Chapter XIX. Credit and Depressions

CHAPTER XIX Credit and Depressions Since production is carried on through time, credit arises as a natural consequence. Credit is patterned on the processes of nature. When a man plants something in the expectation of a harvest, he is expending goods and labor in the present for a return in the future, with the attendant risk of loss. The next step is obvious j one man can advance goods to another for a subsequent return. There is no reason to suppose that money created credit, though they might have developed simultaneously. Money is the only means by which deferred exchanges* in goods could be effected without credit. But men give credit, and cannot be persuaded to refrain from doing so, because it is their nature to. By virtue of his mind, man works through time and space. The impulse is not greed, but the creative and expansive faculty. The added risk is accepted for the sake of quicker and greater extension of power over nature.

If mankind wished to have the soundest possible production system, money is the proper medium. In that case, no credit should be given, no loans should be made. All transactions in goods and money should be closed on the spot, including the shortest possible period for payment of labor. Money would still cover time and distance. With such a system, there could be no panics; and there need be no hard times except as incident to crop shortages. It cannot be said that there would be no poverty, because goods must be produced. Proposals to "abolish poverty," or to guarantee "freedom from want" or * THE PROMISES MEN LIVE BY. By Harry Scherman. Random House. Mr. Scherman coined the phrase, "deferred exchanges."

220 THE GOD OF THE MACHINE "freedom from fear" are a mere confusion of terms. Fear and want are subjective; and poverty is the absence of wealth. If it were promised that from the hour of his birth no man should ever again stand in his naked skin, who is to produce the clothes? who is to have such absolute power over every person? The only condition in which no one can experience poverty, want, or fear, is that of rigor mortis. The dead neither want nor fear. With living persons producing and exchanging goods in freedom, judgment and the seasons are variables, introducing risks. All that can be said is that money is the safe means of extending exchanges of goods into the future. The spot cash system has never been proposed by any social theorist, because it calls for no control, no compulsion, no political job or power for the reformer. It is entirely within the competence of the individual as long as there is real money.

Nobody is obliged to give credit. Men can stick to cash transactions if they care to, and they don't. During the Middle Ages, when interest on money was stigmatized as morally wrong, men made loans at interest just the same, and paid high rates. The merchants and craft guilds quietly carried on a far-reaching credit system j the ultimate reliance for collection was on negative and private power, by refusal to trade further with a defaulter. Without credit, it is difficult to imagine how the modern high energy system of production could have got under way. Accumulation of paid-up cash capital in the needed sums would have been almost impossible, or at least much slower. Though vast enterprises have been created without using all of the various modern instruments and channels of credit—as Henry Ford managed without public stock flotations—yet if there had been no such credit system as there was, with banks to facilitate payment for shipments to and from distant points and to carry deposits of current funds and give some local credit, one cannot conceive of the business attaining such magnitude.

CREDIT AND DEPRESSIONS 221 Even without credit, there must be capital losses. Inventions and improvements may make previous capital assets obsolete ; or experiments with new inventions may fail; and finally, capital enterprise necessarily pushes ahead of the immediate demand j it creates a market. Energy drives for an outlet, and human judgment is not always adequate for its direction. Dishonesty is the smallest factor in the widespread losses of a major panic and depression; mostly it enters after the fact. That is, men resort to crooked shifts when enterprises begun honestly are failing. Hence the nauseating spectacle of prominent men falsifying accounts and mumbling feeble excuses or sullen lies under investigation. This is not to palliate dishonesty -j it is imperatively necessary that summary treatment should be meted out to the guilty, and that failure should result in demotion. The point is that dishonesty is never the prime cause of a collapse of credit. But it causes greater injury than the proportionate sums involved, because it diverts attention from the crucial task of getting production going again.

Further, it confuses the vital issue of profit, and affords a pretext to muddle discussion with such meaningless phrases as "production for use and not for profit." Production is profit ; and profit is production. They are not merely related; they are the same thing. When a man plants potatoes, if he does not get back more than he put in, he has produced nothing. This would be obvious if he put a potato in the ground today and dug up the same potato tomorrow $ but it is all the same if he plants one potato and gets only one potato as a crop. His labor if wasted; then he must starve, or someone else must feed himy if he has no reserve from previous production. The objection to profit is as if a bystander, observing the planter digging his crop, should say: "You put in only one potato and you are taking out a dozen. You must have taken them away from someone else; those extra potatoes cannot be yours by right." If profit is denounced, it must be assumed that running at a loss is admirable. On the contrary, that is what requires justification. Profit is self-justifying.

