Committee on Economic Security (CES)
Volume VI. Social Insurance
J. Economic Reform and Security Proposals
BACKGROUND OF THE DEANE PLAN
G. Reginald Crosby
October 25, 1934
The so-called Deane Plan was originally conceived by Albert Lytle Deane. But Mr. Deane found it difficult to make the time necessary to "place the Plan in its proper economic setting and to develop its implications. I am indeed grateful, therefore, to my friend and collaborator, Henry Kittredge Norton, who was willing to assume the task of tracing in the economic background, and who, because of his intimate knowledge of the subject and intense interest and belief in the soundness of the Plan itself, has made possible the publication of this book." The book is Investing In Wages: A plan for eliminating the lean years by A. L. Deane and H. K. Norton. Macmillan, N.Y. 1932. 155 pp.
Albert Lytle Deane is 45 years old. He was born in Chicago. He first worked in his father's business, the Hall Safe & Lock Company. His experience includes mining in Mexico, mail-order business in St. Louis, manager of International Correspondence School in Mexico, security and banking activities in California. He joined general Motors Acceptance Corporation in 1919. At present he is president of the General Motors Holding Corporation and deputy administrator of the Federal Housing Administration.
Henry Kittredge Norton is 50 years old. He graduated from Dartmouth in 1905, a Dragon and member of Kappa Kappa Kappa. Studied at Pomona and the University of California. Admitted to California bar, 1908. An author, widely traveled, active in foreign relations at Williamstown Institute of Politics, International Conference of American States at Havana. Formerly a lecturer in modern history and in economics. At present treasurer, national Broadcasting Company, Radio City, N.Y.
(The capital letters in parenthesis in the text refer to my comments to be found on pages which follow the exposition of the background of the Plan)
The aim of an economic system is continuing prosperity. Prosperity depends on mass production. Mass production depends on mass consumption. Mass consumption depends on purchasing power of the masses. Purchasing power of the masses depends on wages. Continuing prosperity demands "investing in wages." (A)
The road to prosperity, to employment, to profits is through a balancing of the production-consumption activity of our economy. This balancing can be done, and done automatically, by controlling consumption through control of wages.
"The task of industry, of labor, even of government today is to bring back sufficient purchasing power.(B) The value of all of the investment in this country is dependent upon maintaining the flow of wages in sufficient volume to assure the consumption of the products of the nation's industry."
Mr. Deane attributes "these terrific economic crises" to under-consumption which occurs when producing power outruns consuming power. While this "may not have appeared in every case to be the immediate cause of the slump, it is safe to say that each crisis would have rapidly corrected itself if there had been no discrepancy between the power of industry to produce and the power of the public to buy." It follows from this and from the fact that wages are "the controlling element in regulating national consumption" that when, as for instance in late 1929, "the contribution of the average individual worker to the total production was more than his share of the consuming power would enable him to buy" the maintenance of wages at 1929 rates could only aggravate the situation. "Preposterous as it may seem, the thing most needed in October, 1929 to prolong the prosperity of the previous years, was higher wages!" (C)
Wage incomes of the masses must total enough to keep business going, but wages must never, for industry as a whole, be so high as to absorb the whole output of industry. "There must be profits or business will stop." The wage level must "not be so high as to interfere with the other charges which industry must carry." (D)
"Eventually every dollar received in payment of the products of all industry is distributed as either earnings or profits." ("As 'earnings' we should include all compensation for personal services rendered, fees, salaries and wages. In 'profits' would be included all returns on any form of investment, including interest, dividends, rents, royalties, etc., etc...And the largest item in 'earnings' is wages.") All income received is:
- expended in consumption,
- used through investment,
- lost by the actual destruction of money, or
The last two are negligible in ordinary times, although in panic times boarding may "run to appreciable figures and help to intensify business depression."
Approximately 90% of the "earnings" is used for consumption and 10% for investment. Of the "profit" income 50 to 70% is used for consumption and 30 to 50% goes into investment.
