N. I. STONE.-Business cycles with their concomitants of business booms and business depressions are characteristic of the capitalist system. I prefer the term "capitalistic" to that of "money economy" used by Professor Mitchell, because the economic system which prevailed in the days of the guild, when the producer was both worker and owner of the means of production, was also a money economy. For, to use Professor Mitchell's test, under that pre-capitalistic industrial system the primary function of man in society, the making of serviceable goods, took the form of making money, as it does now. Else, St. Thomas Aquinas and other mediaeval writers would not have been writing learned disquisitions on the subject of a "justum pretium." But the money economy of their day did not move in cycles. Marx's claim that the phenomenon of recurring business depressions is peculiar to the modern capitalistic system has never been disputed, to my knowledge, by any economic writer. The Socialist indictment of the capitalist system for its failure to function properly in what is the sole mission of its existence, has remained unanswered, for as Professor Mitchell says, Carlyle's moving description of the tragedy of British life in 1843 "applies as well to the United States in 1921.” The significance of Professor Mitchell's paper, to my mind, lies in the fact that the science of economics, and particularly applied economics, is awakening to the realization of the fact that paralysis of industry with unemployment and starvation need no more follow in the wake of the downward swing of industrial cycles than freezing to death need be caused by the winter phase of the weather cycle. This new conception marks a turning point in the progress of economic thought. Its successful application will give a new lease of life to our industrial order, and will make impossible the cataclysm which Marx predicted as the inevitable consequence of the choking of the capitalistic system with the productive forces it has conjured up.

The power of the Federal Reserve Board to regulate the flow of credit is so great and all-pervading as naturally to suggest the idea of its being used as a means of controlling the ebb and flow of industry. The thought is not new, as that is just what the Bank of England has been trying to do in Great Britain for more than half a century. The new departure is in Professor Mitchell's and Professor Sprague's suggestion to adjust the discount rate not with a view solely to financial tests, such as the reserve ratio, but by direct reliance on industrial symptoms such as an index number of physical production.

Since the bank is but the handmaiden of industry, there can be no valid objection to the proposition, except on the score of its feasibility. The latter is merely a matter of improved technique in our statistics of production and of wholesale and retail trade, which have been

woefully neglected hitherto, but which can be made available with adequate promptness and accuracy, once their need and usefulness are clearly realized. The proposition involves a much more intimate insight into the problems of industry on the part of controllers of credit than they have had any need of acquiring in the past. Incidentally, it opens up a new avenue for practical service to the economist and the statistician.

But the use of the discount rate as a means of regulating our business cycles can not be regarded as a panacea for industrial crises. The discount rate may help regulate; it can not create. It can be made to perform the functions of the flywheel and the governor in a steam engine. The steam engine, like our industrial apparatus, does its work in cycles. At each extreme point of condensation and expansion of the steam, which coincides with the rise and fall of the piston, the piston rod gets to what the engineers call a dead point; because of its motion in a straight line, the piston rod-and with it the engine -would come to a dead stop at either extreme if it were not for the flywheel, which by the force of its momentum continues to revolve and by means of the connecting crank starts the piston back on its journey to the opposite extreme from which it is brought out again by the revolving momentum of the flywheel.

The varying loads of work to which the steam engine is subjected in its cyclical operation would break it down if it were not for the "governor," a little centrifugal device which automatically reduces or increases the flow of steam to the cylinder in response to the varying needs of the work.

But neither the flywheel nor the governor will keep the engine going indefinitely, if the fire goes out under the boiler and the flow of steam stops for good. By the same token, increased or reduced rates of discount will not alone maintain our industry on an even keel. An advance in the discount rate will reduce industrial activity and, with it, opportunities for employment; a reduction in the rate will not of itself start up industries for whose product there is no ready market. Back of it all there must be the live steam of an effective economic demand for goods on the part of an employed population. The remedy for unemployment is employment. It is at this point that a regulated system of public works, and a more intelligently adjusted operation of privately owned plants comes into play.

Let me dwell on the privately owned plant first. The movement for continuity of production in such plants, which had its beginning in Great Britain, is as yet in its infancy in this country. Enough however, has been done by way of demonstration to indicate the possibilities in this direction. I happen to be in charge of one of three large clothing plants in this country which deliberately set about to

operate on an even keel throughout the year and have been successful in their efforts. If this could be achieved in an industry which is proverbially seasonal and is the first to feel the quickening and deadening effects of good and bad times, and is moreover subject to changes in style, if the Dennison Company could regularize its manufacture of Christmas goods throughout the year, not to speak of other examples, is it too much to expect that the steel industry might regularize the production of steel billets and rods and rails?

Unfortunately, progress in this field is dependent on individual initiative and intelligent study, and requires an outlook beyond the horizon of the counting-room of the individual business, which is a rare asset in our industrial world. In so far as it can be stimulated by a direct and palpable financial incentive, the proposal for unemployment insurance with a premium for each industrial plant based on the amount of unemployment in that plant, contains great educational possibilities (educational for our captains of industry) apart from the immediate relief from want for millions of people, idle through no fault of their own.

