The Outlook for 1931

MR. WILLIAM TYRRELL, Vice-President, introduced the speaker.

MR. BALDWIN was received with applause and said: I consider this a great honour to come to the Empire Club, which is better known below the line than perhaps you realize.

What I have to say concerning the Canadian business situation perhaps will not, in spots, be as pleasant as some may hope, but we believe that we must honestly face the facts if we are to get anywhere and pull ourselves out of this depression.

Forecasting business conditions is always a precarious undertaking, despite all the statistics available and the facility for interpretation of them. Since forecasting is the business of the organization I represent, we must strive to make for you as careful a forecast as we can, hoping that our fate will not be so serious as that stated in a recent theme report handed in to a teacher in a school near us. The student had been told to write on Socrates. The pertinent quotation ran as follows: "Socrates was a great thinker and expounder of the Truth; he told people what was going to happen, and they did not like it, and gave him poison which killed him."

As we meet here today, we are facing the situation which was unbelievable a year ago or so among the masses of people. They thought that a new era had dawned, and that a constantly mounting volume of business and great expansion in manufacturing facilities would have developed. The stock market was discounting this golden future, and speculators became mad dreamers dashing recklessly on to the pot of gold along the rainbow of fundamentally false optimism. They felt that commodity values were established on a relatively stable basis. They even invented new formulas for the expansion of credit which were to prevent our suffering from the insecurity that had existed before. They felt financial and industrial reaction could never occur with all the economic wisdom they had acquired since the great break in 1921. Yet here we have been confronted again with a sweeping downward period of reaction.

The law of action and reaction in our business fabric never fails. The expansion of five years previous to the break could never be counteracted by sufficient reaction from our excesses to build again a sound foundation for improved business. There has been general feeling, not merely of disillusionment but of bitter disappointment, over the discovery that we still follow the old economic laws. If we rush into extravagant spending and debt, we always pay the penalty as individuals and as a country.

You may ask whether our theory of action and reaction is not a fatalistic doctrine. We reply that the extreme swings of the business cycle can be eliminated along with the dire consequences of extravagance and heart-rending depressions, if close attention is paid to the old law of supply and demand. But we believe no agencies or group of agencies in our form of government can ever entirely eliminate these cyclical swings.

As to what brought about this period of depression, a great diversity of causes has been assigned, but we believe that a considerable part of it was brought on by super-salesmanship. Industrial leaders had prided themselves on their policy of controlling production to fit demand, but in reality our mass producers were using every expedient known to sales and advertising men to inflate the visible demand to undue proportions. With unbelievable success, consumers were taught to buy with money which they did not have. Much of this type of buying converged on semi-luxuries and luxuries. Salesmen and even bankers preached the doctrine that to spend is to enlarge the activity of business. If you saved your money it went into the building-up of competing concerns, with most ruinous competition and business depression. Now, if there is any one cause largely responsible for this depression it is excessive spending. Perhaps this development might have gone much further if prices had been logically reduced as the decreased cost of production developed with mass production. But prices were held up, and when consumers' demands refused to be boosted further, the whole price structure came tumbling down violently. Here, in our opinion, is the real basis for the deep depression we are suffering now. We might have overcome this drop for some time to come if we had reduced prices In proportion to the saving due to mass production, but we did not do so. That, to our minds, was the beginning of this break, which occurred before the stock market break. We would date the start of the break in June and July, 1929.

Of course you are interested in knowing about commodity prices. We have talked about the tendency to hold prices at an unwarranted high level, and of the result-the rather sudden drop in commodity prices. We are what are known as "price economists"; so let us talk briefly about commodity prices. We feel that the price situation is very basic to the entire business situation. Commodity prices over a long period of time have followed cycles which seemed to us to be very important in interpreting the present and immediate future of the business situation. These cycles appear to be approximately of fifty years' duration. Here is a chart showing the prices in the United States from 1790 to date; the general trend of Canadian prices would be the same. You will notice that there are these large cyclical springs in prices, and we are again experiencing a long downsweep of commodity prices. You may say there is sufficient historical evidence here on which to base any distinct conclusions, and you may be interested to know that we have carried this chart back to 1740 in a smaller group of prices, and find that same sweep in that period, although not so pronounced as since that time. Of course the reasons for this are rather deep, and would involve long discussion.

