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The Libel Against Capitalism

ISSUE:  Spring 1932

Having pulled the pillars from under the economic temple, like Samson, we catch the debris on our heads. Question: shall we demand a new type of structure which has no pillars, or shall we keep the old and repress our vandalistic impulses?

Some think that the recurrent urge to attack those shining columns is inherent and irrepressible. Hence, the only way to avoid repeated catastrophes is to have a socialistic structure whose massive walls and towering bastions will brook no nonsense. They would have not even a gargoyle exposed to the incorrigible forces of instability.

Others, less fatalistic, would cope with the destructive tendencies merely by setting up additional bulwarks around, and in, the present structure. They talk in terms of “controls,” of a “planned economy.” Since such devices, however, would seriously disfigure the capitalistic structure and deface the very features which justified its existence in the first place, they could be no more than temporary. They would serve merely as shock absorbers for the ultimate major transition. The consensus of capable opinion is that no permanent halfway position is possible. We must in the long run choose definitely between the present economic system and its logical antithesis, socialism.

As the tons of literature on socialism attest, men do not approach lightly this concept of an order in which all join hands in mutual self-suppression. There is much more involved than the collective ownership of the means of production, the denial of individual enterprise, the wiping out of profits, dividends, interest, and rent as sources of income. It touches all the imponderables of life, transmutes loyalties, remakes religion, art, philosophy, social institutions, every phase of human expression into essences of the State, and the State itself into a structure whose brick and mortar are men and machines.

Socialism, therefore, in its implications, reaches beyond the scope of logic, transcends the boundaries of any economic reasoning. One can judge it only in the light of what he is himself. If he be an individualist, he sees it as a system of repression, an incarnation of the ultimate grimness in men, a fatalistic conception of life as inherently hard and mechanistic. He views it as a society of stipulations, of fixed patterns, commanded routines, standardized behavior in which the individual is indistinguishable, unimportant, helpless. It comes into being, as he sees it, by making its builders atomic parts of its own structure, and so the peace which they gain is the peace of enslavement, their security the security of fixation.

And in truth there are but few men who advocate socialism for its own sake. Its truly ardent disciples more often win converts not by eulogies of love for the projected order, but by denunciation of the old. Their success requires the presence of much to hate, such as the tyranny of a brutal feudalism, or the privations of economic collapse. But in the main, the proponents of socialism as we find them in the United States, visualize it as the inevitable denouement of certain onsweeping economic forces. They do not wish for it; they merely see no way of escaping it. Why continue to spend our energies in repairing, readjusting, rebuttressing the capitalistic structure, when each effort is followed by a new assault and a new weakening?


What are the bases of such dire forebodings? One of them is the belief that bigger and more expensive machines necessitate bigger and more expensive factories which in turn involve the presence of great “overheads” and the necessity of mass production, these in turn inviting combinations for the sake of security in the markets—combinations in their turn growing into monopolies in order to escape the ruinous competition of giants. To seek protection from monopoly, or threatened monopoly, the public must set up controls, the most effective of these being socialism. Another cause and effect chain which presumably leads to socialism is made up of business practices, rather than changing structures, featuring periodical overproduction, excess plant capacity, technological, as well as cyclical, unemployment, all of these being viewed as fundamental characteristics of the competitive process. In such fashion socialism may be presented as the logical solution of our ills, whether they spring from a structure of combination or from methods of competition.

It may not be irrelevant, in considering the first of these “tendencies” toward a changed order, to recall that the man who formed the first “trust” in the United States still lives in the flesh and plays his daily round of golf. It seems strange that a movement mighty enough to veer the destiny of the race could become irresistible in so short a time. Especially so, since as late as 1913 the combination movement, in so far as it tended to approach monopoly, had been definitely checked by the action of the courts, by the passage of the Clayton Act and the Federal Trade Commission Act, by the vocal hostility of the public, and by a general recognition within the ranks of business itself that many of the traditional arguments for combinations large enough to exercise arbitrary control of the markets were specious in character. Those changes in our industrial structure which threaten the life of competition, either by restricting it to the rivalry of giants, or by smothering it with virtual monopoly, have come about since the war—most of them in fact since 1922. Moreover the public indifference to the growth and activities of super-corporations falls within the same recent period, as does the indifference of the government, and is no doubt adequately explained by the belief that the merger movement was an important cause of the great prosperity.

