Business Looks at the n.r.A

IN a recent Punch the Intense Young Woman is depicted as explaining to her visitor, ‘I always think the future is so inevitable.’

If a crude cartoon were substituted for the clever pen-and-ink sketch, if the earnest and simple lady were labeled ‘NIRA’ and her baffled companion ‘Business,’ we should have a drawing to portray a current situation in a recognizable way. It would fail of so doing only in that Business, in real life, thinks it knows what NIRA is talking about and doing. On the whole, Business approves, or at least does not demur. And thus the inevitability of our future seems assured.

May it not be wise to be a bit more critical?


The Recovery Act has two sections: ‘Title I,’ which deals with the controlled expansion of business; and ‘Title II,’ which is concerned with a large-scale public works programme. This latter shows no signs of getting under rapid headway. It is Title I and its carrying out by the National Recovery Administration which are moulding the future of business enterprise.

The provisions of Title I are becoming familiar to the news-reading public. They include the drawing up of codes of fair competition for each industry, with specifications as to maximum hours of labor, minimum wages, the age limit of workers, and other conditions of employment. Trade abuses may be defined and forbidden. Management is required to permit to its employees freedom of association for bargaining purposes. Special exceptions are made of industries which may come under the Agricultural Act, and special limitations are imposed on the oil industry. The President is a party to all codes and agreements. He may draw them up himself if an industry fails to do so, or if the codes presented are unsatisfactory to him. He may compel obedience to codes by invoking a licensing power bestowed for this purpose. Finally, he may control imports by establishing quotas or by other restrictions, if foreign competition threatens the success of the recovery plans.

Very evidently this is a programme in posse, not in esse. Congress worked out no technique of recovery. It simply forged an instrument of power and placed it in the hands of the President.

Up to the time of writing, the President has very wisely declined to initiate the innumerable details of industrial policy which it is his right to determine. He has extended that power to the National Recovery Administration, organized for the purpose. And, through it, industry itself has been invited to exercise the initiative. In fine, the results of our progress so far, for good or for ill, are chargeable, not to the Act itself, but to the proposals of control developed by the industries, and to the policies being accepted, fostered, or rendered inevitable by the administrative body.


Tendencies, policies, and achievements as so far revealed are both heartening and perturbing. The incredible and glorious achievements are the ending of child labor in the textile mills, the elimination of the third or ‘graveyard’ shift, and the setting of minimum wage rates. Thus will end that part of the competition between Northern and Southern cotton mills which depended on the debasement of the operatives’ scale of living. All of these elements, if judiciously determined, are capable of making direct contributions to human values, and need not dislocate the economic mechanism. In the same category are many of the detailed prohibitions of certain practices of the separate industries, which long experience has shown to be demoralizing to business and without compensating social advantage of any sort.

But other elements have come into view which tend toward dislocations, and thus toward a lowering of the quality or quantity of goods whose production and distribution are the only end for which the economic mechanism derives its right to exist. Among these doubtful tendencies in code making are: limitations, expressed or implied, on improvements in management, processes, and equipment; hindrances to the expansion of efficient plants; allocation of output among existing plants; allocat ion of sales territories; the setting of prices. Every one of these developing policies, directly or indirectly, sets limits on the production of wealth or on its equitable distribution; in so far as they do so without other social gains (such as inhere in shorter hours, for instance), they must be classed as discouraging to the possibilities of economic progress.

This body of doubtful doctrine is founded on two assumptions: that our troubles have arisen from too drastic competition, and from an accompannying overproduction. The ultimate remedy is therefore seen in an economy in which wages, methods, machines, hours, salaries, profits, markets, output, and prices are to be scientifically determined and adhered to — in short, in a planned economy. This is the Paradise of Business as dreamed of by the ‘tired business man’ — Virgil Jordan having recently transferred this phrase from theatrical parlance to a use descriptive of the industrialist who has arrived, but who has lost the love of battle, whose energy of initiative and adventure is drained, and whose only desire is for the protection of his present position against the forces of change and development.

