American Academy of Political and Social Science

Planning against Postwar Depression

Author(s): Alan R. Sweezy
Source: Annals of the American Academy of Political and Social Science, Vol. 224, Labor
Relations and the War (Nov., 1942), pp. 175-182
Published by: Sage Publications, Inc. in association with the American Academy of Political and
Social Science

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Planning Against PostwarDepression

By ALAN R. SWEEZY

HE depression of the thirties was

by all odds the worst we had ever

known. Even the so-called "great" depressions of the seventies and nineties
were mild setbacks by comparison. In
the seventies, for instance, industrial
production fell only 7 per cent, and in
the nineties 13 per cent, compared with
a drop of 50 per cent from 1929 to 1932.
The earlier declines were soon followed
by renewed expansion which in the
space of a few years carried output and
employment far beyond their previous
peak. In the thirties, on the other hand,
the depression dragged on, despite unprecedented efforts to overcome it. In
1939 the volume of production was no
higher than in 1929, though productivity
had increased greatly in the meantime,
while approximately -one-sixth of the
country'sworkerswere still unemployed.
The war has served to underline the
tremendous productive power of our
economy. It is no longer possible to
argue, as some people were doing in
1939, that production and employment
had reached satisfactory levels by the
end of the thirties.
But, although war has called into action the country's full productive powers, there is still a widespread fear that
after the stimulus of war and of reconstruction has subsided the economy will
fall back again into the saine sort of
depressed condition that existed in the
thirties. There is a fear, in other words,
that the modern world is faced with a
persistent, long-run tendency towards
depression. To decide whether or not
this fear is justified we must examine
the factors on which the general level
of economic activity depends.
CAPITAL GOODS EXPENDITURE

Most economists today agree that in

a capitalist economy the rate of construction of new capital goods plays a

key role in determiningthe general level
of production and employment. Not
only are people employed directly in
building the capital goods, but other
people are also employed indirectly in
making the consumption goods which
the capital goods workers are enabled
to buy. Once an economy becomes adjusted to a relatively high rate of capital goods construction ("investment" in
current economic terminology) it is
likely to be dependent on the continuance of that rate of construction for its
prosperity.
It is theoretically possible, of course,
that a decline in expenditure on capital
goods might be offset by a simultaneous
increase in expenditure on consumption
goods. People who had been saving
part of their incomes might reduce their
saving and increase their consumption
spending. The result would be a shift
of labor and other resources from the
capital goods to the consumer goods
industries but no change in the total
employment of resources.
Such a compensating shift is, however, highly unlikely. The community's
saving habits tend to remain stable over
long periods of time. When investment
falls off, people go on trying to save as
much as before, with the result that the
total demand for goods and services decreases. As demand declines, production is curtailed and people are thrown
out of work. The decline in incomes,
production, and employment continues
until the community is sufficiently impoverished to reduce its saving to equality with the smaller volume of investment.
To discover why income has been low
and large numbers of people unem-

175

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176

THE ANNALS OF THE AMERICANACADEMY

ployed so much of the time in the

modern period, we must try to find out
what has been wrong with investment.
Likewise, to decide whether or not unemployment and depressionare likely to
reappear in the postwar period we must
form some estimate of the probable future trend of investment demand.
Many writers are convinced that the
underlying demand for capital goods is
just as strong-relative to the supply of
funds forthcoming
investment-seeking,
at a high level of income-as it ever
was. The extraordinary difficulties of
recent years are attributable, they think,
to social and political developments
which have kept investors from taking
full advantage of the existing opportunities.' Since these writers believe that
opportunities will continue to be abundant for a long time to come, their
program for combating future depression is in principle very simple: remove
the social and political deterrents and
leave to private investment the job of
maintaining income.
In terms of concrete measures this
would mean roughly a return to the economic and social policies of the twenties.
In the fiscal realm it would mean a balanced budget, curtailment of government expenditures, and reduction of
income and profit taxes; in the "social"
field, discouragementof labor organization 2 and a sharp reduction of relief
and other welfare activities.3 Writers
1Cf., among others, Sumner H. Slichter,
"The Conditions of Expansion," American
Economic Review, Vol. XXXII (March 1942),
pp. 1-22; Joseph A. Schumpeter, Business Cycles (New York, 1939), Vol. II, pp. 1032-50;
Henry C. Simons, "Hansen on Fiscal Policy,"
Journal of Political Economy, Vol. L (April
1942), pp. 161-97.
2 This was
accomplished in the twenties by
a hands-off policy so far as the Federal Government was concerned. The active discouraging was left to the local governments and to
the courts.
8 This might also be accomplished by returning responsibility to local government.

