Wharton Assembly Addresses, 1936 [Reprint 2016 ed.] 9781512819533

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W H A R T O N ASSEMBLY ADDRESSES

WHARTON ASSEMBLY Addresses ! 9 3

6

By L U T H E R GULICK FRANCIS BIDDLE LEO WOLMAN FRANCIS B. SAYRE HOMER P. RAINEY CHARLES R. GAY LEWIS W. DOUGLAS HAROLD L. ICK.ES

U N I V E R S I T Y OF P E N N S Y L V A N I A Philadelphia 1936

PRESS

Copyright

1936

UNIVERSITY OF PENNSYLVANIA PRESS Manufactured

in

the

United

States

of

America

FOREWORD HE W h a r t o n Assemblies were inaugurated in 1934-35 by the Faculty of the W h a r t o n School and the W h a r t o n Association in an effort to b r i n g before the student body of the School distinguished speakers on some current topic of timely economic or political interest. A l l classes are adj o u r n e d six or eight times a year and the W h a r t o n School students, faculty, and guests meet in Irvine A u d i t o r i u m to listen to the message of the guest speaker. T h e s e sessions serve a valuable educational purpose and furnish a most effective intellectual stimulus to students and faculty from persons o u t s t a n d i n g in their respective fields.

T

T h r o u g h the courtesy and interest of a generous clonor, w e have been able to secure this year the persons whose addresses are printed herewith. T h e donor's generosity has also made it possible to u n d e r w r i t e the p u b l i s h i n g of this series of lectures. It should be noted with regret, however, that the address of Dr. G e o r g e E. V i n c e n t , former President of the University of Minnesota and of the R o c k e f e l l e r F o u n d a t i o n , on " D e m o c r a c y : C y n i c i s m o r F a i t h " is not included since Dr. V i n c e n t prefers that his p u b l i c lectures be not published. In place of this, two lectures are included from the series of the p r e c e d i n g year. T h e y are L e w i s Douglas' address entitled, " T h e R e l a t i o n s h i p between Federal Fiscal Policy and Economic and Social Stability," and H o n o r a b l e H a r o l d L. Ickes' address o n "Federal E m e r g e n c y A d m i n i s t r a t i o n of Public Works." JOSEPH

June ι, 1936 Philadelphia,

Pa.

H. WILLITS,

Dean.

CONTENTS M A K I N G G O V E R N M E N T WORK, by Luther Gulick O B J E C T I V E S OF T H E W A G N E R P U T E S A C T , by Francis Biddle P R O B L E M S IN T H E R E G U L A T I O N CONDITIONS, by Leo Wolman

LABOR OF

DIS-

LABOR

ι 17 31

T R A D E POLICIES AND PEACE, by Francis B. Sayre

45

M E E T I N G T H E NEEDS OF A M E R I C A N by Homer P. Rainey

59

YOUTH,

S T R A I G H T T H I N K I N G , by Charles R. Gay

77

T H E R E L A T I O N S H I P B E T W E E N F E D E R A L FISC A L POLICY AND ECONOMIC AND SOCIAL S T A B I L I T Y , by Lewis W. Douglas

91

FEDERAL EMERGENCY ADMINISTRATION P U B L I C WORKS, by Harold L. Ickes

OF

107

MAKING GOVERNMENT WORK by Luther Gulick

1

4 s a practical people we often feel a bit lost in the maze l \ of our governmental structure. We see a welter of governments, agencies, and authorities, each claiming a certain sphere of action, and political independence. We find local districts overlapping local districts, metropolitan areas spilling over city, county, and even state lines. We discover administrative agencies managed by a fly-by-night personnel that shifts with the winds of political opportunism. And the question that we raise with increasing persistence about the system is, " H o w can we make it work?" During recent years, especially during the last generation, the world has learned as never before the fallacy that is to be found in simple answers for difficult questions. As we approach the problem of making our governments work, it will therefore be necessary to pause for a moment and see what the elements in the situation are. T h e y can be, I believe, summarized under several heads: first, the land; second, the people; third, the institutions. THE

LAND

T u r n i n g first to the land, we find in the United States the largest contiguous, solid block of land suited to human habitation that can be found anywhere in the world. Few 1 Director, Institute of P u b l i c Administration; Eaton Professor of M u nicipal Science and Administration, C o l u m b i a University. A n address delivered before the W h a r t o n Assembly of the W h a r t o n School of Finance and Commerce, University of Pennsylvania, N o v e m b e r 12, 1935. 1

2

W H A R T O N ASSEMBLY ADDRESSES

realize that if the western boundary of the map of t h e United States were placed over the map of Europe so that it would cover England, France, and Spain, the eastern boundary would reach all the way to the Ural M o u n tains and include most of the dynamic nations of t h e world excepting those of the Orient. In natural resources we have a variety and wealth w h i c h is unmatched by any of the modern nations. T h e continent seems to have been designed, with the possible exception of the Pacific Coast and that part lying n o r t h of the St. Lawrence River, to come under the influence of a single economy and a single government. W e were protected in our formative period by two great oceans, an opportunity for development which other countries have not had. THE

PEOPLE

A great deal could be said about the second phase of the problem, the people. B u t most of this has been said so often that only a few of the major points need be b r o u g h t out here. It is hard to realize that in the last eighty years the population of the country has increased over ιοο,οοο,ooo. T h e United States is the most phenomenal population movement that has occurred in the history of the human race. N o t only has there been a wholesale transportation of peoples, as many as a million a year, from the old countries, but there has also been a ceaseless movement of population within this country. W e are truly a phenomenon of mass migration. In this migration there has been a selective process. W h e r e did these people come from? W h y did they come here? W h a t kept them moving? T h e answer can be seen in our customs, our mental attitudes, our songs. T h o s e who came to this country were in a large measure individuals who would not accept the social stratification, the regimentation of society, of economics, of government,

MAKING GOVERNMENT WORK

3

which existed in the lands from which they came. T h o s e who pressed on to the western states were individuals who moved away from even that degree of regimentation which had developed under the normal processes of mass settlement in the East. By nature we are thus the original non-regimenters among the peoples of the world. W h i l e others sing " G o d save the K i n g , " we sing "Sweet land of liberty"; and while they are singing "Die Wacht am Rhein," we are singing " F r o m every mountainside let freedom ring." T h e y may salute the unitary state, but we raise our t h u m b to our nose in the characteristic American salute to all authority. T h e s e attitudes have been bred in the bone of America through the process of selective migration, and they are factors which cannot be overlooked when we talk about the task of making o u r government work. Minute subdivision of labor is another characteristic. It has come everywhere with industrial development. Much specialization has taken place in the mechanized industries and in the professions, but we are still in the first stages. T h e process has barely begun. W e are still a classless people, a nation of individuals, having a greater interest in opportunity than in security. In that, we differ markedly from all of the other nations in the world. Y e t it may be that we are now passing the stage of predominant interest in opportunity and that we are entering a phase of natural existence in which we shall attach a greater significance to security. W e are an energetic nation; we are composed of friendly people; but we are not a particularly thoughtful people, and we are not a disciplined people.

THE

INSTITUTIONS

T h e third underlying element is our institutions. I was much struck the other day when the Boy Scouts gave

4 WHARTON ASSEMBLY ADDRESSES their pledge of allegiance and saluted the flag. Everyone knows that salute with its phrase, "One nation, indivisible, with liberty and justice for all." T h e first part of that phrase, "One nation, indivisible," is, it seems to me, precisely the thing which we are not. We are a nation whose institutions are more characterized by the principle of multiple division than are those of any other country. Our whole system is built on division. This can be easily illustrated. Take, first of all, the division of sovereignty between the Federal Government and the state, the division of sovereignty under the doctrines of home rule between the state and the cities, and the increasing division of sovereignty between the state and the cities and the counties through the introduction of constitutional county home rule. Just recently, in its last election, the state of New York adopted an amendment to its constitution providing for a certain measure of constitutional home rule for counties, changing provisions of the constitution which had been there solidly since 1843. There are now in the United States over 175,000 more or less independent units of government with independent power to determine their own programs and levy their own taxes. No other nation on the face of the globe has such a multiple division of sovereignties in the structure of its governmental organization. Second, there is the division of power which we have all been brought up to believe in—executive power, legislative power, judicial power. This division is written into our fundamental law. It does not exist in the governmental structure or in the institutions of any of the other great powers of the world. Also somewhat unique is our division of laws between constitutional and statutory law, between law adopted by "the people" and law passed by legislative bodies. Here again is a division which does not exist in the same degree in any of the other large nations.

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Added to these divisions is a widespread division of functions. T a k e such a matter as control of commerce. It has been divided very sharply between certain powers entrusted to the national government, which we define as control over interstate commerce, and certain controls over intrastate commerce that rest with the states. T h e r e is even a certain amount of control over purely local affairs of commerce tied up with municipal home rule. Public welfare shows the same division of functions between local institutions, state institutions, and, at the present time, federal agencies. A direct result of this multiplicity of agencies performing the same or related functions is friction, misunderstanding, and failure to develop a coördinated program. Corresponding to the division of function is division of service. T a k e the school service. In almost every American municipality it is sharply set apart and divided from the other local government functions. These may furnish recreation, playgrounds, may be responsible for the care of child health, but the schools are set up in a separate division. In many communities health, welfare activities, or recreation activities are also set up as separate divisions, a process frequently carried to great extremes. Perhaps the most remarkable division of services, and yet one that we regard as perfectly natural—in fact most of us would be shocked if we had anything else—is that which exists with reference to police. In this country the service that we call the police function, which includes the detection of crime, the apprehension of criminals, and the prevention of crime, is handled by the policemen within a given community. But there are city police, county police, state police, and now the federal G-men, who are nothing but federal police—all at work within the same community. In the whole field of federal police there are separate police forces for immigration, for control of smuggling, and for liquor administration. T h i s

6 WHARTON ASSEMBLY ADDRESSES division of police functions into many minute subdivisions stands out in very marked contrast to the status of police in the continental countries, where the municipal police are brought under the arm of the central government through the appointment of chiefs of police by the central government, or through the payment of a share of the costs of police by the central government in return for the imposition of certain standards of local administration, so that the local forces actually form a part of a national police force. A final division which should be mentioned, although it belongs in an entirely different category, is the division of spoils. In this also America remains unique among the great nations of the world. It stubbornly clings to the notion that political parties can neither function nor exist in a democracy without distributing administrative offices among faithful party supporters. W H Y DIVISIONS?

Why do we have these divisions? Partly they are a pure accident of history. Some have been handed down to us because our civilization started in many isolated areas, due to the structure of the continent. Others exist and are maintained as a part of the struggle for power. There are many politicians in many municipalities who guard their power within their own four walls, hiding behind the doctrine of municipal home rule, who know that they would be dethroned if the municipality lost its home rule. Jealousies and political power are therefore often aided by the many subdivisions that we have built into our institutions. A multiple division is thus partly historical and partly an expression of the struggle for power. Beyond that there are two philosophic reasons, two fundamental conditions requiring multiple division. One is the vast size of our territory, requiring flexibility in our

MAKING GOVERNMENT W O R K

7

governmental institutions. O u r m a j o r centers of activity and growth are located on the t w o extremes, the east and west coasts, in the center and in the South, which naturally separates the country into certain areas of action and thought, with differences of desire and objective. Such sectionalism makes it impossible to conceive, in o u r present stage of civilization, a unitary state that can operate successfully over this vast area. Decentralization is necessary, a mechanism which is elastic and which can adapt itself to these differences which exist in the natural resources, the human resources, and the terrain of this country. A second fundamental principle of m u l t i p l e division is expressed in the philosophy of checks and balances. T h i s is the idea, so familiar to all of us, that a proper distribution of forces and powers tends in the long r u n to produce a governmental mechanism in w h i c h one branch, activity or division, helps to keep the other branches and activities within their bounds and on their toes in the performance of their work.

THE DIFFICULTY

OF

DIVISIONS

Whatever may be thought of these fundamental reasons for the multiplicity of division in the structure of o u r government, few will deny that it tremendously increases the difficulty of getting things done. W e are a nation of dreamers. W e have had our share of idealists and idealism in the history of the world, considering the short span of years d u r i n g which we have existed as a nation. W e have had great ambitions, great objectives. A n d yet, I fear that someone looking at us objectively from the outside would have to say: "Yes, you are a nation of great dreamers, but you don't arrive, you don't finish anything, you don't accomplish your dreams. Y o u start a program, and then you are u n a b l e to carry

8 WHARTON ASSEMBLY ADDRESSES it out. You can't administer it." As Mark Twain said, "There is no end to the laws and no beginning to the execution of them." He put his finger on a very sore point of American character and American institutional structure. Part of our failure in this regard is due to the system of multiple division which we have built into our government. It causes a tremendous amount of friction and waste motion. We call upon the citizens of America to discharge an entirely impossible task in reconciling their town, their city, their county, their state, their Federal Government in any unified program. At the same time when we make up our minds that we want to be friends with all the countries of the world and adopt a national policy of friendly dealing, the Pacific Coast decides that it has particular interests to be protected, and therefore passes certain alien land laws which immediately plunge the whole country into a series of difficulties with Japan. Here are citizens of California who, as citizens of the United States, wish to have friendly relations but, as citizens of their own state, are backing a government which enacts legislation directly controverting that objective. Another result of this system of multiple division is the professional politician. He is the man who has stepped forward and said to the American citizen: "As long as you maintain this unworkable system of government, I shall be very happy to make the thing work for you. You can't r u n it, it is too complicated. I will run it for you, and in the process, I will exact my price." What we have is "invisible government." Controls are set up by the professional politician which correlate and make operative the many individual divisions of the service groups and of governmental layers within the area in which he has his power. The invisibility or extra-constitutionality of these controls encourages their use for corrupt purposes, and

MAKING G O V E R N M E N T W O R K

9

part of the corruption of our political life can be traced to multiple division. W e have examined the elements in our current governmental situation. As we have seen, our country is much too large to come within the view of a single eye or the control of a single hand. Our people are still more interested in individual opportunity than in collective security. We have divided sovereign power between federal, state, and local governments. W e have further divided authority between the executive, legislative, and judicial branches of those governments. W e have further divided responsibility for functions and services. T h i s complicated system may be due to sectionalism, or to historical effort to achieve democracy, or to slipshod indifference to the whole problem; which, is not so important. What is important are the consequences. They are on the one hand, friction, waste of effort, lack of coordination, delay—in some instances almost governmental chaos—accompanied on the other hand by boss rule, favoritism, and corruption, where the mechanism is too complex for public control. W e are thus a single country, but our governmental house is divided against itself. THE

WAY

OUT

Now we have reached the core of our problem. How is the house to be put in order? Innumerable suggestions have been made. I have two to offer. T h e first has to do with structure, the second with personnel. From the standpoint of structure, we undoubtedly do not need the 175,000 independent local government units with which we are now blessed. T h e time has come to take an inventory of our requirements and redesign the mechanism of government along more simple, more coordinated lines. Of course we wish to maintain flexibility, opportunity for adjustment to different needs in different

io WHARTON ASSEMBLY ADDRESSES sections of the country. We must maintain a large portion of the segregation and division of sovereignty in the state, in the cities, and in the counties, in order that the administration may meet local requirements without endeavoring to clear through a highly centralized government where so many problems are brought to the apex that it is impossible for any group of men to settle them intelligently. And when problems have to be taken to a group of men who are unable for physical reasons to settle them, the natural result is chaos. We have had a good illustration of that during recent months. Reorganizing governmental structure will thus go far toward solving our problem. But it will not go the whole way. No form of government, however perfect, can perform its work well unless it is properly manned. T h e best ship will not survive the storm if it is run by poor seamen. Nor can we expect much of the ship of state unless it is equipped with competent personnel. It does not matter in this regard what attitude we take toward the objects of government. Some believe that the less government we have the better. Others think that the function of government is to sustain the country's economic structure especially in times of crisis. Some maintain that government should provide employment for those who are out of work. Still others think that government should own and operate all business. Whichever view we take, whether we lean toward anarchism, capitalism, socialism, or communism, we cannot fail to recognize that whatever the objectives or the structure of a government, that government in the modern day needs suitable man power to discharge its responsibilities satisfactorily. During the past year a distinguished commission, the Commission of Inquiry on Public Service Personnel, was established to study government personnel—federal, state, and local. It was the conclusion of this commission that American government does not now draw into its service its

MAKING GOVERNMENT WORK

11

fair share of the young men and young women of character and capacity in this country. T h e reasons assigned for this failure are significant. These are of two types. One is the familiar and sordid story of American spoils and politics, too well known to need further consideration. T h e other is more important, especially for the future. It vvas the conclusion of the commission that the main reason why government does not have in its service its share of the abler brains and character of the country is that we have failed, first of all, to recognize the difference between politics and administration. In our thinking the two are quite confused. We still think it entirely proper to have a man who is elected to office on a platform which has to do with politics, step down into the details of administering an office, and determine what kind of persons should be appointed, what technical training they should have, how the work of the office should be delegated, what types of financial controls should be applied, and other purely technical problems of administration. T h e second error in our practice in the past was introduced in the early days of the civil service in this country. Throughout the United States, there was a great civil service reform wave in 1883, following the assassination of President Garfield by a disappointed office-seeker. But at that time we got off on the wrong foot in civil service reform because we adopted in the whole field of personnel the idea that the proper solution of the problem was to make a job specification for every position in the government. For example, take the post of associate assessor in a city service. T h e civil service commission would make a careful definition of just what our associate assessor does, just what experience he should have before being appointed to that position, and all the precise details of his individual knowledge and skill. T h e n when the position falls vacant, the civil service commission would go out to hunt for a man who will precisely fill that particular niche,

is WHARTON ASSEMBLY ADDRESSES that pigeonhole in the service of the municipality. In fact, the whole service was divided up into these minute compartments, and individuals were found for individual pigeonholes. T h e natural result of this system was that for the upper positions a person would be chosen who had a certain number of years of experience. That automatically disqualified those having specialized training but no experience. It disqualified college students looking for something to do—they could not furnish both the particular skill and the years of experience required. T h e inevitable consequence, of course, was that the entire product by the American educational system, coming from its upper reaches, with specialized training and broad knowledge, was automatically excluded from the ordinary run of the administrative services of national, state, and local government. In the technical fields we did much better, because we recruited men for technical work when they graduated from their technical studies in colleges and universities. CAREER GOVERNMENT

SERVICE

It was the conclusion of the Commission of Inquiry on Public Service Personnel that the one thing most needed to improve American government is the adoption of the principle that the public service shall be placed on a career basis. What we mean by a career is simple enough. We know what it is in all the other fields of activity. We know what it is that a young man looks for when he has completed his educational program. He wants a job. He wants a place where he can earn a decent living and support for his family later on. He wants the opportunity to go ahead, he wants a job that will have the respect of his associates, and his family. And he wants a chance as

MAKING GOVERNMENT WORK

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he goes forward to improve his position as he merits it on the basis of his work. T h a t is what is meant by a career. A n honorable occupation undertaken in youth and pursued upward, until the time of retirement. Government has never given that in the United States, except in a few positions. In these positions the fine caliber of the men who come into government service can be immediately seen. But in all the other appointive positions we have overlooked the necessity of picking men young and bringing them forward as they demonstrate their capacity. T h i s philosophy of career service, of recruiting 90 to 95 percent of all those working for the government as they step from the educational system, lies at the very foundation of the English, the French, and the German civil service. It is an interesting fact that the first-rate man in normal economic times looks for a j o b but once in his life. T h i s is when he finishes his training at college, the university, or a professional school. T h e job that he then takes determines the whole course of his life from that point on. T h e r e are a few individuals who move back and forth, but they are exceptions among men of the first rank. Our government has not been bidding for these individuals at this important stage of their lives. It has not provided, save in rare exceptions, a career service, and therefore it has automatically prevented itself from bringing into its employ the first-rate brains and the first-rate character of this nation. Unless we recognize that the public payroll is not maintained for the sake of jobs, but for service; unless we realize that the work of government requires, in order to get the best results, a lifetime of service, a career service; unless we plan our policies of recruitment on the same career basis in government as we have in the liberal professions—we are not going to be able to go forward, to develop from our matchless natu-

14 WHARTON ASSEMBLY ADDRESSES ral resources and our unique human resources the full harvest of American life. With our philosophy and practice of multiple division we need, more than any other people, governmental officials and employees who, because of their breadth of knowledge and imagination, can knit up the divisions of our structure and produce through cooperation a result which could never be produced through the creation of a unitary state. Such men must be chosen according to our highest standards. They must be given the rewards and inducements necessary to hold individuals of their rank in the public service. By virtue of a long career in that service they will become acquainted with every detail of our diversified governmental structure. Understanding the problems of other governmental units, they will work together, because of their common interests and their vital concern in the object of their life's work, to coordinate the whole governmental structure. It is they who can knit together our multiple administrative divisions, better than any existing invisible controls. And the price they ask is not the price of spoils. Nor is it the price of bureaucracy. It is the price of an honorable career. Those who enter the public service without the breadth of education, without the opportunity for a career, will continue to look backward into the past. As Professor Ogburn, of the University of Chicago, said recently, "Human beings seem to be going through life looking backward, traveling as it were in a car at a rapid pace through the open country more or less in a fog, with every passenger, including the changing drivers, looking from whence they came with only an occasional glance forward." All our decisions are made on the basis of what happened last year, what happened ten years ago, what happened in the last depression. Nobody is looking ahead. The only kind of man who can look ahead is the man who in thinking and character comes from the front rank.

