Keys to Plenty

I

New Time

DO you doubt that we are in a new time? The economic life of everyday reality is so strange that we have among us no proverbs about it to be smuggled into the gelatin as copy-book exercises. It is a curious fact. Life without folk maxims to summarize our kitchen wisdom. There are some that survive from another time and we keep repeating them, but they are false and serve only to illustrate what power there was in the old copy-book propaganda.

Suppose, for example, that one night everybody should come by way of a common dream to a conviction of thrift as it was taught in Poor Richard’s Almanac and McGuffey’s school readers; suppose that from the implanted suggestion of this dream people should begin all at once to practice old-fashioned thrift, buying nothing but what was absolutely necessary, thinking to save the rest and become rich by self-denial. What would happen?

First there would be a terriffic slump in retail trade, next a panic in Wall Street, after that, frightful depression of industry. Factories that had been producing motors, textiles, shoes, garments, radios, furniture—all manner of things that satisfy human wants—would have to close or go on short time because everybody had suddenly resolved to consume less and save more. All incomes, whether in the form of wages or profit, would be cut down. People everywhere would be talking of hard times. The standard of living would fall. You would be lucky to have enough to live on, with nothing at all to save.

The quantity everybody expected to save was a quantity that might have been consumed; but when people all at once begin, as they think, to save it, then it does not exist. Why? Because, since they do not require it for purposes of consumption, it will not be produced.

You may say: “But what people save is money. They put their surplus money in the bank and the bank lends it to others who will use it as capital to create more wealth.”

By more wealth do you mean more motor cars, more textiles, shoes, garments, radio sets, furniture, better houses, with more plumbing and modern conveniences? But as people now are minded to save their money instead of spending it, they will buy fewer of all these things, not more. Therefore why should anyone be so stupid as to borrow the money the people have saved and use it to produce more of the things the people are not buying? It would not pay.

So the seeming paradox that people may ruin themselves by saving instead of spending. It is not a paradox. It is simply true. It was not always true, and it is now true for the first time in the economic annals of the race because the problem of production has been solved. How to produce enough, even more than enough, is no longer any problem at all. We continue to recommend thrift as a private and public virtue without realizing that when once you have solved the problem of production, then thrift universally and rigorously practiced—the kind of thrift that means doing with less in order to save more—is economically disastrous.

Why was saving ever a necessity? This is to speak of saving in the economic sense, collective thrift as a national virtue, not thrift as a form of personal providence. The use of collective saving in the economic sense—the use of it in Ben Franklin’s time—was in order to create capital means to the further production of wealth. The means were more tools, machines, power stations, factories, mines, railroads, and so on. The only purpose of increasing these is to increase the production of goods that finally satisfy human wants, all precisely with the end in view that people shall be able to enjoy more, have more, exist in a state of plenty, with no necessity to stint and save and deny their wants. After many years of saving, the time may come when you have means sufficient or means in excess so that there is a potential surplus of consumable goods. Then collective saving ceases to have any merit at all. Your problem changes. It is no longer how to produce enough wealth; it is how to distribute what you are able to produce.

That time has come. In any direction you may happen to look there is a potential capacity to produce more things than the effective demand requires. It is true of lumber, coal, bricks, steel, textiles, wearing apparel, food, chemicals, luxuries—whatever you like.

It was only a few years ago that the possibility of oversaving occurred to anyone as an idea. Now you may hear it discussed as a problem of the utmost importance. We must mind that we spend enough—consume enough—to keep our existing industrial machine going at ideal capacity, for unless we demand and consume what it is ready to provide, there will be unemployment, from unemployment under-consumption, and the rhythm of prosperity will break. We must be careful at the same time not to increase our power of production faster than we increase our power of consumption—careful, that is to say, not to go on adding to our capital means at the expense of our current buying power, for that is like plowing more land than you can sow or sowing more than you can reap.

You do not wear a power loom or a shoemaking machine. You want textiles and shoes. If people have already enough capital means in the form of power looms and shoemaking machinery, they are stupid to do without other things in order to create more power looms and more shoe-making machinery. In doing so they lock up their labor in excess capacity. It is no good to anyone; it is waste—waste from oversaving—because it must lie idle and is indivisible. They had done much better to save less capital and spend more money for the immediate satisfaction of their wants.

The fact is that we find it now much easier to increase our industrial capacity than to extend the effective demand for consumable goods. The mere wishing for things does not constitute effective demand. One must want them enough to be willing to put forth the necessary exertion, and then, of course, the conditions of opportunity must be such that the exertion in itself becomes productive.