of this group would perhaps be willing

to retain the unemployment and old-age
insurance systems, provided they were
kept on a self-supporting basis and
benefits were limited so there would be
no danger of their exerting an upward
pressure on wages.
Whatever its merits from a social
point of view, this program is economically unrealistic. It ignores the profound changes in the underlying conditions of economic activity that have
been taking place since the late nineteenth century. In attributing the instability of the modern economic world
to social and political developments it
is mistaking symptoms for causes.4
INVESTMENT RESULT OF SPECIAL

CONDITIONS

It is important to point out, to begin

with, that the existence of adequate
investment opportunities cannot simply
be taken for granted. Many people
assume that investment is a "natural"
part of economic activity which, in the
absence of disturbing factors, will always play its proper role in the economic process. Actually, investment is
the product of special circumstances.
It is in no way essential to the process
of production, exchange, and consumption. A society could go on producing
and consuming indefinitely without
making any addition to its already existing stock of capital goods. All it
would have to do would be to replace
the old goods as they wore out and that,
of course, could be accomplished through
4 "In every great crisis the struggle of contending groups, maneuvering for an advantageous position amidst rapid change, wfhips up
the froth and fury of political and social controversy. Always there is present the temptation to explain the course of events in terms of
the more superficial phenomena which are frequently manifestations rather than causes of
change." Alvin H. Hansen, "Progress and
Declining Population," American Economic
Review, Vol. XXIX (March 1939), p. 4.

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PLANNINGAGAINST
POSTWARDEPRESSION

177

the spendingof depreciationallowances.5

There would be no place in such an
economy for net investment or saving.
Either the community would voluntarily
spend all of its income on consumption,
when income was at a high level, or it
would be forced to do so by the decline
of income to a low level.
Net investment is a product of change
and growth in the economic system. It
arises in connection with the introduction of new methods of production and
of new products, the development of
new natural resources, and the building
of additional equipment for an increasing population. Over any considerable
period of time, its volume is determined
by the rate and character of these dynamic developments.
In the nineteenth century investment
was stimulated both by revolutionary
technological changes and by rapid
growth of population and expansion of
territory. The outlets provided by combined change and growth were generally
sufficient-though there were, of course,
occasional setbacks, those in the seventies and nineties being fairly serious-to absorb the rapidly increasing supply
of investment-seekingfunds.6

progress has continued, of course, and

large amounts of capital have gone
into the development of new products
and new techniques. But technological
change by itself can scarcely be enough.
Writers who suggest that technological
change may become so much more rapid
and so much more capital-absorbing as
to make up for the lower rate of growth 7
are ignoring the whole trend of the past
hundred years or so. Ever since the
early phase of the industrial revolution
the growth in the supply of capital has
tended to outstrip the growth in demand. Until recently this tendency was
kept in check by the continual opening
up of new fields for external expansion.
But it has constantly threatened to reassert itself the moment expansion
should slow down.
England had already developed a surplus of capital relative to the requirements of internal change in the early
part of the nineteenth century. If it
had not been for the outlet English
capital found in the United States and
in other new countries, a condition of
"oversupply"8 would have existed from
the middle of the nineteenth century on
-perhaps even earlier-and the English
economy would have suffered from a
TECHNOLOGICAL CHANGE
tendency to chronic depression.
Since the end of the nineteenth cenWhat happened in England in the
tury, however, the field for territorial first half of the nineteenth century hapexpansion has been narrowing and the pened in this country soon after the begrowth of population has been slowing ginning of the twentieth. Wherever it
down. The extensive outlets for in- occurs, industrializationbrings about an
vestment, in other words, have been enormous increase in productive power.
growing less important. Technological When this increase is accompanied by
an unequal distribution of income, it
5 Actually a great deal of improvement, and
creates large new sources of capital supeven expansion of capital equipment, is covply. In the United States, the domestic
ered by depreciation allowances. Cf. espesupply had grown to such proportions
cially, "Savings and Investment," Hearings
Before the Temporary National Economic
by the end of the nineteenth century

Committee, Pt. 9, pp. 3511, 3620, 3634 ff.

6 At "satisfactory" rates of return, that is.
A satisfactory rate can be defined as a rate
that will induce investors to purchase additional real capital goods in preference to holding their accumulations in money form.

