Interest and Capital Formation

Erick S. Hansch

[An unpublished paper written in 1959]

Interest as a return to capital has been the subject of discussion for many centuries. The Greek philosopher Aristotle had something to say about it, and we find references to the subject even in the Bible, During the Middle Ages the Church in following Aristotle's views, forbade the charging and taking of interest. The discussion pro and con waxed very hot at times because it was though^ by many to be ethically and morally wrong to take interest on loans. People then had not yet conceived of the marginal efficiency of capital, and loans were sought mostly by those who were in dire financial straits, and not for the purpose of "producing, more wealth". Public sympathy was usually with the distressed persons seeking loans.

Over the last two centuries several theories have been used to explain and justify interest as a return to capital.

Capital goods as we possess them today and use them, help us produce many times what we could produce with our bare hands only. It is therefore not surprising to find a theory that makes this Increased productivity the basis for the explanation and justification of interest.

However, of this theory Henry George has said that if interest depended upon and were determined by the productive power with which capital could aid labor, then the rate of interest should be steadily increasing. But obviously, interest is not many times what it once was. There seems to be a fairly constant level, an average level of the rate of interest.

Another theory brings out the thought that abstinence from current or immediate consumption should be rewarded. This theory had its proponent and defender in Senior.

Karl Marx spoke of exploitation in connection with interest.

Boehm-Bawerk suggested the agio-theory, or theory of differential values between present and future goods.

Schumpeter sought the origin of interest in the application of new combinations of factors of production with greater results, a theory of dynamics, so to speak, and this term has actually been applied to it.

More recently, Keynes elaborated a theory of interest which took as its basis the marginal efficiency of capital which Keynes explains In these words (from his General Theory, p. 135):

"When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of that asset. This series of annuities it is convenient to call the prospective yield of the investment."

"Over against the prospective yield of the investment we have the supply price of the capital-asset, meaning by this, not the market-price at which an asset of the type in question can actually be purchased in the market, but the price which would just induce a manufacturer newly to produce an additional unit of such assets, i.e. what is sometimes called its replacement cost. The relation between the prospective yield of one more unit of that type of capital and the cost of producing that unit, furnishes us with the marginal efficiency of capital of that type. More precisely, I define the marginal efficiency of capital as being equal to the rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price. This gives us the marginal efficiencies of particular types of capital-assets. The greatest of these marginal efficiencies can then be regarded as the marginal efficiency of capital in general."

"lf there is an increased investment in any given type of capital during any period of time, the marginal efficiency of that type of capital will diminish as the investment in it is increased, partly because the prospective yield will fall as the supply of that type of capital is Increased, and partly because, as a rule, pressure on the facilities for producing that type of capital will cause its supply price to increase."

"Now it is obvious that the actual rate of current investment will be pushed to the point where there is no longer any class of capital-asset of which the marginal efficiency exceeds the current rate of interest. In other words, the rate of investment will be pushed to the point where the marginal efficiency of capital in general is equal to the market rate of interest."

Marginal efficiency of capital can therefore be considered as an influence on the demand side, while the factor of quantity of money or available savings would be a determinant on the supply side in the capital funds market.

Causing considerable oscillations between them would be the factor of liquidity preference which has a strong psychological element in it since it is influenced by general business prospects and profit expectations. From the interactions of these factors the incidence of the rate can be assumed to result. In order to bring forth an increase in savings when the demand for investment rises, a higher rate of interest would seem the answer. But the marginal efficiency of capital is here obviously the limiting factor.

But to come back to our listing of theories of interest: There is even the theory which thinks of interest as compensation for the loss of purchasing power due to inflation, an idea which is used sometimes in present-day ads by investment brokers.

It should be mentioned in this connection that in times of advancing inflation, when price increases are expected to occur more or less as a matter of course, part of the interest has to be considered as "hausse premium". Loans are contracted the nominal price or money value of which is expected to be de-valued due to price-inflation, and repayment of the loans in the stipulated amounts is therefore made easier. The degree to which the repayment is estimated to be easier is expressed by the "hausse premium".

Henry George considered the increase given by nature through growth and reproduction as the basis of interest. This concept stems undoubtedly from the periods in history when herds of cattle and sheep, or fruit trees and the like, were considered a man's capital. I do not wish to entirely exclude this concept, but think that in a predominantly industrial economy the productivity theory, or rather its derivative, the theory using the marginal efficiency of capital, has the greater merit.