We believe we are at the point where we should roundly stabilize prices. Whether it should be for two or as much as five years we are not prepared to say; but we are prepared to say, with specific reasons, that following the next period of prosperity, which we hope to enter soon, we shall again go to a lower level. The reasons for saying that would lead us into a rather deep subject. We have every reason to believe that there will continue to be a shortage of gold for monetary purposes, and that by the year 1935 or 1936 all of us will realize that there is a real shortage-unless we find another Rand mine, and unless we change our central bank reserve policy the world over; and the latter reform is rather difficult in times of depression, or even times of improvement coming out of a depression. In such times people are not wanting more paper money; they are wanting more hard money. So such a movement is not likely to occur in the near future. With the shortage of gold increasing, we may expect its value to increase, and commodity prices to decrease. We are even prepared to forecast that within ten years we shall see a distinctly lower level of commodity prices. We hope we may be fooled by the discovery of a Rand mine.

Talk about lowering commodity prices may sound gloomy, but it is gloomy only when we have such sudden descents as we have had in recent months, which make it difficult quickly to readjust our whole economic fabric. In the long run, it is not the level of commodity prices that worries us; it is the adjustment of the industrial fabric to the level of commodity prices. We shall probably have just as good business as ever when commodity prices fall to a lower level, but the adjustment of prices is painful to most of us. That leads me to our forecast of 1931.

How will this depression develop, and when will it end? Frankly, we foresee lower levels for Canadian business during the first half of 1931, and we do not expect business conditions to improve in Canada to any measurable extent. Beyond that time, much depends on world-wide conditions and their relation to Canada's crop. Relief could come from heavy European purchases of Canadian wheat. But that is an uncertain development at present. Russian wheat will drag the market to a low level, and it is largely responsible for Canada's wheat situation now, and will be so in the future. Both Canada and the United States have foolishly and artificially kept the price of wheat at such a high level that they have made themselves particularly vulnerable to attacks on the wheat market by the Russians. We are suffering the consequences of a decidedly uneconomical policy.

The first quarter of 1931 will be exceedingly quiet, due to increased unemployment, decreased industrial activity and a falling-off in trade. The political situation is not at present a constructive factor, and no immediate developments favourable to business are within the power of the present administration here or on the other side of the line. We do not believe that government unemployment relief projects will be of practical value in the immediate future in aiding the general business situation. There must necessarily elapse a considerable time between the desire to build and the actual building. Real support from this movement will not come until late spring.

We find trade running about 13% below a year ago. While there is always a considerable minimum amount of business to be done in the necessaries of life, there will not be any increase in trade trend this winter. But one favourable development is the declining trend in living costs. Much can be done to increase the effect of this trend by further readjustments in retail prices. The difference between wholesale and retail prices offers a considerable cushion for the logical readjustment of retail prices. Those far-sighted retailers will surely prosper who realize that the urge to buy to bring back prosperity can bear fruit only with lower prices. Temporarily lower profit margins for retailers should be their contribution to the solution of the present business problem. Why ask the public which suffers actual unemployment, or fear of unemployment, to "buy now", unless retailers are willing to make prices attractive to them by logically lowering them? Eventually the retailers will have to lower their prices; why not begin now?

Fortunately there has been no general slashing of wage rates, but a slight downward movement is in evidence. We shall see some readjustment in wages in the next two years, as we always have during a major business depression. But the long-time trend of wages will climb, as it has done for many years. Our standards of living will be maintained and even increased when we again return to normal business conditions. The minor drop in wages during and immediately following the depression will be more than offset by declining living costs. Purchasing power will be maintained and eventually increased.

Commodity prices seem to have reached the point where they are relatively stabilized, and we believe that prices as a whole will go a little lower in the wholesale fields. Undoubtedly, when we return to prosperity again, prices will strengthen to some extent, but the long-time trend of commodity prices is still down, and we must expect to do business on a lower level of prices as we look ahead for five to ten years.

The major industries will remain relatively quiet through the first quarter of 1931. But the automobile industry, one of the factors in the prosperity before this drop, will show a healthy pick-up by the end of the first quarter of 1931; but our calculation is that we shall not have in 1931 over 65% of the production in 1929; but we must remember that 1929 figures were quite comparable to those of 1926, which was a pretty fair year.