Of course there has been a steady, and approved, drift toward large-scale enterprise as a necessary adjustment to increased mechanization. But for the individual enterprise the technological requirements of maximum efficiency can be met in every major industry, and usually have been met, without encroaching upon its competitive status. To state the case more positively, in the growth of individual enterprises a point is eventually reached when further expansion means no greater efficiency in production technique and no greater facility in the marketing process. Expansion beyond this point of maximum efficiency cannot therefore be regarded as a natural response to economic principles. It is rather due to the desire for arbitrary market control or for the immediate profits to be derived from the sale of the combination securities to the public. I contend that such objectives are in violent contradiction to the philosophy of capitalism and distort its normal processes.

The concentration of eighty-five per cent of the public utility power facilities of the United States into the hands of a half-dozen holding companies was in its early stages a proper exploitation of the super-power idea. It was a desirable adjustment to the new developments in electrical generation and long distance transmission to procure a greater volume, relative to overhead, and a more stable load factor. But the final stages of that concentration had little to do with the idea of greater technical efficiency, or of cheaper service to the public. They were for the most part easy and conspicuous acts of harvesting: on the one hand, a reaping of the golden yield of juggled securities; on the other, a gaining of political power for quite obvious purposes.

Among the major manufacturing industries, the really big deals in combinations were conceived and “put over” by investment banks looking for business, or by financial wizards seeking to grow ten shares of stock where one grew before. They usually required that the constituent units of the proposed combination be profitable to begin with; in other words, already efficient. The money market had to be just right, that is, the banks inclined to lend liberally and cheaply on collateral security. Above all it was essential that the public be in a buying mood for securities—a highly speculative mood, if common stocks with a high water content were to be issued. With these ingredients of the situation in proper juxtaposition, the remaining labor was the acquisition of the stocks of the constituent units for fifty million dollars, say, and the sale to the public of the holding-company stocks and bonds for one hundred million. The holding company would probably build a new skyscraper, but the operating units would run on as before—it was not their business, this change in directorships and shifting of stockholders.

In our late prosperity, enterprises that really needed to combine were usually overlooked. Their profits were not big enough to be worth while! The textile industry has shrieked for more combinations. Its numberless small units, dealing separately with a treacherous raw material and producing for a blind market, have fallen by the wayside like autumn leaves. What an opportunity there for super-management, for large-scale control, for the economies of “big business”! But since there was no opportunity for a financial killing all the “tendencies” and irresistible “forces” backed up and side-stepped. The few combinations that were formed, notably the Loring merger, were put through against almost insuperable obstacles. They were truly aimed at the salvation of the industry. Would we had more of this type in textiles and in bituminous coal. They are real examples of the operation of inherent forces and for that reason are exceedingly rare.

The railroads, desiring to be more efficient public servants, clamored for some thirty years to be relieved of the folly of competition. Their petition granted in 1920, they were free to combine, were urged to combine, were under actual legal compulsion to combine. Whereupon their interest in combination per se promptly subsided. The issue was quickly changed from combination to “acquisition.” Into the rich field of promised financial reorganizations the hungry interests swooped down. . . . And now, after twelve years, the history of this epoch-making consolidation movement consists of the fabulous but futile exploits of two Cleveland bankers, the formation of a couple of off-color holding companies, the frantic purchasing by the railroads of each other’s securities at enormous prices, ruinously heavy losses from these selfsame purchases, a shifting of traffic to the motor trucks, a final grand march to the Interstate Commerce Commission for increased rates—while we still wait for the combinations. These events are no doubt highly significant of something, but I suspect that they reflect traits rather than tendencies.