Our concern is not with the total purchasing power available in the community. The trouble comes when from time to time production gets seriously ahead of consumption. Over a period of years it is probably true that no matter how much a country produced, it thereby automatically provided itself with the purchasing power which would enable it to buy its own products. This fact "relieved us of the necessity of finding the necessary purchasing power to consume however much we may produce, and lease us the lesser problem of devising some means to distribute the purchasing power which already exists in adequate measure." (E)
Income received in 'earnings' or 'profits' is largely spent to purchase the products of industry. These products are of two kinds - producers' goods and consumers' goods.
The ultimate consumer makes the market. His desires are unlimited. According as he has purchasing power business is good or bad. "The man who buys producers' goods makes only an incidental contribution to prosperity. He cannot make prosperity. For he will not buy producers' goods unless he has a reasonable assurance that he will be able to sell the consumers' goods they will produce." (F)
If there is an increase in the proportion of the national income going into 'profits' and the proportion into 'earnings' is lowered, immediate consuming power is decreased and producing power is increased. (G) The result is an unbalanced situation in which purchasing power distributed to consumers is insufficient to buy the flow of consumers' goods moving into the market. These consumers' goods must be purchased if prosperity is to be maintained. The ultimate consumer makes the market, makes prosperity.
Somewhere there is a proper balance between producers' goods and consumers' goods. "We do not know just what that balance is in figures but wen can visualize what its effect would be." Whatever the ideal proportion between producers' goods and consumers' goods is, it is not a constant. "It would vary form year to year and probably even from month to month in accordance with the demands of the times and the progress of scientific research." (H)
Now if this interpretation is correct, the maintenance of prosperity "so that all men can once more be employed" and "to keep the industry of the country at the most profitable level," requires that the proper balance be kept. This balance should be kept, not by an attack on production, but by control of consumption. Controlling consumption will control production. "The obvious way to restore the balance... is to increase the consuming power." Wages are controlling element in 'earnings' and, therefore, in regulating national consumption. "We cannot, at least with our present knowledge, determine the exact level of this adequate wage. (I) As far as specific figures are concerned, it is probably different for different industries, for different localities, for different times." (J) "The flow of wages should be so regulated (I) that, under constantly varying national and world conditions (K) the amount supplied will be just what is necessary to keep the country's economic machinery running at maximum productiveness...i.e.. To assure the consumption of the products of the nation's industry."
If the regulation has not maintained the balance (L) and "business becomes conscious of a general over-production (M)," we should "by some means automatically reduce production (N) and at the same time sustain the consuming power of these 20,000,000, workers" engaged in manufacturing and mechanical and mining industries and transportation. (O)
"There in one further refinement" to the mechanism of restoring a balance. "All industries do not reach the point of over-production simultaneously. It is the cumulative effect of over-production in various industries which produces the recurrent crisis. If, therefore, we could know when any individual industry reached the point where its contribution to the total production was greater than its contribution to the total consuming power of the country, we could at once start the corrective process working within that industry. If we could automatically raise the consuming power of its workers, we could by promptly restoring the necessary balance in that industry, minimize the possibility of a general over-production." (P)
Mr. Deane writes that "an ideal balance between producers' goods and consumers' goods would bring into operation the entire producing capacity of the country. The amount of the national effort which would go into the creation of producers' goods would be just sufficient to accomplish three things."
1. To provide replacements for broken and worn out machinery in order to "prevent any diminution in the national producing capacity."
2. "To increase our producing capacity in proportion to the increase in our population...to maintain the per capita rate of consumption."
3. "To give effect to every new invention, every scientific process and every improvement in management which might be devised, in other worked, we should be able to take advantage of every technical advance which would enable us to produce the same amount of goods with less work or to substitute some new and better sort of goods for those already in use."
"Having provided for these three requirements, all the rest of the national energy would be devoted to the production of consumers' goods, which would thus in increasing quantity be made available to the population of the country." (Q)
A. There is nothing new in this point of view. Many others have expressed the opinion that the cause of the business cycle is the fact that consumer buying power does not keep pace with production. The marxists made this point. Foster, Catchings, Filene, Chase, Ford, Adams, Martin, Douglas, the Technocrats and others have called attention to this phenomena. J. A. Hobson has made it the very center of his economic writing.
