In the early 1930s, at the height (or depth) of the Great Depression, the Brookings Institution undertook an in-depth study of "the Distribution of Wealth and Income in Relation to Economic Progress." The results were published in four volumes, America's Capacity to Produce (1934), America's Capacity to Consume (1934), The Formation of Capital (1935), and Income and Economic Progress (1935).
Dr. Harold G. Moulton, president of Brookings from 1916 to 1952, personally directed the study, which was funded by the Maurice and Laura Falk Foundation of Pittsburgh. As explained in the Foreword to the first, 1935 edition of The Formation of Capital (which we consider the most important book in the series), "Relation to a Larger Study":
"This is the third of four volumes devoted to an analysis of the relation of the distribution of national wealth and income to economic progress. The purpose of the investigation as a whole is to determine whether the existing distribution of income in the United States among various groups in society tends to impede the efficient functioning of the economic system.
"The study is concerned with something deeper than the causes of business depressions. The economic system, for some reason, never succeeds in operating at full capacity. It has been observed that even in periods of prosperity we have some unutilized plant and equipment and a considerable volume of unemployment. This situation not unnaturally suggests that there must be some basic maladjustment which seriously impedes the operation of the economic machine by means of which the material wants of society are supplied.
"The fact that business enterprises seldom produce at full capacity, and that the greatest problem of business managers appears to be to find adequate markets for their products, has raised in the minds of many business men and economists the question, Is not the primary difficulty a lack of purchasing power among the masses? This leads at once to the correlative question, What is the bearing of the distribution of income upon the demand for the products of industry? Concretely, if a larger percentage of our annual income were somehow made available to the purchasers of consumption goods, would not business managers find it profitable to utilize existing capital equipment more fully, thereby giving to the masses of people higher standards of living, and at the same time promoting a steadier and more rapid rate of economic progress?
"In endeavoring to throw light upon the great problem with which we are here concerned, we divided this investigation into four major parts. In the first volume, entitled America's Capacity to Produce, we attempted to get an objective and comprehensive picture of our economic society as a producing mechanism. To what extent had we piled up excess productive capacity in the United States during the boom period of the late 1920s? Was the amount of unused capacity increasing over the three decades from 1900 to 1930? We chose this period for study in order to focus attention upon the situation at its best — in a period of great technological advancement.
"The conclusions reached may be briefly summarized as follows: Idle productive capacity is not a phenomenon that appeared for the first time in the years just preceding the collapse of 1929. On the contrary, a considerable amount of unutilized capacity existed throughout the period under review. However, with the exception of transportation and a few other special lines, we found in general no persistent increase in the percentage of unutilized capacity. At the height of the boom period the amount of idle capacity, expressed in terms of a generalized figure, was something like 20 percent. In periods of depression this percentage is, of course, very greatly increased — rising perhaps as high as 50 percent in the current depression.
"In the second volume, America's Capacity to Consume, we directed our inquiry to the division of the money income which arises out of the nation's productive operations. This investigation and analysis was divided into three major parts. In Part I we showed, as accurately as available data would permit: (1) The amount of the national income and the extent of its increase during the first three decades of the twentieth century; (2) the division among the various claimants, such as wage earners and investors, and among the various income groups; and (3) its distribution on a geographic basis.
"In Part II we indicated how those who receive the national income dispose of it. We showed (1) the allocation of expenditures among the major types of consumers' goods; (2) how the amount that is spent for consumptive purposes by the several income groups compares with the amount which is saved, and the bearing of this apportionment upon the division of aggregate income as between spending and saving; and (3) whether there was any tendency during the period from 1900 to 1930 for the proportion of the aggregate income set aside as savings to increase as compared with the amount devoted to consumptive purposes.