These doubtful tendencies, be it observed, find their sources in the field of industry. Those capable and self-effacing technicians who form the working staff of the N.R.A. are not as a body sympathetic to such counsels of decay. Much that has been accepted has been so over their protest. Much more has been prevented by them from reaching the public eye. It is in the higher seats of the Administration that we must look for official encouragement of these doubtful views. Happily, we may stop short of Mr. Roosevelt himself. He has been careful to call attention to the experimental character of at least one venture toward a planned economy.

There are others of the Administration, however, who are not troubled by doubts, who are, indeed, convinced that our ills all have their sources in the unmanaged business practices of the recent past.


Among the most insistent of the critics of business are Mr. Donald R. Richberg, general counsel of the N.R.A., and Dr. Rexford G. Tugwell, Assistant Secretary of Agriculture. The latter has expressed himself freely in speech and in writing, most recently in the New York Times Sunday Magazine for July 16. Mr. Richberg’s definitive address, of similar tenor, was delivered before the Merchants Association of New York on July 6, and was heard over a nation-wide broadcast. Here are some of the things Mr. Richberg said: —

(1) We are not trying to establish public management of private business.

We are not trying to fix prices or wages by governmental orders.

We are not trying to unionize labor by federal command.

(2) Some stubborn minds may yet have learned no lesson from the World War, from the following years of intoxicated expansion of credit, and from the later years of deadly payment of our debts. But to most people has come some realization of the fact that an era has ended, that new occasions now impose new duties, and that a new generation cannot rely wholly on the wisdom of its fathers.

(3) The success of this great adventure will depend largely on the ability of the managers of private business to accept a new opportunity for self-government in industry. They can now substitute enlightened coöperation in promoting the general welfare for a cannibalistic struggle to survive by eating their own flesh and blood.

(4) There is no choice presented to American business between intelligently planned and controlled industrial operations and a return to the gold-plated anarchy that masqueraded as rugged individualism. There is only the choice presented between private and public election of the directors of industry. If the privately elected boards of directors and the privately chosen managers of industry undertake their task and fulfill their responsibility, they will end all talk of dictatorships and governmental control of business. But if they hold back and waste these precious hours, if they take counsel with prejudice and doubt, if they fumble their great opportunity, they may suddenly find that it has gone forever.

Of the brief paragraphs of the first quotation, it may be said that the first two are expressions of honest hopes that are doomed to failure, if the emergency policies of the more radical codes may be taken as evidence of what our permanent industrial programme is to be. As will be shown later, public management and price fixing will become inevitable.

As to federal support of unionization, it is already here — not by direct action, but by the implications read into the Act and by the advantages which organized labor has reaped thereby. We have here, not a constructive element essential to recovery, but merely another skirmish in the centuryold guerrilla warfare between organized capital and organized labor, in which a victory for either side means defeat for both.

In the second quotation Mr. Richberg reveals what seems a clear understanding of fundamental causes of our distress, which lie quite outside of the responsibilities delegated to the N.R.A. And then, in the third passage, he straightway forgets his clear vision of causes, and puts full responsibility on the managers of private business. Finally, near the end of his address, he delivers himself of the appeal and the threat of the fourth passage.

Such a selection of excerpts from a carefully prepared address is of course misleading. A body of clear sense and high patriotic appeal lies between these quoted paragraphs. But there the erroneous and harmful statements stand! What shall we say to them?

In fairness to Mr. Richberg it should be asked whether he includes banking and speculation in his definition of business. Only if he does so, and only if he lays specific emphasis on them as he would in developing the second quoted passage — only so is he justified in his appeals and his threats.

The occasion and his position deprive him of this defense. He is a leading actor in the drama of the N.R.A. He was appealing for its support. And the N.R.A. cannot concern itself with the major causes of the depression, which lie within the alien fields of war-debt liquidation, banking practice, and speculative mania.


These major causes are spread quite clearly before our eyes in the perspective of the last fifteen years. There is among economists much divergence of opinion about details, but little as to the broad elements of causation. It is with the broad elements that we are here concerned.

First, as was hinted by Mr. Richberg, we must give some attention to this matter of credit. What is credit?

