Consequences of Dollar Debasement

LET US BEGIN BY RECALLING TWO COMPARISONS already mentioned. From the end of 1939 to the end of 1968 the United States’ stock of money (hand-to-hand currency plus demand bank deposits) has been increased more than fivefold—from $36 billion to $193 billion. In the same thirty-year period (in spite of a huge increase in industrial production), prices of goods and services increased by an average of 164 per cent.

This debasement of the dollar resulted in a succession of problems, including a chronic “deficit” in the American balance of payments.

The “balance-of-payments problem” has arisen not merely because of our domestic inflation but because of the combination of this with the so-called “gold exchange” standard and the world monetary system set up at Bretton Woods in 1944. Under that system each government undertook to keep its own currency unit within 1 per cent of parity in either direction by buying or selling that currency against other currencies in the foreign exchange market. In addition, the United States Government undertook to make the dollar the world’s “reserve currency” and anchor currency by guaranteeing to keep it convertible at all times (for foreign central banks, but not for its own citizens) into gold at the fixed price of $35 an ounce.

Though only central banks, and neither American nor foreign private citizens, have the right to ask for this conversion, keeping the dollar convertible into gold at this fixed price has proved increasingly embarrassing to our monetary authorities, especially since 1957. During the last decade we have been sending or spending abroad for various purposes—to pay for imports, for foreign aid, and for the support of our armed forces in Europe and in Vietnam—billions of more dollars each year than we have been getting back in payment for our exports and earnings on our capital invested abroad.
This excess of outgoing dollars is called the “deficit” in our balance of payments. From the end of 1957 to the end of 1967 this deficit ran at an average of $2.8 billion a year. At the end of 1968 the cumulative total was in the neighborhood of $30 billion. In early 1969 the deficit on a “liquidity” basis was running at an annual rate of $6.8 billion.

As a result, our monetary gold stock had fallen from $22.8 billion at the end of 1957 to only $10.4 billion in July, 1969. Against these reduced gold reserves the United States had liquid liabilities to foreign official institutions of $10.8 billion, plus short-term liabilities to private foreigners of $22.6 billion—a total of nearly $34 billion.

In much discussion our dollar liabilities to private foreigners are not counted as a potential demand on our gold reserves because private banks, firms, and individuals cannot directly demand gold for their dollars. But under the International Monetary Fund agreements they can always indirectly sell their dollars at par to their respective central banks.

In sum, against United States gold reserves of only about $10 billion there are more than three times as many potential foreign dollar claims for gold.

As our gold has drained out, and as foreign dollar claims against it have mounted, the blame has been put on this “deficit” in our balance of payments. But instead of dealing with the main cause of this deficit—domestic inflation—our governmental authorities have allowed the inflation to go on, and have even increased it, while trying to stop the symptom. They have treated the deficit in the balance of payments as itself the problem, and have adopted desperate measures to try to halt it by direct controls.
Their first major control, imposed in 1964, was a penalty tax on purchases by Americans of foreign securities. To make such foreign investments the culprit responsible for a balance-of-payments deficit was not only arbitrary but implausible on its face. In the five years 1958 to 1962 the aggregate net outflow of $16.6 billion for new foreign investment was offset by $15.4 billion of income from previous investment. Even the Secretary of the Treasury, who had asked for the penalty tax, conceded: “In the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned on that capital.”

He urged the tax, in fact, “only as a temporary measure to meet our problem pending more fundamental solutions.” Of course the more fundamental solutions were never adopted, so not only was the “temporary” security tax renewed, but on January 1, 1968, the President added mandatory controls on direct investments by American corporations abroad.

The implication of these measures is that our private foreign investment has been one of the chief causes of the deficit in our balance of payments. This is clearly untrue. It is Federal spending, through foreign aid and military outlays, that has been in deficit. In recent years the private sector as a whole, as a result of export surpluses and income on private investments abroad, has continued to generate a payments surplus.

In 1967 our total new foreign investments—including bank loans, purchases of foreign securities, and direct investments in factories and sales facilities—amounted to $5.6 billion. But the income from these and earlier private investments came to $6.2 billion.

At best, then, all these foreign investment restrictions and prohibitions are shortsighted. Any reduction we make in new foreign investment today means a corresponding reduction in investment income tomorrow.

If the Federal Government, instead of picking foreign investment as the culprit chiefly responsible for our balance-of-payments deficit, had put punitive tariffs on the further import of foreign luxuries—liquors, wines, perfumes, jewelry, furs, and automobiles—its action would still have been a mistake, but much less damaging to our future economic strength. These tight curbs on direct foreign investments by American corporations must severely hamper their ability to compete successfully with other international corporations in Europe and the rest of the world.

The President’s own Economic Report of 1967 pointed out that: “U.S. investment abroad generates not only a flow of investment income but also additional U.S. exports. From a balance-of-payments point of view this is an additional dividend.” The U.S. Department of Commerce found, in fact, that in 1964 $6.3 billion, or 25 per cent of our total exports in that year, went to affiliates of American companies overseas.

It is hardly too much to say that direct foreign investments, with the exports and income to which they give rise, are the greatest single source of long-range strength in our balance-of-payments position.
Still worse, from the standpoint of their direct restriction on personal liberty, were the Johnson Administration’s proposals (fortunately not enacted) to have Congress impose practically prohibitive penalty taxes on Americans travelling abroad.

The whole effort to eliminate our balance-of-payments deficit by direct controls over arbitrarily selected individual items is doomed to failure. Such controls may succeed in changing the relative amounts of different items, but cannot change the end result. At best we can make our immediate balance of payments look better at the expense of our future balance. We cannot unilaterally cut down our purchases or travel or investments abroad without also cutting down our sales abroad and our investment income from abroad. In his Economic Report of 1968, President Johnson himself conceded that “by provoking retaliation” we may “reduce our receipts by as much as or more than our payments.”
The whole so-called “balance-of-payments problem” would never have arisen except under the arbitrarily contrived International Monetary Fund gold-exchange system set up at Bretton Woods in 1944. It could not exist if the United States and other countries were on a pure “floating” paper standard with rates fluctuating daily in a free market, because under such a system the fluctuations would themselves set in motion the self-correcting forces to prevent unwanted deficits or surpluses from arising. Nor could the balance-of-payments problem exist if the United States and other leading countries were on a full gold standard. A “deficit” in the balance of payments would then lead to an immediate outflow of gold. This in turn would lead to immediately higher interest rates and a contraction of currency and credit in the “deficit” country, and the opposite results in the “surplus” countries, and so bring the so-called deficit to a halt.

Under the Bretton Woods system and the “gold exchange” standard, however, no self-correction of this sort is allowed to take place. When we “lose” paper dollars abroad we simply print more at home to take their place. And when Europe gains these dollars they find their way into the central banks, where they become additional “reserves” against which the European governments issue still more of their own currency. Thus further inflation, in both the “deficit” and the “surplus” country, seems to take place automatically.

In the IMF system there are no freely fluctuating market rates for individual currencies to reveal and correct international imbalances. Market rates are not allowed to fluctuate by more than 1 per cent above or below parity. At that point each government is obligated to buy or sell its own or foreign currencies to prevent any further departure from parity.

These currency-pegging operations are supplemented by the so-called gold-exchange standard. This arrangement, which goes back to international agreements in 1921 and 1922, permits central banks to count not only their gold but their holdings of dollars (and of British pounds) as part of their reserves. The arrangement was adopted in the belief that there was a “shortage of gold” and a “shortage of international liquidity.” As a result the world’s monetary “reserves” today consist of about $42 billion in gold plus about $28 billion of “reserve currencies,” of which more than $15 billion are American dollars. As credit and other currencies are issued against these reserve currencies, the reserves themselves are inflated.

The real reason the American monetary authorities fear a continued “deficit” in the balance of payments is that they have given the central banks of other countries the right to demand gold for their dollars at $35 an ounce. They have seen more than half our gold reserves flow out in the last twelve years, and they are fearful of losing any more.