More important, because of its more concentrated effect, is emergency employment which can be furnished through public works. When it is considered that the amounts spent by our federal, state, county, and municipal governments on buildings, roads, bridges, tunnels, canals, harbors, docks, irrigation, drainage, and the deepening of rivers run into hundreds of millions, if not billions, of dollars per annum, the tremendous power which the damming up of these sources of employment in flush years and turning them loose upon the market when industrial activity slackens would have in stimulating employment can hardly be overestimated.

The indirect effects would be even greater than the direct, for the billions of dollars thus expended upon necessary materials, equipment, and wages would have their repercussive effect upon every industry in the land like the ripples which spread from a stone thrown into still water. The effective demand for every commodity which is produced for the satisfaction of human wants on the part of the workers and their families directly employed in these public works and indirectly employed in furnishing the building materials and equipment, would have a quickening effect on every industry in the country. Only in this way would banks feel prompted to extend crit to industries and make effective use of the reduction of the disco by the Federal Reserve Board.

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It would thus seem that, if we are to cope successfully with the evil effect of industrial depression, both devices will have to be used to supplement one another. Although the difficulties in the way of a comprehensive handling of the problem are so great as to have seem

ed insurmountable until recently, the outlook at present seems promising. Already the federal government has greatly stimulated the building of roads by its system of sharing the cost of construction with the states. The unemployment conference under the leadership of Secretary Hoover has resulted in prompting public authorities to push public works at this time to the limit of their authority. What we need most, is legislation which would permit our public authorities to expend the appropriations for public works at such times as conditions will warrant over a period of say five to ten years, instead of their being available only for the current fiscal year, as is the present rule.

Senator Kenyon's measure entitled "A Bill To Prepare For Future Cyclical Periods of Depression and Unemployment by Systems of Public Works" introduced in the United States Senate last month aims at this end. Though susceptible of improvement in detail, it would go far toward approaching this goal. In addition, it vests the Secretary of Commerce with power to publish monthly reports on business conditions and to "obtain such additional facts and statistics as may be necessary to carry out the provisions" of the bill. Under this simple provision, it would be possible, under the bold leadership for which the present head of the Department of Commerce is known, to organize the collection of the statistical information which Professor Mitchell has outlined as so urgently necessary, and the foundation would thus be laid for still greater achievement in the future.

Both from the broad viewpoint of the best interests of the country and from that of our immediate interest as workmen in improved tools, it behooves us all to exert our influence for the adoption of the Kenyon Bill. (S 2749)

W. C. SCHLUTER.-The problem of controlling the wide variations in business conditions centers primarily upon the understanding of the workings of our money economy and the principles that determine the several phases of the business cycle. The augmented degree of elasticity that our credit system has acquired because of the efficiency of the reorganized banking system and because of the enormous accretion to the gold supply makes some kind of control over the upswing of the business cycle seem necessary. Again, whether considered from the private acquisitive or social viewpoint, human interest in the millio f moneyless unemployed and in the elimination of economic wa as a result of idle industrial equipment ought to elicit support for plans that aim to moderate the business depressions.

The chief obstacles involved in the problem which seeks to devise ways and means toward moderating the upswing and downswing of business conditions are the traditional aversion in America to centralization of power and control over private conduct, and the traditional

propensity to acquire immediate profits and "to cut the melons as they ripen." These two factors so deeply ingrained in our habits of thinking can only be rendered less tenacious by education. The process of education will take time and patience, but the war has helped to make the average mind more susceptible to suggestions in this respect. Along the line of meeting the above traditional aversion and practice, the following methods of education should not be overlooked in proposing plans for controlling the business cycle. First, sufficient data should be obtained, not only for the purpose of understanding the workings of our money economy and of formulating policies of control, but also, and of no less importance, the efficient utilization of the data in order to make a convincing appeal to those whose change of attitude is desired in behalf of the plans proposed for controlling the business cycle. Secondly, especially does it seem necessary to organize courses in business cycles in the universities and colleges. These courses should involve the study of the principles of business cycles, the analysis of business conditions, the intelligent and practical utilization of the data offered by business reporting services and the training in making scientific business forecasts for particular businesses as well as for general business conditions.

The policies of control to moderate the upswing of the business cycle that are generally agreed upon as practical measures involve the restriction on the uses of bank credit. Recognizing the basis of facts with reference to the credit system in this country, the relative importance of the banking resources held by the twelve federal reserve banks as compared with those of the 30,000 member and non-member banks seems small. It is difficult to see how the control by the federal reserve discount rate can be made effective until the wide elastic margin that the national and state banks' resources possess has become narrowed by the normal economic growth of the country. As the situation stands, the business maladjustments will certainly become serious before the resources of the 30,000 banks have become exhausted. Besides waiting for the economic growth of the country, or perhaps a loss of gold through export, to reduce these surplus banking resources, a concentration movement among the 30,000 banks might aid control over credit, but this development seems extremely doubtful because of traditional and legal restraints. Nevertheless, the immediate fundamental requirements that the federal reserve discount rate should be kept above the market rate at all times ought not to be difficult of attainment. The history of European central banking practice, even though a greater mobilization of banking resources existed there than in this country, reveals the primary need of keeping the central bank discount rate above the market rate. And, since the English bank rate was generally above the French bank