Libertarian Land Philosophy:
Man's Eternal Dilemma

Oscar B. Johannsen, Ph.D.

BOOK VII: RESULT OF STATE'S INTERFERENCE

Chapter 2 - Depressions

Depressions are among the most terrifying phenomena that afflict western civilization. These are periods when for apparently inexplicable reasons much, if not most, of land, labor and capital are out of work. Depressions are part of the business cycle. The business cycle is one in which a period of high employment, great economic activity and prosperity, known as the boom, is succeeded by a period of low employment, relatively little economic activity and hard times, known as the depression or bust.

Though many theories have been evolved to explain the business cycle, and depressions in particular, the best known have gained only grudging acceptance, and deservedly so, for they fall far short of any adequate explanation.

Time and again, versions of the over-production theory are advanced. This is based on the assumption that during a period of prosperity more goods have been produced than the people are capable of absorbing. The depression is assumed to be the period in which this excess production is reduced.

A variation of this is the over-consumption theory. This posits that too much has been consumed during the boom period. The people have been living beyond their means and have incurred debts and engaged in foolish extremes. The depression is the period of retrenchment necessary to pay for the people's past over-indulgence. (It is the hang-over from last night's party.)

These theories have never satisfied the inquiring mind. It has always teen obvious that people are just as anxious to have goods during depressions as before. If anything, people are suffering from a lack of goods. Certainly, it cannot be over-production for dad lets his old suit last another season. He convinces his new-car loving wife that their present one has much more life in it than she realizes. He pointedly proves to his friends and his wife that a vacation can be enjoyed just as well at home as at some elaborate country establishment. He does without and so does the family. They are certainly not suffering from an excess of goods.

Of course, it is possible to over-produce a few articles for a short period of time, but it is not possible to over-produce all the wealth desired by people. If buggy whips were to be made today on the scale of seventy-five years ago, they would be over--produced as few people want them in this automotive age. People want other things, and no matter how much they have, they always want more.

One house in the city is hardly enough. A country home is a necessity. Only an inconsiderate husband would deny his wife an extra car for shopping. What woman can be expected to attend the Saturday night dance at the Club without being a walking advertisement for the millinery, jewelry and shoe emporium? What man ever has enough suits, shoes, boats, cameras, or makes enough business and vacation trips to Europe, Asia, Africa or India? What man or woman can truthfully say, I have all I want, and mean it? This fact is so generally recognized that the above theories which hypothesize that we have produced more than we can use, or that we have consumed too much and lack the desire for more. simply do not have the ring of truth.

The reason we appear to suffer from over-production or over- consumption is that people do not have the wealth needed to exchange for the things they desire. The important question, then, is not the one that is usually asked, "will the consumer buy?" Rather it is, "why does he not have the wealth with which to purchase other goods? What is it that prevents him from getting the wealth he needs so he can exchange it for the things he desires?"

To arrive at an understanding of a depression and what causes it, we must have a clear picture of what a depression is.

To a man, willing and able to work, but unable to find a job at a wage which he believes he warrants, a depression means no job. To a man owning a piece of land which he refuses to rent below a figure which he considers adequate and which therefore lies idle, a depression means no rent. To a man owning capital, such as productive machinery, factories, and tools, which he is unable to hire out at a price he believes he should receive, a depression means no interest.

What is common in all these cases? It is simply that the laborer, the landowner and the capitalist all find themselves in a position in which there is no acceptable return for the production of wealth. The laborer, try as he may, can find no one to employ him at what he feels he is worth.

The landlord feels below a certain figure it would be better to let the land lie idle. The capitalist considers it pointless to loan his tools out at a figure which he consider negligible.

Whatever the reason, the net effect is that there is a stoppage of production on a large scale. A person who traveled throughout the United States in 1932, at the depths of the great depression would have seen millions of acres of land lying idle, thousands of factories with closed doors, and millions of people unemployed.

Paradoxically, while a much smaller amount of wealth was being produced compared with previous years, at the same time the storekeepers' shelves groaned with the weight of large quantities of goods, and warehouses bulged with articles off every description. But as the owners of these goods would not sell them below certain prices, they remained unsold.

Why was it that they did not reduce prices so the merchandise would move? Many did, but in doing so they had to take losses. If everything were to be sold at a loss, bankruptcy would be the end result. Still more land, labor and capital would be idle. Thus, many held on to their inventories waiting for business to improve and depended on their investments and whatever goods they managed to sell at a small profit to carry them along. Those who were unable to do this had to sell for whatever they could get.

Why was it that prices did not cover costs of production? They did, but only the costs of the most efficient producers. These were the businesses which, for the most part, stayed in existence. Possibly they just broke even. If they did lose it was not a disastrous amount. Had this not been so, they too, would have gone out of business. Eventually nothing would have been produced, ending in the starvation of the people. Prior to such a calamity, however, a revolution would have erupted in which the people would storm the warehouses and steal the merchandise. In the upheaval, possibly by accident, the people might eliminate some of the man-made restrictions which made it seem senseless to produce.

A depression, then, is stoppage of production on a massive scale.

To revert to the question: Why is it that the people do not have the means to make their usual purchases?

When a person lacks money, it usually is because he has neither wealth nor services which he can barter for money. He is not working at his specialty. But, if he is willing and able to work and is not employed at his specialty there must be some blockage. What is it?

If men are physically prevented from laboring, as is true of men in jail, there could be no production. But such is not the case. Idle time hangs on the hands of millions of men who are quite free to work. The blockage is not due to laborers physically being prevented from working. As to their willingness to work, they are not only willing but anxious to work, up to a point. That point is where according to the standard of living to which they are accustomed, it is senseless to work. If after laboring all week, the result is not enough on which to live, why work? That they are willing to work is evidenced by the thousands of men in the great depression of the 1930s who were willing to perform tasks which ordinarily they would have considered far beneath then. Former executives gladly took jobs as clerks, awaiting the time when executives would be in demand again. During a depression, there is little question but that labor is only too anxious and ready to work.

The second possibility is that labor is denied access to the tools they require, that is, to capital. It is true that capitalists want a minimum return. However, as the depression deepens the fierce competition makes them quite willing to accept returns which previously they would have scorned. In many instances, It might reach a point where capitalists are willing to lend their tools gratis on condition the capital be kept in good condition. In that way, the capital is kept in existence at no cost to the capitalist. So, capital is available in a depression if labor sees any point in using it.

The remaining factor is land. Now, man can survive without capital if he wishes to live like the animals, but he cannot survive without the land. In order to employ himself, he must have access to it. But is he blocked from it? He might be. For example, certain areas of land might be taboo -- sacred land on which he must not work due to religious reasons. This occurs in primitive societies, but as land is necessary to sustain life, not too much can ever be forbidden land.

It has always been a puzzle to many why primitive people are never out of work. It is because they always have access to land. But while this is true of a crude society, does it necessarily apply to a modern one? The point which one must never forget is that regardless of whether a society is primitive, medieval or modern, the absolute prerequisite for existence is that men must have access to land. There can be no dispute about that. The question is not, "does modern man require land?" Of course, he does. Instead, absurd though it may appear at first blush, the real question is, "does modern man have access to the land?"

Obviously, there is plenty of land. But and this is important, it is available only under the institutional arrangements of society. In modern western society, labor has access to land only if it is willing to pay the contractual rent which landlords demand.[1] Now, if the rent for a piece of land is so high that the laborer who is working on it finds that after paying the rent there is nothing left over for himself, why, then, he will simply stop producing. The landlord is getting the entire production pie with nothing left over for labor and capital.