They long ago persuaded the Federal Government to prohibit American citizens from holding or asking for gold. In the last few years they have resorted to increasingly desperate expedients. Where possible, they have brought political pressure on foreign central banks to keep them from asking for gold for their dollars. Early in 1968 they stopped feeding out gold to hold down the price in private markets in London, Paris, and Zurich. They now try to maintain an inherently unstable two-price system, with official monetary gold at $35 an ounce and non-monetary gold free to sell at whatever price supply and demand fix.

Early in 1968 the Administration also got Congress to abolish the remaining gold-reserve requirement of 25 per cent against Federal Reserve notes, on the plea that this was necessary to reassure foreign central banks by making all remaining United States gold holdings available to them. But what this action really did was to remove the last legal limitation on the amount of paper money that the Federal Reserve system may issue.

Finally, the American government has pressed for the creation by the International Monetary Fund of “special drawing rights” (SDR’s), or “paper gold,” to “supplement” dollars as international reserves. The only thing this purposely complicated scheme can do is to adulterate reserves still further and make it possible for nations to issue still more paper money against these paper SDR’s, which are declared with a straight face to be just as good as gold if not better.

All these schemes are unsound, and in the end all of them will prove futile. The truth is that no solution of the monetary problem, national or international, will be possible until inflation is stopped, and that it will not be stopped as long as we have the welfare state.

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We Owe It To Ourselves

AT THE OUTBREAK OF WORLD WAR I, THE NATIONAL debt amounted to only $1.2 billion. At the end of 1919 it had swelled because of that war to $25.5 billion. But there was a national sense of responsibility about it. Prudent policies were followed. Successive Republican administrations reduced it at a rate of nearly $1 billion a year, so that at the end of 1930 it was down to $16.2 billion.

But then, well before we got into World War II, welfare spending started to soar. There was no effort to balance the budget; the cult of deficits prevailed. At the end of fiscal year 1941, five months before Pearl Harbor, the public debt was at the then record level of $55.5 billion. We ended the war with a public debt of $260 billion, but this time there was no important reduction, except almost by accident in 1948 and 1951. Chronic deficits have now brought it up to $363 billion.

It is amusing to recall the rationalizations that accompanied each succeeding deficit. At first each presidential message would solemnly estimate a surplus for the next fiscal year, which always turned out to be a deficit before the year was over. Next, the budget was always to be balanced sometime in the next couple of years—but, of course, not now.

Then a new doctrine began to be put forward. It set up a straw-man: the conservative who allegedly insisted that the budget must be balanced every year, come hell or high water. Ah no, this new doctrine replied; the budget need be balanced only over a period. But the high priests of the new doctrine never got around to specifying just how long the period should be, or just when it would be safe to begin to show a surplus again. They showed no ardor for sticking to the arithmetic even of their own proposals. If, as in the eight years 1961 through 1968, there was an uninterrupted average administrative deficit of $8 billion a year, shouldn’t there be an average surplus of $8 billion a year for the next eight years?

The argument for a budget balanced “over a period” has, in fact, been quietly dropped. In its place is the argument that the budget should never be balanced when there is less than full employment, or even when there threatens to be less than full employment. And this again has become in fact an argument for a perpetual deficit. For though President Johnson’s economic advisers called for and got a tax increase (but never called for a spending cut), no one dreamed of suggesting a surplus, or even a balanced budget. In presenting his budget for the fiscal year 1968, for example, President Johnson planned a deficit of $4.3 billion in the cash budget and of $8.1 billion in the orthodox administrative budget. (The actual administrative deficit turned out to be $25.4 billion.) “To seek a lower deficit or a surplus” for 1968, he warned, “would be unwarranted and self-defeating” because it would “depress economic activity.”

The implication of this whole philosophy is that it is dangerous even to balance the budget, and that so far from trying to pay off or even reduce the national debt, we should permit a perpetual increase.

Let us look at what this has already meant for annual interest payments alone. They have doubled in the last ten years—from $8.3 billion in 1960 to $16 billion in 1970. Thus interest payments alone are every year greater than the entire amount it took to run the government in 1941, and more than five times as much as was required to run the government in 1929.

In 1932 Candidate Franklin Roosevelt was alarmed because the national debt had increased by $3 billion in the preceding two years. But for a generation the size and growth of the national debt have been lightly dismissed with the argument that “we owe it to ourselves.” This was presented in the Nineteen Thirties as a brilliant discovery of the “new” economics; but the argument is so old that it was familiar to the great British philosopher David Hume, who answered it in a brilliant essay in 1740: “The practice of contracting debt will almost infallibly be abused in every government . . . We have indeed been told that the public is no weaker upon account of its debts, since they are mostly due among ourselves.” But Hume then went on to point out that the creditors who received the interest on the debt were by no means the same people as the taxpayers who had to pay it, and that practically no one paid and received exactly the same amount. The tax burden fell mainly upon the active workers and producers, and hampered production. “If all our present taxes be mortgaged,” he asked, “must we not invent new ones? And may not this matter be carried to a length that is ruinous and destructive?”

“I must confess,” he also wrote in the course of his essay, “that there is a strange supineness, from long custom, creeped into all ranks of men, with regard to public debts,” so that hardly anyone dared to hope that substantial progress would ever be made in paying them off. We find plenty of evidence of this complacency today. Academic economists even vie with each other in trying to prove that the situation is after all very good.

A favorite argument of the last few years is that “the nation is growing faster than its debt.” This is “proved” statistically. In the table below, for example, I merely bring up to mid-1969 some comparisons presented (in billions of dollars) by one academician in 1964:

1945

1969

National debt

$260

$359

Gross National Product

$212

$925

Debt as burden on GNP

123%

 39%

So we might advance triumphantly to the conclusion that the national debt, when viewed as a burden on a year’s production, has been cut by two-thirds since 1945!

The conclusion would be technically correct, but complacency would be unjustified. The reason the national debt is less of a burden is that, through inflation, the purchasing power of the dollar has been steadily reduced. It has been reduced 65 per cent since 1933 and more than 50 per cent since 1945. Let us state this another way. By failing to balance its budget, by borrowing, by monetizing the debt, by printing more dollars, by steadily diluting the dollar’s purchasing power, the government has in effect repudiated 65 cents of every dollar it borrowed in 1933 and 50 cents of every dollar it borrowed in 1945.

To put it bluntly, the government’s creditors have been swindled.

Adam Smith, writing in 1776, was perfectly familiar with this method of disguised repudiation. “When national debts have once been accumulated to a certain degree,” he wrote, “there is scarce, I believe, a single instance of their having been fairly and completely paid.” But governments usually covered “the disgrace of a real bankruptcy” by the “juggling trick” of “a pretended payment” in depreciated money.

So the relationship that seems to give some present-day writers so much satisfaction—that the national debt, in dollar terms, has been falling in relation to the gross national product in dollar terms—is simply the outcome of the steady depreciation of the dollar. The more inflation we have, and the more the purchasing power of the dollar is depreciated, the more the national debt will “fall” in relation to the GNP, because the GNP, measured in soaring prices, will rise in relation to the dollar debt.

Do we have any serious intention of ever paying off our national debt in dollars of at least present purchasing power? If so, isn’t it about time we begin to balance the budget and make an honest start?

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Salvation Through Government Spending

IN THE EARLY NINETEEN THIRTIES, IN THE DEPTH OF the Great Depression, the theory became fashionable that the cause of all depressions was Lack of Purchasing Power. The people just did not have enough money, and because of unwarranted pessimism they were refusing to spend enough even of what they had. The solution was therefore simple: at such a time the government should boldly increase its own spending, “prime the pump,” and “get things moving again.”

Naive advocates of this theory assumed that more government spending was the whole answer. The more sophisticated advocates saw that the increased spending would not give people more purchasing power if the government kept the budget balanced and took it all away again in higher taxes. The thing to do was to spend more without taxing more. The trick, in other words, was deliberately to unbalance the budget—to run a deficit.

Most of the champions of deficits—including the eminent John Maynard Keynes himself, the theory’s chief architect—at least publicly professed to believe that the required deficit could be financed by selling bonds directly to the public, to be paid for out of savings. But again, the more sophisticated deficiteers must have seen that a man who buys a $1,000 bond out of his savings surrenders that much purchasing power for the life of the bond. In short, he loses just as much buying power as the government gains. On net balance, no new buying power has been created.