You see, our philosophy is apt to be wrong in looking ahead, because we compare business conditions with the peak year. We think of abnormal years, and not what is the more normal year. As far as automobile business is concerned, we believe you will look back at 1931 as comparable to the year 1926--not a slashing good year, but a good year, the best we can see in that industry--in fact in any other industry. Any improvement in the automobile industry will be reflected immediately in the iron and steel industry. The mining industry is fundamentally in a healthy condition, but the present lack of speculative interest has somewhat curtailed operations in many of the mining fields. Base metal prices are low, due to overproduction in most minerals.

Do we see any increased activity in mining? We certainly do as far as gold is concerned, and some increase in most of the other lines, as we approach the latter part of 1931. There can be no question about gold mining being more profitable for next year, and several years to come, than it has been for many years. Spring orders for agricultural implements and heavy hardware are only in fair volume. The lumber industry is quiet, and it is not expected there will be a large cut this winter. We must remember that building activity in Eastern Canada and the United States governs the activity of your lumber industry.

As soon as present unemployment projects get under way the volume of contracts awarded should increase fairly rapidly. But the real effect of that building program probably will not be felt until the latter part of the summer or early in the fall.

Of course you gentlemen are interested in the serious conditions before the Provinces. The Prairie Provinces have the worst conditions, due to the wheat situation. In fact the future of Canada seems to a large extent to be tied up with the wheat situation. Your wheat people, just as foolishly as ours, attempted to maintain an artificial price level, and have suffered all the more from Russian competition. Our world wheat markets are all the more vulnerable to attack from the Russians. Being a conservative man, I am not interested in the Soviet form of government; but, Gentlemen, we must pay some attention to it. We have there a phase of the competition which is difficult to measure as we look ahead. It seems to us that even in the immediate future the wheat situation is very closely tied up with what Russia does; and we must comment upon a kind of competition that we do not like to think about, and face it. That is one of the things that we cannot measure. It seems that at present the Russian wheat is a drag on the wheat market, but there is an indication that the drag may eventually be relieved; how soon we do not know. If it is relieved so that large European purchases of Canadian wheat are made relatively soon, your future is all the better. If it is not relieved to any extent, it is very difficult to say how soon conditions will improve, especially in the Prairie Provinces.

Our figures indicate that collections are very satisfactory considering present business conditions. The indications are that the Ontario towns and cities are suffering less than any other part of Canada. While unemployment and hardship due to it seem to be acute to you, and there seems to be no improvement in sight for the immediate future, we must recognize that we have seen worse times than this, and that we shall eventually come out of this depression all the stronger for it.

An organization like ours is at the present time under a tremendous moral pressure to be optimistic rather than pessimistic, just as a year ago indignation was heaped upon us, particularly from many brokers explaining that we should not be pessimistic at that time. Now, we conceive it none of our business to be either optimistic or pessimistic. We believe that we would be false to our responsibility to you and to Canadian business generally, if we coloured our economic conclusion with any title of unwarranted optimism on the one hand or unnecessary pessimism on the other. After all, what you want is the facts, and while it would be a pleasant task to stand here and tell you pleasant and favourable things about the business outlook--because we all like to hear of pleasant things--I want you to believe that whatever I have offered you is in no sense offered because it happens to be either optimistic or pessimistic, but simply because statistics and inevitable economic conclusions point to certain irresistible facts.

When you study conditions province-wide you must know-although you may not think so locally--that Ontario towns and cities are relatively in much better position than any other section of Canada--relatively, I say. There are some situations which are still burdensome, which must be ironed out. Frankly, as far as your payments are concerned, you are in a much better position than we are across the line. We have been very lax in spots in our banking situation, and because of it we may be a drag on you indirectly, I am sorry to say. We have a lot of weak spots there that must be cleaned up yet, before we can get back into a normal period of business. Your banking situation, on the whole, is really a great deal better than ours, although some of your may not think so. (Laughter and applause.) You are fortunate in some phases of your banking situation-the way it is carried on. We have a good system also, but there are some faults in it, too.

