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Before coming to regard the problem let us examine a term the economists use. They speak of capital formation. What is that? It is the old, old thing of saving.

If you put a ten dollar bill under the rug instead of spending it, that is capital formation. It represents ten dollars' worth of something that might have been immediately consumed, but wasn't. If you put the ten dollar bill in the bank, that is better. Hundreds doing likewise make a community pool of savings, and that is capital formation. Then thousands of community pools, like springs, feed larger pools in the cities and financial centers. If a corporation invests a part of its profit in new equipment or puts it into the bank as a reserve fund, that is in either case capital formation. In a good year before the war the total savings of the country would be ten or twelve billions. That was the national power of capital formation. These saved billions, held largely in the custody of the banking system, represented the credit reservoir. Anybody with proper security to pledge could borrow from the reservoir to extend his plant, start a new enterprise, build a house, or what not. Thus the private capital system works when it works freely.

Now regard the credit reservoir as a lake fed by thousands of little community springs, and at the same time assume the point of view of a government hostile to the capitalistic system of free private enterprise.

You see at once that the lake is your frustration.


Because so long as the people have the lake and control their own capital and can do with it as they please the government's power of enterprise will be limited, and limited either for want of capital or by the fact that private enterprise can compete with it.

So you will want to get rid of the lake. But will you attack the lake itself? No; because even if you should pump it dry, even if you should break down the retaining hills and spill it empty, still it would appear again, either there or in another place, provided the springs continued to flow. But if you can divert the water of the springs—if you can divert it from the lake controlled by the people to one controlled by the government, then the people's lake will dry up and the power of enterprise will pass to government. And that is what was taking place before the war; notwithstanding the war, that is what still is taking place.

By taxing payrolls under the social security law of compulsory thrift and taking the money to Washington instead of letting the people save it for themselves; by taxing profits and capital gains in a system that is, or was, a profit and loss system; by having its own powerful financial agencies with enormous revolving funds, the Reconstruction Finance Corporation being incomparably the great banking institution in the world; by its power to command the country's private bank resources as a preferred borrower, and by its absolute ownership of more than twenty billions of gold, which may be one-half of all the monetary gold in the world, the Federal government's power of capital formation became greater than that of Wall Street, greater than that of industry, greater than that of all American private finance. This was an entirely new power. As the government acquired it, so passed to the government the ultimate power of initiative. It passed from private capitalism to capitalistic government. The government became the great capitalist and enterpriser. Unconsciously business concedes the fact when it talks of a mixed economy, even accepts it as inevitable. A mixed economy is one in which private enterprise does what it can and government does the rest.

While this great power of capital formation was passing to the government the New Deal's economic doctors put forth two ideas, and the propagandists implanted them in the popular imagination. One was the idea that what we were facing for the first time in our history was a static economy. The grand adventure was finished. They made believe to prove this with charts and statistics. It might be true. No one could prove that it wasn't, because all future belongs to faith. The effect of this, of course, was to discourage the spirit of private enterprise.

The other idea was that people were saving too much; their reservoir was full and running over, and they were making no use of their own capital because the spirit of enterprise had weakened in them. There was actually a propaganda against thrift, the moral being that if the people would not employ their own capital the government was obliged to borrow it and spend it for them.