlled what they did, have given a very superficial interpretation indeed. There was no other language which they could have used, taking into account the kind of education they had and the kind of tradition they had and the philosophy of government in which they were brought up. They talked the language that they knew.

Breakwaters Against Mob-Mind

Government, as they saw it, was necessary. And the government must be adequately strong. But the caprice of the governor must be under restraint, private liberty must be protected, and local liberty must be protected. They made a government of checks and balances—a government in which most of the problems would be settled by the States. Certain general problems were to be handled by the Federal Government. And in this Federal Government no one will was to be supreme. The Legislature and the Executive and the Judiciary were coordinate bodies, each with power to impose checks upon the others. The framers of our Constitution distrusted unrestrained power in the hands of any man or of any group of men. They distrusted mob-mind. They knew their political history. They knew the history of the ancient democracies. They knew that the people acting in a moment of mob excitement could do violent things. They devised a great many breakwaters and impediments to the cation of mob-mind. One of the purposes of having two Houses in the Legislature was "to let hot legislation grow cold." And one of the definitely understood and anticipated functions of the independent courts was to review legislation in the light of the Constitution to make sure that the Legislature had not exceeded its constitutional powers.

Checks and Balances Never More Needed Than Today

I may say that today this danger of mob-mind, of psychological contagion dominated by emotion in the course of which hasty and unreasonable action may be taken, is far greater than it was at the time the Constitution was framed. In those days communication was much slower. An hysterical impulse originating in New England passing down the coast to Virginia would have calmed down in New England by the time it reached Virginia. The whole country was less likely to be simultaneously excited then than now by an unreasonable project which could not bear calm and dispassionate analysis. But today with telegraph and, above all with radio, the whole country can be simultaneously excited and the whole country can bring to bear simultaneously upon Washington pressures of a sort that can lead to action which we can easily regret a little later. We never had greater need than we have today for breakwaters against mob-mind. Among these breakwaters I would first of all put the importance of our system of forty-eight States, the importance of having most matters handled in Sacramento or in Albany rather than in Washington. The legislatures of the several States will not be in session at once. They will be closer by far to the actual problems to be dealt with than the Congress can be. The restraining influence of local knowledge and local consideration of local consequences will have a better chance to work. We need the States, and we need the independence of the Senate and the independence of the lower House of Congress at Washington, and we need an independent judiciary as we have never needed them before. We need the breakwaters against mob-mind.

This Anglo-Saxon political tradition of ours is full of ingenious devices compelling deliberation and cooling off. Witness our system of parliamentary law with the requirement of a first and second and third reading of a bill before is can be finally voted on, in each House, with its provisions for the appropriate time for amendment and a time when no more amendments may be offered. Witness the organization of our Legislatures under which bills are referred to committees before they come into the Chamber for amendment and discussion—all are devices of compelling study and thought and preventing hasty and impatient action.

And our rules of judicial procedure, irritating and vexing and antiquated though many of them are, have none the less the profoundest significance in their tendency to prevent the stampeding of juries, by compelling the jury to study the difference between direct testimony and circumstantial evidence, by the elimination of hearsay evidence, and by the elimination of irrelevant testimony.

All these things which grew out of the long struggle between the English people and their King, designed to restrain the arbitrary, capricious, and tyrannous action of the King, our country has saved as a body of restraints upon its temporary rulers, lest an ambitious ruler leading a temporary popular hysteria should himself become tyrannous and destroy the liberties of the people. The framers of the Constitution knew the political history of Greece and Rome as well as that of England. They were not afraid only of kings. They were equally afraid of dictators or usurpers or tyrants. And they knew how easy it is for the leader of a mob to make himself a tyrant, and then to take away the liberty of the mob itself. These restraints do not prevent and were not designed to prevent the sober, reasoned convictions of the people from prevailing in the long run. But they were designed to compel sobriety and reason in public action, and they were very emphatically designed to leave to the individual and to the minority a large body of liberties, including very especially the liberty to protest and to argue, which the majority could not take away.

Now what qualifications has a democracy such as I have described for guiding and directing and controlling and running the economic life of a vast country such as ours? How can men sitting at Washington with agents out over the country, subject to direction from Washington, guide and control and regulate and run the economic activities of one hundred and thirty million people? The answer is that they can't; that they are not qualified; and that to the extent that they undertake to go into the details of the economic transactions of the country and the economic activities of the country, they can make turmoil, they can make confusion, they can slow things down, they can stop things, but they can't coordinate them and make them function well.