How, then, can the government “create” new purchasing power? It can do so only if it does not increase taxes at all, but “sells” its bonds to the banking system, and if the banks “pay” for them by creating deposit credits on their books in favor of the government. This leads to an increase in “the money supply”—that is, an increase either in the amount of currency or of demand bank deposits.

If the government’s new bonds are sold directly to member banks, there tends to be a dollar-for-dollar increase in the money supply compared with the amount of new bonds. But if the government’s securities get into the hands of the Federal Reserve Banks, they are used to create what is called “high-powered” money. This can lead to the creation of about $6 of new money for every dollar of new government securities.

It is not easy to give a satisfactory but short explanation of the reason for this to readers without any previous knowledge of monetary theory. When member banks “buy” government bonds and “pay” for them by creating a deposit credit on their books against which the government can draw, they are adding to the nation’s supply of purchasing media. They are creating money out of government promises, and some would say they are creating money out of thin air.

Now if a member bank that has bought such government bonds sells them to its regional Federal Reserve Bank, it can ask that Reserve bank to credit the proceeds to the member bank’s reserves with that Reserve bank. But if the member bank is a “city bank,” it is required to keep a reserve with the Federal Reserve Bank of only 16½ per cent against its net demand deposits. This means that the member bank is entitled to lend, and so create demand deposits for, about six times the amount of its reserves with the Federal Reserve Bank. That is why money created directly or indirectly by the Federal Reserve Banks is called “high-powered” money.

Thus new “purchasing power” is brought into being. Thus people have more money to buy more goods, create more jobs, stimulate more output, and restore prosperity.

At least so it seems for the moment. But soon there are other consequences.

If there have been heavy unemployment and much “idle capacity,” the new monetary purchasing power in the system, by increasing the demand for commodities, may indeed lead to an increase in production, and hence to an increase in employment. This has been hailed as the great Keynesian contribution to economic theory and policy. But there are fatal flaws in it.

Unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other—the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play.

The reason the Keynesian medicine can work—under special conditions and for short periods—is that by increasing monetary demand and prices it may increase both sales and profit margins, and so restore production and employment. Yet this could be done even more effectively—and without the poisonous side-effects and after-effects—by restoring freedom of competition and individual coordination of prices and wages.

The Keynesians think in terms of aggregates. Their remedy is to increase the total money supply, and thereby to bring the price “level” sufficiently above the wage “level” to restore or maintain profit margins and so keep the wheels of industry spinning at full speed.

This remedy is defective in two respects. It tacitly assumes that there is a uniform discrepancy between prices and wages and a uniform percentage of “idle capacity” throughout industry. Neither is true. If “industry” is estimated to be operating at 80 per cent of capacity, we must remember that this figure is at best an average. It may cover a situation in which, say, industry A is operating at only 60 per cent, industry B at 63 per cent, and so on up to industry M at 97 per cent and industry N at 100 per cent. If we try to expand the money supply enough to return industries A and B to full capacity, we may completely “overheat” industries M and N and produce serious productive distortions and bottlenecks.

What is more, an increase in the stock of money, contrary to Keynesian theory, will begin to force an irregular increase in prices long before “full capacity” has been reached and the “slack” taken up—if only for the reason that the “slack” is never unifrom throughout industry. In a very short time, also, with the increase in prices and the increase in the demand for labor, wages will start climbing too. Then, if the previous trouble was that most wages were already too high in relation to most prices, there will again be discoordination between wages and prices; and the Keynesian prescription will call for still further doses of government spending, deficits, and new money.

So the Keynesian medicine must lead to chronic deficits and chronic inflating of the money supply. This is precisely what we have had. It is no accident that we have just run eight annual deficits in succession, and that we have had 32 deficits in the last 38 years. It is no accident that the U. S. money supply (currency plus demand deposits) has been increased more than fivefold—from $36 billion at the end of 1939 to $199 billion in September, 1969. And so it is no accident that, in spite of a tremendous increase in industrial production in this thirty-year period, consumer prices have increased (to June, 1969) by 164 per cent.

Today the Federal Government is spending in a single year 269 times as much as in the fiscal year before the outbreak of World War I. The recent increase in annual spending is being attributed by government spokesmen to the cost of the war in Vietnam. Yet though in 1970 scheduled national defense expenditures are $35.6 billion greater than in 1960, total expenditures are $103.1 billion greater. This means that non-defense expenditures alone have increased $67.5 billion in the same period. It is not the war, but the determination to impose the welfare state, that has led to this incredible squandering.

A central fallacy of Keynesianism, as of all inflationary nostrums, is that they chronically confuse “income” in terms of paper money with real income in goods and services. It is possible to increase paper-money income to any amount by debasing the currency. But real income can only be increased by working harder or more efficiently, saving more, investing more, and producing more.

So let us not be too impressed by politicians who constantly cite the increase in dollar incomes, in dollar “gross national product,” to show that we never had it so good. In Italy today, as a result of past inflations, it takes 624 lire to buy an American dollar. So anyone in Italy with an annual income or even total property worth more than $1,600 American dollars is already a millionaire in his own currency.

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Instant Utopia by Henry Hazlitt

IN AMERICA TODAY MOST OF THE OLDER GENERAtion—and many of the young—stand appalled at the nihilism of the self-styled Now Generation and its demands for unattainable reforms, or merely for the sheer destruction of whatever is established.

But the cynicism, nihilism, and revolt of “youth,” and even of some of its parents, are the result of a common cause. In the last generation politicians and governments have been promising the voters that they could not only bring perpetual full employment, prosperity, and “economic growth,” but solve the age-old problem of poverty overnight. And the end result is not merely that accomplishment has fallen far short of promises, but that the attempt to fulfill the promises has brought an enormous increase in government spending, an enormous increase in the burden of taxes, chronic deficits, chronic inflation, and a constant loss in the buying power of the people’s earnings and savings. “Social Security” has brought an ominous increase in social insecurity.

Another result of the promise of instant utopia has been a gigantic growth of governmental power—of interference in the details of everybody’s business and everybody’s life. As this power has increased, it has also become concentrated in fewer and fewer hands. In America the towns and villages have steadily lost power to the States, the States to the Federal Government, and Congress to the President.
One mark of the welfare state everywhere has been the gathering of power into the hands of one man. This is no mere unfortunate coincidence; it has been inevitable. Thirty-six years ago the eminent Swedish economist Gustav Cassel explained in a prophetic lecture how “planned economy,” long enough continued, must lead to despotism:

The leadership of the State in economic affairs which advocates of Planned Economy want to establish is, as we have seen, necessarily connected with a bewildering mass of government interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such policy will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason Planned Economy will always develop into Dictatorship.

The succeeding chapters of this book explain in detail the ideology and methods behind the present inflation and aggrandizement of State power, the conditions to which it has led and, finally, the solutions we must apply if this sinister threat—not only to the economic future of the American people but to the future of civilization itself—is to be averted.

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The Gospel According To Marx

The Fourierist adventure was the last of those gaudy Utopian dreams to flourish in America. While the philosophers, professors, poets and other literati dallied with this nonsense, a much more formidable philosophy was being kindled in Europe. The machine age created a new landscape which was enticing hordes of peasants into the cities and their slums. Long hours, grimy mills, the hazards of cumbersome machinery and the intervals of depressions and booms all created a variety of human problems for a new school of social reformers. There was no place in this new machine age for these enclosed Utopian heavens. Socialism, which had been a dreamy cult, began to have a sharper relevance to the new age.

No one with a grain of the humanitarian spirit could support the thesis that all was well in Western Europe and, for that matter, in the new mill cities of America. The new socialist reformers began to talk about revolution, which would bring the workers into the streets of European cities in a bid for political and economic power. This new demand was for a transfer of the instruments of production and distribution—the economic apparatus of society—to the hands of the State.

Karl Marx became the great apostle of this faith. He said crisply his task was not the setting up of Utopias. And, in time, with his friend Engels, he produced what would become the gospel of socialism—the Communist Manifesto. This famous document contained a number of mere humanitarian and other reforms, such as bringing wasteland into production, improving the soil, free education, an end of child labor. But the heart of the Manifesto was not in these reforms but in its revolutionary demands. These called for (1) abolition of private property; (2) abolition of inheritance; (3) confiscation of the property of immigrants and rebels; (4) state ownership and operation of transportation and communications; (5) a heavy graduated income tax; (6) a gradual extension of the transfer of the instruments of production to the hands of the State.

