Brace Up, America!

FROM the way the reformers handle the word ‘profit,’ one might conclude that there was something wrong about it. Fortunately the dictionary confirms our suspicion that the word signifies a desirable condition. It is defined as ‘any accession or increase of good from labor or exertion, comprehending the acquisition of anything valuable, intellectual or corporeal, temporal or spiritual.’

In this fundamental sense, the word ‘profit’ applies as much to the birth of a baby as to a pay envelope at the end of the week. It is the hope of youth and the reward of age. It is the mainspring of all human activity and the dynamic force behind the progress of all civilization. We work for a greater good, both for ourselves and for others, and the function of an organized state is to encourage that ambition.

Within the past several years, various official spokesmen have belittled both the desirability and the possibility of profits. We have been told that the frontiers are gone and that there are few opportunities as compared with the old days. We have been advised that security is more important than profit. And this intellectual disdain of profit making has been supplemented by legislation which renders it exceedingly difficult.

Some of the leaders in this campaign honestly believe that American industry has expanded too greatly, and that further expansion should be retarded; some of them are motivated by a desire to punish industry for the abuses of the past; some of them, in their zeal for reform, fail to realize that, while a strait jacket will keep a man out of trouble, it is not a suitable garment in which to work.

Whatever the motive, the result of these efforts is all too apparent; after SIX years of strict regulation and taxation of industry, we have as many people unemployed as at the beginning of the period. That is the grim and inescapable fact. The reluctance of business men to accept wholeheartedly the reformer’s point of view is not a result of any lack of humanitarianism. The intelligent among them arc as anxious as the political reformer to see wages at a high level, to enhance the security of the aged and unemployed, and to maintain honest markets for securities and commodities. Such men, however, ask in all sincerity how these desirable conditions can be achieved without impairing the industrial system that pays the wages, employs the workers, manufactures the products, and utilizes the investment.

When industry has a chance to make profits, it expands and employs more men; when it is unprofitable, it reduces employment and curtails its operations. Fortunately, with a little will — even a little good-will — we can remove all of those artificial barriers to profit making without too much difficulty; and we can do this without upsetting any of the economic reforms of the past few years.

Three conditions are primarily responsible for the extraordinary economic achievements of the American people. We were, of course, lucky in coming to a land where the natural resources were abundant. We were even luckier to come to it at such a time and under such circumstances that it could be developed as a whole, before it was chopped up into small competing territories as in Europe. This meant that we were not only rich in raw materials, but blessed with the greatest free-trade area in the world. We could ship our goods from one coast of the continent to the other without ever paying a tariff or passing a customs inspection.

To these physical conditions our forefathers added what might be called a spiritual one: a faith in individual initiative and free enterprise. When our forefathers said ‘freedom,’they did not mean simply freedom of speech, freedom of press, or freedom of religion. They meant economic freedom as well. They were strong believers in the desirability of encouraging business enterprise.

This item of economic freedom has not loomed sufficiently large in the dossier on liberty maintained by the professional apostles. Tainted, perhaps, with that slight social inferiority which, as mentioned, seems to attach to the word ‘profits,’economic freedom has less standing than its intellectual and moral counterparts. This, however, is an invalid discrimination. In the end, all forms of freedom stand or fall together. You cannot have freedom of religion without freedom of speech — or vice versa. You cannot have either one of them without free business enterprise. For the alternative, a planned economy, calls for rigid control of prices and production; and this control in turn leads to the suppression of civil freedom.

Presumably our forefathers were aware of this interdependence of liberties. Certainly they seemed to recognize the necessity of encouraging economic enterprise for the sake of popular welfare. The results have been extraordinary, although the statistics are so worn by use that they have lost the stamp of their significance. To-day we have 6 per cent of the world’s area and 7 per cent of its population, but more than 45 per cent of its wealth. We can summarize our economic achievement, without going into detail, by stating that we have the highest real wages, the shortest working hours, and the greatest percentage of home ownership on earth.

I believe that this achievement was possible only because men in America were encouraged to take risks; the entrepreneur was given a chance to profit; the inventor and the investor alike were willing to assume the hazard of loss because they were not denied the chance of gain. Industry went to work in an atmosphere as brisk and stimulating as a New England autumn.