M A K I N G G O V E R N M E N T WORK

15

This man should therefore be drawn into the structure of our government in order that we may heal its breaches, its multiple divisions, and go forward in the hope that we can achieve the promise of America.

OBJECTIVES OF T H E WAGNER LABOR DISPUTES ACT by Francis Biddle, Esq. 1

M

R. C H A I R M A N , Mr. Wells, Members of the Association: Professor Willits' introduction sounded like an invitation to attack an absent foe. It may be that Dr. Wolman's point of view might have been modified after the debate that we had together, so that it would be impossible for me to tell precisely on what ground to attack. I think I will only mention, then, perhaps incidentally, some of the points that he brought up and try, rather, to cover the policy of the Administration in labor as expressed in this Act—it is expressed in others, too, but I think it is more broadly expressed in this Act than in any other— to speak of some of the social theories, the economic theories, very briefly, behind that policy, and then to analyze some of the problems that arise under this policy.

It is a particular pleasure to speak to students. At my twenty-fifth anniversary at Harvard two years ago, one of our classmates, who is now a professor at Harvard, in talking to the men at the class dinner, said that the men who are graduating or are in college today, start exactly twenty-five years ahead of where we are. He did not mean in the lapse of time, but referred to the things which have taken place in the world. T h e new knowledge and the new points of view and the extraordinary historical changes ι Former Chairman, National Labor Relations Board, Washington, D. C. A n address delivered before the Wharton Assembly of the Wharton School of Finance and Commerce, University of Pennsylvania, January 9, 1936. >7

i8 WHARTON ASSEMBLY ADDRESSES have created a group of men who are way ahead in their approach and in their sympathy, I believe, to those of our generation. Moreover, I feel that students have not yet been conditioned by what is so often called a practical approach to this subject which but too often means a prejudiced approach, and can still look at the problem objectively and with less passion than older men. I try to make my approach to this somewhat in that way, then, and to point out the weaknesses of this Administration policy as well as its strengths. First, let us look in a general way at the Act itself. What does this Wagner Labor Disputes Act do? What is the basis of the Act? It is an act drawn for the purpose of furthering collective bargaining. T h e phrase is a loose one, but you all know what it means. It means the bargaining, the making of contracts between employers and between the collective will of employees expressed through their agents; in other words expressed through unions. As a practical matter, collective bargaining has existed in shop relations for many years in some industries, but until comparatively recently, collective bargaining as an economic and social theory has had little general discussion. This Act therefore is to further collective bargaining and collective bargaining agreements. In order to do that, it lays down certain inhibitions. It says to an employer specifically, "You shall not do certain things"; and it defines those things that the employer shall not do. It says to the employer, for instance, "You shall not interfere with union organization; you shall not discriminate against a man because he is or is not a member of the union; and when your plant is organized and a majority of the employees have elected representatives to deal with you, you must bargain collectively with that group." T h e n it goes on to define certain of these things, to provide the machinery and method of enforcing the law, and to set

W A G N E R L A B O R DISPUTES A C T

19

up a court, a judicial body, which has the duty of enforcing the provisions of the Act. T h a t , roughly, is the Act itself. I will come back to the various features of it later, but at present, I want to say something about the underlying theory behind the Act. I suppose that the underlying theory behind this Act, and behind most of the New Deal legislation, is that the economic crisis was caused by a maldistribution of wealth. Before 1929 that was realized, but until more scientific study of the problem had been made, notably by the Brookings Institution and by various economists, the significance of the fact that a very small percentage of the population enjoyed a very large share of the income of the country was not realized. For example, 27 percent of the population in 1929 had incomes of less than a thousand dollars a year; 42 percent had less than $1,500 a year, and some 70 percent had incomes of less than $2,500 a year. Until the effect of that distribution was seen on the consumptive demand which creates production, and until it was seen that the balance of wealth going into consumer goods and into the income of the masses, as against wealth going into capital goods and into savings, until it was seen that that balance was out of proportion, the economic significance of the situation had not been realized. We start then with the belief that wealth is poorly distributed and that maldistribution is a specific cause of curtailed production and of the crisis, continually more severe in our economic life. Economists would differ 011 the various means to change that condition. T h e main efforts of the New Deal were, it seems to me, pointed toward the change in distribution of wealth—if you can find one common denominator. T h e Ν R A , in fact the whole Ν R A administration, was an effort to prevent the breaking down of minimum wages and to create better living conditions for workingmen. T h a t was one of the fundamental bases of Ν R A , balanced against

2o WHARTON ASSEMBLY ADDRESSES the right of industry, freed from the Sherman anti-trust laws, to combine in stabilizing prices. I am not now discussing, nor will I discuss, the economic value of these particular questions; I will confine my discussion today to the Wagner Bill, but I am pointing out the general basis of the approach. That also, of course, was the approach of the Agricultural Act, lately dead. T h e basis of that Act was that the relation of the farmers' income, which played such a tremendous part in consuming the goods that were produced by the industrialists, had got out of balance. Various ways, for twenty-five years, had been used by the Government to put it back into balance, and it was considered economically wise, as a temporary measure, to prevent the farmers from producing an excess of agricultural products, which could not be absorbed in the market, until their income rose to such a figure that it could absorb what at that time was an excess. There, again, was a specific effort to raise the income of a large group for a further distribution. T h e third group of legislation which fits into this picture is the labor statutes. The Wagner Bill is only one of a group of statutes which attempts to put into effect collective bargaining. T h e principles which I speak of here are found in the Bankruptcy Act, in the T V A Act, in the Guffey Coal Bill, and in a number of other statutes, so I think it is fair to say that they do express an Administra tion policy. Now the economic theory of collective bargaining is simply this. There is no doubt that industry has continually tended to combine into larger units. There is also no doubt—and that has been continually recognized by the courts—that the laboring man cannot in any realistic sense contract or deal with these large corporate units as an individual, that his sole protection for making a bargain is through the collective force of labor which has behind it the great power of refusing to work if it cannot make what

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21

it considers a fair bargain. In other words, the theory of collective bargaining, I suppose, is that it betters the general condition of the workingman. What are the things that collective bargaining can improve? You hear all through this Act, and all through a discussion of the legislation or the cases, the phrase—"Wages, hours, and working conditions." And those, roughly, are the things that collective bargaining deals with. I am inclined to think that the effect of increasing wages through collective bargaining is the one that may be most open to criticism by economists. It would seem, as the report in the last volume of the Brookings Institution has pointed out, that as wages are increased there is a tendency to increase prices. Probably, 011 the whole, a lowering of prices would have a broader and more salutary effect on the general population so far as real income went, than raising wages. In other words, the price follows the wage. I think it may be said that that is a generality about which there is some disagreement, and which can only be stated in the loosest way. Dr. Moulton points out that the union movement generally throughout the country, even if it has not tended to increase wages over a long period, has tended to prevent the slashing of wages in times of depression. In that negative sense, we can say that collective bargaining tends to increase the whole wage. But I think there is much less doubt about the other two features of collective bargaining. Those features are hours and working conditions. Even though the competitive demand for labor in normal periods of industrial activity may regulate wages, through the law of supply and demand, hampered as it is by statute, by tariffs, by many other things, that cannot be said of hours and basic working conditions. Those are matters which are far more in the hands of the particular employer, about which there is none of the standardization coming from the free flow of a competitive condition, which varies enormously, and

22 WHARTON ASSEMBLY ADDRESSES which, in the long run, is therefore more open to regulation. That is also obviously true of working conditions, ol sanitary conditions and of the general conditions for health and comfort in plants. T h e objections to collective bargaining—and I think they are obvious—are that it tends to rigidify wage structures in times when there may be a change, either in one direction or the other, and when wages should follow the fluidity of the economic market, rather than be imposed by this fixed method. I think there are two answers to that. In the first place, the fixed wage in such industries as the building industry, for instance, which is an outstanding example of a rather frozen wage condition, is not actually the wage of the industry. It is a more theoretical than actual problem. T h e other answer is that if you want to stabilize wages at all, the stability coming from agreements is far better than a stability coming from an outside source, e. g., from the Government's saying, "You must not reduce wages, you must hold wages at that point." At the moment, as was found in Ν R A , that the Government tries to fix or influence wages, that attempt is reflected in prices, and it is on that point I think that the N R A chiefly bogged down. Moreover, it is not at all bad, where a market is changing violently—and that is the only condition where the problem comes in at all—to have the brake of, to a certain extent, long collective agreements with fixed wages on the tendency to either a too rapid rise or too rapid drop in wages, depending on circumstances. I think there are psychological as well as economic considerations behind the passage of this legislation. Often, it seems to me, it is difficult to separate those two considerations based on the psychology of the people for whom the laws are adopted if we are really empirical about it. In the Wagner Act, the considerations of collective bargaining, and of all this kind of legislation from a human,

W A G N E R L A B O R DISPUTES A C T

23

psychological point of view, seem to be something like this. T h e history of the movement of American labor has been a history of opposition to the development of unionized labor, both by industrialists and the courts. T h e r e is 110 doubt but that the construction of statutes and the interpretations of what are and what are not proper activities for unions to indulge in have, on the whole, been biased and narrow. T h a t has developed a type of labor leadership in this country which is interested, fundamentally, in keeping itself alive. We are not very far from the frontier, either from the point of view of labor leaders or industrial leaders. All of us still dislike suggestions of closer social cooperation, and this problem suffers from that point of view as much as any other problem. Today in America there is a type of leadership which is continually fighting for its very existence. In a few industries, which are exceptions, where collective bargaining lias come to be the rule rather than the exception—as the railroads and the needle industry, for instance, types ot labor leaders have been developed who are interested in the problems of production and of management. For example, in the shops of the B. &.· O., they have developed plans of cooperation with management which have resulted in economies, and in a far better psychological, human relationship between employer and employee. It is there that real arbitration machinery can start and has started. Those industries which have the best history of arbitration and conciliation work, where joint committees have been built up to decide the issues, are those industries in which the habit of collective bargaining is ingrained, where employers are accustomed to dealing with a few labor leaders representing the industry. A n d I think that organized labor will never accept any form of arbitration or shop council or joint conciliation work, where labor is not truly represented in the field. T h a t brings me back to Dr. Wolman's philosophy from

24

W H A R T O N ASSEMBLY ADDRESSES

w h e r e w e started. It seems to me that the m a i n fault w i t h the h a n d l i n g of the a u t o m o b i l e situation was that an arr a n g e m e n t for arbitration, f o r proportional representation, f o r conciliation, for the d e c i d i n g of these disputes so as to k e e p o u t this c o n t i n u a l difficulty of labor unrest, s h o u l d have c o m e after the field was organized and n o t before. A s the Ν R A report on the a u t o m o b i l e situation tends to indicate, a l t h o u g h the w o r k of the A u t o m o b i l e Board was very successful in d e a l i n g w i t h specific instances of discharges and getting p r o m p t and practical satisfaction, it left a c o n d i t i o n of distrust a n d ill-feeling t h r o u g h o u t the industry. T h a t is a t h i n g w h i c h it is difficult to prove and a b o u t w h i c h there are many d i v e r g e n t opinions. I b e l i e v e that the l a b o r i n g m a n is today t h o r o u g h l y alive and conscious of what, to h i m , is the v a l u e of d e a l i n g w i t h i n a g r o u p . I believe that until he feels that that right has b e e n really recognized by employers, there w i l l lurk in h i m a distrust a n d dislike of employers w h i c h is difficult to eradicate w h e r e efforts are c o n t i n u a l l y b e i n g made to break d o w n his o w n organization. M o r e o v e r , I believe that the use of collective b a r g a i n i n g tends to educate labor. T h e average l a b o r i n g m a n knows n o t h i n g a b o u t figures, h e k n o w s n o t h i n g a b o u t economics, and w h a t is more, he labors u n d e r the delusion that most businesses are m a k i n g

an e n o r m o u s

profit. A s

Justice

Brandeis pointed o u t b e f o r e some Senate C o m m i t t e e years ago, most industries are r u n n i n g at a very small m a r g i n of profit or, w h e r e the profit is substantial, it is usually necessary to meet the possibility of great losses. I b e l i e v e that peace comes f r o m a partnership, b u t a partnership comes f r o m an agreement. Y o u are n o t a partner u n t i l y o u get together w i t h the o t h e r f e l l o w a n d say, " W e w i l l d i v i d e whatever there is in the business." I d o not think that, in any true sense, w o r k i n g m e n are partners of their employers, to d i v i d e the p r o d u c e o r wages or profits, u n t i l some

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25

sort of a general agreement has been made to express that relationship. Now so much for the theories behind the Act. Let us look at the Act itself. I do not want to run through it paragraph by paragraph, but to suggest one or two things which have been most controversial. First, I would like to speak of the so-called majority rule. T h e majority rule has been many times defined and undefined and analyzed and talked about. It is an exceedingly simple thing. It means that where a majority in a plant are represented and where the law says the employer must deal with that majority, the bargain that results must affect the plant. T h a t is, in substance, all that it means. Now, obviously, when an employer makes any agreement with respect to, let us say, the wages of a certain type of workman, that agreement must cover all the men in that class, whether they happen to belong to the union or not. I think the best way, perhaps, of illustrating the majority rule is an example which was given in testimony before the Wagner Bill two years ago when it came before Congress, by Dr. Leiserson. He said something like this: T o say that the majority rule is unfair and is un-American is like saying that if a group of farmers get together in a cooperative and try to sell milk or vegetables at a certain price to distributors, that that price must not affect the price of milk or vegetables which are sold by the individual farmers who are not members of the cooperative. In other words, your organization speaks for the trade, it speaks for the cooperative, it speaks for the plant, and once you are embarked on a theory that collective bargaining is proper and that the employer should bargain with a majority, then it seems to me that that eliminates the minority as a factor in making an agreement because you cannot make two agreements. As another practical matter, it will save the employer from the infinite trouble of having competing unions, and one of the main causes for dissatis-

z6 WHARTON ASSEMBLY ADDRESSES faction throughout all this labor difficulty is the competition of two unions in one field with the employer. T h e employer is so continually torn by such things as, for instance, union jurisdictional disputes, that the majority rule tends to simplify and solidify the relationship. T h a t brings me directly to the question of the proper unit. Here, for example, is a plant in which a majority belong to the union, and the rule is that you must deal with that majority. But the question is more complicated than that, because in the plant there may be other kinds of units, which it is important to take into consideration. For instance, in a single plant you may have a group of carpenters who work on their own wage scale under their own union rules; its union has always been recognized by the employer and it properly represents that group within the plant. You may also have a group of electricians in the same plant. It is necessary therefore to find out from the majority of the employees whom they want to represent them. They may have an election to determine that, but before having the election, the unit within which the election will be held must be determined. Should that unit be, in this particular illustration that I have given, a unit of the carpenters, dealt with as a single unit? Has not the carpenter a right to say that he will be represented by his carpenters' union; and the electrician likewise? In a plant, should there be three or four unit elections held for each group? Or, on the other hand, as in the shipyards, for instance, where these units are trifling—twenty-seven or thirty men out of five thousand—is it not fair to say that for the convenience of everybody and as a practical matter, we will pick the industrial unit, the plant itself, and have everybody vote? Under the Wagner Bill, that problem at once arose and it became necessary to decide on who should finally determine what the unit was. Obviously, the employer could not break down the very basis of the Act by being given

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27

the power to determine the unit; nor could the employee, because any three employees could go off and say, " W e will make our own unit." So the only other thing left to do was to put that power in the hands of the Labor Board created by the Act. T h a t Board is given the power under the Act to determine the proper unit which shall be recognized and within which an election shall be held. It is rather interesting that the significance of that was not realized by the craft labor unions until almost immediately before the Act had been passed. As you ask the Government to help labor, more and more labor puts itself within the power of the Government, whether for good or ill. If you are going to get the Government to give you a chance freely to organize, to protect you against discrimination by the employer, inevitably, sooner or later, that will result in more regulation of your union by the Government. T h i s is an example of that general historic tendency, because the choice of whether or not that unit shall be an industrial or a craft unit lies in a government body. One of the most fundamental features of the American labor movement, as you know, is the fight between the industrial unionist and the craft unionist. With a group definitely set 011 one theory or another, let us say, on the craft theory, think of the power of breaking down the industrial theory that they would have—the craft people could ask for elections all through the country. Crafts could be continually chosen as the unit and the industrial units could be wiped out—except, of course, in industries where, as in soft coal, for instance, the industrial organization is entirely inclusive. Labor suddenly discovered that, two days before the Senate voted on it. T h e y sent down a delegation, headed by various powerful labor leaders, and begged Senator Wagner to take the provision out and to give it to the employees. Obviously you could not give the determination of what was the proper unit to the employees, and

28 WHARTON ASSEMBLY ADDRESSES Senator Wagner said, "No, we'll keep that in. You must trust your board and give them that power." But up to the very last moment before the passage of the Act there was definitely the possibility of labor entirely reversing its position from having said, "This is the Magna Carta of labor," and holding torchlight parades and everything else, and then saying, "This is a risky thing; we had better not go along with it." There are a good many labor leaders who, today, distrust and fear all legislation with respect to labor, chiefly because it means that the Government inevitably, in some direction or other, will tend to get into the picture more and more. Let me say a word now about company unions, another very controversial question. I shall not detail the figures to you which I have here, or go into them at length, but it is sufficient to say that although company unions in the accurate sense of being organizations within a single plant, of the employees of a single employer, have always existed and particularly in American life and before the wider spread of the labor unions, the company union in the sense that the employer was interested is but a recent development, and chiefly since N R A . Studies that were made six months after N R A , and then again a year later, of something like three million employees engaged in mining and manufacturing, showed that of the company unions in those industries, about 60 percent had come into being after N R A and were fences put up to come under the provisions of the law, of Section 7 - A of this Act, which provided that there should be no interference with organizations; and the other 40 percent only had come in before the Act. There is another interesting study of company unions just made by the Labor Department which tends to show —these generalities you have to be careful about—that of the six hundred company unions studied, only seventeen had the basic characteristics of real labor unions—that is.

