A Reviewer's Notebook - 1963/11

Peggy Bacon, who could draw wicked cartoons and supply them with wicked captions, once com­plained that Morris Ernst was "glitteringly unoriginal." This may have been unduly disrespect­ful to Mr. Ernst, but the phrase is almost completely descriptive of David T. Bazelon’s The Paper Economy (Random House, $6.95), which comes to us with the mis­guided praise of Adolf Berle, Max Lerner, and Leon Keyserling plastered all over its back dust cover.

Mr. Bazelon, a lawyer, is, first of all, a strayed reveler from the period when many of us were sit­ting, quite foolishly, at the feet of such luminaries as Howard Scott, the high priest of tech­nocracy, and Thorstein Veblen, who could curl a lip with the best of them but who mistook a bril­liantly sustained sneer for a rea­soned point of view. What troub­les Mr. Bazelon is Veblen’s old notion that capitalists have a vested interest in keeping the masses from buying things. We have heard this refrain from a thousand-and-one critics of capi­talism: The price system is only compatible with "conscious" or "conscientious" withdrawal of ef­ficiency. In this view of things, Standard Oil became wealthy by pouring its products down the kitchen drain, and Henry Ford never did lower the price of the Tin Lizzie. Moreover, Jim Walter had no idea that he might cut the cost of housing by selling "shell" homes, and the supermarket is still something for the far future, not something that exists in the present all over the United States and even in Venezuela and Peru. Just how crazy can you get in confusing contemporary reality with a completely nonapplicable abstraction?

The second thing to be noticed about Mr. Bazelon is that he is a master at manipulating sentences to produce a sustained tone poem. Every phrase in the book has a calculated veneered finish. The performance is pleasurable enough from a purely literary point of view. The tone poem is a veritable triumph of the pejorative mood. A price, to Mr. Bazelon, is never a price, it is always a "tax." A price—or a price-tax—is never charged, it is always "admin­istered." A stock option is never a way of rewarding managerial skill, it is always a "paper graft." The U.S. continental domain is never developed, it is always "raped." Money is not a medium of exchange, or a store of value, it is always "paper," meaning that it doesn’t matter whether it is German marks as of 1923, or checkbook figures representing the forty-eight-cent dollars of 1963. The pejorative tone poem is sustained for 467 pages. But what does all the brilliance come to?

A Paper Cure

Well, thereby hangs a tale, or should we say a tail (that of a very small mouse)? Since every­thing is "paper" to Mr. Bazelon, and "paper" is an illusion, he sug­gests that the way to cure our troubles is—to issue more paper. To make our system really work­able, Mr. Bazelon thinks we should amend the Full Employment Act by making it illegal for any group of industrial managers to let pro­ductive capacity of any kind re­main idle. The steel industry should be compelled to produce steel at top speed, and the federal government should stand ready at all times to buy up the steel sur­plus and stockpile it or force it down the throats of automobile or refrigerator or building material manufacturers. You and I would naturally pay for the stockpiling, presumably via additions to gov­ernment budgetary deficits. But so what—the deficits would be only paper. And we’d owe the paper to ourselves.

This sort of thinking sounded rather profound to those who were deluded by Veblenism in the nineteen thirties. And when, back in those New Deal times, Mordecai Ezekiel suggested that the prin­ciple of support prices and gov­ernment storage bins be extended from the wheat and cotton econ­omy to the steel economy, there were those who applauded. But the Ezekiel Plan, when offered with a straight face in 1963, has a horribly dated sound.


Mr. Bazelon’s verbal brilliance doesn’t extend to understanding the dictionary. He speaks of the corporation as an "illegal" entity (see page 226, where he writes: "The corporation is a primary American illegal instrumentality, just as the political party is, and syndicate crime is.") Elsewhere he says the corporation is an "illegitimate institution." But how can an entity be either "illegal" or "illegitimate" when it is ex­pressly created by law? The cor­poration may not always have done things in ways that Mr. Bazelon would approve, but this has nothing to do with its legality as a sanctioned form of economic organization.

Jay Gould and Jim Fisk and other money-changers of their stripe may have tried to "rape" a continent, but Mr. Bazelon rapes both logic and the dictionary. The corporation, to him, is "private government." By this he means that it rules people by force with­out the sanction of the voters. In implying this he has raped the definitions of both "rule" and "force."

Can Mr. Bazelon’s definition of the corporation be sustained by reference to any existing reality? Must a man work for U.S. Steel if he prefers to go elsewhere? Must a consumer buy a General Motors car if he has a yearning to possess a Volkswagen or a Mercedes Benz? If a person chooses to live in the United States and be a citizen thereof, he must obey the laws of the United States or else pay a fine or go to jail. But nobody is compelled to work for U.S. Steel or to use its steel products if he happens to prefer aluminum or wood or glass—or even steel purchased from Sweden or Luxemburg. The great beneficent fact of a corpor­ation is that it doesn’t have the legal power to compel anybody to do anything.