222 THE GOD OF THE MACHINE When any institution is not run for profit, it is necessarily at the cost of the producers. One way the non-producers go about destroying a free production system by degrees is to persuade men of wealth to endow foundations for "social work" or for economic or political "research." The arguments sought by such research will generally be in justification of parasitism, favoring the creation of more sinecures by extension of the political power. It is most important to recognize just what has happened when credit collapses, causing a "depression." The energy circuit has broken down. At numerous points along the line, energy is leaking, being lost in one way or another. When the wires from an electric power plant go down in a cyclone, a similar condition occurs, but from external accident ; and the necessary measures for repair are obvious. With a production system, the energy hook-up is more complex, and the breakdown is from internal causes, originating in mis judgment of the various factors and connections.

In the simplest possible example, if a man should walk eight miles in two hours to obtain supplies which will yield him only sufficient energy to walk four miles in an hour, it is a losing venture. Real physical energy has been lost, expended in the heat and waste matter of muscular effort. But for accounting purposes, the loss would have to be reckoned in time or mileage. This is the utmost simplification, which assumes that the man himself is the whole production system. If he used any tools, their cost and wear ought to be included. So with a high production system, every part of it must be maintained by surplus production j the system as a whole came out of stored up surplus. When a railway is overbuilt, extended "ahead of time" through space in which there is not enough traffic to support it, it is a tricky problem to discover the real loss to the energy circuit j when and where does it occur? * A * It has been suggested, by a transportation expert of wide general knowledge and practical experience (Robert Selph Henry, assistant to the president of the Association of American Railroads) that the major business depressions of the 19th CREDIT AND DEPRESSIONS 223 specific loss to an investor does not necessarily signify a real loss to the energy circuit, nor even a gain to some other person 5 though either supposition may be true in a given instance.

It might be that in one transaction, there is a real loss to the circuit, a loss to the original investor, and even a loss to the purchaser who takes over the assets and makes them pay; but none of these factors can be taken for granted. Time, space, and management are the variables. Real losses occur through time and space5 and in physical objects. The same loss has both aspects. Material is perishable in that it loses its usable form and quality with wear or mere neglect, in time. The kinetic energy of a production circuit may be dissipated without return in so many ways that it is tedious to enumerate them. It may be converted into static forms which are useless for the circuit; and these again may be simple net loss, or they may be carried as century appear to have followed Immediately upon periods when rapid expansion of transport facilities temporarily outran the general development of the country.

Nothing could be more probable. A high energy system is a conquest of time and space, and rapid transport is the physical transmission line. Any disproportion in such facilities would have direct consequences to the whole system as a matter of course. But as long as the financing came from private enterprise capital, the condition would be self-correcting. Mr. Henry says: "In the case of each of the earlier depressions, the new system of transportation, although created faster than it could be put to economic use, in time justified itself and paid out, because it was inherently much more efficient and economical than the transportation system which it replaced.... This did not prove true after the depression of 1929. ... One possible reason for this difference might be found in the fact that the new system (super-highways, inland waterways improvements, Federal airports, etc.) upon which more money was spent in two decades than had gone into railways in more than a century, does not meet these conditions. It is not less expensive to maintain and operate than the system, which it partially replaced, but is tremendously more expensive.

Another important difference is that while more than 98 pe; cent of the investment in railroads came from private funds, and was therefore subject to the inescapable test of economic reality, approximately 85 per cent of the recent investment in transportation plant came from public tax funds, which are relieved of that ultimate test." In brief, a lot of energy has gone into static forms, and a continuous current still goes into a ground wire through those forms s it is not merely a net loss but a steady leakage.