In the practical aspects it is, of course, a question of how well I can use my own capital or savings, as against the use which someone else might be able to make of it. I am disregarding for the moment the existence of savings banks and similar financial institutions set up to channel the savings to the places of investment, and in so doing offer a certain rate of interest to the savers.

The financial world is really something secondary in existence -- not in importance, of course; it has become of very great economic importance today. But supporting this entire financial superstructure is our industrial and commercial activity, namely manufacture and trade.

When I mention capital it should always be understood that capital in the sense of political economy is meant, actual, tangible articles of wealth used to produce more wealth. Keynes' term is capital-assets. Money savings or capital funds are just representing these articles, or, at any rate, can cause them to be produced.

We were asking the question, how well can I use my own capital as against the use that someone else might be able to make of it. If I use it myself, the reward for not immediately consuming it is obviously the increase in productivity it gives to my labor. It must give me more than what could be represented as my wages, which wages I could earn, presumably,anyway by working for someone else and using his capital.

On the other hand, he who wants to use my capital must be able to offer an inducement to me greater than what I myself can obtain from its use. That is obvious. He, in turn, is limited in his offer to me by what the capital will help him earn, set against the earnings of his competitors, or, in other words, he is limited in his offer to me by the marginal efficiency of capital. An advantage in using someone rise's capital can only be gained by using it with better results than the competitors. When the general level of productivity has caught up to him, he again has to look for better ways to use capital.

Someone will therefore use capital if he can get it cheaper than the marginal efficiency it affords him. But with that he will also have to bid for the supply of capital funds against his competitors. All this shows that the rate of interest in a highly industrialized economy is not apt to increase without limit.

Another factor that has an influence on the rate of interest is the total amount of money savings available for investment.

There is nothing in our economy that will tend to regulate the amount of savings relative to the desired investment. At any one time, demand for capital funds may be in excess of money savings, at some other time there may be more savings than demand for them. In times past, there has always been the business cycle that could be depended upon to prevent the demand for investment to rise too far beyond actually effected savings.

Since presumably the collection of groundrent for government revenue is to bring about an improvement in the distribution of income, we should then have fewer very large fortunes, which would mean, according to the testimony of many economists, a declining rate of saving.

Moreover, saving habits in a stronger and healthier economy might conceivably be quite different from what they are today, or have been in the past. With improved conditions for job and business opportunities, there may be less inclination to save and greater disposition to spend "now" and enjoy the immediate advantage of "gadgets". And with government being better able to provide for the education of our children through college, and pension plans approaching Mr. Townsend's ideal, two important incentives for the individual to save may be greatly reduced. Of course, pension funds would still accumulate savings that can be and are so used for investment by institutions. In Sylvia Porter's column in the Oregonian of October 8 is this statement:

"Corporation funds alone hold over $9 billion of stocks listed on the New York Exchange. In the past decade, pension funds have increased their ownership of stock 1720%."

And further on we read in the same column:

"Now, mutual funds alone hold over $10 billion of stocks listed on the Big Board in New York, 620% more than a decade ago. Other investment companies hold another $4.4 billion."

Again I quote another passage from the same article:

"The stockholder in 1929 was primarily an individual. Now this is no longer true. A great and growing force in the stock market is the institutional investor -- the pension fund, the mutual fund, the savings institution, the life insurance company, the personal trust fund, the foundation! No one can yet grasp the full significance of this development; we know it is of towering importance." (Unquote).

Saving habits among consumers can be influenced to some limited extent by a change in the rate of interest. But to rely on a growing rate as an inducement to increased savings could have undesirable consequences both socially and economically.

Socially, because only a part of the population could take advantage of the increased inducement. With many spending units at the lower end of the income scale it is just not a question of taking advantage of the higher rates since all those spending units can generally do is to make ends meet, if not worse.

And economically, because it is felt that there is a limit to an economic rate of interest as we have seen in discussing the marginal efficiency of capital.

It would seem then that the aggregate amount of savings by consumers is not very elastic, except perhaps under extreme and abnormal conditions, such as we have seen during war-time, for instance. At the end of World War II, there was a pent-up effective demand for consumers' goods, and consumers divested themselves of a large part of their war-time savings. On the manufacturing side there was fortunately also a considerable reserve of funds created by large wartime profits that came handy for the needed expansion of production facilities, or reconversion of existing ones to peace-time uses. And where the need arose for additional investments the banks were glad to oblige.