Increasingly the anxiety of modern business is how to stimulate effective wanting, how to induce people in the average to exert themselves more in order to be able to have and consume more. Installment selling has that motive. Give a man on credit a better house in a better neighborhood, give him on credit a garage and a motor car to put in it, give him on credit all the goods that belong to a higher standard of living than he has hitherto thought himself able to afford, and what will he do? Will he give up these things—the house, the neighborhood, the car and all—because he cannot afford them? Not for that reason. Not for any reason whatever if he can help it. He will think of ways to increase his income. This means only that he will exert himself more to produce other things the equivalent of these, and that will be more than he ever produced before.

II

The Forces of Production Set Free

Once you get the idea that the only use of wealth is to be consumed, either directly in the form of divisible goods or indirectly and more slowly as the capital means whereby divisible goods are produced, then you understand that people are rich not by any token of what they possess but in the measure of what they consume. We could easily do with 1,000,000 new motor cars a year instead of 4,500,000, but if we did, the immediate consequences would be such a shrinkage in the automobile industry as to throw perhaps 2,000,000 people out of work. They would have no buying power. And the further consequences might well be that you yourself, though wanting a motor car and willing to buy it, would be unable to have one.

How does one get a motor car? Begin there. To get a motor car one must produce other things of equivalent value. Having produced these other things, one must sell them. Who buys them? Everybody buys them, including those who make motor cars. But because people at large, in a spirit of thrift, are denying themselves cars, there are 2,000,000 motor-car makers out of work. They cannot buy your things no matter how badly they may want them. Therefore your own things—which may be goods, ideas, services or labor—are much harder to sell, the demand for them having fallen in proportion as the demand for motor cars has fallen. You may be unable to sell your things at all, or more than enough to meet your bare living necessities, and in that case you cannot have a motor car. The only reason you cannot have it is that other people are doing without cars in a spirit of self-denial. If instead of buying motor cars they put their money in the bank, that will not help. Saving does not support the motor industry. It does not sustain this rhythm of balanced exchange.

So long as nothing happens to the rhythm, so long as consumption and production are kept in balance, there is no limit to prosperity—to the satisfaction of human wants—this side of satiety. A new principle works. The principle is that consumption finances production. The more wealth is consumed the more it will increase—that is, provided the forces of production have been set free.

Other people had caught glimpses of the truth that prosperity is the total phenomena of consumption. High profits, high wages, even the rapid increase of capital, merely indicate the rate at which people consume wealth. They do not consume it because they are rich; they are rich because they consume it.

More than seventy-five years ago a French economist named Bastiat delivered to his disciples from his deathbed the following dictum: “Political economy should be considered from the consumer’s standpoint.” Dimly, he had seen a great light. The idea was that the true economic end could be nothing else than consumer benefit. The idea was sound. But for half a century it could not prevail; in Europe it has not yet prevailed against the tyranny of certain false notions about capital, labor, profits, wages, producers as a class and consumers as a class and a natural conflict between them.

In this country the demonstration of that idea has occurred. It is the American contribution to economic experience. It has occurred with no change whatever in the common principles of what is called a money and profit economy. All exchange takes place in terms of money and the incentive is profit, as in other industrial societies. So it was neither a sinister law of money nor depravity of the profit motive, any more than it was the institution of private property, that ever hindered prosperity here or elsewhere. All differences arise from what people conceive to be the right use of these powers. Yet it had been often proposed to abolish money and profit and destroy private property in order that people might freely produce and freely consume.

Between producer and consumer there is no conflict. As well speak of a conflict between the two poles of electricity. There is the necessity to create by effort that which we wish to enjoy, and from this comes a state of tension, the same in a man who may be living alone on a South Sea island as among 120,000,000 people living together on a continent. There is only this difference—that among 120,000,000 people working together as one economic society there must be a partition of effort and a division of enjoyments. Then exchange, money, capital, method, organization and system, tending to become impersonal, with the danger that much quarreling over division will impede the effort and limit the quantity to be divided. A science of production develops sooner than a science of distribution. Naturally so. Exertion before enjoyment.

III

Mechanical Extensions

Not until about 1900 did the American mind begin to act in a characteristic manner on economic problems. Previously it had been obsessed with production as phenomena. Since then it has more and more emphasized the social meaning of production, and with this change of view came the astonishing revelation that in proportion as you emphasize its social meaning so will it increase as phenomena.*

So great and unexpected has been the extension of the human power of production in American industry since 1900 that it begins to be treated as an event—a second industrial revolution. And the reason why foreign observers find it so difficult to understand is that they regard it as phenomena and not as idea.

In the first twenty-five years of this century—1899 to 1925—the population of the country increased one-half.

In the same period the output of agricultural, mineral and manufactured commodities and railroad transportation increased two and a half times.

The output of wealth per capita was actually much greater than these figures indicate. The number of people employed in agriculture, mines, industry and railroad transportation increased only about one-third, as against an increase of one-half in the total population. To have produced two and a half times as much wealth in 1925 as in 1899, with no increase of productivity per worker, would have required the labor of 43,000,000 people. We did it with the labor of 23,000,000.

