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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


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The A B C's of Business

* .

BY

HENRY S. McKEE

iReto goriiTHE MACMILLAN COMPANY

1922All rights reserved


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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 ofJ. J. Little Ives Company

New York, U. S. A.


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INTRODUCTION

Probably the greatest resource of any countryis the cultivated intelligence of its people.

Inasmuch as American industry has for its ob-ectthe fullest possible development and use of

our country's resources, then this particular re-ource,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 ofthe governing principles of business, of how welive and are industrially organized, was one of themost amazing of the many discoveries about our-elves

for which we are indebted to the WorldWar. Our war task was rendered gravely difficultby Democracy's greatest menace well-meaningignorance. At every step of our national life wehave been hampered and often seriously injuredby the wide prevalence of unsound economic andfinancial doctrines, urged upon us with all the sin-ere

zeal of half -knowledge.As a nation we are ingenious, courageous, origi-al

and inventive, industrious, and various other

519861


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VI INTEODUOTION

things greatly to be admired, but as to any wide-preadknowledge of how we are industrially or-anizedfor our national tasks, or as to any under-tandingof the economic principles that must gov-rn

our conduct and determine our success or fail-re,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-eveloped

national wealth, awaiting only the ser-iceof a higher popular intelligence and a greater

intensity of interest in business, economic, andfinancial subjects. In what follows there is littlepretense to any scientifically instructive contri-ution

toward such education, but merely sug-estivereference to and comment upon matters

deeply affecting the daily life and work and wel-areof all of us, upon which complete and popular

enlightenment would do more to enrich us thanany other of our vast sources of future wealth andnational contentment.

Acknowledgment is made to Stewart McKee,who contributed the chapter on Internationalismand supplied helpful criticism and suggestionupon the remainder.Los AngelesOctober, 1921


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CONTENTS

Introduction y

CHIPTBR

I. The Complex Character of Our BusinessOrganization 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


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THE A B C'S OF BUSINESS

CHAPTER I

THE COMPLEX CHARACTEB OF OUB BUSINESSORGANIZATION

If American business is to be understood at all,it must be viewed as a whole. And yet few of usever see or come into contact with more than apart of it, so small as to be almost microscopicin relative importance.

It is transacted over an area three thousandby two thousand miles in extent, while each oneof us goes seldom outside an area of a few cityblocks. It is conducted by a population of onehundred and ten million people, whereas each ofus knows hardly more than a few dozen. Oneman, working yesterday in his office or farm orfactory, knows what he did (and may or may notunderstand the true significance of it). He per-aps

knows a little something of what was doneby a few who stood in immediate contact withhim. But throughout the nation perhaps fortymillion people worked that day. When night


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10 THE A B O'S OF BUSINESScame they had accomplished a great total ofmainly creative work. He knows nothing of whatany of them did. And yet they were all workingfor one another. Each one was producing some-hing

for the use and benefit of the others. More-ver,they were all doing this in obedience to

(or more likelyin violation of) certain economiclaws which were enacted by no legislature; whichcannot be repealed ; which are self-enforcing lawswith severe punishments for disobedience. Thesepunishments take such forms as the panic, theperiod of disaster and business depression, un-mployment

and the bread line. Being, as wehave been called,a nation of economic illiterates,we do not understand that we brought these visi-ations

upon ourselves, nor how we did it.In our social and politicallife,governed by

legislaturesand the police,it is an axiom thatignorance of the law excuses no man. But in ourindustrial 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 usthink that there are no such laws and so areunaware of having violated them, just because wedo not see the policeman and are not formallyaccused by the district attorney.We know that as a people we are periodically


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CHARACTEB OF OUB BUSINESS ORGANIZATIOIT 11

punished in the form of hard times or lost jobs orhigher prices or tight money, but we do not knowwhat we did to deserve it. In this case, too, igno-ance

of the law excuses no man. The reason wedo not know what we did is that as a people wenever read the law. We do not know we have beenviolating one. We do not even know there is aneconomic law. We see no attorneys about whoexpound and practice it,and give us warning.There are some, but we do not recognize them asbeing such; for they are in contempt with mostof us as being merely impractical theorists,wholecture at universities or write supposedly learnedbut very obscure books of little practical value.In addition to these, there is now and then theoccasional studious business man or banker, buteven he is apt to be regarded by the more hard-headed, who rely upon experience, or by theleaders of organized labor who seem to get theirwisdom by inspiration,as being over-educatedand a theorist. The charge that is made againstthese men, the economist and student,is that theyhave what is rather scornfully called book knowl-dge.

Just what kind of knowledge this was be-oresomeone put it in a book has never been quite

fuUy explained, nor how putting it in a book sub-ractedanything from its value.


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12 THE A B O'S OF BUSINESSIf one could rise to an altitude high enough

above the United States to bring it aU within hisrange of vision and then view it through a glasssufficientlyowerful to show the detail,he couldview this country as one great industrial estab-ishment

employing one hundred million people.The thing he would see might be called the plant.It has an investment value of perhaps three hun-red

billion dollars. This plant, or fixed invest-ent,consists mainly of farms, mines, factories,

railways, ships,docks, warehouses, officebuildings,banks, wholesale stores and retail shops, schools,dwellings, wires, pipes, and machinery. Aboutthe proper amount of each one of those thingshasbeen provided, through the free operation of thecompetitive principleand the right of every manto select his own occupation.

This plant,has been built and is being operatedfor no other purpose than to provide the Americanpeople with the things they want. It was builtand is operated under the government of economiclaw. It is the best plant in existence,with roomfor immense further development. It containsthe greatest known stores of raw materialwaiting to be worked up. Its hundred mil-ion

workers are probably not equaled inskill by any other body of workers of the


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OHAEACTEB OF OUB BUSINESS OEGAISXZATION 1^same size in existence. These workers pro-uce

for themselves and enjoy more of the neces-aries,comforts, and luxuries than any other peo-le.

It is said that the annual output of the plantin goods would be valued at perhaps forty or fiftybillion dollars. The American people usually con-ume

all these goods which they produce in thisway during the year, except perhaps five billiondollars' worth which, in one form or another, re-ains

in existence as new wealth. Probably thisnew wealth finallytakes the form of additions tothe plant,new construction,or perhaps partly theform of debts due us from foreign countries towhich we send some of the goods. The distribu-ion

of the goods that are produced is not alwaysjust and equitable,but in the main it seems to betrue that this plant, like most private concerns,really seems to pay its workers about in propor-ion

to the value of the services they render. Theaverage American seems generally to get out oflife just about what he puts into it. The worldhas a way of paying him about what his servicesare reallyworth.

Naturally, an organization so highly compli-atedas this is easily thrown out of adjustment.

A state of prosperity may be said to exist wheneach branch of industry,working to full capacity,


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14 THE A B C'S OF BUSINESSis turning out just the right amount of productto serve fully the needs of other industries thatare related to and dependent upon it; so thatevery plant and every man is fullyemployed andnot delayed or hindered by troubles in someother essential part of the plant.

A prosperous year is one in which, with abun-antcrops from the farms, there was also mined

the proper amount of coal to keep the boilers go-ngin the factories, locomotives, ships, power

plants,and houses ; in which the wool and cottongrowers furnished the textile mills with a fullsupply of raw materials for cloth; in which themakers of dye stuffs produced the correct quan-ity

of dyes ; in which there was delivered to thesteel industry an unbroken supply of ore andcoal, to enable it to build for the farms the rightamount of harvesting machinery and for the citiesthe right amount of structural steel and indus-rial

tools ; in which all these things were done atexactly the right time ; and perhaps, in all thingsexcept crops, a prosperous year is one in whichour railway system finds itself adequatelyequipped and in sound physical condition to movepromptly perhaps fifty billion dollars' worth ofthings from place to place,to pick up each thingwhere it is and move it quickly to the place where


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CHARACTEB OP OUB BUSINESS OBGANIZATION 15it is going to be needed next, without keeping any-ody

waiting in unproductive idleness. A pros-erousyear would be one in which one hundred

million people each did a full day's work on everyworking day, finding it each day possible to doso because of an abundance of tools and materialspromptly supphed to each one by virtue of thefact that every other man, on whom he depends,was doing his full part.