Bank credits are quite elastic, or can be made so through manipulations by the Federal Reserve System. That is, credit can be granted to industry and commerce in excess of actual savings. The natural consequence of such excess credit is an inflationary tendency of the money supply, which means that consumers have to give up part of their purchasing power without being asked their consent nor offered direct compensatory benefits.

A fluctuating rate of interest is generally thought of as resulting from the supply and demand situation, the rate rising when demand exceeds supply, and vice versa, keeping in mind, of course, the limitations set by the marginal efficiency of capital beyond which the rate actually cannot rise.

However, we must take note here of several factors which interfere with the free interplay of economic forces in arriving at a rate of interest in the market place.

One is the very fact of the existence of our government debt. Apart from instances where such indebtedness is used to finance public works, this debt is Just a convenient means offered to savers to obtain interest from a rather secure investment, some of which is even tax-exempt, and the interest on it must be raised by the taxpayers in general. It cannot be considered as a means of using wealth for the production of more wealth, which is after all the basic definition of capital.

Government bonds used mostly for refunding of existing debts, are bidding against industry1s and commerce's demand for capital funds, and thus keep the rates artificially higher than they would otherwise be.

It can also be seen from this that if Government ever decided to retire our huge public debt, this would be a disastrous calamity for the capital funds market.

Besides, as is well known, the self-regulatory function of a fluctuating rate of interest according to demand and supply is often severely interfered with by government fiat through the agency of the Federal Reserve Board. The rates are raised or lowered according to what objective it is desired to be achieved. When inflation threatens as an accompaniment of boom-times, the rates are raised to prevent an over-expansion of credit, and when depression threatens or has set in, rates are lowered to stimulate investment. The opinions regarding the efficacy of the Federal Reserve Board's actions are not unanimous. But since the causes and cures of inflations are not the subject of our discussion, I shall refrain from further comments on this point.

Another circumstance that beclouds the issue of the regulatory action of the law of supply and demand on the capital funds market is the fact that land -- in the meaning of political economy - is thrown in with capital, both being labelled with the expedient term "factors of production", and no distinction is made between them economically. Hence, the prevailing rate of interest must necessarily contain a very strong part of what by rights and common sense -- and even according to a strictly scientific definition -- should be called rent. And since land is being used extensively as collateral for investment loans, it can be seen that the level of interest rates is greatly influenced by the rent.

As long as this confusion between land and capital persists, we cannot gain a true and clear picture as regards interest rates.

We said that land is being used as collateral for investment loans, and it must be added that rent is likewise used for extensive expansion in industry. Opponents of the proposal for site value taxation point to this fact as proof that the movement aspires to the impractical. Because by diverting rent to government use as revenue in lieu of taxes, -- or let us put it: in lieu of many taxes -- land becomes, not valueless or worthless, but priceless, and therefore useless as collateral.

Later on a suggestion will be indicated as how to overcome this dilemma. But first let us look at another phenomenon which has become prominent in our corporation studded economy, and which also has a bearing on interest rates and capital formation, and befuddles the picture still more.

This is the re-investment of huge profits by large industrial and commercial corporations. For the most part these profits are backed by rent-of-land. The steel industry is an example. It is perhaps unfair to single out this industry as there are many others with so-called administered prices, which is a polite cover-up for monopoly prices.

Presumably many people will object in shocked consternation to the suggestion that the re-investment of profits may not be socially or economically desirable. But let us for a moment analyze the situation.

Using the steel industry again as an example, anyone wanting to get into the business of producing iron and steel will have to get hold of iron ore deposits, or at any rate, of the ore. Since we have an ever increasing population and a constantly increasing per-capita consumption of most everything, including iron and steel products, and only a limited -- not necessarily a small, but still limited -- supply of iron ore which in economic jargon is called a non-reproducible asset, the price for this ore, according to the law of supply and demand, must go up, especially since the other factors of production, capital and labor, have essentially strong institutional safeguards that keep interest and wages from going down, numerically. Thus, the companies that own iron ore deposits must reckon part of their income as rent-of-land.

According to Robinson, Morton and Calderwood, in "An Introduction to Economic Reasoning", between the years 1947 and 1950, retained business earnings financed about half the new plant and equipment purchased by American Industry. It does not necessarily mean that only those corporations that had rent-of-land backed profits did do it, or could do it, but the process seems most prominent in areas of industry with administered prices.