And even yet the increased power of per capita production is not fully indicated. All this time the length of the workday was being shortened. The statistics here are incomplete. We know that since 1910 the hours of labor in all industry have been reduced more than one-tenth. Working fewer and fewer hours, one-third more workers produced two and a half times more wealth in 1925 than in 1899. Thus the increase of the worker’s power was greater than the increase in the actual quantity of wealth produced.

To compare 1925 with 1919 will give results even more striking, tending to show not only that the curve of productivity continues to rise; its rise is self-accelerating.

Taking again the four great divisions—agriculture, mining, industry and railroad transportation—the output in 1925 was nearly one-fifth greater than in 1919 from the effort of 1,800,000 fewer workers. Actually, in these four fields, a release of workers, though the output of wealth increased nearly one-fifth. Note that the increase in all cases is calculated in quantity, not in value. The value, if you took that, would be affected by fluctuations of price.

What became of the 1,800,000 workers released from agriculture, mining, industry and railroad transportation? They were absorbed into other fields.* More than that number were required in the new service of motor-truck transportation alone. The increase in motor trucks in those five years was nearly 2,000,000.

This dispersion of workers is a continuous movement. With no change in productive power per man, such a thing as increasing the product of agriculture, mines, industry and railroads two and a half times in twenty-five years would have been impossible for two reasons. The labor could not have been found, for it would have required one-third of the total population to be engaged in those four divisions of economic activity; secondly, if that amount of labor had been forced into these occupations, there would have been nobody left to man the motor-trucks, mind the filling stations, make concrete roads, build garages, more houses, more factories, more bridges. Which is to say, even if the wealth had been produced, it could not have been consumed.

Why this intensive mechanization of American industry? Machines are not a gift. Like everything else, they have to be produced, and if forces of production new in kind or degree had not been liberated among us, American industry would not be mechanized as it is.

There is no new principle in machines. They are all built upon six simple mechanical powers—the wheel, the pulley, the lever, the inclined plane, the screw and the wedge—and all their actions are compounded of two movements, one rotary and one tangent. Man’s first machines were driven by hand and foot power. Then he hitched them to brute power, to water power and to the wind. Only a century and a half ago he learned how to drive them with steam power, and that was the beginning of what we call the industrial era.

We have nothing strange in the line of machines—certainly nothing that other people may not copy, as we to begin with, copied theirs. A machine as such is no more powerful or cunning in this climate than in any other. That we use it more deftly may be doubted. There is no evidence that we do. But we do use more machines than any other people, and use them harder. Why we do that is the whole matter. We do it because we have a peculiar philosophy of wealth. Pursuing it, we came to see machines from a new point of view.

* During the earlier history of the country its progress was in considerable part owing to the opening up of new resources. The increase of output during recent decades, however, cannot be attributed to this cause. There have been some new discoveries of minerals, notably of petroleum, but these contributions have been offset by the partial using up of other resources and by the necessity, with the growth of population, of extending cultivation to somewhat inferior lands. The principal factors in the recent increase of productivity therefore are human as distinct from natural factors. Commerce Year Book of the United States, (Department of Commerce) 1926.

* If the productivity of industry through mechanization should continue to increase in the same manner and at the same rate for the next twenty-five years, it would at the end of that time require but forty-five men to produce what now requires a force of nearly seventy, and which a little more than twenty-five years ago necessitated the employment of 100 men. Such calculation, however speculative it may seem, does not overdraw the striking advances constantly being made in the way of mechanization and more efficient coördination of effort in manufacturing processes.* * *

This process of mechanization has multiplied the available stock of consumption goods, has made possible the wider use of many commodities formerly in the class of luxuries, and is strikingly reflected in an effective increase of our national income of more than 40 per cent since 1914. The real wage of industrial workers—that is, the purchasing power of the industrial wage earner’s average weekly pay—is now more than a third greater than it was in 1914. The increased mechanization also in effect has released many who otherwise would have been claimed for manual tasks for activity in other fields, thus affording opportunity for not only a materially but also culturally richer and broader national life, as is evidenced by the increased proportion of the population attending schools and colleges during the past few years. National Industrial Conference Board, 1927.

IV

Dilemma of Quantity

First were certain characteristic ways of thinking and feeling that had to survive the sudden impact of industrialism governed by an alien doctrine of political economy. This has already been represented as a drama of the spirit in which the joint dignity of hand and mind was triumphant, together with the faith that economic and social motives were to be reconciled. Then the approach to economic problems began insensibly to change. You cannot say quite where or how the new ideas emerged. There was an unconscious movement of the mind in the right direction. Now here, now there, someone acted as if upon dual motives. In a given pioneer case the individual would probably be himself unable to say whether it was for profit or for another reason that he embraced the thought of quantity. Enormous additions of power were brought to bear upon the continuous production of goods in quantity in order to reduce their cost and so increase consumption. No matter what the motive was. The idea of quantity was economically sound; it swept American industry and caused a great change of view.

