IN good business years there is general activity throughout all industry. This means an increasing volume of sales, a minimum of unemployment, a spirit of optimism and confidence, a great stir of life throughout the whole economic structure. Prosperity, once under way, is cumulative. The revival of one business is easily transmitted to others, calling as it does for materials, for tools, for transportation and banking services, for labor. The wages spent give an impulse toward prosperity in the retail trade which is reflected back through the sensitive structure of industrial society. The great basic industries. which supply raw materials and the railroads are directly affected by the good fortune of any field of industry. The intricate correlations of finance and industry are so sensitive that good business in one locality or in one trade sooner or later tends to promote general prosperity, and eventually every mill is running to capacity, the railroads are jammed with traffic, the unemployed are all at work and working overtime, jobbers and wholesale houses are hardly able to handle their orders, there is a press of confident buying, and retail stores are thronged with purchasers. This is prosperity. The greatly augmented flood of produce, from building brick to lip sticks, is bought by the thousands of purchasers who are now receiving high wages for full-time and overtime employment. They are now able to afford washing

machines, wrist watches, a set of Shakespeare, and a car bigger than the Browns'. Novelties and ephemeral luxuries of every sort are in demand, as are also more durable and conservative commodities like woolen blankets, gas stoves, and bathtubs. Neither does there fail to be a quickening demand for old portraits, antique highboys, 'landscaped' gardens, and other things of beauty.

The authors of "The Dilemma of Thrift,' in the Atlantic for April, would persuade us that these good times need not come to an end were it not for thrift. This is a serious charge against a habit which we have been taught to cultivate as a virtue. Let us examine the evidence with care.

It is argued that the flow of money to consumers is less than the flow of goods, because some money is put aside as a saving instead of all being paid out in the conduct of business or manufacture. If a company making shoes pays out nine thousand dollars in wages, rent, materials, insurance, and so forth, in a given year, it expects to sell the shoes for ten thousand dollars, but it gives consumers nothing with which to buy the extra one thousand dollars' worth of shoes. Individuals, as well, save some of the money they receive, so that not even all that is paid out by the corporations is spent to buy the produce. A man may decide to save five dollars instead of buying a pair of shoes, and the money saved is withdrawn from

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the shoe market. But, we object, this money is not saved to be hoarded it is saved to be invested. The teply is made that money saved by the corporation and the individual is, indeed, usually invested, but that there is an important difference between money spent and money invested, for money invested results in increased production. The thousand dollars saved by the corporation and the five dollars saved by the thrifty man are invested, let us suppose, in such a way as to produce more shoes. The money is spent on wages, and so forth, and thus is dispersed to consumers, so that they now have enough to buy the original output of shoes. But they have received nothing with which to buy the additional shoes. Production must, therefore, be curtailed, and business thrown out of gear; and all of the hardships and wastes of idleness result from the simple fact that people do not spend all the money they make.

In considering this charge against thrift, it must first be made clear that it is general prosperity which is under discussion, and not the prosperity of this or that industry. Differences in the rate of expansion of various industries are conspicuous during a period of general expansion. Although all businesses are interdependent and intricately related, there is no constant ratio in the changes which take place. New inventions, new fashions and tastes, are obviously important in determining the trends of trade. In a period of expansion, when all industries are touched by quickening demand, business is usually especially active in luxury articles, the consumption of which is reduced to a minimum during hard times, and there is demand for goods of better quality and for more expensive things generally clothing, food, housing, furniture. If the volume of trade from year to year is represented by a series of

circles, it is the relative size of the different circles with which the present discussion is concerned and not that of the different segments which represent the trade in shoes, motor cars, harvesters, perfumeries, and so forth.

