THERE can be no Kope of progress or freedom for the people without the un- restricted and complete enjoyment of the right of free speech, free press and peaceful assembly. Gift of IRA B. CROSS GIFT OF IrcL ^. Cross Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/abcsofbusinessOOmckerich The A B C's of Business ^J^g^ THE MACMILLAN COMPANY HBW YORK • BOSTON • CHICAGO • DALLAS ATLANTA • SAN FRANCISCO MACMILLAN & CO.. Limited LONDON • BOMBAY • CALCUTTA MELBOURNE THE MACMILLAN CO. OP CANADA, Lm. TOEONTO The A B C's of Business • > • * •. « « BY HENRY S. McKEE iReto gorii THE MACMILLAN COMPANY 1922 All rights reserved PBINTED IN THE UNITED STATES OF AMEfiICA '2> y^ ^ OOPTMQHT, 1922, Bt the macmillan company. Set up and electrotyped. Published September, 1928. ^'1'' Oi: lira fe.Cros^ Press of J. J. Little & Ives Company New York, U. S. A. INTRODUCTION Probably the greatest resource of any country is the cultivated intelligence of its people. Inasmuch as American industry has for its ob- ject the fullest possible development and use of our country's resources, then this particular re- source, being the most valuable, should receive the most industrious cultivation. But instead of this, our situation is quite the reverse. In fact, our imperfect understanding of the governing principles of business, of how we live and are industrially organized, was one of the most amazing of the many discoveries about our- selves for which we are indebted to the World War. Our war task was rendered gravely difficult by Democracy's greatest menace — well-meaning ignorance. At every step of our national life we have been hampered and often seriously injured by the wide prevalence of unsound economic and financial doctrines, urged upon us with all the sin- cere zeal of half -knowledge. As a nation we are ingenious, courageous, origi- nal and inventive, industrious, and various other 519861 VI INTEODUOTION things greatly to be admired, but as to any wide- spread knowledge of how we are industrially or- ganized for our national tasks, or as to any under- standing of the economic principles that must gov- ern our conduct and determine our success or fail- ure, we have been aptly described upon high authority as a nation of economic illiterates. It thus appears that there is a vast field of un- developed national wealth, awaiting only the ser- vice of a higher popular intelligence and a greater intensity of interest in business, economic, and financial subjects. In what follows there is little pretense to any scientifically instructive contri- bution toward such education, but merely sug- gestive reference to and comment upon matters deeply affecting the daily life and work and wel- fare of all of us, upon which complete and popular enlightenment would do more to enrich us than any other of our vast sources of future wealth and national contentment. Acknowledgment is made to Stewart McKee, who contributed the chapter on Internationalism and supplied helpful criticism and suggestion upon the remainder. Los Angeles October, 1921 CONTENTS Introduction y CHIPTBR I. The Complex Character of Our Business Organization 9 II. The Misunderstanding of Money ... 25 III. Wages and Wealth 34 IV. The Elements of Banking 54 V. Business Consequences of the War . . 68 VI. The Abuse of Our Railways 85 VII. Speculators and Markets ..... 91 VIII. Good and Bad Times 103 IX. Internationalism Ill X. Education ....««!»••• 126 THE A B C'S OF BUSINESS CHAPTER I THE COMPLEX CHARACTEB OF OUB BUSINESS ORGANIZATION If American business is to be understood at all, it must be viewed as a whole. And yet few of us ever see or come into contact with more than a part of it, so small as to be almost microscopic in relative importance. It is transacted over an area three thousand by two thousand miles in extent, while each one of us goes seldom outside an area of a few city blocks. It is conducted by a population of one hundred and ten million people, whereas each of us knows hardly more than a few dozen. One man, working yesterday in his office or farm or factory, knows what he did (and may or may not understand the true significance of it). He per- haps knows a little something of what was done by a few who stood in immediate contact with him. But throughout the nation perhaps forty million people worked that day. When night 10 THE A B O'S OF BUSINESS came they had accomplished a great total of mainly creative work. He knows nothing of what any of them did. And yet they were all working for one another. Each one was producing some- thing for the use and benefit of the others. More- over, they were all doing this in obedience to (or more likely in violation of) certain economic laws which were enacted by no legislature ; which cannot be repealed ; which are self -enforcing laws with severe punishments for disobedience. These punishments take such forms as the panic, the period of disaster and business depression, un- employment and the bread line. Being, as we have been called, a nation of economic illiterates, we do not understand that we brought these visi- tations upon ourselves, nor how we did it. In our social and political life, governed by legislatures and the police, it is an axiom that ignorance of the law excuses no man. But in our industrial life, which is governed by far higher, simpler economic laws of world-wide application, we do not even ask what the law is. Most of us think that there are no such laws and so are unaware of having violated them, just because we do not see the policeman and are not formally accused by the district attorney. We know that as a people we are periodically CHARACTEB OF OUB BUSINESS ORGANIZATIOIT 11 punished in the form of hard times or lost jobs or higher prices or tight money, but we do not know what we did to deserve it. In this case, too, igno- rance of the law excuses no man. The reason we do not know what we did is that as a people we never read the law. We do not know we have been violating one. We do not even know there is an economic law. We see no attorneys about who expound and practice it, and give us warning. There are some, but we do not recognize them as being such; for they are in contempt with most of us as being merely impractical theorists, who lecture at universities or write supposedly learned but very obscure books of little practical value. In addition to these, there is now and then the occasional studious business man or banker, but even he is apt to be regarded by the more hard- headed, who rely upon experience, or by the leaders of organized labor who seem to get their wisdom by inspiration, as being over-educated and a theorist. The charge that is made against these men, the economist and student, is that they have what is rather scornfully called book knowl- edge. Just what kind of knowledge this was be- fore someone put it in a book has never been quite fuUy explained, nor how putting it in a book sub- tracted anything from its value. 12 THE A B O'S OF BUSINESS If one could rise to an altitude high enough above the United States to bring it aU within his range of vision and then view it through a glass sufficiently powerful to show the detail, he could view this country as one great industrial estab- lishment employing one hundred million people. The thing he would see might be called the plant. It has an investment value of perhaps three hun- dred billion dollars. This plant, or fixed invest- ment, consists mainly of farms, mines, factories, railways, ships, docks, warehouses, office buildings, banks, wholesale stores and retail shops, schools, dwellings, wires, pipes, and machinery. About the proper amount of each one of those things has been provided, through the free operation of the competitive principle and the right of every man to select his own occupation. This plant, has been built and is being operated for no other purpose than to provide the American people with the things they want. It was built and is operated under the government of economic law. It is the best plant in existence, with room for immense further development. It contains the greatest known stores of raw material waiting to be worked up. Its hundred mil- lion workers are probably not equaled in skill by any other body of workers of the OHAEACTEB OF OUB BUSINESS OEGAISXZATION 1^ same size in existence. These workers pro- duce for themselves and enjoy more of the neces- saries, comforts, and luxuries than any other peo- ple. It is said that the annual output of the plant in goods would be valued at perhaps forty or fifty billion dollars. The American people usually con- sume all these goods which they produce in this way during the year, except perhaps five billion dollars' worth which, in one form or another, re- mains in existence as new wealth. Probably this new wealth finally takes the form of additions to the plant, new construction, or perhaps partly the form of debts due us from foreign countries to which we send some of the goods. The distribu- tion of the goods that are produced is not always just and equitable, but in the main it seems to be true that this plant, like most private concerns, really seems to pay its workers about in propor- tion to the value of the services they render. The average American seems generally to get out of life just about what he puts into it. The world has a way of paying him about what his services are really worth. Naturally, an organization so highly compli- cated as this is easily thrown out of adjustment. A state of prosperity may be said to exist when each branch of industry, working to full capacity, 14 THE A B C'S OF BUSINESS is turning out just the right amount of product to serve fully the needs of other industries that are related to and dependent upon it; so that every plant and every man is fully employed and not delayed or hindered by troubles in some other essential part of the plant. A prosperous year is one in which, with abun- dant crops from the farms, there was also mined the proper amount of coal to keep the boilers go- ing in the factories, locomotives, ships, power plants, and houses ; in which the wool and cotton growers furnished the textile mills with a full supply of raw materials for cloth; in which the makers of dye stuffs produced the correct quan- tity of dyes ; in which there was delivered to the steel industry an unbroken supply of ore and coal, to enable it to build for the farms the right amount of harvesting machinery and for the cities the right amount of structural steel and indus- trial tools ; in which all these things were done at exactly the right time ; and perhaps, in all things except crops, a prosperous year is one in which our railway system finds itself adequately equipped and in sound physical condition to move promptly perhaps fifty billion dollars' worth of things from place to place, to pick up each thing where it is and move it quickly to the place where CHARACTEB OP OUB BUSINESS OBGANIZATION 15 it is going to be needed next, without keeping any- body waiting in unproductive idleness. A pros- perous year would be one in which one hundred million people each did a full day's work on every working day, finding it each day possible to do so because of an abundance of tools and materials promptly supphed to each one by virtue of the fact that every other man, on whom he depends, was doing his full part. In such a year as this the American plant might turn out twice its normal output of the neces- saries, conveniences, and luxuries of life. Every- thing would be abundant and prices consequently lower. Everyone would be employed and conse- quently able to buy his fair proportion of what the plant produced. America would be called rich and prosperous. It is a state of affairs that is gradually approached as we bring the various parts of our plant into nicer adjustment to one another in obedience to economic law. It is said that in this American plant a varia- tion of some ten per cent in the total quantity of goods produced marks about the difference be- tween a boom and a business depression. This variation may be quite easily brought about, as we have gone so very far in applying the prin- ciple of the division of labor that disturbances 16 THE A B O'S OP BUSINESS may proceed from very remote causes. The sup- ply of paper pulp from distant forests has been known to fall so low as to threaten to suspend the publication of newspapers. Little general anxiety was felt. Perhaps there was occasion for none, but the danger called attention to our unconscious complete dependence upon the press for many things, among them daily market reports, with- out which all commerce would fall into confusion, as few would know the value of anything. It semns probable that the publishing and book-sell- ing businesses must have sustained considerable injury by the invention of so remote a thing as the gasoline motor or the motion picture camera, as these new recreations drew readers from the li- brary to the highway or the theater. Some of us, whose preference is for general business, employ our entire capital in that and so prefer to pay rent for the use of the premises, in- stead of investing capital in land and buildings. Others know nothing of business, so do their part by erecting buildings and providing housing for business and residence. If there is a scarcity of housing, tenants compete for its use by offering higher rents. These high rents attract more capi- tal into building and thus we are soon provided with an adequate supply of housing. As we get CHAEACTBE OF OUB BUSINESS OEQANTZATION 17 enough, or too much, rents come down again. This is the operation of economic law. It brings things into proper adjustment if let alone. The only way to get housing at a proper and fair rental is to pay high rent until someone provides more housing. If they provide too much, they will be punished for a while by too low a rent. Simple as all this is, we do not seem to under- stand it. When more housing is needed and the natural remedy is being applied in the form of high rents, we are very likely to call the legisla- ture together and pass a law forbidding high rents, or apply some other quack remedy that pro- duces just the opposite effect of the one desired, so great is our national ignorance about the intri- cate organization of our industrial plant and the laws which govern it. If a referendum election were held (in any American city afflicted with that system of government), to determine by pop- ular vote whether telephone rates should be re- duced from, say ten dollars per month to one dollar, there is no serious doubt that it would carry by a great majority. The consequences that would follow and the lesson learned thereby fairly illustrate the American method of taking a course of study in economics and industrial organiza- tion. And it is not confined to the average voter. 18 THE A B C'S OP BUSINESS A Boston banker who, every year, loans money upon the security of wool lying in Boston ware- houses was recently attracted by the higher in- terest rate obtained by a banker friend in Flag- staff, Arizona, but upon learning that the Ari- zona bank's security consisted of sheep walking about for months through a vast range of moun- tains, he viewed the loans as simple western in- sanity. What he said was that back in Boston they would **just as soon loan money on a shoal of shad out in the bay/' And yet he is in gen- eral a very intelligent man. He simply did not realize that he and the Arizona banker were both really in the business of producing wool clothing. They are both a part of that industry. Each knows only his trifling part of the industry, which is to extend credit against wool at a particular stage of its progress from the sheep range to the retail clothing store. During the war there was great uneasiness in California because the people of that state were continuously paying the Government vast sums of money for bonds and taxes, and the Government was spending it all in the Eastern munition cen- ters. California was expecting to be thus com- pletely drained of money, and yet the opposite happened. The process afforded a perfect oppor- CHABACTEB OF OUB BUSINESS OBGANIZATION 19 tunity to observe the workings of the American industrial plant, regarded as a whole, working under that fundamental principle of modern in- dustry known as the division of labor. It is true, of course, that the completed guns were delivered to the Government and paid for at, perhaps, Bethlehem, Pennsylvania, and a man- ufacturer there received the final purchase price in money, but before receiving it he had already paid out nearly all of it for labor and material. The money he had spent for material and the money his workmen had spent for things to wear and eat had already reached nearly every state in the Union. Even what remained to the manu- facturer probably went to the holders of his bonds and stocks, and these might reside anywhere. Most of what he received was paid to workmen and they spent most of it within the same week for things produced in distant places. The thing is so complicated the human imagination can hardly follow it. When an employee of the Bethlehem Steel Company does so simple a thing as use a match to light his pipe, he has spent money in numerous localities. He has paid some Northern state for the wood in the match, a Southern state for the chemicals in the match head. His cloth- ing came from Southern cotton or Idaho wool; 20 THE A B C'S OF BUSINESS his food perhaps from the Pacific Coast. Every state in the Union takes part in the manufacture of virtually everything that is produced by in- dustry. It, therefore, turned out (though it is but little understood) that California got part of its bond and tax money back again by selling beans to a miner in Arizona, who produced cop- per that was finally turned into a shell casing at Bridgeport. The important fact is that, under the principle of the division of labor, we profit most by producing those things we can produce with the greatest economy and abundance. The simple fact is that American business is nothing but the work all of us are performing every day, each according to his choice. In do- ing this work we have only one purpose : namely, to produce food, clothing, shelter, and some addi- tional conveniences, decencies, and luxuries, and to divide and distribute these among ourselves and live upon them while producing more. Naturally there is nothing to divide and live upon except what we currently produce; unless we choose to divide and consume the plant itself and thus re- store America to the condition in which Columbus discovered it when inhabited by Indians. The natural resources of America were as great then as they are now. We live better than the Indians CHABACTEB OP OUR BUSHfTESS OBGANIZATION 21 only because we produce more. We produce it from the very same sources, but we have increased the output partly by building up a great mechani- cal plant (the investment of capital) to do most of the work, instead of merely usiug our naked hands, and partly by training each man to pro- duce one thing only, in great quantity; relying upon others to supply him with everything he needs in exchange for his own output. In its simplest terms we might imagine a great national market place, to which each man goes and deposits there the thing he has produced in great quantity, satisfying his own needs by carrying away a small quantity of each of the innumerable things that others have brought. Most of the confusion of thought about business seems to have begun when we gave up the simple practice of barter at the market place and passed into the more modem and complex usages of com- merce. At that time we