In such a year as this the American plantmightturn out twice its normal output of the neces-aries,

conveniences, and luxuries of life. Every-hingwould be abundant and prices consequently

lower. Everyone would be employed and conse-uentlyable to buy his fair proportion of what the

plant produced. America would be called richand prosperous. It is a state of affairs that isgradually approached as we bring the variousparts of our plant into nicer adjustment to oneanother in obedience to economic law.

It is said that in this American plant a varia-ionof some ten per cent in the total quantity of

goods produced marks about the difference be-weena boom and a business depression. This

variation may be quite easily brought about, aswe have gone so very far in applying the prin-iple

of the division of labor that disturbances


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16 THE A B O'S OP BUSINESSmay proceed from very remote causes. The sup-ly

of paper pulp from distant forests has beenknown to fall so low as to threaten to suspend thepublication of newspapers. Little general anxietywas felt. Perhaps there was occasion for none,but the danger called attention to our unconsciouscomplete dependence upon the press for manythings, among them daily market reports, with-ut

which all commerce would fall into confusion,as few would know the value of anything. Itsemns probable that the publishing and book-sell-ng

businesses must have sustained considerableinjury by the invention of so remote a thing as thegasoline motor or the motion picture camera, asthese new recreations drew readers from the li-rary

to the highway or the theater.Some of us, whose preference is for general

business,employ our entire capitalin that and soprefer to pay rent for the use of the premises, in-tead

of investing capital in land and buildings.Others know nothing of business, so do their partby erecting buildings and providing housing forbusiness and residence. If there is a scarcityofhousing, tenants compete for its use by offeringhigher rents. These high rents attract more capi-al

into building and thus we are soon providedwith an adequate supply of housing. As we get


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18 THE A B C'S OP BUSINESSA Boston banker who, every year, loans moneyupon the security of wool lying in Boston ware-ouses

was recently attracted by the higher in-erestrate obtained by a banker friend in Flag-taff,Arizona, but upon learning that the Ari-onabank's security consisted of sheep walking

about for months through a vast range of moun-ains,he viewed the loans as simple western in-anity.

What he said was that back in Bostonthey would **justas soon loan money on a shoalof shad out in the bay/' And yet he is in gen-ral

a very intelligentman. He simply did notrealize that he and the Arizona banker were bothreally in the business of producing wool clothing.They are both a part of that industry. Eachknows only his triflingpart of the industry,whichis to extend credit against wool at a particularstage of its progress from the sheep range to theretail clothing store.

During the war there was great uneasiness inCalifornia because the people of that state werecontinuously paying the Government vast sums ofmoney for bonds and taxes, and the Governmentwas spending it all in the Eastern munition cen-ers.

California was expecting to be thus com-letelydrained of money, and yet the opposite

happened. The process afforded a perfect oppor-


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CHABACTEB OF OUB BUSINESS OBGANIZATION 19tunity to observe the workings of the Americanindustrial plant, regarded as a whole, workingunder that fundamental principle of modern in-ustry

known as the division of labor.It is true, of course, that the completed guns

were delivered to the Government and paid forat,perhaps, Bethlehem, Pennsylvania,and a man-facturer

there received the final purchase pricein money, but before receiving it he had alreadypaid out nearly all of it for labor and material.The money he had spent for material and themoney his workmen had spent for things to wearand eat had already reached nearly every statein the Union. Even what remained to the manu-acturer

probably went to the holders of his bondsand stocks, and these might reside anywhere.Most of what he received was paid to workmenand they spent most of it within the same week forthings produced in distant places. The thing isso complicated the human imagination can hardlyfollow it. When an employee of the BethlehemSteel Company does so simple a thing as use amatch to light his pipe, he has spent money innumerous localities. He has paid some Northernstate for the wood in the match, a Southern statefor the chemicals in the match head. His cloth-ng

came from Southern cotton or Idaho wool;


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20 THE A B C'S OF BUSINESShis food perhaps from the Pacific Coast. Everystate in the Union takes part in the manufactureof virtually everything that is produced by in-ustry.

It, therefore, turned out (though it isbut little understood) that California got part ofits bond and tax money back again by sellingbeans to a miner in Arizona, who produced cop-er

that was finallyturned into a shell casing atBridgeport. The important fact is that, underthe principle of the division of labor, we profitmost by producing those things we can producewith the greatest economy and abundance.

The simple fact is that American business isnothing but the work all of us are performingevery day, each according to his choice. In do-ng

this work we have only one purpose : namely,to produce food, clothing,shelter,and some addi-ional

conveniences, decencies, and luxuries,andto divide and distribute these among ourselves andlive upon them while producing more. Naturallythere is nothing to divide and live upon exceptwhat we currently produce; unless we choose todivide and consume the plant itself and thus re-tore

America to the condition in which Columbusdiscovered it when inhabited by Indians. Thenatural resources of America were as great thenas they are now. We live better than the Indians


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CHABACTEB OP OUR BUSHfTESS OBGANIZATION 21only because we produce more. We produce itfrom the very same sources, but we have increasedthe output partly by building up a great mechani-al

plant (the investment of capital) to do mostof the work, instead of merely usiug our nakedhands, and partly by training each man to pro-uce

one thing only, in great quantity; relyingupon others to supply him with everything heneeds in exchange for his own output.

In its simplest terms we might imagine a greatnational market place,to which each man goes anddeposits there the thing he has produced in greatquantity, satisfying his own needs by carryingaway a small quantity of each of the innumerablethings that others have brought. Most of theconfusion of thought about business seems tohave begun when we gave up the simple practiceof barter at the market place and passed intothe more modem and complex usages of com-erce.

At that time we invented a new standard-zedtool known by the name of money, and its

purpose was to facilitate our exchanges. Westopped trading things for other things and begantrading things for money and the money for theother things. We thus got to thinking and talk-ng

of everything in terms of money. We are stillbartering things for things just as essentiallyas


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22 THE A B C'S OF BUSINESSwe always did, but because we never see but halfof the complete operation money standing al-ays

in between ^we have lost all realization ofthe simple truth that we are still trading thingsfor things and that money is a mere tool,and wehave come to regard it as an end in itself. And,to make matters worse, money, like most other in-entio

has had improvements made upon it inthe form of paper tokens, credit instruments, andbookkeeping entries which are used in place ofit,and these have still further disguised the realnature of money and obscured the truth about ourreal transactions. The essential and importantthing about it all is that we simply produce goodsand services and trade them for other goods andservices,and we can only divide among ourselvesin this way what our united efforts have produced.We have national prosperity or poverty as weproduce much or little.

The thing that has distinguishedAmerica as anindustrial country is the great abundance of itsproduction of wealth in proportion to its popula-ion.

Aside from certain personal qualities,suchas inventiveness,resourcefulness, and adaptabil-ty,

inherited from Americans who, for severalgenerations,developed those qualitiesby pioneer-ng

the wilderness that lay west of them, this


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CHARACTER OF OUR BUSINESS ORGAITIZATION 23great productive power per inhabitant is due tothe unequaled extent to which we employ tools,machinery, and equipment. No other nation util-zes

so many mechanical horse power per man.Billions of tons of freight and endless passen-ers

require to be moved from place to place,andthe performance of this task, of indescribablemagnitude, by the two million men who are em-loyed

in the railway service,has been made pos-ibleonly because for each man so employed we

have invested ten thousand dollars in railways;yet so littledo we heed the significancef this thatour popular attitude toward this twenty billiondollars of railway capital is one of resentmentand hostility,and we normally starve it into astate of dilapidation.