In any case, it appears that by not distributing corporation profits, the producer-consumers -- a somewhat awkward term which, however, designates the dual role which these people play in the economy -- are actually prevented from making the savings represented by the differential between the administered prices and the prices that might prevail due to the normal process of free competition.

The producer-consumers -- and we should include the stockholders -- are thus deprived not only of the opportunity to make the savings and of the right of disposal as to how and where to invest them, but they are also deprived of the interest income from such possible savings. It is true, of course, that the stockholders of the corporation with re-invested profits gain with the appreciated values of their stock. But if prices were lowered instead, then the entire community would gain.

The corporations that reinvest their profits in new plant or in expansion of the existing plant, are in an economically more advantageous position than those of their competitors who have to go to the capital funds market for their investment requirements and pay the often not inconsiderable rate of interest and subject themselves to stringent terms of the loan.

Besides, corporations that have their own resources for investment and expansion avoid being subject to the credit restrictive policies and measures of the monetary authorities. And perhaps these corporations are quite possibly the ones most in need of restriction, if restriction is considered a good feature. They are most likely to overshoot the mark when it comes to investments in boom-times, and that to the hurt of the entire community.

A Federal Reserve Bulletin of June 1956 which gives statistics on sources and uses of funds for 295 selected corporations for the years 1954 and 1955 seems to bear out the data by the aforementioned authors. Plant and equipment expenditures for these corporations in 1955 are stated as over $11 billion, and the amount "Net from Operation" as slightly higher. Bank loans, both short and long term, are not over $23o million. This indicates that a very large part of profits goes into re-investment.

The authors mentioned say of these re-invested profits: "When this happens, the corporation functions as a device to induce the group to save more than they would as individuals." It would come closer to the facts to call this a form of forced savings.

Since the tax structure of most civilized and industrialized nations cuts heavily into the incomes of individuals and businesses, the propensity to capital formation has often been given special attention by the tax imposing bodies, and special privileges have been granted, ostensibly with the aim to facilitate capital accumulation. The far-reaching social-economic consequences of such favored treatment are somewhat outside the compass of this essay and shall therefore not be discussed here in detail.

Capital formation in many countries is very slow and cumbersome, so for instance in India. We in America have a good head start, and capital goods, or capital assets if you wish, really help us produce enormous masses of both consumer goods and also more capital.

When Communist Russia first started up in 1917 there was practically no capital available in that country, and outsiders did not like to invest theirs. The Russian government offered interest to individual savers, but had to resort substantially to forced savings. They used the method of monetary inflation, by just speeding up the printing press. Of course, these forced savings were used as capital funds to expand their industrial production in the main. In later years the so-called turn-over tax came into prominence.

Other cases of government printing press inflation in the past have not always had such beneficial results, they were mostly used to create unproductive debts, or to pay off those debts that had already been incurred as through a war, or perhaps to cover the heavy expenditure of some potentate or corrupt government.

While on the subject of interest mention should be made of an idea that by many may be considered strange or curious, and is thought by some to be outright idiotic. And that is the matter of negative interest.

Keynes arrives at that concept from considerations derived from an analysis of the rate of interest not of money, but of commodities. He says, just as there is a rate of interest on money, so is there a rate of interest on wheat, houses, steel plant, etc., figured not in terms of money but in terms of wheat, houses, steel plant, etc. He cites an example using the forward quotations for wheat, but the example is unfortunate since forward quotations of commodities are not a function solely of time, but have quite other, namely speculative elements determining them preponderantly. He is duly attacked and literally shredded to pieces by his fellow economists for this example gone sour. However, there is also an element of truth in it.

And that is shown by the following taken in substance from Silvio Gesell:

All goods and commodities produced are subject to decay, deterioration, erosion, etc. Gesell enumerates a whole series of such influences as heat, frost, rust, oxydation, insects, rotting, obsolescence, friction, normal wear and tear by use, etc. etc.

And the following is taken from Henry George's book "Progress and Poverty" - p. 148:

"It will be well for a moment to consider this idea of accumulated wealth. The truth is that wealth can be accumulated but to a slight degree, and that communities really live, as the vast majority of individuals live, from hand to mouth. Wealth will not bear much accumulation; except in a few unimportant forms it will not keep. The matter of the universe, which, when worked up by labor into desirable forms, constitutes wealth, is constantly tending back to its original state. Some forms of wealth will last for a few hours some for a few days, some for a few months, some for a few years; and there are very few forms of wealth that can be passed from one generation to another."

