■IB 3717 L9G8 . M3 lopy 1 mm^^ THE PANIC AND E PRESENT DEPRESSION ADDRESS DELIVERED BEFORE THE AMERICAN ACADEMY OF POUTICAL AND SOCIAL SCIENCE Philadelphia, April 10, 1908 THEODORE MARBURG, M. A. (Reprinted from the Proceedings of the Academy) Two things conjointly cause gold to be drawn to a country ; one is the providing of a place for gold in the cunency system of the country, the other is the interest rate. . . 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' °a ^^ . -^^ -+f " = , -| =Mi 30 vb U-; u Pi P^ 1 Ti-vO ro<; ■Sff ^|; -| , «| » «j« S «| Q 00 -.g *1 ' •** cOoc • '^'1 ^? -to-* ? ^c; , « S *R CO 1 : c : . . • ; • ; •si : ■fe4 •bi ; •^ •65. • "^ ; •fc4 •fei ■fci : "^ W : G T?-6i 'd-tes . -C-fei -^-fes - "^-bi T3-fe4 "H^^ - 'H"^ , "O bi -o-fei C c C C c a c > 4) S (U u < Dp: Qa qd: 5i Qit 5£ Sa: Qti c i! Qo-i J ' — . — • ' ,_ ■' ' — »-— ' •• ' — r- ■" ' — / — > ' — , — ' Pi • s*^* < c S "5 c c I g 4) g <^ • 1^ •ocn 1 >- a s >< c n 1 O 4> Is 4 i 1 u o. t) g^ §^ ' 3 ^ 1 c O o O J J J hJ ^ 1 14 Another potent cause of the panic, a cause which has been generally recognized, is the in- elasticity of our currency. This subject has been dealt with quite fully before this body and else- where during the past few months, and what I have to say today is simply by way of supplement- ing that discussion. The problem of an emergency currency re- volves principally around the question of what con- stitutes an adequate tax on such currency. With- out an adequate tax the currency will not contract sufficiently in normal times and will, therefore, lack proper elasticity in abnormal times. Further- more, without such tax there is serious danger that inferior money will take the place of good money. Two things conjointly cause gold to be drawn to a country; one is the providing of a place for gold in the currency system of the coun- try, the other is the interest rate. Neither the one nor the other alone suffice. High rates of interest have obtained in silver countries without drawing gold to them; high rates of interest obtained in the United States before our resump- T5 tion of specie payments, without sufficiently at- tracting gold. There must be a need for gold (i. e. a gold standard and an absence of other forms of money), accompanying the high interest rate, otherwise gold will not come. Obviously the way to maintain "an absence of other forms of money" is to tax such money. If we want to prevent an issue of paper money which, if issued, would in- terfere with the supply of gold, we must begin the tax on such money at a rate which is supposed to attract gold so that the general rate of interest may not be interfered with beyond that point. For example, if the United States, which is on a gold basis, finds that a general interest rate of 6% will attract gold, it can avoid having its gold supply affected by an emergency currency if the tax it imposes upon such currency begin at 6%. A currency taxed at 6% will not be issued until the general rate of interest is high, i. e. until gold is being attracted; and it will not interfere with the continued inflow of gold because the moment the interest rate falls too low, emergency cur- rency so taxed will become unprofitable and will i6 be withdrawn. On the other hand, currency is- sued at a low tax is apt to keep the general inter- est rate too low and prevent the inflow of gold. The advocates of asset currency in this country refuse to consent to the imposition of a high tax which alone will make it a purely emergency cur- rency. An asset currency so taxed is not their kind of asset currency. The question of the basis of the currency issues, whether bank assets or miscellaneous securities deposited with the government, is of minor im- portance as compared with the question of an adequate tax on the issues. Still, because of the number of banks in the United States to be sur- veilled, it seems preferable that the government should have in its own hands something to secure the issues. Coming to the question of the charac- ter of the securities to be so desposited, we find objection made to the inclusion of railroad bonds on the ground that the market value of railroad bonds would be unduly enhanced thereby. Is this objection well taken? A high market price for their bonds means borrowing at a low rate of in- 17 terest, or lighter fixed charges on the railroads. Now, whether it be the public purpose to further cheapen the service or to let the railroads earn a profit and insist upon their using it to better the service, a lessening of the burden of fixed charges conduces equally to either end. So that from whatever standpoint we look at it, the in- clusion of railroad bonds in the securities to be deposited for emergency currency issues would be a pubHc gain. The crisis of 1907 was aggravated, as we know, by a run on the banks. Two devices suggest themselves as calculated to prevent a recurrence of this; one, postal savings banks, the advan- tages of which must be apparent to every student of public questions, the other a guarantee by the federal government of deposits in national banks. It would be a distinct gain if, while having a secure currency, we could at the same time make secure the deposits in national -banks. This guar- antee could be made without risk of financial loss to the government if a small tax were imposed on the banks, the proceeds of which would con- 18 stitute a guarantee fund, the