indicated in terms of current dollars in table VI and summarized in chart XII. The great depression drop in consumer expenditures and the much greater drop in the expenditures on fixed capital are clear. Expenditures for additions to inventory show a more erratic behavior, partly varying with other forms of expenditures but to a considerable extent varying independently. The variations in these expenditures combined with variations in prices, still to be discussed, largely determine the variations in the level at which resources are used.

Need for Intensive Investigation of Money Flows

In this chapter an attempt has been made to sketch the major money flows overlying production and to point to some of their major characteristics. Neither the collection nor analysis of data has developed to the point where it is possible to block in a clear and balanced picture of the actual money flows as they affect production. Here and there parts of the total picture have been indicated in the preceding pages, but they constitute only fragments. There is great need for intensive work to develop the whole picture. This chapter can serve only to indicate the importance of money flows to the functioning of production and suggest the character of an analysis of money flows which would clarify the structure of production and throw light on the behavior of the American economy.

1929 1930.

1931

1932

1933

1934

1935

100

1 Source: Kuznets, Simon, Commodity Flow and Capital Formation, vol. I, p. 484. This item represents expenditure on gross capital formation exclusive of net changes in claims against foreign countries, of all repairs and maintenance and of consumers' movable, durable commodities, but includes net changes in stocks of gold and silver. 2 Source is same as above.

See appendix 18, section 12.

Total Expenditure on Consumption and Capital Formation

All of these money flows operate to stimulate productive activity. Consumer expenditure provides the ultimate basis for financing current production. Savings and allocations to depletion and depreciation provide the basis for financing capital formation whether in the form of fixed assets or additions to inventory. The magnitude of these items from 1929 to 1935 is

BILLIONS OF DOLLARS

1935 Source: or Fexpenditures of producers on gross capital formation, see Simon Kuznets, Capital Formation and Commodity Flow, vol. I, table VIII-2, p. 484. For expenditures of individuals and families on consumption, see appendix 18, section 12.

The first part of this report has outlined the economic basis for production-the wants of American consumers and the resources of the nation available to satisfy these wants. The second part has set forth the more important characteristics of production-its geographical distribution, its functional aspects, and the overlay of financial flows which prick out the pattern of productive activity: It is the purpose of this third part to examine the organizing influences which weld the millions of separate individuals engaged in production into what is essentially a single national economy.

The way in which the millions of workers in the American economy are organized into a functioning whole is far from simple. Even the supplying of a single commodity like gasoline calls for the services of a multitude of separate individuals and agencies. An oil operator brings oil to the surface of the ground; the local government prevents the theft of oil or destruction of equipment; a railroad corporation transports the oil; State and Federal Governments prevent interference with the transport of oil; a refining company maintains an organization of workers and chemical equipment to convert the oil into more useful forms; a retail distributor parcels out the resulting gasoline in small quantities to individuals requiring it; the Federal Government supplies a dependable medium of exchange, which allows the oil operator, the railroad, the refining company, and the retailer to act easily in an organized fashion without being under a single administrative authority, and enforces contracts so that organizing arrangements on specific points can be more safely entered into; finally, government maintains a system of highways and byways which allow an ultimate consumer to combine the gasoline with other resources under his control in satisfying his desire for automobile travel. This joint activity of many individuals contributing to satisfy the demand for a particular product is typical of most production and represents a high degree of organization in the use of resources.

Basic Continuity

Underlying this organization and essential to its existence is the basic continuity in human wants and human actions as today's activity grows out of and repeats that of yesterday, yet varies from it in greater or less degree. The influence of essential repetition in wants and in the techniques employed to fill wants is so all-pervasive that it is often overlooked, yet without it the existing organization of resources could hardly have arisen or continued to function. The farmer plants wheat, not

because of some contract with an ultimate consumer, but simply because of an assumed continuity in the demand for bread. The business man, in setting up a new cotton mill to make cloth for men's shirts, is impelled to do so very largely by a belief in the contiuity in the demand for shirts. The tobacco grower and the cigarette manufacturer both base their actions on the belief that the practice of smoking cigarettes will continue in the immediate future.1

Likewise, there is continuity in techniques, for the methods of doing things, in the aggregate, do not change overnight. Constant improvements in techniques are made, but as a rule they are introduced into practice gradually over a period of years. The automobile did not replace the horse in a single season. Continuousstrip rolling mills did not replace older, less effiicent mills, in a single year. The process of old rolling mill displacement has been going on for a decade and is not yet complete. Ways of doing things in the immediate future are not going to be essentially different from the ways of the immediate past, though the scientific knowledge of improved methods may exist and though gradually over a period of years great changes may take place.

