Economics and the Public Welfare. Benjamin M. Anderson

Navy, and Civil Service. Nor did the government increase public employment with a view to taking up idle labor. There was reduction in the army and navy in the course of these years, and there was a steady decline in the number of civilian employees of the federal government.

      Sound Government Financial and Monetary Policy Generates Business Confidence. This policy on the part of the government generated, of course, a great confidence in the credit of the government, and the strength of the gold dollar was taken for granted. The credit of the government and confidence in the currency are basic foundations for general business confidence. The relief to business through reduced taxes was extremely helpful.

      Great Spurt in New Technology, 1921-23. One major factor in the extraordinarily strong business revival of 1921-23 was a great spurt in the application of new technology to industry. During the war and the postwar boom, our industrial system had been overstrained by the heavy demands made upon it. Management, harassed by rush orders, did not have time to make far-reaching plans or to keep pace with the growth of technological knowledge. Our increased production during the war and the postwar boom was much more a matter of increasing the number of wage earners than of increasing the efficiency per man through new technology, through growing skill of labor, and through improved managerial policies.

      In the depression of 1921 management had time once more to study new methods and to make long-run plans. Overtime work ceased, shop discipline improved, and men valued their jobs. A great body of new technological ideas was awaiting application. Many of these ideas had been developed as part of the technology of war in the fields of aircraft, artillery, naval construction, fortifications, and the chemistry of explosives. But the same ideas, with modifications, were to have fruitful application to peacetime pursuits. They were waiting to be used. In the years 1921-23 there was widespread application of the improved technology. The following table reveals the facts:

      [print edition page 94]

      GROWTH OF MANUFACTURING PRODUCTION IN THE UNITED STATES, 1914-23^*

      Index Numbers of Physical Volume of Production, Number of Wage Earners, and per Capita Output

Year	Physical volume of production	Number of wage earners	Output per wage earner
1914	100.0	100.0	100.0
1919	127.7	124.5	102.6
1921	105.7	100.1	105.6
1923	156.3	130.3	120.0

      * Frederick C. Mills, Economic Tendencies in the United States (New York, 1932), p. 192.

      From 1914 to 1919 physical output per wage earner in manufacturing increased only 2.6 percent. From 1921 to 1923 output per wage earner increased 14.4 percent. If those who fear technological improvement were right, then this should have been accompanied by a falling off in the number of workers in manufacturing. It was, however, as shown by our table, accompanied by an increase of 30 percent in the number of wage earners. Rapidly improving technology did not make unemployment. Rather, it helped to generate an immense increase in employment. Production itself generates purchasing power, and therefore creates employment. Production in one place gives rise to demand for production in other places. Be it observed, moreover, that this rapid spurt in technological progress comes, not at the end of the great boom, 1921-29, but, rather, at the beginning of this great boom.

      [print edition page 95]

11

       The Money Market, 1920-23—Renewed Bank Expansion

      A very important factor in the revival, as in all revivals, was an easing of the money market and an expansion of bank credit. There was a very substantial liquidation of bank credit from the high figures of 1920 to the low figures of 1921, very impressive in dollar volume, though less impressive in percentage. The tide of bank credit turned, however, in the latter part of 1921 and a renewed expansion began. National bank figures are better than figures for member banks in the Federal Reserve System in the period 1914-23, because the number of national banks changed very little, while the number of member banks changed a good deal. The following tables make use of national bank figures, Federal Reserve bank figures, and reporting member bank figures.

      Gold, Money in Circulation, and Rediscount Rates. The bank credit expansion, 1922-23, which reversed the process of liquidation, was due first to incoming gold, which amounted to about a billion dollars in the years 1921 and 1922; second, to an $800 million decline in money in circulation; and, third, to Federal Reserve policy. The Federal Reserve banks reduced their rediscount rates in 1921. Beginning in the first half of the year by successive stages of a half percent each, the New York Federal Reserve Bank reduced its rate from seven percent to four percent in the summer of 1922. During this same period rediscounts were steadily declining, though the steady reduction in the rate, which brought the Federal Reserve rate well below the market, undoubtedly retarded the decline in the volume of rediscounts. But member banks continued to get out of debt to the Federal Reserve banks, and rediscounts fell from the peak figure in the autumn of 1920 of $2.75 billion to $1 billion at the beginning of 1922.

      The First Large Open Market Operation of the Federal Reserve Banks, 1922. A second contributing factor in Federal Reserve policy was open market purchases of United States government securities by the Federal Reserve banks. Beginning early in 1922 there was a sharp increase in the

      [print edition page 96]

      holdings of government securities by the Federal Reserve banks, the total rising from roughly $250 million to approximately $650 million.

      The policy that lay behind these purchases initially was not a desire to make the money market easy, or a desire to facilitate bank expansion. These were unintended and unanticipated consequences. The motive, as explained privately by a member of the Federal Reserve Board early in 1922, was a much simpler one. The Federal Reserve System had grown enormously during the war and postwar boom. With its growth there had come a great volume of expense. The system needed $45 million a year to meet its expenses and to pay dividends on its stock. This meant a billion dollars of earning assets at 4.5 percent. When, in early 1922, rediscounts fell below a billion, the Federal Reserve banks began to buy government securities to uphold total earning assets. The authority for this statement, who was one of the very able men in the Federal Reserve System, was chuckling over the failure of some of his associates to realize that increased purchases of government securities by the Federal Reserve System would accelerate the process of paying off rediscounts. In buying government securities the Federal Reserve banks increased the reserve balances of the member banks, and the member banks used these increased reserves in reducing their debt to the Federal Reserve banks. Rediscounts dropped to around $400 million in the summer of 1922. But they did not thus use the whole of the increase in reserves, and the result of these government security purchases, taken in conjunction with the other factors mentioned above, was a relaxation in the money market, a lowering of interest rates generally, and a renewal of the expansion of bank credit.

      At no time, however, did interest rates in the period, 1920-23, go really low, as shown by the following table on open market commercial paper rates in New York City.

      OPEN MARKET COMMERCIAL PAPER RATES IN NEW YORK CITY^*

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