invented a new standard- ized tool known by the name of money, and its purpose was to facilitate our exchanges. We stopped trading things for other things and began trading things for money and the money for the other things. We thus got to thinking and talk- ing of everything in terms of money. We are still bartering things for things just as essentially as 22 THE A B C'S OF BUSINESS we always did, but because we never see but half of the complete operation — money standing al- ways in between — ^we have lost all realization of the simple truth that we are still trading things for things and that money is a mere tool, and we have come to regard it as an end in itself. And, to make matters worse, money, like most other in- ventions, has had improvements made upon it in the form of paper tokens, credit instruments, and bookkeeping entries which are used in place of it, and these have still further disguised the real nature of money and obscured the truth about our real transactions. The essential and important thing about it all is that we simply produce goods and services and trade them for other goods and services, and we can only divide among ourselves in this way what our united efforts have produced. We have national prosperity or poverty as we produce much or little. The thing that has distinguished America as an industrial country is the great abundance of its production of wealth in proportion to its popula- tion. Aside from certain personal qualities, such as inventiveness, resourcefulness, and adaptabil- ity, inherited from Americans who, for several generations, developed those qualities by pioneer- ing the wilderness that lay west of them, this CHARACTER OF OUR BUSINESS ORGAITIZATION 23 great productive power per inhabitant is due to the unequaled extent to which we employ tools, machinery, and equipment. No other nation util- izes so many mechanical horse power per man. Billions of tons of freight and endless passen- gers require to be moved from place to place, and the performance of this task, of indescribable magnitude, by the two million men who are em- ployed in the railway service, has been made pos- sible only because for each man so employed we have invested ten thousand dollars in railways; yet so little do we heed the significance of this that our popular attitude toward this twenty billion dollars of railway capital is one of resentment and hostility, and we normally starve it into a state of dilapidation. This, then, is the highly complex and delicately adjusted business organization we are operating in America. When it gets out of adjustment and slows down, as all complicated machinery does when out of adjustment, few understand what has happened, what may be expected to happen next, or what to do about it, and there is much suffering. Notwithstanding such examples as that of Russia, which would certainly seem to carry adequate warning against hasty and radical attempts to alter the existing social and industrial struo- 24 THB A B O'S OP BUSINESS ^ ture, every period of temporary industrial dis- tress brings forward well-meaning proposals of unsound economic, financial, and political doc- trines. Their enactment into laws is urged with all the zeal and courage of ignorance. They are gravely dangerous because of the very sincerity of their well-intending advocates. They are utterly incurable except by education in business, in eco- nomics, in sociology, and in government. CHAPTER II THE MISUNDERSTANDING OF MONEY Pbobably no single thing has done so much to confuse and bewilder ideas about business as the misuse of the word money; and not merely the misuse of the word, but misunderstanding of the real nature of the thing itself and its place and use in industry. It is the habit of almost every man to consider himself a free and untrammeled creature, working quite independently at some monotonous occupa- tion which he has chosen in exchange for money. The business world for him ends there. With the money he goes out to buy things from strangers. The doing so seems to him a separate act, being in no way a part of his own business occupation. The fact is, however, that in buying those things he is merely being paid for his own work. He is simply in the act of collecting his real wages, and finding out how much he was actually paid. He helped to produce all those things and is now be- ing handed his share of what all joined in pro- ducing. He thought he had been paid when the 26 money was handed to him, but he had not been. He did not even know when he received the money how much he was being paid. He only learned the amount of his real salary when he finally had it handed to him in goods. The money that he was temporarily carrying was only a token that entitled him to go to various shops and places and collect his real wages. His real wages were just his fair proportion of all the various goods we had all joined in producing. If we as a nation produced much, he received much. If we only succeeded in producing a little, or if we wasted a great part of it in war or foolishness or incom- petence, then his share became less. The amount of money was just one of the tools used in indus- try. It was a kind of conveyor upon which his real pay was carried to him from the grocery store, from the picture theater, or from the doc- tor's office. He could elect to take his pay in anything he pleased: food, clothes, amusements, services, or he could save his money and decide later, but sooner or later he is paid in things — ^not in money. The fluctuations that have taken place in prices make this plainer than it used to be. The man always speaks of his occupation as if it were a thing by itself and the aim and end of it all were THE MISUNDEESTANDING OF MONEY 27 to exchange it for a fixed amount of money. The fact is that the man is really taking part in the production of nearly everything. If a banker loans money to a baker to buy flour, then the banker is really producing bread. When the phy- sician restores the health of a temporarily sick butcher, he is not practicing his dignified profes- sion aboye the level of the common world; he is at the moment producing meat, and so is the car- penter who built the counter in the butcher shop. Of course the surgeon and the carpenter cannot be paid directly in meat, nor the banker in bread. To meet this difficulty, we have gradually evolved and adopted the practice of distributing little metal and paper tokens, and we call them money and have certain agreements and practices about receiving them from one another in exchange for goods. The next great source of confusion about money is our loose use of the word, our failure to understand what money is and where it comes from. Strictly speaking, the only money in Amer- ica is gold (a limited amount of silver, unimpor- tant, however, for the purposes of this discus- sion). Of this gold there is perhaps three billion dollars, and most of it lies in bank vaults, for the sole purpose of being used to pay deposits or 28 THE A B O'S OF BUSINESS notes in case anybody really wants them paid in actual gold. The gold, in other words, is held in reserve for this purpose, and so these great stores of it have come to be spoken of as bank reserves. The gold used in this way renders the country a money service probably ten or twenty times as great as it could render if it were in circulation from hand to hand. Prior to 1914 this gold re- serve was subdivided among about twenty-five thousand banks in the United States. Since the creation, in about that year, of the Federal Re- serve System, each of these twenty-five thousand banks (except a few which are not members) has deposited its gold in the nearest Federal Reserve Bank, of which there are twelve, with branches. It is still just as available to the banks as before they did this and by doing so they have multi- plied its effectiveness. So that there is a great store of gold in the vault of each Federal Reserve Bank. The relation between a Federal Reserve Bank and the surrounding banks in its district is prac- tically the same relation that exists between any bank and its customers. That is to say, a bank carries a balance on deposit with the nearest Fed- eral Bank and also borrows from it, if need be, by rediscounting its customers' notes at the Fed- THE MISUNDEESTANDING OF MONEY 29 eral Reserve Bank. This banking machinery so arranged undoubtedly constitutes the most per- fect and highly developed banking system in the world; also the most powerful in the service it can render. It is practically true, then, that the only real money in the country is gold and its amount varies but little except when it is imported or exported in settlement of trade balances with foreign coun- tries. Everything else that we speak of as money is in reality only bank credit. The amount of this is very great. It can be created to any extent necessary, subject to the limitation that it must not be created beyond the ability of the gold re- serves to redeem it upon demand. It exists in two forms, bank notes and bank deposits. They differ only in form. They are the same thing in substance and are interchangeable. Banks bring it into existence by the process of making loans. The borrowers to whom the loans are made put it out of existence again when they pay the loans. If a baker needs to buy $10,000 worth of flour and his bank balance is exhausted, he borrows that sum from the bank. The prevalent idea of this transaction seems to be that the banker loans him a particular $10,000 which he happens to have about him, probably having been recently brought 30 THE A B O'S OF BUSINESS in in money by some opulent depositor. The thing that really happens is that the baker signs a prom- issory note for the amount and the banker makes two bookkeeping entries. He charges '* Bills Receivable/' meaning that the note has now passed into the bank's assets, and he credits "Individual Deposits/' meaning that he has placed the amount of the note to the credit of the baker's account. By those two entries the bank's loans increased and its deposits also increased, each by the sum of $10,000. There was no money used in the transaction; nothing but ink. The bank deposits went up. The baker now speaks of having money in the bank. It is not money; it is bank deposits or bank credit. The circulating medium in this country is not money; it is bank deposits. It is created as in the last transaction. It circulates by the use of the bank check. The baker hands his check for $10,000 to a flour miller for flour and his bank's total deposits go down $10,000. The deposits of the miller's bank go up $10,000. During the ensuing month, the baker sells bread and every day deposits in his bank some checks given to him for bread by retail grocers. When his balance is finally built up about $10,000, he pays his note by giving his bank THE MISTTHDEBSTASTDIKG OF MONET 31 a check for $10,000. By this transaction the bank's loans have gone down $10,000 by the sur- render of the note, and its deposits have gone down $10,000 because in paying the note the baker reduced his balance by that sum. By such transactions as this do bank deposits rise and fall. Men see them rising and marvel at where all the money is coming from. There is no money involved in it. It is only the banks creating for the use of business men new supplies of credit that did not exist before. If they need it in the form of what they call paper money, or currency, for perhaps payroll or cash drawer pur- poses, it is all the same. The bank, instead of crediting the sum to the customer's deposit ac- count, hands him bank notes instead, but it is the same kind of bank credit in substance. It is created as needed and retired again when, after having circulated from hand to hand until it has served its purpose, someone brings it in to the bank and deposits it to the credit of his account. By this latter act it ceases to circulate as notes and is transformed into deposits. The amount of bank deposits and the amount of bank notes in circulation rise and fall according to the require- ments of business. These are not money, though 32 we all so call them. They are redeemable in money on demand if desired. Their limit of total expansion is controlled by the amount of gold in the reserve banks. Now in consequence of this misunderstanding about money, a strange thing took place among the American people in consequence of the war financing. By reason of the vast war transac- tions, principally by the Government, an unpre- cedented amount of bank credit was created. The Government expended it in purchase of goods and services, and thus it passed into general circula- tion. Being in possession of so much money we quite naturally felt that we had become rich (money being our popular conception of riches) and we spent it accordingly. The fact was just the opposite; instead of growing rich we were becoming poor. We were vaguely conscious of a diminishing supply of goods, as they were ab- sorbed into the waste and destruction of war, but that was not so plainly seen as was the abundance of money. Our real wealth was being destroyed, but so long as money was plentiful we were not only complacent but actually extrav£tgant. The waste of war has cost America tens of billions, not in money but in true wealth. We, as a people, are in consequence poorer by that amount. But THE MISUNDBBSTAITDINQ OP MONEY 33 the excess of mere money that was given to us in exchange for onr goods and our services so ob- scured the fact that we do not completely realize it yet. -.\ CHAPTER III WAGES AND WEALTH Regarding the distribution of wealth, there seems to be need of a clearer understanding, to be derived from looking at the essentials rather than at the mere appearance. Our present na- tional state of mind seems to include the sincere belief that the products of industry are not being justly apportioned between those who own the plant and those who work in it. We think the wages of labor should be greater and the returns upon invested capital less. (Naturally, if one is to be greater, the other must be less,| since we can- not divide more than we produce?) So far as can be discovered, this belief is more a matter of sympathy than of reasoning and calculation. Nothing need be added to what has been al- ready said to the effect that wages are really paid in things, not in money. The pay envelope or the salary check may not be exchanged for goods at once, but until it has been the holder of it has not yet received his wage and does not even know how much his real wage is to be. His 34 WAGES AND WEALTH 35 true wage, in the only form in which he can use it, consists of just his proportion of what we all produce by united effort. It is increased or di- minished accordingly, as we produce more or less. It is handed to him in the form of money, so he can choose the particular things in which he wants the world to pay him. Money is merely one of the tools of industry, like a monkey wrench; to be picked up and used temporarily. It is only used in accomplishing the exchange of things, or labor, for other things or other labor, and then passed on to someone else who will use it next. The whole question is one, not of money, but of goods. Our whole end and aim in industry is to produce goods and divide them among ourselves. Our proportion of the goods produced is our wage. Naturally, these wages can be increased only by increasing our total production of goods. We cannot divide more than we have. But it is claimed that in the division, the pro- prietor of capital, the owner of the plant, re- ceives too much. Some of us object to much profit going to him. Good salaries to the superin- tendents, yes. Perhaps a very large one to the general manager, who plans and directs it all. But what to the proprietor, who merely owns it! If he gets too little, most of the capital invested 36 THE A B O'S OF BUSINESS in the plant will be lost and destroyed just as com- pletely as war destroys it. If his plant is not allowed a fair profit, it will be abandoned and cease to produce wealth. No one will operate at a loss. If he gets too much, alert competitors will do everything necessary in the public behalf. But if one or the other must happen, it actually seems far more to the public benefit that he should get too much. Suppose he receives every year a very vast income in money. What is the economic func- tion of the capitalist in our industrial system! He cannot personally consume much of the coun- try 's goods. He eats and wears probably a little more than the rest of us. He wastes the services of a man or two in driving a car for his pleasure and beautifying his garden; also the services of a couple of women to prepare his food and keep his house in extra nice order. A little more wealth would perhaps be produced and we would all be richer if the man waited upon himself and re- leased these employees to become producers on farms or in other creative industry. That, how- ever, is nearly the limit of his wrongdoing. In that way he may obtain possession of, and use up, a little more than one person ^s share of the forty or fifty billion dollars' worth of goods and ser- vices that we all (including him) united in pro- WAGES AND WEALTH 37 ducing. That is about as far as Nature makes it possible for him to go, and most of his vast income is still unspent. It may be that this man ought to live after the style of a penitent monk and make his life a drab and cheerless period of frugality and self-denial. The rest of the world would be a little richer by the saving of what he wastes. But even in the very heaping upon him of this enviable abundance of enjoyment and benefits, it seems that Nature has served a beneficent pur- pose. Desire for these very things, kept alive by the daily reminder that they are within reach of the successful, is the main force that drives for- ward human progress. If it were the custom for the successful to live on a meager diet in dark tenements, ten million eager young American men, whose promised achievement is the sole hope of our future, would turn their backs upon all thoughts of success and embrace idleness. In view of these things, it is rather remarkable that some legislature has not repealed this law of Na- ture. As a people, we would be likely to carry at the polls by an overwhelming majority a referen- dum prescribing hovels and rags for the success- ful and forbidding enjoyment except as the re- ward of failure. In an ideal society, such as may be attained in 38 THE A B O'S OP BUSINESS time, the possessor of great wealth will probably live, as many now do, in enough comfort and en- joyment to serve the useful purpose of incentive to success among the rest of us, but without abus- ing the privilege in the offensive manner prac- ticed by so many of our rich of the less cultivated and enlightened type. Our widespread resentment against the capital- ist, on account of his all-too-frequent abuse of personal power and privilege, has so confused our ideas that we include in this resentment the very institution of capital itself, and as a people we retaliate upon capital (a thing) because we dis- like the occasional capitalist (a person). This very confusion of thought upon the subject seems to be the cause of most of our disputes about cap- ital and labor. To most of us the word capital merely suggests the brutal-looking individual pic- tured in the familiar newspaper cartoon. He is but one of the temporary phases in our great in- dustrial progress; acting that way only until he learns better, and doing that very rapidly. The word capital ought to suggest to our mind no individual at all, but something like a railway, a