rate, while the German bank rate was above the English, it seems advisable that the federal reserve discount rate should be kept above the German rate, granting relative comparability of conditions now with those that existed in the respective countries before the war. The factors that caused this difference in the rates of Germany, England, and France were the wider margins of profits in industry plus the less determinateness or greater fluctuations of the market rate. Since these factors are present to a greater degree in the United States, the reasons for higher discount rates become apparent. Again, it must be recognized that the central bank rates in Europe before the war had an additional significance for those countries because of the preponderance of foreign trade relative to the domestic trade and the close interrelation of the European credit markets, making thus necessary the use of the bank rate to conserve the already economically used banking resources for the respective countries.

The problem of long-range planning of capital expenditures to moderate the business depressions involves certain practical difficulties. The traditional dividend policies of concerns as well as the attitude of the investors would make the adoption of such plans on the part of private enterprises quite improbable. The methods of managing business capital would have to undergo considerable changes in the direction of meeting scientific standards of capital requirements over long periods. Such also would be the difficulties if the plan were adopted by railroads and public utilities. The undertaking of capital expenditures in periods of depression should only be attempted if an effective control over the uses of credit could be established. The billions of dollars that could be thus expended with the employment of the necessary labor would contain all the seeds of a business boom. There are other considerations. The strain in the investment market is only relieved after the decline in business activity has set in. The conditions for capital application become favorable after the disorganization and unemployment of the personnel in the industrial plants has already taken place. The business readjustments upon a new basis of cost would render the calculations of the amount of capital required very indeterminate. The immobility of labor would necessarily limit the scope of the possible reëmployment of labor. Perhaps only the laborers in the construction industries would be benefited unless the whole business system would again be stimulated into a state of revival. Finally, the interferences with the liquidation process that would become possible under such plans might place undue burden upon the marginal laborers and business concerns. The irregularities in the movement of prices might also become greater if capital expenditures were undertaken in periods of depression. If it is true that we are entering a long period of falling prices with inter

mittent short-time price recoveries, the application of these plans would probably meet with more unfavorable conditions.

Nevertheless, these difficulties are only pointed out here to open up further aspects of the problem of controlling the business cycle by these proposed schemes. Practical tests of well devised plans along these lines should meet with the support of those interested. These experiments should be welcomed.

In conclusion, it might be suggested that there is another approach to the problem of controlling the business cycle which has thus far not been wisely sponsored. Dr. W. C. Mitchell has pointed out in a scholarly manner the fundamental nature of our money economy, the necessity of procuring adequate data with reference to its workings in order to effect better means of control toward the end of greater human welfare. It is difficult to disagree with him in this matter. Then, must we not recognize that a more coherent organization of the money economy would offer a better basis for control and more homogeneous data with reference to its workings upon which policies of control could be better formulated? Economic evolution is distinctly toward concentration of markets and of business enterprises in the industrial as well as in the financial field. It is only necessary to point to the development of the system of industrial and banking Kartels in Germany before the war. Since the war the movement toward concentration of business enterprises has received added impetus. The recent experiences in England and Germany offer illuminating evidence. The movement has struck root in this country. As examples, one might cite the Cleveland bank consolidation, the proposed steel combine of the independent concerns, and the Ford industrial integration. It is true that the traditional aversion in America toward consolidation and combination of business enterprises is deeply rooted. But the development is obviously in that direction. Federal supervision over the large business concentrations might be substituted for the present harrassing state control. Would not efficient, directive policies inaugurated toward the end of properly fostering the movement of concentration in American fields of banking and industry lead toward a better organization of our business system, more homogeneous data as a basis of control, and be more fruitful of results over a given period than the various plans proposed? Would not some consolidation within the 30,000 banks in this country aid toward the control of credit? Would not production and prices become more stabilized and the prices in the price system keep a more consistent relation toward each other under a system of greater business concentration? Recognizing the practical limitation upon the size of business units which would involve the law of diminishing returns in productive efficiency, nevertheless, the tying together

of the various large enterprises could be obtained through Kartelling as, for example, in Germany and England. It is realized that these suggestions open up intricate and vital questions, but policies formulated along these lines would lead to a more expeditious control of our business life, for we would be swimming with the current of development of our industrial and financial enterprises.

WALTER W. STEWART.-The preceding papers have raised, in sharp fashion, this question: Can men learn to control the institutions under which they live or must men continue to be controlled by them?

Professor Mitchell believes that since these institutions are rules of our own making they are subject to amendment; that in order to carry out a revision we need fuller statistical information, a clearer comprehension of the influence of institutions upon our economic behavior, and a courageously constructive attitude toward the problem. My comments bear upon these last two points, upon the influence of institutions and upon the attitude of economists. More specifically, I wish to consider the consequences for investors and for workers of the business policy pursued during depressions, and to suggest a method by which further control might be secured.