Railroads, textiles, public utilities, profitable manufacturing industries provide convincing evidence that those examples of the combination movement about which the public need concern itself were not devised so much for economic production, or for cheaper and more adequate service, as they were for the immediate financial gains from the combination act itself. They have not been dictated by the urge to greater efficiency. They serve to frustrate rather than to support the fundamentals of the economic process. Their presence then is from sufferance, not from necessity. If they are the sine qua non of the assaults on the capitalistic competitive temple, we have only to reach for the broom.

Of course the consequences of such combinations, once they are established, are serious and inescapable. Reasoning from them alone, the case for socialism seems strong. But it is illogical to become fatalistic about consequences before we have given consideration to causes. If there is no fundamental justification for the formation of these many-storied super-corporations, to argue a course of action which is based only on their consequences is begging the whole question. One copes with flood waters only at the dykes. To ignore this principle is to leave us hopeless and without choice so far as the future of capitalism is concerned. Yet it is precisely this that would be accomplished by the so-called “liberalization” of the anti-trust laws and the concurrent setting up of government controls to grapple with the consequences. Such action would be tantamount to saying to the vast acquisitive energies of the economic system: break through the dykes in any way you choose and we will meet you in the bottom lands. It is not difficult to surmise what the ensuing inundation would do to the government controls. Thereafter, nothing short of socialism would be possible. If the latter is their ultimate objective, the advocates of this procedure certainly know what they are doing.


If the combination activities in our economic organization do not convince us of an irrepressible tendency toward socialism, what can be said of competitive practices? Do they not share heavily in the blame for depression, unemployment, and poverty? If the blame be so placed and is proved to be characteristic, then competitive capitalism is guilty of large-scale tyranny and oppression, even though it be unintended and impersonal. But modern capitalism in any case is not pre-inclined to tyranny either in fact or theory. In the whole category of abstract ideas, not one can be found which is more repugnant to the spirit of capitalism than the idea of repression, or exploitation. Capitalism, given its way, submerges us with goods. It not only indulges all known wants to the point of satiety, it frantically endeavors to create new wants for the sake of their fulfillment. The striving for this objective is responsible for its incredible material achievements.

Exploitation in its Marxian meaning is rapidly becoming obsolete. Aside from the financial survivals which we noted above, the term no longer necessarily implies unethical taking or ruthless squeezing. Men “exploit” by building great power dams, by converting trees into cloth, coal tar into dyes and perfumery, air into nitrates, by propelling gas five hundred miles or so through underground pipes, by placing twenty million cars where there were only ten million, and making the twenty millionth car twice as good and half as expensive as the ten millionth. The major portion of economic activity is in harmony with this concept. How otherwise could the real income of the average American, his consumption of goods, have increased by a third in the decade from 1919 to 1929, an increase not only unapproached for velocity, but also for the heights to which it carried the level of general well-being?

These aspects of capitalism, its urge to produce more, to consume more, to restrict less, serve to clarify the distinction between capitalism per se and capitalism as it is sometimes made to appear. To it are attributed many features which are not a part of it. The realm of human activity is broader than capitalism and engenders many follies of serious economic consequence for which capitalism cannot be held responsible. The capitalistic mechanisms are delicate, intricate, and finely balanced, and should not be expected to function smoothly under whatever stresses and strains men see fit to impose.

In his “Economic Consequences of the Peace,” published in 1920, John Maynard Keynes stirred the intellectual world, strangely enough, by pointing out that the peace stipulations imposed upon the economic systems of the various countries payments which could not be made and collections which could not be received. Attempts to enforce the proposed settlements could only bring ruin upon conquerors and conquered alike. Subsequent events proved Keynes to be right. His analysis was purely capitalistic and showed that the terms of the treaty were in violation of capitalistic principles. It was for that reason that they were unsound. Had the exactions of the Peace been in the interest of private profits, or long-run capitalistic gain in any form, they would have been intelligently contrived. Capitalism long ago learned better than to kill the goose that lays the golden egg.