merchant vessel, a telephone system, a factory building full of machinery, a harvesting machine, a steam shovel, or a screw driver. WAGES AND WEALTH 39 Bnt why should all the capital be owned by a few men? In the first place, all that they own is bnt a trifling part of the vast quantities that have been produced. The rest of our enormous pro- duction we have consumed or destroyed as we went. The capital now in existence, even great as it seems, is simply the relatively small remainder that we, as a people, have preserved. It is in the hands of those who now hold it for various rea- sons. The largest of them are trustees we have appointed for the purpose, such as life insurance companies and savings banks. Every holder of an insurance policy and every depositor in a sav- ings bank is a capitalist, none the less because he wisely leaves the management of his capital to the company or the bank. So is every owner of a farm, a home, or a mortgage, of a stock of mer- chandise, a bond or a share of stock, a motor car or a set of tools. The stockholders and bondhold- ers of our railroads, banks, and business corpo- rations are numbered by the million. Some of our railways are said to have a greater number of stockholders than employees. Their stocks and bonds, deeds and mortgages, pass books and in- surance policies, are merely convenient forms of title papers which evideja^jp the ownership of ijapital jiBelL 40 THE ▲ B O'S OF BUSINESS We are a nation of capitalists, yet hating a thing we picture to ourselves as **capitaP'; ham- pering it at every step because it has come to be represented in our mind by the occasional million- aire with rude manners, foolishly extravagant habits, and a tyrannical disposition to misuse his power. Millionaires of this type do exist. People exactly like them by nature are also just as numerous in most other branches of society. But the flagrant and objectionable thing about the capitalist is that he owns the plant and derives a very great income from it. There are those who claim he is not entitled to this income in the first place. If so, then it should be distributed, upon some just principle, among the rest of us. We are reliably told by statisti- cians that, if this were done with all the large in- comes in America, the average person would re- ceive but a trifling pittance. So that even if we were entitled to have that done, it would not bene- fit us appreciably. Being a small sum for each of ns, we would, of course, spend it, with rare excep- tions. But failing to distribute his surplus income in that way, the capitalist must find some other dis- position of it. Being like the rest of us, his nat- ural impulse will be to try to make more money WAGES AND WEALTH 41 with it. This will generally take the form of loan- ing it to whomever will pay him the most interest for its use. The man who can afford to pay the most for it is necessarily going to be the man who can make it produce the most. Generally speaking, that will cause it to be employed in producing something the world will pay a high price for, just for the very reason that that par- ticular thing is at that moment the world 's great- est and most pressing need. Therefore, the nat- ural motive of private selfishness on the part of the capitalist causes the world's surplus capital to be applied where it will do the world the most good. It was new capital, created and left un- spent during the preceding year. It was saved by the capitalist, just because there was no way in which he could spend it. He loaned it to a man with ideas, courage, and enterprise, who built with it perhaps a new factory that did not exist before. This factory then began to produce new goods that could not otherwise have been produced. It competed with older factories for the services of workmen and probably raised their wages in order to get them. It reduced the cost of living by increasing the quantity of goods. The capitalist, in all this, seems to have done no harm and to have been the innocent and unsuS' 42 THE A B C'S OF BUSINESS pecting tool of a great natural force, of which he was not even aware. When asked what he did with his income, he probably did not fully realize that in obedience to a natural law he had put it back into the enlargement of productive industry ; he probably just said that he bought bonds with it. That was the form it took to him. He does not know it, but in reality organized society has grad- ually evolved him and set him up as an institu- tion for providing ourselves with more machinery and tools with which to produce wealth. Now why could not all his income have gone to the rest of us or to the workmen, and still have been invested in the bonds just the same, but thus permitting the bonds to be widely owned among us all, instead of so much of it going to one? If that had been done and every one of us had saved the trifling sum we thus received and had bought the bonds with it, then it is true that we would have reached the happy situation all sympathetic people hope for in behalf of labor. But the amount coming to each of us would be so small we would surely consume instead of saving it. Virtually none would be saved. Hence no new capital would be created. Hence industrial prog- ress would cease. Stagnation and decay would follow. The production of goods would decline, WAGES AND WEALTH 43 prices rise, and poverty ensue. To be sure, we would all have received for one or two years this trifling increase in our yearly income and would have enjoyed spending instead of saving it, but what would that avail us when we saw our whole industrial plant, railways, factories and all, de- caying into unproductive ruin for lack of the capi- tal no one had saved? In other words, our indus- trial life will decay into ruin if new capital is not continuously put into it. The only new capital obtainable is what may be saved out of our total current production of wealth as we produce it. Most of us consume our entire share and will not save. A very high authority recently said, in sub- stance, that if the two million railway employees in America, who receive about fifteen hundred dollars per year each, would set aside fifty dol- lars each, they could, with the total so saved, buy a controlling interest in the outstanding capital stock of the New York Central Railway System, and if they would each save fifty dollars per year they could, in five years, buy a like control of all the railway systems extending from Chicago to the Atlantic seaboard. No one expects them, however, to do this, or to save at all except in rare instances. The capitalist is the fruit of our industrial ex- 44 THE A B C'S OF BUSINESS perience. He is the only contrivance, except the savings bank and the insurance company, by the use of which we have succeeded in accumulating much capital ; and it is only by obtaining and using capital that we have risen out of the cave and the wigwam. It has been proved that the only way we, as a people, can save enough capital to insure the continuance of our industrial life is to put so much income into the hands of one man that he cannot consume or destroy it, and thus cannot help saving it. After saving it there is no place it can go except into industry. In this way we get it saved, which is the important thing to America as a whole. Just who saves it does not matter much. Saved and employed in productive industry, it serves all of us about equally well, no matter who owns it. The obstacle, then, to an equal distribution of wealth is simply our lack of intelligence and thrift. Wealth drifts into the hands of the few because the many will not save it, even if paid to them. In the hands of a few, it is actually saved because there is no way for them to waste so much of it. In this way the drifting of great wealth into the hands of a few is really the only thing that saves us from industrial ruin. It seems to be a scheme contrived for us by Nature, because it is fool- WAGES AND WEALTH 45 proof. It is not perfect. It has abuses. We have not succeeded very well in correcting many of them by law; perhaps Nature will correct even those for us in time. The system has worked well. Upon it we have become a great, rich, powerful, moderately contented people. Until the war all classes of us have been steadily becoming better off, as we have perfected and enlarged our indus- trial plant and made it produce more and more goods for our consumption. After all our abuse of the capitalist, we shall some day learn that he is an innocent part of our highly complicated organization^ put there by Nature to render us a useful and valuable service. If we destroyed him or any other essential part of our industrial machinery as it exists, we would come to dire grief, just as they have done in Russia. The existing system, if let alone, wiU slowly but steadily benefit us all. Some day we shall come to understand it, and when we do we can make it far more productive. This view may be mistaken as being a plea in behalf of capital and against labor. It is just the opposite of that. It is a plea in favor of the greatest possible accu- mulation of capital for the use and benefit of labor, by the only method that can be employed until labor has learned to save and to invest. 46 THE A B O'S OF BUSINESS As opposed to this view, there is set up, by champions of the supposed cause of labor, merely a blind demand for more wages. Probably all right-thinking people cordially desire that labor shall receive more wages; but proposals to pay them by depleting our capital, already heavily de- pleted by war, are simply proposals that we shall eat up our tools and machinery and go back to producing with our naked hands. They are pro- posals that rest merely upon sympathy for labor, and it has been wisely observed that sympathy without understanding is always ineffectual and usually injurious. A demand for increased wages does not merely raise a question between the employee and his em- ployer. It is really a demand made upon all of us, that this particular employee shall receive a larger proportion of what the entire American business organization produces, though it calls upon his particular employer to get it for him. The employer can do this only by trading off the goods he makes for a larger quantity of the kind of goods the rest of us make. He does this by raising his price, because money has to be used in doing it and so it all has to be expressed and talked about in terms of money. But the claim is that the employer should not raise the selling WAGBS AND WEALTH 47 pnce of his goods, but should pay increased wages by correspondingly reducing the amount which he has been receiving as interest upon the capital in- vested in his plant. No one wants him to get too large a return upon the capital invested in his plant and if he tries to and succeeds for a while, the economic law will punish him for it. He cannot possibly conceal from an alert world the fact that his business is yielding attractive profits, and enterprising in- vestors will promptly enter the same business to secure them also. It is a fortunate law that draws capital where the most can be earned upon it, be- cause, in the long run, that results in its being employed in industries that are the most produc- tive of new wealth and withdrawn from those which, producing the least, are of the least public value. Perhaps two or three new establishments, in addition to the one that is making too much profit, might suffice to furnish enough competi- tion to bring the profits down to normal, but when two or three discover the opportunity perhaps twenty or thirty do also. They all consequently enter that particular business at once, and com- petition among them to make and sell the same commodity forces down the price of it, and so the abnormal profits the original employer had been 48 THE A B C'S OP BUSINESS making are taken from him. And when his com- petitors entered the business and had completed their buildings and installed their machinery, they cast envious eyes upon his experienced employees and got them by paying them the increased wages which they knew the abnormal profits of the busi- ness would make possible. Especially was this true of the employees who were conspicuously worth the most by virtue of intelligence, character, and industry. The natural laws of industry, under which our entire nation has been gradually built up to its present greatness, are apparently so comprehen- sive that they in due course invariably compel every man and every industry to pursue a course that is in the interest of public welfare. As a peo- ple, we are slowly beginning to perceive this and to grant ready approval to the new slogan, **He profits most who serves best." Suppose, now, that our employer, unable justly and fairly to raise the selling price of his com- modity, nevertheless timidly yielded to the de- mand of his employees for higher wages — a de- mand upon him that was unjust because it took away from him a fair return upon his actual and real capital invested in his plant. He would con- sequently be unable to pay the usual dividend WAGES AND WEALTH 49 upon his stock, or perhaps even the interest upon his outstanding bonds. The owners of the stock would see it fall at once in public estimation, or market price, to perhaps a fraction of its former value. The savings bank or life insurance com- piany which had bought his bonds (these institu- tions being the greatest of all investors and simply investing funds they hold in trust — perhaps, among others, funds of his very employees) would also feel an immediate loss upon them of a sub- stantial part of the investment. Having defaulted in the payment of interest upon his bonded debt, the employer's credit, at his bank and elsewhere, would be at once destroyed and, being deemed un- safe and so deprived of credit, he must reduce the output of his business down to a volume he can pay for with his actual cash. On so dimin- ished a volume of business, his cost per unit of product would be increased and his losses thus become greater. The employer having defaulted in the interest upon his bonds, the bondholders would, of course, foreclose their mortgage upon his plant. The value of his capital stock would thus be wholly wiped out as a complete loss. The plant, having been proved unprofitable and hence worth little, would be sold under foreclosure. The bondholders would receive only what the plant 50 sold for under foreclosure and thus sustain a par- tial loss. The plant, being proved incapable of earning a profit, would be closed, for of course no one would operate it for pleasure or just to pro- duce losses. This being plain to everyone, it would have been bought at foreclosure sale by a speculator in junk who would sell the machinery for scrap and dispose of the building to someone for a warehouse. The employees, who had thought capital ought not to receive a just. return, would be seeking employment elsewhere, perhaps to do the same thing again, because about this chain of events they had not the slightest under- standing. Suppose, now, that the invested capital in the plant received a large return, large enough to give the employer high credit and yet not large enough to excite the cupidity of others and attract dis- astrous competition. Being successful, and so hav- ing the confidence of the public, of the investors and of his bankers, he could give to the business (and to the world) many benefits. He could bor- row new capital on favorable terms to install bet- ter machinery or to enlarge the plant. He could secure ample credit at low discount rates to carry on a large volume of business. Having by these WAGES AKD WEALTH 51 methods lowered the cost per unit of his product, he could render the highest of all business ser- vices, that is, to serve the world with more and better things at less cost. By a perfectly wise and just apportionment of what he had thus saved, he could do this and also distribute higher wages and increase his own profits beside. America is well provided with men who possess sound ideas and meritorious plans which are lying unutilized. Vast projects which, if realized, would be capable of producing much wealth and of fur- nishing abundant employment for labor, lie dor- mant. The reason usually assigned for our fail- ure to carry such projects forward is that we can- not get the money. In truth there has been no scarcity of money (using the word in the ordi- nary sense) but recently rather too great an abun- dance of it. The thing really needed and really scarce is capital. It is capital of which we have not enough, because we have not saved any con- siderable part out of our immense annual pro- duction. It is for lack of capital that the whole world stagnates, and yet we hear constant clamor for dividing the little that there is among work- men in increased wages to spend. America, just because it among the nations pos- 52 THE A B C'S OF BUSINESS sesses capital in comparative abundance, is glori- fied throughout the world as the only rich and prosperous country. Europe (though flooded with the thing we call money) is destitute, because its capital has been dissipated by war and waste. We are called upon by all the world to loan it capital and yet we ourselves need infinitely more than we have. Had we but sufficient capital in the form of tools, factories, power plants, and current wealth seeking investment in more of such equipment, new enterprise would spring forward and we could produce such an annual abundance as would give every workman high wages indeed, in the form of better, cheaper, and more plentiful subsistence. But instead of seeking relief properly by con- serving our capital, we do the opposite. In a futile attempt to stimulate industry, we encourage the undertaking of unnecessary and often unpro- ductive public expenditures by states and munici- palities, as being a good thing to do during hard times by way of furnishing employment. If the mere furnishing of employment were the goal, men could be employed to swing Indian clubs, but it should hardly be done in preference to swinging hammers in productive industry; and yet we de- liberately impede our own progress toward eco- WAGES AND WEALTH 53 nomic recovery with vast offerings of state, munic- ipal, and other public bonds, to compete in the market for capital against productive industry, which is starving for the lack of it. CHAPTER IV THE ELEMENTS OF BANKING Until recent years, banking seems to have been considered purely a private enterprise, conducted principally for profit, after the manner of pri- vate business in general, little regard being paid to the idea that a bank owed any duties to its cus- tomers other than to be honest, to publish true statements of its condition, and submit to govern- ment examination. The more modem view seems to be that banking is a public service. This being undoubtedly the correct view, it seems important that the nature of the business should be more widely understood and the obligations of banks and customers to one another more clearly defined, and that every customer of a bank should fully understand what service he and the other cus- tomers are now receiving and have a right to ex- pect from the bank; and also, what the bank's rights are. This is all pretty well established by customs which are the outgrowth of experience, but they are poorly defined at best and the rea- sons for them are not universally understood. 