The Hardened Arteries of Business
I
EVER since October 1917 the Western world has been waiting for the Soviet regime to collapse. It has seemed inconceivable to the Western mind that an economic system so thoroughly imbued with communistic philosophy and so definitely committed to a programme of tearing capitalism out by the roots could maintain itself for any considerable period. Yet the fact is that Sovietism has more than survived, It has not only strengthened its hold upon the imagination of the Russian masses, but, since 1921, it has scored notable successes in increasing the production of the nation and in carrying through an ambitious modernization programme. In the face of these successes the Western world has stood agape, wondering whether the ’fight for a cause ’ — that powerful motivating factor in Soviet achievement — is not, after all, a force to be taken seriously.
The man in the street, the business man, the social worker, the college professor — all have become intensely curious about the world’s newest and greatest experiment in communism. While it is obvious, of course, that a great, deal of the business man’s interest springs from a desire to know more about the potentiality of Russia as a market for his products, his fancy is at once caught by the magnitude of the modernization programme now going forward and by what, he hears of the much-heralded ’Five-Year Plan.’ The idea of planning carries a natural appeal to the business executive.
There are other points of appeal in the Russian experiment. Under the system of state planning — whereby the state, virtually the sole capitalist, sets a definite goal for the quantity of agricultural and industrial goods to be produced, the quantity to be exported and imported, the number of factories, office buildings, and houses to be constructed, the total money to be expended by the state and the total to be collected — the Soviets have been able to sidestep that incubus of capitalism, the ‘trade cycle,’ with its alternate periods of prosperity and depression. More than that, they have dealt a decisive blow to the unequal-distribution-of-wealth problem which has never ceased to harass capitalism.
The ability of the Soviets so to plan their lives as to make such problems nonexistent has touched a sympathetic chord both in Western Europe and in the United States. In the light of the difficulties we have been having during the past two years and in the light of the remarkable recovery Russia has made under communism, it has been suggested again and again that something must be inherently wrong with the capitalistic system when it requires periodically that factories be closed, that labor be thrown out of employment through no fault of its own, and that the entire economic organization be disrupted for months on end.
There can be no question but that the Russian experiment has already had a far-reaching influence on the social philosophy of the outside world. Men are asking whether it is not better to be guaranteed a job even at lower wages than to run the risk of being jobless; and the small investors who recently suffered heavy losses in real-estate and stock-market securities are wondering why they should attempt to save when their savings are so easily wiped out as the result of ‘overproduction,’ ‘overspeculation,’ ‘overbuilding, and other circumstances over which they have no control. When it is reflected that communism has now extended itself over an area comprising one sixth of the land surface of the world, that this system has forged ahead unmistakably during the past ten years, and that it has succeeded in solving some of the most vexing problems which beset capitalism, can it. be expected that capitalism will be unscathed by Soviet influence? Assuming that Sovietism will continue to function successfully over the next two or three decades, will not capitalism have to mend its ways to hold its own?
II
Not the least of the difficulties which capitalism must face in the competition with Sovietism is the overflowing enthusiasm of the Soviet protagonists and of those reformers whose social sympathies have been aroused by the earnest fight that is being made for the cause of the proletariat. It is the habit of these enthusiasts to spotlight the accomplishments of the Soviets over the past decade and to make no mention of, or pass over lightly, the darker side. The result is that the capitalistic world is in danger always of having to compare itself unfairly with a distorted picture of the new order. As a defense measure, it should be the avowed goal of capitalism to make its darkest side compare favorably with the best that Sovietism has to offer.
The advantages of an economic system in which there is a large measure of economic freedom far exceed the disadvantages. Take, for example, the competition that comes from freedom of enterprise. Although competition is often decried on the ground that it gives rise to endless duplication of human effort, duplication of physical plant and equipment, and is socially wasteful, how much more waste would be incurred if the state owned and operated all industry, assigned wage earners to their tasks, and regulated all prices. Human incentive would be shackled, inefficiency would be substituted for efficiency, progress would be impeded, and the product of industry would be diminished. With fewer products to be divided among the members of society, there would be less to eat, less to wear, less to live in, and fewer luxuries to enjoy.
