CHAPTER XXX

THE FINANCIAL SYSTEM AND THE GENERAL ECONOMIC ORGANIZATION

Our study of the work of the various financial agencies and institutions which together comprise the financial structure of the modern economic system is now completed. It remains to attempt in this final chapter a statement, however inadequate, of the significance of this financial structure from the point of view of the general economic organization of which it forms so integral and so important a part. What, in general, are the elements of strength and of weakness in an economic system that is organized on a pecuniary basis? What problems of economic or social control have resulted from the evolution of the modern financial system? Does this system in all respects give rise to a well-ordered economic life and-to borrow a statement of the ends and aims of human society that has yet to be improved upon-does it on the whole "promote the greatest good of the greatest number"? It is scarcely necessary to say that a satisfactory or adequate answer to these questions is impossible; all that can be attempted in this chapter is to make some suggestive statements with reference to the economic significance of the modern financial system and to the nature of the unsettled problems of economic control to which this system has given rise.

The economic services rendered by the various parts of the financial structure have in preceding chapters been discussed in connection with the work of particular financial institutions and agencies. Here and there also in the course of the treatise there have been some suggestions of the interrelations of financial institutions-of the development of a financial structure and of the larger significance of this financial system in relation to the general economic organization by means of which

the wants of mankind are supplied. The analysis of the present chapter will therefore consist in part of a drawing together of the threads of our previous discussion. It is believed that such a recapitulation, with the necessary elaboration and restatement, will present a reasonably complete and accurate view of the interdependence of finance and business-of the relation of the financial system to the general economic organization,

I. MERITS AND DEFECTS OF THE
PECUNIARY MECHANISM

The pecuniary system has undoubtedly rendered economic services of the greatest importance. It will be recalled that the evolution of the pecuniary unit rendered both language and numbers intelligible for the purposes of business and thus furnished the necessary basis not only for all trade but for all business activity. In a very real sense the pecuniary unit of calculation, together with the medium of exchange and the standard of deferred payments, have not only made possible but have been responsible for the development of our large scale co-operative exchange society, which, with all its weaknesses and evils, is almost universally conceded to be a highly efficient form of economic organization, so far as its productive aspects are concerned. It will also be recalled that the system of pecuniary accounting stimulates and hastens the development of improved productive processes and fosters industrial progress.

In the main it may also be said that the financial system has been fairly responsive to changing business requirements. The growing size of business establishments and the gradual universalizing of the credit method of conducting business has been attended by a commensurate-though often laggingdevelopment of facilitating financial agencies and institutions. Indeed the whole complex financial structure, pictured in the charts on pages 134, 136, and 650, and discussed in the accompanying chapters, evolved to meet the needs of a rapidly changing economic organization-a changing organization for which the motivating force was mainly the prior development of

the pecuniary unit and the capitalistic form of enterprise, dominated by the spirit of gain. It will doubtless be conceded that the various financial institutions thus developed, notwithstanding the numerous weaknesses that have been pointed out in the foregoing chapters, have, in view of the remarkable rapidity with which the capitalistic industrial system has expanded, fulfilled in reasonably satisfactory fashion the requirements imposed upon them.

The financial organization also has some very real shortcomings. At various places in the foregoing analysis attention has been called to certain perversions and evils in the pecuniary system. In chapter v, for example, emphasis was placed upon the dominating and pervasive influence of the pecuniary system over social and economic standards and ideals. It was seen that the almost universal expression of modern economic activities and achievements in pecuniary terms has led to an exaltation of the significance of money that has done much to pervert the ideals of society. While even under a non-pecuniary system individuals would no doubt place great emphasis upon things material; and while it is highly important to bear in mind that the modern worship of the "almighty dollar" is in a sense only the worship of the material goods which dollars will buy, there is little doubt that the development of the pecuniary system has tended to strengthen materialistic impulses and to intensify the struggle for gain. The acquisitive instincts of mankind appear to find greater encouragement as well as fuller scope for development under a pecuniary system than under any other suggested form of social organization.

Moreover, as we have seen, the importance to the individual of a large supply of money has led to the all but universal assumption that it is equally important that the nation as a whole have a large and a rapidly increasing supply of money. This fallacy has been responsible for numerous and persistently recurring social movements for increasing, in one way or another, the national supply of currency. All men are instinctively mercantilists and all instinctively rejoice when the per capita circulation increases; hence a not inconsiderable portion of

organized political activity in every country has centered around the attempt to achieve through an increase in the quantity of currency an improvement in economic conditions which can come only through an increase of productive efficiency. It remains true, however, as has been noted in various connections, that the supply of currency as manifested in bank reserves is at times a matter of no little significance.

Among the shortcomings of the pecuniary order we have also noted the social and economic consequences of changes in the level of prices. This is no doubt the most serious weakness of the financial system. While no attempt has been made in this treatise to discuss the complex forces which control price movements in a capitalistic society, we have seen that prices are in a more or less constant state of flux, with minor oscillations in connection with the various stages of the business cycle, and with major secular movements, as indicated in the diagram on page 31. Price changes, as noted in chapter iii, often cause very serious maladjustments in the incomes of different classes of society and result in social discontent, which on occasion may lead to a very general disorganization of economic, social, and political life. The individual, compelled to order his life in pecuniary terms and through pecuniary agencies, is powerless to control his destiny in the face of price movements that depend, so far as he is concerned, upon entirely adventitious circumstances.

The modern business man also finds his productive activities circumscribed at every point by financial considerations, over many of which he has but little control. Sudden changes either in the price of his particular product or in the general level of prices may at one time give him exceptional profits and at another bring him to the verge of bankruptcy. While price movements may to some extent be forecasted and, in consequence, preparations may be made for taking advantage of a rise or for discounting the effects of a fall, it is seldom possible to avoid all losses incident to price changes; and for the rank and file of business men who are quite without knowledge of the influences governing price movements, price changes

constitute perhaps the most baffling problem with which they have to deal.

Prices should be stabilized if possible. The economic and social losses resulting from price changes have naturally given rise to various suggestions for controlling or stabilizing the level of prices. We cannot here enter upon a discussion of the different methods proposed, or of the possibility of stabilizing prices by any conceivable method. It must suffice to say that as yet no method of general price control has been devised which commands sufficient support in government circles to secure a thoroughgoing practical test. The method of price stabilization that has attracted the greatest attention is that advanced by Professor Irving Fisher, and known as the compensated or stabilized dollar. Under this plan it is proposed to vary the weight of the gold dollar in which prices are expressed, in proportion to changes in the number of monetary units, thereby preventing variations in the general level of prices'. Among students of money and prices this method of price control has many supporters-and numerous opponents. Another method of price regulation lies in the control of the supply of bank credit through the machinery set up by the Federal Reserve System. This will be briefly considered on page 753 below.

The price mechanism is not always a satisfactory guide to the distribution of social energy. One of the most difficult problems associated with the pecuniary system is that of maintaining and developing, in periods of rising prices, our basic “quasipublic" enterprises such as transportation and public utilities. In a financially organized society, we rely upon price and profit levels to direct the flow of labor and capital into the various lines of enterprise. But owing to a fear of exploitation by private interests in naturally monopolistic fields of enterprise, society has assumed the control of rates (prices) in such industries, with the inevitable result that in periods of rising prices these enterprises are unable to compete with uncontrolled industries for the necessary supply of labor and capital with 'See Irving Fisher, The Stabilized Dollar.