Formerly a manufacturer guessed at his costs, added his profits to arrive at a price, then lifted his prayer for a demand that would bear it. Now it is the other way around. The manufacturer whose object is quantity assumes to begin with, that demand is expansible. It is all a question of price. To reduce his price he must reduce his costs; to reduce his costs he must have quantity upon which to act with more power, higher science of method, keener imagination. Therefore cost is a function of quantity. The more, the cheaper. Instead of adding profit to your costs to make a price, you reduce your costs to make a profit from the price that is necessary to increase the demand. The margin may be small, but when a small unit profit is multiplied by a great quantity the total profit may be much larger than before.

But there is a strange dilemma in this magic of quantity. To keep your costs down you have to go on increasing the quantity. If your output becomes static your costs will begin to rise. Why that is so would require too much explanation. Anyway, it is a fact. For many reasons costs tend always to rise; they run uphill naturally. To reduce them you have to increase the quantity; then to keep them down you have to continue increasing it. Unless you do, someone else will. The competition is keen.

From what now appears in the case it is easily understood why industry is bound to witness the consumer in a new light. Demand is no longer that want which creates itself and comes knocking at the door. Demand equals consumer buying power. Its potentiality may be calculated scientifically. The United States Treasury’s figure of total national income, divided by the population—that is the average consumer buying power per capita. That is the money there is to spend for all goods. The consumer is everybody. Whatever else one may be, one is certainly that—a consumer. The wage earners—they are consumers. They represent in the aggregate the largest single body of consuming power. The quantity goes there. Demand—a very great part of it always—is the dollar in the wage earner’s pocket. Two dollars will represent twice as much demand as one.

Who puts the dollar in the wage earner’s pocket? Industry does that?

How can it put two dollars there instead of one, to increase demand? Simply by doubling the wage earner’s power of production.

From this way of conceiving demand comes a new way of regarding the machine in relation to labor.

Always before this the machine had been regarded as a substitute for labor. The capitalist had no other opinion of it. If the cost of a machine and the working of it were less than the cost of the labor dispensed with, then it was said to be profitable. Industry adopted the machine and the labor was dispensed with. That is why labor so bitterly opposed the introduction of labor-saving machines and why industrialism for so many years was a cruel mirage. Power of plenty, power of quantity, yet want and wretchedness at the base of the social pyramid.

Labor was dispensed with. That part of it for which the machine was substituted had no buying power. True, as the machine process of manufacture cheapened goods, which it was bound to do, and as the cheapening of goods did ultimately increase demand, the labor that had been dispensed with came to be required again as machine workers. But in the meantime, waiting for this of itself to happen, labor suffered terribly; and the competition for jobs was so great that wages were depressed, according to the ancient rule of supply and demand. So it was that for a long time machine industry did tend to reduce the wage earner’s buying power, actually and relatively.

Seeing this, and unable to imagine any other result, social-minded economists denounced machines. Where was the good of increasing the production of wealth by use of machinery if poverty increased at the same time, inevitably, as everyone believed?

A Swiss economist named Sismondi invented against machines what became celebrated as the winch argument. Suppose it were possible in England to do all work of every kind by steam power, so that the king, by merely turning a winch once a day, could produce as much wealth as his subjects had formerly produced by their collective exertions. In that case, all labor whatever having been dispensed with, save only that one daily act of the king, it followed that the people high and low became the king’s paupers.

This illustrates no principle in economics. It does illustrate, first, an incredibly naïve notion of machine power, simply that it comes to exist, no one to invent it, mind it, repair it or reproduce it; and, secondly, the fatal opinion that the machine was a substitute for labor. The truth is that the economists who gave laws to the industrial age never understood machine power in either economic or social principle, never glimpsed the possibilities of an industrialized society.

V

Save the Man; Spend the Machine

In what is characteristic of our scheme the machine is not regarded as a substitute for labor. What we perceive is that when you dispense with the worker as a producer you dispense with him also as a consumer. And as a consumer he is indispensable. Unemployment, once the anxiety of the worker alone, now becomes the anxiety of business. How to sustain and improve the wage earner’s buying power is its scientific study.

The machine now comes rightly to be regarded as an extension of the wage earner’s power of production in order that his power of consumption may rise. Cheap labor is no longer an asset; its wants are necessarily limited. Unskilled labor represents a waste of human effort. With the same expenditure of time and effort, plus skill, much more may be produced, much more for that reason may be consumed. The cost of digging a ditch with hand shovelers at $2.50 a day may be the same as digging it with power machines handled by men working in gloves at ten dollars a day—exactly the same cost per cubic yard of material moved. But in the latter case you have high productivity per man, and as a consumer that man is worth four hand shovelers.