Government as Traffic Police versus Government as Back-Seat Driver

How could the Government at Washington run the twenty-six million automobiles of the country? It can't, nor can even the local policemen do it. But the local policemen can do a pretty good job in enforcing traffic regulations. Each automobile is run by the driver in it who knows where he wants to go. In general that driver is intelligent enough and well-meaning enough to avoid collisions with other drivers; and usually he is courteous enough to give the driver approaching from the opposite direction room enough on the road. Usually he is careful in making a left turn at an intersection not only to avoid a collision but also to choose a time when he won't unduly delay on-coming traffic. But without the highway police regulating traffic, enforcing traffic rules, we should have a great many more collisions than we have.

Traffic regulation is very important; but this is very far from having the Government put into each automobile a back-seat driver who would tell the driver where he was to go, who would tell the driver the rate of speed he was to employ, who would tell the driver when to make the left turn, and who would, incidentally, charge the driver a high price for his services. Democratic Government such as ours is perfectly qualified to make the needed traffic rules for economic life. It is totally unqualified to control and guide and regulate the details of economic life.

The central problem in economic life when you get beyond production that meets bare necessities and when you get independent producers each specializing in his own production, producing primarily so that other men may consume what he is producing and expecting to get what he consumes from other men, the central problem in the regulation of such an economic life is its proper coordination. We want goods produced in the right proportions. We want the energies and resources of the community put in the most important uses. We don't want a great superfluity of hats produced when there is need for more shoes. We don't want an excess of wheat produced when there is a shortage of machine tools.

Autocratic Central Control versus Control by Voting, Palaver and Compromise

I once heard an advocate of governmental economic planning lay down the proposition that an army properly equipped could go around the world living on what it itself produced, the General and the planning board of army engineers directing the different parts of the army to produce in definite given amounts this and that and the other thing that the army needed, the army being converted into an economic producing mechanism with its resources and energies and equipment skillfully directed to the utilization of the raw materials and other physical resources of the region through which is was passing. I don't know how far the army could get this way, but in principle, I should be disposed to accept the proposition that as long as it moved only in regions of fairly diversified physical resources it could support itself and the soldiers could all keep busy. But the army is not a democracy. A democracy could not do that.

A democracy undertaking to guide and control and direct and apportion the economic activities of its members would have to settle these questions by voting and palaver and compromise. If there were an excess of voters in one line of industry and it was desirable to shift them to other occupations, these voters might not wish to be shifted; and they might be politically powerful enough to prevent a contraction of their activities. The different groups would, moreover, all be certain that they were as consumers getting unfair shares of what the community was producing. There would be constant disputes among them and constant bargains among different groups, each trying to exploit the others. The General of an army, if there were enough wisdom in the army planning board, could settle these questions in such a way that the most essential things were produced and that every soldier had something to eat and wear. The abbot in a monastery can settle questions like this. But it is impossible to visualize a democracy in which the needed economic balance would coincide with the political balance of forces, and in which anything but economic chaos could come out of the conflict of interests among the different productive forces.

One thing almost certain is that a democracy, seeking directly to regulate production and consumption, would in its political compromises make heavy inroads on the accumulated stocks, the capital of the group, and would consume more than it produced, with a deterioration of its productive resources and its standard of life.

Democracy Gets Efficient Control and Coordination of Economic Activities by Means of Free Prices in Open Markets

Democracy and efficient economic life are compatible only if there is some impersonal and automatic machinery for guiding and controlling the community's productive activities_some machinery which makes it to the interests of theindividuals in the system to do the things that bring about an economic equilibrium.

We have used a radically different method of directing and coordinating our economic activities during the hundred and fifty years of our existence as an independent country. We have not had a government deciding whether shoes or hats should be produced and in what amounts, directing so many laborers to go into this kind of work and so many into that kind of work. We have rather relied upon the self-interest of our people to seek and find out for themselves the best employment for their labor, the best employment for their land, and the best employment for their capital. We have relied upon the markets. We have relied upon the prices of goods and services measured in dollars to guide and to control our industrial activity.

We have not made these decisions by votes at the ballot box, but we have made them by votes at the market place. The ballots have been dollars. When goods are produced in the wrong proportions—too much of one thing and too little of another thing—prices and profits very quickly tell the story. Falling prices for one commodity with rising prices for another, make it worth while for men to shift from those activities where prices are falling to those where prices are rising. With declining demand for buggies and rising demand for automobiles, free enterprise and the free and voluntary movement of labor makes the needed response. Production of automobiles is expanded; production of buggies is contracted.

And in an economic life of this kind the control and the guidance of particular enterprises and of particular parts of economic life comes readily and naturally into the hands of those men who are most skilled and most efficient in gauging the trends of demand and supply, in coordinating labor and resources in such a way as to produce the maximum of goods with the minimum of costs, in using those methods which reduce costs, in producing the proper amount of goods and getting them with a minimum of friction to the right places and into the right hands.