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29

strike benefits, regular dues, and regular meetings and affiliation with some outside union—practically none oí them; which of course shows that they were created not for the purpose of collective bargaining but for some other reason. T h e theory of the Wagner Bill is that company unions are perfectly good for their own job; I mean company unions in the sense of company-dominated or controlled unions; but that for purposes of collective bargaining they are not efficient. Why? Because a man in his own plant cannot talk to his employer about raising wages without the risk of being fired. T h a t seems to be obvious, and the strength of a trade union is that the representatives who talk for the men within the plant are not employees of that employer; and they have all of the outside strength and all of the outside objective backing of the tightly closed union. Company unions are perfect for things like health and sickness benefits, insurance, playground facilities and all that sort of thing—but for collective bargaining they are no good. T h a t is the reason, in many instances, for their having been created. T h e y are inefficient for collective bargaining, therefore the Act comes along and says, " W e will make the employer keep his hands off this whole union question and give the men a chance to organize their own unions and see what they can do by themselves." And it says to the employer, " Y o u keep out of the picture." Now one other feature of the Act which I think is very much misunderstood is this question about the closed shop. T h e Act specifically provides that it shall not affect a closed shop. In some states, closed shops are legal and in others illegal, so that the law with respect to closed shops is precisely, under the law, what it was before. Moreover, a very interesting thing—which I suppose I should have mentioned in the discussion of collective bargaining —is that where you find collective bargaining agreements

go WHARTON ASSEMBLY ADDRESSES in an industry on any large scale, and where you find the entire industry as in the railroads or in the needle industries, but particularly in the railroads, dealing entirely through the unions, the closed shop problem disappears. In England, for instance, where employers deal as a matter of course with unions and not with individuals, the question of closed shop is unheard of. Why? Because a man knows that the union is going to represent him, whether he is a member or not, and there is no particular reason for his belonging to the union and paying dues. Of course, I do not believe that, through legislation, conditions which are desired can be brought about where such subtle things are involved as the relation of labor and of employer. I do not believe that this Act is going to change this condition. But I do believe that the enactment of a policy by the Government, where the policy has had historical background (as in this case fifteen or twenty years), where it is accepted by a respectable majority of some industries, where it is desired by a large number of men in the country, tends to educate the country along the lines of the desired approach to the subject; and, though not automatically enacting into fact the policy of the law, it gives to laboring men the sense of a government which is sufficiently interested to create regulative bodies which will protect them from the continual and oppressive fear of being fired just because they join a union to better their own conditions.

PROBLEMS IN THE REGULATION OF LABOR CONDITIONS by Leo Wolman

1

T

of us who desire to test the soundness of a labor policy must go beyond the textual examination of the law. T h e y must weigh the validity of the theories upon which policy rests; they must reveal the administrative practices which the enforcement of suggested legislation involves; and they must disclose the political and social consequences most likely to flow from the measures proposed. From the purpose of improving the lot of labor, there can, assuredly, be no dissent among the members of a democratic society. If equally well-meaning and publicspirited citizens differ sharply concerning proposals for social and economic reform, it is because there is doubt as to the character of the methods to be employed, the probabilities of their success, and the collateral effects they engender. HOSE

I need not stress the difficulty of undertaking to apply such tests to the practical experience of this country since the summer of 1933. Observations on the value of alternative proposals for social reform are under the best of circumstances an undigested mixture of sentiment and analysis. T h e crucial fact that great classes of labor legislation have been absorbed by the existing economic order 1 Professor of Economics, Columbia University; former Chairman, National Automobile Labor B o a r d . An address delivered before the Wharton Assembly of the Wharton School of Finance and Commerce, University of Pennsylvania, J a n u a r y 17, 1936. 3'

32 WHARTON ASSEMBLY ADDRESSES mainly during long periods of expanding industrial activity and widespread activity is little noticed in the vast literature dealing with this whole subject. It is an item of common experience in all industrial countries of the world that some labor laws are promptly and successfully enforced while others, equally desirable in purpose, are in practice quickly thrown into the discard and continue to exist only in the records of laws proposed and adopted. It is a fact of common observation, further, that some of the most startling declines in wages and of the standard of living have taken place in the face of the most elaborate and effectively enforced structures of minimum wage and other labor legislation. An accurate account of how the mass of labor laws, enacted in industrial states during the last century, have worked and the conditions responsible for their success or failure is one of the rarest items in a veritable library of works limited to compiling, classifying, and annotating the labor laws of the world. Analysis of the circumstances contributing to higher standards of living and to permanent benefits accruing to labor is a subject which has clearly escaped the notice of the high priests of economic reform. Yet there is on all these questions a wealth of research, evidence, and conclusions. T h e recent efforts directed toward raising the labor standards of American employees, toward assuring them greater security, and safeguarding their status by promoting trade unionism and collective bargaining, are all in the tradition of historical experiments aimed at the same goal. They differ from like experiments in the past in the speed with which they were put into effect, the scope of their application, and the theoretical principles advanced in their support. Within less than two years laws were adopted in this country embodying nation-wide regulation of wages, hours, and other working conditions, a national system of unemployment insurance and old-age pensions, and extreme and drastic controls over the rela-

P R O B L E M S IN L A B O R R E G U L A T I O N 33 tions of employers and employees. T a k e n as a whole this enterprise in social reform has not been exceeded by any similar undertaking of which we have a record. It clearly surpasses on all counts the reform measures sponsored by Lloyd George in England before the World War. Its closest counterpart is to be found in the laws and regulations of those countries which have, in the last several decades, dedicated themselves to the principles and practices of a planned economy. Most proposals for social progress are plausible and attractive. If wages are too low to satisfy the social conscience of the community and will not go up by themselves, then the obvious expedient is to raise them by fiat. If the numbers of unemployed stubbornly resist all attempts to reduce them, then the natural way out is to continue to contract the hours of labor until all the unemployed are absorbed in jobs. If the overwhelming majority of the workingmen of a country have been chronically non-union for half a century, then the irresistible action of a government which believes in corporate economic relations is to use the weight of its influence in urging people to join organizations and in imposing upon employers the obligation to deal with them and with them exclusively. Simple as these reforms appear, it should be plain that experiments of such magnitude and potential consequence merit at least some theoretical examination and support. T h e classic exponent of the philosophy of social legislation in England wrote as follows in 1887: No laws, no customs, no rights of property are so sacred that they may not be made away with, if it can be clearly shown that they stand in the way of the greatest happiness. The well-being of the people is the supreme law. But it ought to be evident that before we venture upon a great leap in the dark, we may well ask for cogent evidence as to the character of the landing place. . . . What are the means of proving . . . that a certain change will conduce to the greater sum of happi-

34 W H A R T O N ASSEMBLY ADDRESSES ness? In the case of any novel or considerable change direct experience must be wanting. T h e present social arrangements have the considerable presumption in their favor that they can at least exist, and they can be tolerated. A heavy burden of proof, therefore, lies upon him who would advocate any social change which has not or cannot be tested previously on a small scale. Wherever direct experience can assure us that good is to be obtained by a certain course, we may with some confidence venture to adopt it. In hardly any case, however, are the consequences of an action or a law limited to the direct obvious results.1 It fortunately does not require extensive search to discover the core of the theoretical foundation for existing programs of social reform. T h e economic theory of the National Industrial Recovery Act, of the Wagner-Connery Act, and to a considerable degree of the Social Security Act, all derives from the same source. It is at once an explanation for the depression and its cure. It has been variously stated. In its simplest form it ascribes the onset of the depression and its prolongation to growing inequality in the distribution of income and to substantial lag in the purchasing power of the ultimate consumer. In its more complex and elaborate form alleged widening disparities in income distribution and deficiencies in purchasing power are held to account for the disproportionate expansion of plant and equipment and the production of goods which the consumer is unable to buy. T h e theory was alluded to by Mr. Biddle last week when he said: " I suppose that the underlying theory behind this Act, and behind most of the New Deal legislation, is that the economic crisis was caused by a maldistribution of wealth." Official statement of the theory is given in Section ι of the Wagner-Connery Act as follows: " T h e inequality in bargaining power between employees who do not possess ι W. Stanley Jevons, The State in Relation don, 1887, p. 1 1 .

to Labour,

MacMillan, Lon-

P R O B L E M S IN L A B O R R E G U L A T I O N 35 full freedom of association or actual liberty of contract, and employers who are organized in the corporate or other forms of ownership association substantially burdens and affects the flow of commerce, and tends to aggravate recurrent business depressions, by depressing wage rates and the purchasing power of wage earners in industry. . . ." T h u s even the collective bargaining provisions of the New Deal are seen to be a means to an end; the end being the increase in the purchasing power of the masses of ultimate consumers. I shall not burden you with a discussion of the intricacies of economic theory, except to say that the theory just stated has found acceptance among very few indeed of the professional economists of this and other countries. But I shall make some reference to the available facts as they bear upon the truth or falsity of this popular doctrine. T h e r e is first of all little, if anything, new in the existence of inequality of income and wealth in the industrial societies of modern times. In the history of business depressions it is certainly not easy to detect this assumed relationship between changes in the distribution of income and the frequency and severity of periods of business decline. So far as our latest catastrophic decline is concerned, the facts of income distribution in years before the depression appear to be at considerable variance with the theory. According to the data compiled by Willford I. King, who has made the most definitive studies in this field, wages, salaries, and other forms of compensation to labor constituted 52 percent of the total national income in 1 9 1 4 , 1 9 1 5 , and 1916; the percentage rose and became 57 in 1920; it remained around this point for several years and rose again between 1926 and 1928 to 59. Anyone at all familiar with this type of figure can readily see how radical an improvement in the relative position of labor took place in these years. King's conclusions are moreover fully confirmed by independent inquiries into the movement of

j6 WHARTON ASSEMBLY ADDRESSES wages and the cost of living during this same period. These studies show that real wages, or the purchasing power of money wages, ascended in the 1920's to record heights and remained there throughout the decade. There is in these materials little to support the view that the depression was brought on by a growing inequality in income distribution and by the deterioration in the position of labor. T h e picture of the movement of goods and services bought by the ultimate consumer in these years furnish additional evidence in support of similar conclusions. T h e volume of precisely these types of products rose to unprecedented heights and their number and variety multiplied many times over. T h e striking feature of the period was the facility with which goods were taken off the shelves of stores and sold to the ultimate consumers. Even during the worst years of the depression, ordinary consumption remained, as it apparently usually does during depressions, at surprisingly high levels. The great deficiencies in output and hence in employment have until today persisted in the capital goods industries, dependent for recovery and expansion upon the investment of accumulated funds and therefore upon the existence of the willingness of enterprisers and capitalists to take those risks that the investment of large funds requires. In an economic environment, finally, in which the succession of events following the close of the World War has been so painfully clear, it should be neither necessary nor useful to invoke novel hypotheses and dubious conclusions. The dismemberment of the prevailing economic units of Europe, the course of post-war fiscal and currency policies, the rise of a new and extreme nationalism, the pervasive influence of the costs of war and post-war armaments, the radical redistribution in the world's supply of gold, are more than enough to explain the train of events

PROBLEMS IN LABOR REGULATION 37 beginning in 1929 and to suggest the elements of a workable policy of American and world recovery.

Whether based upon correct or incorrect principles, the success or failure of a body of law will depend on the administrative burdens which its enforcement entails. O11 this whole matter the experience of these last years has yielded a wealth of data indispensable to the development of the science of law and of its administration. When the burdens of administration tend to strain the capacity of those charged with the execution of law, the impulse to resort to hasty, ill-advised, and hence arbitrary action will inevitably, in a democratic society, doom promising legislative experiments to failure and early extinction. This in a sense is the explanation for the collapse of the Recovery Act and its executive agencies. Begun as a cooperative venture in the moderate regulation of minimum wages and maximum hours, it succeeded through processes of negotiation and persuasion, through the conciliatory adjustment of fundamental differences in opinion, in devising and applying national labor minima for the great bulk of employees throughout the most important categories of American industry. T h e taste of accomplishment on a grand scale, the state of public excitement and belief in panaceas, and uncurbed administrative ardor, soon combined to force the abandonment of slow and reasonable administrative procedure and put in its place the arbitrary rulings of agents of the state. T h e well-known Executive Order which in the face of the opposition of a whole industry announced a general cut in hours and a general increase in wages may well be regarded as the climax in this course of action and the beginning of the decline which was brought to a painless end by the decision of the United States Supreme Court on May 27, 1935·

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T h e provisions of a law which are in their essential character unenforceable will clearly inflict greater damage than benefit. T h e y will lead to the disregard of the law and will impair the esteem in which the organs of government are held by its citizens. Efforts at enforcement will contribute to a rising tide of resentment and perhaps even to the corruption of the agencies of government. We in this country are familiar with the enactment of legislation designed to achieve the worthiest of objects that succeeded only in corrupting the instruments of law and being finally discarded by a harassed and chastened electorate after a trial of less than fifteen years. Several of the provisions of the National Labor Relations Act are, in my estimation, of this character. T h e y rest on the assumption of the prevalence of evil practices which, if they in fact exist on this scale and to this degree, are probably incapable of correction and remedy by the legal means at our disposal. They charge the administrators of the Act with punishing violations of the law, whose discovery involves the most subtle distinction between right and wrong practice in industrial relations. T h e y , in substance, authorize the agents of government to determine in specific cases whether the denial by an employer of a specific demand by a union constitutes "a refusal to bargain collectively with the representatives of his employees" or not. And they do this in a field of human relations in which many of the most notable advances have been made through free consultation and negotiation and, wherever the intervention of an outside party was desired, through the method of conciliation and voluntary arbitration. Provisions calculated to achieve ulterior purposes will, likewise, impair the value of a statute, however laudable its general purposes and however high the motives of its sponsors. Many of the phases of the majority rule, as stated in the National Labor Relations Act, place the part of the law dealing with that issue in this category. T h e provisions

P R O B L E M S IN L A B O R R E G U L A T I O N 39 of the law are as follows: "Representatives designated or selected for the purposes of collective bargaining by the majority of the employees in a unit appropriate for such purposes, shall be the exclusive representatives of all the employees in such unit for the purposes of collective bargaining in respect to rates of pay, wages, hours of employment or other conditions of employment. Provided that any individual employee or group of employees shall have the right at any time to present grievances to their employers." T h e principles embodied in the foregoing sections were, according to their sponsors, introduced into the law because they represented the only sound and practicable principles of administration likely to promote genuine collective bargaining. It is the stated belief of the supporters of the majority rule that genuine collective bargaining is without it impossible. Whether this view is correct or not, it is clear from even the most cursory survey of the course of industrial relations during the last two years that for all practical purposes the majority rule is much more a weapon for expanding union organization than for raising the standards of collective bargaining. Enforced in a period of extensive organizing campaigns, the immediate effects of the application of the majority rule are increases in the membership of those organizations that have succeeded at the moment in winning the majority of the employees to their side. It is interesting in this connection to cite the following excerpts from the first annual report (p. 16) of the National Mediation Board—the agency empowered to deal with disputes in the railroad industry: In none of the representation disputes settled by the Board during the year were individuals chosen as representatives. The employees in every case designated organizations to represent them. Broadly speaking the organizations are of two types: (1) National labor organizations, or as they are often referred

40 W H A R T O N ASSEMBLY ADDRESSES to, standard trade unions; (2) system associations, or organizations of employees confined to one railroad system, commonly referred to as company unions, but these, of course, may not be sponsored, supported, or otherwise assisted by the carriers. In one of these contests, involving about 2,100 clerical employees, two elections were held without a conclusive result. T h e first gave the national labor organization a slight majority of the votes cast, but not a majority of those who were eligible to participate in the election. The second gave a slight majority of the votes cast for the system association, but again there was no majority of all the eligibles. In the two elections the combined vote for the national labor organization was 2,034, while the system association received 1,976 votes. The Board being at that time of the opinion that the Railway Labor Act required a majority of the eligible employees to choose representatives declined to issue a certification to either organization and suggested that they attempt to settle their dispute by mutual agreement. Acting on this suggestion the officers of the two organizations met and entered into an agreement by which the national labor organization was authorized to represent all the employees. This agreement was approved by employees who were members of the system association at special meetings called for the purpose, and a number of the association lodges then disbanded, many of the members joining the national labor organization. It being clear then that a majority of all the eligibles desired representation by this organization, the Board issued a certificate accordingly. T h u s under this system two organizations almost equally matched in membership presumably were unable to bargain singly or jointly for their members. But when, later, under the benign influence of the National Mediation Board and the majority rule the members of the one organization were absorbed into the other, collective bargaining was resumed. T h e distinction raised in the law between the rights of individuals and minorities, on the one hand, and ma-

P R O B L E M S IN L A B O R R E G U L A T I O N 41 jorities, on the other, is purely an abstract qualification of the majority-rule principle which cannot possibly mean what it says. T h e academic differentiation between negotiating over the general levels of wages and hours of employment and negotiating over everything else has, in my judgment, no practical significance. T h e bargaining that counts is that which goes on in the shop all hours of the day. Any minority group or organization which is occupied with that type of bargaining cannot practically be restricted in the grievances and issues it presents to the management. T o the extent that such a minority retains its vitality and vigorously asserts its position, it participates fully in the process of collective bargaining with the majority, and the majority ceases to be the exclusive agent of all the employees. What, however, is more likely to happen is that the minority and individuals will be denied the rights granted them by the law and they will be forced in self-defense to join the ranks of the majority. American experience in industrial relations shows that it has for many years been the prevailing practice for separate groups of employees to bargain jointly with the representatives of management. T h e preponderant systems of industrial relations in this country are precisely of this nature. T h e belief of the advocates of the majority rule that only exclusive representation by the majority produces negotiation and collective bargaining does not appear to be in accord with the record. It may well be that majority representation yields a higher and more effective type of bargaining, but it is only fair to say that an adequate analysis of prevailing types of labor relations in industry, on which such conclusions would be expected to rest, has yet to be made. T o hold that joint action by groups with conflicting interests and opinions is impractical is to challenge the practicability of the industrial union, at present the favorite form of labor organization of many of the friends of the majority rule and the type of labor union

42 WHARTON ASSEMBLY ADDRESSES which must of necessity include within its ranks men of highly diverse occupations and economic interests. In these and other provisions of the National Labor Relations Act there is implicit a greater measure of compulsion than it is safe for democratic communities to contemplate. We have already seen how short a time was required to convert the National Recovery Administration from a consultative body into an agency assuming farreaching arbitrary powers and eager to use them all. T h e process, once it begins, is swift to gather momentum and increasingly difficult to bring under control. In view of this observation it is not surprising that one labor board after another has become involved in extensive litigation and its jurisdiction and power have been challenged at every step. T h e American labor movement has for fifty years included within its ranks only a fraction of the employees of industry. For this condition the hostility of the courts, the opposition of the employers, and the structure of trade unions have all been blamed. Now under the influence of fallacious theories of economic recovery the powers of government have been applied to spurring the expansion of union organization, and by drastic provisions of the law to impelling industry to enter into agreements with the organizations so created. Within the first year of the New Deal, union membership in this country increased by twenty-five percent; but in the second year the rate of growth declined. It is now abundantly clear that the effects of this newest law of trade unions have fallen far short of the hopes and forecasts of even the less sanguine of its supporters. But if the law were to be fully effective in its avowed and implicit purposes, its success would impose upon government, labor, and industry unsuspected, and probably unwanted, responsibilities and burdens. If we may judge by experience in several of the countries of Europe since the War, government sponsorship of organized labor inevitably results in strict supervision and

P R O B L E M S IN L A B O R R E G U L A T I O N 43 control of the entire range of trade union activities. A11 American government which undertakes to strengthen the institution of trade union cannot do so long without taking responsibility for the movement's good behavior and its policies. It is, under these circumstances, a short step between asserting the right to organize and to engage in collective bargaining, as it is asserted in the Wagner-Connery Act, and undertaking to pass on the demands of organized labor. Beyond this lies the shadow of compulsory arbitration. T h e r e can in my judgment be no full organizations of industry and labor, unaccompanied by the thoroughgoing regulation of wages, prices, and production. Anticipations of this possibility appeared in their earliest form in the Ν R A . In clarified and more emphatic form the beginnings of such control constitute the core of the provisions of the Guffey Act for the regulation and stabilization of the soft coal industry. What the virtues of universal control over industry and labor are, contemporary students of politics and economics are having ample opportunity to discover in the experiments now being conducted by not a few countries of this world. T h e open-minded student of organized labor and its problems would do well particularly at this juncture to examine the experience of England with the very questions which have so agitated the authorities of the country and which have been the subject of this morning's discussion. All professional students of the history of labor have been unanimous in the opinion that the English law defining the rights and duties, privileges and immunities of the British trade union has for long years been above reproach or criticism. Yet since 1920 the English unions have lost as heavily in membership as have the American. They stood in 1934 only 300,000 larger in number of members than in 1914. But in the face of this persistent decline, which took place while the total volume of employment

44 WHARTON ASSEMBLY ADDRESSES had measurably expanded, the English unions fail to court new legislation in their behalf, and cling tenaciously, under an unceasing barrage of criticism from the academic philosophers of organized labor, to the tenets and practices of free unionism.