The position of the landlord is quite different from that of the capitalist. If after a laborer pays the rent for a piece of land on which some capital is to be used, and then he finds that the capitalist demands as interest an amount that would absorb the remainder of the income, then it simply would not pay him to borrow the capital. Production would cease at that location. But this cannot occur on a general scale. It could only occur if only one tool existed which was extremely difficult to duplicate, so that the capitalist could make his monopolistic demand. And that is precisely the point. The difference between land and capital is the difference between a monopolistic and a competitive situation. Since tools can be duplicated.

It is unusual for capitalist to be in a monopolist position. If he is, it is ordinarily for a short time.

The unique feature of land is that it is limited in extent and utterly impossible for man to increase or decrease it. There is just so much universe outside of man and his products, and none can be created by him.

Capital, on the other hand, can be increased almost indefinitely as long as man has access to land.

Interest cannot soar to extreme heights. If it does, the production of more capital would be encouraged. As an increasing quantity of capital came on the market, interest would tend to stabilize at some point, other things being equal.

In a boom period, the very fact that interest rates would tend to rise would bring into existence its own compensating factor - the encouragement to produce more capital. The additional capital prevents interest rates from rising indefinitely. In addition, the fact that labor will produce its own capital for its own direct needs if interest rates go too high, helps to limit the rise.

Land, however, is something over which man has no control. There is just so much and no more. Though rents soar to the heavens, the quantity of land would not be increased one iota. Land, that is, the earth, or more exactly, the universe, is the ultimate given about which man can do nothing. [2] He can merely use it as best as he knows how.

That being the case, if the institutional arrangements of western society were practiced throughout the world, theoretically it would be possible to dis-employ most of the world's population. All that would be necessary would be for the owners of he land to raise the contractual rents to such heights that no one could possibly pay them and have anything left over. Of course, this could never occur. Men will not sit by supinely to starve. The would simply ignore the institutional arrangements and use the land. If the landlords objected , a war or revolution would erupt. This would cause changes in property relationships so that men could once more employ themselves by applying their energies to the land. It is merely theoretical that a few men could own the earth and dis-employ the rest of mankind. However, in modern western society, when a depression ensues, in effect, this is precisely what occurs but on a limited scale. Nevertheless, the scale is extensive enough to reduce millions of men to an unemployed status, but usually not sufficiently great to induce a revolution or war. As a boom nears its top, contractual rents soar into the stratosphere reaching a point at which men cannot hire land and make a go of it. A farmer, who rents an additional quarter section finds that after paying the rent, he loses money. Therefore, the next season he does not rent it. Instead, he contents himself with tilling the land he may own. He dismisses the hired hands who helped him farm the extra land. These men find they cannot hire themselves out to other farmers as they, too, are cutting back. A chain reaction ensues.

The unemployed reduce their purchases. They must live off any investments and savings which they possess, or off charity. Reduced purchases mean that retail merchants' sales drop. They cut back, so the wholesalers' sales fall. They, then, must reduce their purchases from the manufacturers, who, in turn, must reduce production. Employees all along the line are discharged. With less raw materials required, companies in the extractive industries cut down on the production of ore, coal and other resources taken directly from the earth. They, too, need less men and discharge many.

The whole process snowballs. At first, the pace may be slow as few wish to believe the boom is over. Employers may carry employees for a while on the assumption that the downturn in business is only temporary. But, as it becomes apparent that something is wrong, the pace increases. The stoppage of production multiplies rapidly. This retrenchment may continue until a point is reached where it is almost impossible for it to go lower as people would literally starve to death.

Prices of almost everything drop, prices of labor, that is, wages are among the first to drop. It is true that in industries where labor unions exist, and particularly if the government has placed the unions in a more or less monopolistic position, nominally wages may not drop. A bricklayer may still be paid $40 a day, but he may work only three days so he earns only one-half what he formerly did. More likely, he does not work at all for his high wage rate precludes anyone hiring him. Regardless whether wage legislation exists or not, wages drop in both organized and unorganized industry.

Interest rates also drop fairly quickly. This is especially true once it is recognized that bad times are at hand. The amount of capital in existence is simply too great. The boom was instrumental in producing huge quantities of capital. Rather than hold it idle, capitalists quickly reduce rates and, if necessary, may even lend it out for just enough to cover depreciation charges.

What happens is that labor and capital offer to take less of the production pie, which pie at the same time is getting ever smaller. But this may be of little help if the landlords will not reduce the share they demand. They are the key. Only when they reduce their contractual rents, that is, when they offer to take less of the production pie so as to leave sufficient for labor and capital to make it worthwhile for them to produce, can the economy recover from the doldrums.

Land, however, is imperishable so the landlords can hold out for the rent they desire much longer than can labor or capital. labor starves unless it gets income. Capital deteriorates rapidly, so holding it out of use for any great length of time is self-defeating. But whether anything is done to land or not, it still exists. Landlords need do nothing as long as they have some means of livelihood. As a matter of fact, certain land as farmland will have its productivity improved by lying fallow. Since the landlord can hold out the longest, he does. Anything which enables landlords to maintain their absurd rental charges tends to lengthen the depression. This is probably one of the reasons the great depression of the 1930's lasted so long. The New Deal, while no doubt it meant well, passed legislation which enabled landlords to hold their land out of use longer than they would have otherwise.

In the boom period, particularly once the boom is well under way, contract rents tend to rise quite rapidly. Speculation is rife. Businessmen agree to pay ridiculous rents. They assume business will increase markedly in a few years. They are not overly concerned if they lose on their new propositions at first, for the assumption is that it takes a while to get going. In effect, they agree to give to the landlords all and even more than they produce in the hope that when they are finally established their production will be so great that they can easily pay the rent. But the rents have reached heights not justified by productivity even though projected at generous figures far into the future. When this point is reached the top of the boom is at hand.

In the discussion which follows, for the sake of simplicity it is assumed that all the land is rented from landlords. (Actually, while much land is rented, probably more is purchased. The purchase price represents the rental value capitalized at the going rate of money-interest. That is, if the rent which a piece of land could command is $1,000 annually, and the average money-interest rate is 5%, the purchase price would tend to be twenty times $1,000, or $20,000. This is because 5% of $20,000 is $1,000. However, in boom times, the prices paid for land are not based on rents which are determined by actual productivity in the present but on some assumed productivity which it is expected to have in the future. Thus, in the example cited above, a person might pay $40,000 for the land. The assumption would be that soon the productivity of the site would rise so that the economic rent, that is, the rent based on productivity would rise from $1,000 to $2,000. If it is assumed that the purchaser puts up $20,000 of his own funds, he must borrow another $20,000 from a bank. This additional $20,000 actually represents the capitalization or speculative rent. It amounts to capitalization of hopes, not reality. Though he calls the carrying charges he must pay to the bank money-interest and amortization, actually it is speculative rent.

As mentioned previously, contractual rent consists of two parts -- economic rent and speculative rent. Economic rent is the rent which is based on the actual productivity of the land. Speculative rent is the additional charge which a landlord will levy based on some assumed future additional productivity of the land.

In a boom while economic rent tends to increase, it is probably a more or less gradual rise. This is because it is based on actual productivity. Usually it is not possible to increase productivity greatly in a short time span. On the other hand, as speculative rent is based purely on assumptions, it can and does rise to absurd heights.

If all land were rented on the basis of productivity, that is, on the actual need for it, and if there were no speculation, then as stated in the previous paragraph, there would be a more or less gradual rise an economic rent in an expanding civilization. In Figure I, this is shown as the Economic Rent Line.


FIGURE I

Note: For the sake of simplicity in explaining the boom and bust cycle, only the Economic Rent Line and the Speculative Rent Line are shown. The Contract Rent Line which is the sum of the Economic Rent Line and the Speculative Rent Line has been left out.