7 Cf., for instance, Slichter, op. cit., p. 11.

L. H. Jenks, The Migration of British
Capital to 1875 (New York, 1927), p. 22 and
passim. Also John Stuart Mill, Principles of
Political Economy (Ashley Ed.), p. 731.
8

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178

THE ANNALS OF THE AMERICAN

ACADEMY

that it was able, on balance, to satisfy

the domestic demand." English capital
was forced to look for new outlets in
still-undeveloped parts of the world.'0
Twenty years later, at the end of the
first World War, the United States had
also developed a surplus of capital and
was joining in the search for fresh openings abroad.
War temporarily weakens the ability.
to accumulate of the nations most directly involved and also provides a supplementary outlet for capital in the
reconstruction it necessitates. It thus
covers over for a time the growing disparity between the supply of investmentseeking funds and the demand for them.
But it does little to alter the underlying
trend. Industrialization, and with it
the power to accumulate,has been steadily spreading to new parts of the world.
Meanwhile the still-undeveloped areas
have been shrinking in extent and in
the abundance of opportunities they
offer. It is unlikely that these areas
will be able for any length of time to
provide adequate outlets for the surplus
which unrestricted accumulation in the
advanced industrial economies would
produce.
It is even more unlikely that the
whole trend of past development will
suddenly be reversed and countries like
the United States, which have already
had a surplus " for some time, will find
that domestic opportunities are again
sufficient to absorb the entire (poten9Cleona Lewis, America's Stake in International Investments (Washington, D. C.:
Brookings Institution, 1938), p. 455.
10 "British investors have acted as pioneers
in discovering and opening up new fields for
development. ... there has thus been a process of transference by which British capital
has been able continuously to advance into
the more distant and less developed parts of
the world." C. K. Hobson, The Export of
Capital (London, 1914), p. 122.
11 During the depression the 'surplus was
potential only, actual accumulation being held
in check by low income.

tial) 12 Supply. Such a reversal is the

more improbable in view of the marked
slowing down of population growth in
this and other countries of the Western
world.
The prospect, then, is that after the
war and the postwar reconstruction are
over we shall again be confronted with
a long-run tendency toward depression.
The tendency need not, of course, become an actuality. Ways of compensating for an inadequate volume of private
investment expenditure are well known.
Whether or not they will be followed
depends on the community's understanding of the reasons for depression
and on its willingness to make the necessary economic and political adjustments.
DEFICIT SPENDING

The simplest way of combating depression is through government deficit

spending. The virtue of private investment, from the income and employment
point of view, is that it provides a means
whereby money, which would not otherwise be spent, is pumped into the spending stream. Private investment,in other
words, makes a net contribution to the
total demand for goods and services.
Government deficit spending does exactly the same. It makes no difference,
so far as income is concerned, whether
money is borrowed and spent by a railroad, a public utility, the city of New
York, or the Federal Government.
It also makes little difference what
the money is spent on. Many people
still have the idea that the purchase of
durable goods, things with steel and
concrete in them, has a more stimulating effect on income and employment
than the purchase of perishable goods
or of services. There is no real basis
for such a distinction. A department
store contributes just as much to the
income stream and to the demand for
labor when it borrows from a bank to
12

That is, at a high level of income.

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DEPRESSION
PLANNINGAGAINST
POSTWAR
increase its clothing inventory as a utility company does when it sells bonds
to buy a new turbine. A turbine is
undoubtedly more impressive than an
inventory of suits and dresses. But
that has nothing to do with income and
employment. Labor is just as necessary
in making clothes as in making turbines,
and clothing workersas well as electrical
workers have to buy things with their
incomes. The same applies to different
types of government spending. A billion dollars spent on WPA has in general just as much effect on the national
income-perhaps more since WPA workers have no margin for saving and there
are no contractors' profits-as a billion
dollars spent on a regular public works
program.
The effectiveness of deficit spending
in turning the tide from depression to
recovery was demonstratedseveral times
during the thirties. Each time, however, the program was curtailed almost
as soon as it began to show results.
Business and political leaders viewed it
as at best a temporary expedient to be
abandoned the moment recovery got
well under way. They still expected
private investment to do the long-run
job of supporting prosperity without
help from the Government.
EXPENDITURES ON RELIEF

The temporarynature of the program

is evident in the way the money was
spent. By far the biggest item was unemployment relief. The need for relief
was immediate and pressing and the
New Deal deserves much credit for the
way in which it improved,against strong
opposition, the adequacy and character
of the relief program. But relief is obviously unsatisfactory as a permanent
channel for distributing purchasing
power. Other large items in the spending program of the thirties were also
essentially relief measures, namely, farm
benefits and the bonus. Even the regu-