government being empowered to levy an extra assessment on all the national banks in addition to the regular tax whenever the guarantee fund fell below a speci- fied amount fixed by the statute. The contention that the government would assume an impossible obligation under such a guarantee is met by the provision that the government guarantee be lim- ited to the actual fund collected as under the Canadian provision for the redemption of the notes of failed banks. Is such a guarantee likely to undermine to any great extent the conservative managerrient of the banks? Certainly it would not relieve the stockholder from responsibility. Before the government guarantee would apply and the government fund be touched, the stock- holder would be called upon to make good his extra liability of $ioo on every share of stock when the assets were inadequate. It may be urged that the power to withdraw deposits and make the bank unprofitable, or ac- tually to threaten its stability, is an instrument the effect of which is immediate, that, therefore. 19 the depositor in practice exercises a much more effective control over the directors than the stock- holder, whose knowledge of the affairs of the bank is notoriously inadequate and whose control of the bank's policy is correspondingly feeble; that the consciousness of this fact acts as a check upon the bank's officers; that if deposits were guaranteed the depositor would no longer scru- tinize the management of the bank, the result being looser management and more failures and greater losses to be made good by a government guarantee. To what extent the watchfulness of the depositor makes for conservatism in banking is problematical. Let us assume that all of these contentions are well founded and that at first losses through bank failures would be doubled under this plan. On whom do these losses fall? Not: on the depositor, for his deposit is secure under the government guarantee — and the de- positor is the public. It falls, first, on the stock- holder, who, if bank methods become lax, will soon devise means of keeping better control of the management. It falls, next, on the associated banks, whose interest it immediately becomes to insist on more efficient government supervision. Furthermore, one source of bank failures — the run on banks — is removed. With these factors to offset the greater laxness of bank manage- ment, which we will assume results from the with- drawal of watchfulness on the part of depositors, it is reasonable to suppose that in the course of a few years the losses through failure of banks would not be greatly in excess of the present average. But even if these losses were doubled a very small tax would still suffice to cover them. In the extreme case of losses threatening to become excessive, resort could always be had to a repeal of the statute and^ after reasonable notice, an abandonment of the government guar- antee without jeopardy to existing interests. In other words, the proposed legislation involves no such dangers as lax currency legislation. Ease of mind of the depositor, actual security from loss on the part of many who can ill afford a loss, a broadening of the practice of instrusting money to banks, instead of hoarding, the entire 21 removal of the incentive to withdraw deposits for hoarding and consequent doing away with runs on banks ; these are the advantages that could be confidently expected. In a discussion of the business depression and possible remedies the question of wages forces itself upon us. It is urged that the laborer should accept lower wages to help along recovery. In many cases he is forced to accept lower wages whether logic is with him or not. In times of business depression his strategic position is par- ticularly weak and his appeal must be principally an appeal to reason. Now, from the standpoint of the public interest, to what extent does a re- duction of wages really conduce to recovery, and even though it may so operate, is the public welfare promoted in the long run by such reduc- tion? If the standard of living be lowered by lower wages — and how can it be otherwise — lowering of wages is to be avoided, if possible. It is the standard of living which makes not only the market, but the man, i. e. makes him a more valuable citizen and more efficient workman. If wages are the last thing to recover with a recov- ery of business activity and the last thing to advance amid advancing prices, then wages are entitled to especial consideration and protec- tion. Undoubtedly lowering wages helps to lower prices, but in times of depression the extent to which lower prices enlarge the mar- ket is problematical. If it be a question of foreign competition, e. g. if lower wages abroad are forcing the manufacturer out of his prin- cipal field of operation, the case for lower wages at home is plain. But when a people are sur- rounded by a tariff wall, it is safe to say that in the long run wages are recovered by the em- ployer in prices, just as taxes in the long run are recovered in prices. And underlying the whole problem is the ques- tion of social justice. Has the laborer since the beginning of the industrial era gotten out of his labor as decent a living as the ingenious labor- saving machinery of modern times should give to him? And is it not fairer that capital and direction should suffer the pinch of hard times before they ask labor to share it ? 23