A few years ago, anytime before the war, you might have seen men carrying pig iron and steel ingots from the stock pile to the charging hoppers on their backs. Their day was twelve hours long and the pay was $2.50—a little more or less. That was what that kind of labor was worth.

Now you will see this drudgery performed by a crane and swinging magnet. This one machine does the work that formerly required sixty or seventy human burden bearers. If the two men now operating the crane magnet were receiving the same wage as when they carried the load on their backs, then you would say the machine was a substitute for labor. But their wage is now seven or eight dollars for an eight-hour day. This is responsible work and much more productive. What has become of the others? They, too, have been graded up into semi-skilled work, touching machines, according to their aptitudes, and their wages have increased as their labor has become more productive.

The mechanization of American industry does not dispense with skill. On the contrary, it requires at the top more and more skill and at the bottom less and less unskilled drudgery. In the automobile industry at Detroit alone you will find more skilled men than in the entire motor industry of Europe. They are designers and builders of machines, makers of tools and patterns and gauges, engravers of dies, workers in the mechanical laboratories. And in the factories, serving the assembly line, you will find thousands now graded as semi-skilled who formerly were and might have been always unskilled workers.

One will say there was vision in American industry. Another will say it was necessity acting. The supply of cheap labor was failing; wages began to rise; industry was obliged for the sake of its costs to find ways of doing with power a great deal of work that had been performed as manual drudgery. That is to debate whether efficiency was the cause of high wages or high wages the cause of efficiency. It does not matter. Probably it was both. Here is the rule that works:

Save the man and spend the machine.

This rule now colors the whole language of American industry. For a typical expression of it, take these words from a message addressed to industry in general by the makers and designers of handling equipment, who are now an industry of themselves:

“In many a concern and many an industry the loss of a nickel’s worth of material is a great offense, while the waste of men is suffered without the batting of an eye. This is neither logical, humane nor profitable. Wasting men by keeping them at unproductive work, when machinery would do it faster, better and cheaper, is indefensible. The better way—the American way—is to concentrate men upon productive work at better pay and let iron and steel in the form of material-handling equipment attend to the moving of materials.”

The great example is that the most prosperous industries, or, within an industry, the representatives of it that have the lowest costs, the highest profits, the headway over competitors, are those that waste human labor least. And that is saving in the highest sense—the kind of saving that takes the place of thrift as self-denial.

VI

Our Fifty Tame Slaves per Capita

Once people begin really to command the power of the machine as a free extension of themselves, it is as if a new force of Nature had been released. The rise of mechanical power in this country during the last twenty-five years resembles a cosmic advent. The industrial age was already a century old, and no one faintly imagined that it contained a further planetary possibility like this. Regard it:

In the year 1899 the capacity of prime movers in American manufacturing was 10,000,000 horse-power. That was just more than two horse power for each worker, and this was considered very high—the highest in the world. By a prime mover one means only the primary power unit, or the power generating plant, not any of the driven machines that consume the power.

In the year 1925 the capacity of prime movers in American manufacturing was 37,735,000 horse power. That is 4.5 horse power for each worker.

Taking one horse power to be ten times one man power, what do you see? In manufacturing alone we have mechanical power equal to 377,350,000 tame slaves exerting their bodies for us—and that is more than three times the total population. This is in manufacturing only.

The total capacity of prime movers in manufacturing and mining establishments and in electric plants in 1925 was approximately 73,373,000 horse power.

That is the equivalent of 733,730,000 tame slaves exerting their bodies for us.

And this is nowhere near all. In railroad locomotives we have 26,000,000 horse power, equal to 260,000,000 draft slaves.

In agriculture we have 5,000,000 mechanical horse power, equal to 50,000,000 ground slaves.

And lastly, in 23,000,000 automobiles and motor trucks, taken at an average of twenty horse power each, we have 460,000,000 horse power, and that is as if we had 4,600,000,000 Chinese coolies to carry us about.

The figures are difficult to comprehend merely as facts of magnitude. But consider, moreover, that nearly all this has occurred in twenty-five years.

Since 1899 the horse power capacity of prime movers in manufacturing, mining and electric plants has increased five times. The horse power capacity of railroad locomotives has increased four times. The mechanical horse power in agriculture has perhaps doubled. Twenty-five years ago there were no motor cars.

The total amount of primary mechanical power that could be accounted for in 1899 was probably not more than 25,000,000, or the equivalent of 250,000,000 human slaves.

The total in 1925, including automobiles, was 564,000,000 horse power, or the equivalent of 5,640,000,000 human slaves.

