Industry, the Tool of the American People



Delivered before the National Founders Association, Waldorf Astoria Hotel, New York, November 13, 1940

Vital Speeches of the Day, Vol. VII, pp. 210-214.

MR. Chairman and Gentlemen: After hearing Mr. Toland review the conduct of the National Labor Relations Board, I wonder if we gave it a mandate too a week ago Tuesday? As I raise that question, I have in mind an interpretation that came to us last Sunday from Washington, from the Washington correspondent of PM, the former president of the American Newspaper

Guild, in which he said that industry had lost its fight in this election and as a result should expect the consequences and not look for any favors. I think that is an exceedingly significant statement, significant to me from this standpoint: It indicates that industry has not yet completed its effort to make clear to the public that industry is much more than the private property of a relatively few top executives and that industry constitutes the facilities by which all of the American people earn their living and the facilities by which we defend ourselves in time of stress and danger. When such an interpretation of industry, as the tool of the American people, is properly set forth, then the whole cult of business baiting becomes unpatriotic and ridiculous in itself.

In order to get some continuity to the discussion this afternoon, I would like to say that in approaching my subject of "Whither Business," I got a great deal of inspiration out of the pictures and remarks of Dr. Wendt. As you know and I know, in answering this question of whither business, it depends on whether we look at the subject through a microscope, on the one hand, or a telescope, on the other. If we take the near term view of industry, we see a bulge in orders, an expansion in activity, certainly a great increase in the turnover of goods, which will go through the till and from which there will be a substantial subtraction in the way of added taxes. If we take the long view and raise the question of what will happen to the American economy two or three years hence, when this dues ex machine in the form of a new industry—the armament industry—fails to be needed to the degree that appears to be required at the moment, and it seems to me that in the pictures Dr. Frank showed us there is a suggestion of what the answer can be—the answer as to what activity, what normal activities that will raise the material well-being of the people can be substituted in a couple of years for this new industry of making lethal weapons.

I think that the answer must be found in the work of the creative minds of science, invention and engineering in the laboratories of industry and the universities. When our political friends become too pessimistic about the long term outlook for the United States and think that our industries are fully built and that from now on the problem is simply one of re-distributing what we have rather than of growing, I think that they take a static and near term view. They are confused by the fact that our geographical frontiers have been pushed to the Pacific, and think that that is all there is in the way of growth.

They do not see that the frontiers of the mind, of the creative thinker of science, invention and engineering opens up great vistas of opportunity for the future if we can apply our intelligence to the problems of life and living and stop this ten year diversion into the fields of emotional economics and social class warfare. The political long term pessimists, in addition to stressing the disappearance of our frontiers, making it impossible in these days of a young man in time of depression to find alternative jobs in the cities or come to the west and take free land, raises another consideration which justifies their lack of hope in the future of America.

They direct our attention to the statistical fact that the trend of population growth in the United States is slowing up. They point to that as an inexorable fact, something beyond human control or decision.

Personally, I fail to see any dangerous economic implications in the change in population trend, because I believe that the expansion of the future can be based on an improvement in the quality of our population rather than its mere numbers, and that the stress in the long future will be in raising living standards.

But apart from that, let us examine the nature of the argument. There is nothing in the nature of oriental fatalism in this change in population trend of which we hear so much in the theoretical discussions about the long term future of the United States. This change in population trend is something that human decisions have caused, andwe can reverse these decisions any time we wish to do so. The population trend has slowed up primarily because we have restricted immigration in the United States. I am not advocating a change in that policy; I am merely directing attention to the fact that it represents a human decision subject to change.

A second factor, a minor factor though an important one, is the trend in the United States toward birth control. Since Dr. Wendt introduced sex into the discussion, I suppose it is all right to say that perhaps even that too can be reversed if necessary, although it will probably take a T. R. or a Mussolini to start a movement toward bigger and better families.

But I do not think that is the issue. I think the great expansion of the future will lie in the direction of opening up new markets within our gates by raising still further the material standard of living—the living standards of our own people. It will be in the direction of quality rather than quantity development.

But the long view pessimists in the universities and among consultants to the politicians raise another major adverse factor to justify the negative view that the great future of the United States is behind us rather than ahead. That is, they say that in this troubled and war-torn world in which we live the future of our foreign trade is dim and unattractive.

Looking across the seas at the present time, I do not think any of us would take a very optimistic view of the export prospects, but I want to set that trend in a setting which I think the facts warrant.