Silvio Gesell suggested, as will be recalled, stamped money-bills to increase the cost of hoarding money. He felt that the economy came to a faltering pace by savings withheld from spending or investment. The method of stamped money-bills would have driven out of hiding the money that some suspicious European peasants might have buried in tincans under the walnut tree in their backyards, and the effect on the economy -- even on those of the small size in European countries -- would have been almost negligible.

However, Keynes proposed to extend the idea of increasing the carrying cost of money to all kinds by what he called "analogous methods". His analytical arguments in favor of such a measure should, however, be supplemented with the consideration that fortunes made in one generation have no inner functional and moral connection with the production of succeeding generations. They should, therefore, not be allowed to make claims on that production. A similar reasoning can be applied to debts.

If a rate of 1% p.a. were used on our public debt, we could look forward to have the entire debt wiped out equitably and without serious disturbance to our economy within about 100 years.

But let us go over the points I made in some sort of review, and then bring this essay to some tentative conclusion.

First I mentioned the changed attitude toward the charging and taking of interest on loans since ancient times and through the Middle Ages, then the various theories that were advanced and which purport to explain and justify interest as a return to capital.

I mentioned Keynes' concept of marginal efficiency of capital, also how in practice the self-levelling of the rate of interest according to economic forces is severely tampered with by various of our institutions, one being the actions taken by the Federal Reserve System, another the existence of our huge public debt, still another the fact that rent is included in the rate of interest. Then we considered capital formation under various conditions, and it was brought out that there was an anomaly in the procedure of reinvestment of profits by industry. We also mentioned the lack of balance between savings and investment requirements in the national economy.

There is one more point that should be touched upon before leading up to the conclusion, and that is what Keynes has called his desire to see the euthanasia of the finance capitalist (rentier).

For this stand, incidentally, he has been taken to task by Prof. Harry G. Brown who accused Keynes of having singled out the finance capitalist to be held up for contempt for enjoying the interest income on his capital, but not explicitly saying anything against the landowner for collecting rent as private income. Now the reason for this is obviously not Keynes' one-sided aversion toward finance capitalists as against landowners, but merely the fact that Keynes had not yet freed himself, the same as so many other economists, from the mistaken idea of calling both land and capital by the inclusive term "factors of production". So then, landowners are not set apart, and rent is considered just a special form of Interest on the investment in land.

Such a mistaken concept could not easily survive if economists would give attention to what Henry George had to say about the two kinds of value, namely (1) value brought about through exertion (= labor), and (2) value from obligation, to which latter class the private property in land belongs.

Incidentally, Keynes firmly expected the economy to become saturated with capital assets eventually, in which case the rate of interest would approach zero. Since land values simply are the capitalized amounts of groundrent, it would follow that these land-values would assume astronomical proportions.

Keynes, as already mentioned, wanted to see what he chose to call the euthanasia of the finance capitalist.

There is a book titled "The Future of Industrial Man" by Peter Drucker, in which the author vividly describes how far removed the present-day finance capitalist is from our production processes and problems. He is only interested in his returns, and buys and sells stocks and bonds without consideration for the continued existence and health of any worthwhile industrial corporation, if the stock market turns panicky, and the banker friends of the corporation managers cannot help out, the corporation simply goes bust.

Although stockholders have the right, and are even invited to attend stockholders' meetings, very few of them want to bother, and the business of managing a corporation is generally left to the judgment of its directors. There is no close connection and interest other than income and profit motives. Absentee ownership is not even the right word to describe it, because management is left in many cases absolutely free and unchallenged to decide policies and other important matters.

This lack of interest on the part of the stockholders may have its good side especially in prosperous times, but in a pinch there is no stockholder interested enough in the welfare of the corporation to stick to the guns, and see it through; it is every man for himself.

Many corporations make a great showing of "service to the customers, or to the public" as a sort of justification of their use of the absolute power with which managements find themselves left, and they are not altogether happy about the situation.

Our short and necessarily sketchy survey of the matter of capital formation has shown us, it is believed, that the situation is really somewhat precarious. It seems of the greatest importance for the continued health and growth of our economy -- especially since we are in such a deadly competitive struggle with another ideology -- that we should have available at all times, or can make available for almost immediate use, the capital resources of this nation needed for a rapid expansion of our industry, and in all directions.