This was the first concrete platform of the modern socialist revolution. Harold Laski has said correctly that Marx created the first positive philosophy of socialism, which had hitherto been a mere vague and angry protest against social abuses. Here was a doctrine, simple and appealing at once to the intellectual dreamers and the dispossessed poor. The doctrine had a powerful humanitarian appeal to minds disturbed by poverty, injustices and grave social inequalities. The older customers for Utopian heavens were quickly fascinated by the new dream. Horace Greeley, who had helped finance Brook Farm and had hired Brisbane to write about Fourierism, now engaged Marx to explain the new socialism to his readers. Later, of course, the Tribune would fall into very different hands and become the organ of reactionary Republicanism and the champion of big business. But, in recent years, it would seem that the disturbed ghosts of Karl Marx and Horace Greeley, revisiting the glimpses of the moon, rise to hover like troubled shadows over the sanctum of that obfuscated journal.

Marx had summoned the workers to unite—"You have nothing to lose but your chains.” He was talking about violent revolution. But just before this, another and more rational evangelist had launched his crusade for suffrage reform. John Stuart Mill, who had flirted with the socialist movement, declared the ballot had opened the way to rational reform. And many years later Engels, before he died, conceded that great revolutions could be effected more quickly by the ballot than by violence. Marx himself is said to have come to the same conclusion before his death. Socialism became a reform movement, its purpose being to kill capitalism one limb at a time. Even Karl Kautsky observed that capitalism can grow into socialism, which became the root idea of the gradualists, as they were known on the Continent, and of the British Fabian movement. Here it is labeled properly “creeping socialism”— that is, the piece-by-piece liquidation of the system of private enterprise, replaced by socialist enterprises until the private enterprise sector of the society crashes under the weight of its socialist partner.

It is a fact, of course, that socialism made little headway in the United States. From 1912 on, Socialist Party candidates polled several hundred thousand votes for the presidency, but never enough to constitute a real threat. Eugene V. Debs polled nearly a million (919,-799) votes in 1920, and Norman Thomas polled 728,-800 in 1932, the year of the depression crisis. After that, the Great Depression, instead of advancing the fortunes of the socialists, practically reduced their party to utter futility. The Party polled only 187,000 votes for President in 1936, and 20,189 in 1952. One might assume that the Depression actually marked the Socialist Party as one of its greatest victims. But we must never ignore the tremendous importance of the fact that while the depression wrecked the Socialist Party, it breathed new life into socialism. Strange as it may seem, the socialist movement got under way in America on an amazing scale as the Socialist Party faded out of effective life.

It is not possible to overestimate the significance of this curious twist of fate—the death of the Socialist Party and the rise of socialism as a movement in America. With the practical demise of the Socialist Party, the socialist philosophy has come to dominate the political and economic development of the United States on a scale so broad and at a gait so rapid as to give to it the dimensions and pace of an authentic revolution. The explanation is obvious. The word “socialism” conjured up before the mind of the American the total load of the socialist revolution. The socialist leaders were honest in the frank exposition of their whole purpose which was to enthrone the central State as the political ruler and economic employer of everyone. The American people, despite their loyalties to one party or another, had no illusions about the politicians who ran them—corrupt, selfish, wasteful, crude, incompetent. The havoc they had wrought upon city and state governments was a favorite theme with journalists of every school. The idea of installing them not only in our political activities but in all our vast economic agencies appalled the average informed American disgusted with the incompetence and rascality of the politicians. They had no taste for handing over to them all the great instruments of production and distribution of wealth.

A people who were deeply moved by the slogan “Throw the rascals out” in our city and state and federal governments, exhibited no hospitality for the suggestion that the rascals be invited into all the industrial and economic installations of the nation. Yet, today in America, with the demise of the Socialist Party, the socialist philosophy has come to dominate the society and government of the United States on a scale so broad as to become the foremost challenge to our whole philosophy of organized life and our liberties as well. Of course the professional politicians remain in power, corruptly armed as never before. The Socialist Party has practically disappeared, but the professional politician, interested in power, has become suddenly enthralled with the weapons put into his hands—the vast flood of government taxes and borrowed funds to be spent on jobs for the faithful. Thus this old-fashioned politician, with these socialist weapons in his artillery, is enabled to purchase the support of businessmen as well as workers, the growing legions of revolutionary teachers, writers and publishers and, of course, the numerous minority groups dedicated to the interests of various pet nations and the several types of one-worldism. And so while the old-fashioned socialist disappears, this new brand of socialism, under the false label of Social Planning, is taken over by the professional politicians of both parties.

In what has gone before, I have sought to clarify a group of factors and principles which are essential to a clear understanding of our present difficulties. I have set it down as a fact that the American Republic, after nearly a century and a half of its history, has been subjected to a profound and revolutionary change.

In expounding this thesis, I have attempted to make a clear picture of that thing we call the State—which is the corporate soul of the population in an actual political structure. The State uses a thing called government as the instrument of order and control. Government is an apparatus of power—power to make the rules and to enforce them. Government itself, therefore, throughout history has been a problem of the first order, for it is the institution which possesses the corporate authority to rule its citizens wisely and justly and freely or to exploit and oppress them. This danger arises from a thing called the Administration—the organized collection of human beings who at any given time has in its power the apparatus of government. The great problem of civilized man has been to erect a government over a society, in the hands of an Administration he can control—a government which will have the power to protect the citizens but without the power to exploit or oppress them.

The solution of this problem, we have seen, was attempted throughout history with varying forms of government, but never with any real or lasting success. The problem was settled in a very real sense only in America. And this was done, as we know, by breaking up the apparatus of government into a number of separate machines or instruments of power. To describe it as it was up to 1932, there were 48 separate state governments—48 small republics—absolutely independent and getting their sovereign power from a charter prepared by themselves. They were supreme in their own dominions. There was an overall republic, with highly limited power—the federal republic—which could do nothing save what the states specifically authorized in the Constitution. The vast power of sovereign authority over the lives of men was deposited in no one central government. No one group of administrators had in its hand anything more than a fraction of the sovereign authority of the republic. The purpose of this, as I have stated several times here, was to give the people all the government a free society required, but so disposed that no one powerful central administration could gather all powers into its hands and use them to oppress the people.

What is more, the greatest care was taken that no alteration in this great institution could be made, no powers taken from or given to either the states or the central government without a formal change in the great charter itself—the Constitution. And this continued to be the form of the American government until the year 1937, when Mr. Roosevelt began his second term. In the years since that time, this republic has been dismantled from top to bottom and a wholly new kind of government—a government of usurped powers—has been set over us. Finally, it was humanly impossible for any administration to set up a socialist government in the United States because of the Constitution. A socialist government could be established only by formally amending the Constitution and conferring vast powers upon a central government which it did not possess under the Constitution, and by liquidating those sovereign powers of the states.

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Revolution And The Intellectuals

This idea has an immense and explosive appeal to a certain type of intellectual. I do not, of course, imply that all persons of large intellectual calibre are seduced by this fuzzy philosophy. I do say that it is an occupational disease of intellectualism. Silicosis is an occupational disease of coal miners, but only a fraction of them succumb. It is probable that the vast majority of so-called intellectuals are well-balanced, sober-minded people who do their work with interest and satisfaction without any disturbance in their mental balance. One frustrating condition, of course, is the comparatively small financial return to workers in the field of the mind—teachers especially, as well as journalists and a large number of writers and run-of-the-mill scientists. There are among these persons a number who resent the disparity in the salary of the professor of philosophy or history compared with the unlearned member of the board of trustees or the school board who earns as much as half a dozen teachers put together. There is something wrong, they feel, in a society which pays $50,000 to a bank president and only six or seven thousand dollars to a professor of economics or English poetry.