An example of this gradual rise could be seen an a growing town. As the town spreads out to marginal land, the rent would tend to rise. All this rent would come from production. The more valuable land would and could pay more as it would be more productive. Although it may seem peculiar, the rent would be no burden on the producer as the production is there. A man selling ties on 42nd and Broadway in New York City would sell about ten times as many as he could sell on the outskirts of that metropolis. The greater sales volume is not due to the man as he is the same. True he may have to expend a little more energy at the better location if only to wrap up more ties. However, that is insignificant; it certainly does not account for the large difference in production. The product is also the same. The only significant difference is the locality. Many more people are passing by at 42nd street so the opportunity to sell more ties is vastly greater and almost without effort they ore sold. For that reason, the merchant is quite willing to pay a much larger rent at 42nd Street than in the outskirts. The additional rent comes out of the increased production at the busier site.

However, if during a boom, the landlord at 42nd Street raises the rent to a point where the seller of ties finds he is now losing money, he stops selling there. Possibly he establishes himself on the outskirts of the city where the rent may be based on actual productivity and not on any anticipated production. There he can making a living, although not as good a one as he made at 42nd Street before the speculative rent was added to the economic rent. If he cannot establish himself anywhere, he becomes one of the first casualties of the incipient depression.

The store at the better location is now vacant unless some tenant can be found whose mode of production is such that he has a better possibility of paying the high contract rent. But near the top or the boom, the rent may be so high that no new tenant could rent the site and ever hope to make it pay.

To review slightly, Contract rent consists of two parts: economic rent plus speculative rent. If the speculative rent is zero, then the contract rent is all economic rent, and the tenant should have no difficulty paying it. However, if any speculative rent exists, it will have to come out of the tenant's wages or any past accumulation he possess, or from any loans he may obtain.

In Figure I, it will be noted that in addition to the Economic Rent Line, there is another labeled the Speculative Rent Line. At the beginning of the boom period, the two lines are together (point A). It is assumed that at this point the speculative rent is Zero. Thus the Economic Rent Line and the Speculative Rent Line coincide.

As the boom progresses, landlords who are well aware that business is good, demand increases in rent. Even if landlords were not conscious of the existence of a boom, the fact that businessmen fight one another for choice locations will, soon awaken them. Rents are bid ever higher, with little or no relationship to the actual present productivity of the land. Thus, the Speculative Rent line rises above the Economic Rent Line at an increasing pace.

Near the top of the boom, rents become fantastic. Real estate is sold at ridiculous prices, usually subject to large mortgages. Finally, a point is reached where labor realizes that after paying the rent, there is not enough left over to make production worthwhile. This may take the form of a simple calculation in which the rent is deducted from sales and noticing how little is left over for wages and interest. Usually, it is not that obvious. What is more likely is that the banks may request that their loans be paid off, or at least reduced. But a businessman who receives such a request finds himself embarrassed. Possibly he has been having difficulty meeting the money- interest on his loan. To ask him now to pay off his loan, or to reduce it, is to put him in an extremely difficult position.

As the boom was progressing, the banks have been carrying men like him along. If some of their customers have been having difficulties, they may have refinanced the loans on the assumption that the problems were of a temporary nature which would evaporate as the boom progressed.

Eventually, even the most lenient bank reaches a point where it will no longer carry a customer. Possibly its loan-deposit ratio has reached unusually high levels. This is a warning signal to retrench. Possibly the nation's central bank has finally become alarmed over the speculation in real estate, inventories, and the stock market. It therefore institutes restrictive measures which force the commercial banks to retrench.

Whatever the initiating reason, the banks make their demands upon their customers. The businessmen must get the money somehow. To do this, they must increase their sales and cut costs. This means to cut prices and to discharge some of their help. Unless these former employees are able to find other jobs, they, in turn, will have to cut living costs which reduces the purchase of shoes, clothes, cars and houses. As explained previously, this process snowballs downward as the depression gathers greater and greater momentum.

In 1930, the cigar store chains were among the first retail establishments to suffer. They had bid recklessly against one another for the best locations, usually on corners. The high rentals they had agreed to pay were far out of line with the increases in population and productivity which actually occurred. Since few landlords would renegotiate the leases and set rentals based on actual productivity, the stores simply could not make out. The landlords would not reduce the rents as near the top of the boom, their eyes, as well as those of everyone else's, were focused on still greater heights. They reasoned if the present occupants could not pay, there were others who could and would. The fact that they might not rent their locations immediately after they had been vacated did not disturb them unduly. It would merely be a question of time before someone would show up to pay their absurd rents. But at the top of the boom, few, if any, appeared.

It is impossible to say when the top is reached. Usually some dramatic event occurs which historians subsequently take as the top. October 28, 1929, the day the American stock market amazed the world with an astounding crash, is usually taken as the top of the boom of the 1920s. Actually, the stock market had suffered drops shortly before.

Businessmen ware already being forced into a more liquid condition, for in the latter part of 1928, the Federal Reserve System instituted restrictive actions. It was well aware that its monetary manipulations had resulted in too many money-aids being created, many of which were winding up in the stock market. The heads of the Federal Reserve had been afraid to be restrictive, for while they wished to dampen the stock market, they did not wish to curb the business boom. Eventually, however, they realized they had no choice but to act, hoping for the best.

It was over a year before the dramatic crash occurred. In Figure I, the top of the boom is illustrated as a point to emphasize this dramatic event. It would probably be more accurate to graph the top as a gradual change. After all, not everyone is carried away. Some recognize that the feverish activity cannot continue and long before the top, they have been attempting to put their financial houses in order. In the post World War I boom, John Wanamaker, a merchant prince, in 1920 recognized that conditions were unhealthy. He slashed prices in his department store before others were aware of what was happening. He was, thus, able to ride out the ensuing depression of 1920-21.

Once a bust begins, prices may drop slowly at first but then with increasing speed. Businessmen cut the prices of their inventory to cost or even below cost to get the money necessary to pay their "fixed charges". But despite what they do, many discover they cannot meet their bankers' demands. They rush over to the banks requesting reductions in their money-interest charges. But the banks not only want these charges paid promptly, but they wish the loans to be liquidated or at least reduced. In many instances, the banks may be forced to take over whatever collateral protected the loans as the businessmen go bankrupt.

Now, as stated before, rents drop grudgingly because the landlords are in a monopolistic position. For example, there is only one Broadway and 42nd Street. It cannot be duplicated. There may be other locations somewhat similar but by and large each site is unique. And even the number of somewhat similar locations is small. Landlords do not have the spur of competition in anything like the degree which exists among laborers and among capitalists. Thus the landlord on 42nd street holds out for his rent much longer than the laborers or capitalists can for their incomes.

However, eventually even the landlords are forced to let their rents drop. After a number of businesses go bankrupt and the sites remain idle for months, the rents start to come down.

As the depression progresses, pessimism increases. Then the prices of goods and rent drop further and further. As shown in Figure I, the Speculative Rent Line drops. Finally a point is reached where the Speculative Rent Line again meets the Economic Rent Line (point B). At this point, labor and capital can go back to work again and produce wealth. After the rent is paid there will be enough left over for wages and interest to make it worthwhile. It is the point at which businessmen would employ labor and capital on land normally if there were no speculation in land values.

However, no one knows when this point is reached. As a matter of fact, it is not a point. The owner of one piece of land may eliminate his speculative rent in the early stages of a depression so the tenant pays normal economic rent, and possibly is able to weather the storm. Some landlords never drop their rents and their locations lie idle most of the time.