TRADE POLICIES AND PEACE by Francis B. Sayre

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PRESUME that most people would find themselves in complete agreement in believing that during the past fifteen years the nations of the world have done many things which they o u g h t not to have done, and have left undone many things which they ought to have done—if they are to live in peace. If the world is to enjoy peace and stable prosperity, nations must pursue economic policies which permit peace. It is with this thought in mind that I should like to consider with you certain aspects of our foreign commercial policy; for unless Americans generally come to comprehend something of the underlying problems of commercial policy which we face today, we stand in danger, in spite of o u r ardent desire for peace, of b e i n g caught in the tide sweeping toward war, and no program for peace or neutrality will prove practicable unless at the same time we b u i l d a g r o u n d w o r k of sound commercial policy.

Since the W a r nation after nation has surrendered to the onslaught of economic nationalism. T a r i f f walls have been heightened; arbitrary quota restrictions and exchange controls have been set u p in increasing numbers until today the national frontiers of the world are as formidably fortified with trade barriers as with armed defenses. T h e result is a staggering d r o p in international trade. Between ι Assistant Secretary of State. An address delivered before the Wharton Assembly of the Wharton School of Finance and Commerce, University of Pennsylvania, January so, 1936. 45

46 WHARTON ASSEMBLY ADDRESSES 1929 and 1932 the value of international trade dropped to about a third of its former value. If goods can't cross international frontiers, armies will. It will not do to deal with symptoms rather than causes. Much effort has been spent since the War in seeking to limit or reduce national armaments. But until very recent years comparatively little effort has been spent in seeking to limit or reduce economic armaments. Perhaps this is not the least substantial cause why armed preparations are in the ascendent today. If we are to have lasting peace, economic disarmament is quite as important as military disarmament. Perhaps more so. President Wilson used to delight in telling a quaint story of a Scottish highlander, who went into the market of Edinburgh followed by his dog. He went into a fishmonger's stall, and the dog incautiously dropped his tail into a basket of lobsters, and one of the lobsters nipped his tail. Whereupon the dog went yelping down the street, with the lobster bouncing after. T h e fishmonger said, "Hoot, mon: whussle to your dog!" "Hoot!" said the Scotchman, "whussle to your lobster." We must whistle off the economic policies which pinch before we can control the dogs of war. I want to begin with a thought which I believe must underlie all our planning for peace. It is this: that nations will prefer to fight rather than to impair seriously their prevailing standards of living, and that it is utterly impossible for some fifty nations to achieve or maintain a satisfactory standard of living as self-contained units. T h e United States, with its richly diversified resources and industries, can perhaps attain as high a measure of self-sufficiency as any other nation. And yet all but the most extreme of the economic nationalists would admit that any sweeping program of complete economic selfsufficiency, even for the United States, is impossible in the world of fact.

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How long would the people of the United States be willing to go without coffee? Last year we imported $ 1 3 3 , 154,000 worth of coffee. We also imported $ 1 0 1 , 5 3 2 , 0 0 0 worth of rubber, $71,764,000 worth of silk, $44,801,000 worth of tin. We need rubber for our automobile tires; we need tin for containers; we need antimony for our telephone equipment; jute for our burlap bags; hemp for our rope. Not one of these can the United States produce. Are we ready to forego the use of silk, or of tea, chocolate, bananas, or other tropical products which we cannot grow? Moreover, many of our important industries are vitally dependent upon imported raw materials or ores. T o cut ourselves off from all foreign importations would play havoc with our economic processes and our accustomed ways of living. T h a t the value of these is small in proportion to the total value of goods consumed in the country may be readily admitted. T h e point is that we cannot set ourselves up as a hermit nation. If the American standard of living is to be maintained, we must trade. But the case for foreign trade rests upon necessities more biting than our requirements of essential imports. Unless we can export and sell abroad our surplus production, we must face a violent dislocation of our whole domestic economy. Many of our strongest industries are those in which, because of climate, soil, natural resources, aptitudes of labor, mass production possibilities, or otherwise, we can produce better products and sell them more cheaply in the markets of the world than our competitors. It is natural that we should build up, with respect to these products, an important export trade. These are, generally speaking, the industries or occupations in which American labor can produce most effectively. T o cut foreign markets away from them is to cripple our strongest and most rewarding forms of production with a consequent lowering of wages and increased unemployment accompanied

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WHARTON ASSEMBLY ADDRESSES by a rise in the cost of goods. Inexorably this means a reduced standard of living for the American people. T h e fact is that international trade is an essential part of our domestic economy. The value of our cotton, our wheat, our lard, our automobiles, and the like, depends directly upon whether or not we can find markets for them. Value attaches to goods because they can be exchanged for other goods. A nation's wealth is as vitally dependent upon the possession of markets, to which its goods have access, as upon the possession of the goods themselves. In a word, national wealth depends upon trade. Cripple a nation's trade, and you strike directly at its wealth. T o the extent that you strip a nation of its export markets you reduce thereby its national income. Cotton affords an illuminating example. Speaking broadly, under normal conditions we use in this country less than 45 percent of our ordinary cotton crop; unless we can exchange the remaining 55 percent abroad for other goods, the value not only of the unsalable surplus, but of the entire cotton crop, is shattered. Similarly, the maintenance of a normal price return for our whole leaftobacco production depends upon the retention of foreign markets for roughly 35 percent of our ordinary crop. In the same way, to maintain normal prices for our entire production, we must sell abroad, roughly, 25 percent of our lard, 20 percent of our rice, 40 percent of our dried fruits, about 60 percent of our resin and turpentine, 30 percent of our lubricating oils. And so it is in the case of our manufactures which have been developed to serve foreign markets, such as agricultural implements and automobiles. A loss of foreign markets for these products means unemployment and heavy financial loss. Moreover, such examples reveal how specious is the argument that our export trade is unimportant because it comprises not more than 10 percent of our total production. General averages in a case like this are seriously mis-

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leading. It is not merely that surpluses are without value unless markets can be found for them, and that in many of our most important industries and occupations the surpluses which we must sell abroad greatly exceed 10 percent. Even a 10 percent loss of trade does not mean that the remaining 90 percent of the enterprise remains in a prosperous condition. T h e equipment necessary for producing the 10 percent exported is not separate and distinct from that necessary for producing the remaining 90 percent. It is an intimate part of the total productive equipment of the country, and when exports decline the effectiveness of the productive machine as a whole is impaired. T h e last 10 percent in many cases makes all the difference between profit and loss for the entire enterprise. And what is of far more vital consequence is the effect of unsalable surpluses on domestic enterprises. Unsold surpluses, by glutting home markets, demoralize the prices received for that part of the output or crop sold at home, and thereby spread havoc and cause dislocation throughout the industry or occupation. T h e resulting repercussions are nation-wide and affect producers who themselves do not sell abroad. Unquestionably one of the substantial causes for the widespread suffering and unemployment which we have been experiencing since 1929 has been the loss of foreign markets. Under a system of self-sufficiency the only alternative for unsalable surpluses is an arbitrary restriction of production; and this would involve not only a lessening of national wealth and income and thereby reduce and limit the American standard of living, but it would also necessitate a degree of regimentation and strait-jacketing of agriculture and business quite incompatible with the American spirit. T i m e does not permit an enumeration of the prodigious changes and costs which such a program would entail in our economic, our social, and our political life. T o restore prosperity among the cotton planters of the

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WHARTON ASSEMBLY ADDRESSES South, the corn farmers of the Middle West, and wheat ranchers of the Northwest, the fruit growers of both North and South, and the factory workers in every state, we must sell abroad more cotton, more hog products, more wheat, more fruit, more automobiles, and more machinery. Increased exports mean increased home employment and increased money in the pockets of American consumers. T h e connection is close and direct between exports and domestic prosperity. What is not so apparent to some is the close connection between domestic prosperity and imports. And yet it must be obvious to all that broadly speaking no nation can continue indefinitely to buy more than it can pay for either with the proceeds from sales of goods or services or from its foreign investments. True, it can fill the gap for a short time from its gold stocks or by borrowing abroad; but if such a course is too long pursued, its gold stocks will be consumed and its credit, if impaired by uneconomic borrowing, reduced to a point where further continued excesses of purchases over sales will be impossible. Trade depends upon exchange. Although purchases and sales may be made with money or credit, these after all are only media of exchange by which the seller in one market may buy his goods in another. We in the United States cannot have exports without imports. And what is often lost sight of, the amount of the one cannot but be roughly determined by the other. If American domestic prosperity depends upon increased exports, it must be equally dependent upon increased imports. Moreover, the United States as a great creditor nation must be prepared to accept goods if it is to receive payment on its large foreign investments. Thus the soundest, if not, indeed, the only sound way, of increasing our exports and protecting our long-term foreign investments, lies through a substantial and healthy increase of imports.

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T h i s does not mean an economic dislocation of domestic industry. As a matter of fact, a substantial portion of our import trade is non-competitive, and the range of noncompetitive commodities can be enlarged. It means rather a liberalization of trade restrictions so that we may more easily sell to foreign nations the things we can most profitably produce, and similarly buy from them the things we desire which they can most profitably produce. We must not be misled by the current notion that we can increase employment and the standard of living for American workmen by excluding foreign goods. Such an assumption runs exactly contrary to the actual figures. Increases of imports have not in fact resulted in decreased domestic employment; neither have decreases in imports resulted in increased domestic employment. T h e outstanding refutation of the false assumption is our own country's experience during the past ten years. In the latter part of the 1920's we were prosperous beyond our dreams. Wages rose to their highest level; unemployment was at a minimum. Yet during this decade our imports were steadily mounting until in 1929 their value reached the enormous figure of 44 hundred million dollars. Between 1929 and 1933 the value of our annual imports dropped from 44 hundred million dollars to 13 hundred million—to less than a third of their former value. At the same time our unemployment figures soared to unprecedented heights. T h e staggering decrease in imports went hand in hand with, not increased employment of American workers, but staggering unemployment. Since 1933 our imports have begun slowly to rise. T h i s rise in imports has been accompanied by a general rise in American employment. According to the Federal Reserve Board indices for the sixteen years since these figures were kept ( 1 9 1 9 - 1 9 3 5 ) every single year in which imports increased factory employment increased; and every year in which imports de-

52 WHARTON ASSEMBLY ADDRESSES creased, factory employment decreased. A study of the rise and fall of farm employment and farm wages as compared with imports shows also a similar striking correlation. It was to square our commercial policy with the needs of American agriculture and industry that President Roosevelt recommended the passage of the Trade Agreements Act of 1934. The trade agreements program, which is being carried out under the authority of this Act, has for its purpose both the liberalization of international trade (through the reciprocal reduction of trade barriers), and the removal and prevention of discriminations against American trade. If the purpose for which the Act was passed is to be attained, our methods must be broader than mere "horse trading." We must make of the Act an instrumentality for throwing the weight of American power and influence against the disastrous world movement toward economic nationalism. Our objective must be to encourage and to make possible, so far as we can, the breaking away by other nations from the vicious circle in which they are caught, and their return to a more liberal and constructive commercial policy. Through economic recovery lies the pathway to peace. If a nation is to trade at all, broadly speaking it must base its commercial policy, and it must give and seek trading privileges and concessions, upon one of two alternatives: (1) preferences given and received, or (2) equality to all. Of late years, the increasing drive of economic nationalism has manifested itself through a growing movement in the direction of preferential trading. Of the two alternative policies, that of preferential bargaining will readily win the approval of superficial observers, since it has many apparent advantages. T h e United States, under such a policy, would give exclusive advantages in return for exclusive advantages. In other words, reductions in duty by each country would apply only to

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products of the other, like products of third countries being subject to higher tariff rates. Thereby we would seem to afford protection to domestic producers against competing imports from other nations, to secure American exporters against competition in the markets of the other country from exporters in third countries, and at the same time to increase the inducement to other nations to make concessions to us by giving their exporters corresponding advantages in our market. We would trade special privilege for special privilege; and thus it might be supposed we could bargain away the foreign trade barriers which hamper the free flow of American exports. But the difficulty is that each preference, given exclusively to a single nation, constitutes a discrimination against more than fifty other nations. T h e r e can be no preference without discrimination. A policy of preferential bargaining means in its very essence a policy of widespread discrimination. A n d discrimination gives rise to counter measures—commonly referred to as retaliation— since no nation can afford to see its exports, on which it may depend for its economic existence, displaced by the exports of third countries. Retaliation spells new and still higher trade barriers. A nation which seeks increased outlets in foreign markets for its domestic surpluses cannot afford as a long-time policy to follow a program of bargaining in preferences. On the other hand, just as preferential bargaining leads to economic conflict, so the system of equal treatment under the unconditional most-favored-nation policy makes for economic peace and stability. It prevents granting to specially favored nations exclusive preferences which enable them to undercut the prices of their competitors in foreign markets and thus to shift the currents of world trade and cause untold injury. In its essence it means the rule of minimum disturbance in international trade. It means economic peace.

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W H A R T O N ASSEMBLY ADDRESSES N o one has expressed this thought more aptly than George Washington in his famous Farewell Address. "Harmony, and a liberal intercourse with all nations," he said, "are recommended by policy, humanity, and interest. But even our commercial policy should hold an equal and impartial hand, neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing." Ever since the days of George Washington, the policy of equality of treatment to all, tested and proved by years of experience, has constituted the very cornerstone of American commercial practice. It is founded upon justice and fairness, and therefore it will be enduring. On it rests our "open door" policy. It lies at the foundation of innumerable claims and protests which the State Department makes whenever discrimination can be proved against American commerce. It fundamentally underlies our position toward European debtor countries. It shapes our basic policy in dealing with problems of quota restrictions and exchange control. It has been and still is the guiding star of American commercial policy. Those who, swept along in the present-day currents of economic nationalism, now advocate replacing it with a plausible policy of preferential bargaining, do not stop to count the consequences or the cost. T h e policy of preferential bargaining means the shifting and adjustment of the currents of world trade, not in response to the operation of the fundamental economic forces of supply and demand, but in accordance with the arbitrary and political decisions of governmental officials. It means the placing of the economic life of every nation at the mercy of political manipulations made sometimes by its own officials and sometimes by those of other nations over whom it has no control. Yet, under the drive toward economic nationalism, the

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policy of equality of treatment is gradually being supplanted by that of trading in preferences. If this movement is not checked, white water lies ahead. Special bargaining arrangements, arbitrary allotments of quotas, artificial diversions of trade to countries in exchange for special concessions, allotments of markets to favored sellers, preferences granted in the treatment of exchange control—all these are fertile soil for increasing international strife. By the arbitrary act of a control board, or by a preferential treaty arrangement, a whole market may suddenly be destroyed and the economic life of a third nation threatened. T h e danger is that nations, like men, may prefer to fight rather than to starve. A further danger of the present movement, thus far little stressed, gives cause for perhaps the gravest concern of all. If national economic self-sufficiency should be the dominant feature of the civilization of the immediate future, it would mean a world in which national governments will undertake to control and regulate, and sooner or later to take over and operate at least the basic industries of the country. In the early part of the nineteenth century, business enterprise and production lay very largely in the hands of competing private individuals over whom government exercised an easy and salutary control. In the second half of the nineteenth century the individuals in control of business were being replaced by corporations, undying and powerful, whose excesses and abuses of power were curbed by courts of law only after considerable struggle and difficulty. Single corporations were in turn succeeded at the close of the century by great trusts and combinations, so powerful that they could even defy at times the power of government itself. Many of the political battles which shook Washington and menaced the integrity of our very government were fought over the effort to curb flagrant abuses of power in the prosecution of their selfish purposes.

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WHARTON ASSEMBLY ADDRESSES We now face another critical period. T h e present direction of economic nationalism points to the future control of business enterprise no longer by individuals alone nor by corporations nor trusts, but by national governments themselves. Where will this development lead? What will be the outcome of its far-flung implications? T h e trusts and combinations of the end of the nineteenth century, with their soulless unethical practices and their "public be damned" attitude, are in the way of becoming eclipsed today by profoundly more powerful units. Today great nations, competing relentlessly one against the other for the business of the world, with armies and navies at their command, resorting too often to methods which the courts would not tolerate in private life, manifest far too frequently an attitude of "the world be damned." Picture to yourself the great trusts and combinations of the early twentieth century, recall their practices in pursuit of market monopolies, magnify their power and their resources a hundredfold, remove from them all the restraint of law, put at their disposal the terrible engines of modern warfare with which to gain their ends, give them the ability to drive to their goals through calling upon sentiments of patriotism and national devotion, and you gain some conception of the menace which faces the world if economic nationalism runs its course unchecked. Economic nationalism reaches its culmination in imperialism. If orderly processes of trade break down as a means for securing the ready exchange of goods and the distribution of the necessary raw materials of the world, only force remains. Imperialistic expansion, whether in pursuit of markets or raw material resources, cannot mean other than perpetual conflict. Surely economic nationalism is not the pathway to peace. T h a t which offers the greatest hope at the present junc-

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ture is a program which recognizes the vital importance to all national economies of increased foreign trade and which therefore seeks the reëstablishment or maintenance, through intelligent and cooperative action on the part of the trading nations of the world, of strengthened and rational international trade. Whatever the economic developments of the future may hold in store, one thing stands out clearly. Economic nationalism in its recently developing forms is incompatible with permanent economic stability—hence with the future peace of the world. T h u s far the movement has accentuated our economic difficulties and problems, caused widespread unemployment, generated staggering problems of finance, and gravely intensified international frictions and hostilities. T h e stabilization of peace demands the vision of statesmen and the courage of fighters who know that the present sweep of the world toward economic nationalism, if unchecked, leads toward disaster, and who have the grit to oppose and fight it. Peace is not to be gained through mere emotional appeal. T h e stabilization of peace depends upon the slow and careful building of a solid substructure of sound political conditions and healthy economic relationships between class-conscious groups and race-conscious nations. T h e day of dynastic wars, thank God, is happily past, but unfortunately other forces are at work which threaten to take their place as disturbers of the equilibrium of the world. It is when political or economic conditions become intolerable that most men fight. T h e turn which economic issues take today in large part spells the destiny of tomorrow. War or peace in our time may hang upon the choice which nations are now making of the economic policy which is to rule the world.

MEETING THE NEEDS OF AMERICAN YOUTH by Homer P. Rainey seems to be abundant evidence that the needs of American youth today are more acute than those of any other generation of American youth. T h e youth of other generations have suffered hardships and endured many privations, but there was always hope and opportunity, and, as a result, personality was not destroyed. For the youth of other generations there was always the opportunity to "go West" and to carve a place for themselves in the vast unexplored and undeveloped hinterland beyond the frontier. This opportunity solved most of their other problems. T o be sure, they had social, economic, moral, and religious problems. They had sorrows and disappointments. They even suffered discouragement and defeat. But in the face of all these ills there was always hope and faith. There was a deep-seated confidence in the "manifest destiny" of a new and undeveloped country. There lay before them a continent of almost unlimited natural resources which offered them opportunities limited only by their own capacities and enterprise. HERE

T h e youth of this generation face an entirely different scene. They are confronted by a new set of circumstances. A new kind of frontier opens before them. The old frontier ι Director of the American Youth Commission, American Council on Education. A n address delivered before the Wharton Assembly of the Wharton School of Finance and Commerce, University of Pennsylvania, April 17, 1936.