We are looking forward to a relatively good period of prosperity following this depression, and of course you are interested to know when that will develop, as we see it. We do not see how it is possible to pull out of this depression into a normal period of business until the middle of 1932; but please remember that there is always good business done after we pass the bottom of a depression. You will recall that, after the real bottom of the depression of 1920 was experienced, a very healthy feeling spread through this Continent, and confidence increased, though prices were abnormally low as we approached normal activity. We finally came back fairly rapidly, although naturally we were longer in coming back than going down. We hope this will be the case now. We do not believe it is advisable to force the issue by any unsound economic movement. Things must be allowed to readjust--with some careful direction, however--and if we find Canadian business back to normal in the spring of 1932 we ought to be quite satisfied that we have done our best. Meantime we can look for a slowly improving condition in business after the middle of 1931.

I would mention here a development which seems to us somewhat unsound, which you have here, as we have--this campaign to "Buy now and bring back Prosperity". I think its promoters lose sight of the fact that they appeal to the mass of people unemployed, or who fear unemployment--a poor type to appeal to. Even if it were fairly successful, that appeal would to some extent fall flat, because we know that retailers on the whole have not adjusted their prices to the fall in wholesale prices. There is a difference of about 20% between these prices--a sufficient cushion to enable retailers to readjust. One really constructive thing that can be done is to induce retailers to help out by making prices lower and attractive to the people. Retailers should be willing to contribute to trade revival by being willing to take a lower margin of profit. (The speaker gave a personal experience showing that the retail price of underwear in Boston had not responded to the 15% reduction made by the wholesalers.) We feel that the promoters of the "Buy Now" campaign should take the retailers behind the scene, and give them--as well as the public--a lecture. (Applause.)

Another means of bringing back prosperity, and preventing periods of depression, which is being adopted by many Canadian employers who are fortunate enough to have a surplus, is to build up what we call a "prosperity reserve". Some companies across the line have done that -very few, however. They have practically guaranteed employment to all their employees, or in some cases to groups of them. When you guarantee employment, even half-time, to a man, you instill confidence in him. Pardon a personal reference; our organization practises what it preaches, and has guaranteed for this year that no employee will be discharged. (Applause.) Why can we do that? Because over a period of years we have built up a prosperity reserve, and we have also made our profit. We think that leaders in industry should recognize this as one method of improving the situation. It is a longsighted move. It sustains the purchasing power of employees and officers. Some people may think it is impossible to build up such a reserve, but if you cannot do it, poor management is shown. In our opinion no business has a right to exist that cannot build up such a reserve. Businesses that are said to be relatively decadent have done it.

It seems to us that this problem of business depression is distinctly in the hands of our managerial types of citizens. We must plan for it in the future. We do not hold the fatalistic doctrine that there must be action and reaction. We believe a large part of these terrible periods of depression can be overcome by a little more careful governing of our over-expansion periods.

One of the things we frequently talk about is savings. We feel that we got off the track in the last five or six years in telling people to spend. It was said, "If we save a great deal of money it will go back to the industry; it will build up a large plant; competition will result, and of course profits will decline, and we will go into depression." We went into depression, not because of that, but rather because of extravagant expenditure. We believe that this virtue of saving ought to be, and must be, taught more extensively as we go back into a period of prosperity. We must remember that there is a fundamental firmness, soundness and vigour to the Canadian economic structure, which will eventually bring you back to prosperous conditions, which we honestly believe will be even better than those through which we have passed, because we feel certain it will not be carried to the excesses that we experienced in the immediate past. This depression is world-wide and, therefore, is a much more difficult one to work out of. As we look ahead, it seems that it will be some time in 1932 before we shall get back to what we call absolutely normal conditions. Yet in the meantime we must work hard and remain hopeful that with this hard work we shall see somewhat better times by the end of 1931. Business should carefully reduce its prices as quickly as possible, and prepare for the first half of 1931 on a basis of conservatism and reasonable cost. The area of depression below the normal line of growth, as shown on the Babson Canadian chart, should develop further. But hard work in sales and cost-cutting efficiencies in production and distribution are the key-notes of your 1931 business policies. Your reward will come later in the year. (Loud applause.)

MR. FRANK ROLPH, President of Toronto Board of Trade, in conveying thanks to the speaker for his instructive and inspiring address, pointed out that his firm had utilized the plan of "prosperity reserve", and he also hinted that the "other Rand", for which the speaker hoped, might be found in Northern Ontario.