This continuity in wants and techniques is the most basic factor underlying the organizing of resources. Without a large measure of continuity, chaos would result. Minor breaks in continuity can be taken care of through the price mechanism, through administrative adjustments, through alternation in the canalizing rules, and through shifts in goals accepted. But where continuity breaks down to a significant extent as in the case of flood or fire or panic, loss of foreign markets or war, strike or technical breakdown, the effective organization of resources itself breaks down and often drastic steps have to be taken. Such is usually the case when martial law is declared after a disaster, and the service of protection and the service of supply have to be organized afresh. Such also was the case with the accumulated farm surpluses of the depression, which resulted, in part, from lack of continuity and produced intervention on the part of both political parties. also was the intervention during the war, when the railroads became clogged with war supplies and a unified command was necessary to disentangle the traffic snarl. The positive intervention that is necessary when continuity breaks down to a serious extent suggests the importance of this factor to the effective organization of resources.

Such

1 Evidences of essential continuity in wants and techniques of production are set forth in Patterns of Resource Use, National Resources Committee, 1938.

Organizing Influences

Within the conditions established by continuity in wants and techniques the complex organization of resources is brought about and maintained through four major organizing influences. First, there is the market mechanism-the interaction of individuals or groups buying and selling in the market. A second major organizing influence takes the form of administrative coordination, as the activities of individuals in factory, corporation, or government bureau are directed and interrelated by a common authority. A third influence is the canalizing action of laws, rules, and customs whereby the community shapes and molds and limits and canalizes the actions of many separate individuals into coordinated form without the exercise of direct administrative control. Finally, there is the organizing influence arising from the acceptance of common goals which can bring about coordinated action of separate individuals without the presence of any common authority. In practice, these four organizing influences interplay and reinforce each other, sometimes one and sometimes another being the more significant in a particular situation. For the nation as a whole, it is the combined influence of these four factors which results in the organized use of resources and yields that level of living which characterizes the American economy.

The Market Mechanism

Of the influences actually bringing about the organization of productive activity, the market mechanism is the most generally recognized. Through price, and through buying and selling in the market, the activities of many separate individuals or enterprises are brought into mesh with each other. In the market, the price of an article can act, after a fashion, as a regulator. If insufficient resources are being employed in making a particular article and oversufficient resources are going into another article, an increase in the price of the first and a fall in the price of the second will stimulate individuals controlling the necessary resources to divert a part of them into the first activity and out of the second. A relative increase in the price of shoes as compared with saddles would tend to guide leather and labor away from use in saddles and into the making of shoes. The proportion of cotton and corn planted on Arkansas farms varies from year to year with changing relationships in the prices of those crops and reflects the operation of the market as an organizing influence.

Sometimes this market mechanism is credited with being the major, or even the sole, organizer of resources. In theory it is possible to show that, under certain conditions, the market mechanism might, by

itself, have sufficient organizing influence to produce effective use of resources. In the case of a great many commodities, however, free markets do not and usually cannot exist, and the market mechanism acts only crudely, slowly, and not too effectively in bringing basic organization into the use of resources.

Administrative Coordination

Administrative coordination has become of increasing importance as an organizing influence. A century ago, when business enterprises were small and government activity was relatively less important, the market played a major coordinating role. But during the past hundred years great segments in the organization of economic activity have gradually but steadily been shifted from the market place to administrative coordination.

The extent of administrative coordination of economic activity is difficult to realize. Today, hundreds of thousands of workers may be organized in a single great enterprise. Within the enterprise, their activity is coordinated, not through the shifting of prices and supply and demand in the market, but through administrative direction. The largest enterprise, the American Telephone and Telegraph Co., in 1929 was coordinating the activity of over 450,000 persons within its system. Consider the vast difference between this situation and the thousands of separate and independent enterprises such as would have to exist if economic organization in the telephone industry were accomplished primarily through the market place. An effective telephone system would not be possible without a high degree of administrative coordination. In the field of government, likewise, the organization of resources within each government body is to a large extent brought about through administrative coordination. Large-scale enterprise and the extension of the economic role of government together have made administrative coordination a major factor in the organization of resources.