If Mr. Bazelon thinks a "price" is a "tax," meaning that it is something that is compulsorily en­forced upon people, how does he explain the fact that General Motors was powerless a few years ago to keep the American Motors Company from producing a low-priced "compact" car? How does he explain the popularity of the imported Volkswagen? How does he account for the spread of the discount store? How does he ex­plain a January White Sale? How does he account for the bazaar ele­ment that accompanies an automo­bile dealer’s pattern of turn-in al­lowances on old cars? How does he explain any price break any­where?

Ownership in Common

Mr. Bazelon’s basic idea is that the distribution of plenty is im­possible if we persist in respecting private property in "paper." The government must see to it that everybody has enough of every­thing no matter what it does to the rights of ownership. When I was young and foolish (and listen­ing to Technocrat Howard Scott sound off at his table at Lee Chumley’s Restaurant in Green­wich Village back in 1931), I could believe that distribution of purchasing power was a proper function of government. But I have lived to notice that govern­ments, instead of insuring plenty when they intervene in the econ­omic process, always accomplish the opposite. Inflation always de­stroys purchasing power. The Ezekiel Plan, applied to U.S. agri­culture, has kept the price of bread high. In France, rent con­trol has resulted in a chronic housing shortage. In England, socialized medicine is depopulating the medical schools and driving older doctors into emigrating to Australia and Canada. In Russia, state planning keeps a hard goods consumer economy from coming into existence and inadvertently saddles the Russian countryside with a chronic slowdown in wheat and meat production.

Mr. Bazelon thinks that capital­ism is supported by "myths" and "superstitions." Is it a "supersti­tion" to expect a broker to deliver something he has promised to de­liver? When a Harry Scherman writes a book called The Promises Men Live By, is he the victim of "mythology"? No, the truth is that capitalism is supported by performances that cannot be equaled by economies that are run on the gun standard insteadof by the free contract standard. Behind Mr. Bazelon’s elaborate fun-making, there lurks the threat of the ugly mailed fist. Comes his revolution and nobody would be eating strawberries. Or anything else, for that matter, be­sides rationed bread.

America‘s Great Depres­sion by Murray N. Rothbard (Princeton, N. J.: D. Van Nos­trand Company, 1963, 361 pp., $8.95).

Reviewed by Percy L. Greaves, Jr.

The basic fallacy that underlies many of our modern economic maladies can unquestionably be traced to the old Marxian myth: Free enterprise will not work. It contains the seeds of its own destruction. Every succeeding cap­italistic crisis creates more eco­nomic chaos and more human suf­fering than the one before. Even­tually, capitalism must collapse of its own weight and be replaced by the heavenly harmonies of social­ism.

As proof, millions of Americans point to the Great Depression that began in 1929. We tried laissez faire capitalism in the twenties, they say, and it did not work. Left alone, capitalism crashed, bringing years of misery to mil­lions.

Many of our contemporaries, opposed to Marxism, hold that only governmental action can save us from socialism and protect free enterprise from its inherent weak­nesses. In their opinion, our eco­nomic salvation requires that gov­ernment should restrain and regu­late the excesses of uncontrolled capitalists, redistribute the cream of the capitalistically created wealth, and, whenever the pace of capitalism seems to slacken, then government should prime the pump of perpetual prosperity.

For a full generation, various versions of this basic fallacy have persuaded most Americans that depressions are the inevitable re­sult of laissez faire capitalism. There have been countless books written on the depression. A few have made valuable contributions, but not one has pinpointed the part that politicians play in pro­ducing and prolonging depres­sions. Unfortunately, none of the existing books has been written by an economic historian who grasped the full significance of the "trade cycle" theory ex­pounded by Ludwig von Mises.

Dr. Rothbard, a brilliant stu­dent of Mises, has that under­standing. His is a great and much needed book. It may not be the perfect answer, but it certainly towers far above any other book on this most important subject. He may err on some fine points, but he certainly blasts the Marx­ist myth to smithereens. If this book is widely read and its rele­vance realized, we can all hope for a more realistic approach to our many economic problems.

When Government Interferes

Part I deals with the theory. Dr. Rothbard presents the posi­tive Mises theory quite simply, perhaps too simply. He very aptly puts his finger on the fractional reserve defect in "the banking principle." He shows how a polit­ically sponsored expansion of the supply of money-substitutes—bank deposits, and paper-backed paper money—misleads the thoughts and actions of free en­terprisers. Under such conditions, businessmen, induced to borrow the newly created funds, act as though the additional supplies of money represent additional real savings available for starting ven­tures previously frustrated for lack of the needed capital.

