Economics and the Public Welfare. Benjamin M. Anderson

of this book and has made very helpful suggestions regarding it, and of Melvin D. Brockie and Robert E. Smith, who, as graduate students in that institution, helped him assemble and check facts and figures. He is much indebted also to his associates in the Capital Research Company of Los Angeles and in the investment companies served by it, particularly Henry S. McKee, president of the Pacific American Investors, and Jonathan Bell Lovelace, president of the Investment Company of America, both of whom have read the manuscript and have given him the benefit of their criticisms. For the same service he wishes to thank Henry Hazlitt of Newsweek and Dwight W. Michener of the Chase National Bank. He thanks Dr. Ludwig von Mises, who has been good enough to give a critical reading to chapter 60, “Digression on Keynes.” He is grateful also to Dr. V. Orval Watts of the Foundation for Economic Education at Irvington-on-Hudson for a critical reading of the whole manuscript and for many helpful suggestions.

      It goes without saying that none of those who have given him help and information and opinions and advice is responsible for the views expressed in this book or for errors which it may contain.

      Errors it must contain. Thirty-four years is too short a time in which to achieve serene perspective on the financial and economic developments of this momentous period! Serene perspective, moreover, is not easily achieved by a man who lived through this period, not merely as an observer but also as a fighting man trying all too ineffectively to alter the course of events. But the author has been well aware of his duty to be objective in his evaluation of the events that he has recorded, and his friendly critics have helped him to perform this duty.

      BENJAMIN M. ANDERSON

      University of California, Los Angeles

       November 1948

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      Economics and the Public Welfare

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PART I

       WORLD WAR I

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1

       The Prewar World, 1913

      Those who have an adult’s recollection and an adult’s understanding of the world which preceded World War I look back upon it with a great nostalgia. There was a sense of security then which has never since existed. Progress was generally taken for granted. It was even necessary at times for scholars in addressing scholarly audiences—as, for example, Leonard T. Hobhouse in an address at Columbia University in 1910—to make the distinction between progress and evolution and to point out that evolution might not always be progressive. The theoretical distinction was recognized, but the experience of the preceding century, so far as social and economic evolution was concerned, had made the distinction seem unreal. We had had a prolonged period in which decade after decade had seen increasing political freedom, the progressive spread of democratic institutions, the steady lifting of the standard of life for the masses of men. We had even come to the point where some were asserting, incorrectly, that the problem of production had been solved, that enough was being produced, and that with better distribution everybody could be made comfortable.

      In our economic life we had occasional sharp setbacks. Crises and depressions alternated with relatively prolonged periods of active prosperity. We thought of these depressions as severe, but they did not approach in length or depth the depression of 1929-39, or in depth the much less severe depression of 1921. Even in the midst of depression, moreover, it was axiomatic that revival would come again, the question being simply when the bottom would be reached and when the turn would come.

      It was an era of good faith. Men believed in promises. Men believed in the promises of governments. Treaties were serious matters.

      In financial matters the good faith of governments and central banks was taken for granted. Governments and central banks were not always able to keep their promises, but when this happened they were ashamed, and they took measures to make the promises good as far as they could. In the greenback period in the United States, the federal government was unable

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      from January 1, 1862, to January 1, 1879, to make good its promise to pay gold on demand for its paper money. But it did make good its promises to pay interest and principal on the public debt in gold, and it did, in 1879, resume payment of gold in redemption of its paper money. No country took pride in debasing its currency as a clever financial expedient.

      The world was incredibly shocked in 1914 when Bethmann-Hollweg, chancellor of Germany, characterized the treaty guaranteeing the neutrality of Belgium as a “scrap of paper.” In retrospect, one may say that this was one of the most terrible things that has ever been said. The world is full of scraps of paper today. The reference here is not to the brazen, cynical, contemptuous attitude of Hitler toward treaties and toward promises. Hitler made many promises with no intention of keeping them when he made them. But the world united against Hitler. His level of bad faith obviously could not be tolerated. The reference is, rather, to the attitude of some of the most decent governments of the world toward many promises and treaties. Japan and Mussolini could never have started on their careers of aggression if the great democratic nations had kept faith with one another. The reference is also to the broken promise of the British government and the Bank of England in 1931 to pay gold on demand for Bank of England notes. If it be objected that England was forced to this, a view which is erroneous,¹ surely no such defense can be made for the government of the United States, when, in 1933, with $3 billion of gold in Federal Reserve banks, it suspended gold payment and when, in 1934, with $4 billion of gold in the Federal Reserve banks, it reduced the dollar to 59.06 percent of the old gold parity and repudiated the gold clause in its own bonds. In 1913 men trusted the promises of governments and governments trusted one another to a degree that is difficult to understand today.

      The greatest and most important task of the next few decades must be to rebuild the shattered fabric of national and international good faith. Men and nations must learn to trust one another again. Political good faith must be restored. Treaties must again become sacred.

      A world in which all men are upright and in which all nations are voluntarily decent in their international relations is, of course, too much to expect, but a world in which the ill intentioned fear the condemnation of the well intentioned we can rebuild. The same basic human nature which created the fabric of national and international good faith on which we relied in the century preceding 1914 exists today—just as we have discovered that the same human nature which animated the Assyrian conquerors and the hordes of Genghis Khan exists today. The raw stuff of human nature is immensely plastic and can be turned in many different directions, depending on the cultural influences which play upon it. There is no

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      certainty that we can re-create the fabric of good faith which we have destroyed, but there is no higher duty than to make the effort.

      The economic life of the world in 1913 went on in an atmosphere of good faith. Men with liquid capital used the capital themselves confidently in business enterprises or loaned their capital at market rates of interest to others who would use it in productive operations. There were no billions of dollars of “hot money” such as characterized the decade of the 1930s, moving nervously about from one financial center to another through fear of confiscation or through fear of further currency debasement—moving from countries which their owners distrusted more to countries which they distrusted less, but finding nowhere a place which they could really trust.

      Industry, commerce, and finance depend on credit. Credit was in general soundly based on movable goods which had dependable