224 THE GOD OF THE MACHINE dead load, at a continuing loss. (If a skyscraper is built for which there are no tenants, it might conceivably be abandoned j that would be net loss -y but if it is maintained at a cost above the rental return, it is a continuing loss, dead load.) But of all the material objects used in exchange, real money is the one factor in which the loss cannot occur. Of course if a five dollar gold piece were actually lost, dropped by accident and not found again, a moiety of energy is lost with it, which went into digging and minting the gold, although this is offset if the coin has been in use for a time. And gold does wear away slowly. But it is not perishable as most commodities are perishable; time has practically no effect on it. It is because, practically speaking, energy cannot be lost in or through money as a physical object, that it registers loss elsewhere, in the same manner as it facilitates transfers, serving as a meter.

Therefore real money never is and cannot be the cause of a credit collapse. Yet it is invariably singled out on such occasions for attack. The level of intelligence again is revealed in the language j it is the animistic thinking of a savage who imagines a "money devil." * The notion that there must be something wrong with real money because it does not automatically pay bad debts is such an entirely irrational illusion that it seems to lie beyond the reach of evidence or logic. Apparently it derives from the fact that credit, which is debt, has to be computed in money. The sum of debt then may be ten or twenty or a thousand times the amount of real money in existence j because the same money can pay an infinite series of debts in sequence. If twenty million bushels of wheat were contracted for, and only ten million bushels existed, there really would not be enough wheat to fulfill the contract 5 but in that case, nobody would argue that there must be something wrong with wheat as a commodity; much less that the situation could be remedied by calling half * The weakest point in a credit system is that a presumed profit is taken by the financing agency (the bank or investment broker) when a debt is incurred, not when it is paid.

CREDIT AND DEPRESSIONS 225 a bushel of wheat a bushel. Certainly if one man contracted to deliver wheat which he hoped to acquire, and then failed to obtain it when the time came for delivery, it would hardly be proposed that wheat should be seized from another man who owned some, in order to complete a transaction into which the owner of the wheat had never entered. But that is what is done with money in a crisis. Probably the underlying cause of confusion is that increased production tends to lower prices. If it did not, distribution would be impossible, for such increase. But that inescapable condition may at any time result in a temporary loss to producers of a given commodity because they have produced more. A wheat grower might get $2 a bushel one season because of crop shortage, and only $i the next when he had grown twice as much wheat. He feels that this is inequitable3 the $2 was all right, no matter how high the cash profit was; but the $1 is not enough. On the other hand, the buyer feels that he is not getting enough for his money when he pays $2, though he has no objection to paying only $1. But both of them are inclined to think the money must be at fault; the quantity must be inadequate. When it comes to paying debt, that is, meeting the consequences of credit, debtor and creditor are equally prone to this illusion on the same transaction, both being liable to loss.

In a collapse of credit, enterprises which are sound enough in themselves are adversely affected. Cash reserves are a precaution against such contingencies j they constitute storage batteries, by which the business can keep going until the long circuit is restored to sufficiently sound condition. But the only practicable test of where the leakage and loss occurs is that repayment ceases somewhere. The quickest and most drastic liquidation of a credit collapse would be the best and most equitable j because it would most rapidly reconnect the production system j but this is seldom allowed. Instead, the political power is called in to seize or depreciate money; the meter is falsified, and a general leakage all along the line is caused.

226 THE GOD OF THE MACHINE After that, no genuine recovery is possible, unless or until this power is revoked and the general leakage stopped. Under the Roman empire, after the government intervened, there never was any recovery. That was the end of the empire 5 and Europe was sunk for centuries. It should be kept in mind that even in private control, misjudgment on a high potential energy circuit can and does cause vast disturbances and incidental losses in the economy. If viewed merely as physical phenomena, the effects in peace are startling enough. They are most apparent in cities, above all in American cities, because the latter are truly dynamic apparitions. The pre-industrial cities of Europe were of course local energy circuits, connected on the long circuit 5 but the limited potential allowed them to take form as authentic social and political organizations. The pattern is visible in the grouping of civic and religious edifices, commercial quarters, and residences, so as to indicate a center. No American city ever quite established such a pattern. From the beginning, the American city was a high potential power station, a generator of more energy than the traditional form could accommodate.