We need no central brain, no central planning board, no authoritative commands from above to make this system work. And in this fact is its greatest merit. Individuals, seeking their own advantage and studying the particular factors that affect their own particular activities, work out the social coordination guided by moving prices in open markets.

There is no doubt in my mind that in time of peace, at all events, a system of free enterprise and free labor, guided by changing prices and changing wages in the distribution of its activities, produces a far better result than any possible government planning board could accomplish. The wisdom does not exist to anticipate the wants and desires of a great people in the aggregate and to direct their activities for the satisfaction of these wants and desires. The ablest economist could not possibly do it, nor could a board made up of the ablest economists and statisticians possibly do it.

Wartime Controls

In time of war, when the wishes and desires of the civilian population can be subordinated to clearly defined war objectives, it is possible to do a great deal in conscious public planning; and it is possible, relying upon the extraordinary motives which war brings into play, to make a free people forego in part the satisfaction of their economic wants, the making of profits, and even the maximum possible wages in the interest of the public good. We did a good deal of this in the last war. But in peacetime the system under which men do what it is advantageous for them to do rather thanwhat some government planning board tells them to do is by far the most efficient method.

Vote-Getter versus Dollar-Getter

But let it be observed that in a democracy the choice is not between the management of business enterprise by the men who have proved themselves most efficient in business on the one hand, and a wise and competent planning board made up of disinterested scientific men on the other hand. The choice is rather, as Professor Thomas Nixon Carver has aptly put it, between the vote-getter and the dollar-getter. Now both the vote-getter and the dollar-getter are pretty tough babies sometimes; and as we look at the more enlightened vote-getter and at some of the tougher dollar-getters, we may have our moments of doubt, the more as the vote-getter is very articulate and very skilled in making a plausible case.

Dollar-Getter Knows How to Keep Books

But there is one tremendous advantage from the standpoint of the public good which the dollar-getter has over the vote-getter and that is that the dollar-getter knows how to keep books, knows how to calculate profit and loss, knows how to figure which methods are cheaper and which are more productive; and the dollar-getter must do this with a great deal of accuracy and precision if he is going to get dollars and if he is going to keep dollars. And consequently, when it is a matter of conserving and of increasing the productive resource of the country—and bear in mind that the resources of the country are little more than the aggregate of the sum of the resources of the individual productive units in the country—we have a much better chance of conserving and increasing our resources when they are handled under the kind of bookkeeping that the dollar-getter employs.

We have a dream of a Federal budget in which there should be an exact and carefully made balancing of revenues and expenditures and a surplus to reduce public debt and in which expenditures should be kept within reasonable relation to the production of the country, in which there should be careful consideration of what we want to do in relation to what we can afford to pay. This dream has not yet been realized, though it ought not to be an unrealizable dream. But if we did not have, going far beyond this, a continuous careful and detailed and realistic appraisal of all the assets and liabilities and of all the income and outgo of the multitudinous private productive activities by the men most vitally concerned and most closely interested in the success of these private activities, we would have economic chaos very speedily. The dollar-getter knows how to keep books, and is speedily eliminated from the picture by the bankruptcy courts or by his board of directors if he doesn't do it well. The vote-getter in general faces no such difficulty and at times seems to thrive by substituting rhetoric for bookkeeping. The difference is important.

Vote-Getter in Great Country Has Inadequate Financial Restraints

But the vote-getter placed in a position of great power and with a great economic life at his disposal has very few checks in economic necessity upon him for a long time. If he wishes to play recklessly with the resources of a great country, he has an immense taxing power and an immense borrowing power; and it takes a good while to use them up. And he has the further resource of abusing the currency and the banking system of the country, creating new money when he can't get enough for his purposes by taxing and by borrowing from the people. In the United States we have

been building an immense patrimony through public and private policies designed to accumulate capital and to build productive power. Our Federal Government down to 1930 did very little borrowing except for war; and when wars were over, it proceeded as rapidly as it could to pay off the war debts. Our public improvements were paid for out of current taxes as a general proposition. One notable exception was the Panama Canal where we planned to borrow something over three hundred million dollars, but where we actually borrowed only one hundred and thirty-five millions because we had surpluses of revenue over other expenditure which we could use instead of borrowing. Our river improvements, our harbor improvements, our post roads, our public buildings, our army posts, our navy—we paid for out of current taxes. The radical reversal of public policy in recent years has not yet exhausted the great patrimony; and the check upon excessive expenditure which private enterprises so speedily realizes is not yet effective.