All through our history we in the United States have been more nearly self contained than any of the other principal industrial nations of the world. We have been less dependent on foreign trade for our national income or the material welfare of our people. For instance, during the years 1927 and 1929, the people of the United States got but six per cent of their national income from export trade, whereas Great Britain got twenty per cent, Belgium upward of sixty-five per cent and Cuba between sixty-five and seventy per cent. So I say you cannot apply these theories of the importance of foreign trade to a country universally throughout the world, but must distinguish between the particular composition of the national life nation by nation. And in this troubled and upset world in which we live, and in the mess which will follow this war in which the competition will be keener than ever in the international field, it is fortunate for the future of American prosperity that we are set up largely as a self contained nation.

But we cannot rest too easily in that knowledge, because theorists who have not approached this subject from the factual standpoint and the standpoint of sanity have been trying in the last six or seven years to tear away the legal basis for this economic self-containedness of the United States, and under the guise of trade pacts have made some twelve hundred reductions in American tariff rates. Right now, after a decade of failing to deal realistically with our economic problems, we seem to be swept by circumstances toward an easy solution. We are no longer troubled by specters of surplus capacity, unwanted machinery and tools and tremendous surpluses of skilled and efficient labor. On the contrary, with a quickening of the national defense program there has been in these last few weeks a reversal of business psychology, and in the process, by the way, there has been an abandonment, for the first time in nearly twenty years, of the widespread industrial habit of hand-to-mouth buying.

We see some scramble to build up inventories, some effortof the purchasing agents to beat the gong on priority orders and make sure that their companies have what they need in case some bureaucrat, mistakenly or wisely, issues an order preventing the flow of materials along normal lines.

In my talks with the heads of great industries, they tell me that these fears, this hysteria about shortages, is, in most instances, not warranted. I received a memorandum before I came to this meeting from Mr. Grace, of the Bethlehem Company, in which he said that in the steel industry he felt that the capacity was available to meet the demand of the United States government, to meet the demand of the British government, and at the same time to take care of civilian requirements. He said further that he found no need for a price advance in steel.

I wish I could be as optimistic on that point as Mr. Grace. But I think that with the rise in taxes and with the potential rise in labor costs with the problem of time and a half for overtime, there is a very grave danger that the desire of the responsible executive of a corporation to hold down costs cannot wholly succeed in the face of the trend; and even in this fourth quarter of 1940, I do not think you will see reflected in the net profits of the most active companies in this defense program the full scope of their industrial volume in these weeks because, it seems to me, that the tax burden has come so late in the year and its full scope is still unknown—since there may be additions to the tax laws for 1940—that the changes in the tax burden came so late that they could not be fully reflected in the price scheduled. Certainly there will he a tendency of net profits to lag somewhat behind the acceleration in gross volume and gross income. Fortunately there will be a constructive offset in the group economy of reduction of unit cost of overhead as volume expands.

Irrespective of whether the chief executives of responsible corporations are successful or not in resisting tendencies to shove costs and prices upward, I think as a matter of policy there is a grave obligation on the part of the businessmen in this period to stand at the economic pass, at the Thermopylae of industry, and resist inflationary tendencies with all the strength that they can command. Because, if they take the easy-view "cost plus" philosophy—that they can pass on any increases in cost to their customers, especially the one big customer, the government, which is run by politicians not too interested in costs, that if businessmen pursue this easy course and permit a spiral race to get under way between wages and prices, they will unloose forces which in the long run they will be unable either to control or adjust themselves to. Then the seeming profits of this period of quickened activity will be flushed away by the subsequent correction and deflation which will come later. Thus, it seems to me that there is now a strong obligation on the part of the chief executives of industry to pursue the true and authentic economic rule and resist cost increases.

In attempts, through better methods, to reduce costs wherever possible as an offset to the inevitable increases in the tax element in business costs, and where the wage question arises, it is extremely important that there be a community of thinking on the part of management and employees. Employees must be made aware of the danger of the spiral race between prices and wages, in which labor, like capital, in the long run will get costs and get licked. In this period of quickened activity in the heavy industries, in which gross volume is expanding, employment is increasing and orders are coming in with a rush, this is the time when the management quality is more important than ever before in understanding what true costs are. It is important that in an excited and hysterical period such as we are in,you should not overstate your current profit through a failure to understand your authentic costs, because if you overstate your profit now and thus increase your tax liability under the normal tax laws and excess profit taxes, or if you overpay your liquid funds out in dividends at the present time, you will lack the funds which are needed as reserves later when the reversal comes, when peace comes, when we again begin to recognize that the role of industry is to produce better living for the common man and not merely to go into this side show of producing battleships, tanks, guns and other things which are highly necessary in an emergency but which men cannot eat and cannot wear and which do not fulfill the human craving for better living for the common man.