As the energy flowed out to expand the nation, it shifted and transposed every aspect of the civic scene continually. A city by origin is a crossroads 5 that is to say, it marks the confluence of streams of energy, and augments the flow. Immemorially, the location of cities has been fixed by ports, rivers, and highways, a port being the end of an ocean route. The advent of railways did not alter this relationship, but for the time being confirmed the natural factors. Though railways to some extent superseded inland waterways, they still followed the water level as far as possible, and therefore did not greatly change the previous trade routes. Once the right of way had been obtained and the tracks laid, traffic was tied to the line of rails. But the next development in transport was essentially different. Its effect is most strikingly exemplified in New York. Having the port and river to begin with, and an ocean route CREDIT AND DEPRESSIONS 227 to Europe, New York naturally became a great railway terminus. With these advantages, it was also the financial center.

Significantly, the motor car industry developed inland. New York supplied liquid capital to promote the unparalleled expansion of that industry. But motor cars are not tied to a special track, like railways 5 neither do they require a set terminus, as ships and railways do. Something had happened, with the advent of the motor car, which was not immediately perceived 3 the trade routes were altered to a considerable degree. In the past, when the great trade routes were blocked or shifted, cities and regions fell into decay, as with Venice, the Levantine ports, the Hanseatic towns 5 but the cause was obvious. It occurred in respect of the routes as such. With the motor car, the change occurred in the vehicle of transportation y and what it did was to diffuse traffic and lessen the importance of the centers. Whether or not the airplane tends to centralization again remains to be seen} the plane is certainly tied to established routes, much more than the motor car, because it must have a landing field, but we do not yet know if this is a permanent condition. In any event, the railway built up great cities as it also facilitated settlement of the wilderness; it was an ambivalent factor, and on the whole it equilibrated the economy. In the development of the high energy production system, the railway is the product of an immense centralization of energy (in money, cash capital) -y hence its action must tend preponderantly the other way. From that point, the normal process should have been mainly toward decentralization, and the motor car came in appropriately. Another sign of decentralization was the stepping down of the size of the generating units of power, in smaller dynamos. These developments have a philosophical, social, and political meaning. The motor car is designed for individual ownership and use. The course of events reveals the true nature and processes of capitalism, which is not collective and cannot be brought into any system of collectivism; capitalism is the economic system of individualism. The energy 228 THE GOD OF THE MACHINE age could get under way only by a preliminary concentration of liquid capital in private control, which collectivism will not permit to begin with. Thus it was assumed by superficial minds, such as Marx, that capitalism tended to concentration of wealth and a "class" division of interests. But the "interest" of capitalism is distribution. All the inventions of man have individualism as their end, because they spring from the individual function of intelligence, which is the creative and productive source. Freedom being the natural condition of man, inventions making for greater mobility resolve into individual means of transport. So far as co-operative action is useful toward the development of the individual, capitalism is fully able to carry out by voluntary association vast and complex operations of which collectivism is utterly incapable, and which are self-liquidating at the limit of their usefulness, if they are allowed to complete the process. No collectivist society can even permit co-operation; it relies upon compulsion y hence it remains static* That miscalculations will occur is inevitable. Though the motor car, the smaller dynamo, and other signs should have been sufficient warning that the great American cities were already somewhat overgrown, nobody read the omens. Instead, when the liquid capital from the profits of the motor car industry flowed back to New York, the stream was directed under the very foundations of the city. It shot up in steel and * Paradoxically, though socialism cannot tolerate free enterprise, the political framework of free enterprise accommodates every form or type of co-operative association, to the full extent of its practicable operation. The socialist electrical engineer, Steinmetz, working for General Electric, did not want fixed compensation, preferring to draw whatever funds he felt he needed} and his wish was complied with, on open account—which would have been impossible in socialism! The

arrangement was practicable in the given case simply because it was left to the private judgment and willingness of the parties concerned. All the defects which may occur in a free enterprise system are positive and settled features of collectivism. If the collective (political power) debars a man from work, what can he do? If a man does inferior work in a free economy, the purchaser is the judge; who can have the right to judge under socialism? At worst, in a free society, the most unfortunate depend on charity} in the collective, they may be killed.