But the dollar-getter, managing an enterprise, has no such leeway. If he borrows, he must explain to his creditors what he means to do with the money; and he must protect his credit by using the money well. His justification or his condemnation is not going to rest upon eloquent speeches made to his stockholders or his board of directors. The verdict will be found in the balance sheet at the end of the year and in the profit and loss account. The dollar-getter is held in check by the Government above him, by the laws of the land—the traffic laws and the highway police of industry and markets. He has his competitors to keep in mind. He has his stockholders to satisfy. He has his executive staff which must be kept loyal and satisfied. And he must satisfy his working men in wages and conditions of work, or the best of them will speedily be drawn away by his competitors. He is held in check above all by the consumer of his products whom he must satisfy both as to price and as to quality. He is held in check by the purveyor of the raw materials that he uses. And these checks come every day and all the time, not once every two and four years at election time when he might be able by bringing up some new issue to divert attention from past mistakes.

Monopoly Indefensible

Please note that I emphasize very especially the checks that come upon him from his competitors holding him to efficiency. An economic order shot through by monopolistic combinations, by market manipulation, by price-fixing agreements, and by the kind of inflexibilities which the elimination of competition creates, is very ineffective as compared with a competitive order. The instinct of our Anglo-Saxon democracy with its common law prohibition against combinations in restraint of trade, and its Sherman Law, is an absolutely sound instinct. Monopoly is indefensible in the general field of business enterprise. Where monopoly must exist, as in certain public utilities and railroads, then governmental regulation of rates and services becomes necessary. But with this governmental regulation come a host of problems which we have not yet properly solved and which I hope we shall never have to solve for the great body of our industry. It is a competitive private enterprise that I am defending. Great monopolies can not carry mistakes as far as great governments can. But great monopolies can make far more mistakes and can be far more wasteful of the resources of the country than competitive businesses dare be. The competitive business must in general pull up before its mistakes are carried too far. The forces of the markets and the profit and loss account act quickly on competitive enterprise.

Our Government Can Not Move With Promptness in Economic Control

It is essential in economic life that decisions be made quickly, that readjustments of policy be made frequently, and that decisions made be rapidly carried out. A satisfactory contract can be made today which it may not be possible to make three days later. A market opportunity occurs today which may be gone tomorrow. It is, on the other hand, of the essence of a democracy like ours with a division of powers between States and Federal Government and within the States division of powers among counties and municipalities, with the tripartite system of independent Executive, Judiciary, and Legislature and with the general system of checks and balances, that decisions are made with deliberation and frequently decisions by one division or department of Government will be made on the basis of fundamental policies different from those obtaining in the decisions made by other departments of Government. Our democratic governmental system is not adapted to the systematic, orderly and prompt handling of economic details.

As our Government is constituted, it is virtually impossible for it to see economic life as a whole. In our Congress appropriations and expenditures are not even visualized together. Different committees deal with them. Separate legislation is passed dealing with revenue and dealing with expenditures. The connection between tariffs and monetary policy is close in economic fact. If goods can move freely in international trade, there is much less pressure on gold than when trade barriers are high and large international payments must be made in gold if they are to be made at all. And yet to bring this obvious economic principle to the attention of the Congress in a practical way is very difficult If you present it to the Committee on Banking and Currency in the Senate, you will find a recognition of the truth of it but a feeling that nothing can be done about it. The tariff is a problem of the Senate Finance Committee and not of the Committee on Banking and Currency. We at one time thought that we had control of the money market centered in the hands of the Federal Reserve System. But as an apparently undesigned by-product of the currency legislation of 1933 and 1934 we find the Treasury with immense money market powers and with the ability to neutralize and offset the policies of the Federal Reserve System. And we find at the present moment apparently a very definite divergence of policy between the Treasury and Federal Reserve authorities.

In the nature of our democratic system it is essential that we maintain the market as the primary instrumentality of coordination and control, with its automatic functioning which needs no central brain. We must not try to create a system which requires a central brain and an unimpeded power of decision and execution when our democracy does not possess them.

Dictatorship Has Obvious Advantages if Regimentation of Industry Is Desired

Dictatorship can do a good many things that democracy can not do in dealing with economic life. When private rights protected by the courts have disappeared, when the separate States have disappeared—Hitler recently destroyed the States in Germany—when there are no longer any vote-getters, when all the dollar-getters can be harnessed as servants of the dictator, when labor unions are destroyed, when docile labor will work for wages set by the dictatorial power in whatever industry it is assigned to, when farmers will accept the prices dictated and submit to constant checking of their production and even their personal consumption of

foods—many of the economic problems which a democratic government such as ours can not solve, can be solved. I don't think they have been solved well in Germany. I think the German economic order, viewed as a peacetime means of improving the conditions of the people, is a ghastly failure. But when war objectives dominate the picture and when the purpose is to concentrate all the energies of a people upon the winning of a war and to suck out of a country all of its resources for concentrated effort at the battlefront, I recognize that the Hitler system has its merits.