On the other hand, other landlords in the depths of the depression become so discouraged that they may drop their rents below what is really necessary for labor and capital to go back to work. These landlords accept less than the economic rent. Their tenants, in effect, become partners of the landlords to the extent that they receive the difference between the actual contract rent they pay and the economic rent they should pay. This is the period where bargains exist. It is the years 1932-33 of the great depression. Shrewd men, cognizant of values, either rent or buy land and start to produce. They make money. Their profits consist not only of wages and interest, but also some rent. Stocks on the exchanges are bought at deflated prices. The farmer finds he can now rent the quarter section next to his farm at a very low figure so he can easily afford to hire a man to work it. After paying wages to the hired man and interest to the capitalist for any equipment borrowed, he finds he makes a nice return.

The hired man now finds he can buy the shoes, shirts, suits and other items he so sorely needs. Those retail merchants still in business note their inventories drop as people buy. They look to the wholesalers and manufacturers for more goods, who, in turn, must employ more people and purchase more raw materials to take care of the increased demand. These employees are now able to buy the things they have deferred during the depression. The snowball works in reverse. Business starts to revive.

In Figure I, the bottom of the depression is shown as a curved line to emphasize that the turnabout is gradual. There rarely, if ever, is any dramatic event advertising that the bottom has been reached. As a matter of fact, many people are now so pessimistic that it takes them a long time to realize that the worst is over. They believe any improvement is merely temporary and the prelude to a further and even steeper drop.

But the bottom has been reached, and the production of goods starts to rise. Prices may stay down for some time. As inventories are worked off businessmen are not sure that the turn for the better has come. But as demand keeps increasing, prices also tend to rise, and sooner or later, rents too start to increase. Speculation takes hold again. More and more people begin to see bigger and better days ahead. The speculative rent line starts to increase and finally crosses the economic rent line. The cycle is now complete.

In Figure I, we are now at A', which is the same relative point as A. It will be noted A' is above A. This is to illustrate the tendency, at least in the United States, for each succeeding cycle to trend upward, as measured in terms of productivity.

It may be that this is due to America's increasing population. With a greater population, even in a depression there must be greater production than in earlier periods when the population was much less. And in boom times, the increased competition by more people means a tendency to a greater over-valuation of land, as well as most everything else.

There are, of course, ancillary causes which tend to accentuate the boom and bust. Depending on how they interact, they may add to or lessen the height of the boom or depth of the depression. For example, protective tariffs and quotas hamper production as they restrict the exchange of goods with other nations. The Hawley-Smoot tariff of 1930 quite likely was an important contributing factor in the depression of the 1930s for it reinforced the Fordney-Mccumber Act, which had raised the average tariff rates to the highest in history.

Higher taxes by government at all levels discourage production. While taxes could be raised to a point where the people would cease to produce, such has not been the cause of depressions in the United States. It has only been within the past generation that taxes here have really become onerous.

What taxes can do has been demonstrated in China. In the early part of the 20th Century, the rapacious warlords taxed production so heavily that it was hardly worth anyone's while to produce. So, famine swept areas. Such has not, as yet, occurred in the United States. Taxation has made its contribution to the boom and bust cycle, for as governments of all levels lower or raise taxes, they accentuate the rise and fall in production.

Though such factors as tariffs and taxation have had their effect on the business cycle in the United States, they have not been the fundamental factors. Even if tariffs were raised to a point where the United States was insulated from the rest of the world, as Japan was before Perry's visit, there seems little reason to expect the business cycle to be changed much. People would have to do without goods which were unobtainable in America, and production would have to be altered or eliminated in certain lines which depended on foreign products. However, although the people would be foolishly inconvenienced, in the main, production would continue. The boom and bust cycle would still be with us.

Of course, the government could easily eliminate the business cycle. All it would need to do would be to raise taxes to an absurd level. Then there would simply be no boom. Instead, the economy would be in a chronic state of depression, with the people barely eking out a living. Speculative rent would probably not exist as there would be no point in paying rent based on expected higher future earnings as such could not occur and no one would expect any.

How does an economy recover from a depression?

If the reader will glance at Figure I, he will note the Economic Rent Line is depicted as rising at a constant rate. While it is hardly likely that it does rise constantly, this line can be looked upon as a trend. As society expands and land of lesser productivity is required, there is a gradual rise in economic rent. Since economic rent comes out of production and therefore is readily paid, labor and capital easily earn their wages and interest, all other things being equal. Such being the case, if it were possible somehow to make the Speculative Rent Line coincide with the Economic Rent Line, the economy would recover.

How can this be done?

One corrective method has already been described. The depression itself is a correction. What occurs is that most of the Speculative rent is squeezed out of existence, so the Speculative Rent Line drops to coincide with the Economic Rent Line. This is point B' in Figure I. Here production can resume with the landlords, the capitalists and the laborers obtaining their rewards based on actual productivity. At the depths of the depression, however, the Speculative Rent Line may have dropped below the Economic Rent Line. The landlords are not charging as much contract rent as they could. There is little or no Speculative rent; it might even be called negative Speculative rent. Those who rent land pay less than the normal economic rent.

Since depressions bring the Speculative Rent Line down to and even below the Economic Rent Line, they serve to bring about a recovery. But this is a difficult adjustment, causing untold hardship. Fortunes are lost, careers are ruined and for some the very joy of life disappears. Many cannot adjust, and the newspapers are full of heart-rending tragedies. Depressions have always been feared, but until the past generation have been more or less accepted by the people as a corrective with which one must live.

Another method of recovery, and much more agreeable, would be to adopt the reverse technique. That would be to raise the Economic Rent Line to coincide or even go above the Speculative Rent Line.

How can this be done?

By making land so much more productive that labor and capital can readily produce the necessary wealth so that the contract rent can be paid. This can be achieved by inventions, discoveries, improvements to the land and better government. For example, in the early 1920's, it may well have been that the automobile helped America to rise out of the depression of 1920-21.

A simple example may illustrate the point. Imagine a piece of land which was about twenty miles from New York, and which had been leased in the horse and buggy era at a ridiculously high price. The land's productivity at that time simply could not yield much of the rent which had been contracted. The speculative part of the contract rent was too great. However, the advent of the automobile brought the land within say a half hour's drive of New York. Now, the land could easily produce the contract rent. The reason might be, if it was a farm, that sufficient crops could now be brought quickly and cheaply into the city for sale making it easy to pay the rent. Previously, it might have been that the crops could only be sold within the rural area which could be covered by a horse-drawn vehicle where demand was small and so little production required.

In effect, the Economic Rent Line has been raised to be equal to or even higher than the speculative Rent Line. If inventions and discoveries were so prolific and resulted in such a huge increase in production as to raise the Economic Rent Line far above the Speculative Rent Line, business would be very good. What this means, of course, is that the Speculative Rent has been squeezed out. Now the contract rent is simply the economic rent. It could even be that the contract rent is less than the economic rent.

It is for this reason when a nation is in the throes of a depression, people are constantly seeking new inventions to bring them out of the hard times. Because of the belief that the automobile had been so instrumental in helping the country out of the 1920-21 depression, people in the 1930's thought that, possibly the airplane or radio might do the same thing. However, while such inventions must have helped, they could not possibly have as great an effect as the automobile. Almost anyone can drive a car, but only a few can pilot a plane. Therefore, although the plane brought distant areas of land closer timewise to cities as New York, the effect could not by any means be as pronounced as that of the automobile, certainly not within any short time-span.

The radio essentially is a service, so its effect could not be as great as that of the automobile. What is needed is some device or discovery which will, directly or indirectly, result in a sufficiently large increase in the production of wealth so as to make the payment of contract rent relatively easy.

A third method by which a depression might be ended is for the people to resign themselves to a lower standard of living. This amounts to raising the Economic Rent Line to coincide with the Speculative Rent Line. It changes the speculative part of the contract rent into additional economic rent. The lower wages the people receive they now consider to be normal and proper. Since they are willing to work for less, production resumes. This means that the people agree to take a smaller piece of the production pie, letting the landlords have a bigger piece.

