"The condition in the World War years is simple to understand. During war, production goes at maximum speed for the war machine and burns up the excess. Of course an enormous load of debt is created which must someday be cancelled in some fashion. Before the World War there were many years in which the pattern was similar either to the boom twenties or to the depression thirties. In either case production always ran ahead of consumption and was disposed of in the usual ways; by the creation of debt, by destruction of price values through bankruptcy, by sending more goods out of the country than were taken in, or by outright destruction of goods as in war, or, as was done in peace time, by crop destruction.

"The case in which more goods are shipped out each year than are imported deserves special mention. For many years this was regarded as the ideal economic condition although any child can see the absurdity of it, but it was called by all sorts of fancy names; 'Favorable Gold Balance', 'Favorable Trade Balance', 'The American Plan', 'Cornerstone of American Prosperity'. It was taught in the public schools as a natural law."

"Yes," mused Perry, "I remember being taught that in grammar school. My geography book devoted a whole section to telling how necessary it was."

"As a matter of fact it was as vicious as it was silly. Each nation tried to sell more than it bought, and this was the basic cause of every war in modern times. The stupidity of the idea should have been obvious, but the nature of the financing system made it inevitable. Since production always exceeded consumption by a wide margin throughout this period,* [*The reader need not accept this without proof. Fortunately the records of the period are available in the Washington Archives. See statistics of the Department of Commerce, et al., for those years. The Author] it was necessary for a nation to get rid of its excess as best it could or suffer severe economic upset at home. Many were the devices to promote this, for example, the 'protective' tariff and the subsidizing of the merchant marine.

"There was only one period in which this peculiar financial fallacy was suited to the needs of the country, and that was in the days of the frontier. The system created bankruptcy and poverty, and the victims moved west and developed the country. It is customary to speak of population pressure as causing the movement west, but that is true only in a limited sense. The east was never too crowded in the pioneer days to support its population insofar as land and raw materials were concerned, but it already had a financial system which automatically created a spread between purchasing power and production, and thereby automatically created an unemployed class, which moved west with the next wagon train to rehabilitate itself in a simpler economy. Oh yes, we had an unemployed class in Andrew Jackson's day, but we called them pioneers!

"So much for the simple fact that in your 1939 economic system over-production or under-consumption or a shortage of purchasing power was a chronic condition. Now let us examine the mathematical nature of purchasing power to discover why this was so. In so doing we shall discover the possible solutions and select the one we like. You see I've done this problem before and can show off how clever I am. You know about Little Jack Horner? I've always suspected that he knew where the plum was before he stuck in his thumb." A grin split Davis' saturnine visage and made him look like a little bald-headed gnome.

"Consider, if you please, two typical units of production, a factory and a farm. Let the factory be large, an employer with many employees; let the farm be small, a one-family affair. These two cases will be typical—insofar as price and purchasing power are concerned—of the entire economic organism. First, the factory: It makes, let us say, shoes. These shoes are placed on the market at a definite price. This price consists of two parts; the cost to the owner of the factory of making the shoes, plus a profit. The cost consists of a number of items, of which the principle are wages to employees, cost of raw materials, depreciation on capital goods, rent of land, interest on invested capital, and taxes. The additional portion of the price is the profit. This is the return to the owner or entrepreneur for his time, personal labor, ingenuity, and so forth, and is the source from which he must support himself and his family. To assume that profit is unnecessary is to assume that employers don't eat. It was popular in your day to attack the 'profit system'. We shall see that profits to an entrepreneur are not the cause of unemployment and financial distress. Of course there will arise the question of some entrepreneurs receiving a disproportionate amount of production as their profits, but that is a question of morals to be regulated according to the current customs. It does not in itself cause unemployment, as we shall see. As a matter of fact most persons who undertake the enterprise of new production, or entrepreneurs, did not make an excessive profit; most of them made no profit and went bankrupt. That is a simple matter of record. In your day eighteen out of nineteen businessmen failed in the long run. The groups who attacked the 'profit system' were beating a dead dog.

"Nevertheless, since entrepreneurs must eat, profits are a legitimate part of the cost of production. Henceforth we shall include them as cost charges and consider that the necessary value of an article of production is its total cost, or cost to the entrepreneur plus his necessary profit."

Perry interrupted. "Do you mean to say that the profit system in my day was okay? It seems to me that the profit system was always being attacked as the villain in the piece."

"The profit system was not the villain in the piece. The villain was ignorance of the workings of the economic mechanism, in which the entrepreneurs or industrial leaders were the greatest offenders. At the very least the laborers knew that something was wrong and demanded a change, but the industrial entrepreneurs denied that any change was needed, and stubbornly resisted change with the ignorant willfulness of a Marie Antoinette. Furthermore they possessed the economic and political power to resist change. In that way they were the villains and were responsible for all the tragedy of your era. But let's not condemn them too heartily, as they were ignorant and stupid rather than innately vicious.

"But now let's prove the statements I have made. Let's put this factory into operation and see how a cycle of production and consumption works. I mentioned a shoe factory. That will give us too limited a case to understand the whole industrial system. You understand the mathematical principle of the general case, the one in which all possible factors appear. Consequently any individual problem can be solved if you can solve the general case. Of course you do, very well then, let this factory be the general case of any production unit in the country which employs labor and uses capital. Its raw materials will be the materials it processes even though those materials have previously been processed after leaving mother earth. Thus steel plate or tanned leather may be termed raw material for automobiles factories and luggage factories. The term factory includes buildings and chattels of every sort used in production but which are not themselves the goods produced by the factory. Land includes the sites of buildings, rights of way, and so forth. Do you follow me?"

Perry nodded. "Sure. It's like any algebraic general case, like the general quadratic equation for instance; ax squared plus bx plus c equals zero gives a general solution of x equals negative b plus or minus the quantity the square root of b squared minus four ac all divided by 2 a. Substituting the conditions of a particular case gives the answer for that particular case." *