Spencer Heath Archive

Item 1176

Carbon of letter of June 17, 1935 to Gardner Prizer, 49 West 12^th Street, New York City, together with a letter to Francis I. duPont of

July 6, 1935

Dear Mr. Prizer:

I have been reading very carefully Mr. duPont^’s ideas in regard to agriculture and industrial depressions as set out in the paper you handed me and also in a more extended paper that I received from Mr. Lane. I am very much impressed with these ideas. It is such as these that I would like to see more adequately presented to the various economic groups. We all know that a national economy is possible based on farming alone without any formal manufacturing industry but that no manufacturing and trading economy can exist except it be supported by agriculture. This makes agriculture fundamental in any mixed economy. I say we all know this but we do not always give it sufficient emphasis in our interpretation of the recurring disorders and distresses.

Since agriculture, including the other extractive industries, is primary and therefore of prime importance, any repression of creative activity in it, even though this repression be general as to all industries, must have the most far-reaching evil effects.

Now the evil which restricts agricultural activity and production, Mr. DuPont points out, is speculation or, as he terms it, investments in lands. I am in hearty agreement with this and I see it as of the very first importance. I am willing to generalize further and look upon speculation of every kind as a destructive phenomena that vastly hinders economic activity and prevents the production and exchange of wealth in every field. Although this phenomena is very general, I think Mr. DuPont does well to point out so clearly its critical effect upon agriculture, the basis of all industry.

Now, if speculation is inevitable and ineradicable certainly some means should be found and applied for holding it in check. But first we ought to consider whether speculation is not itself an effect or one of the many effects of an underlying cause and that speculation is only one of its many evil effects. I refer to the universal practice of governments in placing almost an infinitude of obstructions and restrictions upon creative activities of every kind, the cumulative effect of which is so devastating that the historian Buckle, even in his day of so-called “laissez faire,” quoted with approval a statement that trade must have perished from the earth had it not been for those who broke the laws. None of these restrictions are services; and public or governmental services that arise out of them come to us at a stupendous cost. Every governmental restriction on industry is by actual or potential violence. There is no other way to drive capital and labor out of employment; there can be no restriction except by disemployment. Restriction is forcible disemployment. When the members of a community perform acts of mutual service they, for the most part, store up their services in materials and commodities and by free exchange of these commodities convey these accumulated services to one another. By this means a great deal of wealth is produced and enjoyed. But any restrictions on exchanges must cut down production and lower the standard of life. Thus, every restrictive act of government is predatory, but every service act is creative.

Let us imagine a certain type of industry in which there are, say, ten producing units all serving the public with the same kind of goods. Let us say that seven of these units have been long established and are somewhat fixed and conservative in their ways, while the three newer units are more progressive and are therefore able to serve the public more abundantly or at lower cost — with higher social efficiency. The older group resents the intrusion of this competition and clamors for regulatory laws. Perhaps it is a licensing system. Then a license bureau must be established with its horde of functionaries selected, of course, from or at the instance of those who procured the passage of the law. Leaving out of account the inevitable favoritism and corruption in the enforcement of such a law, its effect must be to impair the profits of those younger and newer units who supply the public at the narrowest margin and are therefore the most socially efficient. At all events, whereas capital had been coming into this business it is now on its way out. Bank loans are liquidated, thus taking materials and equipment out of the hands of labor and disemploying it. The disemployed capital is now in potential form and the disemployed labor competes for the jobs of those still employed and finally lands on the dole. Production of goods in this industry declines; prices rise under the double influence of scarcity and monopoly, for the remaining units are now exempt from competition and can easily combine to restrict output and raise prices, and thus show larger profits in licensed production. Thus the driving of capital out of its productive activity has of itself created the condition of scarcity and rising prices to tempt this disemployed capital into purely speculative operations. And while speculation is on its upward swing, the apparent profits it yields tempts, while restrictions drive, more and more capital out of productive enterprises. The vast speculative activities which restriction on production thus induces becomes as universal as the restrictions themselves. It invades the whole economic fabric, but is most conspicuous in the securities markets and in real estate, including farm lands. Almost everything is mortgaged or held as collateral or held for a rising price. This is what makes it difficult to obtain land or anything else at a price that can be justified by its yield. And when the inevitable crash comes there are two classes of people — those who have the money or credits representing profits, not of production but from speculation, and those who hold the lands, securities and commodities, mostly mortgaged, for which there is then so little sale. It is not so much the constriction of currencies and credits as it is their siphoning off into the hands of the few who in speculation found success. We are in that situation now; bank deposits at maximum volume with securities (except good bonds), commodities and land priced low, and the national income down about two-thirds and still declining. While the speculation was on, the rising prices of lands did indeed keep them from being used, and after the crash only those who have money (credits) in bank are able to buy, even at declining prices, and they would be unwise to do so or to lend to others to do so while more and more taxes and restrictions of production are being piled on.