To-day the atmosphere is spiritless. The Secretary of the Treasury recently epitomized it when he spoke of the ‘What’s the use?’ attitude of business men — not the big business men alone, but the small ones as well: the shopkeeper, the local mill owner, the man with fifty shares of stock carefully diversified among five companies. And the cause of this melancholia in a naturally spirited people is found in those legislative policies that discourage the use of private capital for the development of industry and prevent the reëmployment of millions looking for jobs.

These policies are principally as follows: (1) government spending on an enormous scale; (2) wage fixing and payroll taxing which increase the costs of employment; (3) personal and corporate taxes which penalize investment and expansion; (4) capricious interference with industry by regulatory commissions.


The theory that the government can spend its way into prosperity has two evil consequences. Of these two evils the lesser is the better-known — the unbalanced budget. In the past ten years our total government deficit has mounted to over 27 billion dollars. The figures are so large that, like the sky overhead, they make no particular impression as to size. The deficit for the fiscal year will be nearly four billion dollars, and the estimated deficit in 1940 is only slightly less than that figure.

Most of us, of course, do not know what national bankruptcy means; we have a sturdy faith in the American dollar and we cannot imagine its ever being used for wallpaper, like the old German mark; but we are vaguely uneasy when we contemplate the prolongation of this deficit policy. At all events, we are beginning to realize that deficits mean high taxes which somebody — either we or our children — wall have to pay.

But the deficit itself is not the worst feature of the government’s spending policy. The worst feature is the fact that government spending drives private capital out of industry and prevents exactly the kind of investment which recovery demands — namely, voluntary spending for productive purposes by the people who have money to invest. As in Gresham’s law— ‘bad money drives out good money’ — these huge indiscriminate government expenditures, many of them in direct competition with business, have scared private investment into hiding.

One of the leading advocates of government spending is Marriner Eccles, Chairman of the Federal Reserve Board. He has attempted to assure the private investor (although he should know better — and perhaps he does) that the extent of government spending is no cause for alarm because it has merely taken the place of private spending, and the total debt, public and private, is no larger to-day than in 1929. It is just because government spending has taken the place of private spending, however, that there is reason for alarm.

As Senator Byrd has ably pointed out, there is a very great difference between the public debt and the private debt. The public debt is created by the government and not directly by the people who pay it. The private debt, on the other hand, is voluntarily created by people who expect to pay off the debt. The public debt is created primarily for nonproductive purposes — relief payments, military expenditures, civic projects, and so forth. But the private debt is created for purposes of industrial production— chiefly for the production of durable goods, which represent the most conspicuously retarded of our country’s industries.

The private debt has declined each year of the depression, since 1930, and the total decline amounts to 11 1/2 billion dollars. The federal debt, on the other hand, has increased each year of this period, and the total increase amounts to 22 billion dollars.

Now some of this government money was constructively used. It helped to stimulate retail business activities; it built some very useful public works; it helped to restore the morale of the young unemployed through the work done by the Civilian Conservation Corps. But this type of spending tends to be wasteful and unproductive because the government does not have to get a return on its money; it does not have to consider the economic soundness of its projects; unlike private capital, it does not face the imperative necessity of earning its way. Moreover, government property does not pay a tax; and to make up for this exemption the tax on private property must be increased. Since the government through the TVA has purchased the Tennessee Electric Power Company, for example, the state and municipalities of Tennessee will lose $3,500,000 in taxes which can be recovered only by increasing the taxes on the citizens and their business.

But any theoretical argument as to government spending versus private spending should be largely unnecessary, since the failure of government spending is only too obvious. Government spending has not provided jobs for the 10,000,000 unemployed. It has failed to increase the national income to a point where budget balancing is possible. It has failed to stimulate the industries producing durable goods. It has undermined financial confidence, doubled the public debt, and enormously increased taxation.


Fixing wages and taxing payrolls have increased the costs of employment, and thus reduced the number of those employed.

In this country we have long been rightly proud of the relatively high wages paid to American workers as compared with the workers abroad. There were, of course, plenty of inequities in the situation. There were many sections where sweatshop wages were paid, and many where the employee had no voice whatsoever in determining his working conditions. The present Administration’s proposals to improve these conditions met not only with the endorsement of the increasingly strong labor unions, but with that of the general public. Unfortunately, when wage increases are arbitrarily set by law, they may hurt the American laborer instead of helping him.

