Hard Times, Economists, Then and Now
Frank C. Genovese
[
GroundSwell, May-June 2010]
(Dr. Frank C. Genovese is the retired Graduate Dean
Emeritus of Babson College. The following presentation was made Feb.
28, 2010 at the Eastern Association 36th Annual
conference, Lowe's Hotel, Philadelphia. He is 89 years old and
experienced the Great Depression.)
We expect too much and too little of economics. Theodore J. Lowi
entitled his Presidential address to the Amer. Political Science
Association in Dec. 1991 "The Pernicious Effects of Economics
on American Political Science." He blamed three developments,
public opinion, public policy and public choice developments for its
failure to develop "transferable insights" which would aid
democracies. But the failure he spoke of has deepened. This is
revealed in the light of our inability to write adequate health
insurance, and the Supreme Court's decision legitimatizing financial
corporate political influence, and our inability to pacify all of
Palestine and the costly human turmoil it has engendered abroad and
domestically. Should we not despair? Mussolini's corporate state
lives, central government ceases to act, and we find parallels to
apartheid and the Warsaw massacre and widespread terrorism. Are we a
rogue state recently governed by unprosecuted international
criminals making war on trumped up charges?
It is apparent that the American Congress seems intent on holding
down the American public while the insurance companies and some
health providers pick their pockets. How to get us a good health
care system finally after all the futile attempts of the past? Where
is the political muscle to come from? There is an obvious answer
almost totally absent from the American press and congressional
debate, American Business. The government should as quickly as
possible relieve employers from the direct costs and the
administrative costs of health care for their employees. Cities,
towns and state governments would also be enormously benefited and
be able to retain local residents in their jobs as teachers, police,
fire fighters etc. This will enormously help struggling local
enterprises. It is main street support rather than largess to Wall
Street. This relief to businesses would be a giant and permanent
stimulus for production in this country. It would lower costs and
thus stimulate production. It would lower prices and stimulate
domestic and foreign demand for our goods and services. We would
export more goods rather than jobs.
Please consider some of my thoughts. I come from a different
background than most of you. It was not necessarily better, or
richer, just different. But the differences may bring some insights.
Simply by being a Canadian I was used to false claims and boast of
our sometimes bullying neighbor. This did not make me totally immune
to the horror of a lynching in Louisiana in 1948 where I took my
first full-time teaching position. Nor did it prevent my curling of
lips when I heard repeatedly, "Only in America" and "with
Liberty and Justice for All".
This did make me aware of the difference between high ideals and
rotten corrupt practices. It lowered my expectations but gave me
goals. There was ample opportunity to participate and seek a better
land and world. Perhaps that is what I still attempt even today. I
concentrated on banking, particularly central banking and have
taught managerial economics and business cycles for decades. I
served as Advisor to the Central bank of Jordan and a member of
their official delegation to the world monetary meeting in
Washington in 1975 and turned down the money market research post at
the Board of Governors as well as some other posts. My scanty
writing concerned banking, Bagehot, fiscal and monetary policy and
international monetary matters and "Lets sell city hall"
one thought which circled the globe. I have done much editing and
shifted an all male graduate program into a leading co-ed graduate
school with a broadly recognized program in entrepreneurship. The
latter was an off shoot of my thesis at Wisconsin.
I read of the stock market crash in 1929 in Canada newspapers at
age 8. Obviously this was a matter of great import. Canada was
especially affected. Raw materials, metals, pulp and paper, wheat,
fish provided her sustenance. There was a dust bowl of probably of
greater significance than the one suffered here.
The treatment of young men was deplorable and much affected by the
division of power under the constitution, the British North American
Act. The Federal government wanted to balance its budget and pushed
expenses off onto the provinces and towns which were unable to meet
them. Vast numbers of the young removed themselves from the scantily
provisioned family meal tables. They sought work across the country
and often, illegally in the United States. The governments were slow
to come up with not very good attempts to find means of keeping them
peaceful and alive.
One of the great historic injustices was when the depression
unemployment was ended because of the start of World War II, it was
these men, who became the seasoned Canadian troops, that took so
much of the brunt of the reliable ones called on at Dunkirk, Dieppe,
Juno Beach, Salerno, Caen, the Battle of the Bulge. They also in
disproportionate numbers were often short-lived pilots in the Battle
of Britain who trained in Canada. Many were college students and
graduates who could absorb the brief training. The merchant marine
suffered heavy losses to German U Boats. The brain drain was
terrible.