Certainly, as Mr. duPont urges, land ought to be brought into use, primarily farm land, for this is basic, but also other types of land and also the idle capital. There is no lack of resources, both of land and capital, but the owners and would-be users of these have not the temerity to attempt to use them while production is increasingly restricted and the making of profits penalized as a crime. The remedy, of course, is to discontinue all restrictions and “abolish all taxation save that on land value.” Speculation would cease, for no capital would be driven out of its creative employment. Abundance would arise. No labor would be disemployed and therefore no competition for jobs between the idle and the employed; and, out of the great abundance of wealth produced, wages, profits and rents would rise beyond all our present dreams. The restrictive activities of government would be eliminated and its functions reduced to a basis of service, and the services of government would of necessity be supported and paid for by taxation of the mounting rents which every industry, out of its abundance of production, would gladly pay for the locations they enjoyed in proportion to the public services delivered to them. It would become the obvious province of owners of land to collect the rents created by the public services and out of them to meet the public payroll and incidental expense, thus becoming the paymasters of the public servants and therefore their natural directors and supervisors. Thus would demagoguery and corruption come to an end, for the administration of and finance of the public services would be in the hands of a land-owning class whose net income would depend upon their making the value or earnings of the government services, as reflected in their rents, much greater than the taxes they would need to pay. The difference between rent and taxes would, indeed, become the reward and measure of the value of their services in directing the public affairs.

Among Mr. duPont^’s thoughts are many perfect gems. One of the brightest is:

The truth we must keep in mind is that the only thing that can possibly cause involuntary poverty or business depression must necessarily be something that definitely interferes with men making a living for themselves.

Another:

What men really do is to exchange services and commodities for services and commodities; money is merely an extremely convenient medium by which these exchanges can be evened up and by which a party having something to exchange but not wishing to decide immediately what he wants in return, can defer this decision.

And:

…whatever facilitates trade makes the community more prosperous and whatever hinders trade tends to make the community poorer.

And again:

It should be the duty of the economist to point out the cause of conditions and to refrain from advocating any remedy. When a sufficient number of intelligent people clearly see the cause of economic ills a way will be discovered to remedy them.

The intelligent interest Mr. duPont takes in economic problems certainly makes him worthy of his distinguished ancestor, associate of the great finance minister, Turgot.

Mr. duPont^’s idea that once agricultural lands were liberated from repressive taxes, cities would be forced to follow as a matter of business expediency appears to me to hold great potentialities. Certainly the practicability of this approach needs thorough discussion. I am very much interested in his suggestion that a few people of understanding in economics get together in a little meeting and try to arrive at some constructive views. I should appreciate being invited to such a meeting. I have no doubt a small group of able men like Mr. duPont, having arrived at clear and constructive ideas, could have a profound and beneficent effect on the critical decisions and adjustment that must be made in politico-economic affairs. Such a group, led by a descendant of duPont de Nemours, would be a poetic fulfillment indeed.

 

Very sincerely yours,

SP:n

__________________________________________

 

310 Riverside Drive

New York City

July 6, 1935

 

Mr. Francis I. duPont

One Wall Street

New York City

 

Dear Mr. duPont:

I must, indeed, thank you for your letters of June 24 and 25.

Probably you are familiar with the volume by Say, The Life and Writings of Turgot. This gives a most interesting account of the Physiocrats.

I am sorry I did not make the distinction found in some of the text-books between pure speculation and speculative enterprises, for I had reference only to the former. The distinction is important because speculation rests not on wealth but on values that seem to arise out of scarcity and monopolies when wealth production is restricted or exchange units (money or credits) are inflated. This pure speculation is not any activity of real capital (materials and facilities of production in the hands of labor and administrators of enterprises) and therefore creates no wealth or service. When the deflation comes, speculative values vanish; only the intrinsic remain. But speculative profits (in the form of money, sound credits and obligations that cannot readily default) do remain, and thus actual wealth is transferred at deflated prices to those who have created nothing and who render no equivalent in return.

But enterprises which look to future production or service and are in that sense speculative are totally different in character and in their results, for in them actual capital is actively employed and wealth is produced.

Stock exchange transactions and similar legitimate operations are essentially the means whereby persons transfer and exchange their ownership of capital from that invested or loaned in one enterprise to that invested or loaned in another. This is a valuable social function and speculation in the bad sense does not inhere in it. Its great social and economic value lies in the fact that it enables persons to change their ownership of capital in different kinds of enterprises and obligations most freely and equitably and at minimum cost and so associate themselves always with the particular kind of economic activity for which they have the greatest inclination and capacity. As stockholders (owners of capital), their interest is in their highest earnings; as obligation holders (owners of debts), their interest is in the highest solvency and security. Both of these interests are valuable to most enterprises.