There is another mental disturbance involved in this problem. It is sometimes the case that a gentleman who knows how to split an atom or even compose a majestic symphony or write a book of poems of passion, may suppose that he also knows how to construct a model society on some new and gentler plan—and rule it as well. One does not run into many authentic poets who assume that their peculiar power enables them to split the atom or even understand what it is. But as every man in a free society is a citizen, he is at liberty to suppose that the role of citizenship itself qualifies him to rule or, even more, to divert himself in the intoxicating pastime of social architecture.

There is nothing new in this. The dynamic appeal in this idea cannot be understood unless we realize that it is not new and that it antedates Marx by many centuries. The building and direction of the State throughout the ages has been considered a department of philosophy by the philosophers. It is a fact that all during human history, society has consisted of the herd and the shepherd—the masses, and the monarch and lords and warriors who understood the methods of acquiring power. The intellectual, if he was present, served the warrior. There were in most early civilized societies intellectuals who gagged at this rule of the knight and the soldier. Hence they dreamed of the perfect commonwealth where they would rule the herd. The herd would be better off, not because it acquired the right to rule itself, but because of the benevolent mastership of the philosophers.

The earliest evangelist of this school was Plato. He sketched in his Republic the outlines of the perfect planned society. There would be no private wealth. All would be rich since all would have an equal “allotment” of leisure, merry-making, visiting, drinking and begetting children. There would be the Workers who would produce, the Warriors who would defend the city and the Philosophers—the Guardians—who would “bear rule.” No inhabitant would take part in government until he was 35 or 40; and after 50 the more intelligent would be chosen as guardians and would occupy their time in philosophical studies. They would form a monastic order, live in seclusion and never touch silver or gold. The artisans would have no share in government because they could not become philosophers. Here, therefore, in the early years of the ancient world, was the dream of the Dictatorship of the Philosophers.

Perhaps the most famous of these mythical heavens was Sir Thomas More’s Utopia. More was a philosopher and a dreamer who went to the block because he refused to yield to the policies of Henry VIII after the monarch’s break with Rome. In his treatise, More introduced us to a mythical navigator, Raphael Hythloday, who discovered a fabled communist island society called Utopia. The people divided their time between agriculture and industry, the whole product going into warehouses, whence each family could withdraw its share of goods. There would be no hoarding, no covetousness, no gold or silver. All ate ample meals in a common hall to which the diners were summoned by the trumpet. Children were cared for in nurseries. Every 30 families chose a magistrate and each ten magistrates chose an Over-magistrate who served for life and who chose a philosopher-prince who also ruled for life.

Not long after More, Sir Francis Bacon created another earthly paradise ruled by a “philosopher king.” Bacon, described as “the wisest and meanest of mankind” came up with a solution closely akin to that of More, who could be justly described as among the wisest and kindest of mankind. Bacon, in retirement because of his conviction of bribery, conjured out of the mystic seas his own island—New Atlantis. The center of this paradise was Salomon’s House, a laboratory where chosen students pursued the search for truth and constituted the ruling aristocracy of the island.

About the same time other Utopias sprouted—one in Italy and one in Germany. Thomas Campanella, an Italian monk, brought up from the deep a fabled island discovered by a fabled mariner—the perfect society known as the City of the Sun. Here the people were poor, because they possessed nothing, but rich because they wanted for nothing. The State was supreme and its powers were deposited with an aristocracy of learning. Here there was progressive education, to be discovered later by John Dewey. The City had seven walls on which were presented pictorially the seven regions of knowledge, so that the little children would inhale their education painlessly without going to school as they strolled the streets. Johann Valentin Andreae came up with a German version of a communist heaven known as Christianopolis. The Rulers of the City—the Commissars—would determine the needs of all for a given period whereupon the mechanics and farmers would produce them under the direction of the Commissars—representatives of religion, justice and learning—the Commissariat of the Philosophers.
The last quarter of the 18th century and the first quarter of the 19th produced the most extraordinary eruption in history of what have come to be known as Eggheads. The Egghead has been defined by Louis Bromfield as a character who pretends to the title of philosopher—a sort of professional intellectual—dedicated to the theory that the Eggheads are the appointees of destiny who will bring something known in the intellectual trade as “security” to a creature known as the “common man,”in return for which he will deliver himself to the management of a society managed by the Eggheads. The society of the Eggheads today embraces communists, socialists, rudimentary fascists, along with their wives and certain rich men’s sons and daughters, and even some corporate vice-presidents.
Near the end of the 17th century, the Age of Reason was dawning and presently the Age of the Machine would appear. The shape of the Western world would change and a newer and somewhat more rational breed of social architects would also enter the arena of ideas. But the communist philosopher with his enclosed commune would persist for a long time. What is more, the philosophers would in some instances desert the realm of fiction and begin to set up their enclosed heavens peopled by actual human beings, while others would toy with the idea of transforming great commonwealths into communist gardens of abundance and peace. Rousseau was telling France that private property was plunder and that all must return to the golden age of nature. Babeuf was teaching pure communism applied to a whole existing society, where production would be carried on by government agencies whose officers would determine what each family would have. All would dress alike and children would be taken from their parents at an early age to be instructed in the principles of the communist State.

There still were, however, dreamy philosophers making blueprints for small communities like Utopia. Etienne Cabet was a lawyer who entered the French Chamber of Deputies. He invented a mathematically precise heaven called Icaria, a commonwealth divided into 100 small provinces, each province into 10 communes. The capital of Icaria would be in the exact mathematical center. Each block would have 15 houses. The streets would be straight, the sidewalks covered with roofs of glass. The State would own all agricultural and industrial units and manage all. All would dress alike, including the women. Education would begin at five and end at 18 for boys and 17 for girls and all would work until they reached 65. Literature would be rigidly censored. Of course the inhabitants would hoose their governors from among the technicians. These would constitute a Dictatorship of the Technicians. Cabet felt his plan would require 50 years to complete in France. Blocked in that highly policed country, but impatient to begin, he decided, in 1848, to launch his experiment in—of all places—Texas. He actually gathered 1,500 pilgrims for his paradise. The Icarians, however, turned out to be human beings and began to behave as such. The first victim was harmony and Icaria dissolved.
It taxes belief to witness these masterpieces of credulity launched by men of great intelligence, but all convinced that the erection and direction of society is the peculiar mission of the philosopher, with a growing admission to the ranks of power of persons vaguely defined as technicians. What could be more bizarre than the career of Count Henri de Saint Simon, who was born in 1760? He insisted he was descended from Charlemagne. He inherited a large fortune which he lost. But he nursed his dream of glory. His valet was instructed to wake him each morning with the admonition: “Arise, Monsieur le Comte. You have grand deeds to perform.” He fought in the American Revolution and later, during the Commune in Paris, was thrown into jail as an aristocrat. In his cell his ancestor Charlemagne, he informs us, appeared to him with an interesting challenge. The august shade called his attention to the fact that in all history no family had produced both a great hero and a great philosopher. Charlemagne reminded St. Simon that he, the dead emperor, had given the family its great hero. Now St. Simon must become its heroic philosopher.

Thus urged, St. Simon plunged into speculation and made a fortune. He then studied philosophy and, to enrich his knowledge of man, he lived successively as a profligate, a pauper, and a gentleman of fashion. After this he settled down to remake the world. He wrote three volumes, the Industrial System, the Catechism of Industry and the New Christianity. There must be a new order that would guarantee jobs for all under the men of science. The striking fact about this scheme was that it attracted at once a whole rabble of professors, writers, poets, journalists, philosophers and some engineers and politicians. The president of the Constituent Assembly of France became a member, as did De Lesseps, the builder of the Suez Canal. The Ecole Polytechnique became its stronghold.

In time St. Simon drifted out of the leadership, which passed into the hands of Enfantin, an erratic exhibitionist, who abolished the institution of marriage in favor of free love, which ended the movement. The end, however, is sufficiently grotesque to be mentioned. Enfantin and twoscore leaders, some of them men of distinction, retired from the world to live an aesthetic life as a sort of monastic order, studying astrology and geology. But after a brief go at this, the order dissolved and Enfantin returned to everyday life and amassed a fortune.