Of the whole earth the population is about 1,750,000,000. In terms of mechanical power we have multiplied it more than three times in twenty-five years. The increase is here. We have created it. Mechanical energy equal to nearly fifty docile slaves per capita!

There are effects that are statistically visible and may be expressed in physical terms. There are others to which we are still so strange that we have no short terms by which to suggest them. There is one, profound and startling, which we have hardly begun to realize. It is as if time had changed, with nobody aware of it, as if the world had suddenly begun to make its revolutions at an accelerating speed and we had made our clocks run faster, supposing them to be wrong.

The machine has changed the tempo of life. Everyone knows this, and yet how little we think of what it means. We look at the clocks. They are running as before. Nothing has happened to the astronomical mechanism. Life nevertheless is running very much faster. Take it not by the clock; take it by the time required to do things, to go from place to place, by the rate at which we consume goods that formerly could not be consumed because enough could not be produced in time for everyone to enjoy them—now as compared with twenty-five years ago. By that measure we are living maybe thirty or forty hours between suns.

VII

Effects of This American Tempo

The tempo of life is so much faster here than in Europe that we may be said to exist on another time plane. What now is to be illustrated is how speed, the tempo, the foreshortening of the time required to produce, distribute and consume wealth—how this has altered the economic premises. For one thing—and this is the particular effect—it has greatly modified the capital function of money.

It is well to make sure we know what we mean when we speak of the capital function of money.

There is this story of money: First it had local token value only. It was something of small bulk, like beads or ivory teeth, that people would take in exchange for any kind of goods; and that was the beginning of a money economy in place of the more primitive barter economy, which was the swapping of goods for goods. As money was standardized in the ideal substance of gold, it came to have a universal hoarding and capital value.

Economists now say, and have said for many years, that gold is not wealth, because you cannot eat it or wear it or warm yourself with it. They have never said it was not capital; they have always treated it as capital, which of course leaves them in the position of saying capital is not wealth. The fact is that gold as the universal money was wealth. It was the perfect form of wealth. If you had gold, you had command of wealth in any other form up to the value of the gold measured in goods. You could not eat or wear the gold—no—and yet no man with gold was ever hungry or without garments in any civilized society. The merchant princes of old had no bank credit to work with. There were no banks, only money lenders, who kept their wealth in gold and loaned it under pledge that two pieces should be returned as three.

Then banking was invented and there was a new form of capital called credit. The banker issued for token purposes pieces of paper that everybody thought were as good as gold, because, whenever they liked, they could go to the banker and cash them for gold. As a matter of fact, the banker issued more paper than he could cash in gold all at once. He worked on the assumption that it would never come back to him all at once, and it never did so long as everybody was content to think the paper was as good as gold and could be cashed for gold. If they began to doubt it and went all at one time with their paper demanding its face value in gold, the banker had to shut up shop. This happened very often; yet banking survived because the convenience of paper over gold was too great to be lost.

Credit is precisely this power of the banker to issue not only paper in place of gold but more paper than gold. It became presently necessary that he should do this. Commerce increased much faster than the gold supply and there was not enough gold to transact the world’s business.

But as such power was bound to be abused, and as bankers were always failing, the state was obliged to interfere, saying: “It is all very well to issue paper money in excess of your gold. Business could not otherwise be transacted. Nevertheless, it must be made safe. You must have on hand never less than a certain proportion of gold—say, one-half or one-third of the amount of your paper money outstanding.”

Such was the origin of the gold reserve, on which all banking now is founded. Thereafter banks announced regularly how much paper they had outstanding and how much gold they had in their vaults to protect the paper; and though everybody could see there was two or three times more paper than the banker could cash in gold if it should happen to be presented all at once, still, that made no difference. Everybody knew the practice and how necessary it was, and knew also as a matter of experience that it was safe. The paper never was all presented at one time to be cashed in gold. The gold remained in one place; the paper circulated continually from hand to hand, effecting the endless exchanges of daily life.

Now it appears that gold has a new function. It is the basis of bank credit. As the use of it in that function increased very fast, use of it directly as either token money or capital declined. The merchant princes were overthrown and ruined by the competition of traders working with borrowed credit.

The next thing to happen was that bank credit, based upon gold reserves in the banker’s vault, came to have two distinct functions. One was a token function—pieces of paper to pass from hand to hand in place of gold. The other was a capital function purely. This has to be made clear.

VIII

On the Capital Function of Money

Suppose you are a manufacturer. You will need to borrow at the bank a great deal of money for token purposes, such as to buy raw materials and to pay weekly wages. But this you need only for short periods—a week, a month, three months perhaps. As fast as the materials are worked up you sell them and from the proceeds you pay back what you have borrowed at the bank. But if you want to build a new plant, that is a different matter. Credit borrowed for that purpose you may be unable to pay back in less than ten years. Hence the distinction. Credit borrowed for only a few weeks, as token money, to buy raw materials and pay wages, would be called fluid capital. It is continually circulating; you spend it, the people who receive it spend it. But credit borrowed for the purpose of building a factory would be called fixed capital, because for a number of years it is fixed there in bricks and mortar and cannot be paid back except slowly and a little at a time from the annual revenues of the business.

