that the time for effective action is the time when industrial activity is approaching the elastic limit set by full use of existing plant and when further expansion will be primarily a speculative boom. In addition to angry recrimination, there is much dispassionate analysis of the mistakes committed by the business community in 1919, analysis which seeks to find how such mistakes may be avoided in future.

The central issue in most discussions of what we did amiss in 1919 is the time at which the discount rates of federal reserve banks should have been raised. Most competent judges seem to agree with the "personal opinion" expressed on this point by Governor Benjamin Strong in his statement of last August to the Joint Commission of Agricultural Inquiry. "I believe," said Governor Strong, "if it had been possible, it would have been desirable for the Federal Reserve System to have advanced its rates at some point in the period between January and March, 1919" instead of waiting until November.'

Since our concern is with the future we need not stop to discuss Governor Strong's limiting clause "if it had been possible." Perhaps the Treasury's plans for floating the enormous Victory Loan in the spring really did make it impossible, or at least undesirable, to raise the federal reserve rates until that undertaking was accomplished. However that may be, we are justified in hoping that in the future such exigencies will seldom arise to prevent the Federal Reserve Board from adopting the policy which seems wise in the economic interest of the public. What most concerns us is that the Governor of the largest Federal Reserve Bank and many other experts believe after mature consideration that it would have been desirable to raise rates before the boom began. His reason for this conclusion is that an advance of rates would have moderated the expansion of business' and thereby diminished the severity of the crisis of 1920.

If Governor Strong and the men who share his opinion are right about the policy that was desirable in 1919, as I think they are, may we not generalize and say it is desirable to raise discount rates in future periods of expansion whenever signs appear that production is nearing its limit and that further expansion will consist mainly in bidding up the prices of securities, of industrial

"Hearing before the Joint Commission of Agricultural Inquiry, SixtySeventh Congress, 1st session, Part 13, p. 763.

'Ibid., p. 772.

equipment, and of the goods in process of production and distribution?

Three objections have been made to this suggestion that the excesses of booms can be tempered by advancing discount rates at an earlier stage than has been customary in the past. First, it is said that the measure would be ineffective. Bank discount is a minor item in most business undertakings, an item small in comparison both with other costs and with the profit margins anticipated in periods of prosperity. In this respect, we are told, American business differs notably from English business in pre-war days, when an enormous volume of international trading was done in London on margins so narrow that a change of a quarter of one per cent in the market rate of interest made a marked difference in the prospects of profits.

There is force in this contention, but not, I think, enough force to countervail Governor Strong's opinion that an advance of discount rates would moderate the expansion of business. And moderation is what is wanted to prevent booms from producing those credit entanglements which make inevitable a long period of liquidation. Granted that most business plans would not be affected by an advance of even one or two per cent of the discount rate, there probably remains a considerable volume that would be affected directly, and a larger volume that would be affected indirectly by a signal from the banks to observe caution. To control these marginal transactions would tend to relax the stresses that are accumulating within the business system.

A second objection is that the American public has been accustomed to accept reserve ratios as the best index of banking conditions and the proper guide to discount policy. In view of that fact it is chimerical to propose schemes that set up a novel basis of control. The wise line of advance "is not that of finding a substitute for the reserve ratio as a guide to credit policy, but rather that of finding how to make our reserve ratio a more sensitive and immediate indicator of changing conditions than it now is." Mr. A. C. Miller of the Federal Reserve Board has recently presented this view with his cogent lucidity in the American Economic Review. And in accordance with this view he has suggested changes in the methods of federal reserve banking designed to make the American system work in much the same "Federal Reserve Policy," American Economic Review, June, 1921.

way as the English banking system worked for forty years before the war.

One may, I think, go far with Mr. Miller and yet stop short of the conclusion that the reserve ratio should continue indefinitely to be the guide to credit policy. Efforts to make "our reserve ratio a more sensitive and immediate indicator of changing conditions than it now is" are certainly in the line of progress. But I hope that progress will not be limited to attaining such measure of success as the Bank of England achieved for forty years before the war. For with all this success England suffered grievously from business cycles. We should aim at gaining a far more effective control over the wastes of prosperity and the sufferings of depression than the Bank of England has ever exercised. And while we may agree with Mr. Miller that our business public is unprepared for a discount policy that might raise the rates while reserve ratios were still high, yet we may not treat that attitude as an insuperable obstacle. As an official Mr. Miller confines himself to that which is immediately realizable; as an economist he might join us in considering plans which involve campaigns of education.