The Hitler system has gone far in exhausting the Germany behind the battlefront when the war began; but it had placed an immensely powerful military force at the battlefront. Shortages of many kinds were acutely in evidence in Germany early in 1940. The startling successes of the vast military machine in 1940 have enabled Hitler to supplement his resources by an immense loot from the conquered countries—a loot of accumulated supplies and materials though not, I think, a considerable addition of net surplus in current production over civilian consumption. The German plan of regimenting and controlling the production and consumption of the people seems not to be working in France or Poland as effectively as it works in Germany.

Hitler's Method Unsuccessful in Italy and Russia

The Hitler system has its merits in Germany. It hasn't been successful elsewhere. It has failed in Mussolini's hands to make an efficient fighting State. It appears to have failed in Stalin's hands to make anything like the efficient military machine that Russia's great resources in man-power and in others forms ought to be able to support.

German Political Philosophy—Hegel versus Locke

In Germany as a temporary thing designed primarily for war, it has its merits. In Germany we have the extraordinary combination of a highly intelligent people who are also a very docile people. In Germany we have a political philosophy which generations of Germans have been indoctrinated with which subordinates the individual to the State and which glorifies war. Prussian people, long before the German Empire, had been used to a Government which told them what to do in their economic life and to a political philosophy which glorified the State. It is interesting to note that as political philosopher, Frederick the Great himself introduced a liberal note, influenced by Voltaire and other liberal writers of the time. But in the writings of Fichte, to whom I shall later refer, and above all of Hegel, we have a kind of political philosophy so alien to the thinking of John Locke and the framers of the United States Constitution and the general democratic tradition in England and the United States that it is not easy for us to feel the kind of thing that the typical German is almost born with. The German people today is almost an army, guided by a general and an engineering planning board, docilely obeying orders and obeying them with something of the spirit of an army. But I repeat that Italy can't do it and that Russia can't do it. And I assert that we in the United States will not submit to it.

The Efficient Democratic Governmental Economic Policy

But our democratic government can do a great many things in the guidance of our economic life if it will operate with due respect for economic law and if it will content itself with general measures designed to influence the course of markets instead of specific measures designed to neutralize or directly to control market action. Let me give an illustration of two divergent lines of procedure with respect to a problem about which everybody is talking today, namely: the possibility of a drastic "inflationary" rise in commodity prices and what ought to be done to prevent it.

For many years we have been laying the foundation, on the side of monetary policy and policy in public finance, for an exaggerated price rise. We have deliberately debased the dollar forty-one per cent in gold content. We have made a great excess of bank reserves, partly by the purchase of government securities by the Federal Reserve Banks, partly by injecting a large volume of silver certificates into circulation, partly by changing the law so that every ounce of gold coming into the country will make thirty-five dollars instead of $20.67, and partly, not as a matter of policy, because vast sums of gold have come here from frightened Europe. We have had an unbalanced budget for many years and are now greatly increasing the flow of borrowed funds through the Federal Government's hands.

The price rise has not yet come. But the potentialities of a dangerous price rise are there so soon as it becomes difficult to increase the production of goods in response to market demands. Now in important places we have reached full production, and prices are showing some tendency to rise. What can we do about it?

Well, the thing that is being done so far is for certain Government officials to talk prices down and to threaten governmental action if prices are put up; and with this, in pertain cases, there is the realistic further action of rationing tout supplies which is an imperative part of this policy if it is to succeed. We did that in the last war in the case of certain commodities which were acutely scarce; and we did it with a good deal of success, though the thing was limited to essential commodities and to desperately short commodities. We did not try price-fixing all along the line. We had a war on when we did it, and we could rely upon unusual wartime motives and wartime public opinion to impose a good many temporary restraints.

Now an alternative line of governmental policy which I think most economists would prefer at this stage of the situation certainly would be along lines proposed by the Board of Governors of the Federal Reserve System and the Federal Advisory Council and the twelve Presidents of the Federal Reserve Banks, namely: that measures be taken to reduce the volume of excess reserves and to reduce the now virtually unlimited potentialities of bank expansion which would help to finance a boom in commodities if it came. I put in a reservation here that I think that the proposals of the Federal Reserve authorities go too far in the matter of raising reserve requirements for member banks. They contemplate a possible maximum reserve requirement of fifty-two per cent, which I am sure is altogether too high. I should be very much afraid of a maximum as high even as forty per cent from the standpoint of the flexibility of the banking system in anything like an emergency.