Canalizing Rules

A third means by which organization is brought about is through canalizing rules whereby the action of individuals is molded and limited without being subject to administrative control. Laws, rules, and regulations, accepted procedures, and binding customs constitute canalizing influences which narrow down the scope of individual action without determining it. They supply the traffic regulations for the ceaseless interplay of human activities. If effective, they contribute to the organization of resources by limiting action which will disrupt or impede effective use and by facilitating the flow of action into constructive channels.

Accepted Goals

Finally, the acceptance of common goals is, of itself, an organizing influence. A number of people, having accepted a common goal, may be able to act independently and without communication, yet their activities may be to a greater or less extent coordinated by the logic of their accepted goal. The acceptance of a specific goal by the management of an enterprise, as a contract to fill a big order, for example, can spur the individuals in the management to independent though coordinated action, as each, knowing the meaning of the big order in terms of the functions for which he is responsible, acts to carry out his share in the undertaking even before he is given specific instructions.

The Complex Play of Organizing Influences

These four organizing influences-the market mechanism, administration, canalizing rules, and accepted goals-all combine to give that complex organization of resources, without which daily living as we know it would not be possible. The major organizational problem involved in seeking more effective use of resources is, therefore, to discover the appropriate role to be played by each of these organizing influences. How much can be left to continuity and the inertia of continuity? How far can reliance be placed on the organizing influence of accepted goals? How much reliance can be placed on the market mechanism? How much coordination can be supplied through canalizing rules? At what points can administration provide more effective organization?

The role which each influence plays at different times and at different places will vary; but hardly any significant event occurs without some element of organization being contributed by each of these four influences. While each can be discussed separately, their actual operation in the American economy is so closely interrelated that their separate roles cannot be easily disentangled. The market mechanism would not be an effective influence for organizing the activity of separate economic units on a large scale if it were not for the existence of canalizing rules, whether these rules are codified into law as in the case of the enforcement of contracts, are formal but nonlegal rules such as the trading rules of the wheat pit and the stock exchange, are informal rules such as the "one-price" rule accepted by buyer and seller alike in most American retail stores in which there is no bargaining with customers,"

2 The extent to which this informal "one-price" rule contributes to the organization of economic activity is difficult to realize until comparison is made with the operations of an oriental bazaar where the prices of even minor items are the subject of timeconsuming higgling and bargaining. A modern department store could not survive if each sales clerk had to bargain with each customer on the price of each article purchased. Nor could it survive if each customer spent several minutes trying to get a penny reduction in the price of a spool of thread. Only by the acceptance by both buyer and seller of the informal rule of "one-price-no bargaining" can efficiency in retailing be maintained.

or take the form of the custom of accepting money in exchange for goods. Neither could it function effectively in the absence of an accepted goal, namely, the goal of transacting business.

Administration alone is equally incapable of organizing resources on the scale of the whole American economy. Even in the case of the largest administrative units of government and of business, some of the burden of organizing resources is carried by the market as workers are hired, raw materials purchased, and goods sold, while, without the organizing influences of accepted goals, the minute detail in administrative direction which would be required would make large administrative units impossible.3

Though these four different organizing influences are not in practice independent of each other, it is possible to speak of particular situations as dominated by one or another of the four factors. Thus, it is usually appropriate to refer to the activity carried on within a particular factory or government bureau as organized administratively. The administrative influence dominates activity even though a supplementing role is played by the other three influences. If, in a particular community, practically all activity is carried on by oneman enterprises and the products are swapped through the market, it would be appropriate to say that the activity was organized primarily by the market, even though other organizing influences were present. The political field sometimes gives an example of organized activity in which the acceptance of a common goal, the election of a particular candidate nominated by the party, is the dominant organizing influence. National unity in time of war or depression is another example of the coordinating influence of an accepted goal. Obvious examples of situations in which canalizing rules play dominant roles are city zoning and the regulation of traffic.

For the American economy as a whole it is not possible to say that any one of these organizing influences is the dominant one. Each appears to play a significant role. The remainder of this chapter will be devoted to an examination of the extent to which each organizing influence contributes to the organized use of resources. Since the market consists of transactions between administrative units within which coordination is primarily administrative, the first of the organizing influences to be considered will be administration. The role of the market will then be discussed, and, finally, the roles of canalizing rules and accepted goals.

