is possible to measure the position of each line of business in the broad current of business fluctuations. This device of comparison with normal is a most valuable guide in averting maladjustment and unbalancing of production, and breakdown of coördination between consumption and output. In addition to this statistical coördination of production and marketing, business men can control business by attempting to control costs and efficiency. A proper use of modern cost accounting makes possible information on the rate at which unit costs of production are increasing and on the exact factor in production which is responsible for the increase. Upon knowledge of cost trends may be built policies of labor administration, scientific management, industrial engineering, and technical research. Proper use of cost accounting data helps to avert that general encroachment of costs upon profits which, as previous analysis. has abundantly emphasized, is the very heart and center of business oscillations. A study of control by individual producers further leads to the separation of one particular branch of production-the construction of buildings, plant, equipment, and producers' goods-from the general mass of production. The tendency has always been to bunch new construction and making of new industrial equipment into the period of active boom, with a resulting over-extension of capital equipment at the very time when prosperity is almost at an end and when therefore the new capital equipment constitutes an enormous overhead burden on industry. The capital in this case is purchased at top-notch prices and construction is carried on at the time of maximum costs of labor, materials, and loans. It is proposed that this policy of the past be modified. Business may build up reserves during prosperous years to be spent in construction later on when other business is dull. Laying out extensions of plant and equipment ahead of immediate requirements with the intention of carrying them out during slack times and low prices, would go far toward stabilizing construction industries. Private profit, from the long view rather than the short, stands to be attained by this shifting of some part of the construction now done during booms into the subsequent depressions. Stabilizing construction and manufacture of industrial equipment is a necessary step toward stabilizing business in general. (4) The Long Range Planning of Public Works. If private construction can be levelled out, public construction can also be levelled out. The proposal is to hold back government construction during business boom and let it out during business dullness. In the past, municipalities have followed such a plan more extensively than either State or Federal Governments, but there is no economic reason why the latter should not adopt the same course of action. Bowley has estimated that if England for ten years would set aside as reserves between 3 and 4 per cent of the ordinary appropriations for public works, the amount would be sufficient to relieve unemployment and stimulate new business activity when private industry was in the depths of depression.17 Otto T. Mallery suggests that in the United States, where annual government outlays for building average about $900,000,000, a reserve fund of onethird this amount should be set aside and assigned to the long range program.1 18 The same principles are also applicable to extensions of plant and additions to equipment by public utilities. The railroads are particularly heavy users of materials for construction and equipment, and a policy of levelling out railroad construction is of basic importance. (5) The Prevention and Relief of Unemployment. Policies for the prevention of unemployment include all those general methods of credit, price, and business control which have previously been discussed. Whatever stabilizes business at large is a fundamental step toward the prevention of unemployment. However, since unemployment is a public burden and responsibility, it is particularly fitting that government policy should be specially aimed at control of employment. Hence, the long range planning of public works is of unusual importance in stabilizing employment. Further than this, the government can accumulate and distribute statistical data on production and trade, and on unemployment itself, which business men in turn can use in stabilizing their own enterprises. Thus the government can prevent and relieve unemployment by the long range planning of public works and by statistical information service to business. The chief policy fo. the relief of unemployment is unemployment insurance. Trade unions have in the past followed out a version of this plan by building up funds for "out-of-work benefits." Coöperative reserve funds built up jointly by employers and employees offer a more comprehensive plan of unemployment insurance. Scattered individual experiments of this kind have been tried in the United States, and with a substantial degree of success, but in general such insurance has not been carried as far in the United States as in many European countries. It not only relieves the distress of labor, but aids in the recovery of business activity by putting labor in possession of purchasing power to be spent in consumers' markets. Moreover, by placing some of the burden and cost of unemployment on business men, they are confronted with a strong incentive to prevent unemployment from occurring in the first place. Moreover, public offices of employment may be used to discover at what points an unsatisfied demand for labor exists, and at what points. idleness of workers seeking jobs exists, so that the two may be brought together. Such bureaus would aid in transferring labor from one locality to another with the least possible loss from idleness. 17 A. L. Bowley, Report of the Royal Commission on the Poor Laws and Relief of Distress, 1909, Cd. 4499, p. 1195. 18 The Long Range Planning of Public Works, in Business Cycles and Unemployment, National Bureau of Economic Research, p. 234. Summary. The prevailing condition in business is not a static equilibrium or a perpetual prosperity, but a series of alternating ups and downs of prosperity and depression. In the past these have often been considered inevitable, but present analysis leads to the reasonable expectation that a substantial amount of control and stabilization can be attained. The main methods of control are preventive in character. They aim to prevent the downfall of profits and prosperity, and to keep the fluctuations of business within limits that are not excessive or wasteful. BIBLIOGRAPHY BERRIDGE, W. A., Cycles of Unemployment. An Index of Purchasing Power. CLARK, J. M., The Economics of Overhead Costs, Chapter XIX. ELY, R. T., Outlines of Economics, Chapter XVIII. FISHER, IRVING, The Purchasing Power of Money, Chapters IV-IX. HANSEN, A. H., Cycles of Prosperity and Depression. HOBSON, J. A., The Economics of Unemployment. HULL, G. H., Industrial Depressions. KING, W. I., Employment, Hours, and Earnings in Prosperity and Depression. LAVINGTON, F., The Trade Cycle. LINCOLN, E. E., Applied Business Finance, Chapter I. MITCHELL, W. C., Business Cycles. MITCHELL, W. C., and others, Business Cycles and Unemployment. MOORE, H. L., Economic Cycles. PIGOU, A. C., and others, Is Unemployment Inevitable? PERSONS, WARREN M., and others, The Problem of Business Forecasting. Review of Economic Statistics, Harvard University Committee on Economic Research. VANDERBLUE, H. B., Problems in Business Economics. VEBLEN, T., Theory of Business Enterprise. PART VI INTERNATIONAL ECONOMIC RELATIONS CHAPTER XXIX THE BALANCE OF INTERNATIONAL PAYMENTS The Nature of International Payments.-International trade and services create the necessity for international payments. Each nation owes certain sums abroad, and is owed certain sums from abroad. The central principle of foreign exchange is the settlement of the great bulk of these debts by a cancellation process, without the shipment of gold or silver. Only the net difference between a country's international debits and credits is met by shipment of the precious metals. This cancellation process is complicated by the wide variety of national money units,-francs, marks, dollars, lire, pounds sterling, and many others. A French debtor must pay an American creditor in dollars, not in francs. An American debtor must pay an English creditor in pounds, not in dollars. Between all the nations, those who owe money must pay, not in their home money, but in the foreign money where payment is due. Hence the object of foreign exchange is the buying and selling of claims to foreign money. The credit process has as its aim the exchange of the money of the debtor countries for the money of the creditor countries. The pre-war explanation of this process proceeded upon the assumption that the leading nations of the world use the gold standard. However much foreign moneys might differ in name or appearance, nevertheless they were alike in that the content of the money unit was gold, and that all currency in these leading countries was freely convertible into gold. But the World War resulted in widespread abandonment of this gold convertibility. The United States alone of the principal nations retained the unrestricted gold standard. Return to the gold basis of convertibility was a slow process for even the most favorably situated of the European belligerents. Hence the normal situation for the post-war period was in vital respects the opposite to what was normal in foreign exchange prior to 1914. The following discussion deals first with the nature of foreign exchange under normal conditions when the gold. standard prevailed, and second, the modified nature of exchange under conditions when the gold standard was the exception. |