These men were not fools. Many were men of great intelligence and some were driven by generous dreams of a better world. But there is a little screw somewhere near the center of the intellect which holds all its functions together in harmony so that a man may dream, yet dream within reason. When that little screw gets loose, the imagination, the reason, the senses of order, balance and proportion, seemingly begin revolving in contrary and eccentric orbits with amazing results. Shakespeare described it in Ophelia as “sweet bells, jangled out of tune.” These curious philosophic warriors might be described as “good brains, jangled out of tune.” It would be easy to name a dozen, even a full score, of eminent men—some of them in business—in the affairs of America these last dozen years who would most certainly have been members of St. Simon’s entourage and might have persisted even when Enfantin took over.

This was not an 18th-century disease. There are many among us today deeply infected with it. Take the case of Henry Wallace, a perfect example of a devotee of the cult of “intellectualism.” He has toyed in his time with almost every religion, having, in his search for peace, probed Buddhism, Confucianism and other cults. He told the Federal Council of Churches that perhaps we should be moving toward something like the theocracies of old. He finally got tangled with a curious old wandering mystic named Roerich, who concocted a hash of yogiism and various other Oriental cults. A whole collection of well-to-do American mystics gathered around Roerich, who was addressed as the Guru. One of the disciples, a Wall Street broker, built a temple for him—a $1,100,000 apartment house in which the first four or five floors were dedicated to the ministrations of the Guru. Roerich decided to go to Asia to establish a new state in Siberia. And to make the journey financially possible, at the expense of the American taxpayer, Wallace, as Secretary of Agriculture, commissioned this grotesque old faker to go to China to collect wild grass seed. But some difficulties intervened and while Roerich was in Asia, Wallace backslid and fired him. This curious adventure, which has the flavor and odor of the enterprises of St. Simon and Enfantin, took place here in our own time and country in a group led by a man who was Vice-President of the United States, and missed becoming President by only a few votes.
Associated with St. Simon was a far greater intellect—that strange recluse, Auguste Comte. He had served for a while as secretary to St. Simon, but in later life denounced him as a quack. Comte is known chiefly as the founder of the philosophic system called Positivism—the central idea being that philosophy must concern itself with knowledge based exclusively on experience. Comte had an intellect of the first order, but he was subject to periods of dark melancholy in one of which, at the age of 30, he threw himself into the Seine from which he was rescued—to resume his philosophical studies. But Comte, the recluse, felt called on to venture upon the reconstruction of the work-a-day world of which he knew little and which, indeed, he despised, and from which he gradually withdrew. Almost all the data on which this work-a-day world is based lies outside the mind of the recluse and embraces a formidable array of forces including economics, law, the table of weights and measures, the laws of gravity, the science of management and, above all, a knowledge of mankind. Comte had a system of investigation which he called Hygiene Cerebral. His method was to retire into complete seclusion, avoid people, newspapers, scientific and economic reports and devote himself to reading religious and political tracts. For setting about the reconstruction of society this was hardly a method to be recommended. Yet, little informed of the play of human, economic and political forces, he withdrew into complete seclusion to prepare a blueprint for the reconstruction of society.

Rejecting religion, he felt he had to find a substitute for it. He created a spiritual image called Humanity to replace God as the center of adoration. He sought to duplicate the images, sacrifices, rituals and external forms, including prayers, in his new church. One of his critics described his new religion as the Catholic Church minus Christianity. There would be a hierarchy, an officialdom, a priesthood, an elaborate series of feast days to excite the devotion of the faithful. But running through his whole system was the central idea that the rule of the people belonged to the philosophers who would be the clergy, as well as rulers, in this new order.

It is a fact the significance and influence of which cannot be ignored, that at the base of all these schemes of social reconstruction—from Plato to Marx—ran this idea of the Soviet of the Intellectuals. The attraction of this idea is nowhere more sharply illustrated than in the impression made by Comte’s philosophy on John Stuart Mill. But in the end the pragmatic Mill had to repudiate Comte, and his comment on this morose philosopher is most revealing. Mill said frankly that he “agreed with him [Comte] that the moral and intellectual ascendancy, once exercised by priests, must in time pass into the hands of philosophers, and will naturally do so when they become sufficiently unanimous and in other respects worthy to possess it.” But, added Mill, “when he exaggerated this line of thought into a practical system, in which philosophers were to be organized into a kind of corporate hierarchy” 19 invested with that kind of spiritual ascendancy possessed by a religious hierarchy, he could follow him no longer. He saw in it a scheme which would invest the State with a despotism which would extend to every part of society.
This pinpoints sharply the curious evil in this strange theory. First, it contemplates a society fully planned in its operations by an organized body of philosophers and administered by them. Of course this proposal ignores the solid fact that such a society or any other, when set up, will be administered not by philosophers but by politicians who possess the special talent for getting and holding power. The philosophers who created this formidable engine of power will probably all be in flight from the country or in jail.
The most illuminating episode in this weird history is to be found in our own country in that curious madness called Fourierism. Charles Fourier (1772-1837) was a traveling salesman in France. He discovered that the earth was passing out of its infancy and he contrived a plan to usher in 70,000 glorious years for mankind, when lions would be used as draft animals and whales would draw vessels through the seas. He proposed to reorganize society into groups called Phalanxes—small communities of from 400 to 2,000 inhabitants each. A central building—the phalanstery—would be surrounded by a purely agricultural community. Workers would dine in a central hall on meals prepared in a community kitchen. Each inhabitant would produce enough from his 18th to his 28th birthday to support him in comfort the rest of his life. This society would be headed by a Unarch and all the Phalanxes would be united under an Omniarch residing in Constantinople. The millennium, however, would not appear for ten years.
The most amazing aspect of this movement was not its weird simplicity, but that it crossed the ocean to America and commanded the support of many of the foremost writers and artists in this country. Its most noted convert was Horace Greeley, founder of the New York Tribune, who ran for the presidency against Grant and polled 2,834,000 votes to Grant’s 3,597,000. Greeley was recruited into the Fourierist movement by Albert Brisbane, a journalist who was engaged by Greeley to write for the Tribune about this new fenced-in heaven. Another convert was Parke Godwin, later a famous associate editor of the New York Evening Post. Charles A. Dana, editor of the Sun, and George Ripley, literary editor of the Tribune, also enlisted for this new paradise. Societies were formed to promote the new great dream and held a national convention in 1840 in which Greeley, Dana, Ripley and others took a leading part. The intellectual center of this movement was the Transcendental Club in Boston, the most exclusive rendezvous of America’s intellectual world. There Nathaniel Hawthorne, the novelist, William Ellery Channing, the great Unitarian divine, George Ripley, literary critic and encyclopedist, John S. Dwight, poet and music lover, Ralph Waldo Emerson and, among the women, Elizabeth Peabody and the famous and beautiful Margaret Fuller, breathed into the movement the inspiration of their flaming souls and their wide intellectual influence.
However, this enterprise required more than a soul. Hence George Ripley bought a 200-acre tract not far from Boston, and on it the first Phalanx was formed, known as the Brook Farm Institute of Agriculture and Education. Here its happy denizens would get employment according to taste, free education, medical care, baths, dancing and music, lectures and discussions and—of course—very short working hours. And hovering over its destinies were the master spirits Greeley, Godwin, Dana, Emerson, Thoreau, Hawthorne, Ripley, Lowell, Whittier and others. Hawthorne has idealized this adventure in his novel The Blithedale Romance. In addition to the Brook Farm Phalanx others were started at Red Bank, N.J., and one or two other spots. The phalanstery at Brook Farm was nearing completion when it was destroyed by fire. Thus the great adventure vanished—ended by one fire.
It is an interesting fact that this curious blueprint of an earthly heaven fired the imaginations of what might be called the intellectual élite of America. Ralph Waldo Emerson wrote to Carlyle in England: “We are a little wild here with numberless projects of social reform—not a reading man but has a draft of a new community in his waistcoat pocket.” It was the same in England. Social conditions cried aloud for reform and many serious and practical men were busy at that. But there was the same gaudy, giddy experimentation in transcendental economics, played up in song and poetry. Wordsworth wrote:
“Bliss was it in that fair dawn to be alive,
But to be young was very Heaven! …
To meditate with ardor on the rule
And management of nations, what it is
And ought to be; and strove to learn how far
Their power or weakness, wealth or poverty,
Their happiness or misery, depends
Upon the laws and fashions of the State.”
And Shelley mourned:
“The seed ye sow, another reaps;
The wealth ye find, another keeps;
The robes ye weave, another wears;
The arms ye forge, another bears.”
The problem, in which there was at least a grain of truth, having been stated, the next step is a leap “into the wild blue yonder.” The root idea at the bottom of this long history of reckless blueprinting from Plato to Karl Marx, Aneurin Bevan, Henry Wallace, and their disciples such as Dr. James Conant, Dr. Robert Oppenheimer and the essayists of the floundering Nation, the New Republic and the Daily Worker is that social planning is the peculiar mission of the poet, the playwright and the novelist, the scientist and the teacher generally. Obviously I do not imply that this disease afflicts all writers, teachers and intellectuals. I merely suggest that the members of these crafts, some of them dissatisfied with their share of the social dividend, are apt to offer a peculiarly sensitive incubation to these giddy ideas. In the last 20 years in America this disease has run like a scourge through our colleges and journals of opinion. The bursting egotism of the intellectual collegian, sensitive to this subject and supposing that his diploma confers on him authority to seize the world by the scruff of the neck and shake it into good behavior, may be seen in the following chant by one of our most intrepid New Deal intellectuals as he left the campus at Columbia and charged into the battle with his war song on his lips:
“I am strong.
I am big and well made.
I am sick of a nation’s stenches.
I am sick of propertied czars.
I have dreamed my great dream of their passing.
I have gathered my tools and my charts.
My plans are finished and practical.
I shall roll up my sleeves—and make America over.”
The singer of this song was young Mr. Rexford Tugwell, who inevitably found himself, with his charts and his tools, as Under Secretary of Agriculture under Mr. Henry Wallace, who himself was equipped with no end of fantastic charts and tools. But this brash and exultant proclamation of authority and capacity to blueprint and operate the economic life of a vast nation is not confined to the young collegian. Recently Dr. Vannevar Bush, president of the Carnegie Institution, informed us that what this country needs is a “natural aristocracy”a minority of eminent intellectuals who will plan our political and economic lives. This curious cult of the “Soviet of the Intellectuals” has persisted through the centuries—this fatuous notion that because a man knows how to split an atom, hunt down viruses, write an ode or compose a symphony he is best qualified to undertake the rule of nations. There can be no doubt that the intellectual descendants of that curious company of brilliant quacks who presided over the rise and fall of the great phalanstery at Brook Farm can still be found in quantity in the groves of Harvard today.