The fact that Mackenzie King the Canadian Prime Minister was an
economist trained in Chicago did not help. He was a psychological
case.
I found no important writing by Harold Innis, who was to become
our most famous economist on fighting the depression. But he was
crippled after WWI and had to finish his Ph.D at Chicago. He did
evidence great hatred for war and worked hard seeking why wars
happen. He was probably the first foreigner to be head of the
American Economic Society. He turned down an offer from Chicago to
join them and do whatever he wished to do, such was the reverence
for his scope, grasp and endeavors. He was close to Frank Knight.
He is sometimes remembered in connection for the fact that his
insights were the inspiration for some of the work of Marshall
McLuhan. It should be noted there is a considerable hiatus in what
McLuhan took from Innis and pure Innis. McLuhan went to Mass every
day. Innis was an atheist and found much fault with religion.
Innis observed how the details of production had affected the
development of Canada and many other countries, indeed world
history. He saw information as fundamental to all activities and the
biases it produced. He was interested in how it arose, was handled,
buried or promulgated, and manipulated by institutions. He spoke of
monopolies of knowledge. Our information flows almost entirely
through a private corporation media system. The decision makers do
not want government controls which negatively affect them. They do
not want labor parties to affect wages, working conditions, pension
plans, health concerns on the job, climate controls, public provided
medical care and the like. They do not like to pay enough to have
uniform national high level education for our people. Publishers and
broadcasters reflect the views and wishes of those who hire them.and
their services. There is an old saw that it is unwise to pick a
fight with someone who buys ink by the barrel.
The litany remains, a good tax is paid by somebody else, a bad tax
is paid by me, a good expenditure of government is on my behalf, a
bad one gives me nothing that I want. A Conservative objects to
paying taxes to help others. This is a virtual definition. "I
am up, pull up the ladder" rules much decision-making.
Bull, ballyhoo, ignorance, stupidity and deliberate, often paid
for dishonesty is still with us, not only on political matters, but
extending even to false medical reporting by professionals. The
interest of the public is largely devoted to sports, scandal, and
fashion by the media.
The internet will not counter the vast influence imbalance of
monied interests over the general public's influence over much
legislation. The forces of plutocracy are vast and enhanced. We have
two classes of lobbyist, the ones generally recognized as employees
of organizations who aim to secure benefits from legislators and can
be described as "outside lobbyists." But there is another
group who also answer to the same paymasters and can be called "inside
lobbyists" because they are members of Congress. The name of
the game is "get re-elected." Money is important towards
this end and thus rich contributors are avidly sought and served.
There is public rage over munificent payments to malefactors of
great wealth. Those firms that made bad loans and rapidly packaged
them off to the world are relatively unscathed. The great war on the
poor that has gone on for years has given us remarkable data such as
the change from 1980 when the CEO's compensation was 42 times that
of the average workers salary towards 400 times now. (WSJ A25,
1/19/2010)
One notable Canadian contribution was the book, Homo The Sap, Or
The Theory of Permanent War. It was produced by Lorne T. Morgan , a
historian. It pointed out the neither Canada nor the US had been
really successful in fighting the depression but the beginning of
hostilities solved the Canadian problem in 1939, and the USA's in
1941. The book noted that in the future waging a small and
controllable war with a distant Latin American country, for
instance, Chile, could be a means of securing steady employment
levels in Canada. He pointed out that some loss of life was a normal
accompaniment of production and that the great difficulty imposed by
the geographical separation would limit casualties while stimulating
employment. The book was dedicated to Lou Somers, brilliant student,
outstanding athelete missing in action. A fellow student airman and
later Speaker of the Canadian House of Commons, C. Lloyd Francis
told me Lou's dog tags were recovered from the wreck of a downed
plane in the Zuider Zee. Incidentally Lou's brother, Gerry was also
shot down but recovered enough to have a brilliant career at the
University of Wisconsin. Another older brother was a notable expert
in public finance at the University of Buffalo. The human costs of
the war were enormous!
The war, and the Treaty of Westminster, did make plain that Canada
stood as an independent nation and could make its polices
independently and in its own interests.