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6o WHARTON ASSEMBLY ADDRESSES was geographical and material. The new frontier is social, economic, moral, and spiritual. Men are challenged by material obstacles, but they are dismayed in the face of spiritual conflicts. If there are rivers to be crossed, men build rafts, boats, and bridges. If there are forests to be cleared, men wield the axe. If there is space and distance to be conquered, men construct steamboats, railways, and airplanes. But if social and political intelligence are demanded, men seem to resist the necessity for thought and prefer the will-o'-the-wisps offered them by the propagandist and the demagogue. If honor, integrity, and moral discipline are required, men seem to prefer to achieve their ends by resorting to "pull," political intrigue, and perversive propaganda. If precious liberties are threatened, men seem to prefer to sacrifice those liberties and to surrender to any dictator who will tell them what to think and do, and who will offer them an ordered existence. The youth of this generation live in a cock-eyed world. It is topsy-turvy. A whole system of values and standards of behavior have been violently smashed, and little but wreckage and débris remain. New patterns have not been formed. Mr. Ortega in his delightfully thought-provoking book, The Revolt of the Masses, characterizes modern world life in these words: "The world at the present day is behaving in a way which is the very model of childishness. In school, when someone gives the word that the master has left the class, the mob of youngsters breaks loose, kicks up its heels, and goes wild. Each of them experiences the delight of escaping the pressure imposed by the master's presence; of throwing off the yoke of rule, of feeling himself the master of his fate. But as, once the plan which directed their occupations and tasks is suspended, the youthful mob has no formal occupation of its own, no task with a meaning, a continuity, and a purpose, it follows that it can do only one thing—stand on its head."

T H E NEEDS OF AMERICAN YOUTH 61 Where could one turn for a better characterization of the contemporary scene? The teacher has left the room, and the world is standing on its head. No one is ruling the world, and the world is in chaos. Rule signifies the predominance of an opinion, or a set of ideas, or a purpose. These qualities are woefully lacking in the world today. Chaos exists in most areas of thought and life. Old life patterns are broken up, and we have not yet crystallized new ones to take their places. Consider the confusion resulting from the political realignments of the national election of 1932. Old political concepts have been discarded, at least temporarily, and the masses of the population have not been able to adjust themselves to the new ones proposed. We, in Pennsylvania, might not have felt the shock so seriously had we not had our own earthquake in 1934. The Republican Party had been in power so long in Pennsylvania that thousands of school children in the state had come to believe that a republican form of government was synonymous with a rule by the Republican Party. Is it any wonder that most people think that we have had a radical change in our form of government? When the Republicans were in power we knew who our rulers were, or we thought we did. We had their pictures hanging in all public places. Their names were bywords in every Pennsylvania household, and they were in our minds when we pledged our allegiance to the flag and the Constitution. Today everything is different. We do not yet know our new rulers. We should feel a measure of comfort and reassurance if the Republican Party would only make up its mind who its leaders are to be. Our political confusion is no greater, however, than that which we are experiencing in economics. For a long period of time a given set of economic ideas has dominated the life of the world. Until the Russian Revolution we thought that those ideas were pretty definitely fixed, and that these ideas supported a set of economic laws which held virtually

62 WHARTON ASSEMBLY ADDRESSES the same relation to the cosmos as the laws of chemistry and physics. Today we are not quite so sure. There is a great big question mark in the minds of a great many people. When we come to the field of government we find that we are faring no better. Until a very few years ago there was no question but that the Constitution was a sacred document, and that a republican form of government was the best government on earth, even though the Democrats did get possession of it about once every twenty years. Today we find democracy in a general retreat, and being supplanted by Socialism, Fascism, and Communism in one country after another. This movement seems to be something more than a rejection of democracy. It is the emergence of a new type of leadership exercised by an organized group, which is usually a party knit by close discipline, yet open to men who accept its creed. This party conceives itself not merely as a body of men and women who hold common beliefs, but rather as an élite, possessed of a high degree of the gift of leadership. It is this that confers upon it, as Hitler argues, the exclusive right to govern. Coupled with this theory is the philosophy of the "totalitarian state" which recognizes the state as the supreme force or power in human affairs. Do these developments mean that the democratic or libertarian state of the nineteenth century is now obsolete, and that the "authoritarian state" must take its place? Again, a great many people are not sure. One other great area of life must be mentioned in this analysis. It is the area of morality and character. There are many who believe that social disintegration has been more widespread and devastating in this field than in any other. There is, of course, no means of making comparisons, but no one will deny that the collapse of personal integrity and moral character is one of the most significant features of contemporary life. Until recently the social life of the world was integrated around a generally accepted moral code.

T H E NEEDS OF A M E R I C A N Y O U T H 63 It would not be so bad when people do not know what to believe, if they only have someone in w h o m they can believe and trust. T o d a y w e are in the sad plight of not k n o w i n g what to believe, and at the same time not knowing whom to believe or w h o m we can trust. T h e s e situations constitute our basic need for leadership in America today. T h e r e has been a fundamental displacement of power in virtually every area of life, and we have not yet enthroned o u r new sovereigns. T h e situation at present is reflected in the story of the gypsy w h o went to confession. H e was asked by the priest if he knew the Commandments of the Laws of God. H e replied: " W e l l , Father, it is this way: I was going to learn them, b u t I heard talk that they were g o i n g to do away with them." " T h e whole world—nations and individuals—is demoralized," says Mr. Ortega. H e says further that "before long there will be heard throughout the planet a formidable cry, rising like the h o w l i n g of innumerable dogs to the stars, asking for someone or something to take command, to impose an occupation, a duty. . . . T o command is to give people something to do, to fit them into their destiny, to prevent their wandering aimlessly about in an empty, desolate existence." W h a t do our youth need and want? O n the basis of a preliminary study of their needs which we made, some of their most urgent needs are the following:

EMPLOYMENT

T h e most reliable figures indicate that there are five and one-half millions of youth between the ages of sixteen and twenty-five who are o u t of school, unemployed, and seeking work. A b o v e all else, these youth need employment. T h e y need to have a responsibility which will give them a sense of h a v i n g a part in the life and work of their respective communities. T h e r e is no single factor or combination of fac-

64 W H A R T O N ASSEMBLY ADDRESSES tors that is so demoralizing as unemployment; and, on the other hand, there is nothing so spiritually wholesome as creative work. T h e results of this great mass of unemployment are beyond our powers of measurement or evaluation. It is an easy thing to speak in the abstract of five and one-half millions of unemployed youth, but it is a haunting thing when one begins to think of it as five and one-half millions of individual boys and girls. Our productive output since 1929 has decreased 40 percent. T h i s has resulted in a loss of over four hundred billion dollars of national income. These are staggering material losses, but I am convinced that they are trivial when compared to the loss in human values and human resources which are resulting from this great mass of unemployed youth. What has this depression done to youth? It has brought frustration and despair to millions, some of whom are already passing from youth into maturity. From studies which have been made, it is found that 70 percent of those studied stated that their educational careers have been curtailed by the depression. Fifty-eight percent said the depression had brought them enforced idleness. One serious aspect of this unemployment situation is that of youth's lack of desire for work. When one has been without a job for many months, even years, the ambition to secure a position gradually wanes. A great deal of social reconstruction is going to be necessary to combat the waning ambition and energy of youth. Youth, therefore, needs employment.

EDUCATION

Forty percent of all youth of high school age are not enrolled in school. In some states the enrollment is as low as 30 percent, and for the Negroes in some states it is as low as 5 percent. It is among the Negroes in the southern states

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that we have come nearest to failure in providing universal secondary education. Furthermore, of those enrolled in school, evidence in our possession indicates that the curriculum of the schools is ill suited to as much as 60 percent. We are still struggling to impose a rather narrow classical type of education suited to only a small percent of the population upon the masses whose needs and interests and capacities are diverse in the extreme. Perhaps our most serious educational need is to provide more adequately for vocational training. W e have discovered that the lack of jobs is not the sole employment difficulty. Many of the unemployed youth are out of work because they are unable to qualify for positions available, and not because there are no openings. T h i s may be a surprising fact, but it is borne out by recent investigations. In an inquiry conducted last year by a large Middle Western university, it was found that 70 percent of the young men and women interviewed who did not have jobs were unemployed because of inadequate training or some personal deficiency. A recent study of 43,000 youths under twentyfive years of age in Connecticut throws more light on the subject. Over 73 percent are untrained for a skilled occupation, and 40 percent are unprepared for work of any kind. Still another report in one of our C C C sections shows that a very large percentage of unemployed World War veterans in the camp had lost their jobs because of their attitude toward their work. These examples, of course, do not cover enough cases to be conclusive, but they indicate forcefully another part of the unemployment problem which faces us. It is not alone that of finding jobs; it is also that of preparing youth for the jobs in existence. We recognize that much of our programs of training and placement are at fault. Guidance and placement, therefore, become a very significant part of the youth problem. T h e r e is at present a wide gulf between our education and employment problems. Our vocational guid-

66 W H A R T O N ASSEMBLY ADDRESSES ance program is very inadequate. It is too haphazard. Its techniques are not scientific. It does not adequately understand vocations on the one hand, nor individuals on the other. Vocational guidance enthusiasts too frequently neglect their desperate need for scientific data and see only dimly the intimate relationships of an individual's vocational problems to his education, social, emotional, domestic, economic, and other personal problems. Vocational education specialists too often neglect the necessity for scientific selection and guidance of individuals before training is begun, and they sometimes overlook the growing needs of all young people for training along appropriate avocational lines. General educational specialists too often neglect the wide range of individual differences in youths and the ultimate need of each youth for an appropriate job and a pay check by which to maintain himself and his family. The employment office has always been dependent upon records of the individual's occupational experience and has usually been too far removed from the other agencies concerned to be able to use effectively the helpful data they have already accumulated regarding each youth. All of these agencies have probably given too little attention to the power of the home, of the community, and of current economic conditions which make available millions of workers for whom there are no jobs. (Trabue) Now there is another very significant area of this youth problem which I should like to present. Because so many youths are without jobs, because they are so bewildered, because they have, in a large measure, lost faith in many of the values inherent in our society, and in leadership generally, they are now subjected to a withering propaganda that may lead them to follow demagogues and false gods. T h e r e is literally an "open season" on our youth, and there is serious danger of their exploitation. Every political group, every patriotic organization, and others who think they are patriotic, and every pressure group in the country

T H E NEEDS OF A M E R I C A N Y O U T H 67 are making overtures to our youth for their support. It is going to require a high degree of intelligence 011 the part of youth to resist this avalanche of propaganda. T h e r e is another aspect of it which is important. So much is being said about youth and so much attention is being concentrated upon them that there is a real danger that the youth themselves will become too self-conscious and think of themselves too much as a class. T h e y might well become a powerful pressure group with powerful political influence as they have in other countries if leadership in this direction should emerge. It should be said to the credit of our youth that, so far, they have shown no real disposition to pursue such a course. In the main, their attitudes are quite wholesome. In some of the studies of the attitudes of youth the following facts are revealed: In a large study made of youth in Houston, Texas, for example, the interviewers in the survey rated the attitudes of their respondents on a four-point scale, and on the basis of this rating it was found that about .5 percent were classified as having an antagonistic attitude toward society; 10 percent were indifferent; 70 percent were favorable; and 20 percent were enthusiastic in their outlook. Comparable results were obtained from the rating of attitudes toward planning for the future. Fewer than 2 percent were classed as despondent; 6 percent as resigned; 58 percent as making the best of it; and 34 percent as optimistic. In a similar survey in Indianapolis, Indiana, in which interviewers were instructed to characterize briefly the person's attitude toward his present situation, it was disclosed that by dividing the answers into five classes 44 percent were satisfied; 6 percent were indifferent; 30 percent restless; less than 1 percent were radical; and 20 percent were hopeful. From this brief citation of factual information, I think it is reasonable to conclude that our youth are keeping their bearings remarkably well. In fact, it is rather phenomenal that our youth are not more antagonistic and radical in

68 WHARTON ASSEMBLY ADDRESSES their attitudes than they are. T h e fact in this connection, however, which we need to keep clearly in mind is that we cannot expect these favorable attitudes on the part of our youth to continue indefinitely in the face of such overwhelmingly discouraging conditions and circumstances. If perchance this large group of unemployed youth should become seriously disgruntled, and if a real leadership for them were to emerge, it requires little imagination to understand what a powerful force they might become. Another very important area of our youth problem needs considerable attention in this discussion. It has to do with the whole area of character and citizenship values. I have already indicated that one of the outstanding characteristics of the recent period through which we have passed has been the breakdown in character and the failure of men in places of trust and responsibility to live up to their obligations. Another aspect of this problem is reflected in the rapid increase in juvenile delinquency and crime. It is a matter of great concern, it seems to me, that the peak of arrests for delinquency and crime last year was nineteen years of age. The Identification Division of the Federal Bureau of Investigation reported that for the year 1935 one in every five persons arrested was under twenty-one years of age. T h e fingerprint records submitted to the Federal Bureau of Investigation further showed that during the year 1935 15 percent of those arrested were under twenty years of age; 22 percent were between the ages of twenty and twenty-four; and 18 percent were between the ages of twenty-five and twenty-nine; making a total of 55 percent, or more than one-half of those arrested who were under thirty years of age. These facts clearly reveal that there is no more important problem before our society than that involved in the problem of youth and crime. Another fact that should be associated with this situation is forcefully brought out by Maxine Davis in her recent study of American youth. She quotes youths themselves

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as saying, " W e realize that honesty, integrity, and industry don't get you to the top any more. Our fathers had a lot of set rules for success. W e know the world doesn't play by them now." T h e r e is evident here a type of cynicism which if not checked will result in serious social consequences. Above everything else, youth needs to believe in something fervently, something in which he can throw his whole personality without reservation in order that his personality may really grow and develop. T h a t element is woefully lacking in our situation today. Youth has not only lost much of its confidence in our system of values, but it has also lost confidence in its leadership. Miss Davis points out very effectively again that one of the most urgent needs of youth is a hero. On this point, Miss Davis says, " T h i s generation is no different from any other in its inherent need for someone to admire, to imitate, to follow. Yet it is a generation without great heroes. T h e r e is a curious paucity of public men and women who fire the imagination of young people today." Since this is such an important phase of our problem, I should like to deal more in detail with this matter of leadership. Let us ask ourselves, first, What are the qualities of leadership that we need? On this point Ralph Waldo Emerson made some very pertinent remarks. He said: T h e people know that they need in their Representative much more than talent, namely the power to make his talent trusted. They cannot come to their ends by sending to Congress a learned, acute and fluent speaker, if he is not one who, before he was appointed by the people to represent them, was appointed by Almighty God to stand for a fact—invincibly persuaded of that fact in himself—so that the most confident and the most violent persons learned that here is resistance on which both impudence and terror are wasted, namely faith in a fact. Now what does Emerson mean by "standing for a fact," or "faith in a fact"? Successful leadership demands, above

7o WHARTON ASSEMBLY ADDRESSES all else, that a leader represent an idea, or a set of values, or a social purpose. It was said of Napoleon that he owed his predominance to the fidelity with which he expressed the tone of thought and belief, the aims of the masses of active and cultivated men. All the prophets of history possessed this same quality. Indeed it was the possession of it that made them prophets. A prophet is the transcendent need of this period. We are confused and muddling aimlessly because the desires, aspirations, and purposes of the masses of men are not articulate. There is a confusion of social aims. Whole social systems are in conflict with each other. T h e struggle has not progressed far enough for us to see clearly what the new direction of society is going to be. We are between two historical generations. T h e sociological concept of a generation will help us to understand our problem. A generation, according to Mr. Ortega, is characterized by a vital sensibility. It is conscious of a vital social impulse that gives purpose and direction to the social body. Mr. Ortega expressed the concept in these words: Each generation does in fact represent a certain vital attitude at which existence is conscious, in a certain sense, of being determined. If we consider the evolution of a race in its entirety we find that each of its generations appears as a moment in its vital process, or as a pulse-beat in its organic energy. We may well picture each generation by means of the image of a biological projectile launched into space at a definite moment and with a predetermined force and direction. In the light of this concept it may fairly be said that a generation has recently come to an end, and that the new one is struggling to be born. T h e man, or group of men, who would lead our society must, first of all, therefore, define the vital sensibility for the new generation. They must evolve a whole new set of social, economic, political, and moral objectives that will indeed be an expression of the vital impulse of this age. They must give us a new and dis-

T H E NEEDS OF A M E R I C A N Y O U T H 71 tinct social configuration—a new pattern of thought and life. Professor Carver of Harvard strengthens this concept when he says: It is useless to command when nobody has the disposition to obey. It is futile when nobody knows exactly what to command. In such societies [when customs are unsettled] wherever they have appeared among civilized men, the moralist has had to be an administrator of usages, and has had to become an interpreter of human needs. For ages when custom is unsettled are necessarily ages of prophecy. T h e moralist cannot teach what is revealed; he must reveal what can be taught—he has to seek insight rather than to preach. T r u l y , is this not the quality of leadership that we so sorely need in American life today? When our house of clay crumbled over our heads in 1929 did it not indicate that our philosophy of materialism had utterly failed, and that we needed a new way of life? When Emerson wrote his formula, "Stand for a Fact," the facts of his generation were quite generally understood. His generation was fairly well launched upon its course by its own vital sensibility. His emphasis, therefore, was naturally upon the other half of the formula, namely the courage to stand for the pattern of social values at the risk of any personal disadvantage, no matter how great it might be. Let us, therefore, direct our attention to this second basic factor in leadership. T h i s factor involves several ideas. In the first place, it refutes the current doctrine that leaders, and particularly political leaders, should be merely reflectors of opinion. It suggests the positive nature of leadership, and asserts that genuine leadership is a maker of opinion. In my opinion this negative concept of political leadership is one of the fatal weaknesses of our present political system. Politicians cloak their own weakness and cowardice in the flimsy excuse that they are doing the will of their constituents. T h e y

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are impure men who consider life only as it is reflected in the opinions of others, and in events and persons. Again, Emerson has a pertinent word on this point. He says: The men who carry their points do not need to inquire of their constituents what they should say, but are themselves the country which they represent; nowhere are its emotions or opinions so instant and true as in them; nowhere so pure from a selfish infusion. The constituency at home hearkens to their words, watches the color of their cheek, and therein, as in a glass, dresses its own. A genuine leader must be guided by an idea, a purpose, or a principle, that is independent of the mind or thought of the masses. On this point Emerson said: " W h a t I must do is all that concerns me, not what people think. T h i s rule, equally arduous in actual and in intellectual life, may serve for the whole distinction between greatness and meanness." It is certainly the chief distinction between a real leader and a mere politician. A real leader is one who assumes responsibility for an opinion, or a set of values, and thus becomes the conscience of the society to which he belongs. Unless we can develop this type of leadership we might as well resign all hope for our democracy. A democratic form of government is the most difficult of all governments to make function successfully. T h i s is true because it requires more of intelligence and character among its citizens than any other form of government. It exacts a high degree of intelligence, individual initiative, and responsibility, and character among the masses. And of its leaders it requires even a higher measure of all these virtues. It is a well-known fact that the masses cannot govern themselves. T h e mass man has been defined as that portion of society that does not think for itself. It is swayed by emotions, feelings, sentiment, and propaganda. Genuine leadership, therefore, must think for the masses, and lead them to desirable social

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goals. W o o d r o w Wilson had this principle in m i n d when he wrote: T h e only way in which we can preserve our nationality in its integrity and its old-time originative force in the face of growth and imported change is by concentrating it; by putting leaders forward, vested with abundant authority in the conception and execution of policy. . . . I believe that we have not made enough of leadership. " A people is but the attempt of many T o rise to the completer life of one— And those who live as models for the mass Are singly of more value than they all." We shall not again have a true national life until we compact it by such legislative leadership as other nations have. But once thus compacted and embodied, our nationality is safe. An acute English historical scholar has said that "Americans of the United States are a nation because they once obeyed a king"; we shall remain a nation only by obeying leaders. "Keep but the model safe New men will rise to study it." In the second place, this idea of " S t a n d i n g for a F a c t " carries with it the concept of absolute dependability. Professor C a r v e r of H a r v a r d , in listing the morals essential to g r o u p survival, rates this factor of dependability of p r i m a r y importance. H e says: Morals that forbid the use of fraud among neighbors in their dealings with one another must always rank as high in their survival value as those forbidding violence. Lying and thieving gain entrance to society under many apparently respectable aliases; but no society can afford to tolerate them in any guise. For men who cannot trust one another cannot live together as successfully as men who can. Morals that ban lying and thieving put a brake on the elemental anarchy of human nature. They are rather negative, however, in their appeal. There are morals of a more positive kind that give

74 WHARTON ASSEMBLY ADDRESSES fraud a bad name, morals that make trustworthiness and dependability esteemed in society. Dependability is a large name for a good many kinds of behavior that are unrivalled in importance to the success of group life. It includes common honesty. It includes sobriety; for a drunken man cannot be trusted. It includes the giving of value for value in trade. When contemporary leadership is measured by these criteria we get some idea of the moral transformation that is needed. T h e numerous investigations of the last two or three years have revealed the depth of our moral depravity, and the utter poverty of our moral leadership. My concluding word in this analysis is to youth themselves. After all, it is soon to be their world and they are going to have to assume full responsibility for the situation whether they like it or not. It is clear also that they must take over a situation that was none of their making, and upon them largely will fall the responsibility for finding solutions to the numerous problems which now exist. It would seem that there is as much of a challenge for contemporary youth in the problems of this generation as was ever presented to any other generation of American youth. If there is a feeling on the part of youth that there are no opportunities for them today in American society, one might conclude that the spirit of youth is really dead. For my part, I am confident that the youth of America today are facing perhaps the greatest opportunity that they have ever had, and it will be a tragedy indeed if they do not rise to the challenge presented to them. The qualities of youth demanded for this situation are: first of all, an abiding faith in the fundamental values and virtues of life; a knowledge that whatever measure of civilization we have achieved is the result of the establishment of these fundamental values in our customs, our laws, and our institutions; a self-discipline that will enable them to become genuine masters of their own destiny. If there is any weakness of American youth more evident than another, it is

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this apparent lack of disciplined character. Life for the vast majority of youth in America has been easy. T h e y have been called upon to make few sacrifices. T h e y have been given many things by a generous society. T h e almost inevitable result is that many of them have become soft. Now that the easy days have apparently come to an end and our youth are facing difficult circumstances, it would be a genuine tragedy if they allowed themselves to be overcome by these difficulties and if they failed to respond with the discipline and training which are required to meet contemporary demands.