This, then, is the highly complex and delicatelyadjusted business organization we are operatingin America. When it gets out of adjustment andslows down, as all complicated machinery doeswhen out of adjustment, few understand what hashappened, 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 adequatewarning against hasty and radical attempts toalter the existing social and industrial struo-


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24 THB A B O'S OP BUSINESS ^

ture, every period of temporary industrial dis-ressbrings forward well-meaning proposals of

unsound economic, financial, and political doc-rines.Their enactment into laws is urged with

all the zeal and courage of ignorance. They aregravely dangerous because of the very sincerity oftheir well-intending advocates. They are utterlyincurable except by education in business, in eco-omics,

in sociology, and in government.


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26money was handed to him, but he had not been.He did not even know when he received the moneyhow much he was being paid. He only learnedthe amount of his real salary when he finallyhadit handed to him in goods. The money that hewas temporarily carrying was only a token thatentitled him to go to various shops and places andcollect his real wages. His real wages were justhis fair proportion of all the various goods wehad all joined in producing. If we as a nationproduced much, he received much. If we onlysucceeded in producing a little,r if we wasted agreat part of it in war or foolishness or incom-etence,

then his share became less. The amountof money was just one of the tools used in indus-ry.

It was a kind of conveyor upon which hisreal pay was carried to him from the grocerystore, from the picture theater,or from the doc-or's

office.He could elect to take his pay in anything he

pleased: food, clothes,amusements, services, orhe could save his money and decide later, butsooner or later he is paid in things ^not in money.The fluctuations that have taken place in pricesmake this plainer than it used to be. The manalways speaks of his occupation as if it were athingby itself and the aim and end of it all were


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THE MISUNDEESTANDING OF MONEY 27to exchange it for a fixed amount of money. Thefact is that the man is really taking part in theproduction of nearly everything. If a bankerloans money to a baker to buy flour,then thebanker is really producing bread. When the phy-ician

restores the health of a temporarily sickbutcher, he is not practicing his dignifiedprofes-ion

aboye the level of the common world; he isat the moment producing meat, and so is the car-enter

who built the counter in the butcher shop.Of course the surgeon and the carpenter cannotbe paid directlyin meat, nor the banker in bread.To meet this difficulty,e have gradually evolvedand adopted the practice of distributing littlemetal and paper tokens, and we call them moneyand have certain agreements and practices aboutreceiving them from one another in exchange forgoods.

The next great source of confusion aboutmoney is our loose use of the word, our failure tounderstand what money is and where it comesfrom. Strictlyspeaking, the only money in Amer-ca

is gold (a limited amount of silver,unimpor-ant,however, for the purposes of this discus-ion).

Of this gold there is perhaps three billiondollars,and most of it lies in bank vaults, for thesole purpose of being used to pay deposits or


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28 THE A B O'S OF BUSINESSnotes in case anybody really wants them paid inactual gold. The gold, in other words, is held inreserve for this purpose, and so these great storesof it have come to be spoken of as bank reserves.The gold used in this way renders the country amoney service probably ten or twenty times asgreat as it could render if it were in circulationfrom hand to hand. Prior to 1914 this gold re-erve

was subdivided among about twenty-fivethousand banks in the United States. Since thecreation,in about that year, of the Federal Re-erve

System, each of these twenty-fivethousandbanks (except a few which are not members) hasdeposited its gold in the nearest Federal ReserveBank, of which there are twelve, with branches.It is stilljust as available to the banks as beforethey did this and by doing so they have multi-lied

its effectiveness. So that there is a greatstore of gold in the vault of each Federal ReserveBank.

The relation between a Federal Reserve Bankand the surrounding banks in its district is prac-ically

the same relation that exists between anybank and its customers. That is to say, a bankcarries a balance on deposit with the nearest Fed-ral

Bank and also borrows from it,if need be,by rediscounting its customers' notes at the Fed-


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THE MISUNDEESTANDING OF MONEY 29eral Reserve Bank. This banking machinery soarranged undoubtedly constitutes the most per-ect

and highly developed banking system in theworld; also the most powerful in the service itcan render.

It is practicallytrue, then, that the only realmoney in the country is gold and its amount variesbut little except when it is imported or exportedin settlement of trade balances with foreign coun-ries.

Everything else that we speak of as moneyis in realityonly bank credit. The amount of thisis very great. It can be created to any extentnecessary, subject to the limitation that it mustnot be created beyond the abilityof the gold re-erves

to redeem it upon demand. It exists intwo forms, bank notes and bank deposits. Theydiffer only in form. They are the same thing insubstance and are interchangeable. Banks bringit into existence by the process of making loans.The borrowers to whom the loans are made putit out of existence again when they pay the loans.If a baker needs to buy $10,000 worth of flour andhis bank balance is exhausted, he borrows thatsum from the bank. The prevalent idea of thistransaction seems to be that the banker loans hima particular $10,000 which he happens to haveabout him, probably having been recentlybrought


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30 THE A B O'S OF BUSINESSin in money by some opulent depositor. The thingthat reallyhappens is that the baker signs a prom-ssory

note for the amount and the bankermakes two bookkeeping entries. He charges'* Bills Receivable/' meaning that the note hasnow passed into the bank's assets, and he creditsIndividual Deposits/' meaning that he hasplaced the amount of the note to the credit of thebaker's account. By those two entries the bank'sloans increased and its deposits also increased,each by the sum of $10,000. There was no moneyused in the transaction; nothing but ink. Thebank deposits went up. The baker now speaks ofhaving money in the bank. It is not money; itis bank deposits or bank credit. The circulatingmedium in this country is not money; it is bankdeposits. It is created as in the last transaction.It circulates by the use of the bank check. Thebaker hands his check for $10,000 to a flour millerfor 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 bakersells bread and every day deposits in his banksome checks given to him for bread by retailgrocers. When his balance is finally built upabout $10,000,he pays his note by giving his bank


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THE MISTTHDEBSTASTDIKG OF MONET 31a check for $10,000. By this transaction thebank's loans have gone down $10,000 by the sur-ender

of the note, and its deposits have gonedown $10,000 because in paying the note the bakerreduced his balance by that sum.

By such transactions as this do bank depositsrise and fall. Men see them risingand marvel atwhere all the money is coming from. There isno money involved in it. It is only the bankscreating for the use of business men new suppliesof credit that did not exist before. If they needit in the form of what they call paper money, orcurrency, for perhaps payroll or cash drawer pur-oses,

it is all the same. The bank, instead ofcrediting the sum to the customer's deposit ac-ount,

hands him bank notes instead, but it is thesame kind of bank credit in substance. It iscreated as needed and retired again when, afterhaving circulated from hand to hand until it hasserved its purpose, someone brings it in to thebank and deposits it to the credit of his account.By this latter act it ceases to circulate as notesand is transformed into deposits. The amountof bank deposits and the amount of bank notes incirculation rise and fall according to the require-ents

of business. These are not money, though


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32we all so call them. They are redeemable inmoney on demand if desired. Their limit of totalexpansion is controlled by the amount of gold inthe reserve banks.

Now in consequence of this misunderstandingabout money, a strange thing took place amongthe American people in consequence of the warfinancing. By reason of the vast war transac-ions,

principallyby the Government, an unpre-edentedamount of bank credit was created. The

Government expended it in purchase of goods andservices,and thus it passed into general circula-ion.