The final objection is that we have no definite means of knowing the precise point in the prosperous phase of the business cycle at which it is desirable to check expansion. But that objection has been met by the progress of statistical research and the ingenuity of Professor O. M. W. Sprague. Professor Sprague proposes to use index numbers of physical production such as have been made recently by Day, King, Snyder, and Stewart as a basis for discount policy. These series show that the increase in volume of business after a depression is for some time produced mainly by a rapid increase in the output of serviceable goods. During that phase of the cycle expansion is economically desirable. But whenever the existing industrial equipment is booked to capacity and the industrial army is fully employed then future growth in the supply of serviceable goods slows down to the rate at which new equipment and new hands can be provided and improved technical methods devised. After this point has been reached in the cycle a further rise of prices serves not to increase the current supply of serviceable goods, but to create confusion in the markets, stimulate disserviceable speculation, and to produce the credit entanglements which cause so much anxiety during the crisis and prolong the period of liquidation. Our aim accord

ingly should be to check the rise of prices when the index numbers of physical output indicate that the limit of existing capacity is being approached. At that point it would be desirable to raise discount rates-even though reserve ratios might still be high.

This suggestion is being developed at present by Professor Sprague in a book which we shall all be reading next autumn. We cannot pass final judgment upon this original plan until we have seen it developed in full. But in the meantime let us not dismiss the idea on the ground that the public has now insufficient knowledge of business cycles to permit its adoption. If the scheme is desirable we should be ready to play our part in a campaign of education, and to begin that campaign by educating ourselves in the possibilities of the measure which Professor Sprague proposes. On the other hand let us not expect that any single plan will give us as large a measure of control over the business cycle as we desire and can attain. And this remark carries us forward to the consideration of certain other plans of control which merit attention.

III

The most promising among these other plans are so familiar to economists that I need hardly more than name them. First comes the long-range planning of public works, with intent to get a larger part of such undertakings executed in periods of depression. In England the possibilities of this plan have been investigated by Professor A. L. Bowley and its adoption has been urged by Mr. and Mrs. Webb. In America its chief champion is Mr. Otto T. Mallery. In 1917 Mr. Mallery persuaded the legislature of Pennsylvania to set up the machinery necessary for such a program. California copied the Pennsylvania legislation this year, and now a bill providing for a similar planning of federal public works is pending in Congress. For this plan it is urged that the saving in the cost of public works if contracts were let in periods of depression would be ample compensation for any inconvenience caused by postponing their completion for a year or two; that the reduction of competition for men and materials during periods of prosperity would lessen the strain of over-activity, and the increase of public contracts in times of depression would diminish the losses of both labor and capital. Like most other reforms this plan cannot be put into effect without an intelligent appreciation of what is now amiss on the part of large numbers

of men. It too requires a campaign of public education. And no one can tell in advance just what practical importance it may assume. But clearly the average annual volume of construction work now undertaken by various public bodies runs high in the hundreds of millions, and a considerable fraction of this imposing total can be allocated on the basis of the business cycle without detriment to social welfare. Further, it is quite possible that in addition to construction work public purchases of many standard supplies might advantageously be planned on this basis.

The extension of such long-range planning from public to private enterprises is an obvious suggestion. Before the war the French Ministry of Transportation seemed to be moving in this direction, with reference both to new construction and purchase of rolling stock. As long ago as 1908 Mr. Carl Snyder was arguing that American railways could profit by planning their expenditures, as they have long been planning their financing, with reference to the business cycle. In practice, most American railways still do precisely the opposite; they build and buy most freely in times of business activity when costs are high. For this policy there is at present a compelling reason. Few railway systems have the financial leeway necessary to allocate their outlays in the most advantageous fashion. They are forced to live from hand to mouth however extravagant that mode of life may be. But if it is socially desirable to leave the railways in private hands, it is desirable to secure them revenues sufficient to maintain efficient service and with such revenues they would in all probability find it profitable at least to level down the present inequalities of outlay as between good times and bad, if not actually to undertake more work in periods of depression than in periods of activity. And what is true of the railways in this respect is probably true also of most other industries. The total volume of purchases and construction work which might with advantage to all concerned be systematically planned with reference to the business cycle runs in the billions.

Quite a different line of attack upon the problem is represented by the various schemes of unemployment insurance now in operation or under consideration by government agencies and private employers. Perhaps the most interesting of these plans is the Huber bill at present pending in the Wisconsin legislature. This bill creates an Unemployment Insurance Company, which all manufacturers in the state would have to join, and to which they