Memorandum Prepared by L. B. Currie, P. T. Ellsworth, and H. D. White (Cambridge, Mass., January 1932)

The depression has been in progress more than two years. During this period the index of business activity has declined over a third; unemployment has assumed very grave proportions; partial employment has seriously reduced the weekly earnings of a large proportion of those listed as gainfully employed. In terms of real income the depression has already cost the American people more than the Great War.¹ Nor can the loss be measured in terms of real income alone. The widespread and long drawn out period of unemployment and greatly reduced incomes has been accompanied by increasing physical suffering and anxiety. It has, further, engendered a loss of confidence in American leadership and American institutions which is becoming more marked as the depression lengthens.

The end is not yet in sight, nor can any precedent be used as a forecast of duration; the significant factors of the present crisis have no parallel in modern economic history. The situation has passed the bounds of a business depression and has assumed the aspect of an international calamity. With the reparations problem involved, economic distress throughout Europe on the increase, with the progressive maldistribution of gold reserves, the growing loss of confidence in banks, the mounting trade barriers, disorders in Spain, India, and China, the outlook for recovery in the near future is not encouraging.

In view of the manifest uncertainty as to the duration of the depression, the likelihood of its continuance for another year or longer and the failure on the part of the government to adopt other than palliative measures, there devolves upon the economist the responsibility of recommending a course of action which will hasten the approach of recovery. There are some economists who believe that the course of the depression cannot be checked, that political and economic changes are beyond human control, that to attempt to influence their direction is an attempt to interfere with the “natural” operation of economic principles; there are others who believe that the factors involved are so complex that economists can safely recommend no way out, and that the only policy to follow is one of patient submission to the as yet little understood operations of economic maladjustments; there are even a few who believe that the depression should be permitted to run its course because they regard it as a vehicle for the wholesome purging of inefficiency from our industrial system. A great number of economists, however, are not in sympathy with such views; they believe with Dr. Persons that “the depression will not cure itself and requires prompt, intelligent, and vigorous action”; they believe that recovery can and should be hastened thru the adoption of proper measures.

The recommendations recently made by Dr. Persons and signed by a number of eminent economists are a first step towards a vigorous grappling with the situation. We feel, however, that the proposals are stated in terms too vague, and the program offered is not sufficiently comprehensive to insure the desired goal of business recovery. We therefore venture to submit the following specific program together with a brief discussion of the economic principles involved.

Banking Policy

Production and prices have been and are falling, not because of a decline in the need for goods, but because of a decrease in monetary demand. This decrease, in turn, is due both to decreased monetary incomes and to the decreased spending of those incomes. Monetary incomes, broadly speaking, are determined by the volume and the rate of spending of the community's means of payment, which consist of money and demand deposits. The banking system can influence the rate of spending only indirectly. It can, however, thru its control of demand deposits...