Being in possession of so much money wequite naturally felt that we had become rich(money being our popular conception of riches)and we spent it accordingly. The fact was justthe opposite; instead of growing rich we werebecoming poor. We were vaguely conscious of adiminishing supply of goods, as they were ab-orbed

into the waste and destruction of war, butthat was not so plainly seen as was the abundanceof money. Our real wealth was being destroyed,but so long as money was plentifulwe were notonly complacent but actually extrav tgant. Thewaste 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


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-.\

CHAPTER III

WAGES AND WEALTH

Regarding the distribution of wealth, thereseems to be need of a clearer understanding, tobe derived from looking at the essentials ratherthan at the mere appearance. Our present na-ional

state of mind seems to include the sincerebelief that the products of industry are not beingjustly apportioned between those who own theplant and those who work in it. We think thewages of labor should be greater and the returnsupon invested capital less. (Naturally, if one isto be greater, the other must be less,|ince we can-ot

divide more than we produce?) So far ascan be discovered, this belief is more a matter ofsympathy than of reasoning and calculation.

Nothing need be added to what has been al-eadysaid to the effect that wages are really

paid in things, not in money. The pay envelopeor the salary check may not be exchanged forgoods at once, but until it has been the holder ofit has not yet received his wage and does noteven know how much his real wage is to be. His

34


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WAGES AND WEALTH 35true wage, in the only form in which he can useit,consists of just his proportion of what we allproduce by united effort. It is increased or di-inish

accordingly,as we produce more or less.It is handed to him in the form of money, so hecan choose the particularthings in which he wantsthe world to pay him. Money is merely one of thetools of industry, like a monkey wrench; to bepicked up and used temporarily. It is only usedin accomplishing the exchange of things,or labor,for other things or other labor, and then passedon to someone else who will use it next. Thewhole question is one, not of money, but of goods.Our whole end and aim in industry is to producegoods and divide them among ourselves. Ourproportion of the goods produced is our wage.Naturally, these wages can be increased only byincreasing our total production of goods. Wecannot divide more than we have.

But it is claimed that in the division,the pro-rietorof capital,the owner of the plant, re-eivestoo much. Some of us objectto much profit

going to him. Good salaries to the superin-endents,yes. Perhaps a very large one to the

general manager, who plans and directs it all.But what to the proprietor,who merely owns itIf he gets too little,ost of the capitalinvested


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36 THE A B O'S OF BUSINESSin the plant will be lost and destroyed just as com-letely

as war destroys it. If his plant is notallowed a fair profit,it will be abandoned andcease to produce wealth. No one will operate ata loss. If he gets too much, alert competitors willdo everything necessary in the public behalf. Butif one or the other must happen, it actually seemsfar more to the public benefit that he should gettoo much. Suppose he receives every year a veryvast income in money. What is the economic func-ion

of the capitalistin our industrial systemHe cannot personally consume much of the coun-ry

's goods. He eats and wears probably a littlemore than the rest of us. He wastes the servicesof a man or two in driving a car for his pleasureand beautifying his garden; also the services ofa couple of women to prepare his food and keephis house in extra nice order. A littlemore wealthwould perhaps be produced and we would all bericher if the man waited upon himself and re-eased

these employees to become producers onfarms or in other creative industry. That, how-ver,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 fortyor fiftybillion dollars' worth of goods and ser-ices

that we all (including him) united in pro-


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WAGES AND WEALTH 37ducing. That is about as far as Nature makes itpossiblefor him to go, and most of his vast incomeis still unspent. It may be that this man oughtto live after the style of a penitent monk and makehis life a drab and cheerless period of frugalityand self-denial. The rest of the world would bea little richer by the saving of what he wastes.

But even in the very heaping upon him of thisenviable abundance of enjoyment and benefits,itseems that Nature has served a beneficent pur-ose.

Desire for these very things,kept alive bythe daily reminder that they are within reach ofthe successful,is the main force that drives for-ard

human progress. If it were the custom forthe successful to live on a meager diet in darktenements, ten million eager young American men,whose promised achievement is the sole hope ofour future, would turn their backs upon allthoughts of success and embrace idleness. Inview of these things,it is rather remarkable thatsome legislaturehas not repealed this law of Na-ure.As a people, we would be likelyto carry atthe pollsby an overwhelming majority a referen-um

prescribing hovels and rags for the success-uland forbidding enjoyment except as the re-ard

of failure.In an ideal society,such as may be attained in


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38 THE A B O'S OP BUSINESStime, the possessor of great wealth will probablylive,as many now do, in enough comfort and en-oyment

to serve the useful purpose of incentiveto success among the rest of us, but without abus-ng

the privilege in the offensive manner prac-icedby so many of our rich of the less cultivated

and enlightened type.Our widespread resentment againstthe capital-st,

on account of his all-too-frequentabuse ofpersonal power and privilege,has so confused ourideas that we include in this resentment the veryinstitution of capitalitself,and as a people weretaliate upon capital (a thing) because we dis-ike

the occasional capitalist(a person). Thisvery confusion of thought upon the subject seemsto be the cause of most of our disputes about cap-tal

and labor. To most of us the word capitalmerely suggests the brutal-lookingindividual pic-ured

in the familiar newspaper cartoon. He isbut one of the temporary phases in our great in-ustri

progress; acting that way only until helearns better,and doing that very rapidly.The word capitalought to suggest to our mind

no individual at all,but something like a railway,a merchant vessel,a telephone system, a factorybuilding full of machinery, a harvesting machine,a steam shovel, or a screw driver.


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WAGES AND WEALTH 39Bnt why should all the capital be owned by a

few men? In the first place,all that they own isbnt a triflingart of the vast quantitiesthat havebeen produced. The rest of our enormous pro-uction

we have consumed or destroyed as wewent. The capitalnow in existence,even great asit seems, is simply the relativelysmall remainderthat we, as a people, have preserved. It is in thehands of those who now hold it for various rea-ons.

The largest of them are trustees we haveappointed for the purpose, such as life insurancecompanies and savings banks. Every holder ofan insurance policy and every depositor in a sav-ngs

bank is a capitalist,one the less because hewisely leaves the management of his capital tothe company or the bank. So is every owner of afarm, a home, or a mortgage, of a stock of mer-handise,

a bond or a share of stock,a motor caror a set of tools. The stockholders and bondhold-rs

of our railroads,banks, and business corpo-ationsare numbered by the million. Some of our

railways are said to have a greater number ofstockholders than employees. Their stocks andbonds, deeds and mortgages, pass books and in-urance

policies,re merely convenient forms oftitle papers which evideja^jp the ownership ofijapitaliBelL


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40 THE B O'S OF BUSINESSWe are a nation of capitalists,et hating a

thing we picture to ourselves as **capitaP';ham-eringit at every step because it has come to be

represented in our mind by the occasional million-irewith rude manners, foolishly extravagant

habits,and a tyrannical dispositionto misuse hispower. Millionaires of this type do exist.People exactly like them by nature are also just asnumerous in most other branches of society. Butthe flagrant and objectionable thing about thecapitalistis that he owns the plant and derives avery great income from it.

There are those who claim he is not entitled tothis income in the first place. If so, then it shouldbe distributed,upon some just principle,amongthe rest of us. We are reliably told by statisti-ians

that,if this were done with all the large in-omesin America, the average person would re-eive

but a triflingpittance. So that even if wewere entitled to have that done, it would not bene-it

us appreciably. Being a small sum for each ofns, we would, of course, spend it,with rare excep-ions.