Coupled with this proposal must go other things. This proposal alone would not be effective. It is necessary that the Government should greatly increase taxes on small and moderate incomes—large incomes are already taxed beyond the point of maximum net return. Here is a definite measure designed to reduce the incomes of the people and to weaken their power in competing with the Government for goods and for labor which the Government needs for war purposes. And coupled with this should go a policy of offering Government bonds, not to banks at two per cent which means further bank expansion, but to investors at a rate which will really attract investors' money so as to take up funds which investors have and to take up current savings of investors asa means of preventing their competition with the Government for needed labor and supplies.

And then surely and obviously as part of this functional approach to the problem, we ought to do what we can to increase the production of goods. And here obviously the restraints of the forty-hour week ought to be removed to defer the time when shortages of goods are going to lead to sharp price rises and to reduce the number of bottlenecks where production is so short that either a violent price rise or price-fixing with rationing is necessary.

Here we have the issue fairly clear, I think, between a functional approach to the regulation of economic activity by the Government and a direct approach. On the one hand, a comparatively few general changes in policy could be readily inaugurated and made quickly effective. There might still remain the necessity at a later stage for the regulation of some thirty or forty different prices of strategic commodities. On the other hand, leaving the forces which make for high prices uninterfered with and striking directly at the prices themselves, we may need to regulate a thousand prices with the policing of farmers and small retailers and wholesalers and small businesses. The great concentrated industries are not too hard to police. But to go into the details of the business life of every town and small-sized city in the United States, and to go up and down Amsterdam Avenue in New York City watching the little merchants—well, the Germans are doing things like this today. The Gestapo is much feared and very effective. But I shouldn't want the job in the United States.

I must add to my series of functional changes in policy one other radical but obvious suggestion. If the Government does not wish its spending for war purposes to be competed with by non-essential spending, if it wishes to hold down the total spending so that labor and resources may be concentrated on the things most needed for war, then surely it must radically curtail its own peacetime expenditures. It is nothing less than shocking to have the Administration propose at times like this a further increase in social security expenditures and the revival of the St. Lawrence waterway project, which mean increased expenditure of borrowed funds and increased competition with labor and supplies needed for war. One may—perhaps—leave to the naval authorities the question of the wisdom of building great battleships today when there seems to be more urgent need of destroyers and merchant ships and when the ship-building facilities are already over-taxed. But we need not defer to any judgment in calling for a drastic retrenchment instead of an expansion in the ordinary peacetime expenditures of our Government and in condemning the St. Lawrence waterway project at the present time.

We can meet the danger of a threatened rise in commodity prices by general policies: curtailment of non-essential Government expenditures, increased taxation of the incomes of the people, borrowing from the people instead of borrowing from the banks, raising the reserve requirements of the banks, relaxing the forty-hour week law. And I think by measures like this we can do a great deal toward solving the problem. But I should have very little confidence in our ability to go far or to last long in direct regulation of prices over the whole economic front, omitting these general functional policies.

I do not offer this as a comprehensive discussion of the problem of commodity prices. I offer it merely as an illustration of two opposing theories as to how Government may act as it deals with economic life. The one method leaves the people still free to pursue their profits and avoid their losses, to get the best wages they can, to undertake theactivities they wish to perform, within a framework which operates to divert their energies toward the thing that the Government wants done. The other method tells them directly and in detail what to do, with grave uncertainty as to the compliance of the many millions throughout the hamlets and the streets of the country.

Fichte and Governmental Economic Planning—"Autarchie" an Old German Ideal

Not all of the economic planners are idealists. Some of them are men greedy for power who don't care much how they get it. But the ideal is economic planning designed for the good of the country, planning which will seek justice as among the different elements in society and which will get a good balance. One of the original economic planners, and certainly an idealist, was the German philosopher, Fichte, follower of Kant and a precursor of Hegel, who in a book, The Closed Commercial State, maintains the following propositions:

"The state must adjust in proper proportions the three chief classes of producers—(1) farmers, miners and the like, (2) artisans and (3) merchants, limiting each to a fixed number of individuals; must insure to each individual a proportionate share of all the raw and manufactured products of the country; must for this purpose fix and maintain the relative value and money price of all these commodities; and finally, as absolutely indispensable to the foregoing ends, must render impossible direct trade between citizens and the foreign world. So far as commerce with other peoples may be deemed desirable, it must be carried on by the state itself."