54 THE ELEMENTS OF BANKING 55 The operations of savings banks are much sim- pler than those of commercial banks. In reality, a savings deposit should be classified as an invest- ment rather than as a bank account. A savings bank is not so much a bank, in the broad sense, as it is a standard public investment. The wise in- vestment of money is an art which few live long enough to learn. The average investor has to deal with small sums, in odd amounts, and at irregular intervals. He is without experience or education in the selection of investments and, too, there are almost no suitable investments for such sums. In trying to find them the investor usually loses at least part of the money. It may be said that he buys experience, but without buying enough of it to do him much good. The savings bank affords him an immediate investment for any amount, large or small, even including the odd cents, and it bears interest from the date of deposit. It is a safe investment, requires no investigation or study, pays almost as high an income as the very highest grade of investments pay the world over, and can be converted into money upon reason- able notice, and without loss or shrinkage. To maintain an institution that affords the pub- lic this kind of an investment for its savings as they accumulate, is a suflScient public service, and 56 THE A B C'S OF BUSINESS the savings bank's duties to the customer end here. The permanent nature of these savings de- posits and the necessity for paying liberal interest upon them, allow, and even require, that the bank shall place them in investments of a rather per- manent character, and it necessarily results from this that the depositor could not reasonably ex- pect to withdraw his deposits (even though occa- sionally allowed to do so in moderation) without giving ample notice; and neither should the sav- ings depositor consider that, in addition to receiv- ing interest, his deposits in a savings institution give him any implied or preferential right to bor- row from it or expect it to perform other ser- vices for him, such as paying his checks, keeping his accounts, or collecting his debts. The commercial or business bank is a totally different style of institution. Its relationship to the community and its customers is far more in- volved, more intimate, and not so generally under- stood, and must needs be discussed at greater length. It is the kind of institution people have in mind who speak of banking as being the hand- maid of commerce. It is more often than not the familiar thing we know as a National Bank. Its oflSce, in our scheme of business organization, is to supply credit required temporarily in trans- THE ELEMENTS OF BANKING 57 forming one kind of goods into another kind and in transferring goods from one owner to another one. From an economic viewpoint, the service of a bank (meaning always a commercial bank) is not unlike the service rendered by a railway. It furnishes credit on which goods are carried for short periods. Most of the confusion of thought about banking, of which there is a great deal, is due to the way in which we use the word ** money '* when we really mean credit. One speaks of his bank balance as money in the bank. It is not money ; it is a debt the bank owes him, payable in money if desired. It is, strictly speaking, bank credit. If he draws it out and is paid in bank notes, those also are bank credit. Bank deposits and bank notes are entirely alike in substance and effect. They dif- fer only in form. Neither one of them is money. Correctly speaking, the only money there is in America is held in reserves to redeem the Na- tional Bank notes, Federal Eeserve notes, and bank deposits, which are our real circulating me- dium. These latter are all credit instruments. By creating them and using them as money, we find it possible to provide ourselves with all the so- called money our business uses require. We can create as much of it as necessary, if we do not 58 expand it too much in proportion to our gold re- serve. It circulates freely among us at par, be- cause we know it can and will be redeemed in gold if desired. Bank credit, then, is really the principal cir- culating medium of exchange. Its destruction would entail consequences impossible to imagine. Even a slight contraction of it (the condition com- monly spoken of as tight money) threatens a busi- ness convulsion. Banks create it by exchanging their own credit, which is good anywhere, for their customers' credit, which must be good but is so little known that it will not circulate. The customer's credit is simply converted into bank credit by an exchange of papers and a book entry. The customer speaks of this bookkeeping balance, created in this simple way, as money in the bank. Inside the bank, however, the language is differ- ent. The thing the customer calls ** money in bank,'' the banker calls his ** deposit liability." To him it is not money, but a debt he must pay whenever the checks are presented. He must not create too much of it. He cannot go on increas- ing it indefinitely. The limit is fixed by the amount of real money that can be kept in the bank reserves. This limit is severely contracted, when- ever the timid and the ignorant draw gold from THE ELEMENTS OF BANKING 59 the bank and hoard it or use it in circulation. It can be increased only by depositing more coin in the banks, or by contriving improvements in the banking system that will make the cash reserves more efficient and capable of supporting safely a larger amount of bank credit. Exactly the latter was accomplished by the es- tablishment of the Federal Reserve Banks. In a general way, these institutions do for the national banks just what the banks are doing for their customers. They thus greatly increase the bank- ing power of the entire system. They hold most of the cash reserves of the country and thus make them always available where most needed, so that a bank which has for the moment a heavier credit demand than its reserves will support can con- vert some of its loans into reserves at the Fed- eral Reserve Bank until the pressure is relieved. The banks of a city lose deposits when the peo- ple of that city are buying from the outer world more than they are selling to it, and consequently paying out (through their banks) more than they are taking in ; or, in other words, when the balance of trade, or money movement, visible and invis- ible, is against that city. The balance of trade or money movement against a city must be paid by the banks of that city out of their reserves at the 60 THE A B O'S OF BUSINESS Federal Reserve Bank. Formerly (before the Federal Reserve Act) this loss of reserves com- pelled them to shrink the amount of their loans. This resulted in what is called tight money in that city. Money being tight (that is, borrowers un- able to obtain bank credit) business men were compelled to restrict business activities which in- volve expenditures and purchases; and when, in consequence of this, the purchases from outside the city had been sufficiently reduced so that the balance of trade turned again and became favor- able to the city, the lost reserves came back to the banks and they were then enabled to again ex- pand their credits by making new loans. All this was unnecessary and highly injurious. It was simply due to our former inadequate banking laws. In contrast with such conditions, the great benefit of the Federal Reserve System becomes easily evident as the banks of any city, if they are members of the Federal Reserve System, are now able to tide over a temporary, or seasonal, un- favorable trade balance of this kind by tempo- rarily rediscounting some of their paper at the Federal Reserve Bank, thereby replenishing their reserves out of the immense reserves the Federal Reserve banks hold for just such purposes, and thus are able to avoid subjecting the entire city THE ELEMENTS OP BANKING 61 to the evils of a sudden contraction of the circulat- ing medium. From this it is apparent that each bank is compelled to see that the loans it makes to its customers, so far as possible, are of a kind that will be eligible for rediscount at the Federal Eeserve Bank. It is said, then, that banks constitute, or ren- der, a public service. They create and furnish to the public a circulating credit more useful and convenient than money and several times greater in amount than the total money supply of the country. A customer obtains this credit from his bank by exchanging with the bank his own note for the bank's credit, in the manner described. To become entitled to this privilege, he must es- tablish his own credit. He must satisfy the bank that his own note is good, and otherwise do his part in strengthening and supporting this entire credit system. The very foundation of the cus- tomer's credit is knowledge by the bank that he is the kind of man who, if he gives his note or promise, will certainly perform it. It rests, in other words, uponr character, without which, of course, no credit can exist. He must next satisfy the bank that he not only intends to, but is able also to, pay; and not merely pay sometime, but pay when the note is due. This is partly accom- 62 plished either by depositing security with the bank or giving it a correct detailed written statement of his business condition and the nature of his business operations. It is even usual now that this statement shall be certified by an independent auditor or accountant. But even to customers who meet these require- ments, the bank can only extend a total credit which is limited by its total cash reserves, and these can be increased only by actual money which comes to the bank from newly coined supplies, from other cities, other banks, or from private hoards ; and being thus limited, the bank must so deal with all its customers as to make its total available supply of credit go around among them equitably. No customer, then, should be allowed to borrow more than his fair proportion. This is measured by what he does to support and assist the bank. The simplest evidence of this is, of course, the amount of the average balance he keeps on deposit, but it is also tested by the promptness with which he pays his loans and the extent in general to which he aids the bank in de- veloping its own strength and banking power. In a rough way, then, the bank can extend credit to customers about in proportion to what they do to support and maintain this credit structure. The THE ELEMENTS OP BANKING 63 homely and practical expression of this is to say that the banks can best help those who help the banks. There is one further qualification. The bank can safely and properly loan the most to cus- tomers who borrow for the shortest time. The use- fulness of bank credit is greatly increased when it is borrowed by a customer who uses it to serve a temporary need and promptly repays it to the bank, to be used in turn by another customer, so that a given sum is used by several different cus- tomers in succession in the course of a year. De- posits created out of loans of this character are responsive, elastic, and serve the whole commu- nity. A permanent standing loan of bank credit to one customer is something like cash hidden in a safe deposit box. It is withdrawn from useful circulation ; it impairs the usefulness of the bank and prevents it from serving its other customers. A bank cannot create a line of satisfactory, elas- tic, circulating credit out of a sodden mass of long time, or sleeping loans. The bank, then, in order to be of the highest usefulness in the community, must extend credit to the customer who is known to be of high character, who is amply able to pay when due, who does not try to ]5orrow more than his fair proportion or for too long a time, and who does his full part in cooperation with the 64 THE A B O'S OP BUSINESS bank and strengthening it as a vital agency in the business life of the community. It is thus seen that the most important service the bank renders the public is practically to mul- tiply the money supply, and this service benefits the non-borrowing customer, for even the non- borrower's bank balance is nothing but bank credit, which has been transferred to him by the writing of a check. Probably the next most im- portant service lies in receiving, as deposits from its customers for immediate credit, checks drawn on other banks, often in distant cities. The value of this collection service is little understood. It can be best realized by thinking out some other good method of converting these checks into im- mediate cash without using a bank for the pur- pose. But the important economic function of a com- mercial bank is really that of a carrier. A bank extends credit to perhaps a cotton planter (speaks of it as loaning him money) by receiving the planter's note and entering the proceeds to his credit. If the planter uses part of it to pay for seed, he sends his check to the seed dealer, who is thereby enabled to pay off a loan at his own bank which he had previously made for the pur- pose of buying and carrying seed. If the planter THE ELEMENTS OF BANKING 66 uses part of it to pay cotton pickers, he draws that out in bank notes, and that part of the amount be- comes transformed from deposit credit into note credit, going out of existence as one and coming into existence as the other. The two are exactly the same thing in different forms. The bank notes are paid as wages to cotton pickers, who probably spend them at the store for groceries. They are then promptly deposited at the bank by the grocer to the credit of his account. They thus pass back into the bank and so out of circulation as note credit. Having been deposited by the grocer, they once more become deposit credit in the grocer's account. The planter finally sells his cotton to some cot- ton buyer in another city and receives in payment a transfer of credit to him, perhaps by receiving a check, or perhaps by sending through for col- lection his own draft on the buyer with a cotton bill of lading attached to it. The planter, upon depositing the proceeds of this sale to his credit in his bank, draws against his balance a check in favor of his bank and pays his note. His note is returned to him and the credit, or deposit, which was originally created for him is thus liquidated, having served its purpose. In the meantime, the cotton buyer's bank has created a credit for him 66 THE A B O'S OF BUSINESS (loaned him money) with which to buy and carry the cotton until he sells it to a manufacturer of cotton cloth. This credit will also be liquidated in turn when the manufacturer pays him for the cotton. But the manufacturer will pay him by ob- taining credit from some bank that he regularly deals with and the manufacturer's bank will now carry the cotton while it is being made into cloth, and until it is sold to a wholesale drygoods house. As the manufactured cotton fabric passes to a wholesaler and then, later, to a retailer, the bank that serves each one of these will create for him credit with which to pay for it, and each credit will be wiped out again by a subsequent sale. The carriage of this cotton on bank credit will end when the retailer sells it to the final consumers, each of whom buys only a small amount and pays for it out of his earnings, which he did not have to borrow. In this manner the bank credit, origi- nally created for the planter, has carried the cot- ton clear through to the consumer who finally pays it. All the credit needed was brought into existence at the required time and place and passed out of existence after it had served its purpose. The credit created by a commercial bank was necessary at every step. Existing entirely upon a foundation of faith and character and con- THE ELEMENTS OF BANKING 67 fidence, it cmmbles if these are shaken, and busi- ness suffers in consequence. In earlier years, under a more primitive banking system, our peri- odical breakdowns usually began with convul- sions in the credit system. CHAPTER V BUSINESS CONSEQUENCES OF THE WAB The war did three things to American business. The first of these is that it absorbed and wasted some tens of billions of our current and accumu- lated wealth in the form of labor and commodi- ties and we are now poorer to that extent. The broad economic fact is that the generation which conducts the war pays for it. Much has been said about placing the burden upon future generations; about financing the war entirely by issuing government bonds and allowing posterity to pay them. Posterity can only pay them to itself ; there will be no one else present to receive the payment. Posterity will be both the debtor and the creditor. The Government is, of course, mere machinery. To be sure, the Government will levy taxes upon later generations to pay off the bonds, but these later generations will also own the bonds and qo will receive their tax money back again in the form of bond payments. Not the same individuals, to be sure, but the same generation. Each individuaPs case is, of course, a 68 BUSINESS CONSEQUENCES OF THE WAB 69 thing by itself; some men will pay taxes and others will own bonds, but of the people as a whole, these things are true. The real cost of the war consists in simply the labor and material that were consumed and de- stroyed in conducting it. When the war is ended, these things are gone; the nation is that much poorer, and the war has thus been paid for. If we should thereupon at once destroy all of the war bonds that the United States Government has is- sued, the wealth of the nation would be no less. Certain individuals ' fortunes, to be sure, would be lost, and again other individuals would escape a long subsequent burden of taxation, but the people of the United States, as a whole, would have lost nothing. A government debt is not a national asset. By issuing bonds, then, some of the people simply borrow from others, but considered as a whole, they simply owe money to themselves. The Government only keeps the books. Through future generations the Government will each year collect from the people a large sum in the form of taxes, for the purpose of paying it back again to the people as bondholders. This will affect indi- viduals in proportion to their respective liability to taxation, and in proportion to the bonds they bought and kept. He, however, who saved dur- 70 ing the war and bought bonds with his savings, in- sured for his children that they should receive taxes instead of paying them. Excepting the repairs to our plant, subse- quently necessary, it is substantially true that we paid for the war, in labor and materials, as it progressed. The steel that peaceful industry would have fashioned into farm machinery or locomotives now encumbers battle fields. Copper that could have become wires for the transmis- sion of electric power was virtually destroyed as shell casings. The labor that in peace would have turned these metals into things of value was in- stead employed in producing only ruins and wreckage. Beside this actual destruction of current com- modities and waste of labor we wasted our fixed capital by allowing deterioration of our plant. It was overdriven during the war and, through scar- city of labor and materials to repair it, it was al- lowed to run down in physical condition. For illustration, it is said that some such sum as a billion dollars must be spent upon our railways within a year to restore them to their former con- dition. To the average man this piece of news means little. He may be vaguely interested in their ability to get so much money. He may per- BUSINESS CONSEQUENCES OP THE WAB 71 haps resent their asking for it. To another man perhaps it signifies more and he is gratified be- cause he sees that it will make active business in railway materials and equipment. But many of us forget that it is not enough that business shall be merely active ; it ought also to be of