relatively small area." And he added that "to build a branch office to service loans and to make loans, I believe, that $5,000,000 would be the minimum." 39 Hence, he explained that the Metropolitan made no loans in Oregon and Utah because the volume of business was insufficient; that it made no loans in Texas, even though Texas "has excellent land," because it feels that it could not build a $5,000,000 volume there; and that it made no loans in California because "California is a long way from New York, for one thing." 40

41

Life insurance funds are not venture capital; they are seeking safe, long-term investments, preferably the bonds of well-established enterprises or governments. Thus at the end of 1937 the 49 largest life insurance companies held 12.4 percent of the total long-term debt in the United States, 10.5 percent of farm mortgages, 13.0 percent of all urban mortgages, 11.6 percent of Federal Government bonds, 11.7 percent of all industrial bonds, 17.4 percent of railroad debt, and 18.2 percent of all public utility bonds. With such heavy investments in railroads and utilities, the managers of life insurance companies have sought to safeguard these funds not only by interlocking directorships but have exercised considerable influence on management policies, particularly in times of reorganization. Then they play a dominant role on protective committees.2 This has appeared repeatedly in the records of railroad reorganizations.43 and in Securities and Exchange Commission studies of the role of protective committees.44

In recent years, partly as a result of foreclosures, life insurance companies have become enterprisers despite themselves. For example, they have been compelled to take over a good deal of farm and urban real estate. They are now large owners of farm properties. The Metropolitan Life Insurance Co., for example, operates more than 7,000 separate farms, representing an investment of close to $80,000,000 in 25 States. It employs over 350 farm managers, appraisers, and agricultural experts, and carries out extensive undertakings for the rehabilitation of farm property, repairing barns and homes, building fences, etc. In 1937 alone it harvested 50,000 bales of cotton, 10,000,000 bushels of corn, 5,000,000 bushels of wheat, 6,000,000 pounds of peanuts, and 1,000,000 pounds of tobacco.46

So far as urban real estate is concerned, in addition to managing thousands of one- to four-family houses, apartments, hotels, stores, office buildings, theaters, banking houses, schools, and varied types of business properties, some of the larger companies are putting hundreds of millions of dollars into large-scale housing proects.48

47

41 Ibid., exhibit No. 2259, p. 15493.

42 Ibid., exhibit No. 15573.

43 Hearings before the Senate Committee on Interstate Commerce, Investigation of railroads, holding companies, affiliated companies, pursuant to S. Res. 71, 74th Cong., 2d sess. Securities and Exchange Commission report on the study and investigation of the work activities, personnel, and functions of protective and reorganization committees, Washington, 1936-40. Particularly in instances of default of municipal securities, life insurance companies seem to have played no small part in determining whether local governments should borrow, how, at what rate of interest, etc. 45 Hearings before the Temporary National Economic Committee, Part 10-A, pp. 180 In the 7 years, 1932-38, the principal companies foreclosed farm mortgages with an unpaid principal amount of $669,559,000 and urban mortgages with an unpaid principal amount of $1.229,849,000. (Ibid., pp. 165 and 199.)

and 217.

46 Ibid., Part 28, 14950.

7 Ibid, Part 10-A, pp. 161, 184, and 220.

48 For a description of these developments and an estimate of their importance, see Temporary National Economic Committee Monograph No. 8, Toward More Housing, and ch. XIII, infra.

CHAPTER XII

STIMULATING INVESTMENT 1

UNDERLYING ECONOMIC ANALYSIS

The difficulties in trying to raise the level of investment have been summarized for the Temporary National Economic Committee by Prof. Alvin H. Hansen.

Let us consider what is necessary in order to keep the income stream flowing on a high level. * * * The income received or realized out of the production process of the prior week or month will either be expended for consumption or it will be saved. The part that is spent on consumption goods and services automatically becomes the source of a new income stream. The part that is saved may or may not feed into the income stream, depending upon whether or not these savings are used either by the saver himself or by a borrower for the purpose of capital goods, plant, machinery, industrial and commercial construction, houses, office buildings, schools, or public works.

If the saver does not himself use the funds, or if he fails to find a borrower who will use them to purchase plant, equipment, and other capital goods, the income stream dries up and unemployment prevails in the capital-goods industries. * * * If the amount which is saved is large, as it is likely to be at a high income level, it is necessary that equally large outlets be available for these savings in equipment and plant expansion, and in residential and public construction.2

Professor Hansen in effect considers saving, or withholding money from consumption, as an interruption in the smooth flow of income. If saving is not offset by simultaneous investment-the two need not stand in a cause-and-effect relation to each other-the consequence will be a decline in national income and an increase in unemployment.3 It follows from this analysis that, "If it can be established what proportion of an assumed national income will be saved, or withheld from current consumption, it is also established how large the outlets for or offset to saving will have to be to attain and sustain that national income. Hence the problem of maintaining full employment is the problem of securing sufficient outlets for the saving that will accompany full employment."