America did not do much better at first in meeting the needs of
her unemployed and disposed citizens. Again there were
constitutional problems with the early attitude of the Supreme
Court. The needs were so often local but the funds national. Massive
municipal bond defaults occurred. Statistics on conditions about the
country were lacking in terms of the suffering of the public. Canada
had passed an old age pension act in 1927 which was of great help
while the US lagged in this regard and may have been somewhat pushed
by the Canadian example and the Townsend Movement. Perhaps Howard
Zinn's point about the need for vast public protest and attention is
correct. It was said that at age 70 the vast majority of Americans
were not just poor. They were indigent
How many of you here have contemplated what would be happening in
the country today if we did not have unemployment insurance?
As a new graduate student I once said to Dr. Witte that I did not
understand why he (as head of the Select Committee of the Senate)
wrote the Social Security Act as an insurance law since it obviously
was not an insurance law but one for income redistribution and that
as an insurance act it was so much more complicated to handle that
the simpler approach of the Canadians in their pension law. Kindly
Dr. Witte, said "You are right, of course, but the American
people believe in insurance and we got the law passed." This is
compelling logic and yet such procedures, so often needed, it seems,
can vastly complicate things on occasion. But words are important.
Even though he was wont to say, "Words have the longevity of
soap bubbles" Dr. Edward L. Bernays, an old friend and the "Father
of Public Relations" was proud of the term his firm used to
promote the Social Security Act, by tying it to the term, "Senior
Citizen."
It should be noted that Edwin E. Witte and Wilbur Cohen were both
of the University of Wisconsin and it was in the tradition of its
Institutional school of John R. Commons who also brought Workmen's
compensation to this country. Robert J. Lampman, when he returned to
Madison from service with the Council of Economic Advisors, did
manage to establish a poverty research facility there. He also
conceived the law on the alternative tax.
My father had better economic advice than the economists in the
30's which is relevant again now as we allowed state and local jobs
to disappear. He commented vehemently on how he did not see that
discharging the scrub women at the City Hall in Toronto would help
cure unemployment! I was disturbed with our failure to retain these
main street jobs while talking so much about starting new ones. Aid
to local communities businesses and governments could have flowed
very easily and naturally rather than the some of the stupidities
about preserving our too large financial manipulators. And did we
not ridiculously stand silent as great holders of endowments curbed
their spending and added to unemployment?
Also if we look at our curricula and research, how much of it is
in the broad public interest? Higher education and particularly
business schools may be in the business of sharpening the claws of
rapacious beast especially since education loans have so
strengthened private needs. In my day I was told that part of my
education was a donation to me for which I should return good to the
community. This is a weak refrain these days. There is even
avariciousness in kickbacks in the student loan business. Is anyone
surprised? We have the example of these charitable institutions
reducing their employment and expenditures these days. At one time
college presidents would speak out on public issues. These days they
still are reticent when their own students are wantonly murdered in
our gun available society. There is even the slow movement of
college president's salaries towards that of the members of their
boards. Mirabile dictu!
I advised Barney Frank, my local representative, to note the
distinction between insolvency and bankruptcy and thus to keep the
banks solvent but not to have the banks write down the values of
their non-performing assets. And I also said he should get all the
courts to sharply raise their fees on foreclosures to make the
process less appealing and to encourage the banks to negotiate their
mortgage payment receipt down. This would help prevent foreclosures,
help stabilize housing prices at affordable levels and provide funds
to state and local governments to inhibit the laying off of regular
workers. It would also lessen housing hardship and deterioration of
housing stock and markets. This would be most beneficial to local
officials.
Roger Babson acquired much fame in the former time and established
a college of which you have heard. He had a stone marker planted in
front of its auditorium recording his famous prediction. I used to
joke with my students about the presence in the building's basement
of a yet to be carved twin stone marker awaiting its day of glory. I
did mention that the long delay between the events were probably to
some extent a tribute to increasing longevity which kept those who
remember the 30's alive longer and who thus postponed its
repetition. I think I called it pretty well. It did take a long time
for laws to be amended and practices corrupted and the public lulled
into complacency for our present mess to be achieved. But it was an
almost step-by-step process not brought to public and political
attention by our great organs of the "free press."
Becoming an economist in earlier days was entering social work.
