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 36^th 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 100^th 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?"