THE DEVELOPMENT OF THE CONCEPT OF “AUTOMATIC STABILIZERS”

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ECONOMISTS and politicians alike have for some time struggled with the problem of controlling or modifying the business cycle, offering many and diverse remedies. In recent history the first significant attack was made on the antiquated banking system. This was done just after the panic of 1907-8, the reasoning being that the attempted elimination of a weak banking structure would do much to prevent the business depressions that seemed to follow. The result was a compromise in the form of our partially centralized, partially decentralized Federal Reserve System. The strengthening of the banking system, however, did not provide the protection we had sought, as evidenced by the depression of 1920-22 (following World War I). This time, since the powers that be placed the blame not on the banking structure but on the credit policy of the newly established system, the central bank tradition of looking to the reserve ratio as a guide to credit policy was abandoned in favor of a policy of dispersing credit to business according to the Federal Reserve's conception of business needs. With the new policy an apparent success, it was commonly accepted among many that the long-sought-for preventive had been found.' The false security provided by the foregoing reforms was shattered by the stock market crash of 1929. This time the bank panic did not precede the depression but came after the depression slid to its lowest ebb (1933). Where was the blame to be placed this time? The stock market came under direct attack via the Securities and Exchange Commission Act of 1934. But several other remedies were also set forth, notably the policy of compensatory public works and relief payments, unemployment insurance, the Banking Acts of 1933 and 1935, the NRA, agricultural aid (actually begun by the Federal Farm Board under Hoover in 1929), the various and diverse loan acts, aid to labor unions, and the CCC. In spite of the dip of 1936-3 7