the produc- tive kind. This business of repairing a broken- down road is, to be sure, better than some kinds of business which are even less productive, such as manufacturing chewing gum or burying the dead, but it is not productive in the way it would be if the same labor and materials were put into the building of an entirely new line of railroad in some deserving locality. In the latter case, for a billion dollars spent in labor and material, we would be richer by the value of a new railroad. In the existing case, we only get for our billion dol- lars just the same railroads we had before the war. In other words, about half a million men who might otherwise devote the year to produc- ing new wealth, must instead work at repairing the damage that the war did to our railway sys- tem. The same is true of our factories, our pub- lic utility systems, and our American business plant in general. For years we must take men away from productive labor to repair damage. We are poorer by the total of all this. 72 THE A B C'S OF BUSINESS The second thing the war did to the highly com- plex machinery of American business was to throw it badly out of adjustment. It had been running smoothly and delivering an immense an- nual output of goods, because each part was do- ing just about all the other parts required of it. Coal was coming from the mines, ore from the ground, lumber from the forests, cotton from the fields, all in just about the right amount, and each of us found himself supplied at all times with the tools and materials for his particular work. The outbreak of war suddenly made all this system- atic organization behave like an orderly nest of ants that someone had poked with a stick. Mil- lions of men were taken away entirely or sud- denly shifted to other work. Machinery was de- voted to new purposes and sources of supply were interrupted everywhere. Naturally, there was a great loss of efficiency, which was partially, but not wholly, overcome by the extra zeal and energy which the war put into us. For three years since the Armistice we have been putting the machinery back into adjustment again, but it is still not geared up to capacity pro- duction. It is not turning out new wealth in the form of goods in anything like the quantity it will BUSINESS CONSEQUENCES OF THE WAR 73 produce when fully readjusted. This is the sec- ond form of war injury. The third serious thing the war did to us has to do with money (meaning bank credit). It be- came so plentiful and cheap that we became drunk upon it and are still suffering the consequences. When we began to mobilize and equip an army the Government needed a fabulous amount and variety of things. These were the very same things we had been using in ordinary civil life, though perhaps made up in somewhat different form. The Government had not enough money wherewith to buy all these things and no time to raise it by taxation. So it had to issue bonds. It could not directly trade us bonds for things, so it had to sell us bonds for money and then give us back the money again for the things. A man who bought ten thousand dollars* worth of bonds gen- erally borrowed the money at his bank on the bonds as security. In substance, he and the bank simply created ten thousand dollars in bank de- posits by signing a note and having the same figures that were written on the note also written on the credit side of his deposit account at the bank. It was new money that did not exist be- fore he signed the note. He at once transferred 74 THE A B O'S OP BUSINESS his ten-thousand-dollar balance to the credit of the Government in payment for the bonds. We all did this for about two years and in that way created perhaps fifteen or twenty billion dollars of new bank deposits, and they mostly still exist as such. This amount of money (as we use the word) was created by the public, transferred to the Government in exchange for bonds, and then transferred back to the public again in payment for things. It was not the best way to finance the war, and a few eminent economists told us so at the outset, but no one paid any attention to them, because the hard-headed business men said they were wrong and that we must have business as usual. They said if the people were expected to finance the war they must be permitted to make money, and in order to make money business must be kept good and therefore it was the unrestricted pur- chase of goods that should be encouraged; not the practice of economy. And so, for a long pe- riod it was our policy and belief that, at a time when the army needed everything, the civilian population could do the most good by buying and consuming everything they could in order that trade might be kept active. This should have de- ceived no one, but it did. It had deceived Eng- BUSINESS CONSEQUENCES OF THE WAR 75 land for a long time earlier in the war, to her al- most irreparable injury. So we all agreed that the correct way to finance the war was to borrow money and let the next few generations help pay for it. Consequently, when we had all borrowed the money and transferred it to the Government for bonds, we considered our duty done. The Gov- ernment could take the money and buy what it pleased. The trouble was it had to buy the very things we also wanted. It had no time to waste in trying to conduct a cheap war. It had to act quickly without much regard for what it cost. It needed perhaps a quarter or a third of every- thing the country could produce, and needed it at once regardless of price. The army required food, clothes, shoes, metals, chemicals, vehicles, everything that we as individuals also needed. There was not enough produced to supply both the war requirements and the usual needs of the civilian population. We did not realize this. Ac- cordingly, in the open market the Government and ourselves, in innocent ignorance of what we were doing, bid against one another for what there was and so we forced the prices steadily up. It is plain that if the army required, say one- third of all the goods the country could produce, 76 then the civilian population must, through self- denial and economy, get along on the other two- thirds. If it had done so, we could have fought the war and been little or no poorer. As it was, in the struggle for goods between the Government and the civil population, we used up everything we could produce, everything we had in reserve, and really consumed a noticeable part of our plant itself. This was all done through the means of creating new money in vast amounts and spend- ing it freely. The banks created this money by taking the notes of their customers secured by Government Bonds, but they soon had to begin carrying the notes to the Federal Reserve Banks for rediscount, so the burden of all this new bank credit was, of course, properly and necessarily made to rest on the gold reserves of the Federal Reserve Banks. When the war began, these gold reserves amounted to about eighty per cent of the liabilities of the reserve banks. But as we pro- ceeded in financing the war by creating new money, the Federal Reserve Banks' liabilities were thus increased until the gold reserve amounted to only about forty per cent of the lia- bilities. This was ample, perhaps, if nothing more ever happened, but if we had more war or if we had to export a great amount of gold in payment BUSINESS CONSEQUENCES OF THE WAE 77 of adverse foreign trade balances, then there would be none too much. There was nothing alarming about a forty per cent reserve. The alarming thing was our steady and rapid mo^|e- ment towards a further reduction of it. Fori a movement in price inflation feeds upon itself. Each rise of prices necessitates creating more money and the money so created forces the prices higher. It would no more stop itself than would a sled going down hill, except in the same way. That is, not until the reserve ratio declined to a much lower percentage, and then we should all at once take fright, pass through a panic, and slowly recover our senses amid the ruins of our once splendid business organization. Fortunately the governors of the Federal Re- serve System realized that the further inflation of bank credit must be stopped. But the task was a delicate one. Banks were told they must not go further in creating deposits for customers by mak- ing loans to them, unless there existed a higher reason for it than the mere private advantage of the customer. On the other hand, it was impor- tant that the machinery for producing the essen- tials of life should not be slowed down for lack of credit. It was a difficult course to pursue. Further expansion must practically cease and yet 78 THE A B O'S OP BUSINESS a sharp contraction would produce disaster. The attempt was made in the spring of 1920. The banks and the public fairly understood it and cooperated in it. In consequence, probably as near the desired result was accomplished as could have been hoped for. The expansion of bank credit ceased. The rise of price inflation ceased simultaneously. Those who had been buying for a further speculative profit became timid. Orders were canceled. Many carrying large lines hastened to unload at slightly lowered prices and we were fairly launched upon a falling market. In the mean- time, a similar but more extreme career of infla- tion in Japan had collapsed, accompanied by panic and widespread business disaster. The fall of prices, once unmistakably begun, was hast- ened and intensified by all but universal unwill- ingness to buy, based upon the belief that they would go still lower. The collapse of prices which followed through- out 1920 and 1921, while ruinous to some, in- jurious to many, and demoralizing to everyone, was inevitable and far less ruinous than it would have been if further delayed. As an economic dis- turbance it would be classified as a business crisis without panic. Like every crisis, it is followed BUSINESS CONSEQUENCES OF THE WAB 79 by business depression, the cure for which is hard work, rigid economy, and the lapse of sufficient time for our vast complicated industrial machin- ery to work itself slowly back into the nice and accurate adjustment necessary to the large pro- duction of wealth. This cannot be complete until a more just and more stable relation is ap- proached between the price of each commodity and all the others. Prices have not declined uni- formly. Some have fallen too far and others not far enough. When time and economic law have brought these into proper adjustment, men can produce and trade in normal volume and not until then. We have fought our war and as a nation we have paid for it. But we are a great deal poorer in consequence and we do not know it. We do not realize it because we have plenty of money and it is our custom to think of money as an end, where- as it is only one of the tools. The only thing from which American business is now suffering will be cured by hard work and rigid economy, and by nothing else. There is nothing serious perma- nently the matter with us. We have wasted a great deal of wealth ; our railways are in bad order ; our banks have not yet digested everything they had to eat during the war; our people have not gone 80 THE A B O'S OP BUSINESS back to regular work yet and are under a kind of delusion that instead of becoming poor they have become rich, just because they do not understand what money is. Notwithstanding these facts, it is difficult to be- lieve that the industrial forces of a great nation which have for years been working so largely on war materials can be quickly and smoothly trans- formed and devoted to the production of perma- nent wealth and the comforts and necessaries of life. There is no doubt that it will be done in due course and that the world will enter upon its greatest era of progress and prosperity, in con- sequence of the lessons it has learned and the redoubled exertions it will make. But the inter- vening period of transformation from activities of war to those of peace will call for high intel- ligence and sustained confidence in employers and investors ; for patience, moderation, self-restraint, and sound judgment among employees; for ed- ucation among the leaders of their organizations, and for wise political leadership on the part of Government. This co6peral;ion and control by our Government must not be of the exaggerated, paternal kind that renders private enterprise im- potent and unnecessary. It must be strong enough to assist and protect us adequately against BUSINESS CONSEQTJENCES OF THE WAR 81 unequal foreign competition backed by powerful foreign governments; intelligent enough to con- trol and repress sternly illegitimate or dangerous tendencies, and yet give full encouragement to the development of personal resourcefulness, initia- tive and responsibility. It must be a controlling partner, not a parent. We are being called upon to deal with vague suggestions for the radical reorganization of society, for indiscriminate government control, and for the rearrangment of industry by the in- troduction of new and experimental adjustments between capital and labor. With relation thereto, it may be said that the period we are now entering will contain problems and perplexities enough without adding these. They are questions fit to be dealt with by statesmen, after they shall have been allowed time to gather the lessons of the war and the final deliberate judgment of the world's best intelligence. The example of Russia would seem to carry adequate warning against hasty and radical attempts to alter the existing social and industrial structure during a situation so del- icate. We come, then, to the consideration of what we should do toward the restoration of ourselves and our country to a state of peaceful progress and 82 THE A B O'S OF BUSINESS prosperity. We cannot be enriched by law, by quarreling among ourselves, or by the sudden ap- plication of powerful remedies newly discovered and loudly recommended by political quacks. We have got to win the prosperity of peace in just exactly the way we have won the victory of war : by individual hard work, plain living, the elimina- tion of waste, and the fearless resumption of the enterprises of peace, with a firm confidence in a future from which every really serious menace has been removed. For this we have the talents, the resources, and the machinery which we applied to war, and the lessons we have learned besides. We have only to devote them to the production of wealth. The real problem for America calls for solution by each individual. It is perhaps first of all a problem of eliminating waste — not merely the waste that throws away something valuable, but the waste of time uneconomically employed and misapplied labor and material; the unnecessary doing of something already being done adequately. These and other methods of a like nature are the new sources of national wealth to be gained through economy as well as through increased production. They point the way to private for- tunes to be gained, or saved, by those who choose BUSINESS CONSEQUENCES OF THE WAR 83 to seize the opportunity. A private fortune, however large, accumulated in this way or by any other form of enlarged production or diminished waste is a public benefit. It is newly created wealth devoted to the public welfare. The pleas- ure of possessing and managing it, together with the moderate reward of living in somewhat greater comfort or luxury, has served as the mo- tive to bring forward the best intelligence and talent of him who thereby created it. But he cannot consume the fortune or even a great in- come. His private consumption can at most be but a trifle of the wealth he has brought into existence or saved from waste and destruction. All the rest of it must go back into productive employment in industry. There is no other place it can go. It will in turn thus create new industry, create greater demand for labor, produce more of the comforts and necessaries of life, and cheapen them. The proprietor of the invested capital can eat or wear but little more than the rest of us. Fr^m the public point of veiw it does not matter much who owns the invested wealth of the country, so long as under adequate public control it is not injuriously used or dishonestly obtained. The important requirement is that there should be plenty of it. To insure the creation of plenty of 84 THE A B O'S OF BUSINESS it, it should belong (with such moderate benefits as accompany it) to him who can create or save it, else there will be no motive to create and none created. And capital will be sorely needed to restore the enormous waste and destruction that have taken place and to provide the financial re- sources for which the world must now look largely to America. CHAPTER VI THE ABUSE OF OUB RAILWAYS Nothing could better serve to demonstrate the blindness of American business than its treatment of its own railway system. This system, perhaps two hundred thousand miles of line, with cars and locomotives, buildings, city terminals, and other appurtenances for its convenient use, cost and is valued at about twenty billion dollars. Its worth to us is many times that sum, in the sense that if we were suddenly deprived of it nothing else would have any value worth mentioning. If it should cease operating, the two or three million people who are living on a barren rock known as New York City would either perish or flee for their lives (on foot, for they could even get no gasoline) to the farms of our western states where their food is produced. Every other large city would also become a mass of empty buildings. Every industry would cease for lack of something which is now being hauled to it regularly by rail- way. The farms would perish next for lack of 85 86 THB A B O'S OF BUSINESS clothing, tools, machinery, and supplies of city origin, now coming regularly by railway. There could be a glut of food in one state and a famine in the next one. The business of building and managing these railways was undertaken and is carried on by about two million men. A good many years ago, when the railroad business was young and inex- perienced, those men made the customary mis- takes of ignorance, as all the rest of us regularly do. They abused the great power that had fallen into their hands. They tyrannized over the rest of us when we traveled or shipped goods. They unjustly discriminated by overcharging some of us and favoring others, and they seemed at one time to be making too much money, which dis- pleased us because it was they who were getting it instead of ourselves. As to this latter objec- tion, we did not seem to realize that the only rea- son they put their time and material into the build- ing of roads was because there was money in doing it and that if we forbade the profits no one would build more roads. Even the Government learned during the late war that the way to get a needed thing done quickly was to allow a profit in it. No one will work long at an unprofitable occupa- tion. It is against public policy that anyone THE ABUSE OF OUE RAILWAYS 87 should. These observations are just matters of industrial evolution and economic law. But for these various reasons we, as a nation, be- gan to hate our railroads and proceeded to punish them, not merely by just and wholesome regula- tion, but also intemperately, in pure anger, like a child kicking its toys. There was nothing we needed so much as more railroads and better ones, but we so terrified the builders that progress in building was greatly impeded; in fact, it prac- tically ceased. We also starved the roads we had, by excessive regulation at the hands of nu- merous commissioners of limited vision. We acted toward our railroads