179

lar public works program was in large

part a relief measure for local governments which were themselves no longer
able to finance a normal volume of
construction.
Types of spending which would be
suitable for a long-run program were
limited in scope, or were still in the
discussion stage, at the end of the thirties. Construction of low-cost housing
had been started, but the size of the
programwas extremely small and strong
opposition stood in the way of its enlargement. Programs for the provision
of moreadequate medical care and wider
educational opportunity were under
consideration but had not reached the
enactment stage. The old-age and
unemployment insurance systems had,
ironically, been turned into engines for
the collection of taxes from the mass of
consumers rather than for the distribution of income to them. The WPA and
farm programs contained seeds of valuable long-run activities: theater, art,
recreation, and sanitation projects of
the WPA, and the soil conservation and
Farm Security programs are oustanding
examples. But because congressional,
business, and many administrationleaders regarded the WPA and farm programs as temporary, designed merely to
provide relief, they frowned on the
development of these more permanently
valuable features. It is significant that
in the economy drive of 1939 these were
precisely the things that were most
severely cut.
Any future program of government
spending must break away from the relief concept and concentrate on things
the community, and particularly the
mass of low-income consumers, really
need. It must concentrate on housing,
health, education, art, recreation; on
security against old age, sickness, accident, and temporary unemployment;
and on conservation of basic natural
resources.

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180

THE ANNALS OF THE AMERICANACADEMY

The spending program could theoretically take the form of direct grants to
consumers. We have seen that the basic
problem in the modernworld arises from
the community's tendency to save more,
at a high level of income, than can be
offset for any length of time by private
investment expenditure. In principle,
this calls for a transfer of income from
savers to consumersso that a larger proportion of income will be spent on consumption goods and a smaller gap left
to be filled by investment. One way to
increase consumption would, of course,
be through direct grants to everyone
who would agree to spend the money.
In practice, however, there must be
some method of selection. Money must
be given to people who have a need for
it which appeals to the common sense
of the community. The programs mentioned above provide a basis of selection-money is given to, or spent on
behalf of, old people, people who need
more adequate medical care, etc.-and
they also insure that certain important
community needs will be more adequately met than if the money were
simply distributed to consumers in general.
If the spending program is to be permanent and to be directed primarily to
increasing consumption, the question
arises as to whether borrowing is the
proper method of finance. Would it
not be better to raise the money by
taxation and thus avoid the difficulties
which are likely to arise in connection
with a growing national debt?
BORROWING AS METHOD OF FINANCING

Borrowing has two great advantages:

(1) it draws off saving without at the
same time reducing the consumption expenditure of the lenders and (2) it can
be easily varied in amount. Taxation,
in contrast, is a blunt and clumsy
weapon. The only way it can reduce
saving is by reducing the incomes of

the people who presumably do the saving. But these people may react to the
higher taxes by reducing their consumption as well as their saving. This is
particularly likely to happen in the
case of the middle-incomegroups.
The superiority of borrowing in this
respect is accentuated by the fact that
a great deal of saving in the modern
world is done through such institutions
as insurance companies and savings
banks. Taxation can only be partially
effective in stopping this saving at the
source and is, of course, totally ineffective in reaching it thereafter. Borrowing, on the other hand, absorbs the
funds after they have come into the
hands of the savings institutions and is
thus completely effective in channeling
any potential excess back into the spending stream.
Borrowing also has the advantage of
greater flexibility. Private investment
is not likely to be any more stable in
the future than in the past. Fluctuations may, on the contrary, be more
severe around a generally low level than
around a high level. Deficit spending,
thanks to the relative ease with which
it can be increased or decreased, is a
convenient instrument for offsetting
such short-run variations in private investment.
But there are also disadvantages.
Continuous borrowing means a steady
increase in the public debt and in the
total of interest that has to be paid on
the debt. The community as a whole
does, to be sure, pay this interest to
itself and thus theoretically could discharge a debt burden, no matter how
large. But there is a transfer problem
which is likely to cause difficulty if the
debt grows very rapidly. Taxes might
be levied in such a way that the holders
of the bonds would themselves pay the
interest on them. But this would mean
that the bonds would yield them no
income and would hence be strongly op-