This point is emphasized because the first effect of thrift is to change the direction of consumption. Where money is saved and invested, it is spent on one thing rather than on another. The demand for shoes is reduced, but the demand for steel is increased. At the same time the expansion of other trades may cause a greatly increased demand for shoes by ditch diggers and miners, while general prosperity stimulates the market in gilt kid slippers. Thrift is only one of a great number of factors determining the size of the market for shoes or any other particular commodity. The tendency in saving is to decrease the potential demand for certain types of luxuries and to increase the demand for producers' goods. Industries must be adjusted to their own peculiar, changing trade condition, and the influence of thrift in promoting certain industries rather than others must be considered as only one of a number of influences which prevent modern business from attaining a stable equilibrium. In considering whether thrift undermines prosperity, this effect of saving is not what is held to be objectionable. For the purpose of sustaining general business activity one industry must be counted with another in making up the totals, and Messrs. Foster and Catchings do not mean to imply that business as a whole is benefited more when trade is relatively active in caviar, chiffon hose, and orchids, and relatively dull in pig iron and lumber. The different trades all employ labor and the other agencies of production, and by means of all of them money is kept in circulation. If money is spent on machines instead of on shoes it is

yet ultimately in the hands of consumers and is used in buying the product of industry as a whole. General prosperity, then, is stimulated by saving and investing as much as it is by spending money on shoes and motor cars, so far as the first effect is concerned.

II

The dilemma arises, we are told, because the motor cars and shoes wear out without any after effects, while the effect of investment is to produce more goods. It is this surplus of new goods without a corresponding amount of money in the purses of buyers which causes the difficulty. A man saves five dollars; he invests the money; another pair of shoes is the result. The effect of investment on the volume of produce is exaggerated in this illustration. The price of a pair of shoes does not buy the equipment to produce another pair the following year, and it is the effect of this investment on the immediate situation which is being discussed. The influence of saving in the long run is somewhat beside the point, as it is the short-termed business cycle which is under consideration. By the time the investment of five dollars resulted in the manufacture of one additional pair of shoes, the period of prosperity under which the saving took place would long since have seen its end.

Overlooking the unintentional exaggeration, we find that there is, indeed, made possible by saving and investment some addition, year by year, to the product of industry. But it is hard to believe that this increase of production is significant in the rapidly changing conditions which mark business prosperity. We are asked to picture a balanced flow of money and goods, which is upset by draining off some of the money and adding more goods. There is no such balance during pros

perity. The situation is complicated by a very rapid increase of the volume of produce quite aside from the effect of new investment, by an uneven expansion of all the different industries which make up business as a whole, by a rapid increase in the volume of currency through the extension of credit, and by rising prices which make it impossible to compare the market for any commodity this year with that of the next. In this welter of change, we are asked to consider thrift, with its tendency to increase the productivity of labor through providing men with better machines, as the important factor. It seems, however, that the illustrations used are too simple to fit the case and that certain factors, such as rising prices, are too important to be left entirely out of consideration. The changing price level will be discussed presently.

At this point, however, we may pass over the general complexity of the situation and suppose that the production of new goods due to saving is an important factor in the volume of trade. In 'The Dilemma of Thrift' it is stated that no additional money is given to consumers with which to pay for the extra goods shoes, motor cars, or whatever they may be. But investors do not give up their savings without promise of reward. They expect and receive interest. This interest represents, in the long run, the value of the produce their capital has made possible. By the time the five dollars saved by the thrifty man results in an extra pair of shoes, he will receive a dividend check with which to buy them. Producers are willing to pay for the use of the tools of production, and must, as a general rule, pay interest which approximates the marginal productivity of these tools. Competition between different industries and different producers for capital ensures to investors

a reward for self-denial and places at their disposal the funds with which to buy the surplus produce made possible by their thrift. Capital will, of course, flow to the industries which are able to make the highest bid for it. Investments will, therefore, not be made in businesses already overstocked, like the shoe trade of the illustration, but will go to industries in a favored position for expansion. Instead of resulting in another pair of undesired shoes, the five dollars saved on shoes will result in radio tubes, clipper-ship models, tractors, or oil burners, and the interest paid the investor will enable him to purchase his share of the new products. It is clear that thrift does not reduce the amount of money offered for the profits of industry in the first instance, and it is now also clear that the interest paid on savings takes care of the additional goods produced as a result of saving.