But failingto distribute his surplus income inthat way, the capitalistmust find some other dis-osition

of it. Being like the rest of us, his nat-ralimpulse will be to try to make more money


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42 THE A B C'S OF BUSINESSpecting tool of a great natural force,of which hewas not even aware. When asked what he didwith his income, he probably did not fully realizethat in obedience to a natural law he had put itback into the enlargement of productive industry ;he probably just said that he bought bonds withit. That was the form it took to him. He does notknow it,but in realityorganized societyhas grad-ally

evolved him and set him up as an institu-ionfor 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 havebeen invested in the bonds just the same, but thuspermitting the bonds to be widely owned amongus all,instead of so much of it going to one? Ifthat had been done and every one of us had savedthe triflingum we thus received and had boughtthe bonds with it,then it is true that we wouldhave reached the happy situation all sympatheticpeople hope for in behalf of labor. But theamount coming to each of us would be so smallwe would surely consume instead of saving it.Virtually none would be saved. Hence no newcapitalwould be created. Hence industrial prog-ess

would cease. Stagnation and decay wouldfollow. The production of goods would decline,


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WAGES AND WEALTH 43prices rise,and poverty ensue. To be sure, wewould all have received for one or two years thistriflingncrease in our yearly income and wouldhave enjoyed spending instead of saving it,butwhat would that avail us when we saw our wholeindustrial plant, railways, factories and all,de-aying

into unproductive ruin for lack of the capi-alno one had saved? In other words, our indus-rial

life will decay into ruin if new capitalis notcontinuously put into it. The only new capitalobtainable is what may be saved out of our totalcurrent production of wealth as we produce it.Most of us consume our entire share and will notsave. A very high authority recently said,in sub-tance,

that if the two million railway employeesin America, who receive about fifteen hundreddollars per year each, would set aside fiftydol-ars

each, they could,with the total so saved, buya controllinginterest in the outstanding capitalstock of the New York Central Railway System,and if they would each save fiftydollars per yearthey could,in five years, buy a like control of allthe railway systems extending from Chicago tothe Atlantic seaboard. No one expects them,however, to do this,or to save at all except in rareinstances.

The capitalistis the fruit of our industrial ex-


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44 THE A B C'S OF BUSINESSperience. He is the only contrivance, except thesavings bank and the insurance company, by theuse of which we have succeeded in accumulatingmuch capital; and it is only by obtaining and usingcapitalthat we have risen out of the cave and thewigwam. It has been proved that the only waywe, as a people, can save enough capitalto insurethe continuance of our industrial life is to put somuch income into the hands of one man that hecannot consume or destroy it,and thus cannot helpsaving it. After saving it there is no place it cango except into industry. In this way we get itsaved, which is the important thing to America asa whole. Just who saves it does not matter much.Saved and employed in productive industry, itserves all of us about equally well, no matter whoowns it.

The obstacle, then, to an equal distribution ofwealth is simply our lack of intelligenceand thrift.Wealth drifts into the hands of the few becausethe many will not save it,even if paid to them.In the hands of a few, it is actually saved becausethere is no way for them to waste so much of it.In this way the drifting of great wealth into thehands of a few is really the only thing that savesus from industrial ruin. It seems to be a schemecontrived for us by Nature, because it is fool-


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WAGES AND WEALTH 45proof. It is not perfect. It has abuses. We havenot succeeded very well in correcting many ofthem by law; perhaps Nature will correct eventhose for us in time. The system has worked well.Upon it we have become a great, rich,powerful,moderately contented people. Until the war allclasses of us have been steadily becoming betteroff,as we have perfected and enlarged our indus-rial

plant and made it produce more and moregoods for our consumption.

After all our abuse of the capitalist,e shallsome day learn that he is an innocent part of ourhighly complicated organization^ put there byNature to render us a useful and valuable service.If we destroyed him or any other essential partof our industrial machinery as it exists,we wouldcome to dire grief, just as they have done inRussia. The existing system, if let alone, wiUslowly but steadily benefit us all. Some day weshall come to understand it,and when we do wecan make it far more productive. This view maybe mistaken as being a plea in behalf of capitaland against labor. It is just the opposite of that.It is a plea in favor of the greatest possibleaccu-ulation

of capital for the use and benefit oflabor, by the only method that can be employeduntil labor has learned to save and to invest.


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46 THE A B O'S OF BUSINESSAs opposed to this view, there is set up, by

champions of the supposed cause of labor,merelya blind demand for more wages. Probably allright-thinkingpeople cordially desire that laborshall receive more wages; but proposals to paythem by depleting our capital,already heavily de-leted

by war, are simply proposals that we shalleat up our tools and machinery and go back toproducing with our naked hands. They are pro-osals

that rest merely upon sympathy for labor,and it has been wisely observed that sympathywithout understanding is always ineffectual andusually injurious.

A demand for increased wages does not merelyraise a question between the employee and his em-loyer.

It is really a demand made upon all ofus, that this particular employee shall receive alarger proportion of what the entire Americanbusiness organization produces, though it callsupon his particular employer to get it for him.The employer can do this only by trading off thegoods he makes for a larger quantity of the kindof goods the rest of us make. He does this byraising his price,because money has to be usedin doing it and so it all has to be expressed andtalked about in terms of money. But the claim isthat the employer should not raise the selling


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WAGBS AND WEALTH 47pnce of his goods, but should pay increased wagesby correspondingly reducing the amount which hehas been receiving as interest upon the capitalin-ested

in his plant.No one wants him to get too large a return upon

the capitalinvested in his plant and if he tries toand succeeds for a while, the economic law willpunish him for it. He cannot possibly concealfrom an alert world the fact that his business isyielding attractive profits,and enterprisingin-estor

will promptly enter the same business tosecure them also. It is a fortunate law that drawscapitalwhere the most can be earned upon it,be-ause,

in the long run, that results in its beingemployed in industries that are the most produc-ive

of new wealth and withdrawn from thosewhich, producing the least,are of the least publicvalue. Perhaps two or three new establishments,in addition to the one that is making too muchprofit,might suffice to furnish enough competi-ion

to bring the profitsdown to normal, but whentwo or three discover the opportunity perhapstwenty or thirty do also. They all consequentlyenter that particular business at once, and com-etition

among them to make and sell the samecommodity forces down the price of it,and so theabnormal profitsthe originalemployer had been


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48 THE A B C'S OP BUSINESSmaking are taken from him. And when his com-etitors

entered the business and had completedtheir buildings and installed their machinery, theycast envious eyes upon his experienced employeesand got them by paying them the increased wageswhich they knew the abnormal profitsof the busi-ess

would make possible. Especially was thistrue of the employees who were conspicuouslyworth the most by virtue of intelligence,haracter,and industry.

The natural laws of industry, under which ourentire nation has been gradually built up to itspresent greatness, are apparently so comprehen-ive

that they in due course invariably compelevery man and every industry to pursue a coursethat is in the interest of public welfare. As a peo-le,

we are slowly beginning to perceive this andto grant ready approval to the new slogan, **Heprofitsmost who serves best.

Suppose, now, that our employer, unable justlyand fairly to raise the sellingprice of his com-odity,

nevertheless timidly yielded to the de-andof his employees for higher wages a de-andupon him that was unjust because it took

away from him a fair return upon his actual andreal capital invested in his plant. He would con-equently

be unable to pay the usual dividend


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50sold for under foreclosure and thus sustain a par-ial

loss. The plant, being proved incapable ofearning a profit,would be closed, for of course noone would operate it for pleasure or just to pro-uce

losses. This being plain to everyone, itwould have been bought at foreclosure sale by aspeculator in junk who would sell the machineryfor scrap and dispose of the building to someonefor a warehouse. The employees, who hadthought capital ought not to receive a just.return,would be seeking employment elsewhere, perhapsto do the same thing again, because about thischain of events they had not the slightestunder-tanding.

Suppose, now, that the invested capital in theplant received a large return, large enough to givethe employer high credit and yet not large enoughto excite the cupidity of others and attract dis-strous

competition. Being successful,and so hav-ngthe 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-ow

new capital on favorable terms to install bet-ermachinery or to enlarge the plant. He could

secure ample credit at low discount rates to carryon a large volume of business. Having by these


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WAGES AKD WEALTH 51methods lowered the cost per unit of his product,he could render the highest of all business ser-ices,

that is, to serve the world with more andbetter things at less cost. By a perfectly wise andjust apportionment of what he had thus saved, hecould do this and also distribute higher wages andincrease his own profits beside.