The preponderant political sympathy of young economists continued to
be Democratic, it seemed to me, for many years. Keynes and ideas of
balanced budgets over cycles and responsibility of the federal
government for stability at high levels in the economy had a
considerable public. There was the Committee for Economic
Development, Trade unions were tolerated. But in later years in the
profession I have been surprised that so many economists seemed to
lack social concerns. They have responded to the market which
offered good income for antisocial behavior. Lawrence Ritter, no
slouch as a monetary economist as head of research at the New York
Fed, chairman of Finance at NYU and President of the American
Finance Association and old friend, one day expostulated "I
won't talk to the young guys any more. They are fighting battles we
settled forty years ago."
Perhaps the grouping of the social science at Toronto together and
the institutional bias at the University of Wisconsin that kindly
welcomed me have also kept me insisting that people are not numbers.
They have culture, history, religion etc. In the years when my dear
and brilliant wife, Eleanor and I, edited The American Journal of
Economic and Sociology we spent much time at economics conventions
suggesting breadth of approach to human problems and at sociology
conventions, time stressing economic matters.
By 1933 Hitler had attained a single party state with the
disillusionment with the long inflation. Thus I had the great
privilege of studying statistics at the University of Toronto under
the great master and thinker, Egbert Munzer, a refugee from Germany.
He had been a minister in the Weimar Republic Government that
struggled under heavy reparations following World War I. He said
they were making progress but when the respected British economist,
John Maynard Keynes, wrote in The Economic Consequences of the Peace
that they would fail, their credibility was destroyed and they were
swept from power. This led to his exile in Canada where he said "If
I am to die here, I know I shall sleep in sacred soil." Note
that economic advice can have great consequences and that the
reparations were later lowered and Keynes changed his opinion.
But if we should not put too much stress upon economists and
economic policies in the vastly disturbed world conditions that
followed the war. Many forces were at work. There was the great flu
epidemic. The war dragged on and in Russia was accompanied by
revolutionary change and American military opposition. The
victorious allies were often at odds and not fully frank among
themselves. The Italians were cheated in territory and this helped
Mussolini's later causes. The Greeks were very concerned over
Turkish interests. Britain and France competed for lost Turkish
territory. Mandates were distributed. The principle that "Trade
follows the flag" was understood. Religious difference went
ignored re Iraq. Middle East states were laid out by ruled lines on
maps with little regard for the often legitimate expectations of
former Arab allies and other considerations. Lawrence of Arabia was
ignored. We continue our lack of knowledge of foreign countries and
their languages.
I found I learned more about Jordan where I served as advisor to
the Central Bank by taking Arabic lessons from Brigadier General
Iskander Najar who had been aid-de-camp of Pasha Glubb as the great
British general who built the Jordanian army was called. I attended
the World Monetary Meeting in 1975 as a member of the official
Jordanian delegation. By misreading an Israeli badge as an Iranian
one I almost caused a diplomatic incident. On my way home from
Jordan I visited some central banks. I noted a three-day close down
in Taiwan for its annual audit.
Edward L Bernays, who went to the peace conference with President
Wilson, told the story of Lloyd George asking an American what
Wilson was like since he was soon to meet with him. He was told, to
quote Bernays,"That when adamantly opposed, he concedes".
Bernays did think that the "Ten Points" were a very good
thing. But they and the non-membership in the League of Nations did
not prevent war preparations from being made. By November 1935 our
Secretary of State, Hull, noted the US was exporting materials of
war such as oil, trucks, scrap iron and steel to Italy but this was
legal since they were not prohibited by the law which mentioned "arms
ammunition and implements of war." This US forebearance on
shipping to Mussolini, encouraged Hitler. The successful duping of
British and Canadian politicians by Hitler should also be mentioned.
It was only a few years ago that Gabriel T. Kerekes on his death
bed said to me, "Frank they are destroying my life's work."
He was a graduate student at Columbia who was taken by Parker Willis
to Washington to write the Glass-Steagle Acts. He also served as
alien property custodian at the NY Fed, the chief economic aide to
General Mark Clark and the money distributor to Austria under the
Marshall Plan. He had military decorations from France and the U.S.