Wages are paid out of what industry can get for its output. When industry is confidently engaged in the development of new products and the improvement of existing ones, when it has ample capital from private investors to finance its needs, and when there is an active market for its products — then we have a condition which tends to increase wages. If, however, wages are artificially raised — either by government legislation or by union activities — beyond the level which industry can meet out of its current operations, then there is an almost immediate drop in employment, and the total laboring income declines. That is the basic fallacy in the idea that wage increases are automatically desirable because they increase the laborer’s purchasing power.

The NRA constitutes the most startling example of the effects of arbitrary methods of handling wages. From March to July, 1933, immediately preceding the NRA, industrial production showed an increase of 69 per cent. Then, under the NRA, hours were shortened and wages were arbitrarily raised. Labor costs enormously increased, and there was a drop in industrial production (from July to December, 1933) of 25 per cent. The Director of Research of the NRA estimates, for example, that by reason of the minimum-wage provisions of the lumber codes about 500,000 Negro workers in the South were on relief in 1934.

That is why the labor unions should not take the benefits of the Wages and Hours Act for granted, but should closely observe its operations.

Very serious disturbances have resulted in Puerto Rico as a result of the enactment of even the minimum-wage standard of 25 cents an hour; it is reported that about 100,000 have been thrown out of employment in the needlework industry alone. To those of us who live on the Atlantic seaboard, 25 cents an hour may seem far too small a wage, but its purchasing power may be adequate in a section of the country like Puerto Rico, where living costs are low. In any event, there is no absolute standard for wages, and where we fix one we run the danger of destroying the job.

Too rigid fixation of hours is similarly dangerous to employment. Hours have been steadily reduced in American industry, without legislation, and the 40hour week is common. But in France it was decided to establish the 40-hour week by law — and that country has spent the past year trying to escape from the consequences. Industry after industry in France has been made exempt from the 40-hour limit because these industries were lagging far behind their normal productive capacity. When this happens, fewer men are employed — and it can hardly be comforting to those who lose their jobs to know that those who keep them work a shorter period of time.

The Social Security Act is another law that is in need of revision so that the humanitarian objectives of the Act may be realized without increasing the cost of employment. No one seems to deny that the enormous reserve fund which is being built up under the act is totally unnecessary; and this fund is collected by a tax on payrolls which it is particularly hard for the small business man to meet. There is now a 3 per cent tax on payrolls for unemployment insurance and a I per cent tax for old-age insurance. The latter tax will ultimately be increased to 3 per cent, so that the total federal tax will ultimately be 6 per cent. This means that every time an employer hires a man for, let us say, $100, he must pay $106 because of the tax. If he raises the wages of the worker, the tax is increased.1

As Benjamin Anderson, the economist of the Chase National Bank, has pointed out in a recent study of the subject, a tax on payrolls is a tax on employment. Confronted with artificially raised wage levels and with payroll taxes, at a time when profit margins are very small, American business is forced, against its best intentions and desires, to hold employment to a minimum and to reduce it, where possible, by substituting machinery. Now the use of machinery — what we call technological progress — is desirable where it is a logical step in producing things more cheaply and more easily. In that event the low-cost product made possible by the machine presumably finds a larger market, and more men are employed. Where the use of machinery is forced because of artificially raised costs of labor, however, — where it is merely used to maintain a situation without improving it, — there may be no such satisfactory result.

Of course, American wages are still not high enough. In a number of industries they are far less than profits would justify. But to attempt to raise them without reference to profits is simply to curtail the income of the worker by forcing an increase in unemployment. The American worker — like the investor and the business man — will profit when the profit-making possibilities of business are increased.


Because of our present tax program, we are not making full economic use of the earnings of individuals and corporations.

It is not the severity of American taxes which constitutes the principal danger of the tax legislation; it is the kind of tax that is imposed. An intelligent revision of taxes could probably produce the same revenue, while at the same time serving as a stimulus to free business enterprise.

Such a revision would be designed to encourage what is called ‘venture capital ‘ — money invested not in bonds or savings accounts or gilt-edged securities, but common stock-money that is willing to take the risk which new enterprises and expansions require, and which is the principal factor in creating new jobs.

The personal income tax is a perfectly logical and reasonable method of collecting revenue — until it becomes so high that it drives capital out of industry and into tax-exempt securities. The first income tax was levied in 1913, and it proved so pleasant and easy for the tax collector that we have had a riot of state and federal income-tax laws since that time — without regard to the damage they might do to the nation’s productive system.