America is well provided with men who possesssound ideas and meritorious plans which are lyingunutilized. Vast projectswhich, if realized,wouldbe capable of producing much wealth and of fur-ishing

abundant employment for labor, lie dor-ant.The reason usually assigned for our fail-re

to carry such projects forward is that we can-otget the money. In truth there has been no

scarcity of money (using the word in the ordi-arysense) but recently rather too great an abun-anceof it. The thing really needed and really

scarce is capital. It is capital of which we havenot enough, because we have not saved any con-iderable

part out of our immense annual pro-uction.It is for lack of capital that the whole

world stagnates, and yet we hear constant clamorfor dividing the little that there is among work-en

in increased wages to spend.America, just because it among the nations pos-


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52 THE A B C'S OF BUSINESSsesses capitalin comparative abundance, is glori-ied

throughout the world as the only rich andprosperous country. Europe (though floodedwith the thing we call money) is destitute,becauseits capitalhas been dissipatedby war and waste.We are called upon by all the world to loan itcapitaland yet we ourselves need infinitelyorethan we have. Had we but sufficient capital inthe form of tools,factories,power plants, andcurrent wealth seeking investment in more of suchequipment, new enterprise would spring forwardand we could produce such an annual abundanceas would give every workman high wages indeed,in the form of better,cheaper, and more plentifulsubsistence.

But instead of seeking relief properly by con-ervingour capital,we do the opposite. In a

futile attempt to stimulate industry, we encouragethe undertaking of unnecessary and often unpro-uctive

public expenditures by states and munici-alities,as being a good thing to do during hardtimes by way of furnishing employment. If the

mere furnishing of employment were the goal,men could be employed to swing Indian clubs,butit should hardly be done in preference to swinginghammers in productive industry; and yet we de-iberat

impede our own progress toward eco-


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WAGES AND WEALTH 53

nomic recovery with vast offerings of state, munic-pal,and other public bonds, to compete in the

market for capital against productive industry,which is starving for the lack of it.


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CHAPTER IV

THE ELEMENTS OF BANKING

Until recent years, banking seems to have beenconsidered purely a private enterprise, conductedprincipally for profit, after the manner of pri-ate

business in general, little regard being paidto the idea that a bank owed any duties to its cus-omers

other than to be honest, to publish truestatements of its condition, and submit to govern-ent

examination. The more modem view seemsto be that banking is a public service. This beingundoubtedly the correct view, it seems importantthat the nature of the business should be morewidely understood and the obligations of banksand customers to one another more clearly defined,and that every customer of a bank should fullyunderstand what service he and the other cus-omers

are now receiving and have a right to ex-ectfrom the bank; and also, what the bank's

rights are. This is all pretty well established bycustoms which are the outgrowth of experience,but they are poorly defined at best and the rea-ons

for them are not universally understood.54


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THE ELEMENTS OF BANKING 55The operations of savings banks are much sim-ler

than those of commercial banks. In reality,a savings deposit should be classified as an invest-ent

rather than as a bank account. A savingsbank is not so much a bank, in the broad sense, asit is a standard public investment. The wise in-estme

of money is an art which few live longenough to learn. The average investor has to dealwith small sums, in odd amounts, and at irregularintervals. He is without experience or educationin the selection of investments and, too, there arealmost no suitable investments for such sums. Intrying to find them the investor usually loses atleast part of the money. It may be said that hebuys experience,but without buying enough of itto do him much good. The savings bank affordshim an immediate investment for any amount,large or small, even including the odd cents, andit bears interest from the date of deposit. It is asafe investment, requires no investigationorstudy, pays almost as high an income as

the veryhighest grade of investments pay the world over,and can be converted into money upon reason-ble

notice, and without loss or shrinkage.To maintain an institution that affords the pub-icthis kind of an investment for its savings as

they accumulate, is a suflScientpublicservice,and


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56 THE A B C'S OF BUSINESSthe savings bank's duties to the customer endhere. The permanent nature of these savings de-osits

and the necessityfor paying liberal interestupon them, allow,and even require, that the bankshall place them in investments of a rather per-anent

character, and it necessarily results fromthis that the depositor could not reasonably ex-ect

to withdraw his deposits (even though occa-ionallyallowed to do so in moderation) without

giving ample notice; and neither should the sav-ngsdepositor consider that,in addition to receiv-nginterest,his deposits in a savings institution

give him any implied or preferentialright to bor-owfrom it or expect it to perform other ser-icesfor 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 relationshiptothe community and its customers is far more in-olved,

more intimate,and not so generally under-tood,and must needs be discussed at greaterlength. It is the kind of institution people have

in mind who speak of banking as being the hand-aidof commerce. It is more often than not the

familiar thing we know as a National Bank. ItsoflSce,n our scheme of business organization, isto supply credit required temporarily in trans-


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58expand it too much in proportion to our gold re-erve.

It circulates freely among us at par, be-ausewe know it can and will be redeemed in gold

if desired.Bank credit,then, is really the principal cir-ulatin

medium of exchange. Its destructionwould entail consequences impossible to imagine.Even a slightcontraction of it (the condition com-only

spoken of as tightmoney) threatens a busi-essconvulsion. Banks create it by exchanging

their own credit, which is good anywhere, fortheir customers' credit, which must be good butis so little known that it will not circulate. Thecustomer's credit is simply converted into bankcredit 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-nt.

The thing the customer calls ** money inbank,'' the banker calls his ** deposit liability.To him it is not money, but a debt he must paywhenever the checks are presented. He must notcreate too much of it. He cannot go on increas-ng

it indefinitely. The limit is fixed by theamount of real money that can be kept in the bankreserves. This limit is severely contracted, when-ver

the timid and the ignorant draw gold from


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THE ELEMENTS OF BANKING 59the bank and hoard it or use it in circulation. Itcan be increased only by depositingmore coin inthe banks, or by contriving improvements in thebanking system that will make the cash reservesmore efficient and capable of supporting safely alarger amount of bank credit.

Exactly the latter was accomplished by the es-ablishmeof the Federal Reserve Banks. In a

general way, these institutions do for the nationalbanks just what the banks are doing for theircustomers. They thus greatly increase the bank-ng

power of the entire system. They hold mostof the cash reserves of the country and thus makethem always available where most needed, so thata bank which has for the moment a heavier creditdemand than its reserves will support can con-ert

some of its loans into reserves at the Fed-ralReserve Bank until the pressure is relieved.

The banks of a city lose deposits when the peo-leof that city are buying from the outer world

more than they are sellingto it,and consequentlypaying out (through their banks) more than theyare taking in ; or, in other words, when the balanceof trade, or money movement, visible and invis-ble,

is against that city. The balance of trade ormoney movement against a city must be paid bythe banks of that city out of their reserves at the


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60 THE A B O'S OF BUSINESSFederal Reserve Bank. Formerly (before theFederal Reserve Act) this loss of reserves com-elled

them to shrink the amount of their loans.This resulted in what is called tightmoney in thatcity. Money being tight (that is,borrowers un-ble

to obtain bank credit) business men werecompelled to restrict business activities which in-olve

expenditures and purchases; and when, inconsequence of this, the purchases from outsidethe city had been sufficientlyreduced so that thebalance of trade turned again and became favor-ble

to the city,the lost reserves came back to thebanks and they were then enabled to again ex-and

their credits by making new loans. All thiswas unnecessary and highly injurious. It wassimply due to our former inadequate bankinglaws. In contrast with such conditions,the greatbenefit of the Federal Reserve System becomeseasily evident as the banks of any city,if theyare members of the Federal Reserve System, arenow able to tide over a temporary, or seasonal,un-avorabletrade balance of this kind by tempo-arily

rediscounting some of their paper at theFederal Reserve Bank, thereby replenishingtheirreserves out of the immense reserves the FederalReserve banks hold for just such purposes, andthus are able to avoid subjecting the entire city


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62plished either by depositing securitywith the bankor giving it a correct detailed written statementof his business condition and the nature of hisbusiness operations. It is even usual now thatthis statement shall be certified by an independentauditor or accountant.