CREDIT AND DEPRESSIONS 229 stone, a terrific projection of energy, in the last great skyscrapers, "bigger and better," the Chrysler Building, the Empire State Building, Radio City. It had one effect of an explosion, shattering the previous real estate values. That profit really should have been used to decentralize the industry which produced it, and equilibrate industry and agriculture j instead it was thrown into a short circuit. Yet these costly mistakes of the private property capitalist economy could be absorbed at private expense and forgotten if the political agency were not called in to perpetuate and aggravate them. In New York, obsolete buildings could have been torn down and the sites utilized profitably for parking space, which was badly needed -y with a margin for improvement in the aspect of the city, by letting in light, air, and a few trees. Paradoxically, overbuilding would have made space.

Rents would have been adjusted downward, as they should be in a high production system -y and values temporarily lost would have been recovered on a fairly permanent basis. This natural process was stopped just at the point where it threatens the city with permanent paralysis, by keeping many persons on relief in undesired idleness at subsistence level, on taxes which are a burden to production and tend to drive industry away. Likewise, when the forces in action, including the mass pressure of unions, were tending to decentralize the great industries of the middle west, political action supervened, and forced even greater centralization. A liability to panics and depressions is inherent in a high production system using credit; just as a liability to famine is inherent in a low production system. Of the two hazards, that of the high production is obviously least, on the plain evidence of history. But the intervention of the political power greatly aggravates the hardship in any case. The nineteenth century was the first century of high energy production. It was also the first century in Europe when men did not actually perish in large numbers from hunger. The one famine which did 23O THE GOD OF THE MACHINE occur in Europe was the Irish famine, where a staple crop was blighted and there was little or no industrial development because the political power did not permit enterprise to function freely. Elsewhere, industrial depressions caused severe hardship, even destitution, but it was possible to ward off sheer starvation at the very worst. And the extreme hardship was due to the partial survival of the status economy. In the United States, there were several very heavy and protracted depressions, "hard times." Practically nothing was done by the political power under pretext of relief. There was rockbottom poverty, men tramping the country looking for work, and living on hand-outs or soup-kitchens. But prices of commodities were so low, being allowed to go down as far as they would, that very little money sufficed for subsistence. When the credit collapse had been liquidated, recovery was so rapid that the change seemed fabulous in retrospect. The frontier of freedom had not been closed.

There is a peculiar contrast between the depression of the Nineties and that following 1929, perhaps a lesson for political thinkers. A hundred years ago, Macaulay expressed apprehension that the American constitution and property rights must sooner or later be subverted by popular suffrage, because in time of distress the "have nots" would vote to expropriate the "haves." Unless one goes behind the returns it might be assumed that he was right5 but what did happen? In the depression of the Nineties, an election turned on that issue, in respect of money, the "free silver" question. Certainly the majority of voters were in some distress. The vote was fairly close, although decidedly weighted against sound money by the Democratic party solidarity of the South. But the popular decision was for sound money. Again, in 1932, the popular vote was for government economy, sound money, and incidental reduction of the political power, though the country was suffering acutely from a depression.

What was the cause of the panic? Enormous government loans abroad which were not repaid j and the existence of the CREDIT AND DEPRESSIONS 231 Federal Reserve system, a political creation, which made an inordinate credit extension possible. And who went on Federal relief first? By no means the "have nots." The real cleavage did not occur on the lines Macaulay drew, between the rich and the poor. It was between the producers and the non-producers, in the main. The first measure of "relief" was the Reconstruction Finance Corporation; and the first money paid out from it went to J. P. Morgan & Co. It was the nonproductive rich who first went on the dole. Had they not done so, no measure could have been passed for Federal poor relief j and the workingman accepted it only in extremity and with bitterness j what he wanted was a job. Vincent Astor, drawing a large inherited income from ground rents, sold slum property which had been exploited till there was no income left in it, to the Federal government. Owning shipping, he got shipping subsidies. Speculators urged the extension of government power to maintain the inflated values of their paper securities, by depreciation of money and by stopping "bear" sales on the market, so that huge blocks of stock at artificial prices hung over the market and made normal recovery impossible. To "save" them from the consequences of their own gambling, everyone who had not participated in the game was penalized.