STRAIGHT THINKING by Charles R. Gay

1

f I were to permit myself to yield to the inspiration which any speaker would draw from this audience, my thought would undoubtedly follow the lines of a Commencement address. But I shall try not to succumb to this temptation. In a few days Commencement and the portals of the "wide, wide world" will open to many here present. A t that time you will hear considerable comment and advice fitted to the occasion, and I dare not risk the charge of stealing the thunder of Dr. Gates or of any of his colleagues. Instead, I shall attempt to carry you a little beyond those portals and deal with some matters which have, perhaps, become commonplace and humdrum; more or less routine in character to that great number who have gone ahead of you out of the Wharton School.

I

Routine? No, I'll take back that word. It applies only to workers who have fallen into a groove; nor is business humdrum to anyone who has found the job he likes or the profession for which natural intellectual endowments have equipped him. I include the professions because there is no profession which escapes the encroachments of business in one way or another. Fortunate indeed is the student who, planning to prepare himself for a profession, has first enjoyed the training which this great school affords. Whether a student has majored in economics or some ι President, New York Stock Exchange. A n address delivered before the Wharton Assembly of the W h a r t o n School of Finance and Commerce, University of Pennsylvania, April 27, 1936.

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applied branch of it—merchandising, office management, insurance, finance, or investment—on the road of life he is certain to find his k n o w l e d g e useful. Outside these walls there is an intensely realistic w o r l d ; one which requires breadth and scope of understanding for the attainment of the goal comprehensively spoken of as success. A b o v e all, this present-day, realistic world demands of those w h o would achieve success the ability to think. Recently I ran across a quotation from what might be called the creed of a famous man whose assistance in making our country a republic has become historic. " I read— I study—I examine—I listen," wrote General Lafayette in 1777, " I reflect, and out of all this I try to form an idea into which I p u t as m u c h c o m m o n sense as I can." In other words, Lafayette, w h e n a problem lay before him, sought to get all the essential facts together and then did some thinking. A n d any aristocrat of France who, years after this creed was fashioned, was able to emerge from the French R e v o l u t i o n , as Lafayette did, not only with his head u p o n his shoulders b u t with honor and prestige undiminished, must indeed have been able to think straight. T o think straight! I w o u l d like to pause for a little emphasis upon this. A great deal of t h i n k i n g nowadays is not straight b u t oblique. I w o u l d not call it devious thinking in regard to economics, finance, business, and politics, which has had m u c h to d o with aggravating some of the difficulties of depression. Rather, let us call it tangent thinking—the kind of thought that takes proved and practical Experience by the hand and drags it suddenly off its course at a sharp angle and proceeds to tangle it u p in the roadside brush and weeds. Some present-day t h i n k i n g seems to me to be of this character and quite as bereft of reason. Regardless of the onrushing avalanche caused by utter disregard of economic precepts and violation of fundamentals dictated by expe-

STRAIGHT THINKING 79 rience, some present-day theorists persist in trying to pile one unwise regulation or experiment atop the next, giving no thought to the inevitable day of reckoning when chaos may be not only their portion, but the portion of all the rest of us. T h e kind of thinking to which I refer says, in effect: Experience has followed this path too long; the top-dressing is all worn off by the shuffling feet of too many generations blind to the possibility that any other road can be found. We'll take out-moded Experience and set it on another road, by force if necessary. And if the other road is a bit rough, we'll make Experience take it and like it, anyhow. Outside these portals, wherein I trust you have been learning the rules of thought prescribed by Experience, considerable tangent thinking has been going on. Some shining examples of this type of thinking have undoubtedly figured in your engagements with economics. Ventures in hot-house economics produced some strange business hybrids and resulted in leading Experience far off the beaten track. T h e route of Experience in these misadventures appears to be like the one followed by a steamship which the late Frank Ward O'Malley described as a single sidewheeler that reached its port by crossing the Atlantic in a series of eccentric circles. It must be admitted that mighty few people are able to think straight all of the time. I could narrate to you, not without embarrassment, a number of anecdotes of occasions when my own thinking has gone off at a tangent from logical processes in these last extraordinary years. And I am sure that most business men have suffered from the same lapses, under stress of problems which appeared to distort or contradict the lessons of Experience. T h e fact that business men, as a body, have not wandered far from the wellworn road, and that most of those who strayed have got back upon it, is proved, I believe, by the signals flown by in-

8o WHARTON ASSEMBLY ADDRESSES dustry and trade. Many of the standard indices are showing that business is heading in the right direction, and to them I refer those of my audience who are Seniors and shortly will be rubbing shoulders with their Wharton School predecessors in the activities of a business career. Someone has said, "If a man or woman learns nothing in college except a way to pursue logical thought, the effort was well worth while." The ability to think correctly is the ability to reach a proper instead of an improper decision; it is the ability to plot a course deliberately and correctly; it is the ability to differentiate a sound proposition from an unsound one; it produces the knack, if I may call it so, of getting along—of being successful and, best of all, of being of value to himself and to his fellow-men. The trained thinker is the worker who can lift his head above a distasteful task and calculate how this job, and others which may lie ahead, are going to be the stepping stones to executive work, to finished authorship, to honored professional enterprise or whatever a man charts for himself. Mere hard work without adequate thought usually is only a burden and a bore. As aftermath of my own tangent thinking, now and then, when natural chagrin lives with me, I sometimes think of the Scotch boy, James Watt, in the kitchen of his modest home, watching his mother's tea kettle. Perhaps the story is only legend, but it carries inspiration with it. That boy, seeing the lid of the kettle lifted by a force represented only by a puff of vapor, knew that power of some kind must be contained in the vapor. Probably he watched the kettle for days on end, the while he thought and planned and mentally devised a container to put steam to work. Most of all, he thought; and out of this thinking came the machine age—England's industrial revolution and much of what the world, since Watt's lifetime, has experienced in economical production and speedy transportation of goods.

STRAIGHT THINKING 81 Among those who sit here are some, certainly, who are going to take prominent places in our nation's business evolution of the next fifty years. There are very many who are going to be acclaimed as successful in their vocations. I know a number of men in my own line of business who had no thought whatever of becoming brokers during their college years. Some started as teachers, civil engineers, salesmen, manufacturers, newspaper reporters. Not a few registered marked success in their former fields before their activities were directed toward stocks and bonds. And I know manufacturers and other business executives who were, a few years ago, successful brokers. They accepted change when they found that change was called for in order to exercise their talents and capacities for new fields of work. Not all change that some of you will face will prove to have been wise aftef you have accepted it. T h e force of circumstance will have considerable to do with your alterations of plan and procedure. What these circumstances will be no one can determine very far in advance; in many cases not at all, until events actually shape themselves. T h e problems which most of you will be called upon to solve will, in all likelihood, be different from the problems which confronted my generation. But for individuals who have attained the training furnished by this school, the knowledge and mobility of mind acquired by hard wrestling with books should enable you to proceed from unwise choices of vocations, if you make them, to others which shall prove to be wise. T h e elasticity of the trained mind is one of the fundamental explanations of American business growth. Some of you probably are headed for riches; others who care less about money are going to be noteworthy for some particular achievement, and time will prove that these have been the wiser ones. In order to prepare the way for your fullest development, within the bounds of ability and

8z WHARTON ASSEMBLY ADDRESSES experience, you have spent years of your lives and considerable amounts of money upon education. What is facing you outside? In attempting to answer that question I shall try to talk simply as a business man, and as a man whose business is a sort of clearing house of facts about many kinds of industry. My principal activity, at present, is heading the organization of the New York Stock Exchange. Those ot you who have studied under Dr. Huebner know much about stock exchanges and their functions; you know that exchanges are market places and nothing more than market places, where the minds of many investors and speculators meet to determine the prices at which stocks and bonds may be bought and sold on any given day. The New York Stock Exchange does not, itself, buy or sell securities; but it does receive from the corporations whose stocks and bonds are dealt in a vast amount of current statistics and other information. This portfolio of facts is brought together, and constantly added to, in order that investors who make use of exchange facilities may examine the balance sheets, income accounts, and financial structure of the corporations which interest them, and thus learn what they are buying when they invest. The facts revealed in this collection of business information show that an important change has come over industry and transportation during the last eighteen months. T h e records of greater business activity and increased earnings suggest as plainly as any statistics of past events can do, that industry is rising in much the same fashion that it did after other periods of hard times. Early in 1935, just about six years after business volume began to taper off, important signs of recovery began to come into sight, and I feel that they are becoming more clearly visible. If my reading has been accurate, approximately six years intervened between the beginning of the depression of 1893 and substantial re-

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covery, and the same interval occupied depression and early, stalwart recovery in the severe depression of the 70's. N o man is sufficiently far-sighted to forecast with confidence the direction that recovery will take. Unemployment remains as a disturbing element in the business situation, and the effects of growing taxation upon production, distribution, jobs, salaries and wages cannot be foreseen. But the facts that enter the statistical department of the New York Stock Exchange from week to week and month to month show that the period of hesitation, doubt, and perplexity has been succeeded by an interval of aggressive and more confident business plans and desire to progress. In that change lies a prospect quite different from that which faced the graduates of colleges in a number of years of the immediate past. Incidentally, the president of an Eastern college has recently said that 92 percent of last year's graduating class of that institution had obtained work or were pursuing further studies in graduate school. Perhaps this single reference has application to very many colleges. At any rate, the indications point toward an increasing call for trained men in industry; particularly for those who have learned how to do some straight thinking. A n d I believe that an advantage will be enjoyed by those entrants to business who are able to convince their employers not only that they have been trained to think a problem through to a logical conclusion, to follow a line of business reasoning along a direct route without angles and curves, but also that their ideas about economic phenomena are sound and based upon knowledge of fundamentals. T h i s leads to a question which I know must be troubling many of you. T h e question is this: Shall I find work that I really want to do when my college course is finished? Shall I find myself in congenial surroundings, with a task in hand that is worth while, under working conditions that are

84 WHARTON ASSEMBLY ADDRESSES satisfactory? I am considering both those who are training themselves for business in a broad, generic sense and those also who are aiming at a profession. Certainly this question has a more serious import than it would have had seven or eight years ago. I should have hesitated to answer it at all as recently as two years ago, when depression was still laying a heavy hand upon industry. But when I review broadly the information contained in the records of business enlargement, which this last year has brought to the New York Stock Exchange, I believe considerable more emphasis may be laid upon the affirmative side than was possible two years ago. My own experience, through good times and bad times, does not allow me to think that the shadow of unemployment must permanently hover over trained, industrious men and women. Such a pessimistic idea fails to take into account what has happened in the past. It is, I believe, one of the products of the adventures of Experience while off the beaten track—a defeatist idea which is not borne out by the history of this country of ours, for it ignores the vigor and ingenuity of Americans when it comes to working themselves out of a jam. It thrusts aside precedent which acclaims the often-proved fact that new industries frequently branch out from old ones, or that new ones are created in order to fill the ever-growing demand of our people for more conveniences, more and better facilities for adequate living and a fuller enjoyment of life. Remember, that when you are striving to think as straight as you can in fulfilling your destiny, some millions of other people are doing the same thing. T h e composite of such thought, united with the intelligent use of inherent American energy, makes for individual progress and mass progress as well. T h e duty and responsibility of combating distorted economic programs lies upon the shoulders of all straight thinkers, including the young men who are just entering

S T R A I G H T THINKING 85 business life with the advantage of college-trained minds. You are about to undertake industrial or professional work free from many of the habits and inhibitions that have grown into the mental processes of some of us veterans. You will, I believe, be sufficiently fortunate to enter your life work at a time when America will be swinging away from artificial measures to promote prosperity, away from panaceas which have been found lacking. The swing back to elementary but immutable economic principles is already under way, and, while speed is seldom possible in destroying attractive, if bogus, short cuts toward the millennium, the return to the road of Experience will be made the more effective by the efforts of the nation's virile young men. Much that I have said may sound to some of you like the reactionary utterance of one who clings to ancient principles because they are old or because he is unwilling to accept change. If you knew the scanty extent of formal economics that I have gathered from textbooks, your impression of my attitude might be heightened. Yet, as I said in the beginning, my message to you is designed to come from the outside—from the workaday world. I have wanted to draw your attention and your thought away from books for a while. I am seeking to outline some highly practical ideas; to contrast them with the theoretical propositions contained in parts of a college course. I am aware that many of this audience have had to be grimly practical in order to reach the place they occupy in this college community. I am sure that more of you have had to fight your way to an education these last six years than would have been the case in normal times. T o earn all or part of one's way to a college degree brings a more realistic conception of economics than could otherwise be acquired. T h e process assuredly affords an introduction to the practical necessities of life which will be found outside these portals. So I gladly run the risk of being thought old-

86 WHARTON ASSEMBLY ADDRESSES fashioned or reactionary if I may leave a few practical thoughts with you. Profound forces are at work in the national business life, and while some of them are set upon an unsound base, I would not have you think that business men stand in opposition to any evolution of ancient economic principles. We must accept change, every one of us. In fact, we should welcome it, for a static world soon becomes a dead world just as a static mind becomes narrow, unintelligent, and loses both initiative and ingenuity. We must adapt ourselves to life and business as we find them. In the years ahead, you may expect that the experience of each one of you will be an individual experience. No two of you, even in the same kind of enterprise, will proceed along the same lines. The result which one man obtains in respect to skill, reputation, and eventual success will be different from these same elements evolved by another. In accepting the changes forced by mental and physical contacts with business, and with the competitive factors in business, you may be compelled to accept changes of a personal nature which you cannot now foresee. I fear that, notwithstanding my good intentions, something in the nature of a Commencement address has crept into my words. But I hope I have convinced you that I really am not a business reactionary. It may be that you had expected, when you came to this assembly, to listen to a lecture—a bit of addenda to your classroom work—or a technical economic discussion from which notes could be taken as a part of your college course. I do not believe that your notes applying to this informal discussion could be voluminous. Right here I would urge you to cement into your minds some simple, perhaps ancient, but time-tested rules before you proceed to enter business or a profession, notably these: overproduction of goods causes prices to decline; underproduction makes prices rise; excessive reserves of credit

STRAIGHT THINKING 87 cause lending rates to recede while inadequate supplies of credit make interest rates advance; a business must return a profit or it will fail. And above all have faith in the natural automatic controls of free markets. It seems a superfluous bit of advice to mention, in this stronghold of sound economic thought, the necessity of preserving the freedom of our markets. Nevertheless I do emphasize it because of the fact that the world today is obsessed with the idea of substituting conscious control for the natural automatic control of the market place. Conscious control of markets, which means control of prices, inevitably leads to some form of functional control of all human endeavor. All this is, I must confess, trite and elementary to those who have studied here. But I should feel that I had failed to accept an opportunity even though it be only to reiterate some economic axioms, if I did not mention them; for, unfortunately, in this present period of confused and angular thinking it has become easy for many usually clear thinkers to lean toward specious theories. T h e doctrine of scarcity as a measure to bring back prosperity: where might that lead the nation if projected into too many directions? Or the theory that a weapon to destroy depression is huge spending of money which, for the most part, has still to be earned: what would be the upshot of such a practice carried on without a definite plan to end it at a definite time? We are going to know all about the product of these two ideas one of these days, and it is your generation which must meet the issues thus created. T h e acquirement of this knowledge can be—and may prove to be—quite painful, for a substantial section of the world has been obsessed by these twin theories which, a generation ago, would have been ranked among disturbing nightmares. Nor do these grandiose economic theories stand out as the only illustrations of today's tangent thinking.

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WHARTON ASSEMBLY ADDRESSES Without seeking to view the present economic scene with alarm, I feel it necessary to bring to your attention some schemes which derive their inspiration from angular thinkers. I shall paraphrase from an editorial recently published by the Wall Street Journal and present a number of propositions, each of which gives concern to one of my training and habit of thought: An ostensibly persuasive control over farm management, with an idea of including interstate compacts under such control. Price-fixing in bituminous coal, evoking demands for an extension of the same procedure to textile and other fields in which production and consumption frequently fall out of line with each other. New taxation plans which aim at sociological "reform" by substituting a statutory strait-jacket for trained business discretion. Efforts to legislate against free competition through the "chain store" and other anti-basing point bills, simultaneously with demands for stricter enforcement of the Sherman and Clayton Acts. The result, if not the intention, of measures of this nature would appear to be the restriction of competition among those who can compete and to foster the competition of interests poorly equipped to meet competitive conditions. After discussion of additional economic departures of much the same character, the Wall Street Journal commented as follows: Whether any one of these steps, ideas, proposals, is good or bad in itself, the fact remains that, taken together, they demonstrate the great driving force of the popular yearning to make uniformly ideal conditions for everybody a matter of legal compulsion. The logical end is necessarily some species of State industrialism. If and when that end is accomplished, or to the extent that it is in part achieved, we shall in all probability have done what we have done through no con-

STRAIGHT THINKING 89 scious and deliberate choice of an intended destination, but through a too trustful confidence in the fiat method of dealing with necessary social and economic readjustment. In all probability we shall not follow the primrose path of hazardous experimentalism to its furthest end—at least not on this first big sociological picnic. Nevertheless, we are for the time being treading it with an indifference, surprising in a practical people, to its plainly evident bill of costs. We have opened a national charge account and are acting the way beginners in that temporarily delightful method of financing desires usually act. In citing the foregoing I have no intention of imparting any political slant to my thought. T h e gravity of certain economic tendencies transcends politics. T h e y are not being monopolized by any single political school; they permeate many minds of all parties and have penetrated into population strata where in less stressful times hardly any thought at all would be devoted to economic phenomena. T h e s e theories and happy-go-lucky tendencies are the reflection, in great part, of the angular thinking to which I have referred. Many different ways could be found to illustrate the subject that I have tried to bring before you—straight thinking. T h e route which I have followed has probably been quite different from the one that a specialist in economic theory would take, but after all I cannot stand here in the guise of an economist; no more so than did Dr. Samuel Johnson when he rebuked a boastful visitor from the Isle of Skye. Boswell tells this story, if memory serves me properly: " I n Skye," exclaimed the visitor to London, "eggs are so plentiful that one can buy a dozen of them for a penny." " Y o u are wrong," retorted the good Doctor. "It is not because eggs are so plentiful in your miserable island but for the reason that pennies are scarce." Dr. Johnson drove straight to the point, and from the viewpoint of pure economics it is probable that his deduc-

go WHARTON ASSEMBLY ADDRESSES tion was correct. If, in my discussion of some of the perplexing problems which are extant in the world of business, I have been successful in nothing more than arousing your interest in the problems from the coldly practical point of approach, I have done all that I set out to do. T h e vigor with which you attack them, when you have absorbed all that this great school can teach you, will have much to do, in the years to come, with your comfort and happiness and your consciousness of work well done.