Several of these writers believe that a new economics must be written. The old economics is the lineal descendant of the Manchester School. It takes its departure from an environment of and scarcity, and environment in which men must fight (compete) with each other for existence and in which the "best will survive. The new economics must be written from the facts of abundance, not scarcity. The problem of supply, long overemphasized by the English school, has been solved. Production is no longer a problem. The industrial country of today has the goods. The problem is one of consumption, of distribution, of leisure.
Arthur Dahlberg in Jobs, Machines and Capitalism makes a case for the compulsory shortening of hours of labor. Major C. H. Douglas, a British engineer, maintains that it is impossible ever to sell all the commodities that are produced, or that can be produced, and suggests a scheme of moving goods into the hands of consumers by the use of Social Credit and a National Dividend. Frederick Soddy, a British scientist, takes a somewhat similar tack.
B. Mr. Deane Makes his case for government "Intervention" in the following words. "While, for example, it would be in the interest of industry as a whole to arrange for the massing of reserves of consuming power at any weak point in the economic line, it would always appear to the interest of the individual employer to allow others to carry the load while he accepted the benefits of their action. It is to the advantage of every property owner in a city to have police and fire protection. But if these were left to be supported by voluntary contributions as in villages, they would hardly be effective for city use. Hence the burden is distributed equably by governmental action.
Similar governmental action may be necessary in solving the economic problem. If it is, the use of the governmental authority to enforce the general observance of the requirements of any plan which may be adopted, should not be confused with the interference of government in business. Business may well call upon the authority of government to assist in setting up machinery to prevent depressions. That is quite a different thing-and a much more desirable thing-than for business, by abdicating its own leadership, to invite government to assume the direction of the economic life of the country."
The sole purpose of such (nation wide) legislation would be to preserve the equities of employers and workers alike. It would avoid extending the control of government over industry."
C. The similarity of this thesis to the Marxian approach is shown by the following quotation from W. C. Mitchell. "The most vigorous attempt to prove that crises are a chronic disease of capitalis, however, was that made by Rodbertus and elaborated by Karl Marx. The germ of this theory also is found in Sismondi and Robert Owen. Wages form but a fraction of the value of the product and increase less rapidly than power to produce. Since the masses dependent upon wages constitute the bulk of the population, it follows that consumers' demand cannot keep pace with current supply in seasons when factories are running at full blast. Meanwhile the capitalist-employers are investing their current savings in new productive enterprises, which presently add their quotas to the goods seeking sale. This process of over-stocking the market runs cumulatively until the time comes when the patent impossibility of selling goods at a profit, or even at cost, brings on a crisis."
D. While Mr. Deane begins his book with a touching picture of the bread line and a appeal for full time employment, he is primarily concerned with the maintenance of profits and charges, other than wages, that industry must carry.
His point of view would seem to be that the maintenance of wages and employment, in fact, of all business activity depends absolutely upon the maintenance of profits. "The employer...is quite right when he says that if there is no profit there will be no business. And if there is no business there will be no wages." But further, "if there are no wages, there will be no buying power. And if there is no buying power, there will be no profits." Therefore, the first thing to do is to maintain 'profits.' He finally reaches the conclusion that the best way to maintain 'profits' may be by stopping investment in goods and making investment in wages.
E. At this point Mr. Deane might have suggested, as others have done, that the problem of deficient purchasing power in the consumption market might be ameliorated by transferring purchasing power, through high and progressive income taxes and inheritance taxes, form those who received large 'profits' and do not use their income to purchase extensively in the consumption field. But no comment is made along these lines.
On the contrary, so far as the Plan is concerned Mr. Deane would leave things exactly where they are, except for an occasional dose, or dole, or benefit to consumers (the masses, the workers). This dose is not administered to raise wages. It is passed out solely to maintain purchasing power because this is the only way to hold to mass production and 'profits' and to maintain the values of investment.
The status of the workers, of the masses, is not to be improved except in this incidental manner. Apart form these doses the share of 'earners' in the national income is not altered by the plan.
This does not mean that the real income of the earners is fixed for all time. Industrial progress will increase the absolute size of the national income. The massed, receiving the same proportion of the total income, will benefit as that total income increases.