We are constantly confronted with the necessity of making decisions between the rapid adoption of the latest, most up-to-date capital-assets, and the effect this may have on the owners of the already existing ones.

As a practical example we cite the developments in transportation from the stage-coach to the railroads to trucks and to airplanes and jet-planes. At every stage along the way, we had to discard a constantly increasing amount of capital-assets that had become obsolete through technological advances, and perhaps in some cases through a change of tastes or fashions.

This choice becomes increasingly more difficult with the greater amount of capital-assets in use, and their comparative costliness, and one result is the loud cry for government subsidies by owners of obsolete but still usable, i.e. not yet worn-out capital-assets. Today, the burden of the cost of the change-over is mostly on the individual owners of the obsolete assets.

Yet another consideration should make us sit up and take notice. It may be thought to be economically advisable, or strongly desirable, if not even politically or for defense reasons unavoidable -- just as an example -- to change our existing power generating system over to one of the nuclear types. This would necessitate a rather large outlay of capital, and possibly within a very short time.

Perhaps the government would step in again with a replica of the Defense Plant Corporation plan known from World War II But that would bring us back to government financing of private industry.

On the side of private investment, our industrial corporations are exposed to the whims and sometimes to the unreasoning fears -- or boundless optimism -- of the stock market. We also have government interference at short notice, or no notice at all, in the sudden changes of interest rates, bank reserve requirements, and other Federal Reserve System or U.S. Treasury manipulations of the money market, with the ensuing instability of the entire financial structure.

The individual stockholder is cut out more and more, partly because of the self-financing operations of large corporations partly by the investment of large financial institutions, such as were mentioned before: the pension funds, life insurance companies, etc.

The rate of interest as a return to capital, which is supposed to result from an interaction between the supply of money in the form of savings and the marginal efficiency of capital in the production process, cannot show its true level. This level is falsified by the existence of our huge public debt, by the inclusion of rent-of-land, and also by government interference to fight inflations or help business recovery, as already stated. And the measures taken by the monetary authorities for the purpose of fighting inflation are not effective as far as the large self-financing corporations are concerned. It is therefore not surprising to find economists and lawmakers increasingly insisting on the nationalization of our banking operations and capital formation. But all too well known are the compulsion, coercion, red tape, etc. connected with such an institution. A bureaucratic government agency can never replace the flexible, efficient private banking system. What then would be a better solution of this dilemma?

To what I am going to propose there will, quite naturally, be strong objections; that is human nature. The eight hour day, abolition of child labor, even the abolition of slavery were one and all preceded by the strongest protestations of impracticability.

I am taking my stand, however, on the maxim stated by the Austrian scientist and philosopher, Dr. Rudolf Steiner:

"The human life can only be lived in its fullness when moral imaginations are given their place in our lives."

The idea of collecting the rent-of-land in lieu of taxes for government revenue springs from this fountain of moral imaginations. The movement which espouses this idea, wants to remove rent from the private domain to the common -- not government -- domain; and then, as a distinct second step, this rent would be turned over to the government for the defraying of its expenses, mainly to pay for the services which the government performs and which services throughout benefit the land -- all land in varying degrees. Through this second step it follows that in as much as each citizen has the right to an equal share in the total rent, each contributes his equal share to the government. This arrangement would plainly meet £he requirement that each citizen should contribute something to his government which is voiced so frequently in discussions concerning matters of tax equity and tax base.

With these considerations in mind, it seems logical to likewise have resort to the common domain to obtain the needed funds for capital investment.

It would then be necessary for our elected representatives in Congress to stipulate the total amount so to be used and allowed. This total amount would be arrived at conceivably with the advice of economic organs -- not governmental ones -- that is, organizations whose members come only from industry and commerce. In this way, an upper limit for the total annual amount of Investment to be used for the expansion and growth of our American industry could easily be ascertained. It will perhaps be a compromise between what industry representatives will think necessary, and Congress decides can safely and comfortably be allowed to be so used out of our gross national product.

It would then also be necessary to see that all business profits beyond the replacement and/or up-keep of existing production facilities, and of course, after taxes, be distributed in wages, salaries, and dividends, or better yet, by lower prices.

The economic organs mentioned should then decide among themselves the allocation of the total allowed amount for new investment, and this without any Interference by government organs or officials.