Notwithstanding the progress that Russia has made in supplying increasing quantities of the crude necessities of life and in modernizing her backward industries, no visitor to that country can fail to note the frightful waste of state enterprise — waste in the location of factories, waste in their utilization, and above all, waste in human talent. The thought which keeps haunting the visitor from the West is, What strides the Russians could make in the development of their natural resources and how much more efficiently their efforts would be coordinated under an enlightened form of free enterprise!
It is a commonplace, in the Western world at least, that when men are free to choose their own destinies some will have both the incentive and the ability to forge ahead. Under the system of free enterprise, almost any worker who is thrifty and industrious can aspire to become a salaried employee, a property owner, a small capitalist, economically independent in his declining years. The more valuable he chooses to make himself to his employer, the further he advances on the road to economic independence. It is next to impossible to hold down the man who really wants to get on and is willing to make the effort.
The business man, as distinguished from the wage earner, is exposed to the same urge. Having power and some degree of security, he naturally aspires to more power and more security. And he is impelled by necessity no less than by choice. If he would protect the position he has attained, he cannot afford to stop making progress. The moment he lets down or slackens his pace, some competitor stands ready to take advantage of the situation and win away his trade.
It is this pecuniary incentive under the capitalistic system — an incentive which Sovietism deliberately seeks to destroy — that makes for large production, high wages, and large profits. Experience shows clearly that wages and profits are high where output is high. A man’s wages are nothing more than the things he can buy with his weekly pay check. They consist of the food, the shelter, the clothing, the luxuries, and the protection he can provide. These things cannot be secured out of thin air; they can be provided only out of the products resulting from effort.
Wages in the United States are materially higher than in any other country and several times as high as in Italy. Contrary to popular notions on the subject, our high wages are not due to our high protective tariff. Nor can they be explained on the absurd ground that American employers have willed to pay their men high wages. The simple truth about wages is that the American laborer working with the aid of up-to-date machinery in a country having great natural resources can turn out a greater volume of products in eight hours than can the laborer in any other country; and large production per man is translated into high wages by the competitive bidding among employers for labor power.
The profit rewards that remain for business are in many respects like wages. They are high when production is high. They are the inducement which capitalism holds out for those who keep their minds on the job and who are constantly on the lookout for improved and cheaper ways of doing things. It does not follow, however, that business can retain as profit all the savings it is able to effect through the discovery and use of low-cost methods. On the contrary, competition sees to it that more and more of these savings are assigned to the public — to the wage earner, to the producer of raw materials, and to the consumer of finished products. Every class in society shares to some extent in the benefits which flow from the maintenance of the profit incentive.
III
The position of the capitalistic system would be secure for all time if only its brighter side were visible. The trouble is that the darker side of capitalism is more plainly visible to the rank and file. This side has been so conspicuous for its shortcomings during the past one hundred years that various restrictions have been placed by society upon men’s freedom of enterprise — the very corner stone of capitalism — as a means of protecting the weak against the strong.
In the early days of the factory system it was customary for employers to hire women and children to tend unguarded machines in their factories. It was found that, in the absence of restrictions on the freedom of employers, men, women, and children would work long hours per day in dangerous and insanitary surroundings. In more recent years it has been found that economic freedom may give rise to all sorts of practices which are ‘opposed to the public interest,’ such as the adulteration of foods and the use of brand names and advertising to mislead the unwary. Out of these defects in the workings of free enterprise have come the labor legislation of the past century and the more recent legislation against unfair trade practices.
Considering the known weaknesses of human nature and the prevalence of the reform spirit, it is rather surprising that society has made so little effort to curtail the freedom of the individual with a view to protecting him against himself. In all probability the great majority of people need protection of this kind. Although it is commonly assumed that when men are free to forge ahead each will have an incentive to work, to save from his earnings, and to provide for the rainy day, casual observation shows that such an assumption is unfounded. There is only a small minority in society that has the will both to work and to save. Having a job, it is natural for one to assume that the job and the income from it will continue and that saving may be postponed. As a result of this human tendency to discount future possibilities, it invariably happens that when factories close, and work stops, whole strata of workers are taken unawares without the means of self-support, because they have not saved.