As we all know, only a very small part of the business of the country is done on a cash basis — with gold, its paper equivalent, or some other form of currency. From 80 to 90 per cent (depending on the times and the method of estimating) is done by checks and checking accounts — that is, by bank-credit-money.

What is the origin of these bank deposits which give money value to our checks? We see the checks going in and out, increasing and decreasing the individual accounts; and from the general banking reports published in the financial columns we realize that from time to time there is a wide variation in their totals.

This bank-credit-money is strange stuff. Practically the whole of it is generated by borrowing. Credit is based on debt. When you, or I, or anyone borrows at the bank, the bank makes money, quite as definitely as the counterfeiter does. In the process the bank credits itself with my note and credits me with an addition to my account, and that addition to my account increases the amount of bankcredit-money in circulation. Conversely, when the loan is repaid, that amount of money is extinguished, as surely as though so much paper currency had been burned.

In its proper use, this process is one of transforming business assets, negotiable collateral, and even personal character, into money. The value of the process lies in its ability to expand, direct, and contract the flow of money as needed for useful business purposes. The danger lies in the tendency of this expansion, contraction, and direction to get out of control, purchasing power becoming deceitfully expanded on mere speculative hopes at one time and disastrously contracted at another, with the result that the underlying debt burden attains such enormous proportions that it can only be liquidated by largescale bankruptcy.

The difficulty of liquidating these debts is multiplied by the tendency of an undue expansion (in which credit is expanded faster than business operations) to show itself in a rise in prices and incomes. The ensuing deflation brings lower prices and incomes with which to pay off a debt that is fixed in terms of dollars. This has been the alltoo-evident dilemma of recovery.

Without going into details, let it be said that the war was financed by a deliberate, government-generated process of credit inflation applied to bond financing, to the munition industries, and to agriculture. This inflation was artificially maintained until the last of the Victory bonds were disposed of, and then the credit support was dropped. The deflation revealed the mass of underlying debt in government, industry, and agriculture, incurred at high price and income levels and left to be paid off at low price and income levels. A large share of that indebtedness remains unpaid to this day.

This is no new phenomenon. The other two periods of major warfare since the Industrial Revolution have revealed the same sequence of events. After the Napoleonic Wars, and after the mid-century wars which for us culminated in the Civil War, the ‘civilized’ world as a whole went through the same generation-long period of falling prices, business stagnation, bankruptcy, and social disintegration. And so shall we continue to do until mankind learns either to finance war by some other means than credit inflation, or to discard war altogether.

After the World War, the credit inflation and resulting indebtedness were intensified by the commodity speculation of 1920, intensifying in consequence the depression of 1920 and 1921. More recent and more deadly was the long, slow, but accelerating inflation and speculation of 1924-1929, which interrupted the slow and painful war recovery with a new access of credit expansion. The course of events was somewhat as follows.

The period was one of unusually rapid improvement in production machinery and processes and in business management. It seems probable that the element of initial cyclic unbalance lay in the large profits which flowed therefrom. Too large a share of the returns from industry went to the savers and investors, and too little to the spenders and consumers. This brought about, first, a tendency to build new plants when there was not enough purchasing power to absorb the goods produced; then, as the sufficiency of productive plant became evident, there followed a period in which funds flowed by preference into the securities of existing companies, which were bid up sky-high in the process; and, finally, there followed the manufacture and sale of secondary and tertiary securities of purely speculative earning power, based on the underlying bona fide earning stocks.

These last phenomena are but other aspects of the same inflationary process which was described in connection with war financing. In this case, however, it was generated privately rather than by the government, and it was based on rising speculative profits and security prices instead of on rising wages and commodity prices. But in its inevitable crash it left behind it the typical burden of indebtedness to be repaid in a period of impossibly low incomes and low prices. In this our whole banking structure was deeply involved, as we all know.

The seriousness of the situation was doubled by the fact that the new speculative indebtedness was added to the large residuary war indebtedness, so that the cyclic deflation joined hands with the war deflation and thereby progressed with redoubled speed.

As an exaggerative force in this cycle, governmental policies played their part. Construction of federal, state, and municipal works was expanded at the wrong time and contracted at the wrong time. Taxation was wrong in timing as well as in kind. Bond retirement was not carried out at the proper time, or to the desirable degree, so that governmental credit was low when borrowing would have been advantageous as a substitute for hoarding.