But even to customers who meet these require-ents,the bank can only extend a total credit

which is limited by its total cash reserves, andthese can be increased only by actual money whichcomes to the bank from newly coined supplies,from other cities,other banks, or from privatehoards ; and being thus limited, the bank must sodeal with all its customers as to make its totalavailable supply of credit go around among themequitably. No customer, then, should be allowedto borrow more than his fair proportion. This ismeasured by what he does to support and assistthe bank. The simplest evidence of this is, ofcourse, the amount of the average balance he

keeps on deposit, but it is also tested by thepromptness with which he pays his loans and theextent in general to which he aids the bank in de-elopi

its own strength and banking power.In a rough way, then, the bank can extend credit

to customers about in proportion to what they doto support and maintain this credit structure. The


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THE ELEMENTS OP BANKING 63homely and practicalexpression of this is to saythat the banks can best help those who help thebanks. There is one further qualification.Thebank can safely and properly loan the most to cus-omers

who borrow for the shortest time. The use-ulnessof bank credit is greatly increased when

it is borrowed by a customer who uses it to servea temporary need and promptly repays it to thebank, to be used in turn by another customer, sothat a given sum is used by several different cus-omers

in succession in the course of a year. De-ositscreated out of loans of this character are

responsive, elastic,and serve the whole commu-ity.A permanent standing loan of bank credit to

one customer is something like cash hidden in asafe deposit box. It is withdrawn from usefulcirculation ; it impairs the usefulness of the bankand prevents it from serving its other customers.A bank cannot create a line of satisfactory,elas-ic,

circulatingcredit out of a sodden mass of longtime, or sleeping loans. The bank, then, in orderto be of the highest usefulness in the community,must extend credit to the customer who is knownto be of high character, who is amply able to paywhen due, who does not try to ]5orrow more thanhis fair proportion or for too long a time, andwho does his full part in cooperation with the


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64 THE A B O'S OP BUSINESSbank and strengthening it as a vital agency inthe business life of the community.

It is thus seen that the most important servicethe bank renders the public is practicallyto mul-iply

the money supply, and this service benefitsthe non-borrowing customer, for even the non-borrower's bank balance is nothing but bankcredit,which has been transferred to him by thewriting of a check. Probably the next most im-ortant

service lies in receiving,as deposits fromits customers for immediate credit,checks drawnon other banks, often in distant cities. The valueof this collection service is little understood. Itcan be best realized by thinking out some othergood method of converting these checks into im-ediate

cash without using a bank for the pur-ose.

But the important economic function of a com-ercialbank is really that of a carrier. A bank

extends credit to perhaps a cotton planter (speaksof it as loaning him money) by receiving theplanter's note and entering the proceeds to hiscredit. If the planter uses part of it to pay forseed, he sends his check to the seed dealer, whois thereby enabled to pay off a loan at his ownbank which he had previously made for the pur-ose

of buying and carrying seed. If the planter


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66 THE A B O'S OF BUSINESS(loaned him money) with which to buy and carrythe cotton until he sells it to a manufacturer ofcotton cloth. This credit will also be liquidatedin turn when the manufacturer pays him for thecotton. But the manufacturer will pay him by ob-aining

credit from some bank that he regularlydeals with and the manufacturer's bank will nowcarry 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 awholesaler and then, later,to a retailer,the bankthat serves each one of these will create for himcredit with which to pay for it,and each creditwill be wiped out again by a subsequent sale. Thecarriage of this cotton on bank credit will endwhen the retailer sells it to the final consumers,each of whom buys only a small amount and paysfor it out of his earnings, which he did not haveto borrow. In this manner the bank credit,origi-ally

created for the planter,has carried the cot-onclear through to the consumer who finally

pays it. All the credit needed was brought intoexistence at the required time and place andpassed out of existence after it had served itspurpose. The credit created by a commercial bankwas necessary at every step. Existing entirelyupon a foundation of faith and character and con-


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THE ELEMENTS OF BANKING 67

fidence, it cmmbles if these are shaken, and busi-esssuffers in consequence. In earlier years,

under a more primitive banking system, our peri-dicalbreakdowns usually began with convul-ions

in the credit system.


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CHAPTER V

BUSINESS CONSEQUENCES OF THE WAB

The war did three things to American business.The first of these is that it absorbed and wastedsome tens of billions of our current and accumu-ated

wealth in the form of labor and commodi-iesand we are now poorer to that extent.

The broad economic fact is that the generationwhich conducts the war pays for it. Much hasbeen said about placing the burden upon futuregenerations; about financing the war entirely byissuing government bonds and allowing posterityto pay them. Posterity can only pay them toitself ; there will be no one else present to receivethe payment. Posterity will be both the debtorand the creditor. The Government is, of course,mere machinery. To be sure, the Governmentwill levy taxes upon later generations to pay offthe bonds, but these later generations will alsoown the bonds and qo will receive their tax moneyback again in the form of bond payments. Notthe same individuals, to be sure, but the samegeneration. Each individuaPs case is,of course, a

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BUSINESS CONSEQUENCES OF THE WAB 69thing by itself; some men will pay taxes andothers will own bonds, but of the people as awhole, these things are true.

The real cost of the war consists in simply thelabor and material that were consumed and de-troye

in conducting it. When the war is ended,these things are gone; the nation is that muchpoorer, and the war has thus been paid for. Ifwe should thereupon at once destroy all of the warbonds that the United States Government has is-ued,

the wealth of the nation would be no less.Certain individuals ' fortunes, to be sure, would belost,and again other individuals would escape along subsequent burden of taxation,but the peopleof the United States, as a whole, would have lostnothing. A government debt is not a nationalasset. By issuing bonds, then, some of the peoplesimply borrow from others, but considered as awhole, they simply owe money to themselves.The Government only keeps the books. Throughfuture generations the Government will each yearcollect from the people a large sum in the form oftaxes, for the purpose of paying it back again tothe people as bondholders. This will affect indi-iduals

in proportion to their respectiveliabilityto taxation, and in proportion to the bonds theybought and kept. He, however, who saved dur-


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70ing the war and bought bonds with his savings,in-ured

for his children that they should receivetaxes instead of paying them.

Excepting the repairs to our plant, subse-uentlynecessary, it is substantiallytrue that we

paid for the war, in labor and materials, as itprogressed. The steel that peaceful industrywould have fashioned into farm machinery orlocomotives now encumbers battle fields. Copperthat could have become wires for the transmis-ion

of electric power was virtuallydestroyed asshell casings. The labor that in peace would haveturned these metals into things of value was in-tead

employed in producing only ruins andwreckage.

Beside this actual destruction of current com-oditiesand waste of labor we wasted our fixed

capitalby allowing deterioration of our plant. Itwas overdriven during the war and, through scar-ity

of labor and materials to repair it,it was al-owedto run down in physical condition. Forillustration,t is said that some such sum as a

billion dollars must be spent upon our railwayswithin a year to restore them to their former con-ition.