In 1919 and again in 1929 it was generally believed that we had reached a new economic era. Everyone seemed prosperous. Jobs were fairly plentiful and wages were high. New enterprises were going forward at a vigorous pace. While it was clear to any close observer that there was trouble ahead, the momentum of the pace could not be stopped. Old economic laws were in the discard. Prosperity had become a permanent institution.
It is hardly necessary to recount the events that followed. The stock market, which had mounted by leaps and bounds under the stimulus of ‘prosperity’ and mass speculation, wavered, and then by degrees virtually collapsed, bringing losses to thousands of investors, large and small. On top of these collapses in speculation came trade depression marked by the closing of factories, the curtailment of practically all business, widespread unemployment, and discontent with an economic system that had turned pleasant dreams into horrible nightmares.
Recent experience clearly brings home the fact that the darkest side of capitalism is, after all, business depression and unemployment. As yet society has done nothing to prevent the recurrence of these depressions and little indeed to alleviate the distress that accompanies them. The problem has not seemed to lend itself to social control. There is, nevertheless, an insistent demand that something must be done about it — and justly so. It is a serious reflection on enlightened capitalism that there should be recurring depressions. The argument for the superiority of capitalism over communism is only half-convincing so long as periods of depression are tolerated.
Suppose capitalism should undertake as a matter of self-respect and self-preservation to rid itself of the periodic disease of industrial depression. It would first be confronted with the problem of finding the cause of the disorder; then with the problem of removing it.
IV
Without delving into all the intricacies of the trade cycle or the refined theories that trade-cycle studies have contributed, it is sufficient to note that, whatever the fundamental causes of depression may be, the outstanding difference between periods of prosperity and periods of depression lies in the amount of consumer spending and in the volume of industrial production. These factors arc intimately related. When times are prosperous, it will be found that both spending and production are at a high level; and when business is depressed both spending and production arc constricted. The close relationship between these factors is due to the controlling position in which the consumer stands — he is the final arbiter as to the kinds and quantities of goods that shall be produced.
Another point to be noted in this connection is the important part played by credit in these spending and production cycles. When consumers are once in the mood to spend, an abundant supply of credit facilitates their spending because it enables them to borrow and buy. Consumer spending, in turn, stimulates producers to borrow money and to expand their operations. The extensive use which consumers and producers make of credit for these purposes eventually leads to a situation where the credit structure, like an inverted pyramid, becomes dangerously topheavy. In the process of getting the volume of credit readjusted to its gold base, it is found that those who have borrowed to buy must save in order to pay. The excesses which have been generated during ‘prosperity’ by the misuse of credit must be corrected by depression before normal business can be resumed.
Assume, for the sake of illustration, that there arises a good demand for motor cars. Thereupon Mr. A, a manufacturer of cars, borrows money and expands his production. He and other car manufacturers employ more labor and buy more raw materials. Mr. B, a producer of the raw materials used in the manufacture of cars, immediately apprehends a better outlet for his products. He too borrows money, employs more labor, and expands his output. Mr. C, who represents the labor employed in these operations, now finds himself in possession of new income, which he proceeds to utilize. Having satisfied his immediate demands for food, clothing, and shelter, and feeling secure in his job, he buys a radio on the installment plan, paying ‘a dollar down and a dollar a week.’ The thousands of radios demanded by these C consumers give a much-needed fillip to the business of the radio manufacturers, who respond by borrowing money, buying raw materials, employing more labor, and expanding their output of radios. At length Mr. D, representing the workers in the radio industry, finds his income so improved and his prospects so bright that he buys a motor car on the installment plan.
A whole cycle of spending has now been completed. The original stimulus which the motor-car industry felt has reached out in an ever-widening circle to affect the income and spending power of various classes of workers and has then returned to the source from which it started. Here it gives a fresh stimulus to motor-car manufacture — and another cycle is started on its way.
Thus it is that prosperous business, once started in a few important lines, gains momentum as the effects reach out from one class of producers to another and as producers and laborers expand their buying power with the aid of borrowed money. This process may continue for a long period of time if the credit supply is abundant. Sooner or later, however, the point is reached where the supply of credit begins to run short. As more and more credit is used up, signs of shortage are evidenced by a substantial rise in interest rates. Bankers, scenting danger, investigate more carefully than ever the credit status of their debtors. Many borrowers are unable to renew their loans on favorable terms and are forced to sell something for cash in order to pay off their maturing obligations. Then the trouble begins — for the weak borrower and for others as well.