as though they were public enemies, merely intruding to exasperate and rob us, instead of realizing that they were our own children. In spite of all this mistreatment, they grew up and to-day are fairly near a complete system in size, but horribly emaciated. We need better transportation service from them more than we need anything from anybody, and yet, until we re- cently enacted the new railroad law, we had al- most ruined them. We nearly lost the war be- cause they broke down. They needed money to buy equipment and rails. We refused to loan it to them by buying bonds and stocks from them, 88 THE A B C'S OF BUSINESS because their credit was not good. We kept them poor and their credit bad by denying them enough earnings, and then refused to loan them the needed capital because they were so poor, and then abused them because, being too poor to bor- row the money necessary to equip themselves properly, they were unable to move things as fast as we needed them moved. This is also the approximate history of the method we have employed in providing ourselves with other indispensable services, such as tele- phones and street cars. In all these services the vitally important thing to American business is that the service shall be dependable, abundant, and quick. If it can be cheap, too, so much the better, but any cheapening of it that at all seri- ously impairs its speed and reliability will cost American business, in indirect ways, many times the amount so saved. To impair our transporta- tion service is merely to close the throttle upon all industry. Probably we pay to the railways in a year, for transportation, a total of five or six billion dol- lars, in the form of pieces of paper, spoken of as money. The only use they can make of this paper is to pass it back to us again, directly or indi- rectly, in exchange for things a railroad needs. In THE ABUSE OF OtJB RAILWAYS 89 short, then, out of the forty or fifty billion dol- lars' worth of things which we produce every year (the railroads helping us to do it by doing all the hauling) we turn over about one-tenth, or say five billion dollars' worth, to the people who built and who operate the railways, for them to use in mov- ing the trains and keeping up the road, and to live on while doing so. It is just possible that, now we are preparing, under the new rate schedules, to give them more things than heretofore, they will be able after a while to run more and faster and more dependable trains, handling more goods in less time, and in consequence of this our entire industrial plant may find itself turning over so much more smoothly and rapidly that its total an- nual output of goods may increase by even far more than we have now agreed to give the rail- ways. We are thus very wisely repairing our na- tion's entire industrial plant at its weakest point. We violated an economic law when we refused the railroads earnings enough to keep themselves in good repair and good credit; rich enough to build into, and thus develop, new territory and provide themselves with enough cars and engines to transport speedily the freight and passengers of American business. By our past fifty years of railroad policy we did to ourselves just about so THE A B C'S OF BUSINESS what, for illustration, a very vast factory, using an interior tramway, would have done to itself by destroying its own tramway just to spite the tramway boss. Our slogan has been billions for chewing gum and joy rides and vanities, but not one cent for transportation. We could have spared the money ; for so high an authority as the Secretary of the Treasury has recently estimated that we are now spending for luxuries in one year a sum equal to about the total value of our entire railway system. CHAPTER VII SPECULATORS AND MARKETS Few institutions in our complicated business life appear to be so wholly misunderstood as the speculator. His office is to take upon himself the risks that the rest of us do not wish to assume. He is not any particular individual. He is almost all of us at one time or another. He is the man who deliberately assumes a particular risk be- cause he wishes to. Any man who buys some- thing because he thinks it is cheap at the moment, or who sells something because he thinks it is too high and can be repurchased again later for less, or who keeps something he has for sale because he thinks he can get more for it later, is a spec- ulator at that particular time. He may be one only on very rare occasions when he thinks he has exceptionally correct judgment, or he may be one every day on some line of business of whose hazards he makes a special study. He is just a man who thinks his judgment is good at that par- ticular moment on some particular question and is willing, if wrong, to stand a loss which would 91 92 THE A B O'S OP BUSINESS otherwise have fallen on someone else who did not wish to risk a loss. He does this in the hope and expectation of making a profit, which would other- wise have gone to someone else who took no inter- est in large and doubtful speculative profits but was content with reasonable but certain commer- cial ones. A miller is in the business of grinding wheat into flour for a legitimate commercial profit. He does not want to concern himself with fluctuations in the market price of wheat. In fact, they bother him. He wants only to make a fair reasonable profit for grinding, but he wants to be sure of that. A sudden rise in the price of wheat might wipe out his year's earnings or a drop in wheat at the right moment might yield him a large profit, but he does not wish to gamble in wheat. He would like to eliminate all such risks from his business. He obtains credit from his banker, with which to buy wheat, and pays the banker after he has sold the flour. The miller simply wants to make flour for a reasonable but sure profit. He does not wish to speculate in wheat. Moreover, if he did and his banker knew it, he would lose his credit. But a wholesale grocer gives him an order for flour, at an agreed price, iox delivery several months later. Before the SPEOULATOES AND MAEKETB 93 miller can name the price he must know in ad- vance what the wheat is going to cost him when he comes to buy it several months later — say in December — or else take the risk of its going up in the meantime. To know this with certainty he must have a contract with someone to deliver him the wheat in December at an agreed price. So he tells a broker on the Produce Exchange to buy him wheat for December delivery. It is called buying futures. He seems to be speculating, but is doing exactly the opposite. He has thus elim- inated from his business all risks due to fluctua- tions in the wheat market. If wheat goes up be- fore December it matters not to him. He has avoided a heavy loss, because he has a contract for his wheat at the price on which he calculated his flour bill. If he had not bought a future but had carried the risk himself and wheat had dropped he would, of course, have made a large speculative profit on the wheat in addition to his regular business profit, but he was content with certainties and, beside, his banker might find it out. By this future contract some other man, through the Produce Exchange, bound himself to deliver the wheat to the miller next December at an agreed price. Maybe he did not have any 94 THE A B C*S OF BUSINESS wheat, but gave thorough investigation and keen intelligence to a study of the probable crops of Argentina, and Canada, and the rest of the world, and felt sure that when December came the price of wheat would drop and be could buy it for de- livery to the miller at a much lower price than the one named in his contract. Other keen men were making the same investi- gations. They had time and often very elaborate and expensive facilities for doing so. It was to some extent their business. It was not the miller's, however. He had no interest in or facilities for it. He was a specialist in one thing and they in another. All these keen men foresaw the same thing, that wheat was probably going to drop be- fore December, and probably all bid against one another (through different grain brokers on the Exchange) for the miller's contract. Thus they bid the price of grain down among themselves, so the miller finally got a fairly low competitive price. If they had foreseen a short crop they would have bid the price up instead of down. Maybe they were just keen gamblers and never had any wheat nor expected ever to have any. Perhaps they just sold it short and intended to cover by buying it in again at a lower price. But even so, they made it possible for the miller to SPECULATORS AND MARKETS 95 grind flour in large amounts, on credit, with se- curity to everyone, while they took the risks. They fulfilled a purpose without which business could not be carried on safely on reasonable mar- gins of profit. Cotton planters must usually sell their cotton, or most of it, as soon as baled, because they need the money, and professional cotton buyers buy it from them. These men are specialists, too. They buy and sell for a small but sure commercial profit. They dare not gamble in cotton. They know the various grades and staples ; they are ac- quainted with the requirements of different manu- facturers and know that each cotton spinner has use for only certain kinds of cotton. They also know the cotton growers and the kind of cotton they grow. They study the world markets and compete with one another, both in buying from the planter and in selling to the manufacturer. The cotton crop is the most valuable of all crops. It may be worth a billion dollars or more per year and is nearly all bought upon credit cre- ated by banks for the purpose. The banks loan the cotton buyer nearly the full value of the cot- ton. If the cotton should drop much in price the buyer could not sell it for enough to pay the bank. He must protect himself against the risks of a 96 THE A B O'S OP BUSINESS fluctuating market. He handles vast amounts on a very small but sure profit earned by his special training and his industry. He does not wish speculation to enter his business. He dare not be carrying a lot of cotton that is worth one price to- day and another one to-morrow. Therefore, im- mediately upon buying actual spot cotton, he hedges it by quickly selling a contract for the fu- ture delivery of the same number of bales through a broker on the Cotton Exchange. This is called a future. People who do not know what he is doing think he is gambling in cotton futures. He is in reality taking steps to avoid doing so. If the price of cotton drops while he is still carrying his spot cotton on borrowed money and he has to sell it to a spinner at a loss, he is not concerned, because cotton futures have, of course, also dropped in price and he makes a corresponding profit by now buying in his future contract at a lower price than he received when he sold it. These two transactions offset one another, so far as fluctuations in the cotton market are concerned, and it is these that the dealer wishes to avoid. He has simply made a small but reasonably sure commercial profit between the planter and the spinner, by virtue of his trained knowledge of cotton quality and of the spinner's requirements. SPEOUIATOES AND MABKETS 97 The reverse is true if cotton prices rise ; his spot cotton shows a profit and his hedge sale a loss of a like amount. He is in a position where he can neither win nor lose by any fluctuations in the cot- ton market. If he did not hedge his cotton, but stood exposed to losses through fluctuations in the market, no banker would extend him credit and the cotton crop could not move, because it has to move on borrowed money. The man who bought from him the cotton future on the Exchange may be a mere gambler, or he may be another kind of legitimate cotton dealer or spinner, who really bought it for use in that future month and wanted his price fixed long in advance, so he could know how to calculate the price at which he could sell his cotton goods, just as in the case of the flour miller. Nothing can prevent fluctuations in the price of commodities, but this highly ingenious method has been found for keeping them out of the manu- facturing business and distributive trade, so as to allow these businesses to be conducted with safety, on narrow margins of reasonably assured profit, and in the enjoyment of good bank credit. These market operations in futures conducted by business men for the purpose of hedging them- selves against speculative risks are more or less 98 THE A B O'S OF BUSINESS complicated, are carried on in strange terms of language, are transacted by comparatively few people, and are, therefore, but little understood by the American public. We are mostly of the belief that dealing in futures has no higher or more laudable purpose than shooting craps and our statesmen now and then plan to abolish the practice by law, until someone takes the trouble to explain to them the truth about it, whereupon the danger is averted until new statesmen are elected. Then there are those who speculate in stocks. They make a business of studying the real value of stocks. They stand ready to buy any stock if it is offered on the market for less than they consider it worth, or to sell it if they consider the price too high and think they can buy it back again later on for less. In this latter case the speculator may not own a share of the stock, but if he thinks it is selling in the market at too high a price he will sell some of it short. He simply borrows the stock (giving security for its return) from someone who has it and sells it. Later on, when he thinks the price is low enough, he buys it in again and returns it to the man from whom he borrowed it. His act, in selling short, had a tendency to lower the price a little. His later act BPECULATOES AND MABKETS 99 in buying it when he thought it was low had a ten- dency to raise it a trifle. The further away from normal the price of a stock goes, either too high or too low, the greater becomes the number of men who are aware of the situation and try to make a profit by buying or selling it. If stocks are selling on the stock exchange just a shade be- low their then normal value, only a few men are interested in so small a difference. Therefore, only a few are buyers for a rise because the rise should be only a small one, anyway. These few ^re the men who are extra keen, watchful, and well informed. They are largely professional traders. In such circumstances we have what is called a narrow or professional market. But if the price falls very heavily many know it and many come into the market and give orders to brokers to buy stocks. These speculative buyers do not usually want the stocks to keep. It is not what is called investment buying. They are just speculators buying for a rise. They know the prices are too low. Their very buying forces them up. It is thus seen that the further the prices quoted on the Stock Exchange get away from the real value of the stocks, the greater is the number of speculators who come into the mar- ket and either buy or sell according as they be- lOQ THE A B C'S OF BUSINESS lieve the stocks too low or too high. The final re- sult of their dealings is to exert constant pressure in forcing the market price of stocks towards their true value. The work of the speculator has in this way a constant tendency to steady values and prevent violent fluctuations in price. The speculators also furnish a ready market in which anyone can always sell or buy at any time any- thing he wishes to. If there were no speculators or speculative markets, publishing daily price quotations and rendering these services, the farmer would be compelled to keep his grain or cotton perhaps several months (unable in the meantime even to pay his employees) until he could get into communication with some manufac- turer in a distant city who would buy it. Even then the farmer would not know what price he ought to receive, nor the manufacturer know what he ought to pay. If a holder of some railroad stock desired to sell it he would waste perhaps weeks in finding an investor who happened at that moment to want to buy any stock at all — much less any railroad stocks, or especially the stock of that particular railroad, and even then they might never agree upon the price. The Stock Exchange provides a large room in which stock brokers meet every day, bringing SPECULATORS AND MARKETS 101 with them orders to buy and to sell, sent in to them by wire, by mail, or in person, from cus- tomers all over the world. In this room in New York alone, omitting all reference to like ex- changes in other cities, often a million shares of stock and still more bonds are bought and sold every day between buyers and sellers, who never meet and do not even know or care to whom they sold or from whom they bought. Each gets what he wants through a broker, whose business is to deal with other brokers in executing orders. And in consequence the whole world learns through that day's evening paper the world's composite judgment of what those commodities and securi- ies are worth that day. The same thing takes place in the Grain Exchange, the Cotton Exchange, the Coffee Exchange and, in less formal and highly organized ways, as to other commodities. On these exchanges there are two kinds of transactions. The sellers who actually own the goods sell them there. The buyers who need \ them for actual use buy them there. The specu- lators are also there to keep the prices steady, by buying the excess that is offered in case a large excess forces the price down to where the spec- ulator sees a bargain. The lower the price is forced down by excess offerings, the greater is the 102 THE A B <5'S OF BITSINEB8 number of speculators who come in and buy, until finally enough of them arrive to stop the price from going lower. In just the same way they prevent prices from going too high, by selling short. Of course there are abuses connected with all this, just as there are abuses connected, for in- stance, with the practice of medicine. But the speculator is a most legitimate and indispensable part of our industrial organization. If we did not allow speculation by those who like it, we would all be unwittingly exposed to it against our desire. Under our existing system we can avoid risks and uncertainties by employing these spe- cialists to assume them for us. If we put them out of business, as is often proposed by act of legislature, then each of us would be compelled to carry his own risks and hunt for his markets as best he could and it would seriously interfere with our regular business. We might just as sensibly propose to abolish insurance companies, who are also in the business of assuming risks, and let each of us assume his own fire hazards and death risks, and ship cargoes overseas at his own peril, or that of the bank which loaned money against the cargo. CHAPTER VIII GOOD AND BAD TIMES Perhaps the most striking phenomenon in American business life is its alternation between periods of prosperity and of distress. A period of true prosperity exists when the American people are producing a maximum quan- tity of goods. This is true because to do so is the sole purpose for which business is carried on. It has no other end than to produce goods, in order that we may enjoy their consumption and use while producing more and while building addi- tional machinery for producing still more. Nat- urally, then, we prosper when every man and every piece of machinery is working every day at full capacity. When that is happening, goods be- come abundant and incline to be cheaper. Every- one is able to buy what