The same short-sightedness which characterized the Treaty has continued to be conspicuous in international economic relations. The universal stampede to check the flow of goods between nations is not a capitalistic phenomenon. It stems from a rabid nationalism which is a complex of many things and wholly independent of the type of internal economic structure which a country may have. The presence or absence of internal competition makes no difference whatever in a country’s tariff policy. Had England become a socialist country last year, as she might well have done, her tariff walls would probably have been all the higher for it.

No small part of our present economic plight, as every one knows, is caused by the intergovernmental debt situation. It has thrown financial relationships into a turmoil, made the fiscal burdens of governments intolerable, impeded the exchange of goods everywhere, and demoralized money markets in all countries. Yet it was created by forces which have not the remotest kinship to the business interests of the countries involved. Were it not for these debts, our exports would be bigger, our monetary structure sounder, our private foreign investments safer, our volume of production and employment greater. Capitalism, guided by considerations of its own selfish interest, would not hesitate to rearrange their terms in accordance with economic sanity. But the politics of nationalism, which has no conscious allegiance to any economic principles whatever, rules otherwise.

If we compare the policies of the United States, England, and France with respect to capital export, gold accumulations, currency stabilization, and government fiscal operations, we find wide divergencies between them. For the most part they are in conflict. One seeks in vain for allegiance to common principles, for approach to mutual consistency, which would make for balanced relationships between these countries. An explanation of the incompatibility is not to be found in anything so fundamental as differences in their economic structure, or in domestic business practices. They are all capitalistic states, all devoted to private profits, to freedom of enterprise, to the wage system. Yet how different their policies, their behavior. All of these differences surely cannot be inherent in capitalism. There must be something else which is responsible for them.

A further illustration of the deadly character of the forces which are extraneous to the economic organizations of individual states lies in the universal inabilty to cope with certain important commodities, regardless of the means of control employed. An unrelieved chronicle of failure has been the attempt everywhere to control the economic status of rubber, coffee, sugar, wheat, cotton, copper, wool, petroleum. These raw materials have undoubtedly been overproduced, but the surpluses are due primarily to competition between countries. Even Russia participated in the overproduction of wheat last year, striving her mightiest for an exportable surplus when the markets of the world were already overloaded by the United States, Argentina, Canada, and Australia. The only important product whose apparent overproduction was due to domestic conditions is cotton. In this case the explanation is to be found in the development of new lands in Texas and Oklahoma, certainly not an undesirable transition.

In the case of bituminous coal, there is over-capacity rather than overproduction, due less to competition than to the increasing use of gas and petroleum and to the technological changes in the consumption of coal, which have virtually doubled the average amount of heat energy obtained from a pound of fuel. Under any conceivable form of control the bituminous coal industry could not have escaped a condition of over-capacity.

It seems obvious that so long as the world’s most important staple commodities are priced and distributed through world markets, or produced in areas larger than a single country, their control will be effected no more easily by the socialist state than by the capitalistic state—unless we fantastically postulate a single world state.

As in international matters, so in domestic affairs, we have suffered from practices and conditions which are irrelevant to capitalistic enterprise rather than inherent in it. I have already referred to certain extreme examples of combination as the incidental products of prosperity and financial laxity. Another fortuitous irritant was the investment trust, basically an honest and valuable institution, which was perverted in the years from 1925 to 1929 into a mere accessory of the country’s gambling machinery. It intensified the speculation and then distributed back to the public some billions of dollars of losses to intensify the deflation. It should be relatively easy to keep the investment trust within its proper function, and legislation toward this end is already under way in a number of states, including New York, and is an integral part of the program which the Glass Committee in Congress has sponsored.

The banking system, too, must share its responsibility for our present plight. It failed to restrain financial excesses, but whatever its errors, they are not attributable to competition. Defective machinery of credit administration is partly to blame, but defects of this type can be remedied, and to a large extent will be remedied by the Acts which the Glass Committee has proposed. The errors of judgment will lessen with greater experience, but their presence to a certain extent is inevitable and will continue to be inevitable in any type of economic structure. Complete escape from unwise money and credit policies is a problem which cannot be solved by any magic of organization.