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PLANNING AGAINSTPOSTWARDEPRESSION

posed by them. On the other hand, the

nonbondholding section of the community would be likely to protest against
being taxed so that "surplus capital"
could continue to receive a return.
Taxation fundamentallyis the sounder
method of financing the kind of spending program suggested here. It fits in
with the basic objective of the program,
which is to increase consumption. But
the technical advantages of borrowing
cannot be entirely overlooked. Probably the best practical solution is a
combination of the two methods. Taxes
on corporate profits, incomes of five
thousand dollars and over, and inheritances and gifts should be kept at high
levels. The general level of profit and
income taxes established during the war
should be retained in the postwar period. This would help materially in
keeping the volume of income flowing
to people who do a relatively large
amount of saving within manageable
limits.13 In periods of relatively strong
investment demand it might even be
sufficient to keep income at a tolerably
high level. Much of the time, however,
additional help from the Government
will undoubtedly be necessary and this
should be provided through deficit
spending. Particularly in the United
States, where the public debt is still
relatively small and where productivity
is steadily rising, a moderate rate of
increase in the debt should cause no
serious difficulty.
HIGHER WAGES

It might seem that a far simpler way

to increase consumption would be by
is It must always be remembered that this
volume is excessive only at a high level of
national income. "Oversaving" can always
be corrected by depression. The volume of
investment-seeking funds increases particularly
rapidly as income approaches the full employment level because of the sharp rise in profits.
The year 1941 provides a striking example.

181

raising wages. If labor organizations,

with the encouragement of the Government, obtained substantially higher
wages, would that not do the trick and
make government spending, taxing, and
borrowing unnecessary? To the extent
that the increase in wages resulted in
a reduction of profits, it would, of
course, tend to increase consumption
and reduce saving. But employers can
usually protect profits against wage
increases by raising prices or increasing
man-hour productivity. It may even
be to the interest of labor, in a particular industry, that employers should pass
on the increase, since the employers'
opposition to the increase will be modified thereby. Thus, although wage increases may, under certain conditions,
increase aggregate consumption relative
to income, it would be dangerous to
rely on them too heavily.
Utility regulation, antitrust enforcement, and other types of price control
would also, to the extent that they succeeded in reducing profits, increase the
proportion of income devoted to consumption. But the effectiveness of such
measures should not be overestimated.
Regulation is never designed to deny
investors a reasonableprofit. And there
are many ways of making the actual
profit, however large, seem reasonable.
This is particularly true in an unstable
economy where the large profits of good
years are commonly regarded as necessary to balance the small profits, or
losses, of bad years. From the individual point of view they are necessary.
But for the whole economy the attempt
to make up in good years for the meager
returns of bad years merely helps to
insure that the bad years will soon return.
Increasing consumption seems like an
easy way of preventing depression. It
means that all we, as a community, have
to do to escape chronic unemployment,
poverty, and insecurity is to relax a bit

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182

THE ANNALS OF THE AMERICAN ACADEMY

our preoccupation with building capital

goods and devote a larger part of our
resources to producing things that will
satisfy our immediate needs. In practice, however, a policy of increasing consumption will inevitably encounter serious difficulties.
The chief difficulty is likely to arise
from the opposition of those whose interests appear to be adversely affected.
The essence of the program is the transfer of income from savers to consumers.
The savers may actually be better off
for having less income, in prosperity,
since their income, along with that of
the rest of the community, would soon
be reduced by depression if the transfer
were not made. But they are not likely
to see things that way. They are likely
to think that they are entitled to all the
income that comes to them and to overlook the effect of their actions on the
community as a whole. They are also
likely to be convinced that there will
always be ample investment opportunities, however much people may save.
They will find adequate explanation for

depression in high taxes, government

deficits, the demands of organized labor,
etc., that is, in the very things necessary
to implement a policy of increasing consumption.
To become effective any policy must,
of course, have political support. In
this case support for a policy of increasing consumption must come largely
from the great majority of people in
the lower-income groups who stand to
benefit directly from it. But the people
in these groups can provide effective
support only if they are organized and
if they understand the relation of their
separate interests to the interest of the
community as a whole. Preventing
postwar depression is thus more than a
matter of drawing up plans for the
distribution of additional purchasing
power to the mass of consumers. Its
success depends on the growth of the
economic and political power of labor,
farmers, and other consumer groups,
and on the use of that power in a way
to meet the fundamental needs of the
whole economy.

Alan R. Sweezy is associate professor of economics

at Williams College, Williamstown, Massachusetts.
He was formerly instructor in economics at Harvard
and a member of the division of research and statistics
of the Federal Reserve Board. He is the author of
several articles dealing with economic problems.

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