Anyone of the three methods listed above, if sufficiently effective, should result in the elimination of speculative rent and thus induce a recovery. It is probable, however, that actually all three take place. Naturally, in a depression there is a drop in speculative rent as businesses go bankrupt. Landlords adjust their contracts downward. Banks reduce their money-interest charges or take over the properties of those customers who cannot continue.

At the same time, people are busily engaged in producing new inventions, instituting cost reduction programs, and the government may even try to become a bit more efficient, eliminating some waste so taxes may be cut.

In addition, people cut back on their standard of living, at least during the dark days of the depression. They work less, take shorter vacations, cut down on non-essentials.

Now, in the discussion so far, no mention has been made of monetary manipulation. This has been ignored purely for the purpose of simplicity of explanation. But booms would probably never reach the heights that they do if it were not for the inflation of the exchange media in use. Possibly the depths of depressions are lower because more exchange media are expunged than is necessary.

In the history of the United States, there has always been some manipulation of money and money-aids. Much of it was done by the individual states, particularly in the 19th Century. At that time, large quantities of banknotes were issued by state-banks, much of which was for speculation, particularly in land. The federal government also intruded, although in the first half of the 19th century it usually acted with more restraint than the states did. It was not until the Civil War, with the establishment of the National banks and the issuance of "greenbacks" , that the federal government's lax monetary policies tended to approximate those of the states. With the establishment of the Federal Reserve System, it has thrown all restraint to the winds and has used the banking system to inflate the exchange media just about as it saw fit.

The important point is that booms and busts are accentuated by the poor financial practices of the banks. As speculative rents rise, it becomes increasingly difficult for entrepreneurs to pay them. It must be remembered that speculative rent does not come out of production -- only economic rent does. The speculative rent must come from a businessman's own assets. But he can only continue this practice for a short time as his assets are probably limited. With regard to land which has been purchased, as noted before, the price of the land represents the capitalization not only of economic rent but of speculative rent. As speculative rent tends to skyrocket, it is doubtful if many businessmen could purchase such land with their own funds.

Therefore, to pay the speculative rents, or to purchase land at absurd prices, the wherewithal must be borrowed. If the businessmen cannot borrow, they will be stymied and the boom aborted.

In the history of booms in America, there almost always is evidence of expansion of exchange media. Part of this is probably the natural result of increased goods coming to market, but much of it is for loans to businessmen for long term assets, as capital and real estate. If the banks did not place their superior credit-worthiness at the disposal of entrepreneurs to purchase such assets, it is not likely that the booms would have reached the heights that they have.

Whether booms and busts could occur without the aid of the banking system is a question. Practically, it would appear that the aid of the commercial banks is necessary. But, theoretically, it should certainly be possible for booms and busts to occur even if the commercial banks did not participate. After all, in the sale of land, the seller can become the first mortgagor by requesting merely a small down payment, and granting the purchaser a loan for the balance of the purchase price. If the property is sold over and over again at pyramiding prices, each succeeding seller could emulate the first by accepting a small down payment taking a mortgage for the balance. And, of course, financial intermediaries, as savings banks, investment trusts, and insurance companies, could help the boom along by lending the necessary funds based on inflated appraisals. However, such financial intermediaries are restrained by the fact that the only exchange media they can lend is that which they obtain from others, that is, from depositors, investors, or purchasers of insurance. They do not issue banknotes nor write up demand deposits, as commercial banks can. And while real estate may be successively sold with a first, second and third mortgage, it is hardly likely that fourth and fifth mortgages will be granted.

It seems reasonably certain that the height of the boom would be much lower if the banking system did not assist. And if the boom is lower, the depression would probably not be as deep. If the boom had only been fueled by financial intermediaries (other than commercial banks,) and by investors then in the subsequent pressure, businessmen would have greater opportunities to make quicker and easier adjustments. These financial intermediaries would not be under the same pressure that is on commercial banks to have their loans repaid. So, they might be able to refinance the loans possibly on longer terms and lower money-interest rates. And investors who had loaned funds could readily adjust them by partial write-offs and lower money-interest rates.

But this question is largely academic. In the United States, the sad fact is that the banking system has consistently followed unwise financial policies as regards long term assets. Commercial banks have been much too lenient in loaning on such assets instead of restricting their loans to goods coming to market.

The point, which cannot be over-emphasized, is that commercial banks are not restrained to the extent that private individuals or other financial intermediaries are. Commercial banks in the past have loaned funds on long term assets by the simple process of writing up demand deposits. At one time, they could issue banknotes, although that now has been pre-empted by the Federal Reserve Banks.

In the boom period, the judgment of bankers is warped, just as is everyone else's. And, most unfortunately, it is so easy for them to expand money-aids. The record of the 19th Century is replete with instances of state banks issuing banknotes to finance the purchase of land. This fueled wild land speculation. The boom of 1836 is a striking instance of state banks lending to speculators banknotes which enabled gamblers to bid land prices up to ever higher heights. This was brought to an abrupt end when Andrew Jackson issued his famous "specie circular", This required all sales of public land to be paid for with specie (gold or silver) or Virginia land scrip. (1) This precipitated the depression of 1837. Examples such as this one give point to the connection between land speculation and the poor financial practices of banks in encouraging booms and busts.

Thus, it should not be surprising that in attempting to recover from depressions, a fourth method has arisen which revolves around money. This is monetary manipulation by the government for the purpose of inducing a recovery. By one means or another, the government deliberately increases the quantity of exchange media. The techniques used have been described in the chapter on Inflation.

The three methods previously described to achieve prosperity might be considered to be of a more or less spontaneous nature. Without urging, people cut their expenses and drop their standard of living. Almost unconsciously, people set about trying to invent new things and institute cost cutting methods. The government, itself, tends to become a bit more efficient in carrying on its housekeeping chores. Speculative Rent may be eliminated by bankruptcies and adjustments by landlords.

The fourth method, however, is a deliberate, planned approach to attain a recovery by means of the inflation of the exchange media. The government deliberately brings into existence cheap money so that debtors can pay off their creditors with legal tender of less purchasing power than when the debts were contracted. During a depression, there is an insistent cry for more money. The assumption is that more money will mean higher prices. Higher prices will mean the debtors can pay their fixed charges for such do not go up with the general rise.

Although the government does not know it, what it is really attempting to do is to make the Economic Rent Line coincide or even be raised above the Speculative Rent Line.

How is this done?

It must be remembered that contractual rents are usually based on long term leases. Also, it must be remembered that much speculative rent is disguised as fixed charges, such as the money-interest and amortization payments on mortgages or bonds.

In a depression, businessmen find it increasingly difficult to pay the contract rent or the fixed charges. To help them, the government steps in and deliberately increases the quantity of money-aids.

Let us assume that the quantity of money-aids is doubled in a relatively short span of time. The result is that the prices of most goods double within a short time. (2) Actual production is assumed to be the same. However, now money-sales have increased so that it takes $2.00 to purchase an item which previously cost $1.00. But, while most things go up in price, not everything does. In particular, what does not and cannot rise are the fixed charges and the contract rents as they are based on long term arrangements. The businessman is delighted to find he now receives twice as much legal tender for the same quantity of goods as he sold previously. Therefore, he can pay the contract rent quite easily. For example, if previously his sales had been $1,000, now for the same quantity and quality of merchandise, his sales would be $2,000. His rent is still the same, $1,000. Previously, the rent absorbed all his sales. Now his sales enable him to pay the rent and have $1,000 left over. True, this $1,000 will not purchase as much as before the monetary manipulation, but at least he now has $1,000 for himself. Before, he had nothing.