THE RELATIONSHIP BETWEEN FEDERAL FISCAL POLICY AND ECONOMIC AND SOCIAL STABILITY by Lewis W . Douglas

1

HE New Deal presents so many different aspects, each one of which is susceptible of so much debate and discussion, that it would be impossible in the limited time at my disposal to do justice to them, and so if I may be permitted to do so, I should like to speak for just a few minutes about the things which I do not propose to discuss. I don't, for example, propose to discuss the New Era— the twentieth-century edition of the Mercantile System—except to say that it failed as completely as did its predecessors. I don't propose to speak of the attempts to cure the evils of managed currencies with more managed currencies except to say that we had a managed currency from ig27 to 1929, and that it was that managed currency which contributed to the intensity of the present depression. I don't propose to discuss the efforts to increase the political control of our managed currency except to say that if the efforts are successful, they will prove to be as complete failures as all previous attempts in history have proved to be. I don't propose to speak of the efforts in 1930 and 1931 to prevent deflation, except to say that it is as futile to expect

T

1 Former Director, U. S. Budget; Vice-President, American Cyanamid Company. An address delivered before the Wharton Assembly of the W h a r t o n School of Finance and Commerce, University of Pennsylvania, March 14, 1935. 9'

9» WHARTON ASSEMBLY ADDRESSES that human beings can avoid the penalties of economic excesses as it is to expect that there will be no headache on the morning after a gay night before. I don't propose to speak of the hectic struggle for security, the struggle on the part of capital, on the part of labor, and on the part of agriculture, except to say that no odium can be attached to the efforts of labor or agriculture as long as capital, either through price-fixing provisions of N R A codes, permissions to restrict production, or high tariffs, continues in its efforts. I don't propose to speak of the inconsistent demand of industrialists who in one breath demand a stable currency, and in the next demand a thing that makes that impossible —embargo tariffs. I don't propose to speak of the commonly accepted theory that we can become wealthier by producing less, except to say that if it be true, we can become fabulously rich by producing nothing. I don't propose to speak of distribution of wealth except to say that the only way it can be accomplished without destruction is to compel, under wise provisions for the protection of human labor, a competitive system under which more goods will be produced at lower prices. These are the things that I do not propose to discuss. Any one of them is, however, a fertile field for mental gymnastics. On the contrary, I would like to discuss fiscal policy and some of its consequences. I am particularly impressed at times with man's peculiar ability to lose his sense of proportion. You may recall that in 1926 there was quite a large group in the United States who felt that the stock market was too high, and you may recall that during the year 1927 there had been some desertions from that army. When 1928 came and the stock market was well above the 1927 level, induced largely by a managed currency, and in spite of the fact that industrial production had fallen, the army of orthodox thinkers had

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dwindled to a mere corporal's guard. And by 1929, almost everyone had become convinced that the New Era had dawned and that the value of stocks was not to be measured in terms of earnings, but in terms of anticipated increase in price. (And I deliberately refrain from using the word "value.") And so now, it seems to me, man is demonstrating this peculiar ability of his to lose his mental balance. You may recall that when in 1931, the Federal budget was out of balance by the amount of some $900,000,000 including debt retirement, there was considerable apprehension in the country, and that when in 1932 that deficit amounted to approximately $3,000,000,000, the apprehension rose to a feverish pitch. But in 1933, when the deficit was again approximately $3,000,000,000, there wasn't the same amount of apprehension. And when in 1934 the deficit had risen to $4,000,000,000, the apprehension had diminished even to a greater extent. Now we are told that the deficit for the fiscal year 1935 will exceed $4,000,000,000 and that again for 1936 it will be greater than $4,000,000,000. And yet there seems to be no public expression of apprehension at all. T h e mere size of these deficits is enough to attract our attention to them, but in addition to their size, there are other things which should be noted in connection with them. The first is that they constitute the largest peace-time deficits ever incurred by any country at any time in the history of the world. T h e second thing about them is that in percentage of income, that is, in relation to the Federal Government's revenues, they constitute almost the largest peace-time deficit of any government at any time in the history of the world. T h e third thing about them is that whereas in 1932, 1933, and 1934, a very large part of the deficits incurred was the result of Reconstruction Finance Corporation expenditures, a substantial part of which we may expect to be returned, the deficit for 1935 is not ac-

94 WHARTON ASSEMBLY ADDRESSES counted for by more than $500,000,000 Reconstruction Finance Corporation expenditures, and the deficit for 1936 will be made up of an even smaller proportion of R. F. C. expenditures. So that what has been happening is that while the deficits have been increasing absolutely, returnable expenditures have been decreasing. And the final point in connection with these deficits is that in spite of an increase in revenue as between 1934 and '933' a very substantial increase in revenue of some $700,000,000 or thereabouts as I recollect the figure, the deficit increased $1,000,000,000, and we are told that in spite of a substantial increase in revenue this year and next year as compared with previous years, the deficits will continue to increase. This in a situation which cannot be taken lightly. It is a very serious one. Its seriousness consists in that experience demonstrates that at all times, under all circumstances, wherever tried, whenever governments have continuously expended more than they have taken in, they have destroyed, either in whole or in part, their currencies. It was so in Rome. There were many destructions of the Roman currency, each and every one of them induced by government deficits. T h e destruction of the franc in 1789 during the days of the French Revolution was caused by budgetary deficits, and the emission of paper money corresponded identically with the budget deficits from month to month and year to year. And in our own experience, the destruction of our Continental money was caused by budget deficits; during the Civil War the destruction of the dollar and the emission of the infamous greenbacks, followed by the inflation and the painful subsequent deflation, was caused by budget deficits. In modem times, the destruction of the mark in Germany, the partial destruction of the franc in France and Belgium, the partial destruction of the lira in Italy, and the destruction of the pfennig in Austria, were caused by budget deficits.

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So I repeat, history demonstrates that at all times, under all circumstances, no matter how wealthy a country may have been, whenever governments have continued to spend more than they have taken in, they have destroyed, either in whole or in part, their currencies. T h e r e is a reason for this extraordinarily consistent historic experience. In federal governments, there are vested two powers. T h e first is the power to appropriate and to expend public money, and the second is the power to define what money is. And so whenever governments, continuously spending more than they take in, finally, as they always have and always will, reach the point where they can no longer borrow, they resort to the second power to meet their bills, and they emit directly or indirectly, by obvious or by concealed methods, a currency or its equivalent—it is that process which destroys the medium of exchange. Now, to my mind, there is no more wicked, brutal thing that a government can do to its people than to deliberately or under compulsion destroy its currency, for it destroys the middle class. It destroys the "Forgotten Man," who was so accurately and beautifully defined by Professor William Graham Sumner, of Yale University, during the 90's of the last century—and I take this opportunity to read what William Graham Sumner said about the "Forgotten M a n " and how he defined him: Who, then, is he who provides it all? Go and find him and you will have once more before you the Forgotten Man. You will find him hard at work because he has a great many to support. Nature has done a great deal for him in giving him a fertile soil and an excellent climate and he wonders why it is that, after all, his scale of comfort is so moderate. He has to get out of the soil enough to pay all his taxes, and that means the cost of all the jobs and the fund for all the plunder. The Forgotten Man is delving away in patient industry, supporting his family, paying his taxes, casting his vote, supporting the church and the school, reading his newspaper, and cheer-

g6

W H A R T O N ASSEMBLY ADDRESSES

ing for the politician of his admiration, but he is the only one for whom there is no provision in the great scramble and the big divide. Such is the Forgotten Man. He works, he votes, generally he prays—but he always pays—yes, above all, he pays. He does not want an office; his name never gets into the newspaper except when he gets married or dies. He keeps production going on. He contributes to the strength of parties. He is flattered before election. He is strongly patriotic. He is wanted, whenever, in his little circle, there is work to be done or counsel to be given. He may grumble some occasionally to his wife and family, but he does not frequent the grocery or talk politics at the tavern. Consequently, he is forgotten. His is a commonplace man. He gives no trouble. He excites no admiration. He is not in any way a hero (like a popular orator); or a problem (like tramps and outcasts); nor notorious (like criminals); nor an object of sentiment (like the poor and weak); nor a burden (like paupers and loafers); nor an object out of which social capital may be made (like the beneficiaries of church and state charities); nor an object for charitable aid and protection (like animals treated with cruelty); nor the object of a job (like the ignorant and illiterate); nor one over whom sentimental economists and statesmen can parade their fine sentiments (like inefficient workmen and shiftless artisans). Therefore, he is forgotten. All the burdens fall on him, or on her, for it is time to remember that the Forgotten Man is not seldom a woman. 1 T h a t is the man w h o is destroyed by a destroyed currency. It is the middle class which carries the burden. A n d because the "Forgotten Man"—the middle class—is destroyed by destroyed currencies, profound social consequences may take place. I think it has been established that had it not been for the destruction of the franc in 1789, there w o u l d have been no guillotine in the Place de la C o n c o r d e and n o blood 1 Essays of William Graham Sumner, edited by A. G . Keller and M . R . Davie, New Haven. Yale University Press, 1934, pp. 492-93.

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flowing in the streets of Paris. It is not unreasonable to suspect that if the mark had not been destroyed by the postwar German inflation, H i t l e r and Nazism would not now be in Germany. A n d it is, I think, equally reasonable to state that the Russian R e v o l u t i o n would not have gone to the extent to which it went, had the ruble not been deliberately and consciously destroyed. A n d in that connection, Mr. E. (I must admit I am not conversant with the Russian language) Preobrazhensky, w h o is a noted Soviet economist, said (and I am q u o t i n g from an article, a pamphlet, published by the School of Slavonic and East European Studies in the University of L o n d o n entitled Money, Prices and Gold in the Soviet Union), this Russian economist, Soviet economist, said: Glory to the printing presses! . . . In the reorganization of the great proletarian revolution, alongside modern guns, rifles, and machine guns which mowed down the enemies of the proletariat, an honourable place will be occupied by that machine gun of the People's Commissariat of Finance which took the bourgeois régime in its rear—the monetary system— by converting the bourgeois law of money circulation into a means of destruction of that same régime and a source of financing the revolution. Yes, a destroyed currency—if one can say no more, one can say this of it—does lay the foundation for profound social and economic changes. It does sow the soil with the seeds of a revolution, and I care not whether it be spelled with an " r " or an " e . " People say, I know, " T h i s cannot happen here, we are too wealthy." I would like to remind you that it was in the middle of the 1860's, when our national debt was but $2,000,000,000, and when our wealth, undeveloped, to be sure, to the same extent to which it has been developed since, was very great, that the credit of the Federal Government

g8 WHARTON ASSEMBLY ADDRESSES became obviously and apparently impaired, and that in order to finance the Civil War the government resorted to the infamous greenbacks. People say, I know, "But our per capita debt is approximately but one-third of that of Great Britain." T h e comparison, it seems to me, is irrelevant and immaterial. In the first place, in Great Britain the theory of taxation is that everyone who can possibly afford to do so must contribute something to the upkeep of the central government. For an unmarried man in the income tax brackets, the exemption is $500 and the normal rate is 1 1 1 4 percent on the first $875 of taxable income, and thereafter it jumps immediately to 22i/£ percent. For a married man, the exemption is $750, and the normal rates are the same as those for the unmarried man. But in the United States, the exemption is $1,000 for an unmarried man, and for a married man the exemption is $2,500 and the normal rate is 4 percent. Moreover, in Great Britain, largely as a result of this theory of taxation, out of a population of approximately 45,000,000, there are between 3,000,000 and 4,000,000 income taxpayers, whereas in the United States, out of a population of 125,000,000 or more, there are but 1,700,000 federal income taxpayers. But, in addition, there is in Great Britain a very definite fiscal policy. It is a policy, insofar as it is humanly possible and within the power of the Government, to keep expenditures within income, whereas in the United States there is an equally definite, an equally fixed and an equally determined policy—a policy to widen the gap between expenditures and income to the greatest extent possible. So it is on these scores, on these particular points among others, that the comparison between the United States and Great Britain is not material; for the conditions are different. But more than that, to say that because Great Britain has a public debt three times as great as ours, we should go out and contract exactly the same per capita debt, is very much like saying that because somebody else has scarlet fever we,

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too, should go out and contract it because it is a very good thing to have. A great public debt, even though a bearable one, is a menace, if for no other reason (and there are many other reasons) than that a great public debt impairs the ability of any country to finance itself in the event it is endangered by a hostile power and places the government in the dilemma of either being destroyed by its armed enemies, or deliberately imposing upon its people all the suffering and pain incident to a destroyed currency. A h , but people say, I know, " W e spend to win a war. Why shouldn't we spend to win a depression?" In the first place, spending to win a war destroys a currency just as effectively as spending to win a depression. In the second place, when governments undertake to spend to win wars, there is more frequently than otherwise an automatic termination to the spending—the termination of the war. But when governments undertake to spend to win a depression, there is more frequently than otherwise an automatic continuation of the spending. T h e r e is a very interesting parallel in history in France in 1789, when the Constitutional Assembly inherited from the monarchy a great deficit, and when it proceeded immediately, insofar as it could, by making certain reorganizations within the government, and certain economies, to balance the so-called "ordinary" budget, and coincidentally set up an "extraordinary" budget for public works and relief expenditures. Thereafter, the emission, as I have said before, of paper money coincided from month to month and from year to year with the deficit so created. There is almost always an automatic continuation of the spending when that spending is undertaken to win a depression. Other people say, " O u r ordinary budget is balanced, and we are borrowing only for emergency purposes. There is nothing to become apprehensive about." Such an argument, to me, seems to be a fiction of romantic minds. T h e

loo WHARTON ASSEMBLY ADDRESSES device of two budgets, an ordinary and an emergency budget, has been tried many times in history. All of the South American countries, or almost all of them, have attempted it. Many of the European countries at one time or another during their history have attempted it, and always without exception it has resulted in the bankruptcy of the government which tried it. But more than that, and the reason for it is very clear, it makes no difference what governments borrow for—it is the process of continuous borrowing which finally compels them to resort to their power to make money, and it is the resort to that power which destroys the currency. Other people say, I know, "If we have a recovery, why the budget can be balanced." That argument, I think, is subject to very careful analysis. T h e Administration, under President Wilson, in 1919, collected the greatest amount of revenue that has ever been collected in our history. When industrial production was relatively high, when taxes were piled upon taxes, when the normal income tax rate was greater than the present normal rate, income amounted to approximately $6,600,000,000. Twice, more than twice our present normal revenue—approximately $2,500,000,000 more than the maximum amount of revenue collected during the days of the New Era—of the American Mercantile System—of the "Boom." And yet we are told by the Administration that it contemplates spending at the rate of between $8,500,000,000 and $9,000,000,000. A gap of between $2,000,000,000 and $2,500,000,000! Even assuming (a highly improbable assumption to make) that we shall experience in the near future a recovery and industrial production and employment of people equal to that of 1919, how is the gap to be bridged? People say, "Ah, expenditures will be diminished, the necessity for relief will disappear." Let me ask you this question. How many of the vested interests created by government spending (and vested interests can be created just

FISCAL POLICY AND STABILITY 101 as easily by spending as they can be by tariffs or by NRA price-fixing provisions or any other one of the various methods of granting government subsidies), how many of the vested interests so created will be willing to become divested? How many of the municipalities will be willing to take back to themselves burdens which they have pushed over on to the Federal Government? How many of the retail merchants will be willing to see a diminution of government spending and consequent decrease in the volume of their business? How many of the manufacturers of steel will be willing in the public interest to forego the increase in business which they derive from government spending? Will the bureaucracy itself, created as a natural and inevitable concomitant of a great spending program, be willing without a great struggle to see itself dismembered? But more than all of this, the policy of spending creates inevitably increased permanent additional costs amounting to a good many hundreds of millions of dollars, expressed both in increased interest charges and in increased operating expenditures of the departments. And of this, there is some evidence already. Finally, public works create contractual obligations of many hundreds of millions annually for many years into the future. So that when one takes these things into consideration— the extent to which the bureaucracy already erected will not willingly and gladly see itself dismembered, etc.—it is highly improbable that just a mere recovery will ever bring a budget such as ours into balance, and therefore that we shall have, unless policy changes, a protection to our currency, and some protection to American institutions and traditions. But there is another part of this argument that if there is a recovery our budget will be brought into balance, which is susceptible of analysis. "Can there be a substantial recovery with a budget unbalanced? Is government spending

102 WHARTON ASSEMBLY ADDRESSES conducive to recovery?" T h e great void in our national economy today is not in individual consuming power, it is not in the consumption of these things known as consumers' goods—it is in capital consuming power, and the consumption of things by capital. It is within the industries which depend upon capital investment that approximately 60 percent of our unemployed are concentrated. Does capital seek investment when there is the constant threat that the risks of investment are not the risks incident to the ordinary conduct of business, but incident to a deliberate governmental policy? Will capital seek investment, has it sought investment under a policy which must inevitably, just as surely as the night follows the day, if continued, destroy the currency? How then, if, under a deliberate spending program threatening the destruction of the currency, capital will not seek investment, and if, therefore, the 60 percent of the unemployed concentrated in the industries which depend upon capital investment cannot be restored to employment —how then, can there be a recovery? So when one takes these truisms into consideration, the whole argument, it seems to me, that the budget will be balanced given a recovery, falls to the ground, first because the revenues will not be sufficient to meet expenditures, and second because a deliberately excessive spending policy cannot induce recovery. And so I conclude that if the policy of the Administration, the spending policy, is continued long enough, there is no reason to expect in this country any experience different from the historic one. T h e Federal Reserve System holds approximately $2,500,000,000 of government obligations. The banking system holds more than 50 percent of our government obligations. A Federal Deposit Insurance Corporation, quite irrespective of the principle of it, has been designed and created to protect deposits, but whose ability to protect those deposits rests upon the unimpaired credit of the

FISCAL POLICY AND STABILITY 103 United States Government. Should there be an obvious, open, apparent (and I use these words deliberately) impairment of the credit of our Government, it is not impossible that we shall have upon our hands an insolvent or almost insolvent Federal Reserve System, an insolvent or almost insolvent banking system, a Federal Deposit Insurance Corporation completely incapable of protecting deposits, a destroyed middle class, a depreciated currency, and no government credit with which to provide even a meager subsistence for the unemployed. Now, I recognize that this is not a pleasant picture, but if the emergency in the spring of 1933 was sufficiently great to vest in the executive of the United States greater powers than have ever before in our history, in peace or war, been vested in him, what reason is there to expect that a crisis of such enormity will not require vestment of even greater powers? What reason is there to expect that the sheer weight of economic forces, quite irrespective of intent or desire, will not create profound social and political changes in the United States? A dictatorship, whether it be one of Socialism or Fascism, is not an impossible, improbable consequence of such a set of circumstances. And thus there will be destroyed at one stroke all of the liberties for which the Anglo-Saxon race has struggled for more than a thousand years, and the America which has developed the highest standard of living the world has ever known. I recognize, of course, the dangers of logical statements of a logical sequence of events, I recognize that more frequently than otherwise, or at least frequently, unforeseen events occur to break a logical sequence; I am not, therefore, here prophesying that this great, this terrifically black and unpleasant picture will ever be a reality. But I do say that if the Administration continues its spending policyregardless of what interludes may occur—there will be some sort of catastrophe, and if it continues long enough, this sort of thing is a probability. I don't say that it will happen