A banker must be very careful not to lend too much credit as fixed capital, for if he does, there will not be enough fluid credit left to transact business from day to day—that is, for token money purposes, to buy materials, to pay wages, to effect the exchange of goods among people. If there is not enough fluid credit for these purposes people get very uneasy; there is a rumor that money is bad, and then somebody will come in the old way with a piece of paper demanding that it be cashed in gold. The banker cannot cash it in gold without drawing on his gold reserve, and he cannot touch that because it is the basis of all the credit he has loaned away. So he is insolvent. He cannot pay. When a good many banks are in this position at one time, from having loaned too much of their credit as fixed capital, there is a panic.

Formerly it happened from time to time, toward the end of a great boom, that Wall Street bankers would say publicly:

“We have got to stop. We cannot build any more railroads or factories or power plants; we have used up all the credit that can be loaned for such capital purposes. We cannot perform any new works until we have saved some more capital for that use.”

Then everything stopped and there was a time of unemployment, less spending, more saving, until the credit reservoir had been refilled with credit that could be used for so-called permanent investment.

In fact there is no such thing as a permanent investment. No form of created wealth is permanent. Railroads, factories, power plants, machines—they all wear out, and yet they are capital works for which long-time credit is required. They represent fixed capital.

If you analyze it, the only difference between fluid capital and fixed capital is a difference of time. In one case the borrower is continually returning the credit to the bank; in the course of a year the same credit may be used many times. In the other case, where it is used to build a factory, the return is slow; that credit cannot be used again for maybe ten years. Purely, you see, a matter of time.

Now it must be obvious that if you reduce the time required to perform capital works so that the credit is sooner returned to the bank, so in the same degree you reduce the difference between what are the fluid and what are the fixed uses of credit.

To prove the controlling importance of time, suppose, as a contractor, you were able to build a house, sell it and get paid for it all between sunrise and sunset. In that case you would not require any credit capital at all. This is not a fantastic illustration; it has only that appearance.

Take it now in reality. You are going to found a manufacturing enterprise. What do you need? A site, buildings, machinery, personnel, a perfected product, then a market; and you might well suppose it would be four or five years from the time of beginning your outlay before your capital began to come back as revenue from operation. You might expect to operate for some time at a loss. So, of course, there is need for long-term credit—that is, fixed capital, repayable in—say, to be safe—ten years.

But suppose you could build a factory, equip it, get your personnel, your product and your market all in seven months. Clearly, in that case you need credit for a much shorter time, since in less than a year you will be paying it back out of revenue.

Well, it does actually occur now at that rate of speed. One of the big new motor plants at Flint, Michigan, is the Oakland-Pontiac. Seven months after the ground was broken for the foundation 2000 finished motor cars a day were rolling down the assembly line. Another motor plant, even larger, went into production within 200 days from the time of breaking ground.

When capital works that formerly were years in making may be created and brought to the point of production in a few months all relations are changed. Credit for capital purposes is needed for much shorter periods; it becomes sooner productive and self-liquidating, is sooner returned, is sooner available again to finance other capital works at the like speed. And it is the same as if credit capital had been multiplied. Or it may be said in another way. Industry at this tempo creates new capital many times faster than it was ever created before.

When one begins to consider the effect of time upon economic results a vast field opens.

Beginning in 1922, the railroads spent during four years $3,000,000,000 to improve transportation service. Their schedules were shortened, freight moved faster and people could count on its prompt arrival. This was nothing less than an investment of $3,000,000,000 in time. It was as if many times the amount had been added suddenly to the working capital of business. Secretary Hoover, after a study of it, said:

“We found that the lumber dealers were able to carry on their business with approximately 4,000,000,000 less board feet in stock than six years ago, estimated to be a saving of $200,000,000 of capital in that one industry alone.”

IX

On the Output of Wealth and Power of Consumption

Such was the experience of all industries, all business, down to the retail trade. Less money tied up in stocks because stock could be replenished quickly without fail. From this came a practice for which no name quite appropriate has yet been found. A business magazine recently set up a competition in naming it. What everybody calls it is hand-to-mouth buying. The retailer buys from the wholesaler only as his immediate need is; the wholesaler buys from the manufacturer accordingly. The manufacturer, a steel man, perhaps, finds on his desk Monday morning only enough orders to run the mill until Tuesday night. A few years ago if that had happened he would have been scared out of his wits, accustomed as he was to have orders ahead for weeks, months—maybe a year. In the afternoon mail some orders come, the next morning a few more, and the mill keeps running steadily.