"In Part III, entitled "The Relation of Consumption and Production," our findings were related in a broad general way to the conclusions reached in the preceding volume. We indicated the extent to which the demand for consumption goods would be modified by comparatively slight increases in the purchasing power of the lower income groups and compared these consumptive potentialities with the existing productive capacity of the nation. Finally, the analysis was related to certain important current issues, such as the fear of persistent over-production and consequent demand for restriction of output, the amount of leisure that is compatible with high standards of living, and the necessary length of the working day.
"The conclusions which pertain specifically to the primary issue with which the larger investigation is concerned were as follows: First, the masses of the people had very low standards of living and were able to make savings of negligible importance. Second, the productive capacity of the United States was not adequate to turn out sufficient goods and services to satisfy the unfulfilled consumptive desires of the American people as a whole. Third, owing to the uneven distribution of the national income the bulk of the national savings is made by a small fraction of the population. Fourth, the increasing number of people in the higher income brackets as the years have passed, and particularly in the decade of the twenties, has led to the diversion into savings as distinguished from consumptive channels of an increasing percentage of the total national income.
"These two volumes carried us a considerable distance toward an understanding of the modern economic system. They revealed, on the one hand, a persistent failure to make full use of our productive resources, and, on the other, a chronic state of under-consumption on the part of the great masses of the people. It is clearly apparent that consumptive requirements and productive possibilities are not satisfactorily articulated. The uneven distribution of income evidently has an important bearing on the problem.
"Before reaching any final conclusions as to the source of our economic difficulties it is necessary to give consideration to the process of capital formation. Having found that an increasing proportion of the national income tends to be saved rather than spent for consumptive purposes, we must inquire whether the result is to accelerate or retard the growth of capital. This is the task of the present volume. Then in the fourth volume — Income and Economic Progress — we shall bring together the various segments of our investigation for purposes of integration and interpretation with a view to indicating ways and means of bringing about a more effectively functioning economic system.
"In this analysis of capital formation it is not our objective to make a quantitative study either of the accumulation of investments by the American people or the growth of the national supply of productive capital. The purpose is rather to analyze the process of capital creation and the factors which govern the rate of growth of plant and equipment. National income is received by individuals chiefly in the form of money, and the savings of individuals are made, in the first instance, in the form of bank deposits, insurance payments, or investments in securities. Before actual productive capital can eventuate, these money savings of individuals have to be used by business enterprisers in employing labor and materials in the building of new plant and equipment.
"In the present volume we attempt accordingly to reveal what is involved in converting monetary savings into actual additions to capital equipment. We consider especially the connection between consumptive demand and the creation of new capital and the part which financial institutions, particularly commercial banks, have come to play in the process of capital formation. The conclusions reached as to the forces which control the growth of capital will be found fundamentally at variance with traditional views on the subject.
"The present study was foreshadowed by the author in a series of articles published in the Journal of Political Economy in 1918. The tentative analysis there presented has here been developed and elaborated. Thanks to the accumulation in the intervening years of more adequate statistical data, it has now been possible to subject some of the major issues involved to the test of factual verification." (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 1-6.)
As valuable as the study by Brookings was and remains (and should probably be performed again to be able to apply the principles to today's situation), it was a macroeconomic study, looking at aggregates for sectors of the economy and the nation as a whole. Only the final volume in the series, Income and Economic Progress, addressed the problem of inadequate individual income, and then, again, only in the aggregate. This left a rather large hole in the proposals, and may have accounted for the fact that the Roosevelt administration ignored the findings of the Brookings Institution, and followed the prescriptions of John Maynard Keynes.
True, as Friedrich von Hayek pointed out, Keynes's theories and programs are ultimately collectivist, actively undermining the individual human dignity that the Brookings proposals did not even address. Keynesian programs, however, did benefit individual voters — up to a point and at a hideous cost — and were thus more politically feasible than Brookings's financially and economically sound alternatives.
What we will try to do in this brief series is review the Brookings study, add the insights of Louis Kelso and Mortimer Adler, and then show how a viable program could be applied in a Capital Homestead Act.