Laws were passed against "hoarding," so that the only action punished was prudence. By this means the normal reserves of cash which normally restore production were dissipated. Likewise, thrifty, competent, and solvent farmers, who managed to get their living from their farms, were penalized with quotas and quota taxes to subsidize speculative farming. One man in Montana drew $30,000 of government money because he had persisted in wasting seed wheat on arid land during a drought 5 while a poor widow in New England was forced to pay a "processing tax" because she raised a couple of pigs and made them into bacon! The line was drawn in a striking manner, between the producer and the nonproducer, with Henry Ford and Senator 232 THE GOD OF THE MACHINE Couzens. Ford was in production ; he was against government intervention. Couzens, a one time partner of Ford's, who had taken his fortune out of production and put it into tax free government bonds, advocated the government expropriation of money.

Every time the production system tried to function healthily, the non-producers invoked the political power to choke it off. Ultimately, the main current of energy was forced into the political channel. This process had already occurred in Europe. Enormous loans were made through political agencies to political agencies; and the money went into nonproductive static forms, public buildings, municipal "improvements," none of which yielded any return. Then there was no work, and political control forced the workers into armament factories. In both America and Europe, misdirected energy was projected upward ; but Europe did not build skyscrapers. What went up was military airplanes. An airplane rides on a jet of energy as a cork-ball rides on the jet of a fountain. The energy is drawn from a circuit in which the cities are the center. And the planes are bombing the cities out of existence. How long can they stay up in the air when they have destroyed the source and the circuit which lifted them skyward?

None of this was unpredictable, nor was it wholly unforeseen. Ninety years ago Herbert Spencer perceived the political trend; he said: "We are being rebarbarized." He recognized the cultural level which is enforced by complete "social" control of the individual. But he did not realize that it cannot be imposed on a high energy system peacefully; and that the process was bound to result in explosion. If a financial system is unsound, it can only be so by the possibility of over-extension of credit, and paper currency. A true remedy could only consist of limiting such facilities. Government "guarantees" merely put the property of prudent men at the disposal of speculators in case of loss. There is no CREDIT AND DEPRESSIONS 233 such thing as a "money panic" 5 a financial panic occurs from collapse of credit. In the United States, the inevitable consequence of the political power extending over money, with the Federal Reserve system, was forecast with detailed accuracy by Elihu Root. He wrote: "This is in no sense a provision for an elastic currency. It does not provide an elastic currency. It provides an expansive currency, but not an elastic one. It provides a currency which may be increased, always increased, but not a currency for which the bill contains any provision compelling reduction.... With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.

Bankers are not free from it. They are human. The members of the Federal Reserve Board will not be free from it. They are human. All the world moves along on a growing tide of optimism. Everyone is making money. Everyone is growing rich. It goes up and up ... until finally someone breaks... and down comes the whole structure. I can see in this bill.. . no influence interposed by us against the occurrence of one of those periods of false and delusive prosperity which inevitably end in ruin and suffering. For the most direful results of the awakening of the people from such a dream are not to be found in the banking houses—no: not even in the business houses. They are to be found among the millions who have lost the means of earning their daily bread." Elihu was also among the prophets. But the direful results do not always stop with a financial depression 5 they may issue in violence. Civil wars occur when kinetic energy is forcibly blocked or subverted by political intervention. The popular idea of revolution being made by "masses" ground down for a long period into abject penury is fallacious. Slavery has never been abolished by a slave insurrection, but only by the exertions of free men. There are "palace revolutions," in which power is forcibly seized 234 THE GOD OF THE MACHINE by one group from another, without any other change 5 there are also factional civil wars when a form of government collapses. But in the significant type of civil war or revolution— the terms are not identical, but a given war may include both elements—both sides have colorable claims to some legitimate authority; both are energetic, with a going production system involved in the question at issue j and the larger number of producers are resisting a fresh increase of government power, as in the English Civil War of the seventeenth century, and the American War of Independence. The latter began as a civil war and ended as a revolution, establishing a new form of government to secure the traditional principle of representative self-government originally claimed. Thus any extension of government powers and increase of taxation on the pretense of "averting revolution" can only create the danger if it did not already exist, and aggravate it if it did exist.

Conversely, when a dictatorship gains power, it is by various groups conceding the power piecemeal, not perceiving what it must add up to in the end. Men enslave themselves, forging the chains link by link, usually by demanding frotection as a grouf. When business men ask for government credit, they surrender control of their business. When labor asks for enforced "collective bargaining" it has yielded its own freedom. When racial groups are recognized in law, they can be discriminated against by law.