In a free economic system with the upward flow of value through exchanges unrestricted and the banking function not distorted or restricted, so long as there was increase of wealth production through division of labor and exchange, there would be rising bank credits. Wealth and credits would rise hand in hand. But let the exchanges be clogged and production restricted and credits would decline, unexchangeable “surpluses” would arise in primary industries while general production declined. This is a condition that governments alone can create. Men will exchange their surpluses (and thus avoid them) unless prevented by force directly or indirectly applied. The “surplus” bushel of wheat at one dollar represents the underproduction of some ten or more dollars worth of food by the labor and capital disemployed by the fifty-three different kinds of taxes and other restrictions laid upon the production of bread. Small wonder the producers of “surplus” cotton can buy so little food and the grower of “surplus” wheat such meager clothes.

The first effect of an increase in governmental repression is to reduce the return on working capital. This automatically liquidates the most socially efficient investments — the industrial units serving the community at the narrowest margin or return — thus freeing the less efficient from competition and so entrenching them as monopolies, for the basis of monopoly is the driving out of competition. The disemployed capital, materials and tools, now torn from the hands of working people and supervisors and administrators, leaves “surplus” labor competing against itself in a restricted and monopolized and underproducing industry until it lands upon some form of public dole to maintain which still more and more levies must be made on a declining production resulting in still further disemployment and still greater numbers thrown on the dole. With production thus declining while the doles increase and disemployed and liquidated capital accumulating in the banks, political pressure is applied to force loans into industries while by public policy production is taboo, turnover penalized, profit treated as a crime and the destruction of food and clothing actually rewarded by public subsidies drawn from what production still goes on in an economy so ravaged and destroyed.

Thus is the stage now being set for another riot of speculation. By diverting into channels of consumption much of the capital we have thrown out of production, we have held off for a time the acute shortages of goods that together with advancing inflation must result in scarcity prices and a scramble to spend. At this stage idle capital disemployed from production will speculate in rising prices in a big way. In millions of paper transactions “profits” and prices will rise together. Market values of inventories will rise and the lower the scale of production the higher the fever of speculation. The securities of monopolized industries mount skyward and bonds are issued with inflated stocks as collateral. Speculative “profits” are turned over and over in paper transactions that have no more relation to the production of wealth than a game of poker, until at last optimism turns to panic and the whole operation is reversed. From all desiring to buy, now all wish to sell and real wealth is deflated in favor of those who hold money and credits and is deflected from those who produce.

It seems clear that if we wish to bring about scarcity of goods, to lift prices to scarcity levels, to disemploy capital and labor, establish monopolies, raise up a need, and demand for doles and “social security” and lay the foundations for a grand riot of speculation and ultimate collapse, all these things can be surely accomplished, nor can they be escaped, under a public policy of taxation, restriction and repression of the normal processes of wealth creation.

But all of this belongs to the dark side of the picture. Only those who have the inspiration of Henry George can glimpse the glories of the other side, and they only too faintly and feebly, especially those who center their attack on private property in land because he left them unaware that the annual value of land paid by land users is simply the value of the labor and capital applied to public services and the net value of land to land owners is simply the interest on the capital which they have invested or which has been invested for them in the public services, plus the value of their direction and supervision of the public servants. This administrative and supervisory function of land owners under an emancipated capitalism is a theme too extensive for this letter which is already too long. However, a year or more ago I developed it in an article which I will enclose hoping that you will find it of interest and that you will feel like giving me your reactions to it.

I am completely enamored of the last paragraphs in your letter to Mr. Beckwith as follows:

I believe that the Georgists do not sufficiently regard the vision of the vast amount of wealth which could be produced if we had true liberty. If they did, they would see that the whole of what goes to economic rent as things are now is so small by comparison as to be not worth considering.

We are like children quarreling on the floor over a few crusts and crumbs, whereas if we but stood up and looked we would see that the table is heaped with the most delicious delicacies imaginable.

Your idea for a group or society with authoritative standing in pure economics suggests to me a truly scientific school of economics — one not committed to any propaganda. I think such a school might develop from several persons having analytical and creative minds like your own associating themselves for discussion and arriving at a very few basic principles upon which to interpret economic phenomena. The time is certainly ripe for some new fundamentals, and modification or abolishment of some of the old.

It is not possible to challenge your diagnosis of the causes operating to prevent rural settlement. Just how to eliminate these causes may be open to dispute. The Georgists say tax down the rising prices (I do not call them values). I am more disposed to untax and otherwise emancipate capital so that it could not afford to turn aside from its creative function into the hazards of inactive speculation. Moreover, any tax laid upon speculative values (holding prices) or even upon annual or rental value as they are today would be little more than a gesture, so far as revenue is concerned. I believe the way to raise revenue is to emancipate industry so it can produce it and then we will have actual and abundant land rents for public revenue needs and no other source from which to supply them. Landowners would become directly and of necessity the paymasters of the public servants and their selfish interest in the matter would compel them to so direct the public servants as to create the highest rents. Thus at one stroke, after emancipating production, there would be solved the problem of unemployment and doles, of destructive speculation and deflations, of raising public revenues and the problem of good administration of the public services. Landowners would be differentiated from land users and there would come into being a class of public administrators whose efficiency would be guaranteed, for their private and particular interest in rents would be identical with the public and general interest in good public services.

Very truly yours,

 

 

    Spencer Heath