The income tax isn’t all: there is also the capital-gains tax. This ingenious device imposes a heavy tax on whatever profit a man makes out of a capital transaction; but if he happens to lose (and more men lose than win), he may deduct only a small portion of his losses from his income.

Now you may say that you are not very much concerned about the man who gets $10,000 in income and up: he can afford a high tax. And I say: all right, never mind what happens to him; but what happens to the country? Here is the type of man who ought to be providing our industries with venture capital. We need his money to finance the risks of new enterprises. But the capital-gains tax and the excessive income tax prevent us from using that money because it is put into tax-exempt securities or stays in the bank, where its investment is limited.

A very simple three-point program should remedy this situation: we should give the same weight to losses in the capital-gains tax as we give to gains; we should keep the tax on large incomes within productive limits; and we should impose a tax on state and other government exempt securities. Indeed, if we are going to tax any investments, it would seem more reasonable to tax the safe ones and exempt those that are ventured for the sake of industry.

The tax on undistributed corporate profits, although it has been modified, is another tax that restricts investment. This is not quite as harmful as the discouragement of personal investment, because corporations ‘cannot take risks as freely as an individual can take them; a corporation, being responsible to its security holders, has to be somewhat more careful. Nevertheless, one of the ways whereby a company expands is by ploughing back a part of its profits. It should be merely common sense to encourage this sort of thing if we are trying to find work for the ten million unemployed; but the tax law imposes a penalty on the corporation that builds a new plant out of earnings. The corporation must pay a tax on all profits not distributed in dividends — in addition to the corporation income tax. This may not be so hard on large corporations which have already built up their reserves, but it is a severe burden on a small corporation which can’t save a dollar for itself without paying a tax on it.

An intelligent tax revision might be the most important economic achievement of our time.


Because of the enormous discretionary power given to government bureaus and commissions, large and small businesses to-day are faced with the almost impossible task of operating under constantly changing rules.

Whenever a law is passed regulating an industry nowadays, a commission is set up to administer it. This means that the rules governing the industry are not fixed by Congress, but by the Commission; they may fluctuate with the Commission’s personnel. Thus we have a highly personal form of government — a government of men, instead of a government of laws — in which the favor of a commission chairman determines the conduct of an industry that may be employing several hundred thousand people and be owned by several million stockholders.

For example, it is not the Securities Act which tells a corporation what it must do with respect to the sale of its securities, and it is not the Securities Exchange Act which tells the stock exchanges what they must do with respect to the securities traded in their markets. In both instances one must look, not primarily to the law, but to the Securities and Exchange Commission to find out what the requirements are. And it is not the Wagner Act which can guide a corporation in forming its industrial-relations program. It is the National Labor Relations Board. Likewise, no broadcasting station can read the law governing broadcasting and find out what rules it must observe. It has to consult with the Federal Communications Commission.

An industry can adapt itself to any reasonable law which sets out the requirements for that industry in black and white. But industry cannot successfully operate under a commission form of government which may change its standards as it wills and dispense its favors in accordance with the economic or social predilections of its members.

Even in the face of a ‘spend and spend, tax and tax’ policy, the entrepreneur — always a hardy perennial — will continue to go ahead with his ideas on one condition: namely, that the rules are fixed and that he knows them in advance. In the course of a fairly active life — not all of it in the most dignified surroundings — I have played poker in odd corners of this continent with all kinds of people and under all conditions. It doesn’t make any difference whether the ante is a penny or a dollar; and it doesn’t make any difference what kind of clothes your companions in the game may wear or what language they may use, or even whether or not you might have difficulty at some later date in explaining how you happened to know them — you will play the game as long as the rules are fixed, and you will get out of the game just as soon as somebody starts changing them.

Even those who have been the principal promotors of this bureaucracy recognize these difficulties; but they say that the answer can be found in ‘the type of man you appoint.’ This is uncomfortably reminiscent of the ‘benevolent despotism’ theory — namely, that a dictator isn’t so bad as long as he is good. Aside from the basic unsoundness of this notion, we must realize that when we give a man such enormous power over industry we automatically incite in him the tendency to use it.

It is probably true that laws regulating modern industry are so complex that administrative commissions have become inevitable; but these commissions must rule, as Chief Justice Charles Evans Hughes recently stated, ‘with the recognized responsibility which attaches to judges and with the impartiality and independence which is associated with the judicial office.’