Credit shortage is the spark that usually ushers in periods of liquidation, falling prices, and depressed business. The disease itself, however, is variously diagnosed. Sometimes it is referred to as ‘overproduction.’ It could as easily be diagnosed as ‘underconsumption.’ The point is that when credit shortage has forced weak borrowers to curtail their operations, to reduce their working forces, and to convert goods into cash for the purpose of paying off loans, there is less purchasing power available for consumption purposes — and all the time more and more goods are being offered for sale. A condition of this kind quickly reaches out from the weak borrowers to the strong borrowers until the latter are also forced to curtail their operations because of the restricted outlet for their products. Then follows a period of industrial stagnation, unemployment, low purchasing power, and forced saving. Once started, depression, like prosperity, gains momentum until practically all industry is affected.
The low spending power which characterizes periods of depression is due only in part to unemployment; it is due as much to the debt-paying difficulties in which the C’s and D’s find themselves, For example, during the period leading up to the present depression it was common practice for the consumer, the workingman, the white-collar employee, and others of greater means to increase their spending power by going into debt — by mortgaging their future earnings. They bought radios, motor cars, washing machines, furniture, and so forth, on the installment plan. In recent months these same individuals have been confronted with the task of maintaining their installment payments out of restricted incomes. They have had less money to spend on new purchases because a large part of their incomes was bespoken by creditors’ claims.
The position of the man who borrowed money and bought common stocks for the rise is even worse. When he saw a profit on paper in the stocks he had purchased he jumped to the conclusion that he was a richer man and could raise his scale of living. His expenditures for luxuries increased. His standard of living rose. The unfortunate feature is that he had no more income to spend than he had before stocks went. up. The appreciation in the value of his securities did not increase his income in the slightest. It only increased his borrowing power. In order to obtain more spending money with which to satisfy his pent-up desires for luxuries he had to borrow it.
Those who were led astray in this manner — and the number was legion — found themselves in a serious situation when the stock-market boom collapsed. They awoke to discover that they were hopelessly in debt — in debt for greatly depreciated stocks and for a mode of living which they could not maintain. During the past eighteen months these borrowers have had to concentrate on the task of paying off their debts and of recovering from previous spending excesses. Their debt-paying burden has been aggravated by the fact that debts contracted when incomes and prices were high must be liquidated during a period when prices and incomes are on a substantially lower level. Little wonder that the business of the manufacturer, merchant, and wage earner has been depressed when so many consumers have been forced to save in order to take care of excessive debt burdens.
Is there not something that society could do to prevent the recurrence of disorders of this kind? The search for fundamental causes has not been entirely successful. Granting, however, that fundamental causes may yet be found in some combination of human nature, mass psychology, and the modern credit system, arc there not immediate causes that could be dealt with effectively? Suppose, for example, that spending could be kept within reasonable bounds when times were prosperous, would there not be less need for periodic depressions, widespread unemployment, and forced saving? The smoothing out of the spending process so that it will be free from the disorders which breed depression is without question the outstanding need of the times. It is the problem which confronts capitalism to-day. What is to be done about it?
V
In a few instances attempts have already been made in an organized way to alleviate some of the distress that comes from industrial depression. In both England and Germany there are now in operation unemployment-insurance schemes for certain classes of wage earners. The general view prevailing at the time these schemes were adopted was that a certain amount of periodic unemployment was inevitable under capitalism, and that if employed persons were required by law to contribute a portion of their wages to an unemployment fund, supplemented by contributions from employers and in some cases from the state also, there could be created a reserve fund of sufficient size during prosperous periods to permit the payment of reasonable out-of-work benefits in time of depression — or whenever men became unemployed through no fault of their own.