The autarchie of the Nazi is thus an old German ideal And the emphasis upon the proposition that if you are going to have governmental economic planning in a country, you must cut it off from anything like free contact with the outside world underlies almost all governmental economic planning. Our N.R.A., for example, contained provisions calling for higher tariffs to protect the high prices and costs it was going to involve. And our A.A.A. legislation in 1933 did also. The economic planner does not want to be bothered by outside markets.

As against this view, I shall maintain that democracy will handle its problems of economic life far more easily if it has liberal foreign trade policies, as it thereby avoids the great difficulty of balancing all the different productive elements in the country against one another. When you use the whole world, you have more elbow-room; and it is far easier to get a good economic balance.

Importance of the States

In a democracy as big as ours—a great Federal empire spread three thousand miles from ocean to ocean, with dependencies and outlying territories of an important sort—the effort of a central Government at Washington to regulate in intimate detail the problems which we have heretofore left largely to the States can not, I think, succeed. I am convinced of the fundamental truth laid down by the great sociologist, Giddings, in his Democracy and Empire, that the only way in which we can reconcile democracy with a vast expanse of territory rests on what he calls "the one inviolable condition that, as it lengthens the reach of government, it must curtail the functions of government."

The Swedish Democracy and Economic Life

I want to illustrate some of my propositions by contrasting the democracy of the United States with the democracy of Sweden in dealing with the problems of the relation of government to economic life.

Sweden has often been pointed to by economic planners as an illustration of what can be done. First, let me say that what Sweden has done in economic planning has been modest, carefully considered, carried out step by step, has not involved revolutionary change, and has not involved governmental dictation to industry as to what it shall do. It has been on the whole of a functional type. Second, the claims that Sweden deliberately undertook to regulate prices by monetary measures are not true. Sweden abandoned the gold standard reluctantly after failing to get a loan in New York to hold it; and the subsequent developments in Swedish commodity prices were not price stabilization but were rather a decline in domestic prices and a rise in the prices of imported goods, which happened to neutralize one another in price indexes. Third, Sweden has over-balanced rather than unbalanced her budget. Finally, Sweden has been far too wise to adopt the policy of isolating herself from foreign markets. She has kept a low tariff policy, and her own internal moves have been subject to the discipline of the great markets outside, and her internal monetary policy has been subject to the exigencies of outside money markets. She has never had the illusion of unlimited financial strength. She has known always that she has had to keep her financial house in order, that she has had to keep her central bank in order, and that she has had to put prices on her commodities that the outside world would pay. She has kept herself flexible, and she has kept her markets open. But she has been able to accomplish a good many things—wholesome things—in the matter of social security and in the matter of improving the living conditions of the masses of the people, all within the limits of what her producers could pay taxes for, that command a great deal of respect.

Now let me observe first that Sweden is a country with an area about that of California and with a population about the size of California. We could do a great many things in California if we had here the power that the Swedish Government has. But, second, Sweden has the advantage from the standpoint of efficient democratic government over this great country of ours of a highly homogenous population.

We had to our shame a religious issue in our Presidential campaign of 1928; and we very frequently have religious issues in local elections—issues irrelevant from the standpoint of our fundamental economic interests, and preventing the consideration of economic issues. Sweden has no such problem. Ninety-nine per cent of her population belongs to the Swedish Lutheran Church. Other faiths are generously tolerated and are entirely free; but they are represented by a microscopic part of the population, and no political issues arise because of them. The people are virtually all of one race, the only exceptions being some thirty thousand Lapps and seventy-two hundred Finns—out of a population of the approximate size of that of California. Moreover, the Swedish people have lived together for a long time. There has been no important recent immigration, and there has been nothing like as much movement of population from place to place within the country as we are used to. They know one another well, and they tolerate one another.

Many of the political issues which divide a country as diverse as ours with as many different national elements in it as ours, which, generating heat rather than light, put our political controversies sometimes on a low plane, are absent in Sweden.

But, third, the small size of the country means that the Legislature in Stockholm and the Prime Minister and the King really know that country with intimacy and detail. They do not know merely the figures for its industries, but they know the personalities in the industries. This intimate acquaintance of all the elements involved is made greater bythe fact that in Stockholm one finds not only the political capital but also the financial capital and the industrial capital. Labor leaders, university professors, industrialists, Cabinet members, members of the Parliament, all know one another as friendly personalities, know how to size one another up, know how far they can depend upon one another for accurate statements and for judicious opinions. There are no needless unfounded suspicions among them such as exist in our country between Washington and New York.

England handles many of her economic problems better than we by virtue of the simple fact that political and financial capital are together in the same city.