What all this means is that less capital lies dead on shelves and in warehouses. Therefore much less capital is required in the transaction of business.

No one comments on American prosperity but to say one great cause of it is the abundance of capital. The foreigner observer generally sets that out as the first cause. We seem to have no end of capital. Using it up faster than people ever consumed capital before, still we have $2,000,000,000 more or less each year to lend away to other countries.

Seldom does anyone try to account for the fact itself. Where does the capital come from? It does not fall out of the sky. It does not gush up from the earth. The explanation stands illustrated. We create capital two or three times faster than any other people. What does that mean—faster? It means that we perform the work in less time.

Imagine that we lived on a timeless plan, that this life were eternal. In that case it would not matter how many automobiles we produced in what now we call a day or a year. We might produce only one a year and you might have to wait a million years for yours; but if life were forever and time non-existent that would be the same as getting it today. Now bring time back and you see that the number of people who may enjoy automobiles in the cycle of one lifetime is in proportion to the speed at which they are produced. The cost of them likewise is in proportion to the time it takes to make them. You will find it very difficult to think of an item of cost that does not analyze out to be a matter of time. Production per man is not the measure. Production per man per hour—that is it. And there is time again.

Quantity production is the method by which raw materials can be transformed in the least possible time. That is why the costs are low. Time is cost. Continuous movement saves time, therefore it saves cost.

The head of the Buick Motor Company, telling how in fifteen years the output of cars increased 1400 per cent, with an increase of only 10 per cent in the number of men employed and only 25 per cent in floor space, says:

“Nowhere in our plant is there space for a day’s supply of any finished part except frames. It would take a new set of buildings if we undertook to keep such a supply. One day’s supply comes in some time during the day before it will be used. If incoming materials or parts, for instance, are unloaded from the freight car and handled directly to the point at which they will be used, this saves the customary handling from stock to the machine. If space is not provided for storing goods between machine operations, the rental charge against material and parts is low. It used to take eighteen days from the time a wheel entered the wheel paint shop until it was ready for use. Now within four hours of the time a wheel enters the paint shop it is on the automobile.”

Formerly between machines in long lines you would see tote boxes. One operator filled his tote box, then it was moved to the next machine. But the tote box represented material in a static state, not moving in a continuous manner through time and space. Now no more tote boxes. The machines are closer together, and as one operator finishes his job on the material he slides it along to the next one.

The result of this time saving multiplied in thousands of details is that the company turns its working capital over ten times faster than it once did. That is to say, it needs only one-tenth as much working capital—token money—per 1000 cars of output as it required before.

Acting under a new sense of the meaning of time, particularly as it affects costs, American industry more and more creates its own capital as it goes along. Out of its current revenues it builds more plants and more machines, or replaces old with new, with a view to passing more production through a unit of time; and these capital works are so quickly performed, become so soon productive of more revenue, that expansion of capacity tends to become self-financing in a pyramidal manner.

X

On Wall Street Control of Business

To the degree in which industry becomes self-contained in this way, in the same degree it is able to dispense with the benefit of organized Wall Street finance. Now it is that great corporations which were formerly borrowers of credit in Wall Street are lenders there to employ temporarily at interest their surplus means. Actually, of course, the amount of capital employed in production is increasing. In proportion to the number of wage earners, it is increasing. The capital per worker in the mining industry is $10,500; in railroad transportation it is $8000; in manufacturing it is $5250. Yet relatively to the volume of wealth produced we use less and less capital, meaning only that capital itself is more productive.

Parallel is the effect of hand-to-mouth buying, the quick handling of stock, more rapid turnover of working capital in business generally—actually the sale of merchandise to the consumer while it is in process of manufacture—all of which is greatly to reduce the amount of credit necessary to conduct trade.

There is no mystery about the abundance of American capital. Time saving enables us to create it faster than any other people; time saving enables us to conduct business with a minimum amount of it. We do not regard machines as labor-saving devices; they are time savers. We gear them to a sense of time.

All this, as you would think, is reflected in the capital market. Formerly the problem of Wall Street was how to find capital for business. Latterly its problem has been how to find business for capital. It has had more credit to sell than American business and industry could use, for all the enormous expansion that has taken place. That is why Wall Street has been going so heavily into foreign loans. And as the necessity of business to seek credit in Wall Street is less, so is Wall Street’s authority over business diminished. Once Wall Street, as banker and creditor, controlled big business. That tyranny is broken.

These are new facts of a new time. Whither do they tend? What is this time for that we save?

There is no facile answer. But you may see already that a great deal of the time we save is for leisure. The hours of labor are fewer. A return to the ten-hour day or the full six-day week would be economically disastrous. Why? Because people would not have sufficient time or leisure to consume that enormous quantity of divisible goods which has come from liberating the forces of production.