What has happened is that in terms of the depreciated money-aids, the Economic Rent Line has been raised to coincide or even to be above the Speculative Rent Line, so business can go back to work.

It is often assumed that the purpose of monetary manipulation is to counteract the increased wages which labor is able to obtain as a result of the monopolistic position in which the government places unions. It may well be that such is often the aim of the manipulators. It is based on the assumption that the wage increases which businessmen are forced to grant may be so great that they cannot come out of any anticipated increased productivity. It would mean the unemployment of marginal workers with all the political problems ensuing from so many men idle.

To avoid this, the money-aids are increased. As this tends to increase prices, the increase in money-wages is counterbalanced by increases in prices. The net result is that real wages, that is, what the money-wages can buy, are the same, or lower, or only slightly higher than before the wage raise.

For example, if money-wages were doubled, then this increase would be canceled by doubling the money-aids so the actual amount of goods laborers could purchase would be the same as before. Of course, it does not work that simply. The injection of additional money-aids causes prices to rise only after some time period has elapsed. By that time, labor may have obtained still greater increases or possibly business has fallen off so much that the injection of the money-aids merely prevents prices from falling.

This increase in money-aids could only force labor involuntarily to aid recovery if it caused the Speculative Rent Line either to coincide or be below the Economic Rent Line. For this to happen, labor would unknowingly have to accept a lower standard of living. Laborers are not fooled that easily. Assuming that the manipulation does work, their wives would be quick to point out that their big increases in money-wages had been eaten up in higher prices. One injection of money-aids would probably take so long to bring about the desired result that it is doubtful if its effect on wages would be noticeable. However, if a nation embarked on an inflationary policy and repeatedly injected money-aids into the marketplace whenever it thought business was falling off, the result could be that over a period of time laborers might quite unwittingly be accepting a lower standard. At least, much of the increases their unions obtained for them would be compensated for by higher prices, so they would not be nearly as well off as the money-wage increases might appear to indicate. Whether, therefore, monetary manipulation will help to effect a recovery through a disguised drop in the standard of living of labor is a question. It probably depends on such factors as the time period involved, whether the decreased purchasing power of the money-aids is greater than the wage increases, and whether laborers are unaware that their real wages have decreased.

While there is a question whether monetary manipulation will cause labor to aid or retard recovery, there is little question about the effect that it has on people with fixed incomes. Pensioners, teachers and civil service employees find they are forced to take a lower standard of living. Their incomes do not rise, or if they do, not at the same pace as the depreciated money-aids would require if they are to be as well off relatively as before the manipulation. Their reduced standard of living is an involuntary aid to recovery.

Monetary manipulation also results in capitalists involuntarily aiding in the recovery. For example, if their tools have been lent on long term leases, the interest they receive will not rise during the period of the leases. So their reduced return also helps recovery.

Thus, the effect which monetary manipulation has on wages and interest may result in those factors contributing to a recovery from the depression. But the most important of all is the effect on Speculative Rent; more exactly on contract rent and fixed charges. If, as a result of some institutional arrangements, contract rent and fixed charges are not affected to any substantial degree, it is a question if the effects on wages and interest alone would bring about a recovery.

Whether the monetary manipulators recognize it or not, their method is based on the assumption that people's reactions and psychology are predictable. It amounts to an attempt to "fine-tune" an economy. But this is impossible to do. So, it should not be surprising to learn that the results obtained are rarely what is expected.

The manipulation by the New Dealers in the 1930's did not bring about the recovery they had anticipated. Shortly after coming to power, they embarked on an easy money policy. They ran off in almost every direction conceivable to increase the quantity of money-aids. They even enacted legislation, as the Thomas Amendment, which gave the government the right to print $3 billion in "greenbacks" -- pure fiat money. Fortunately, that right was never exercised. The president and his Secretary of the Treasury indulged in absolutely fantastic gymnastics. They sat in the president's bedroom and casually juggled the "price" of gold. Finally, in early 1934, the nation was taken off the gold standard domestically. The New Dealers had embraced a naive version of the quantity theory of money, hoping to raise the price level. But the manipulation did not work. At least, it did not work in the manner it would have had to in order for this method to accomplish its aim. Prices did not increase appreciably. It may well be that the easy money policy was effective in preventing prices from continuing to fall. But that would not be the effect necessary for monetary manipulation to work. For that method to be effective, there must be an absolute rise in most prices while contract rent and fixed charges remain constant so that the Economic Rent Line would be raised above the Speculative Rent Line.

Just why the easy money policy did not work is debatable. It may be that the technique adopted was partly responsible. Although the government could have issued fiat money under the Thomas Amendment, it did not. Apparently, it was afraid that as this was so obviously an inflationary policy, it might have stampeded the people into purchasing goods. While this would have raised the price level, it would have been much too dangerous and completely unpredictable. The government, while it wished to raise prices, wanted to control the rise.

So, it turned to the banking system. The Federal Reserve System adopted an easy money policy using the techniques previously described in this book to increase the reserves of its member banks.[3] In addition, the influx of gold from abroad occasioned by the rise in the "price" of gold also increased their reserves. With immense reserves available, under the multiple expansion possible through the banking system, the amount of Federal Reserve notes and/or demand deposits could have been increased substantially, and they were. Between 1934 and 1940, all told, the quantity of money-aids increased by more than 50%, yet the price level only rose from 74.9 to 77.1.[4]

The monetary statisticians point out that what happened was that the "velocity of money", that is, the rate of turnover of money decreased. Turnover of commercial bank deposits declined from 29.9 in 1929 to 16.0 in 1934 and 12.9 in 1940.[5] What this means is that while there was a substantial increase in the quantity of money-aids, they were not employed by the people at the same rate as before the depression. Part of the increase was hoarded, particularly by citizens of foreign birth. They had lost all confidence in the banks as so many of them failed. The result was that much of the increase in money-aids wound up in housewives' teakettles, safe deposit boxes, attics and cellars. In addition, much of the increase in bank deposits remained largely idle.[6]

As a matter of fact, the huge influx of gold had alarmed the authorities that the inflation policy might get out of hand. It was believed that the monetary policies were beginning to take effect, and that a boom was developing which might be accentuated dangerously by the inflow of gold. Therefore, late in 1936, a "sterilization" policy was instituted. This was a technical program designed to prevent the gold which was flowing in from raising the reserves of the banks. But the expected boom failed to materialize. On the contrary, in 1937 a big drop in production occurred so that the sterilization policy was rescinded in 1938. The government hoped now that this would pump more reserves into the banks which would help to get the boom going, but it did not develop.

It remained for preparation and participation in war to bring about recovery, if it can be called such.

The question which may be asked is why did the technique fail? Probably because the banks were able to issue huge quantities of money-aids but could not get them to the public. Remember, banknotes and demand deposits are bank debts. Banks issue them by exchanging their debts for those of their customers, that is, they "monetize" their customers' debts. But, if the customers do not come in to borrow, there is no way the banks can put their money-aids into circulation. They can, of course, exchange them for goods the banks, themselves, need. This, however, is negligible, and banks are in no position to indulge in spending sprees.

Of course, if the authorities swamped the banks with federal bonds, which the banks paid for money-aids, and which were then spent or given away in welfare programs, the money-aids would have circulated Prices, then, would probably have risen absolutely. But, the federal authorities, while they were extravagant, they had not then attained the degree of fiscal irresponsibility so evident today. Thus, while the national debt did increase substantially, and much of it must have wound up in commercial banks in return for money-aids, the amounts involved apparently were not sufficiently large to cause a substantial rise in prices.