Added to all this were certain imbecilities in the field of international finance. Of these, little needs to be said here except to call attention to the most obvious of them: namely, that, in the face of the impossibility of collecting war debts on anything like the prearranged scale, we continued to pour credit into European and South American countries, through governmental and private channels, under conditions and to amounts which made the hope of repayment a fantastic mirage. The top-heavy structure broke in the second year of the depression and prolonged and deepened its intensity.


As the final element in this rough analysis we must observe that the destructive forces just described played upon an economic structure possessing elements of instability which do, undoubtedly, derive from our industrial organization. They weakened its resistance to the overturning forces just mentioned.

There was, first, the shift from subsistence to staple agriculture, which took place as transportation was improved and world-wide commerce developed. Subsistence agriculture is the most stable of all occupations, being dependent only on the vagaries of the weather. It is, however, one which maintains only a low scale of living. Staple agriculture, as of cotton or wheat, promises greater returns, but is dependent on national or international business conditions whose variations are far more serious than those of the weather.

A second factor was the shift from subsistence agriculture to urban industry — again an advance to a higher plane of living while business is good, but disastrous when the bottom drops out.

A third unsettling movement was the shift from the manufacture of the staples of existence to the industries producing accessories and luxuries. Again we have an advance in the scale, but one which can be held only with difficulty, since the slightest business recession reduces employment disproportionately in these less necessary occupations.

A fourth unstable element was the increasing importance of the capitalgoods industries, which produce such things as manufacturing equipment and engineering structures. These also cease to function during a depression, and recover but slowly, with corresponding distress to their employees. There is no need to dwell on this point if the reader is, perchance, a builder of machine tools or locomotives. So far as concerns unemployment, this has been the major element in the depression.

Finally, there has been a steady flow from productive occupations in general to sales and service occupations of various sorts. The latter are characteristic of a more developed civilization, and are in great part desirable in themselves, but they are subject to drastic reduction as business falls off.

These elements (and others which lack of space compels us to omit) have probably had far more to do with our economic distress than the muchdiscussed factor of technological unemployment. If technological unemployment was as important as it has been represented to be, it should have been increasingly evident even during the period of good business; yet reputable statisticians have been unable to find that this was so. It would appear that instability of employment, rather than its decrease in volume in good times, is the dubious fruit of our technological tree. We must remember, however, that the instabilities listed are tied up with human progress, so that our remedies must be aimed at the disturbing forces fully as much as at the unstable organization.

In all this variety of causes it is noticeable that only a part are in the proper realm of industry, although we must take some responsibility for the improper invasion of our realm by the financial-speculative operations which have made so much trouble in the recent past. Aside from the necessity for rigorously excluding that element by all means, whether by persuasion or compulsion, by enlightened opinion or by law, the responsibilities of business would seem to be concerned with the distribution of wealth and with our own natural but secondary elements of instability in employment. The remaining and heavier burden of responsibility lies at the door of government and of finance.


Of NIRA and the N.R.A. as an emergency means of promoting recovery, we can say much that is encouraging.

The psychological background, generated by the keen and devoted political genius of the President, is magnificent and essential. The programme of recovery — by the revival of purchasing power rather than by the normal course of the revival of profit — is both humane and hopeful. Any shortcoming to date has lain in the concentrated attention to the consumer-goods industries, and the failure to realize that the real seat of the depression lies in the industries producing capital goods — machinery, equipment, and buildings. It is their exaggerated drop in pay roll which has been reflected in lowered purchasing power for the consumergoods industries.

A method has been provided to revive capital goods, in Title II of the Recovery Act relating to public works. Its action must be speeded if recovery is to occur according to this novel process. The old recovery cycle (through renewed profit, confidence, and physical investment) has been prohibited by the terms of our experiment; but that experiment will be successful only if we carry it out in full.

We have, then, a programme hopeful in its emergency uses, for recovery from a situation brought about by definite causes, and a dangerous determination on the part of some business men and some government officials to apply these emergency remedies to entirely unrelated chronic maladies. Whence this perverse and baseless determination? It is a mystery indeed, without explanation or excuse.