But no such doubts apply to the regulation of certain types of corporate issues. I have reference, not to new enterprises, but to corporations which are built upon pre-existing enterprises, the status of which is known, To corporations of this type must go the blame for imparting a diabetic quality to our financial system. Their over-issues did not generally derive from the intention to use the proceeds in actual expansion or improvement of plant. In some cases the desire was merely to build up bank balances, in others to provide funds for lending purposes—a flagrant invasion of the banking province—in others, to provide munificent rewards for founders, promoters, and others. But in any case, the excess issues remained as a continuing and destructive burden upon the industries whose earnings were called upon to support them. We learned long ago that it was comparatively easy to restrict the issuance of railway securities to the real needs of the carriers. The same lesson can be applied to the regulation of holding-company issues. It is not difficult to distinguish between issues which have a kinship to industrial progress, and those which are related only to the process of financial melon cutting.

One of the chief arguments for socialism—or for its baby brother, government-planned economy—is the allegation that competitive capitalism inevitably leads to periodical overproduction and depression. Certain classes of raw materials have been overproduced, as we have noted elsewhere, and for reasons which have but little to do with internal competition. As regards manufactured goods, there is no proof of general overproduction prior to the depression. The existence of a condition of over-capacity, or of excess inventory, during a depression is merely the depression itself, not the cause of it. If overproduction brought on the depression, it would be revealed by swollen inventories before the collapse. The numerous and dependable indexes computed by the Department of Commerce, the Federal Reserve Board, many trade associations and private reporting agencies show that, until the occurrence of the crisis, inventories were kept well within the proper ratios to sales in all important manufacturing industries except textiles. Most of the industries, in fact, showed commendable caution in refraining from manufacturing to stock, and it was this particular behavior more than any other which was responsible for the confidence of the experts in the soundness of our industrial structure, not only during the prosperity, but even after the stock market crash. Manufacturing activity was merely keeping pace with the public ability and the public willingness to buy.

Far less cautious were the Federal government agencies, the States, and the various local jurisdictions. What State did not plunge with reckless abandon into highway construction, institutional development, and public services of almost every type? What county or municipality escaped the mania of reconstructing street systems, schools, public buildings, water and sewage works, parks and eleemosynary institutions? What civic organizations failed to promote magnificent hotels, Chamber of Commerce buildings, recreational facilities, suburban realty developments? What a thrilling exhibit! But on borrowed money! When these communities approached the limits of their borrowing power, the billions which they had been pumping into the arteries of industry were shut off. What wonder that enterprises everywhere fell gasping for the oxygen that was no longer flowing! It would hardly be accurate to label this sort of termination as overproduction.


In such diverse, and often circuitous, ways have we been unkind to the economic order. By blind adherence to nationalism we have brought confusion into the interchanges of all countries. Through failure to cooperate internationally, the basic products of soil and mine have unduly burdened the world’s markets, though here the fault is one of omission rather than commission. At home we have permitted undue accumulations of power and capital in giant super-corporations which have no economic justification for being. Under the hypnosis of exuberant prosperity, we threw aside our financial inhibitions in an extravagant over-issuance of securities, over-speculation, over-extension of bank credit, and over-borrowing by public agencies.

Some of these cases of uneconomic behavior are international in scope and hence difficult of correction by a single state, but the others are within easy range of corrective influences. No one of them is inherent in capitalism, or a logical accompaniment of capitalistic processes. They are in effect excrescences of the economic order and their prohibition does not involve interference with, or regulation of, desirable business activities. There is therefore a clean-cut distinction between government inhibition of injurious practices and government administration of a “planned economy” embracing all practices legitimate and otherwise.

A procedure aimed merely at injurious practices is simpler too, because the more important evils are not complex in character, neither do they lie concealed from the public view. On the contrary, their existence is conditioned upon public approval and support. Herein lies the paradox of our economic difficulties. It will be dissolved only by economic enlightenment. The public is learning as it has never learned before; never have the processes of understanding advanced on so wide a front. There is reason to hope that the columns of the temple will become more and more secure with the passing years.


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