He had been wounded in action, captured by the Germans and rescued
by a British destroyer that intercepted a German hospital ship. He
paid his dues. Sad that some of them in effect have been besmirched
and stolen by the legislative actions. There were two Glass-Steagall
Acts. The 1933 Act established the FDIC and sought to control
speculation. It regulated savings account interest rates.
Significant changes in the use of gold as a monetary reserve in
Britain and then in the US contributed to the stock market crash in
1929 and the late shoring up of American banks under Roosevelt. Some
powers were removed in the 1980 Depository Institutions Deregulation
and Monetary Control Act and prohibitions regarding Bank Holding
Companies were removed in the Gramm-Leach-Biley Act of 1999. The USA
and the world owe much of the current malaise to these laws.
Bagehot's dictum that "money does not manage itself" again
proved itself. The Fed avoided its responsibilities for years and
mechanistic monetarism probably was part of the tale. Our chief
monetary regulator did not believe in regulation. This is rather
like appointing a doctor who is ignorant of the circulation of
blood, chief surgeon for the USA.
An incidental note concern was that economists who differ in their
political attachments of policy makers can be reasonable. John
Gronouski, our last Postmaster General, was ambassador to Poland and
had interesting comments on being ordered to visit President Johnson
before he visited his boss, Secretary Ball, on his trips home from
Poland, and on being bugged in the Embassy by the Russians. His
field was public finance but he approved of Nixon's block grants. He
also was the first Dean at the LBJ College at Austin. He had
delivered Milwaukee for Jack Kennedy.
We should rebel at the insensitive repetition over "Creative
Destruction" and the airy humor over "irrational
exuberance." There is real human cost in terms of abandoned
research and improvements in productive techniques and practices. If
one does not work today neither he nor his equipment can do two
day's work tomorrow. Production is lost forever. Deaths from
starvation occur and tomorrow's food is of no avail. Families are
destroyed, divorces occur, life savings are lost, mental breakdowns,
education foregone, etc. Property is abandoned and left to
deteriorate and homelessness increases. This is creative
destruction? What fool thinks so? Growth that could have occurred
and been costless to future production did not happen. Indeed, the
neglected planned maintenance and updating of equipment are
sacrificed. When production resumes it is with lower potential
because of the unimproved physical plant, unfinished research and
lost education of workers. Why not talk of evolutionary replacement?
Surely ideas for the improvement of production occur while doing
production.
Human capital was also lessened by the Great Depression. Leonard
Silk, the famed New York Times long time economic editor, told a
story at the 100th anniversary banquet of the economics
department of the University of Wisconsin. He said that in 1930 he
was ready to start college with a small scholarship at a college
when his father lost his job. It so happened that a speech of
Dykstra,the new head of the University, was reported in the press.
He said that one of the tragedies of the times was that many people
who should go to college would no longer be able to do so. Leonard
wrote him a letter in which he said, "I am one of those people."
The next thing he knew he had a four year scholarship at the
University." But not everyone in the same boat was rescued.
Finally the importance attributed to the increase in US tariffs in
the Smoot-Hawley act may be overstated. The actions of the Bank of
England helped start the Great Depression. Irrational cries for a
return to the Gold standard recall a story . An old experienced
British financier said that in his long life he had only met two men
who claimed to understand the Gold Standard. One was an obscure
clerk in the Bank of France, the other an old English merchant, but
unfortunately they disagreed.
Later addition March 1, 2010
Pierre Breton, Pg. 14, The Great Depression, 1929-1939, Anchor
Canada, 2001
"The Depression also played havoc with laissez-faire. For the
first time, Canadians began to realize that government must
interfere in the private affairs of the nation. The Canadian Wheat
Board, the Bank of Canada, the Canadian Broadcasting Corporation,
and Trans-Canada Airlines were among the public corporations born of
those hungry years. Anyone who advocated today's social services in
the pre-Depression era would have been considered a dangerous
radical - and, in truth, some were. But hard times changed people's
outlook."
Will the US learn?
Perhaps one should point out that Canadian Banks did not fail
during the depression while the US for a short period did not have a
single operation bank.
Louis Rasminsky who was head of the Bank of Canada 1961-73 (and
like the chief justice also attended my great high school) had a
story that he was offered a job with the League of Nations shortly
after its founding and wired the offer mentioning the salary in
Swiss francs to his fiancé in Toronto asking her to marry
him. She wired back, "What is the rate of exchange?"