Monetary manipulation did not work for it did not have the people's cooperation. The thinking and psychology of the people had not been adequately taken into account. They had been so shaken by the terrible depression that they feared to embark on new ventures. Even though the governmental officials proclaimed to the world that they were instituting an easy money policy, and took such dramatic steps as going off the gold standard domestically, the people did not lose confidence in the exchange media. They were accustomed to a relatively sound type of exchange media, at least in comparison to other countries and did not expect it to deteriorate. The authorities did not issue fiat currency as they were permitted to do under the Thomas Amendment. In addition, they had "sterilized" gold to prevent an uncontrollable boom. Probably such factors as these convinced the people that the money-aids were sound. So, there was no flight from the "paper-dollars". The people did not discount the nation's circulating IOU's, so prices did not rise to any extent. Quite unconsciously, the people were vitiating the monetary moves of the federal authorities.

But even if the people had not nullified such policies, there was another reason why the New Dealers' tactics probably did not induce a recovery.

At the same time that the nation was increasing the quantity of money-aids, it adopted measures which encouraged landlords and creditors to insist on fulfillment of their contracts. As the depression worsened, mortgagees began to write down the amount of the mortgages and reduced the rates of money-interest. This was preferable to being saddled with property which they had little hopes of renting or selling. But, then the New Deal stepped in with new policies designed to help property owners; for example, the one designed to bail out home owners. It offered to take over the mortgages in toto, together with accrued interest in return for government bonds. Thus, the mortgages and debts, instead of being at least partially forgiven, tended to remain at their face amounts.

Another example: The authorities encouraged farmers and landlords to hold land out of use by paying them not to produce. This kept speculative land values up -- precisely the wrong thing to do.

Without realizing it, the administration in power was working at cross purposes. On the one hand, by its monetary manipulations it was attempting to raise the Economic Rent Line above the Speculative Rent Line. This did not work as it was nullified by the people. Even if it might have succeeded in raising the Economic Rent Line, its measures to help farmers, businessmen and homeowners meant it was assiduously at work to prevent the Speculative Rent Line from falling.

The New Dealers, of course, did not understand that their efforts, no matter how well meaning, were self-defeating. They had no conception of the effect of our system of land tenure on the business cycle. For that matter, few people appreciate its importance today.

Monetary juggling had greater effect after World War II. By that time, the people's psychology had changed. They did not hoard money-aids, certainly not on the scale that they did in the 1930's. In addition, businessmen were willing to engage in new enterprises and to expand their existing ones. Therefore, they borrowed the exchange media which the banking system produced. So the money-aids appeared in the marketplace, and in such quantities that prices rose. At the same time, the authorities indulged in spending orgies which, made those of the New Dealers models of federal administration fiscal decorum by comparison. While the federal administration relied to an extent on taxes, it did not hesitate to increase the nation's debt. And, as the debt wound up in the banking system, it meant that it was "monetized" on an increasing scale.

Thus, prices rose not merely relatively but absolutely. In addition, landlords and creditors either did not insure themselves against the dangers of inflation, or at least not on a sufficient scale to cope with the depreciation of the exchange media. Undoubtedly, they simply did not expect the depreciation to attain the degree that it has. Why?

It must be remembered that it was generally expected that after World War II, the economic situation would be similar to post World War I. It was thought there would be a depression similar to that of 1920-21. Also, while the Korean War had the usual expansionary effect that wars have, it was assumed that with the cessation of hostilities, poor business would ensue. It was a long time before people were convinced that inflation was the normal pattern. In addition, people did little or no hoarding of money. Businessmen were willing to borrow at the banks, particularly when the expected slow business did not materialize to any extent. Because the supply of money-aids kept increasing, discounting occurred, which meant that prices rose. And yet during most of this time, people still retained their confidence in the purchasing power of the exchange media. The fact that Europeans were anxious to have dollars and that theoretically the paper-dollars were exchangeable into gold (at least by foreign central banks) lulled the people into a complacent attitude during most of the 1950s and the early 1960s.

Speculative land values rose but probably not at a sufficient rate to keep pace with the depreciation of the money-aids. As landlords and creditors apparently did not appreciate the extent of the depreciation, they did not institute many escalator clauses to protect themselves until relatively recently.

With rising prices for most goods and with speculative rent probably not rising proportionately, it may be that the Economic Rent Line was above the Speculative Rent Line for much, of the period involved, or at least the disparity between them was not too great.

In addition, the falling standard of living of those on fixed incomes probably helped. Whether the standard of living of laborers dropped is a moot question. In view of the huge quantities of material goods which were purchased, it would appear that, if anything, their standard had risen. If such was the case, the rise was not as great as it should have been considering the huge increase in productivity which had occurred.

In addition, new inventions, new methods of production, as well as better managerial techniques increased production tremendously. All such would have a tendency to squeeze out the speculative rent.

Also, the government's welfare measures, such as Social Security, and unemployment insurance, permitted it to raise taxes to high levels. While taxes discourage production, income taxes tend to take at least some of the speculative rent. Much of this winds up in the hands of the unemployed, the indigent and the handicapped in various forms of welfare payments.

The net effect of all this is that the fourth method may be said to have worked to a degree, but at a great cost. That price has been, is being and will be paid in the future. Those on fixed incomes have been paying the price in lowered living standards. The rest of the populace, if they have not paid the price in one form or another, will in the future. They have saddled themselves with an astounding amount of debt which must be paid off. In addition, grave social disorders have arisen throughout the nation, much of it sparked by the rising cost of living induced by the inflation. The gargantuan debts of the people, as well as the government, will probably be liquidated by a still greater inflation of the exchange media than at present.

While the depreciation of the money-aids, as well as such foreign adventures as the Korean War, may have aided in preventing a serious drop in production from World War II until the early 1960s, it is a question if inflation can have the same effect in the near future. The people are aware that inflation is the American way of life now. Landlords and creditors are avid in devising ingenious safety measures. It may well be that the escalator clauses they place in loan contracts may not only enable them to keep pace with the present rate of inflation of exchange media but may be overly protective. If that is the case, unless such factors as new inventions and a falling standard of living compensate, the Speculative Rent Line will tend to be above the Economic Rent Line. If the disparity becomes sufficiently great, the final corrective may be induced -- a depression.

Whether such will occur or not may depend on the administration in power. Since depressions are politically unpalatable, it would be most likely that as business turns down and the people turn to the Government for help that it will intervene with an inflation of money-aids on a still greater scale than previously. This would be one sufficient to raise the Speculative Rent Line despite the escapes adopted by creditors and landlords.

One other solution might be for the nation to become involved in a great war. From an economic point of view, this is the worst type of depression but it is not recognized as such. That may be why war is so popular with some politicos. During a war, everyone is working or fighting, but the production of goods which people desire drops drastically. Production consists largely of war materiel, but people do not want cannons, warships or warplanes. They desire food, clothing, shelter, and services as drama, painting and music. But to foster the war effort, these consumer goods are reduced to the minimum level. Voluntarily or involuntarily, the people are adopting a lower standard of living.

War might be looked upon as a method to prevent a depression from occurring. When all else fails this will work, horrible though the thought is. When a nation has embarked upon inflation of money-aids as the means to prevent a depression which it thinks is imminent, and finds that the policy works only too well so that what is known as a "runaway inflation" occurs, then the obvious solution is to deflate the quantity of money-aids. But under our present institutional arrangements wherein land is treated as private property, this would bring into being the very thing the inflation was initiated to prevent -- a depression. To prevent this, a dictatorship may be established or a war started.

This does not mean that politicians necessarily deliberately plan either contingency. Rather, the problems created due to the unsound economy engender arguments and disputes within and without the country. Economic nationalism rears its ugly head, with high tariffs, quotas and discrimination against the products of other countries. These nations, in turn, resort to similar tactics in retaliation. The ill feeling aroused spreads to other areas. Thus, though the basic disputes are economic, it may appear that they are ethnic, religious, social or cultural conflicts.