This monetary expansion is pro­duced by irresistible official pres­sures on banks to buy government paper and set artificially low in­terest rates on bank loans. The reduction in interest costs induces businessmen to borrow and start new enterprises, chiefly those that require a lot of capital for a long time. Ventures are started for which the available real savings are not sufficient at current prices.

The capital goods industries then use their expanded funds to bid men and materials away from those industries most likely to prosper in a free market—those that best supply what consumers most want. The boom is on. The malinvestment multiplies as wage rates and prices rise above what they would be, if the money sup­ply had not been artificially ex­panded.

Such politically inspired booms cannot continue forever. When the bubble bursts, society must rec­ognize the insufficiency of real savings for the grandiose plans started with false hopes. Business must readjust. Men and materials must be shifted from making goods for which consumers will not repay costs to those producing what consumers can and will buy at prices that cover current costs.

At this point, the ideal solution is for government to let market forces direct the correction. Free and flexible prices, wage rates, and interest rates will quickly re­direct the economy with the least unemployment, the least loss of capital, and a minimum of human misery. Every government inter­ference with the market indicators misdirects men and materials and thus unnecessarily deepens the distress and lengthens the period of readjustment.

In Part II, Dr. Rothbard revealshow the upward political manipu­lation of the supply of money-substitutes, not free enterprise, created the inflationary boom of the twenties and made the depres­sion inevitable. He touches on the dilemma of government officials in 1928 and early 1929. Arguing and groping behind closed doors, they sought in vain for some easy way to stop the stock market boom without also stopping the highly artificial spiral of business and agricultural activity that they had instigated with their well-mean­ing expansion of the supply of money-substitutes.

The "New Deal" Before 1933

Part III is entitled, "The Great Depression: 1929-1933." Here, Dr. Rothbard is at his best. He presents a masterly account of the development of the depression policies of the Hoover Adminis­tration. He shows how wrong they were and how such political in­terventions made matters far, far worse. He also depicts the role of business leaders and respected economists in the parade toward more and more bureaucratic in­terference with the self-correct­ing tendencies of laissez faire cap­italism. He pulls no punches to prove his point, which is:

"The guilt for the Great De­pression must, at long last, be lifted from the shoulders of the free market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of ‘enlightened’ economists. And in any other de­pression, past or future, the story will be the same."

While this reviewer, a longtime student of depressions and of Pro­fessor Mises, learned much from this book and recommends it highly, he cannot agree with all its premises. Perhaps the most seri­ous objection is to Dr. Rothbard’s predilection for deflation as an antidote for prior politically created inflation. As Mises has pointed out, this is a little like helping a man who has been run over by backing the car over him again. A second injury in reverse does not erase the first injury.

The best solution for such a situation is to stop immediately all political manipulation of the money supply, that is, prevent any further politically induced infla­tion or deflation. Mises has de­scribed the process in the "Mone­tary Reconstruction" chapters of his Theory of Money and Credit. Such a solution would interfere least with existing contracts and help reduce the required read­justment to the very minimum.

The Money Supply

This reviewer cannot agree that life insurance net policy reserves are part of the money supply. In fact, they are not even the cash surrender sums, which Dr. Roth-bard considers money because they are obtainable on demand. Ac­tually, such cash surrenders entail a loss of insurance coverage and often a loss of interest. Demand­ing gold for your paper money or bank checks involves no such loss. Life insurance policies are no more money substitutes than any other forms of easily cashable wealth.

Considering such claims as money also tends to weaken the major thesis of the book. The basic cause of depressions is the creation of several titles to the same sum of money, producing an illusion that permits several peo­ple to act as though the same bank reserves belonged to each of them at the same time. Such multiple titles to the same money are only possible within a banking system operating with a fractional re­serve. A dollar of reserves can thus be pyramided into many dol­lars of spendable money substi­tutes. The illusion of more dollars can continue only so long as de­positors manage their finances by check and refrain from asking for metallic money.

Neither life insurance com­panies, nor savings banks, nor savings and loan institutions can give two or more titles to the same reserves. The inclusion of such assets in the money supply hides the actual deflation of 1930 and thus obscures this conformity with the Mises theory. It also weakens and complicates other parts of an otherwise excellent historical analysis.

Dr. Rothbard knows well that the GNP, generally known as the Gross National Product, might better be called the Great National Panegyric for inflation. Yet he tries to correct GNP by using official statistics to recalculate changes in the right direction. This reviewer must hold that such politically created guestimates are beyond salvage. They should be provided a prompt burial where they can no longer mislead an in­nocent and unsuspecting public.

There are other minor flaws, but it is a great book. Written more for economists and students of affairs than for the general reader, it merits reading by all who seek a better understanding of the dangers of a politically run economy.