Economic Planning by the States

In war and in preparation for war the Federal Government must take the lead in plans for redirecting the industry of the country toward definite war objectives. We all agree on that. But there is a body of active men in Washington who want to use the war emergency as a means of fastening long-time permanent Federal controls upon the industry of the country far in excess of those that now exist. They must be fought. The war policies should be temporary policies. The war controls and the ward boards should be temporary controls and temporary boards. And when peace comes, let us hope for two things: one, that it shall be such a peace as will make possible a restoration of trade in the world so that we may balance our economic life with foreign trade, restoring a good export market for our agricultural surpluses, and restoring productive activity throughout the world. And second, let us plan earnestly and decisively to reverse the rapid sweep of the intrusion of the Federal Government into the multitudinous details of American economic life. Let us restore to the States the function of dealing locally with the divergent local economic problems.

There can be a great deal of intelligent economic planning by the States, held in check by the necessity of competing with the products of other States and held in check by the financial limitations upon the States. We shall move less rapidly that way in economic and social reform; but our steps will be more carefully considered and far more appropriate to the needs of the country, and we shall avoid catastrophic mistakes which, once made, affect the whole country.

The Independent Public Man

One of the appalling consequences of multiplying the economic functions of our Federal Government at Washington is the rapid multiplication of economic pressure groups demanding of the Senator and the Congressman that he legislate in behalf of a special group rather than in behalf of the country as a whole and threatening him with defeat in the next election if he doesn't do so. "Economic planning" under these circumstances too frequently becomes organized plunder, with the Federal Treasury the greatest victim and with a growing Federal deficit the almost inevitable result.

One major reason why we ought to keep legislation regarding most industrial matters State legislation is that it is far easier to beat off raids on a State treasury than it seems to be to beat off raids on the Federal Treasury. And one reason for that is that the State legislator does not have his whole career and his living and his economic future bound up in holding his job, while the Congressman and Senator at Washington too often do. I do not mean to say that there are not courageous men both in the Senate and the House at Washington who will resist pressures of this sort and who will risk losing elections for the sake of the good of the country. There are magnificent men of this kind in both Houses. But the percentage that yields is dangerously high.

There is need for an aroused public opinion in this country which will assert the general interest as against the multitudinous special interests which, trading their influences, accomplish purposes which none of them could accomplish separately and which none of them ought to accomplish.

With the immense sweeping extension of the power of Government in economic life which the past decade has brought, the need for the best men of the country to take active part in public affairs and public discussion has increased to a point where there is the heaviest moral obligation upon every man who is qualified to take an active part to do so.

I have a challenge to some twelve or fifteen of the young men in the University of California at Los Angeles. You want to take part in the public life of your State, and you want to be free to do it from the standpoint of the good of the State as a whole and not to be tied down by servitude to special interests to which you owe your election. How can you do it?

One way is by limiting your political ambitions. The man who goes to the State Legislature for one session and then tries next term for the Senate and after a term in the Senate, wants to go to Congress and after a term in Congress, wants to be United States Senator, almost inevitably multiplies obligations to a multitude of people who have mortgages on him and who cripple his independence. He is like the margin speculator in the stock market who pyramids his purchases as the market rises, steadily increasing his debt as he does so. I have, on the other hand, seen a good many notable cases of men in several States who would stay in the State Legislature session after session representing their counties, refraining from seeking a larger office, who became very powerful men indeed in the State. Staying in the lower House or staying the Senate term after term, they gained the prestige of veterans. They knew the ropes. They attained senior positions on committees. They learned to know the State. Candidates for State offices living in other counties and other districts came to them to ask their support, in their counties. They made no such requests of other men in other counties or in other Senatorial districts. Increasingly they had political assets rather than political liabilities. Their own counties were proud of them. Content with a legislative job and having most of their time free for their private undertakings, their living did not depend upon political success. They could afford to take the chance of losing an election for a point of principle. And they became powerful and respected and influential. They became skilled in legislative matters. Governors listened to them; United States Senators and Congressmen listened to them; and the public respected them. No public officer can serve his country well who dares not lose an election.

The young man who can start from a county where his family has lived for a long time, where his family has borne a good name, should start out by saying to the county that he does not want to go to Sacramento merely to get special benefits for the county, but if the people of the county want him to go there to give his best attention to legislating for California, he wants the job. He may not always get the job. Some other man, skilled in appealing to special interests in that county, may defeat him. But if he gets the job, he is in a very strong position; and if he works faithfully and well legislating for California, the people of his county will increasingly take pride in him. And if he doesn't get it the first time, it is not a tragedy to lose an election. He can still take part in public discussion in his county. He can still urge the general good against the special interest, and in a subsequent election he may easily win. But there is no safety for the country if the politicians all "play safe."