In principle a great deal can be said for unemployment insurance as a device for protecting men against their own weaknesses. It is a form of compulsory saving for rainy-day purposes. At the same time it should be recognized that such insurance relies too much upon the financial assistance of the state rather than upon the principle of developing in the individual a determination to help himself. There is an element of real danger here. What was begun both in England and in Germany as unemployment insurance has in each instance, as the result of special and unforeseen conditions, degenerated into a dole system with the finances of the state heavily involved. Perhaps the fairest appraisal of the insurance plan at the moment is that its value as a corrective of the unemployment evil is limited. It does not go to the root of the matter.
A proposal which has gained vogue in high places both in the United States and in other countries during the recent depression is that in periods of business slackness it would be proper for the governing authorities to appropriate public money and engage on a grand scale in the building of roads, in the construction of public buildings, and in the carrying out of various other public projects. The avowed purpose in making these expenditures would be to give employment to the unemployed, to inject new purchasing power into the pockets of the C’s and D’s, and to lift business out of the slough of depression.
While the proposal is indeed a specious one, it would prove to be a great disappointment in practice. It completely overlooks the fundamental that depression is nothing more than the earmarks of a disease, contracted during a previous period, which must be cured before normal business can be resumed. The injection of new purchasing power into a system which is about to suffer, or is already suffering, from previous spending excesses would only prolong the day of reckoning or aggravate the disorder. It would be like trying to cure a man of indigestion by forcing him to overeat. The proposal, in short, only confuses the issue — it offers no suggestion for removing the cause.
VI
The conclusion seems inevitable that if the problem of depression is to be dealt with seriously, some device must be employed to stimulate greater thrift among the masses during prosperous periods. It is here that the core of the problem lies. Timely thrift would prevent the development of those excesses which breed disorder. The substitution of orderly saving for reckless spending would smooth out, to some extent at least, the ups and downs of the trade cycle, causing prosperity to be less prosperous and depression less serious. While it is hardly to be expected that the practice of thrift during periods of employment would completely remove the cyclical element in business or prevent all unemployment, the thrift habit would strengthen the reserve position of the workingman and so contribute something toward the maintenance of his independence in periods of slack business or whenever jobs became scarce.
In spite of all the thrift evidence revealed in the records of saving deposits, experience shows that the habit of orderly thrift is none too common. In how many families, for example, will one find a savings and expense budget? The stock objection to orderly saving — and one hears this objection from every class whether the family income is $1000, $5000, or $10,000 a year — is that the income is too small to permit saving.
There is need that sentiment of this kind be made unpopular, and that more people be taught to recognize timely thrift not only as a living possibility but also as a definite social obligation. The truth of the matter is that few incomes are so small as to make saving impossible. Where the standard of living is too high to permit saving, there is something wrong with the standard. Barring unforeseen contingencies such as sickness or accident, anyone who is able to pay for food, clothing, and shelter can make definite provision for savings. Failure to make such provision voluntarily is to invite compulsory saving for one’s self, and for others as well, at a later period.
Coupled with the programme of popularizing thrift habits during prosperous periods there should be an educational programme in investment matters so that what is saved may be profitably utilized and not dissipated in speculative ventures. How little the masses know at the present time about the investment of savings, and what difficulties confront the small investor! There are countless widows, spinsters, wage earners, and even college professors who have a complex about going to a banker to talk over the matter of investing small savings.
It would be unjust to charge against the banker the failure of the present investment machinery to meet the needs of the small investor. Capitalism itself is at fault. Modern mass-production and mass-distribution methods take small account of the peculiar needs of the minority. There are, of course, bankers who cater directly for small customers, but for the most part their appeal does not reach far enough down into the rank and file.
Our present educational system is also at fault in that it fails to acquaint the younger generation with t he atmosphere or machinery of careful investing. Beyond stimulating school children to build up savings accounts, the primary and secondary schools provide nothing in the way of investment atmosphere. Even in the universities there is no organized stimulus or training in the subject except in the Schools of Commerce, where a few students are temporarily exposed to a descriptive study of the various kinds of investments. It is a strange and unfortunate fact that our educational system does not instill into the masses the first principles of orderly thrift or investment — the principles every breadwinner needs to have at hand when he is thrust out into a world of individual responsibility.