To the average man this piece of newsmeans little. He may be vaguely interested intheir abilityto get so much money. He may per-


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BUSINESS CONSEQUENCES OP THE WAB 71haps resent their asking for it. To another manperhaps it signifiesmore and he is gratifiedbe-ause

he sees that it will make active business inrailway materials and equipment. But many ofus forget that it is not enough that business shallbe merely active ; it ought also to be of the produc-ive

kind. This business of repairing a broken-down road is,to be sure, better than some kindsof business which are even less productive, suchas manufacturing chewing gum or burying thedead, but it is not productive in the way it wouldbe if the same labor and materials were put intothe building of an entirelynew line of railroad insome deserving locality.In the latter case, for abillion dollars spent in labor and material, wewould be richer by the value of a new railroad. Inthe existing case, we only get for our billion dol-ars

just the same railroads we had before thewar. In other words, about half a million menwho might otherwise devote the year to produc-ng

new wealth, must instead work at repairingthe damage that the war did to our railway sys-em.The same is true of our factories,our pub-ic

utilitysystems, and our American businessplant in general. For years we must take menaway from productive labor to repair damage.We are poorer by the total of all this.


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72 THE A B C'S OF BUSINESSThe second thing the war did to the highly com-lex

machinery of American business was tothrow it badly out of adjustment. It had beenrunning smoothly and delivering an immense an-ual

output of goods, because each part was do-ngjust about all the other parts required of it.

Coal was coming from the mines, ore from theground, lumber from the forests, cotton from thefields,all in just about the right amount, and eachof us found himself supplied at all times with thetools and materials for his particular work. Theoutbreak of war suddenly made all this system-tic

organization behave like an orderly nest ofants that someone had poked with a stick. Mil-ions

of men were taken away entirely or sud-enlyshifted to other work. Machinery was de-otedto new purposes and sources of supply were

interrupted everywhere. Naturally, there was agreat loss of efficiency,which was partially,butnot wholly, overcome by the extra zeal and energywhich the war put into us.

For three years since the Armistice we havebeen putting the machinery back into adjustmentagain, but it is still not geared up to capacity pro-uction.

It is not turning out new wealth in theform of goods in anything like the quantity it will


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BUSINESS CONSEQUENCES OF THE WAR 75land for a long time earlier in the war, to her al-ost

irreparable injury. So we all agreed thatthe correct way to finance the war was to borrowmoney and let the next few generations help payfor it.

Consequently, when we had all borrowed themoney and transferred it to the Government forbonds, we considered our duty done. The Gov-rnment

could take the money and buy what itpleased. The trouble was it had to buy the verythings we also wanted. It had no time to wastein trying to conduct a cheap war. It had to actquickly without much regard for what it cost. Itneeded perhaps a quarter or a third of every-hing

the country could produce, and needed itat once regardless of price. The army requiredfood, clothes, shoes, metals, chemicals, vehicles,everything that we as individuals also needed.There was not enough produced to supply boththe war requirements and the usual needs of thecivilian population. We did not realize this. Ac-ordingin the open market the Governmentand ourselves, in innocent ignorance of what wewere doing, bid against one another for what therewas 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,


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76then the civilian population must, through self-denial and economy, get along on the other two-thirds. If it had done so, we could have foughtthe war and been little or no poorer. As it was,in the struggle for goods between the Governmentand the civil population, we used up everythingwe could produce, everything we had in reserve,and really consumed a noticeable part of our plantitself. This was all done through the means ofcreating new money in vast amounts and spend-ng

it freely. The banks created this money bytaking the notes of their customers secured byGovernment Bonds, but they soon had to begincarrying the notes to the Federal Reserve Banksfor rediscount, so the burden of all this new bankcredit was, of course, properly and necessarilymade to rest on the gold reserves of the FederalReserve Banks. When the war began, these goldreserves amounted to about eighty per cent of theliabilities of the reserve banks. But as we pro-eeded

in financing the war by creating newmoney, the Federal Reserve Banks' liabilitieswere thus increased until the gold reserveamounted to only about forty per cent of the lia-ilitie

This was ample, perhaps, if nothing moreever happened, but if we had more war or if wehad to export a great amount of gold in payment


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BUSINESS CONSEQUENCES OF THE WAE 77of adverse foreign trade balances, then therewould be none too much. There was nothingalarming about a forty per cent reserve. Thealarming thing was our steady and rapid mo^|e-ment towards a further reduction of it. Fori amovement in price inflation feeds upon itself.Each rise of prices necessitates creating moremoney and the money so created forces the priceshigher. It would no more stop itself than woulda sled going down hill,except in the same way.That is,not until the reserve ratio declined to amuch lower percentage, and then we should all atonce take fright,pass through a panic,and slowlyrecover our senses amid the ruins of our oncesplendid business organization.Fortunately the governors of the Federal Re-erve

System realized that the further inflation ofbank credit must be stopped. But the task was adelicate one. Banks were told they must not gofurther in creating deposits for customers by mak-ng

loans to them, unless there existed a higherreason for it than the mere private advantage ofthe customer. On the other hand, it was impor-ant

that the machinery for producing the essen-ialsof life should not be slowed down for lack

of credit. It was a difficult course to pursue.Further expansion must practicallyease and yet


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78 THE A B O'S OP BUSINESSa sharp contraction would produce disaster. Theattempt was made in the spring of 1920. Thebanks and the public fairly understood it andcooperated in it. In consequence, probably as nearthe desired result was accomplished as could havebeen hoped for.

The expansion of bank credit ceased. The riseof price inflation ceased simultaneously. Thosewho had been buying for a further speculativeprofitbecame timid. Orders were canceled. Manycarrying large lines hastened to unload atslightly lowered prices and we were fairlylaunched upon a falling market. In the mean-ime,

a similar but more extreme career of infla-ionin Japan had collapsed, accompanied by

panic and widespread business disaster. The fallof prices, once unmistakably begun, was hast-ned

and intensified by all but universal unwill-ngnessto buy, based upon the belief that they

would go stilllower.The collapse of prices which followed through-ut

1920 and 1921, while ruinous to some, in-uriouto many, and demoralizing to everyone,

was inevitable and far less ruinous than it wouldhave been if further delayed. As an economic dis-urbance

it would be classified as a business crisiswithout panic. Like every crisis,it is followed


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80 THE A B O'S OP BUSINESSback to regular work yet and are under a kind ofdelusion that instead of becoming poor they havebecome rich,just because they do not understandwhat money is.Notwithstanding these facts,it is difficult to be-ieve

that the industrial forces of a great nationwhich have for years been working so largely onwar materials can be quickly and smoothly trans-ormed

and devoted to the production of perma-entwealth and the comforts and necessaries of

life. There is no doubt that it will be done in duecourse and that the world will enter upon itsgreatest era of progress and prosperity, in con-equence

of the lessons it has learned and theredoubled exertions it will make. But the inter-ening

period of transformation from activitiesof war to those of peace will call for high intel-igence

and sustained confidence in employers andinvestors ; for patience, moderation, self-restraint,and sound judgment among employees; for ed-catio

among the leaders of their organizations,and for wise politicalleadership on the part ofGovernment. This co6peral;ionand control byour Government must not be of the exaggerated,paternal kind that renders private enterprise im-otent

and unnecessary. It must be strongenough to assist and protect us adequately against


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82 THE A B O'S OF BUSINESSprosperity. We cannot be enriched by law, byquarreling among ourselves,or by the sudden ap-licati

of powerful remedies newly discoveredand loudly recommended by politicalquacks. Wehave got to win the prosperity of peace in justexactly the way we have won the victory of war :by individual hard work, plain living,the elimina-ion

of waste, and the fearless resumption of theenterprises of peace, with a firm confidence in afuture from which every really serious menace hasbeen removed. For this we have the talents,theresources, and the machinery which we applied towar, and the lessons we have learned besides. Wehave only to devote them to the production ofwealth.

The real problem for America calls for solutionby each individual. It is perhaps first of all aproblem of eliminating waste not merely thewaste that throws away something valuable, butthe waste of time uneconomically employed andmisapplied labor and material; the unnecessarydoing of something already being done adequately.These and other methods of a like nature are thenew sources of national wealth to be gainedthrough economy as well as through increasedproduction. They point the way to private for-unes

to be gained, or saved, by those who choose

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