"What amount the worker should receive as wages compared with what the employer should receive as profits has been the bone of contention between 'labor' and 'capital' since the days of the industrial revolution...Figures (from 1859 to 1929) are far from complete, but they seem to indicate a fairly constant relation between wages and the total value of industrial output...We are not especially concerned here with the relative shares of 'profits' and 'earnings' in the national income. We are immensely concerned as to the size of the total national income...The relative share of the two elements in the national economy may be safely left to those two elements to work out between themselves..."
What, then, does he mean when he says that we are left "the lesser problem of devising some means to distribute the purchasing power which already exists?" It seems to me that this means leaving distribution untouched except for an occasional delivery of purchasing power to the masses, and this is to be administered as benefit, not as wage.
And yet, insofar as Mr. Deane takes past figures to substantiate "a fairly constant relation between wages" and 'profits' plus some elements of 'earnings', he would seem to be in favor of fixing the workers' share of the national income. And further, Mr. Deane takes his figures form a period during which these relative shares were influenced by business cycles and implies the use of this data as a guide for the future when under his Plan the cycle would have been stabilized.
How should the national income of the future be shared according as progressive productivity was due predominantly to techniques of machines and management or to labor?
How would the stabilization of the population of the United States affect these relative shares?
As industrial countries mature do the workers tend not only to become better off absolutely, but also relatively better off?
How should the realization of Mr. Deane's aim of producing "the same amount of goods with less work" affect the share of labor? Since he says he would not interfere with distribution does he imply that the working masses are to be paid as much for a shorter week as for the "present "week?
Is it conceivable that a system of benefits directly to the consuming masses can be fitted into a system in which capital and labor are supposed to fight it out for the irrespective shares of the national income?
F. While the buyer of producers' goods "cannot make prosperity," Mr. Deane's thesis is that it is his over-purchase of producers' goods, or, as Deane would put it perhaps, under-purchase of consumers goods, that caused depression. Since Mr. Deane's masses spend their earnings for consumption, would it not be correct to say that Deane's emphasis and attack should be directed to the producers'-consumers' goods expenditures of the 'profit' received. It is their over-purchase of producers' goods that really caused the unbalancing and crises. But no. The buyer of producers' goods "will not buy producers' goods unless he has a reasonable assurance that he will be able to sell the consumers' goods they will produce." How then can there ever be an unbalancing and depression: Mr. Deane's answer, I presume, would be that purchasers of producers' goods are disappointed in their "reasonable assurance." But a supplemental compensation to the masses does not appear to me to offer any assurance that such compensation would be spent for the particular type and style and quantity of merchandise produced by the particular machines whose purchase disrupted the perfect producers' goods-consumers' goods balance.
G. This case would seem to imply that Mr. Deane should be concerned with the respective shares going to 'profits' and 'earnings,' whereas he declares that "we are not especially concerned here with the respective shares."
H. Undoubtedly Messrs Deane and Norton are no the only ones who can conjure up some vision of perfect balance in our economic functions. However, the visualization of an utopia and the actual realization of it are as far apart as the poles when in reality "we do not know just what that balance is in figures." Our difficulties in accepting the vision are not lightened by Mr. Deane's own admission that this balance is a dynamic one, that it is never constant, that it is even swinging from month to month. Professor H. L. Moore, in his Synthetic Economics, has tried to handle mathematically the problem of a moving equilibrium.
I. Here Mr. Deane comes back again to a determination of the adequate wage which he has previously left for capital and labor to work out by themselves. Our only suggestion would be that he does not mean to determine the wage. He would discover what the adequate wage ought to be, leave the actual wage as it might be, as determined by capital and labor, and make up the difference between the adequate wage and actual wage by a dose of purchasing power.
J. Here is, indeed, a costly and difficult "bit" of statistical work. The governmental inquiry into business demanded by this project is revolutionary if not downright impossible in America today.
K. This phrase, "under constantly varying national and world conditions,"
would seem to be
a sop thrown to those who believes that there are other causes and explanations of business depressions (like wars, etc.) than the one held by Mr. Deane.
L. Mr. Deane has some doubts as to the efficacy of his own plan since he finds it necessary to set forth the mechanism by which balance would be regained, once the regulation broke down. Of course, it might be that he has in mind not an unbalanced economy under his Plan, but a suggested way out of our present difficulties.