The radical planning ideals of the code makers are not merely ineffective; they are destructive. Subtract the provisions for human and business decency, and what remains? An economy of planned details, in areas where each decision raises a dozen problems, and each new solution a dozen more; and every road leads to business breakdown, or to governmental price fixing and in the end to governmental operation. The history of every such experiment points in this direction — whether one looks at railroads, at coffee, at wheat, or at the checkered experiences of the European cartels.

The dangers of the programme are serious. The enormous extent of our operations in manufacturing and distributing material goods, their unimaginable variety, the incalculable complexity of the courses they take, the innumerable final desires and satisfactions they reach and serve, are beyond the comprehension or calculation of any planning board. It. is the profit motive which ultimately maintains these labyrinthine mechanisms, and it is the profit motive which is under fire.

The degree of success which Russia, without the profit motive, has attained in an arbitrary handling of this intricate problem is attributable to three factors. First, her economy has until now been a secondary one, feeding on the finished mechanisms and processes of more vital and self-sustaining nations. Second, her substitute for the profit motive is a discipline that is essentially self-denying; and it remains to be seen whether, in the face of a world incredibly rich in material possibilities, such a principle can maintain its power indefinitely. Third, such measure of success as has been or is likely to be attained in the near future is at the expense of a simplification of the problem that involves a low scale of living and a standardized existence. Only so can the task be brought within the range of human abilities.

The basic objections to a managed economy are that this solution is impossibly difficult if we are to preserve the rich material existence which we now enjoy or can enjoy; and that the alternative of a simplified and standardized existence, brought within the limits of human ability to control, is so false to our desires and possibilities and to the direction of our historic development as to be impossible except as a forced adjustment to some destructive catastrophe. The hopeful possibility lies in a frank recognition of the usefulness of that force of nature which we call the profit motive; and in a purposeful attack on the problem of controlling it in the same way that other natural forces are controlled by the engineer. The problem is akin to that of flood control and irrigation, and of harnessing to human uses in the power plant and transmission line the energy which manifests itself destructively in the lightning.


With all these considerations in mind, let us set a tentative programme for business enterprise — a programme so devised that private profit in the rough may be made to serve social ends in spite of itself, and that the larger and more mature ideal of private profit which is a growing force in American business may serve still more effectively. In the first place, what elements of the codes should be preserved for permanent use?

While there is nothing in the causes of our present distress which gives to shorter hours any fundamental curative effect, the policy does have its uses in distributing work during recovery; and it may properly be accepted as an overdue social dividend on the operation of our labor-saving machinery. If at this time we cannot in thirty-five or forty hours a week make all that we wish to consume, then our improved mechanisms are not what we claim them to be. As a matter of fact, if we can arrange by proper means to keep men working thirty-five hours a week year in and year out, instead of shutting them out for the months or years of hard times, we shall be adding to their productiveness instead of subtracting from it.

The raised age limit which results from the elimination of child labor is a matter of human decency which we can all accept.

The minimum wage, properly set, comes in the same category.

The prohibition of sales below cost, except in carefully regulated exceptions for liquidation purposes, is a step which may tend to reduce the violence of business fluctuations, if it can be made effective.

Elimination of general abuses of the types peculiar to the individual trades should be accomplished for the same reasons as the prohibition of selling below cost.

The trade associations should be strengthened in their new control of particular industry evils. In addition they should be urged, or even compelled, to collect such statistics on production, sales, stocks, and so forth, and such price information on closed transactions, as will form a firm basis of judgment for business men and investors. The permanently effective planned economy will be one arising from the application of the experience of individual business men to data that are sufficient, accurate, and generally available. We have not yet begun to plan on this basis.

To these provisions should be added somewhat technical but imperative changes in financial and fiscal practice : —

(1) Ordinary commercial credit (i. e., thirty-, sixty-, and ninety-day notes) must be confined to financing current operations. It is characteristic of credit extension of this type that in both volume and velocity it tends to equate itself with the flow of goods to market. Therefore it does not seriously affect the price level. Furthermore, being ‘self-liquidating,’ it does not build up a long-term body of indebtedness, which consumes current purchasing power when extinguished by repayment under later and differing price and income levels. In short, credit of this type, properly extended, provides purchasing power in the amount and at the time needed.