In terms of accounting, in terms of sound bookkeeping, we must distinguish between the illusory profit of the moment and the long-term results of this distortion of our economy by the emergency in which we find ourselves.

I have talked a good deal to industrial groups since the beginning of the year last year about the importance of writing off new capital investment at a sufficiently rapid rate. When I did so, businessmen would say, "That is fine; we agree with you, but will the Internal Revenue Bureau permit us to do that?" I said, "Under the existing law as it stood before this recent enactment, probably not, but if the bureaucrats fail to understand your true costs, at least be clear in your own mind about what your true costs are, and if necessary keep one set of books for taxes and another set for determining your policies." Since then, with the aid of Mr. Knudsen and others, they have permitted the five year amortization.

It is an interesting sidelight on industrialists in public affairs that Mr. Knudsen said that it is important to get along with these people down in Washington and not antagonize them. He said that a very distinguished member of the Senate was opposed to the amortization, and Mr. Knudsen went to see him and they had a talk and the Senator said he didn't know what it was all about. He thought it was a plan whereby the government would give the industrialists the plants as a present in five years. Mr. Knudsen said, "I explained it was only a plan to determine the taxability during that period," and then Senator said, "You have got my support," and he got it through.

I would like to go a step further than that. It is important not only to have clearly in mind the fact that in war the rate of obsolescence and depreciation is necessarily accelerated because it depends on how long the emergency lasts. This applies not only to the writing off of capital for tax purposes, but also has a great bearing, in my opinion, on the attempt to pay out liquid earnings to stockholders as dividends. If you overpay during a period of boom and great activity, you may find your company facing an ill wind when the day of correction and reckoning comes, while if you retain as special reserves against this contingency these liquid funds, you are protecting the corporation and the stockholders who eventually can participate fully in the fruits of wise, frugal and prudent industrial management.

I think, too, that in addition to setting up reserves against the accelerated depreciation of special war equipment, it is wise, as the rise in prices of commodities develops—when, as and if that occurs—that instead of permitting distinguished economists from the universities to tell you businessmen that we are again on a new highway and that this is the new norm and we will never go back to the dismal days of 1938 and 1939—that we might, instead, have some honest skepticism in our minds and say that when the stimulus of war orders from the United States and from Britainwanes, that there might be some decline in prices. Against that contingency I would suggest that you set up special financial reserves against possible inventory depreciations. If you find that you were wrong and that you were too conservative and that, instead of the decline, prices advanced still further, you will still have those funds available. But, if you pay them out in dividends and then have a decline, you may be seriously concerned with the solvency of the assets over which you preside.

As a third step in how to behave in times of hysteria and boom excitement, I would suggest that you do not get oversold on the idea of keeping down unit overhead, i.e., the unit cost of overhead, through expansion in volume except in times when your orders warrant so doing. I think you ought to attain your production strictly through changes in orders. It is better to cut down production and let unit overhead costs rise somewhat than to build up an inventory of finished or semi-finished goods which, under a reversal of conditions, might be unsaleable at anything like the prices at which they are valued.

In saying these things to you, gentlemen, I am only assuming that if we have two major wars within one lifetime, it ought to be possible to learn something out of experience. When the politician, in setting up his laws and policies, says, "We want to accelerate production, we want to build a two ocean navy, we want to produce more tanks than the Japanese, more guns than the Italians and the Germans, and whatnot, but we don't want to make any wartime millionaires," I say there is confusion and contradiction in his thinking.

The talk of wartime millionaires is rather unwarranted by the record. There were, during the last war, speculators and short time millionaires, but nature took care of them. For the most part, those who made it quickly without rendering a real service, lost it with even greater speed in corrective reaction.

I think it would be more intelligent to declare in our thinking what our objectives are, to declare that our objective is to accelerate industrial production and get the goods out.