The primary consideration of the corporate management during a period of depression, when earnings are declining, is to protect the solvency and credit of the corporation. In pursuit of this policy provision is commonly made toward stabilizing the incomes of investors in corporate securities. A default in interest payments leads to such serious financial consequences that the management bends every effort to maintain the income of bondholders even though these payments cannot be met out of current earnings. Likewise the harm done to the future credit position of the corporation by passing or reducing its dividends puts pressure upon the management to maintain also the dividend payments; the surplus earnings of the prosperous years are, therefore, made available to the owners of stock during years of depression. Thus during the present year of depression the profits of corporations have declined abruptly, yet the monthly distributions of interest and dividends have continued as in prosperous years.

In contrast, during the year 1921 the wage incomes of approximately 4,000,000 industrial workers completely disappeared. This, too, is part of the accepted policy for dealing with a depression when the financial position of the corporation is at stake. Confronted with unprofitable markets the management decreases the pay roll by the discharge of workmen. When production ceases to be profitable a decrease of even 25 per cent in wage rates appears ordinarily not to be a sufficient protection to the corporate property; what is usually required is a complete cessation of wage payments by the discharge of workmen. The only way, apparently, by which large economies

can be made when prices are declining is at the expense of labor. The maintenance of the pay roll is a problem of greater magnitude than the maintenance of interest payments—a problem which corporations have not solved, and which, acting individually and competitively, they probably cannot solve. The pay roll cannot be maintained. without a maintenance of production. Production and solvency cannot both be maintained at a time when there is no market for the product. Under these conditions a decrease in the pay roll by the discharge of workers is as essential to corporate solvency as the maintenance of interest payments.

Unemployment among industrial workers is the corollary of the decreased production of manufactured goods. The sequence by which this reduction of output proceeds cumulatively from one industry to another and back again to the place of beginning is familiar enough. Each successive corporation, in the effort to save itself, increases the difficulties for all; its discharge of workers cuts off the buying power from which orders ultimately arise. Such a policy, though perhaps expedient or necessary when corporations act individually and competitively, is ruinous collectively.

Unemployment is not the outcome of deliberate intention; rather it is the unintended consequence of a policy with other aims. But the consequences are none the less severe because they are unintended. In like manner the provisions for stabilizing the incomes of investors are not thought of by the management as methods of dealing with the business cycle; they are the by-products of a policy intended to avoid bankruptcy and protect credit. In the control of business cycles, however, we are less concerned with the intentions of the corporate management than with the consequences of a business policy upon economic behavior and welfare. The point is, that a policy based upon financial considerations which bring a degree of security to the investors brings insecurity to the workers.

Investors are doubtless more willing to bear patiently with the irregularities of production and employment than they would be if their incomes and investments suffered in proportion to the irregularity of corporate earnings. Farmers and city workers, however, who have borne the brunt of the depression, appear to be less patient. Their incomes have suffered most heavily and they are in a mood to revise the accepted rules for dealing with a depression. If constructive changes could now be proposed, their interest might be enlisted and a greater stabilization of industry secured.

There have been suggestions for the stabilization of price and production through the control of credit by the Federal Reserve Board. Perhaps economists turn toward banking as a means of control because the Reserve Board seems to be the only organization acting in

the public interest which has the authority and power to make its decisions effective. I agree that in its rediscount policy the Federal Reserve Board should keep in mind the price level and the production level as well as the reserve ratio and prevailing conditions of credit. A change in the rediscount rate, however, is a feeble instrument for making effective a judgment and a will which may differ from the will of the banking and business community. The primary decisions which determine the volume and character of bank loans are made at the place of original discount. In fact, the rediscount policy of 1920 was finally made effective not by the advance in the rate of rediscount alone but by the actual discrimination at the source against certain kinds of loans. Those who approach the problem of industrial stabilization through the control of credit do not ordinarily contemplate the rationing of bank loans by a central authority, yet it is probable that if the attempt were made to restrict the total volume of loans at a time when banking reserves were still adequate the policy would be brought face to face with that issue.

Entirely apart from the effectiveness of the rediscount policy, however, the character of the organization of the Federal Reserve System has shown the possibilities of a certain type of economic organization. The experience in the recent crisis proved the wisdom of transferring certain functions which formerly were under competitive management to a board whose decisions and actions are free from the pressure of business competition. It will be remembered that so long as the responsibility for the ultimate banking reserves remained with the bankers' banks in New York the policy pursued in a crisis did not permit the making of loans to solvent borrowers, nor did it prevent a suspension of cash payments. Each banker, in the effort to save himself, created a situation from which none could escape, and the crisis became a panic. Finally the Federal Reserve Act made a distinction between the management of a banking system and the management of a bank, and took the final responsibility for reserves out of the hands of the individual bankers. Banking panics had arisen out of the competitive management of banking reserves; they disappeared when those reserves were centralized and brought under a unified control.

The uncontrolled and competitive management of production and the free and competitive determination of price now lead to consequences quite as disastrous. Buying power depends upon both price and output, and a collapse of either at the farm or in the factorycauses a breakdown in the exchange of goods. A proper organization of that vast system of markets and prices which stands between and connects the farm and the factory would cause the products from these two sources to mutually and continuously support one another.