III

Further, in defense of thrift, we should point out its positive service to society. The material progress of humanity is based upon an increase in the productivity of human labor. This is made possible by improvements in the human stock, by the development of new natural resources, by improvements in knowledge, technique, and business organization, and, finally, by increasing and improving the mechanical equipment which men use in their work. The possibility of improving human stock is problematical and the outlook is not encouraging, but knowledge, technique, and organization are more promising fields for improvement. The exploitation of rich natural resources cannot be continued indefinitely, and there is, therefore, all the more need for the improvement of the tools and machines which supplement human hands. Harvesters, lathes,

spindles, excavators, ships, locomotives, have multiplied the productivity of society a thousandfold, and these things are created out of savings. Without thrift we should not have even the simplest tools which the savage makes for himself instead of spending his time in idleness or pleasure. Without thrift we could not now add to the complex mass of mechanical equipment which is gradually increasing the economic freedom of humanity and releasing society from the bondage of the struggle for mere existence. Decade by decade humanity is adding to its savings and steadily building up the structure of labor-saving capital. The rapid multiplication of the powers of industry which took place during the industrial revolution of the nineteenth century has been followed by a period of more gradual development. In 'The Dilemma of Thrift' figures on the increase of real wages the net gain when the increase of wages is measured against the increase in the cost of living

in the United States from 1890 to 1919 are quoted. It is stated that the gain did not average one half of one per cent a year. This is slow progress, but it is progress; and the gain for the generation is nearly fifteen per cent not a negligible amount of material progress, covering, as it does, panic years, years of depression, and war years.

It is worth our while to consider the effects of the war as an illustration of the influence of spending on material progress as compared with that of saving. According to the argument used in 'The Dilemma of Thrift,' economic security is strengthened by spending and endangered by saving. During the war many nations ceased entirely the investment of savings in new tools and machinery, and spent lavishly on poison gas and gunpowder. As long as the war demands continued

there was industrial prosperity, but the end of the war left these nations stricken and crippled. Spending on ephemeral products does ensure industrial activity for a time, and there is nothing to choose, so far as immediate prosperity is concerned, between extravagant spending and wise investment, but there cannot be any permanent progress, any gain which is maintained in the long run, unless money is saved and used for the increase of the capital equipment of society. Anything which undermines the habit of thrift must eventually injure society by endangering the slow material advance now being made.

IV

Although there is a gain from decade to decade in material welfare, we are all agreed that this gain is slow. Again and again industrial society has been swept up in a gust of prosperity, only to be dashed to earth after a brief period. Prosperity culminates in panic and is followed by depression. But if industry could for long maintain the pace which characterizes the best years, or if the periods of depression could be made less severe and less prolonged, material progress would be accelerated and the gains now made would be insignificant by comparison. It is this problem that is attacked in "The Dilemma of Thrift.' We have shown that thrift is not the cause of the periodic collapse of business prosperity, and we have shown that thrift is indispensable as a basis for permanent economic progress, but we have not explained the failure of industry to maintain the level reached in the height of prosperity. Let us now turn. to the consideration of this problem.

Many economists now believe that the fluctuations of industrial prosperity are due to the inherent difficulties

of production under conditions of rapid expansion.1 When business revival brings into operation machines which have been standing idle and plants which have been closed down these reserves are naturally not so efficient as others already in operation. They lack some advantage or improvement or are on their way to the scrap heap because of old age, but the cost. of operating them is the same as for the better, more productive equipment. The dependable, picked laborers who have manned industry in its less active phase are now reënforced by the addition of men and women who are not only new to their work and untrained, but are, for one reason or another, less desirable, less productive workers. Not only do these people lack the ability of the reliable nucleus who are too good to be let go even in slack times, but the psychology of the situation favors indifference. Workers are scarce, jobs are easily obtained, and the average man takes advantage of the chance to hold a job without exerting himself unduly. Yet wages for these less productive workers are as high as for the regular staff. There is also widely current a belief that the work will last longer if the pace is slow. The man who speeds up can be made out to be an enemy of labor by much the same kind of reasoning as that used in 'The Dilemma of Thrift.' Many workmen believe there is only a certain amount of work to go around, and class loyalty, as well as laziness, discourages workmen from increasing their productivity.

There also arise annoying and costly delays and obstructions. The railroads cannot handle the shipments properly, and traffic jams occur which cause tremendous losses. The organization of business becomes more complex and details must be entrusted to subordinates. The orderly flow of materials 1 W. C. Mitchell, Business Cycles.