We ought to have the practical wisdom to know that under the present price system, production will climb to maximum volume is you give assurance to people that under the profit motive they will get an opportunity to get their investment back, that they will not be working solely for the tax collector. Why, even in Nazi Germany, where no sense of justice prevails but where they have the hard-boiled, intuitive sense to know that if they want to have production they must safeguard the facilities of production, they allow a six per cent return on tools ahead of taxes.

I want to go back to what I said at the beginning of my talk, to this little remark of Crawford in PM, in which he said that industry had lost the election and should expect to take a licking and ask for no favors. My thought about those remarks was that they emphasize and should point out to industry the fact that it has not yet done the job of educating the public as to what its function is and what service it renders. When the Gillette razor was made and it started a new habit in shaving, the company not only had to sell a razor but it had to sell a form of education as to the new type of shaving in order to get the proper reception from the public. Thus, in order to get the appreciation which industry deserves from the general public, from labor, from voters, from the mass of stockholders, industry not only has to do a good job, which is the fundamental thing, but it has a secondary role in a democracy—an obligation to let people know what industry is, whatservice it is rendering and why it is bad for the people to permit demagogues, fakers, word mongers to confuse the issue. And in carrying on this educational campaign, industry has an obligation never to try to gild the lily.

If it is doing a 95 percent job, it has an obligation not to overstate it and say it is doing a 100 percent job. It should do its educational job each day in its normal relationship with its employees, its customers and its stockholders, and one of the most effective ways that industry can tell the truth to the public about itself in a dramatic form is through the reclassification and simplification of the figures of corporate accounts.

There has been a very significant intellectual revolution in this country within the last few years. It culminated a few years ago when the United States Steel Corporation, in a short accounting form, stated the essential facts about its social and economic place in the life of the nation. Until recently, under the traditions of the old-fashioned accounting which had grown up in the nineties, when the purposes of industry were different, when the main objective was the building of bigger and better plants, the emphasis was on the net income. But in this present day of changing social and political debates, that old form of cumbersome and complicated accounting which played into the hands of the enemies of industry is obsolete.

In this new type of streamlined accounting of which I am speaking, you can, each time you present your statement, make perfectly clear the role you play in our modern society as an agency for putting yourself on a firm foundation through pleasing your customers, through offering materials and services at a price and of a quality that they approve and of which they show their approval by placing orders.

On every industry, on every corporation, there is a democratic control in the form of a consumers' plebiscite, and unless your customers approve of what you are doing as to price, quality, style, design, technique and the like, they have the power to destroy you through the simple and undramatic act of withholding orders. Size is no protection against this check. You will recall in 1927 that the largest automobile manufacturer in the world temporarily got out of touch with his customers. He forgot this basic principle that the customer is the boss, that the customer really employs labor, that you, as chief executives are merely the middle men who do the hiring, but that the means and wherewithal for paying wages, taxes and all the rest, comes from the customer. So, you have at the end of the year the gross receipts which you receive from your customers in payment for goods and services sold, and in disposing of these gross receipts you must look at your cost sheet.

The difference between the politician and the businessman is that the businessman is perpetually disciplined by the cost sheet and faces five major items of cost.

First, and this is becoming an increasingly important element in the cost of goods, is the tax, the cost of maintaining government—national, state and local. You do not have much power to control that element of cost as an industrialist, though as a citizen you do have at least one vote. This tax element of cost is becoming increasingly large and will be more so in the coming months and years, and as far as the businessman is concerned, it is an inflexible and rigid element of cost. When the politicians and the Department of Justice and the theorists begin to berate you for inflexible prices, you might, in your analysis, recognize the rigidity of the elements of cost over which you have no control.

Next to the tax cost is the second major element, the cost of the goods and services purchased from others, including electric utilities, railroads, supplies of raw materials and other things you buy. The management of a company has very little control over that element of cost in business, electric services and rates being very often prescribed by control bodies, and he cannot control the price of the raw materials he buys.

Thirdly, is figuring depreciation on machines, tools, plant and equipment, obsolescence and interest. In the case of mining companies, the depletion element is important. If those costs are correctly figured, the executive has very little control over them.

After these three elements of cost have been met, if there is a residue and this residue is available, it must be split between capital and labor. Out of that residue over a period of eighteen years, the steel corporation, breaking down its data, showed that it paid about 95 per cent of the residue to employees as wages and salaries.

So, your fourth major category is the cost of human service directly employed by the corporation, because under your goods and services purchased from others, you were employing labor indirectly in the form of work in the mines and factories of your suppliers, and in your first element of cost—your tax cost—you were also giving employment to labor. You were providing the funds for the payment of government clerks and WPA workers and the whole array of useful and other public servants.