104 WHARTON ASSEMBLY ADDRESSES tomorrow, I don't say that it will happen next year. I am quite aware of all of the instrumentalities and agencies which the Federal Government has at its hand and at its beck and call, which it can use to retard and to delay the ultimate end, and which it can use to disguise and conceal the inflationary and currency destructive methods which it is using. T o state the case baldly, the Administration has shot out all the red lights. There are not existent any of the ordinary standard tests of government credit. Whenever government obligations weaken in the market, a great stabilization fund is used for the purpose of supporting them, or if not that, a completely subservient Federal Reserve System may be called upon to give to government paper a value which it does not intrinsically and inherently have. Whenever the dollar depreciates untowardly in the exchange markets, the stabilization fund is employed to support it. This huge block of gold that we have, conceivably some measure of protection, enlarged by devaluation, creates a psychological effect which tends to retard the ultimate result of excessive spending. All of these things and other things, the Administration has at its hand, which it can use and has used to prevent an obvious and apparent impairment of the credit of the Government. But just as surely as it is that I am standing on this platform, quite irrespective of the extent to which the standard tests have been destroyed, quite irrespective of the use of the stabilization fund and of the Federal Reserve System, quite irrespective of our stock of gold, quite irrespective of our great wealth, if the present policy is continued long enough, the "Forgotten Man" will, together with all of our people, bear the cost of a destroyed currency. It is not a difficult thing, technically, to avoid the penalties of excessive spending. Technically, it is not now difficult to do the only thing which man has ever contrived to protect his currency, namely, to bring the government's budget into balance. The revenue for the fiscal year 1936 is

FISCAL POLICY AND S T A B I L I T Y 105 estimated to be approximately $3,500,000,000. If the Reconstruction Finance Corporation, which has already served its purpose (if it ever had one) were converted into a purely liquidating agency, and if at least some of the other Federal credit agencies were likewise converted into purely liquidating agencies, there would be another $1,000,000,000 to $1,250,000,000 available to meet expenditures. Thus the total revenue, ordinary and extraordinary, would amount to between $4,500,000,000 and $4,750,000,000. It is not difficult to hold the so-called "ordinary" budget to $2,700,000,000 on the expenditure side. T o that there must be added approximately $1,000,000,000 on account of liquidation of obligations already undertaken for public works. On top of that, it is right and proper that the Federal Administration, in times like these, appropriate and expend, allocating to the states under conditions precedent to the grant, approximately $1,250,000,000 for relief. Thus, for the fiscal year 1936, the budget would have been brought to within approximately $500,000,000 of a balance—a substantial change in direction when compared with a contemplated deficit of $4,500,000,000. And if the same policy were to be pursued in 1937, the budget would not only be actually in balance, but there would be some $300,000,000 to apply against debt reduction. This, technically, is the ease with which the task can be accomplished. That it requires great courage, I do not deny. That as each month passes, and the vested interests in spending become more deeply entrenched, greater courage will be required, I do not deny. But given the courage, given the integrity, given the conviction, the task can and may still be done. " A h , " people say, "this is inhuman, a brutal thing to do." Is it? Which is the more brutal? T o spend recklessly, extravagantly for the benefit, temporary benefit, of ten millions, at the expense of an entire population, or to spend conservatively, wisely, for the ten millions and for the pur-

io6 WHARTON ASSEMBLY ADDRESSES pose of protecting the entire population? Which is the function of government, to do things for a small minority at the expense of all, or to protect all? I sometimes wonder whether in this country of ours we have become too soft, by easy living, too enervated by hot baths, to express an honest, vigorous resistance. And yet, in spite of my wondering, as I look over history I conclude that if the "Forgotten Man" can be made to see the issue, he will rise up and say, "This thing must stop."

FEDERAL EMERGENCY ADMINISTRATION OF PUBLIC WORKS by Harold L. Ickes

1

M O N T H ago Lewis W . Douglas, former Director of the Budget of the United States, had the pleasure that I am experiencing at this moment, of speaking to you on a s u b j e c t of absorbing public interest. May I say at the outset that my very pleasant association with Mr. Douglas during the time that we were fellow-members of the Government not only gave me a very real liking for him personally, but a feeling of profound respect for his ability, his patriotism, and his essential integrity as a man and a citizen. I want to add that in the field of economics and finance Mr. Douglas' attainments are far superior to mine. I have never laid claim to an economic mind. So, in discussing today some of the propositions advanced before this same audience by Mr. Douglas, I do not want to be understood as speaking either with special knowledge or with any assumption of authority.

I am approaching the questions raised by Mr. Douglas purely from the point of view of the average man. As my justification for so doing I would like to plead that, after all, questions of finance and economics under our democratic form of government must in the final analysis be solved in the interest of the average man by the average man. As a nation we shall go up or down on the basis of 1 Secretary of the Interior and Administrator of Public Works. An address before the Wharton Assembly of the Wharton School of Finance and Commerce, University of Pennsylvania, April 15, 1935.

io8 WHARTON ASSEMBLY ADDRESSES our solution as a people of these and allied questions. It would, therefore, do those of you who are students of economics and finance no harm to put on the glasses of the average man, however blurred they may be, and through them seriously look with me at some of the questions in which your welfare and mine are inextricably bound up. In summing up his very able address to you, Mr. Douglas said: "What is the function of government—to destroy the many for the few or to protect all?" T h e answer, of course, is implicit in the question which was artfully, although legitimately, put to instill in the minds of his hearers the thought that, of course, the function of government is to protect all and that, in protecting all, one must not depart by so much as the fraction of an inch from those laissez-faire economic policies which, if they were not responsible for the dolorous state in which we today find ourselves, at any rate offered no obstacle to the catastrophe that overwhelmed us in 1929, nor since that date have availed to save us from its consequences. The penultimate paragraph of Mr. Douglas' address contained this language: "Which is the more brutal? T o spend recklessly, extravagantly, for the benefit . . . of ten millions . . . or to spend conservatively for the purpose of protecting the entire population?" I take it that the "ten millions" referred to by Mr. Douglas constitute the army of unemployed persons in the United States today. I do not know whether his figures are accurate or not. T h e more or less expert estimate the number of the unemployed variously at from ten to twelve millions or even higher. But these ten millions, if we accept Mr. Douglas' figures, do not constitute the total of those who are suffering from unemployment. These ten millions have dependents, and therefore should be multiplied by not less than two, if we choose to be ultra-conservative; or, more probably, by three or four, in order to arrive at the whole number of those who are either out of work themselves or

ADMINISTRATION OF PUBLIC WORKS 109 dependent upon those who are unemployed. Now I say that the suffering of twenty to thirty millions of people, even out of a total population of 126 millions, is not lightly to be ignored by a government whose function, according to Mr. Douglas' eloquent peroration, is "to protect all." Be it observed that Mr. Douglas exhorts us to protect the 126 millions, even if his ten millions have to be sacrificed, by some method that he hints at but does not explain. Listen again to his rhetorical question which is worth repeating: "Which is the more brutal? T o spend recklessly, extravagantly, for the benefit . . . of ten millions . . . or to spend conservatively for the purpose of protecting the entire population?" Be it noted that Mr. Douglas apparently thinks we are "benefiting" people if we merely refuse to permit them to die of hunger or privation. By what method would Mr. Douglas "protect the entire population"? He does not say. What effective step does he suggest that we take in this emergency besides giving up enervating hot baths? T h e record is silent on this point. Mr. Douglas' address was full of admonitions. We mustn't do this; we mustn't do that. Don't, don't, don't; and especially don't let our hearts grow commiserate as we contemplate the miseries of the ten millions of unemployed. If he made a single affirmative suggestion of a policy designed to correct or even to ameliorate the distressful condition in which we today find ourselves, it escaped my notice. Deep student that he is of economics and of government, he offered us no alternative remedy. Undoubtedly if he had known what we might do in order to set satisfied feet on the path of economic recovery he would have told us. We have heard much of balancing the budget. We have been told many times, and never more forcefully than by Mr. Douglas, that an unbalanced budget will not only destroy our currency but will undermine our liberties. No one will dispute that these dreadful forebodings may turn out to be true prophecies if our budget is too seriously unbalanced

lio WHARTON ASSEMBLY ADDRESSES over too long a period. And yet, in the absence of any statement from Mr. Douglas as to what measures he would adopt to bring about economic recovery, I am wondering whether, if it is the function of government, as he says, "to protect all," we are not justified in drawing somewhat upon our credit to provide at least a minimum of food and shelter for our unemployed and to restore motion to the idle wheels of industry through the employment of labor on useful public works. Suppose any one of you should fall upon evil days; you lose your job or you have a long period of illness. No longer do you have an income to support you, but happily when you were able to work and had work to do you laid something aside. It is your reasonable expectation that your unemployment will be only temporary. In such circumstances what do you do? Do you heroically say to yourself: "Since I have no income I will not eat; I will not call in a doctor; I refuse to unbalance my budget; I firmly decline to cut down my surplus in the savings bank; I am chock-full of the old virtues; I prefer to die heroically rather than to pay for food or medicine out of my capital!" Or take a business, even a great one. During its days of prosperous activity, if it is a well-managed business, it does not pay out all of its earnings in dividends to its stockholders or even in salaries and bonuses to its officers. It accumulates a surplus. A period of depression comes and the business is faced with the choice of losing its customers, of discharging all of its trained personnel, or of drawing upon its reserves. Is there any doubt what this business will do even under our laissez-faire economic system? Not the slightest. T h e officers and the directors will reason that reserves were accumulated just to tide over such a situation as this. Even if the individual temporarily out of employment,* or the corporation for the time being fallen upon hard times, has no savings, each will use his credit in such circumstances as I have described u p to the limit of that credit.

ADMINISTRATION OF PUBLIC WORKS 111 There is no thought of insisting upon a balanced budget either for an individual or for a private corporation in times when income has temporarily ceased, if there are reserves or credit to draw upon. Yet it is demanded in many quarters that the Government in a time of national calamity refrain from doing what an individual or a business concern does as a matter of course when misfortune comes. After all, a nation is an aggregation of individuals. No sane man would advocate an unbalanced national budget as a permanent policy. Such a course would in time produce all of the dire results foreseen by Mr. Douglas. But I insist that it is just as proper for a nation in such a time as this to draw on its reserves and its credits, if necessary to save its people from starvation and bring about economic recovery, as it is for an individual to draw on his reserves and his credit in order to tide himself over evil times. T h a t is what reserves are for. That is what credit is for. In this connection may I say that I may not agree with Mr. Douglas that even such a crisis as this will not justify an unbalanced budget, but I am in hearty accord with his remark that "man has a peculiar ability to lose his sense of proportion." Mr. Douglas insists that a government budget is unbalanced if its total expenditures in any one year exceed its income, even if the expenditures over and above the amount matched by income are capital expenditures. In other words, he would not permit any investment in permanent improvements by the Government unless it is charged against income. Yet he suggests no such rule for the individual or for the private corporation. Rarely, if ever, does a private business pay for capital expenditures out of income. It uses its income to meet current expenses, to pay interest and dividends and even to build up a reasonable surplus. T h e practice of many corporations in the past has been to issue new securities against large surpluses and give those securities as stock dividends to its stockholders. When it contemplates an additional plant, the average corporation

112 WHARTON ASSEMBLY ADDRESSES raises the necessary funds by selling its securities. Seldom is a capital expenditure budgeted by a private business concern as a current expense to be met by current income. Just why American business men, who boast themselves to be the ablest in all the world, should not insist upon keeping their own capital expenditures within current income when they demand that the Government do so, is something that my average mind is unable to grasp. Mr. Douglas and those who think along the same lines with him are in complete agreement that in order to pull ourselves out of this depression we must give people who are able and willing to work an opportunity to do so. T o do this requires the investment of capital, particularly in the heavier industries. Their reasoning seems to be along this line: Business must be stimulated; only the investment of money can stimulate business; banks and private individuals possessing funds refuse to invest; the Government alone has both the money and the will to stimulate business; therefore the Government must not spend any money for this purpose but, on the contrary, must keep strictly within its income. This line of reasoning, in addition to its absurdity, would seem to me inevitably and inexorably to lead to the destruction of the America that you and I have known and loved. T h e course that the Government is pursuing is that of stepping into the breach and, to some extent at least, making an effort to stimulate business and thus bring about economic recovery. Exponents of laissez faire as well as those who advocate the policy now being followed by this Administration under the leadership of President Roosevelt are in perfect agreement as to the necessity of a greater circulation of money if there is to be a business recovery. T h e New Deal, however, is not afraid to follow through to the inevitable conclusion that if private capital will not perform its functions, public capital must and will. We will not adopt a defeatist attitude. We decline to run away from logical facts.

A D M I N I S T R A T I O N OF P U B L I C W O R K S 113 If the circulation of money alone will restore health to the economic system and only the Federal Government is both able and willing to provide that money, then the Federal Government must and will provide it. T h o s e w h o would balance the budget at once without regard to consequences seem to forget that if our national debt is considered large at the present time it is largely so because the administrations during o u r prosperous years following the war adopted a policy of tax reduction rather than one of vigorous debt reduction. It should be kept in mind that about half of our national debt has been carried over from the war. Failure to reduce this indebtedness as rapidly as it should have been done during the days of plenty appears to have been overlooked as one of the causes of a present unbalanced budget. T h e budget balancers also ignore the fact that expenditures for capital improvements result in increasing the whole level of incomes, and therefore broaden the tax base, which is the foundation for Treasury revenues. T h a t this is true, there can be no doubt. Treasury receipts for the first quarter of 1935 were 21.6 percent higher than for the corresponding quarter of last year, and income tax payments were from 35 to 40 percent higher. T h e r e are many other factors to be considered in this situation that are just as important as an immediate balancing of the budget. N o t the least of these is the morale of the American people. T o my way of thinking, it is more important in these times to preserve the morale of the people than it is to balance a set of books. T h e r e is still another way of looking at this problem. T h e reservoir of money in the country must be tapped for lifeblood to infuse into the veins of industry in order to combat the pernicious anœmia from which it lias been suffering. T h e r e are two sources through which this lifeblood can be obtained; one is private capitalism and the other is the Federal Treasury. If one source is clogged, then, if the patient

114 WHARTON ASSEMBLY ADDRESSES is to be saved, the other outlet must be resorted to. After all, in theory, does it make a great deal of difference which faucet is turned on in order to get this money into circulation? It is the same money regardless of its depository. It is the wealth of America, the accumulation of the brawn of the workmen of America, as well as of the brains of the capitalists of America. Mr. Douglas, from the remarks he made here, is no more reconciled to the Public Works program of the Federal Government than he was as Director of the Budget. He says: " T h e huge obligations entered into on account of Public Works, even if no further appropriations for Public Works are made, will continue for many years to constitute tremendous drains on the Federal Treasury." Imagine a board of directors of a great corporation declaiming against the expenditure of money for the building of a badly needed fabrication plant because the obligation, if entered into, "would constitute a tremendous drain upon the resources of its treasury." This is not merely laissez faire; it is economic sclerosis. Needed or useful capital expenditures constitute assets and not liabilities. And at what better time can capital be put into permanent improvements than in a time of depression when building is comparatively cheap and the employment of men will contribute to economic recovery? If an investment in a permanent improvement constitutes an economic burden, then no addition to plant equipment would ever be justified. As a matter of fact, the pursuit of this doctrine to its logical conclusion would inhibit not only additions to the plant, but the initial building of the plant itself. It would mean that a man should not deposit money in a bank because the banker might lend it to an industrialist to increase the operating capacity of his factory. T h e only sound course to pursue would be to tie it up in the traditional sock and hide it under the mattress. Many billions of dollars could properly be spent in the

ADMINISTRATION OF PUBLIC WORKS 115 United States on permanent improvements. Such spending would not only help us out of the depression, it would do much for the health, well-being and prosperity of the people. I refuse to believe that providing an adequate water supply for a municipality or putting in a sewage system is a wasteful expenditure of money. Any money spent in such fashion as to make our people healthier and happier human beings is not only a good social investment, it is sound from a strictly financial point of view. I can think of no better investment, for instance, than money spent to provide education and to safeguard the health of the people. Sound and well-trained minds in sound bodies would add more to the actual prosperity of tliis country, measured purely in money values, than anything I can think of at the moment. It need not be explained again that the Government embarked on the Public Works program because of the cowardice of private capital and its refusal to come out from under the bed. Something had to be done about the depression if we were ever to shake it off. And fortunately the great majority of the people wanted to do something about it. They wanted to march out and engage the enemy in handto-hand conflict. President Roosevelt had the same impulse, and immediately after his inauguration he set out to engage in mortal combat as insidious and as relentless a foe as a champion has ever faced. Among the measures promptly advocated and as promptly put into effect under the National Industrial Recovery Act was a program of public works. Without an organization, without a plan, with no precedents out of the past to guide it, the Public Works Administration, launched almost over night, was charged with the duty of expending the enormous initial sum of $3,300,000,000, to which amount $400,000,000 more were added under the Deficiency Appropriation Bill of 1934. In spite of inevitable delays, due to the strangeness of the task, the necessity of building up a strong organization capa-

116 WHARTON ASSEMBLY ADDRESSES ble of handling the job, and the difficulties on the part of local governmental bodies in overcoming legal and financial obstacles in actually putting the money to work, the program has been carried out with due speed. No favorites have been played in the expenditure of these funds. Politics have been rigorously excluded. As competent and qualified a staff as can be found in any private organization was built up on the basis of character and ability alone. T h e money has been allotted without any scandal reflecting on the Government. We have regarded these funds as trust funds and we have surrounded their allocation and disbursement with every possible safeguard. We have never hesitated to expose any intended misuse of this money or to cause the heavy hand of the law to be laid upon those who attempted to make an improper use of it. Our vigilance has brought to the bar of justice a number of men, Democrats as well as Republicans, some of them holding high public office, with the result that the country is thoroughly persuaded that the Public Works fund is as graft-proof and is as efficiently managed as it is possible for a human institution to be. No fair-minded person would expect that the expenditure of $3,700,000,000 on public works by the Government would employ as many men or accomplish anything approaching the beneficial results of the customary annual expenditure in this country on construction prior to 1929. T h e total volume of construction work in normal times in the United States is not definitely known, but various experts have estimated that in the peak years of the 1920*5 from eleven to fifteen billions of dollars were spent each year. Yet captious critics have sneeringly accounted P W A a failure because its comparatively small appropriation, spent over a two-year period, did not have the same stimulating effect on business and industry as did an annual sum many times greater during the pre-depression years. Yet I know that as a result of P W A 109,600,000 man-

ADMINISTRATION OF PUBLIC WORKS 117 weeks of employment have already been provided. Of the 19,000 PWA projects, 17,000 have been completed or are under construction, with 11,500 of them actually finished and in use. On practically all of the remainder, contracts have been let and construction is ready to go forward. Over two million persons have had direct employment at the sites. Many millions more, employed in mills, factories, quarries, forests, or in transportation services have benefited indirectly. Mr. Douglas must know, but lie did not tell you, that many of our projects are self-liquidating; that more than a billion dollars will be returned to the Government with interest, and that the Government is protected by collateral on approximately three-fourths of the reimbursable amount. Nor did he make it known to you that already P W A has sold approximately $75,000,000 worth of bonds taken by it to secure advances on construction projects, at a profit to the government of more than a million dollars. In view of the record, it is, of course, absurd for anyone to say that PWA has been a failure because it has not taken men off of relief rolls and put them on to payrolls. The real difficulty has been that not enough money has gone into the Federal PWA program. You cannot do the work of fifteen billion dollars a year with three billion seven hundred million spread over two years. Some people either expected too much or they cannot forego even a poor opportunity to criticize. Lacking divine power, the Administrator could not perform a loaves-and-fishes miracle. Fortunately, Congress has just made an appropriation for the continuation of the public works program. T h e country may be assured that we are not turning backwards. We are not even halting in our tracks. We are driving straight forward, our hands on the plow, following the furrow that we hope and believe will turn the soil for such a harvest as will add to the peace, prosperity, and happiness of the people.