The individual industrial or commercial concerns could continue to arrange for the loans in the allotted amounts with their banks as heretofore, and negotiate the form of collateral, bank service charge, amortization, etc.

The rate of interest of these loans, for which the name Social Credit loans seems most applicable, but here with an entirely different connotation of the term from that used by Major Douglas --should preferably be set by the monetary authorities, and should, after deduction of the premium for risk, revert to the common domain and thence to government as an offset to taxes to compensate the producer-consumers for the sacrifice in purchasing power by making this credit available to industry and commerce.

Practical considerations would probably require to set a minimum amount of assets for the individual corporations below which the financing would not come under this operation, say perhaps $250,000 as a suggested figure. This would leave considerable scope for private investors to venture into small new enterprises. And since we conceived as rent being collected by government in lieu of taxes, small businesses would have an excellent chance for success for these reasons:

(1) It would be unnecessary to tie up large funds for land - and resources in and on land -- since only the annual rent value would have to be paid. This annual rental value would be less than the Interest on the speculatively inflated purchase price. Also no additional amount would have to be set aside for the amortization of the principal.

(2) Business taxes would largely be eliminated through the collection of rent by the government.

(3) Opportunities would be equalized for large and small businesses since all will have to carry the same charges on the resources and land, and no one concern would have an economic advantage by dint of cornering the limited supply (limited by nature!). This latter point should appeal especially to our sense of fair play.

With this proposed measure of Social Credit we would at once do away with our concern for liquidity preferences, propensities to consume, and meet with Keynes' desire for the almost complete euthanasia of the finance capitalist.

It may be objected that what has been outlined here is the concern of the social reformer, not that of an economist, or student of economics. However, the reformer can only see static systems or modes, and he desires to replace one with another, a better one to him, of course. While the true economist should try to fathom with "moral imagination" the changing sequences in the development of the social-economic organism. The state of this organism should reflect at any time not only the satisfaction of the immediate material needs, but in a wider sense also the higher aspirations of its members.

Another objection to the proposal could be made by citing our well advertised aversion to any planned economy. To this the answer should be:

In a mature economy it should be possible to overcome the immature and puerile attitude which asserts: "I want to do it my way regardless of what you think of it or of how it affects you!" Besides, let us look at some features of our economy which bespeak a conglomeration of schemes and plans:

We try haphazardly to inject some sort of planning into our economy by such varied means as the import tariff; import quotas (oil!); export restrictions; stock-piling of scarce materials, or of farm surpluses; government subsidies, sometimes hidden as in reduced mailing rates; farm plans; housing projects; social security payments unemployment benefits; pension plans; government financing of certain key industries (synthetic rubber; TVA -- and similar projects; atomic and nuclear realtors, etc.); urban renewal schemes; taxation with all its ramifications of attempts to restrict the consumption of certain articles (tobacco, alcohol), or redistribution of income because of faulty distribution in the first place; rehabilitation of workers in defunct industries; money and credit manipulations by the Federal Reserve System and the U.S. Treasury; the National Budget, etc. etc.

The matter of capital formation and investment should sensibly be handled by letting those decide who should and do know where to place these investments, that is, by the men whose business it is to keep our industry running, and at a profit.

The proposed controls, if one can speak of them as controls, are of an over-all nature, and will not interfere with individual decisions over how to use the funds. They will limit the extent of the investment in new plant to prevent overshooting the mark as is so often done to the detriment of the entire community.

The allocation of funds can be compared to a family's budget where every member full well knows that the limit is considerably this side of the blue sky, but where complete freedom exists to choose either maccaroni or lima beans, pork or veal, cabbage or lettuce, and the item for recreation and amusements does not have to be spent only for movies.

The suggested price for the stabilization of our economy surely does not appear high. It should be noted that the term "stabilization" as used here is not to mean "fixation". Rather it is to signify the re-establishment of free play of economic balancing forces, and the avoidance of a top-heavy situation such as is brought about especially through monopoly in land and natural resources.

NOTE

An applicable definition of the economic organs mentioned in this text would be the one given by Dr. Benediktus Hardorp in his "Elements for a Re-determination of the Function of Money": 'The term "association" is to be taken to mean any and all social organs whose purpose it is to bring about a social consciousness so that the individual members are enabled to gain insight into basic social-economic situations and problems and their possible solutions, and have the possibility to come to freely conceived decisions regarding these situations and their contractural ordering.'