he normally wants in mod- erate abundance, being fully and constantly em- ployed. There is no discontent except the nat- ural desire of everyone to do still better; which is, of course, no evil, but a benefit— being the real 103 104 force which is back of all material human progress. But our industrial life is capable of turning out so vast a quantity of goods only because we have organized it so highly. Organizing it consists in each man doing only the one thing for which he is best suited, and depending on all the others to do everything else for him. His dependence on others is absolute, and so is theirs on him. K someone fails the others are at once impeded. They may not know where the trouble started, or where to locate it, but supplies and services that have been coming regularly from the accustomed sources are no longer coming or are coming irreg- ularly. When one stops, he stops the others, be- cause they depended on him for something with- out which they cannot proceed. When everyone is in his accustomed place, do- ing his full daily work, turning out the expected quantity of his particular product for others to use, then the whole organization operates smoothly at top speed; great wealth is produced for distribution among us and we prosper. In a mechanism so complicated and so large that there can be no single guiding head to con- trol and regulate it, trouble may begin anywhere or at any time. It may be a crop failure, a large GOOD AND BAD TIMES 105 prolonged strike, the failure of some very impor- tant financial or industrial concern, or something else great enough to jar the entire country seri- ously. If not instantly corrected, the entire ma- chine begins to slow down, and the output of wealth to diminish. If coal does not arrive from the mines, boilers cool and factories cease. If transportation lags through the pauperized and broken-down railroads, raw materials are delayed or perhaps coal again. If banks are in trouble, credit ceases to flow and all business stops. If the machine is running rather badly just then, anyhow, or is being overdriven at dangerous speed, and one of these things occurs, it is likely to produce very serious, and often prolonged busi- ness distress. And during the distress we do not know what or where the trouble is or what to do about it. It spreads so quickly through the en- tire country that each of us sees it in a different form and consequently attributes it to a different cause. No two of us are in exact agreement about it. No one can do anything and so we wait and work as best we can, feeling confident that good times will come again. Economic laws finally proceed to enforce themselves and we get back into gear again. It was said that the Allies were near defeat early in the war because shells were 106 THE A B O'S OF BUSINESS not promptly forthcoming according to contract from American munition factories. The shells were required to fit gun barrels to a thousandth of ^ inch. This could not be accomplished with- out highly accurate gauges used in the manufac- ture and measurement of the shells. In filling Buch large orders, these gauges wore out very rap- idly and could be obtained only from a certain few makers of instruments of great precision. For some perhaps minor reason the supply of these gauges failed, or was not adequate, and the whole world's future depended upon them without knowing it. The story may not be true, but it could easily have been, and it perfectly illustrates our dependence upon one another. Anything that slows down any part of our in- dustrial organization produces the immediate re- sult of slowing down some other part, this in turn a third part, and so it all approaches a standstill. If it stopped we would about all perish. The nearer it comes to stopping, the more we suffer. This is what we call hard times or a business de- pression. Progress in either direction of slowing down or of speeding up feeds upon itself. When break- down or a delay occurs at any point, men become idle, They are out of employment; receiving no GOOD AND BAD TIMES 107 wages they can buy nothing at retail stores and so retail trade declines. The retailer, of course, then buys less from the wholesale dealer, who in turn gives smaller orders or none at all to the factory, which consequently buys less raw material and fuel and lays off men who are not needed. As this results in fewer goods being moved, railway earnings and consequently railway purchases of material and employment of train men also de- cline. Business having fallen away, men are dis- charged in all of these lines of employment and their purchases from the retailer are still further diminished. The retailer thus sees a still further decline in trade and we are started around the cir- cle a second time. Every decline of business at any point at once causes a further decline at an- other point. We continue steadily to produce less and less. Naturally, at the same time, we consume less from force of circumstances. We thus pass into, and eventually clear through, a period of business depression and great distress. It may last only a matter of months before im- provement is discernible, or it may endure for years. Our total business activities, of course, do not cease. Regarded as a whole, they keep on running at perhaps ninety per cent of normal, for it is said that a variation of about ten per cent in 108 THE A B C'S OF BUSINESS our total production measures about the distance between prosperity and business depression. But in hard times there might easily take place a drop of far more than ten per cent in the amount of goods we consume. In other words, the de- mand for goods is subject to far greater fluctua- tion than the supply of them. In a period of de- pression we immensely reduce our consumption of goods, we waste less, and we work harder when work is obtainable. In consequence wealth is be- ing gradually created faster than it is being con- sumed and it increases. In other words, new capital is being accumulated. It seeks employ- ment and so new undertakings are begun. These employ men and require materials. The markets are at once stimulated and the entire national machine gains a little speed. While it was slowed down, the weak part that caused the breakdown in the first place was probably repaired. We are now emerging from the depressed period and business grows steadily better. Each resumption of activity causes a further one. Newly em- ployed men spend their new earnings at retail shops. All trade becomes better and hence do also manufacturing and transportation. These once more call for more workmen and prosperity begins to feed upon itself, causing more pros- GOOD AJSTD BAD TIMES 109 perity. And then we feel free once more to buy and consume goods with liberality. Demands ex- pand even more rapidly than supplies. Rather regardless of price, we buy what we want and bid against one another for it. We thus force prices higher and higher and the business situation be- comes steadily more and more unsound and we consume faster than we produce. We undertake new enterprises that require much capital and credit. We think we may safely do this because prices are rising, and profits are easily made in everything. We borrow freely to buy anything, because on a rising market it can surely be sold at a profit and the debt so paid. We are inclined to speculate too freely. Vast credits are thus created and wealth is at the same time being rap- idly consumed. The situation is very unsound. The machine is in a condition to be very easily thrown out of order and as soon as some disaster occurs of enough importance to derange the ma- chinery again, we enter the next decline. Many men carefully watch and study these ten- dencies. They do not go on unnoticed by every- one, though they do by most. There are, in America, several business organizations which do nothing but study the progress of these cycles by collecting statistical data, taking careful daily 110 THE A B O'S OP BUSINESS measurements of business and interpreting what is going on. They can tell with great reliability what stage the country's business has reached in its progress towards prosperity or towards distress. The more intelligent and watchful can thus learn that at the crest of prosperity danger is very near. They foresee falling markets, con- traction of credit, business failures, reduced pro- duction, and unemployment, and they prepare for them. They sell instead of buying. They coun- sel others to sell. There are soon many sellers and few buyers, and so prices fall. As they fall, manufacturers stop producing goods which they know they could sell only at a loss. Business begins to decline, men are again out of employ- ment, and progress toward depression is once more under way. CHAPTER TX INTEBNATIONAUSM The American people have always regarded anything foreign with suspicion. Foreign polit- ical relations and our foreign commerce have been discussed more with garrulity than with under- standing, and the periodic appearance of these two subjects during presidential campaigns has exposed them to an onslaught of oratory which has added but little to our knowledge. Under such circumstances, and remembering that until recently we have had little reason to participate actively in international affairs, it is not remark- able that our understanding of them is limited. From the time of the discovery of this continent until the present, there has been but little neces- sity and no inclination for entrance into world af- fairs. The early settlers pushed westward from the Atlantic and turned their backs to Europe and the sea, and from that time the American people have devoted their efforts almost exclusively to the exploration and development of this continent. Ill 112 THE A B O'S OF BUSINESS The timber and mineral resources of the Great Lakes region, the vast and fertile area of the Mis- sissippi watershed, and the semitropic south, with wealth in cotton and sugar cane, held the attention of the pioneer, and the middle of the last century saw the opening of the Pacific Slope, with new fields for settlement and exploration. During this long period the Americans were confronted with problems purely local. Living frequently at great distances from each other, and cut off from contact with but a few people, it would be sur- prising if the pioneers' thoughts had not been re- stricted simply to the events of their daily exist- ence. What was occurring in Europe concerned them much less than the happenings in the nearest village, and the condition of the road leading there. They required but little, and that they se- cured for themselves. Previous to its unfortunate collapse at the time of the Civil War, ship owning and operation flour- ished along the Atlantic and Gulf Coasts, but the shipping and trade of that time were conducted in a manner impossible to-day. The trade con- sisted largely of cargo lots of natural products, and there was not, as at present, a world-wide dis- tribution of manufactured articles; and such trade as existed was conducted by a very small INTERKATIONAUSM 113 body of men, out of the sight and understanding of the great bulk of the American people. The greatest achievement during the nineteenth century was the evolution and perfection of the American railway system, but it was the physical work only which we did ourselves — the money with which to build the roads was furnished to a great extent by the British, French, and Dutch— or, if the idea of the payment and receipt of money is eliminated, we may say that Europe loaned us our railroads. The original investment of European capital in America was the initial movement in an enormous international business transaction, which we have been fifty years in concluding. For that period of time we have enjoyed the use of a railway sys- tem which belonged largely to Europe, while Eu- rope has retained certificates of ownership in the form of bonds and stocks. We paid the interest on the bonds as it fell due, the value of our exports exceeding the value of our imports by the amount of the interest, since all international payments must be made in goods (the dollar, pound, franc, or guilder being but convenient tokens for a cer- tain quantity of any commodity). We continued to use the railroads and Europe to own them until the opening of the late war, but the extraordinary 114 THE A B O'S OP BTJSIKESS requirements brought about by such extensive mil- itary operations could not be met in the ordinary way. The production of merchantable commod- ities diminished in Europe while her requirements increased, and to meet the latter situation we were asked to pay for our railroads. Our bonds were returned to us and in exchange we sent to Europe munitions of war and foodstuffs. Perhaps a clearer picture of what occurred may be obtained if the transaction is visualized without the inter- vention of time : Europe traded us railroads for munitions and food. The same principle is in evidence in all interna- tional business. Barter did not cease as com- merce increased, but the spirit of barter has been obscured by the use of money. As an illustration assume that I manufacture acetic acid, which is used in the production of rubber. Having plenty of acetic acid, I would send some to the rubber plantations in the Straits Settlements, in ex- change for which I would be offered rubber, which I could not use. So the rubber growers would give me money, which would be a claim against the Straits Settlements not only for rubber but also for tin, spice, rattan, or any of their prod- ucts ; but if I did not want any of the products of the Straits and desired some glass bottles from INTEKlSrATIOlfrALISM 115 Belgium, I could trade my claims against the Straits for claims against Belgium, i. e., Belgian money, or francs. The man with whom I traded could then obtain what he wanted from the Straits. From the foregoing it may be seen that while the use of money has obscured it somewhat, barter is the basis of commerce. The value of our imports must equal the value of our exports, and vice versa. Trade must bal- ance, though an examination of the reports of the Department of Commerce would lead one to be- lieve that it does not, which is deceptive. In pre- war times, America was one of the so-called '* debtor*' nations, or, in other words, our visible exports exceeded our visible imports ; and by vis- ible exports and imports I mean those which are shown in the Government's statistics. The ex- cess in value of exports over imports represents the cost to us of the services which Europe per- formed for our account, and for which we have paid in the only way we can, which is payment in goods. These services which are performed for us we call ** invisible" imports, and when accounted for as such demonstrate the equality of our in- coming and outgoing trade. Invisible imports consist of freight and passage money paid foreign steamship owneris for carrying our goods and our- 116 THE A B O'S OF BUSINESS selves, premiums paid foreign underwriters for insuring our cargoes, interest on American secu- rities held abroad, and the money spent by Amer- ican travelers in foreign lands. To facilitate the exchange and distribution of commodities, there is money, but as each nation employs a different monetary system special or- ganizations have been perfected to deal in foreign exchange, or the money of the different countries. Exchange, as commonly spoken of, means the value of the money of one country expressed in the money of another. Sterling (London) ex- change is quoted at par as about $4.86, which means that the value of the English Pound Steri- ing, expressed in United States currency, equals $4.86. Assume that the United States was selling a great volume of products, raw and manufactured, to England, much more, say, than she was buying from the latter. The seller in this country would require that payment be made in dollars. Con- sequently, the buyer in Britain would go to an exchange bank to purchase dollars wherewith to pay. In exchange for £1, he would receive (at par) a draft for $4.86 against the London bank's balance in New York, or a so-called telegraphic transfer of the money could be made. If there IKTBBNATIONAUSM 117 were many Britishers wishing to buy dollar drafts, the demand for them would be greater than the supply. Therefore, the dollar would sell at a premium and for £1 only $4.85, or less, might be given. This would have a tendency not only to check the purchase of American goods by Britain, but also to stimulate the purchase of .British goods by Americans, since goods to the value of £1 could be bought in England for $4.85 (a saving of a cent per Pound). The result would be that Britain would curtail her American purchases, while America would increase her British pur- chases, until a balance would be reached and ex- change would be gradually forced back to par. It must be borne in mind that the present dis- organized state of the European exchange is due partly to the presence of abnormal factors such as repeated violation of economic law, inflation, gold embargoes, depreciated and inconvertible paper currencies, and so forth, and, in so abnor- mal a state of affairs as now exists, no attempt should be made to account for it on the basis of trade inequality alone. Sooner or later all international debts must be paid in goods. Otherwise, they cannot be paid. The European countries owe the United States greatly in excess of ten billion dollars. They 118 THB A B O'S OF BUSINESS are not in a position to pay the debt, because they cannot produce the goods with which to pay it. Their industries are hampered by a lack of capital with which to buy new equipment and material upon which to work. Since comparatively little ready money is to be had in their own countries, they look to America for it, and by failing to ex- tend further credit (in the form of machinery and raw materials) to Europe, we would be not only preventing the payment of the original debt, but also indefinitely prolonging the present wretched state of European affairs. Clearly, then, the only way out is to purchase the bonds of the for- eign governments and corporations, in order that they may employ the proceeds in the purchase of the needed materials and machines. The large interdependence of the nations, one upon the other, was very forcibly illustrated dur- ing the recent war. The exasperation evidenced in the textile industries, and so among clothiers and housewives, due to their inability to secure German dyes, may be easily recalled, and other instances were only too numerous. One can imagine the annoyance which would be felt were America cut off from the tropics and consequently unable to secure coffee, tea, chocolate, spices, rub- ber, tin, lac, jute, edible oils, and other products HSTTKENATIONALISM 119 quite indispensable to us and yet quite impossible for us to produce ourselves. Without rubber, for example, fires could be extinguished only with great difficulty, since there would be no adequate hose; surgery would be greatly handicapped; mo- toring would be no pleasure; the proper insula- tion of electric wiring would be impossible; and ballooning would become very precarious. Were England absolutely isolated from the rest of the world, starvation would be prevalent there in less than one month. England imports four-fifths of her foodstuffs and pays for them with coal, manu- factured articles, and various commercial serv- ices. Her life depends upon her merchantmen and the freedom of the seas. Foreign commerce is not mysterious, except in the persistence with which it is regarded as such. For the purposes of trade the nations of