The magnitude of the problem of securing adequate investment opportunities, and thus of utilizing savings and maintaining a high level of income and employment, depends upon the amounts which the community desires to withhold from consumption at a level of income corresponding to full employment. In a pure consumption economy everyone would desire to consume his full income, whatever its size, and in such a society no investment problem would exist. In a high-savings economy the distribution of income and habits of

This chapter was written by Dr. Paul M. Sweezy, Department of Economics, Harvard University. It was reviewed and criticized by Dr. Theodore J. Kreps, professor of business economics, Graduate School of Business, Stanford University; Dr. Alvin H. Hansen, professor of economics, Harvard University; and Dr. Seymour E. Harris, Department of Economics, Harvard University.

2 Hearings before the Temporary National Economic Committee. Part 9, pp. 3500-3501. See also the exposition of Dr. Lauchlin Currie, ibid., pp. 3521-3522.

Ibid., p. 3523.

thrift are such that a relatively large amount is saved in prosperous times. The United States today falls into the category of a highsavings economy.5 The problem of investment outlets thus becomes one of paramount importance to the economic well-being of the country.

One of the special characteristics of a high-savings economy is that it possesses potentialities of rapid progress and dynamic change. A large part of its resources are continuously available for doing new things in new ways. If conditions are favorable it can settle new areas, add new industries, absorb large population increases without curtailing its accustomed standard of living.

At the same time, however, a high-savings economy is inherently subject to sharp fluctuations in economic activity and national income. Any saturation of investment outlets, however temporary in nature, is certain to be accompanied by a sharp decline in output and employment. The appearance of new opportunities for expansion, on the other hand, can give rise to an immediate resumption of the interrupted upward trend.

Finally, as Hansen pointed out to the committee—

If such an economy fails to find adequate investment outlets in plant and equipment for its new savings and for its depreciation allowances, it will lose its dynamic quality and become a depressed and stagnant economy, with a large volume of chronic unemployment. The high-savings economy can escape a fall in income and employment only through the continuous development of new outlets for capital expenditures on industrial plant and equipment, and on commercial, residential, and public construction."

HISTORICAL BACKGROUND OF THE PROBLEM

The decade of unemployment through which we have just passed is quite unprecedented as to both duration and severity. According to one witness testifying before the Temporary National Economic Committee, this may properly be regarded as a symptom that we are now experiencing the consequences of certain major economic changes as fundamental as the industrial revolution of 150 years ago." 7

The dominant characteristic of the nineteenth century was a vast expansion in population and correspondingly great migrations into new and previously largely unsettled areas. Territorial and population expansion accounted, directly and indirectly, for perhaps one-half of total capital outlays throughout the nineteenth century.

8

This great movement, unique in world history, reached its apex in the decade immediately preceding the World War of 1914-18. So far as the United States is concerned, the largest absolute population increment occurred during the decade 1901-10, an increase which was not quite equaled during the 1920's, and which fell off by about onehalf during the 1930's. All estimates indicate the probability of a further continuous decline in the decennial increase of population." This decline in the rate of growth is in itself sufficient to exert a depressing effect, since the system has been geared to absorb the larger

5 Both Hansen and Currie appear to hold this view. See Hearings before the Temporary National Economic Committee, Part 9, pp. 3536-3537. For further supporting evidence, see ch. IX, supra.

Hearings before the Temporary National Economic Committee, Part 9, p. 3503.

11

increments of past periods.10 To illustrate: if, as Hansen believes to be the case, the long-term trend of residential construction tends to vary with the rate of population growth " (assuming a constant income structure), then a drop in the rate of population growth will probably be accompanied by a decline in residential construction, which constitutes an important investment outlet.

The prosperity of the 1920's was clearly connected with demand for capital in several directions. The greatest building boom in our history occurred during the years 1923-28.12 Exports of capital, particularly to war-torn European countries, averaged around $1,000,000,000 a year.18 State and local governments borrowed heavily for construction of roads, schools, and other public works.14 Consumer credit expanded enormously.15 And, last, but by no means least, the great automobile industry, with all the supplementary and subsidiary industries dependent upon it, was growing to its full stature during the twenties, and in the process opening vast outlets for capital investment.16

None of these factors regained its importance during the thirties. Real estate values collapsed, the percent of occupancy falling by 1932 to all-time low levels. The yearly increase in the number of new families became less and less. Consumer credit institutions were lending money with caution. State and local governments became so enmeshed in financial difficulties that some of our largest cities were unable even to meet greatly reduced pay rolls, much less to continue making capital outlays. The Federal Government, to be sure, tried to take up the slack in its program of public works, but the total amount of public construction was on the whole less than that during the middle and late twenties.17

The automobile industry began to focus much of its attention on the "used car problem" and replacement markets.18 Foreign countries, instead of absorbing American capital, were suffering from economic and political disturbance of such catastrophic proportions that funds flowed, or rather fled, to the United States on the most gigantic scale ever witnessed in the history of international gold movements.

Two further considerations of a less tangible sort are equally relevant in this connection. First, as Hansen says, "we must face the fact that we live in a peculiarly risky world, and this fact does have a repressive effect. It makes the problem of adequate investment outlets more difficult." 19 It would doubtless be over-optimistic to look forward to an early stabilization in the political and international spheres which would effect a material reduction in this high risk factor. Second, the researches of the Committee, summarized and analyzed in foregoing chapters, make it clear that economic power and control over investment decisions are now concentrated in relatively few hands.