Little wonder that small investors periodically suffer such heavy losses. Not having been taught the principles of conservation, they are inclined to subscribe to the notion that anything which smacks of conservatism is out-of-date; that the only road to wealth is via the speculative route rather than through consistent saving. It is sentiment of this kind that causes the small investor to borrow and plunge, to take chances when the odds are heavily against him, to seek more than average returns in the securities he buys, to live extravagantly on the strength of inflated prospects, and, in the end, to suffer substantial losses. Losses, in turn, breed resentment against the capitalist class and discontent with the capitalistic order.
A vast amount of good could be accomplished for the cause of orderly thrift and more orderly business if sound principles on investment matters were disseminated in an organized and authoritative way. As an illustration of one of the principles that should be popularized, take the question of bonds versus stocks. The small investor should be taught to save for the purpose of buying sound bonds before buying stocks of any kind. I he small investor cannot afford to take unnecessary risks. His first $500 investment represents bread and butter in an emergency. He needs stability of both principal and income. As his wealth and savings increase he would be justified in purchasing a few carefully selected investment stocks in the interest of yield, diversification, and the power of growth that inheres in first-class common stocks. The time might come when he could conservatively carry a large proportion of investment stocks to bonds. As for speculative stocks, these are only for the well-to-do.
Clearly, there is much educational work to be done in forestalling the depression ailment. The nature of the problem is such that an entirely new type of thrift and investment organization is required to deal with it. The express purpose of this organization would be to popularize conservative investing, to teach and encourage the masses to adopt and follow a consistent programme of saving (particularly during good times), and to advise any small investor free of charge as to suitable investments. Such an organization would have no securities to sell and would earn no profits. Its recommendations, free from all profit motives, would be dispassionate and of a strictly investment character.
To be successful, an organization of this kind would require the support of extensive and continuous advertising. It would be confronted with the task of making itself, its purpose, and its services known to the man in the street. In performing its educational and hortatory functions it would have recourse to tire most effective media of advertising known to business, reaching down, with the aid of poster advertising, into every factory and office building. The advisory work of the organization would be carried on under the direction of a staff of practical men, responsible in all matters of investment policy to a board of trustees.
There is a legitimate field here for a new form of philanthropy. We now have hospitals, universities, public libraries, and various foundations to promote the general welfare, but no organization of a corresponding nature to stimulate people to help themselves through saving and conservative investing. It stands to reason that there would be less need for philanthropy if more of our philanthropy were directed along the line of helping people to help themselves in a bread-and-butter way.
There are fundamental reasons why those who favor the capitalistic system should seek to perpetuate it by sponsoring some such programme of self-help. Capitalism is badly in need of repair. If the repairs are not made from within by those who understand what is to be done, they are apt to be made from without by those who know little and care less about the delicacy of the machine. Capitalism needs more capitalists and less unemployment. The best way to strengthen and perpetuate the institution is for capitalists themselves to take a hand in our educational affairs, educating more people to become capitalists, and helping, incidentally, to remove or minimize the blight of industrial depression and unemployment.
VII
Is it visionary to believe that organized influence could be brought to bear upon the thinking and habits of the masses so as to bring about greater stability in business through timely saving and conservative investing? One does not usually think of the aims of a government as visionary when it sets out in time of war to educate its citizens on the things it is fighting for. Nor is it customary for business men to underrate their ability to influence the masses when they have a new idea or a new commodity to sell. Business, no less than government, resorts to advert ising on a large scale as a means of educating the public to appreciate its wares — and it usually ‘puts over’ its programme.
Neither is Sovietism contemptuous of its powers to alter the ways of the masses. One of the most interesting and powerful forces in Russia today is the propaganda — propaganda against alcohol, carelessness, ignorance, religion, and capitalism. And there is no mistaking the fact that Soviet propaganda gets results. The whole world can take lessons from the Soviets in the matter of mass-propaganda methods.
If Sovietism and Soviet propaganda can win millions of converts to communistic doctrine, capitalism, in spite of hardened arteries, can win and hold its hundreds of millions if it mends its ways — if it stops relying upon the superiority of its brighter side to blot out the tragedy of its darker side; if it deviates slightly from the traditional path, abandons its self-complacent attitude, and utilizes Soviet educational methods to rid itself of its chronic disorders. The position of capitalism is not so secure that it can afford to be scornful of taking a lesson or two from its new competitor.