the world are as one nation. Geographically, polit- ically, linguistically, and in many other ways, the surface of the earth may be divided, but commer- cially no country is unique; commercially the world is a unit. The United States does not look to China for a government or a language or a sys- tem of weights and measures, but for camphor, silk, tea, hair nets, soya bean oil, etc. The United States depends upon China in the same way that 120 THE A B O'S OF BUSINESS Texas depends upon Wisconsin — ^f rom the stand- point of products only. Trade between New Eng- land and the Gulf States is not called foreign trade, yet it is quite as foreign as trade between New England and Canada. In the former in- stance many hundreds of miles intervene; in the latter it is but a matter of tens of miles. The products of the world are international — there is, and has been, a commercial league of nations which cannot be abolished. In engaging in trade, in the actual practice of it by importers and exporters, the world is divided for the sake of convenience into business areas. That this is done should not be taken as a refuta- tion of the previous paragraph. These divisions bear the same relation to world trade as the busi- ness divisions of a city might bear to that city's trade. They in no way destroy its unity, but are designed for convenience and efficiency solely, and take into consideration such factors as trans- portation routes, languages, laws, products, popu- lations, nature of governments, climatic condi- tions, systems of money and weights and meas- ures, business customs, purchasing and produc- tive power of the peoples, and other factors which serve to connect or disconnect districts. Many of the confused and erroneous ideas concerning INTEBNATIONALISM 121 world trade may be done away with if the concep- tion can be grasped that trade between the rest of the world and one or all of the United States is conducted in precisely the same manner and de- pendent upon the same economic laws as trade be- tween these states themselves. Ships are the instruments by which water-borne commerce is carried from port to port. They are either liners operating with a scheduled run over a fixed route, or tramps taking cargo for any port if offered in sufl&cient quantity, or industrial car- riers for the sole use of the corporation to which they belong, and not receiving general cargo from the shipping public. Since the trade of the world increases from year to year, at intervals ocean freight rates rise, because of the increased de- mand for space aboard ships. This encourages the building of new ships and the formation of steamship companies. Sufficient ships are usu- ally built to exceed demand, and then the price of ships and ocean freight rates decline. There fol- lows a period of depression, relieved only by the retirement or loss of vessels and the gradual in- crease in the volume of commerce. Ship opera- tion is governed by economic law, quite as all other business is. Without the uninterrupted continuance of our 122 THE A B O'S OF BUSINESS trade with foreign countries, we could not hope to continue our own prosperous existence, and to suppose that we could abandon the crippled na- tions who are our neighbors and suffer no evil consequences thereby, is the veriest nonsense. The people of foreign lands are to us as fellow workmen, and whether we work with them in the same factory or in widely separated countries, makes no difference. We are all employed to- gether in the performance of the world's work. If several of our most efficient fellow workmen have their tools destroyed and are themselves weakened, how shall the world's work go for- ward? If they temporarily lack tools and mate- rials, what could be more logical than to lend to them a part of our own, so that the great task might be undelayed? These temporarily disabled workmen have skill, intelligence, character, and industry, and our progress and the world 's prog- ress will best be advanced by lending them the tools and material which they need; particularly as they are already heavily in our debt and other- wise would undoubtedly be unable to pay. There is nothing more to the question of the extension of credit to foreign countries. The world in gen- eral, and in particular America, will best be served through the lending of capital by localities INTEBNATIONAIiISM 123 which can spare it the best to those localities which need it the most, regardless of the geo- graphical position of either region. In deciding with whom we shall trade, we are governed rather largely by our sentiments. To deal with our friends is preferable to dealing with people for whom we have no feelings whatsoever, or perhaps even dislike or distrust. Having con- fidence in our friends, we turn more frequently to them for our requirements than to strangers ; and while we have recognized and capitalized this phenomenon in our dealings with each other, we have failed almost completely to observe that it may be quite as effectively applied to dealings with foreigners, an oversight which has cost us probably many milhons of dollars. Our competitors for many valuable markets, such as Latin America and the Orient, have never neglected the cultivation of their prospective cus- tomers, whether by learning their language, adopting their customs, or marrying their daugh- ters; and as a result American agents have fre- quently knocked vainly on the door to the office while the proprietor danced or drank in the com- pany of the Germans or British. The Germans, in particular, but all Europeans as well, have al- ways made a point of becoming as nearly as pos- 124 THE A B O'S OF BUSINESS sible like the man with whom they desire to trade, thus reducing friction to a minimum. In contrast to this is our own policy, which, with few excep- tions, has been one of indifference or contempt, caused, no doubt, by arrogance and ignorance. That such should have been our foreign commer- cial policy is unfortunate, and since our internal trade is not conducted in such a way, one is forced to the conclusion that it is only because we have failed to study the foreigner that we mistrust and, perhaps, pity him. In considering the people of other countries, we contrast them too much with ourselves, as if we were an international standard of some sort; and the contrast is almost invari- ably made with superficialities. The British drive their vehicles on the ** wrong" side of the street ; but what about ourselves from their standpoint? Orientals feed themselves with sticks, but they probably regard as curious the small metallic implements with which we eat But these are merely surface differences, and do not merit the time we devote to being annoyed by them. The British, for example, will be found to be a delightful, honest, courageous, and sober people, if we can forget that they are superficially different from ourselves. We have built a barri- cade of trivial comparisons between ourselves and iJSrTBKITATIONAUSM 125 the rest of the world, behind which we congrat- ulate ourselves on being not as other men, and until this is replaced by a healthier receptivity to foreign ideas and a more generous consideration of foreign activities, we shall find ourselves seri- ously handicapped in all international nego-- tiations. CHAPTER X EDUCATION It is characteristic of the American mind to love the simple, direct, and practical way of do- ing things. Unlike Europeans, who seem to be more thorough, we do not like the slow, patient, toilsome investigation of any subject. The Amer- ican mind seeks a simple, direct, and easily under- stood explanation of any problem, and an answer of that kind always satisfies us if it seems plaus- ible. We have neither time nor patience for long, laborious, and painstaking studies. If we ask why business is bad this year and are told it is because this is a presidential year, the answer satisfies us because it is simple and easily under- stood. There has never been any truth in it (ex- cept in one or two presidential campaigns such as the one that threatened our entire monetary sys- tem) but, being simple and plausible, we would rather accept it and pass on to something else than listen to a long and highly involved analysis of a difficult and complicated subject. 126 BDTTOATION 127 This is our national habit about everything. In educating our young, we take the simple course that disposes of the whole task at once. We send them to college. The decision is made in a day. They go. The problem is solved and we pass on to other matters. It is just part of our highly developed system of specialization in everything. Education is supplied to us by educators at col- leges. We buy some for our young just as we buy clothes. The universities furnish a standard- ized, factory-made article, turned out, like Ford motor cars, on the basis of quantity production. Like the Ford car, it is an excellent thing but by no means the best. A Rolls Eoyce quality of edu- cation is obtainable. But the other make is the only kind most of us take the trouble to know any- thing about. When we speak of education, we automatically say college education. It is our national conception of the only way to obtain one. It would greatly shock the average American parent to be told that his highest duty in the world is to devote laborious and fatiguing years to de- veloping his child's intellect and understanding; and to impart to it all his own knowledge and all of other people's that he can assist the child in obtaining. It is the one occupation of parents that should take precedence of everything else. 128 THE A B C'S OF BUSI1TES8 It has been pointedly said that if a boy is not an educated boy at the time he enters college, he will probably never become one. College or univer- sity training is of almost priceless value, but it is no more than part of an education, and perhaps not the most important part. It can, moreover, be obtained outside of these institutions and, un- der favorable conditions, can be better done in proportion to the time employed. And yet we offer the excuse of having been denied a college education to explain and justify intellectual pov- erty. It is a shocking national confession of incompetence. Probably the highest stimulant and aid to edu- cation is the companionship of intellectual people. Association with them creates a desire for knowl- edge and understanding, and it points the way to the sources from which these may be obtained. It is but poorly supplied by the companionship of the nursemaid. There is almost no discovery in the whole domain of knowledge that ever died with the discoverer. It has all been reduced to writing and preserved in books. These may even be had for nothing through the public libraries. Free advice regarding them is even furnished. To be sure, there is among these books much rub- bish ; some of it merely harmless and some injuri- EDUCATION 129 ous. The first requirement, then, is to escape positive injury by avoiding the injurious ; to econ- omize time by also avoiding the merely worth- less; and to concentrate one's attention upon the remainder which is of value. This is the first task. It is the most difficult part of the whole undertaking. It can be done only through ob- taining sound advice, guidance, and suggestion, and it furnishes the reason for saying that the greatest aid to education is found in the compan- ionship of those already possessing superior edu- cation and high intellectual development. Careful and discriminating selection of books rests upon the same principle that underlies ad- vertising. The principle of advertising seems to be that if an idea once enters the human mind it will make an impression that remains there, espe- cially if it enters several times and deepens the impression each time. The source from which the idea came is seldom remembered. As a na- tion, we firmly believe that chewing gum aids di- gestion. We are not at all sure whether we were told it by physicians or read it upon billboards, but we believe it. It is part of our knowledge. Our entire knowledge is full of these impressions. They may be obtained from respectable sources fully worthy of confidence, and so may be of 130 THE A B O'S OF BUSINESS value ; or they may be most injurious and mislead- ing if they are the work of ignorance. Naturally, then, one should never permit his mind to receive untrustworthy information if he can prevent it. It is not enough that someone has written a book on a given subject. Before one allows himself to read it, he should first as- certain, if possible, whether the author had a right to be heard on that subject. We should not carry this to the length of insisting that the au- thor's views agree with our own. Our impres- sions already existing on the subject may be wholly wrong (probably are) and the author may erase them for us and make correct ones. But before reading his book we should use every effort to ascertain that he really is a respectable author- ity on the subject. By this method we exclude from the mind much misinformation and include only knowledge that is probably reliable, and the result of this policy, pursued over a period of years, must inevitably lead to broad understand- ing, correct judgment, and accurate knowledge. It is said that every year about six hundred newspapers and two books enter the average American home. A daily newspaper, containing news hurriedly gathered from all over the world upon a thousand subjects, with no time for veri- HPUOATION 131 fication, printed and distributed within a few hours, by men who, however brilliant, could make no pretense to accurately verified correctness upon all the subjects it must print news about, should naturally not be one's main source of knowledge. It can be safely read as to market quotations, or as to who was nominated for office, or as to almost any occurrence not at all likely to have been misunderstood by the young reporter who gathered the item and hurriedly wrote it in the scant time allowed him. But certainly one would not permit his mind to absorb and retain the impressions that would become his if he read a newspaper account of some new discovery in medicine or astronomy, because it is almost cer- tain that the reporter who got the story was just a bright young man who knew nothing at all about the subject and did not even know the meaning of the terms that were used in telling him about it. It is the duty of a newspaper, of course, to serve up everything new as best it can consistently with speed, which is our first demand upon it. But it is not our duty to expect universal learning and a liberal education from the daily press or, for somewhat analogous reasons, from indiscriminate reading of popular magazines. And these seem to be the main sources of the supply of knowledge to 132 THE A B O'S OF BUSINESS the American people, so far as they obtain knowl- edge by reading at all. We complain of and abuse our newspapers largely because we misunderstand and misapply them. At the cost of a few pennies to us they furnish the news of the day from the entire world, and the governing considerations are compelled to be brevity and speed. To expect thoroughness and reliability as well would be preposterous, and yet, in pure mental indolence, we make the news- paper our main source of knowledge because it is so convenient, interesting, and cheap. The mod- ern newspaper is possibly the most marvelous of our achievements, but we do ourselves great in- jury by reading it in a spirit or purpose for which it never was designed. The harm it does us seems in no way seriously chargeable to the paper but to misunderstanding of it. The harm could be mainly avoided if we would read it, much as it is written, realizing that it is only the world's gos- sip, probably no more reliable than what we hear and repeat to one another by word of mouth. It is hurriedly gathered and we will not wait for it to be verified or corrected. The editors, in select- ing and serving it to us, are probably somewhat influenced by their editorial views and policies, or they would not be human, and being much like the EDUCATION 133 rest of us, they probably, in occasional instances, are influenced by at least reasonable consideration for their advertising patrons, without whom they could not live. If they did not also color it some- what to make it interesting, we would not buy it. These things are all practical and necessary. Ex- perience has proved that we do not want and will not, as yet, support newspapers of any materially different kind. They are pricelessly valuable as newspapers but we should not make them (as we are doing) almost our exclusive source of infor- mation and opinion and expect thereby to educate ourselves into any very high degree of intellectual attainment. The highest duty of management in business is to educate, not merely the manager himself but those below him ; and it will not be accomplished by reading the trade organ of that particular in- dustry. Successful management of large organ- izations consists mainly in the employment of men who are more than merely competent to their sev- eral tasks. Men are competent and valuable not according to what they have been or because of previous experience, but rather according to what they may become and thereafter accomplish by possessing highly developed intellectual power and applying it under the inspiring leadership, 134 THE A B O'S OP BUSINESS suggestion, and advice of a real manager. The most valuable man probably will not be the one who has been the most drilled in routine experi- ence. He will be the one who possesses extraor- dinary qualities. The highest of these is culti- vated intelligence. In its broad sense it, of course, includes character. It may be encouraged and developed anywhere — in the ofiSce or in the ranks of labor. The able and successful manager is the man who oan recognize it when he sees it; who can encourage, develop, and further educate it; who is big enough not to be jealous of it or to suppress it. If it attains to a superiority that finally supersedes and displaces him, then his management has been perfect, justice has been done, and the highest purposes of organized so- ciety have been served. On the other hand, excepting for occasional in- stances of unmerited injustice, poverty and fail- ure are Nature's gift to ignorance. It is unde- niably within the power of almost any American, who has the desire and the determination, so to cultivate his mind and understanding, by elevat- ing association and by study, as almost certainly to compel his own advancement. The distance he can go will be limited only by his own fitness for the performance of higher tasks and better EDUCATION 135 paid ones. K his employer does not allot them to him, some other wiser, and therefore more suc- cessful, employer will, and the more conspicuously he merits it the sooner it will occur. The prog- ress is often very slow, but it is fairly sure. In any event, it is the only road there is. Few even start upon it, but remain, in sodden and indiffer- ent incompetence, where they began, blaming the world and an organized society which they con- sider has enslaved them. It is mainly a self- imposed slavery. Probably the most eloquent advocate of free- dom, and foe of oppression, that America ever produced uttered the just judgment: ** There is no Slavery but Ignorance ; Liberty is the child of Intelligences '* THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO 50 CENTS ON THE FOURTH DAY AND TO $1.00 ON THE SEVENTH DAY OVERDUE. AUG 191936 OEC 2& 1937 S£P 29 m^ K': S ^ '--'-2.'D;7 LD 21-100m-8,'34 YB 059^^ OVJ 519861 UNIVERSITY OF CAUFORNIA LIBRARY