M. I confess to ignorance as to just how "business becomes conscious of a general overproduction." However, I presume that Mr. Deane means "general overproduction" in the business sense of the term, i.e., too much produced to sell at a profit. If this is his view, then profits, not wages, should be his criteria of unbalanced economy. He does nothing with this idea which, of course, would enmesh him in all kinds of capitalization, valuation, fair return, reasonable return, and normal profit controversies.
N. Mr. Deane's emphasis is on under-consumption. He reputedly is interested in pushing the industrial machine to maximum utilization, to maximum efficiency, to mass production. Yet, when anything goes wrong with his maintenance of the balanced system of the Plan he would "by some means automatically reduce production." To be sure attention is to be given to consumption, but the consuming power of the workers is not to be increased, the aim is merely to "at the same time sustain the consuming power." And further, Mr. Deane's object is "to bring back sufficient purchasing power, so that all men can once more be employed." How can this be achieved "by some means which automatically reduces production?"
O. Mr. Deane writes: "But wages are paid in various kinds of industries. Agriculture, trade, domestic service, etc., include almost three-fifths of the wage-earners of the United States. The other two-fifths, approximately 20,000,000 workers, are engaged in the manufacturing and mechanical and mining industries and in transportation.
"The control of wages in these latter occupations involved less disruption of our accustomed ways of doing business than would be the case in any of the other fields. In any event, the continuation of the buying power of the 20,000,000 workers engaged in manufacturing, construction, mining and transportation would go far towards stabilizing business conditions in other areas. The assurance of this much business activity should be sufficient to keep the remainder of the nation's workers occupied."
P. This "further refinement" is full of difficulty.
In the first place, I do not see how it would be possible to find out, "when any individual industry reached the point where its contribution to the total production was greater than its contribution to the total consuming power of the power." To get this information one would have to inquire into the budgetary expenditures of the personnel of the industry concerned and of the personnel of those who had received income in the supplying of raw material to the industry. It would be necessary to know these expenditure habits and the characteristics of their change before one would be able to get facts as to how much of the industry's expenditure was being added to consuming power by entering the market for consumers' goods as against what might be moving into the market for producers' goods.
In the second place, if we suppose that we have the facts, the "refinement" would not work. Suppose that the facts reveal that the shoe industry is turning out a total shoe-value product in excess of the consumer purchasing power made effective in the consumers' goods market by those who receive 'earnings' and 'profits' in the shoe industry. Now Mr. Deane suggests that the consuming power of the workers in the shoe industry be raised. The shoe workers' income is to be increased, not by increasing their wages, but by giving them some supplemental compensation which will increase their purchasing power. This increased purchasing power in the workers' hands will be spent in consumption, or some 90% of it will be spent in consumption, and so the goods (shoes) will not suffer, prosperity will be maintained. This assumes that all of the supplemental compensation will be spent for consumers' goods. It also assumes that these shoe-industry workers will spend their supplemental compensation for shoes, and that the shoes on the market are just the shoes the workers want.
On the other hand, I may be unfair to Mr. Deane in this interpretation. It might be that his general thesis of price, profit and employment maintenance should be so applied. Suppose, then, that the supplemental compensation is sufficient only to sustain the shoe workers' income, not his job, and that we let the shoe industry itself slip. Suppose that we do not concern ourselves with the industry's profits (which are necessary to business in general), with its prices, with its employment. Under these circumstances we could believe that, if the purchasing power of the shoe workers and of all others connected with the industry were maintained, the cumulative downward spiral of recession would not get underway. But here we should also have to provide supplemental compensation to those who normal received 'profits' from the industry because some 50 to 70% of these distributive shares is expended in the consumption market and these 'profit' incomes would be cut off if the shoe industry was allowed to "lapse" until its excess productive capacity became "balanced" again.
The latter interpretation would not seem to fit into Mr. Deane's thesis for he says "immediate restitution of the equilibrium of any particular industry which has got out of balance is so vital to industry as a whole that it can well afford a general assessment to prevent a collapse of the consuming power supplied by that industry." This statement is confusing. The first part of it would seem to support my first interpretation; the last part my second interpretation. The immediate restitution of balance in a particular industry seems to me to be one thing; the maintenance of the purchasing power of the workers in a particular industry seems to me to be something different.