In some instances the laws themselves require too much police work on the part of the commissioners. Because these laws were designed primarily as police measures— namely, to punish industry for past abuses and to forbid certain practices — it is time that they were reconsidered now, not in the light of what bad things they have prevented, but in the light of what good things they have contributed. It is not enough to say of a law that it has eliminated the evils of the nation’s hard-bitten and speculative years. From this negative standpoint there is nothing so virtuous as a corpse. The question we need to ask is: has some of this restrictive legislation made industry ‘more dead than alive,’ or has it helped to revitalize industry and make it more useful?

The Securities Act and the Securities and Exchange Act, for example, have remedied certain abuses in the sale of securities to the public, and in the operation of the stock exchanges. That alone, however, does not justify this legislation. We shall want to know whether it has enabled the stock exchanges to perform their job better. Has it increased the liquidity of the markets where the people must buy or sell their investments? Has it aided the flow of private capital so that industry may have the funds which it needs for expansion?

Unfortunately the unnecessary technical requirements of the Securities Acts have seriously restricted the buying and selling of securities. For this reason a group of outstanding investment bankers and brokers (spokesmen for seventeen stock exchanges representing the whole country) submitted a carefully thoughtout proposal this spring for various amendments. It is disturbing to note that the report was lightly rejected by the Chairman. In a newspaper interview, William O. Douglas stated: ‘Throwing things out so that the boys in the Street can have another party isn’t going to help recovery.’

The statement hardly seems to be relevant. The objective in modifying the Exchange Act is not to give the boys in the Street ‘another party.’ The objective is to provide industry with a life-giving flow of capital whether or not the boys in the Street incidentally enjoy a party as a result. I emphasize the phrase because, to my mind, it is far better to accept a few imperfections in a financial or industrial enterprise than to create a condition of economic sterility in which vices and virtues alike are dead.

Under the Public Utility Act of 1935 the utilities are now regulated by the Federal Power Commission and the Securities and Exchange Commission, in addition to the regulation already imposed upon them by the State Public Service Commissions. Unquestionably this mass of regulation has prevented the speculative errors of the pre-depression days; but it has also gone so far as to hamper efficient utility management and restrict the normal expansion of utility systems.


We do not need to rescind any of the laws regulating industry; but we need to amend them so as to encourage new enterprises which can absorb our idle money and our idle men. Business success is a far more hazardous speculation than most people realize. Even in the very active years between the World War and the depression, less than two thirds of the established American corporations made any money. Less than one third make any money to-day. These are established corporations. Among new business ventures, only one out of ten ever makes any money at all. Among the new industries developed since the war, there are three that have attracted considerable attention: the radio, the airplane, and air conditioning. All of these represented capital risks. They were ventures. They could not have been developed at all unless men had been willing to take a chance. And it is interesting to note that only two or three companies in these industries have been able to pay any money on the common stock which represents the venture capital put into the enterprise.

A revision of the tax program so as to encourage investment; a reduction in government spending; a modification of the unnecessarily restrictive provisions of our economic legislation — these are the measures upon which business expansion waits. They are not easy measures to undertake —but they become easier as soon as they are undertaken. For example, a revision of the tax program should shortly increase the revenue from taxation; and the expansion of industry should shortly reduce the number who are living on government funds. We have accumulated a tremendous deficit of capital goods, during the depression, and we shall need millions of men and billions of dollars to satisfy these needs.

Moreover, this program does not call upon us to sacrifice any of the moral gains of recent years. We do not have to get rid of the idea of ‘truth in securities.’ We do not have to abandon any plan for ‘social security’ for the aged and the unemployed. We do not need to annul our provisions for collective bargaining, or reject the principle of federal supervision over industrial activities.

This is a campaign of revitalization which looks forward rather than back; which is not political in its nature, and should legitimately command the support of Republicans and Democrats, Conservatives and New Dealers, employers and employees. It is a program for the assertion of one of our more neglected liberties — that of free enterprise — with the same vigor as we assert our liberties of speech, of press, and of religious worship.

  1. The employee also pays a tax of 1 per cent for old-age benefits, increasing to 3 per cent — which likewise tends to force the wage level up so that this tax will be absorbed by the employer. — AUTHOR