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A New Name For Socialism

By 1936 Mr. Roosevelt’s New Deal had completely collapsed. All his fantastic plans had made no serious impression on unemployment. There were practically as many unemployed in 1936 as in 1933 and far more on relief. The President complained bitterly and justly to his cabinet that “everybody tells me what is the matter, but no one tells me what to do.” The politicians were in a state of frustration and ceased to exercise any important influence on events. These events, however, would soon be shaped by a wholly different set of men who were not politicians, but resolute social revolutionaries.

These revolutionaries were not all in agreement. There were radical communists, moderate socialists, half-way socialist reformers and a whole confused army of angry and discontented critics of American business who were not too clear as to the remedy. But this much was clear. The term “communism” was odious to most people and the term “socialism” was only a little less odious. The practical disappearance of the Socialist Party in the 1936 elections made it clear that the label of socialism, as well as communism, no longer had any value in selling their philosophy. The socialist revolutionary took the advice of Edmund Wilson who urged years before “to take communism away from the communist.” Indeed, they proceeded to go further and take socialism away from the socialists. They did this by giving it a new brand label, far more enticing to the pragmatic American. They called it The Planned Economy or Social Planning. So far as I know, the launching of this idea in any effective way came in 1932 with two books. One was called A Planned Society by George Soule12 of the New Republic. The other was A New Deal by Stuart Chase.13 By 1936, just as Roosevelt’s first New Deal was in a state of confusion and frustration, these two books attracted the attention of the Leftists and, with the collapse of the Socialist Party, this new flag—a new and more alluring socialist flag—was hoisted.

It was at this point the really formidable drive to make America into a socialist society began. It is important, therefore, that we follow with the closest attention the launching of the plan. I repeat that the term “socialism” or “communism” or “collectivism” was abandoned. George Soule began his book with the assumption that capitalism had definitely failed. He knew no method of rebuilding it. Instead, the government should take over the task of planning the economic system. He proposed an Economic Planning Board. Stuart Chase in his book called it a Peace Planning Board. Charles Beard suggested a National Economic Council, with industrial syndicates under the parent body to direct our industrial and agricultural activities. Soule approved of this plan. He did not think capitalism would be got rid of suddenly. He thought we should seek to direct the rise of The Planned Society out of the ashes of the capitalist system. The next step—after taking over the great industries—would be to organize society as a whole. The State must control society as a great economic unit—a vast economic apparatus operated under the direction of the federal government.

The Economic Planners pointed to Russia as a model, though of course there were some who gagged at Russia’s rugged methods. Assuming the failure of the old system, they turned to create a Planned Society. But they urged we did not have to wait for the total overturn of capitalism. Our government could begin by taking mills, mines, land and electric power. But “every step must be a step away from capitalism.” Managers would be paid as such and profits would go into the national treasury, to be reinvested according to plan. Soule described his Planned Economy as creeping briskly over our society under the leadership of the Planners. And he was sure this could all be brought about without violence. The capitalists themselves, one group at a time, would be taxed out of the picture. The rulers would cease to have faith in their own principles. “The citadel crumbles from within; it is not merely stormed from without.”14 ( Italics added. )

Stuart Chase’s book, published at the same time, promoted the same set of ideas and hopes. He called it the New Deal, but he advocated, like Soule, the Planned Society—"The drive of collectivism leads to control from the top.” He conceded it may entail a temporary dictatorship. He was not sure we could make communists or fascists out of the present crop of American engineers, bookkeepers and electricians. He was for what he called a “third road” which “moves slowly, cautiously and away from accustomed habit patterns.” But he expected it would emerge gradually. Here is how it would function:
“At the control switches of the nation stand perhaps one hundred thousand technicians … responsible in the last analysis for the food and the very lives of 120 million people. If they should all desert the controls for as much as a few hours we should be done for. These men have an altogether realistic perception of cause and effect … Increasingly they are becoming aware of their importance in the scheme of things.”

Chase adds that the scientific attitude “tends to color the minds of industrial managers (not owners), professional men and women, skilled workers, particularly machinists and electricians, teachers, particularly in universities.” They have three grievances against our system: It impoverishes them. They have no economic security. “They are not satisfied with the capitalist way of life, frustrating as it does their integrity and canons of workmanship.” Chase did not think labor would revolt. The torch must be carried by another class, one hitherto unknown to history. Who? Who but “the men and women who have grasped the hand of science.”

How will this begin? Chase thinks we should begin by taking over the railroads, coal, steel, power, oil and other resources. That, indeed, is quite a chunk to start with. And what will this celestial abode resemble? Chase’s answer, written in lyrical phrases in 1932, sounds strangely hollow in 1955: “Here, O boys and girls who come to me and ask what you may do to serve the commonwealth is opportunity as great, as thrilling, as any generation, save”—save what? Chase concludes: “As any generation save, perhaps, in Russia has ever known.”

And what is the promise? “Thousands of exciting careers … not only in the central planning and regional planning agencies—the Staff—but also in the administrative boards—the Line. Back of you will stand the intelligent minority, perhaps organized into a new political party, converted and pledged to the Third Road.”18 Here is the plan for the gaudiest, dizziest bureaucracy ever dreamed of outside Russia.

The great importance of these two theses of Chase and Soule lay in the fact that they got rid of the ugly label of socialism and much of its repelling gibberish. The Planned Economy! Here was a brand label which had in it a powerful pull on the imagination of the pragmatic American. Before them lay the broken pieces of the capitalist system, now in grave disrepair after four years of Mr. Roosevelt’s New Deal. What could be more plausible than the proposal that an unplanned economic society had run off the track in a shocking way? What more seemingly logical than to turn now to orderly, intelligent planning of our society to enable it to work at full speed and without pauses? The appeal of this new label for socialism was almost miraculous. Now it was possible for even conservatives to be socialists under a new name. The stigma of Marx and Lenin and of socialism and communism was taken off the package.