Then, you have your final element of cost, your capital cost. Sometimes this is described as a wage payment for the use of the took. This is a residual and contingent factor, and except where there are bonds and other evidences of debt, it becomes a claim only after the previous elements of cost have been met. In the case of the steel corporation over a nine year period, the return for the tools provided out of the savings of the stockholders averaged around two and a half per cent, I should think rather an inadequate rate of return. The steel corporation, although a monopoly, must be a rather injudicious form of monopoly because it was working primarily for the employees and the tax collecting agencies and only saved a very small return for the depositors.

So, when you reinterpret yourself in human terms, you are taking the first step toward meeting the problems of criticism and misunderstanding which befog you, because when you break down your operations into terms of simplified income accounts which meet the social issues, you reinterpret the modern corporation which has been so much berated in the literature of recent years and set it forth for what it is—a cooperative agency for gathering together the savings of many individuals and purchasing with those savings better, bigger tools and superior power equipment. It can be used to build up and increase the productivity of human labor, thus enabling the workers to earn more and get paid more and at the same time enabling the employer to reduce his operating costs and to offer to customers more and better goods at lower prices. And all this goes on while the kitty for the government becomes larger and larger.

In the case of the oil industry, the kitty is so important that practically all the fruits of the better technology of the last decade have come, not to the customer in the form of lower prices or to the owners in the form of increased profits, but have gone to the government in higher taxes. In the last year the members of the American Petroleum Institute paid out in taxes one billion, two hundred million dollars, which equals their total wage bills, so that if theworker is dissatisfied with his wage rates and wants to throw rocks at somebody, instead of throwing them at the stockholder or the capitalist, it would be more intelligent to throw them at the tax collector. Thus, unless you break down your statement into forms that can be grasped and understood by the people who are not CPA's, you have hurt yourself and prevented yourself from getting the support which is deservedly yours.

In this present year, 1940, the taxes paid locally, nationally and to the states by upward of four hundred thousand corporations, will produce about 70 per cent of their total wage bill. The spending of government—national, state and local—before we embarked on this accelerated armament program, was double the annual income of all the farmers in the United States. But until these facts are brought to the consciousness of the workers and farmers and stockholders and customers, they will still operate under the delusion that a friend of mine had the day after the election, when he said, "It is perfectly obvious that the minority in the United States was composed of taxpayers, mainly the large taxpayers." The assumption was that the majority vote consisted of boys and girls who were going scot free of taxes. But let us examine that for a minute.

Mr. Willkie received twenty-two million votes, and only four million persons have incomes sufficiently large to be federal taxpayers; so there were some eighteen million other supporters of the minority who were not sufficiently big shots to be in the group of federal income taxpayers. Now let us look at the other twenty-seven million. Were they really free of taxes? Of course not! We heard the truth about taxes from the worthy lips of our distinguished President in his Pittsburgh address in 1932, in which he said, with much evident truth, that taxes are paid in the sweat of every man who labors. You and I know that every one of the forty-five million gainfully employed is a taxpayer, whether he is on the income tax rolls or not. He pays taxes in the price of every article he buys, in every monthly rent check, but the significance of this is lost by the fiscal trick of publicizing the expenditures of the government and concealing the receipts and camouflaging the sources of the receipts of the government.

The modern corporation should not be set forth as a taxpayer. It should be more accurately described as an agency for collecting taxes from customers in the cost of goods and redistributing the tax to the government in the form of taxes. Then the public gets interested, because it is their taxes, it is their burden and then they come to realize that if we fulfill this new spending program, we shall be called on, that is, the average gainfully employed worker, to work two days for the government for every three days he works for himself and family; whereas, in 1890 the ratio was about one out of fourteen for the government. Unless we put the facts of our economic life in such simple and dramatic form, we will be victims of the phrase makers, we will be victims of the demagogues. The need for clarification, the need for understanding, is greater than it was two weeks ago, because you and I know that we will not get the production that is essential merely by accounting to the people for what you have done. To your good work you must have the energy and capacity to give a social accounting, and when you do that, you will be amazed at your own power, at your reborn prestige. Because in peace and in war the man who makes things, the man who knows how to achieve production and distribution is the useful person in our modern society. It is time to honor him and respect him and not to throw mud at him. Thank you.