In a war, almost anything can happen. Through controls, the government can freeze prices, including speculative rent. It cannot, really, prevent prices from rising or falling, but it appears that it does. However, its actions can result in speculative rent falling, or at least in not rising. This is because the government's measures, as well as the war, make future profits so problematical that few are willing to gamble by bidding up land prices or rents.

If the nation had inflated the quantity of exchange media to absurd heights, then the war may give the government the excuse to expunge most of it by partial or outright repudiation. If the war is lost, future prospects may appear so poor that speculative rent, if any exists, drops as no one cares to attempt any new ventures.

West Germany's amazing recovery after World War II has bean acclaimed as a tribute to the policies of the Austrian school of Economics. This is true, but only partly so. Under the influence of this libertarian school, the Germans established a relatively sound type of exchange media and removed most of the production and financial controls which the Nazis had imposed and which the Allies retained. Quite possibly such reform measures were the initiating factors. What they did was to permit labor and capital to go back to work and assured them that their monetary rewards would not be depreciated by inflation. But it is not sufficient for labor and capital to be free to work. Labor must have freedom of access to land. Such freedom to a considerable extent existed in Germany for the destruction had been so all embracing that naturally land prices had dropped. This meant that the Speculative Rent Line may have been far below the Economic Rent Line.

And, now that Germany is prosperous, it is being plagued with the usual business cycle problems. At this writing, it is still pursuing relatively sound monetary policies, at least in contrast to those of the United States and Great Britain. Increasingly, however, it is tending toward less sound methods with eventual results which will probably be little different from those of the past.

Recapitulation

A depression is a stoppage of production on a large scale. Laborers and capitalists decide it is better to stop producing than to continue as the income they receive is too small. Landlords also prefer to hold their land idle on the assumption that the rents they are offered are not what the land's future demands.

The cessation of production snowballs downward. Prices of goods, wages and interest drop. Finally contract rents and land prices drop.[6] When the rent for land drops sufficiently so labor and capital, after paying the rent have sufficient to make them feel it is worth their while to produce, business revives.

There are three spontaneous methods to induce a recovery. The first method is the depression itself. If contract rents, land prices, as well as money-interest charges (much of which are really disguised rents) drop sufficiently so speculative rent is squeezed out of existence, then business will recover. Ordinarily, not only will speculative rent be eliminated from the contract rent but also some of the economic rent, particularly near the bottom of a depression. This is the bargain era when the shrewd are able to purchase land and capital at bargain prices.

The second method is for the people to produce new inventions, discoveries and improvements. These, in effect, change the speculative rent into additional economic rent as productivity has increased so greatly.

The third method is for the people to accept a lower standard of living, at least during the depression. Contract rent now consists wholly of economic rent as the speculative rent has now become merely more economic rent. This is because the laborers have decided to take less of the production pie, giving the landlords a bigger share.

A fourth method -- a planned one -- is to inflate the quantity of money-aids. This results in prices rising. However, contract rents and the fixed charges on mortgages and long-term debts cannot rise during the period of the contracts. Businessmen's sales increase even though they may not sell more goods. As they receive more money-aids for the same quantity of goods, they are in a better position to pay the fixed contractual rents and fixed money-interest charges. In effect, speculative rent has been squeezed out by depreciating it in terms of the money-aids.

At the present tine, the four methods are employed in one degree or another. The fourth method is a cure which is worse than the disease. It never works as planned. If the inflation of the exchange media is not stopped, the economy will wind up in the "crack-up boom" wherein the people refuse to accept the paper-money . This would cause a severe depression as production slowed. To prevent this, a dictator or semi-dictator might arise. If not, a war or revolution might break out. Regardless which contingency ensues, by one means or another, the money-aids are repudiated and new ones are substituted.

Whether the usual pattern of boom and bust resumes will depend on whether the same type of monetary policies are instituted, and whether land is treated as though it was private property. If such is the case, then the cycle of boom and bust will once again recur.

If, instead, a socialistic economy is established, then a continual depressed condition will exist, with no booms and no busts. Instead, a society of status will arise, with the bureaucrats, army officials and professionals on the top enjoying the cream of what little Is produced, with the mass of the people in a constant state of poverty.

Disclaimer,

It is important to recognize that Figure I is used purely for the purpose of exposition and clarity. It must not be assumed that such Items as the Economic or Speculative Rent Lines actually exist, nor are there any precise mathematical relationships between them. The purpose of the diagram is to illustrate the importance of speculative rent In the business cycle, and that its elimination, with accompanying reforms in the monetary system, will cause the business cycle as we know it to disappear.

The writer is indebted to Frank Chodorov for the diagram on the business cycle. He used it in his classes when discussing the boom and bust cycle.

NOTES

1. Paul Studenski and Herman F. Krooss, Financial History of the United States, p. 109
2. This is an extreme assumption made purely for purposes of illustration, It is based on a highly simplified version of the quantity theory of money. Prices would not automatically double, but certainly if anything as extreme as doubling the quantity of money-aids took place in a short time-span, prices would tend to rise. The government's or its central bank's non-interest bearing circulating debts would be discounted at a higher rate.
3. Cf. chapter on Centralized Banking
4. Paul Studenski and Herman S. Krooss, Financial History of the United States, p. 394
5. Ibid., p. 394<
6. Ordinarily banks strive to keep their assets fully invested. However, during this period the demand from business for loans was low while Excess Reserves were very large. The volume of high grade short-term investments which the banks legally could purchase was limited. Competition for these investments forced money-interest rates very low. For example, 91-day United States Treasury Bills were at a yield which was practically zero. Thus, banks wound up with assets for which they could not find sufficient worthwhile legal investments. The banks were said to have "idle bank deposits". Strictly speaking, this is a misnomer. It implies that these bank deposits were assets of a bank which were not being utilized. But bank deposits are not assets, at all. They are debts of a bank. What were idle were the assets which were not being invested.
   ... Under our fractional reserve system, member banks of the Federal Reserve must keep a specific percentage of their assets as reserves against deposits. The assets which a bank may use to meet its reserve requirements are called its Legal Reserves. The percentage of these assets which legally must be maintained is based on its deposits and are called its Required Reserves. The difference between the amount of Legal Reserves it has and the amount of Required Reserves which legally it must maintain is called its Excess Reserves. It would probably be more accurate to say that these Excess Reserves were idle than to say the bank deposits were idle. (For a fuller explanation of these technicalities see any textbook on the Federal Reserve System.)
7. Contract rent is composed of two parts. One is economic rent. This is the rent based on present productivity. The other is speculative rent. This is the rent based on assumed future productivity. Land prices represent the capitalization of contract rents at the going money-interest rate. If the contract rent contains a large percentage of speculative rent, then land prices largely represent the capitalization of speculative rent. Since most land is purchased with borrowed funds, such mortgages and bonds represent capitalized speculative rent, and the money-interest charges levied on them are really a disguised form of speculative rent.

Preface and Introduction BOOK 1 Chapter 1 * Chapter 2 BOOK 2 Chapter 1 * Chapter 2 * Chapter 3 * Chapter 4 Chapter 5 * Chapter 6 BOOK 3 Chapter 1 * Chapter 2 BOOK 4 Chapter 1 * Chapter 2 BOOK 5 Chapter 1 * Chapter 2 BOOK 6 Chapter 1 * Chapter 2 BOOK 7 Chapter 1 * Chapter 2 * Chapter 3 BOOK 8 Chapter 1 BOOK 9 Chapter 1 * Chapter 2 BOOK 10 Bibliography