As before explained, from 80 to 90 per cent of our active monetary supply is bank-credit-money thus generated, the balance being gold, or currency for the most part gold-based. If this major element can be steadied in its operations by this policy, there will be far less criticism of the gold standard than exists at the present time; and we may yet retain the advantages of gold in international exchange. As matters now stand, it is not gold, but credit, its hysterical partner, which causes more than four fifths of the trouble.

(2) Physical investment must be financed out of savings, not out of credit inflation. In the final account, there is no other way to finance investment. The funds saved out of consumption are the financial counterpart of the materials and labor diverted from the provision of consumption goods to the provision of capital goods.

Any severe deflation — certainly this one — reveals a mass of long-term investment, either in actual physical goods or in stocks, bonds, and mortgages, which was financed, not by savings, but by credit expansion. The damage in this is twofold. Being an artificial provision of funds, not based on the production of goods, it raises the price level in the investment area to which it is applied and generates speculation and further credit inflation, as we have seen. This leaves the typical high-income debt to be paid in lowincome periods. And, when such debts cannot be paid, a mass of nominally liquid assets are in fact frozen by deflation, producing results with which we are only too familiar.

Confining credit expansion to current business operations, and financing investment from savings, are fundamental policies. Indeed, the true index of inflation is the amount of credit which has abandoned its proper uses and has been applied to long-term commitments of the investment type. This, and this only, is inflation, and the amount of it ought to be kept as near zero as possible.1

We can no longer permit our credit mechanism to pump billions of illusory purchasing power into our markets at one period, and then to suck them dry of these funds just as they have begun to seem real. This is a tidal wave more devastating than ever swept the shores of Portugal or Japan. Our economic, social, and political systems will not survive many repetitions of this reckless process. No remedy which does not avert this disaster will serve or save us.

(3) A reasonable balance between spending and saving must be maintained. There is a strong probability that the control of inflation which would result from adopting the two preceding policies would also influence this factor favorably. If the disruptive effects of inflation are controlled, it seems probable that the interest rate would perform its normal function of governing the ratio between consumption and investment. It would probably tend more nearly to approach that 3 or 4 per cent which Carl Snyder has calculated as being the average actual increment on wealth in this country over a long period of time.

(4) As to that deceitful form of investment which consists in bidding up existing securities, or in floating issues which do not represent physical investment, these operations and their resulting oscillations can be damped by rules requiring larger margins, or by substantial federal stock-transfer taxes. These could be set to restrain speculation without handicapping investment.

(5) There is the final resource of taxation to redistribute large incomes from unneeded investment into desirable social expenditure. This may be accomplished by a properly designed general income tax. In any event, it is probable that we shall want, as time goes on, to spend an ever larger share of our total income socially rather than individually. The highest human values will be served thereby.

This will involve the invention of new fiscal policies, to permit the safe application of fluctuating governmental income to contra-fluctuating rates of expenditure. There are unrealized possibilities in a budgetary system thus applied to the period of the business cycle instead of to the fiscal year.


This whole analysis casts doubt on the necessity for a complete overturn of the institutions which have brought us to our present productive capacity and attainable purchasing power. The effective actions are seen to be of a type which would free our system from disturbing forces, as opposed to policies which would force it by herculean and endless effort into predetermined moulds. The unnatural strain of the effort we are making is already only too apparent. Must that strain grow indefinitely with the lengthening and spreading of the task?

That inevitability of the future, which so impressed the Intense Young Woman, is a reality. The inevitable element is that which is conditioned by the present. Such conditioning we may moderate and modify, but may not escape. Our only hope of control lies in moulding the conditioning present. Whether for creative aspiration, for planning, or for action, this present alone is ours. For the sake of our children’s future, pray that we use it well!

  1. This point of view is described, and an inflation index based upon it is presented, in Mr. E. C. Harwood’s book,Cause and Control of the Business Cycle. — AUTHOR