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The Great Depression

The American Republic we have described existed for 144 years. In the 22 years since 1933 it has been subjected to a profound change, accomplished without any change in the actual words of the Constitution. It has been done by a sheer usurpation of power by the federal government. This could not, of course, have been brought about without certain favoring circumstances. The chief influence was what has come to be known as the Great Depression of 1929.

Our system is geared to be a society for free men. It is not a machine that can be operated by pulling levers from a central control tower. It is composed of moving parts—human beings—each operating on its own power and with its own steering gear. It cannot be supposed that this vast nation of free men will move mechanically around a common orbit without encountering occasional interruptions. The socialist supposes that this immense aggregation of human beings can be made to function with the highest efficiency if all men will surrender themselves to the direction of an all-wise and all-powerful central State ordered and steered by the all-wise and benevolent men who control it.

The causes of depressions in a free society are not far to seek. This economic society is a collection of producing and distributing operations involving raw materials moving from mines and farms and from across seas through a multitudinous succession of processes into the shops of merchants and thence to the homes of consumers. All these agencies are directed by free men. All mixed up in this complex succession of activities at every turn are investors, workers, producers, merchants and consumers endowed with differing tastes and abilities, and with freedom of choice. Does any rational mind suppose that such a system will move around in a smooth orbit, without occasional jerks and interruptions arising from the frailties of men and the limitations of machines? There is another force called Progress, continuously discarding old materials and processes for new and more dynamic ones.
The inevitable consequence of these influences must be an occasional slowing down here and there. These pauses will be ordinarily local in area—little depressions here and there, confined to some industry or locality. It may happen at certain times that these individual depressions will assault some larger area of the economic system, when the resulting inertia will be far more serious. And it can also happen that at longer intervals a concurrence of individual and local depressions, arising out of the greed or folly or just plain ignorance of enterprisers may spread its evil effects over a whole nation.
Of course we must recognize that the chief causes of serious depressions are booms, which are created by enormous and unhealthy expansion of credit, particularly bank credit. The depression is the headache after the spree. The depression of 1929 was due to several causes which ordinarily would have forced business into a moderate decline. But the extraordinary energy of the boom of 1923 to 1929 was created chiefly by a wild orgy of speculation of every sort, superimposed on a group of more or less normal activities—and ending in a disorderly crash. Here are the factors which were responsible for the boom:
(1) Making up the grave shortages in peacetime goods after World War I. (2) A building boom on credit following the cessation of building during the war. (3) The automobile boom—new models following each other in dizzy succession and sold on credit. (4) Wide and epochal changes in our habits, brought about by the automobile, such as immense road building on bond issues, and new communities in the suburbs along with the building of community necessities—all on mortgage money. (5) The erection of some 26,000 moving picture theatres on credit, to accommodate the rising movie industry. (6) With this went a wild expansion of installment credit on everything—autos, furniture, new radio sets, even clothes. (7) Devastated Europe added to the orgy through buying here of all sorts of raw materials, mostly on credit.

There were two other very serious sources of the boom. One was a wild witches’ dance of security speculation on credit. The other was the unhealthy development of new and dangerous experiments in banking, largely through what was called “holding company” and “affiliate” banking. The ownership of almost every kind of industry was being converted into stocks and bonds, listed on exchanges and distributed in bold selling drives to millions of new and uninformed investors and speculators. A theory got around that we were in a New Era—some sort of new-fangled world of endless plenty, no longer subject to the laws of arithmetic and gravity. It had its philosophers and prophets just as did the New Deal which succeeded it. Farmers, clerks, school teachers who had never seen a stock certificate, swarmed into the big and little stock markets all over the country. Banks, corporation treasuries, foreign fiscal agents emptied their cash balances into these blazing infernos of speculation on margin loans, thus pumping more oil on the flames. The most explosive element in this situation was the blow delivered our banking system through the use of the newly popular bank affiliate, by which a bank could create a kind of satellite corporation through which it could engage in all those dangerous and dizzy adventures forbidden by law to the bank directly.

Thus our economic system was plunging forward on a raging sea of debt resting on a thin foundation of cash and a towering structure of credit, stocks floating around the exchanges in a hurricane of paper, while turbulent streams of income poured through all the shops on Main Street.

A new school of economists told us that the bleak old world had at last floated out upon a warm and  happy sea called the New Era. Then, on October 29, 1929, the stock market crashed in Wall Street and the Great Depression was on. I can speak with some frankness about it because I attempted at the time, against the advice of unwilling editors, to call attention to this dizzy boom and its inevitable end.
I do not minimize the severity of the depression which followed. Essentially it was an ordinary recession blown into disastrous dimensions by the immensity of the indefensible boom which preceded it. It must be said, in all honesty, that this depression would have run its course perhaps in a year or two were it not for some unfortunate contributing factors. One was the economic crack-up of Europe which preceded our own. The other was the weakness of so many banks because of their bad banking practices. Still another was the magnificent opportunity it gave the Democratic politicians who had been roaming the wilderness since 1920. They went to work with the zeal of crusaders to heap coals upon the depression fires by keeping the alarm bells sounding and whistles blowing over the rising crisis. One dark aspect was that Franklin D. Roosevelt, in 1933 as he took over from Mr. Hoover, had no plans whatever for dealing with the crisis. He appeared as a Saint George in shining armor with his sword uplifted to slay the Dragon Depression—a subject about which he was totally ignorant.
The psychological effect of this depression cannot be overstated. It had something of the appearance of that long-predicted capitalist catastrophe dear to the socialist creed. The frustration of business was almost complete. And into Washington poured evangelists of every known revolutionary philosophy, including some new ones.

It is not necessary to review here Mr. Roosevelt’s first term. It was certainly not animated by any coherent economic philosophy. Socialists, communists, fascists and just plain crackpots poured into Washington in 1933, and each got a little something. Mr. Roosevelt himself staked his hopes on two plans. One was spending money. The other was the NRA—the National Recovery Administration—which was in no sense socialistic. It was almost pure fascism. It organized industry under federal auspices—in total defiance of the Constitution—into great guilds or syndicates, in which employers and employees joined in legislating for each organized industry. Uninformed critics called it socialism. It was a crude form of syndicalism. But in the end it blew up in a disorderly explosion of futility without any help from anybody. The Supreme Court unanimously declared it unconstitutional, to the relief of Roosevelt and his advisers and almost everyone else.

The other plan of the first New Deal was to spend money—both tax money and borrowed money. The federal government spent in Roosevelt’s first term 25 billion dollars compared with Hoover’s expenditures of 14 billions which Roosevelt had denounced. Roosevelt collected only half of his spendings in taxes.

It would not be true to credit the communists or the orthodox socialists with any important part in the confused circus known as the first New Deal. But as the President’s first term moved to an end, various radical groups began to get their bearings. The collapse of the NRA—which they heartily despised, correctly branding it as fascistic—played into their hands. It left Roosevelt in a vacuum without any clear policy.

However, there was present in Washington the pink penumbra of the socialist philosophy—politically angry and frustrated reformers, displaced and poorly paid teachers from schools and universities who were disposed to question the eternal fitness of private enterprise, most of them because they resented the low salary scales on which they existed. And there was that swarm of professional and journalistic critics of capitalism of the smart-alec variety who embraced no other philosophy but poured out their scorn on the “bloated bondholder,” the “trust magnate,”the Wall Street speculator and the crooked politician—all of whom were dramatized, with some justice, in the press as the villains of the depression.

On the outer rim of the aroused proletarians and their bourgeois apostles there was a whole menagerie of new and fantastic preachers of strange cults of every sort. These were neither socialists nor communists. There was Dr. Townsend and his $200 a month for all over 60, Upton Sinclair and his EPIC plan, Sheridan Downey with his Ham and Eggs Every Thursday—who got elected to the Senate in California—Huey Long with his “Every Man a King,”Howard Scott and his cult of Technocracy, and many others. All these apostles of change were doing the work of the real socialist revolutionaries, who realized that these wacky groups were promoting a definitive renunciation of capitalism and hastening the arrival of the capitalist catastrophe, which was a necessary prelude to the coming socialist revolution.

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