The reliance which administrative units place on the acceptance of common goals can be appreciated by considering what would happen in a big corporate enterprise if subordinates did nothing during working hours except those things which they were specifically told to do by the president of the corporation, either directly or through his subordinates. In such a situation the president could leave no decision to subordinates.

Extent of Administrative Coordination

A rough indication of the extent of administration in the American economy can be obtained by examining the size of economic units in different segments of the economy. For this purpose the significant economic unit would be the administrative unit and would include all the productive activity under a single administrative control. The separate producing units would include the independent farm enterprise, the private business or professional enterprise, the corporate enterprise including legally controlled subsidiaries as part of the parent enterprise, the Federal Government and each State and local government, independent universities and independent church units. On this basis there must have been in 1937 between 10 and 12 million economic units producing commodities or rendering services and engaging the activity of approximately 48,000,000 persons either part or full time. Of these, approximately 6.8 million were farm units, nearly 20,000 were government units, and 1.7 million were business units reporting to the Social Security Board or to the Interstate Commerce Commission. The remainder were for the most part service and professional units and very small business units. A crude indication of the relative importance of producing units of different sizes is given in table I. This table tends to minimize the importance of the large enterprises because it treats subsidiaries of a corporation as though they were independent units, but until compilations for consolidated enterprises have been made, it does serve as a rough guide to the importance of producing units of different sizes.

NOTE. The bulk of the data on number employed and employer units, excluding agriculture, are derived from Social Security Board data on employer returns. Since the returns of subsidiaries of a parent corporation are not consolidated in the Social Security Board data, the economic units and the number employed in the class, 10,000 and over. are seriously understated, with a corresponding overstatement of these in the classes under 10,000. For example, General Motors Corporation is represented as an economic unit 54 or more times. It has not been possible to correct for this lack of consolidation.

It indicates that over a third of the manpower engaged in production in 1937 was attached to administrative units of 300 persons or more, while approximately oneeighth was employed in administrative units of 10,000 persons or more. These figures are very rough approximations, but they do indicate the extensive role which

is played by administrative units in the organization of resources.

It would be desirable to present a similar analysis using capital assets employed rather than manpower as a measure of size, but data for this analysis are not available. There is, however, considerable evidence that on the whole there is more capital employed per worker in the large administrative units than in the small units, with the possible exception of the farm. As a result the administrative units employing 300 or more persons would be employing more than a third of the capital assets of all producing units. Major Administrative Units

Some indication of the extent of administrative coordination in particular segments of economic activity can be obtained by listing the largest administrative units in the country and examining the scope of their activities. In table II an attempt has been made to list the 200 largest nonfinancial corporations, the 50 largest financial corporations, and the 20 largest government units in 1935. In the case of the corporations, size has been measured in terms of the assets controlled directly or through subsidiaries, while the size of the government units listed has been measured by the number of persons employed. Various other measures of size could be employed such as contribution to national income or in the case of business enterprises, the volume of sales or value added by manufacture. Different measures of size would give some differences in the specific list of units included as largest but a large proportion of the units listed in table II, except perhaps the financial companies, would be included. among the largest corporations on almost any reasonable basis of measuring size. Data on the number of employees of many of the largest companies are published in Moody's Manuals and are also included in the table, even though the data for the different companies are not directly comparable, sometimes including employment by subsidiaries as well as employment in foreign countries and sometimes excluding one or both of these items. It is probable that there are some big administrative units not included in the above list, because no public data on them were available. However this list includes most of the major administrative units in the American economy.

The method of arriving at the 200 largest nonfinancial corporations in 1935 is set forth in detail in appendix 10. In the case of each of 185 of the companies, the figure given for total assets is a consolidated figure published in Moody's Manual (except that where depreciation and depletion were included in total liabilities these were deducted from total assets), and represents the total assets less depreciation and depletion of the parent company named and subsidiaries which it has chosen to consolidate in the report made available to Moody's Investment Service. In the case of 15 companies no such figure was available, and an estimate of total consolidated assets, less depletion and depreciation was made by methods indicated in the appendix.

In the case of the 50 largest financial corporations, the assets reported above are obtained directly from Moody's Manuals.

The employment figures for the 20 largest government units are derived from sources indicated in appendix 18, section 17.