1948, A Year for Successful Worrying

REVEREND SIR, HONOURED GUESTS AND MEMBERS OF THE EMPIRE CLUB

We welcome you today to our first Regular Meeting for the year 1948 and we are sure you will be interested in the speakers who have accepted our invitation to be with us on successive Thursdays for the next few months.

Today we are indeed fortunate in having as our guest of honour for our First Meeting, Mr. Paul Gray Hoffman, a great industrialist, world citizen and staunch friend of Canada.

Our guest was born in Chicago and attended the great university in that city. Mr. Hoffman started in the automobile business and in 1911 became salesman for the Studebaker dealer in Los Angeles retail branch and in 1917 became manager for the district.

Our guest served as a first lieutenant in the field artillery in the United States Army in the first World War and in 1919 purchased the Los Angeles retail branch of the Studebaker Corporation. In 1925 he was made vicepresident of the company and president ten years later.

Mr. Hoffman has received honorary degrees from ten universities, including an honorary degree of Science from Coe College, Cedar Rapids, Iowa, honorary D.B.A. from the University of Southern California, Honorary LL.D. from Dartmouth College, Hanover, N.H., University of Rochester and many others.

Mr. Hoffman is a chairman and director of many companies and is also interested in banking, insurance, air lines and publishing. In his busy and useful life, social work has not been forgotten and our guest of honour is honorary chairman of the United China Relief Incorporated-is a member of President Truman's Committee on Foreign Aid and serves on other committees too numerous, at this time, to enumerate.

In welcoming Mr. Hoffman we would also join with our neighbour City of Hamilton in expressing our pleasure at the re-entry of the Studebaker Corporation into the manufacture of cars in Canada and while we modestly admit that Toronto would have been an ideal city, we understand that a war plant suitable for Studebaker production was available in Hamilton so we are willing to overlook this apparent lapse in Studebaker's good judgment.

It gives me a great deal of pleasure to introduce to this audience Mr. Paul Gray Hoffman, President of the Studebaker Corporation, South Bend, Indiana, who. has chosen for his subject:

"1948, A Year for Successful Worrying"

Mr. Hoffman:

MR. CHAIRMAN AND GENTLEMEN: I was highly honoured by the invitation to address The Empire Club, but I must admit that it was curiosity that brought me to Toronto. I wanted to see if you gentlemen were the paragons that Mr. Gus Gaskin, our Canadian Director, said you were. He assured me that this was a better Club than any Club we had in the U.S.A., that never had I addressed an audience in the United States--I have addressed several--that could possibly measure up to the calibre of this audience in intelligence and general attributes of that character.

You may be interested, now that I have the chance to look you over, in my judgment: you are not as good as Mr. Gaskin says you are. And this doesn't mean that you aren't very good indeed, but nobody could possibly have measured up to what Mr. Gaskin had to say about you gentlemen.

I am going to show my appreciation of your invitation in a rather peculiar manner. I am up here to share my worries about the United States with you. In justification for that I believe our two economies are so interdependent that perhaps our worries should be your worries, and your worries should be our worries and perhaps we will worry snore successfully if we worry together.

It is a complete understatement to say that 1948 is a year of great crisis because in that year in the United States we are going to have to determine methods for the control of inflation, the manner in which our foreign aid programme should be administered, and the measures needed to bring greater stability to our economy. Taken individually, these methods and the manner and the measure chosen may not seem too important, but in toto they may well either start us down the road to enduring prosperity and peace, or detour us into the quicksands of depression and war.

The Kremlin is eagerly waiting news of the collapse of our economies. I believe that the decisions we make will be sound if we get sufficiently worried. I think the fact that we are concerned is the greatest cause for optimism on the North American Continent today. I remember so well, after World War One we decided to turn our backs-I am speaking of the United States-on the troubles of the rest of the world. We became complacent. Out of our complacency and complacency in other countries came the seeds of World War II. The fact we are worried now, if we get sufficiently worried, not only to think hard on the facts but to face the facts, is our best assurance that we won't again sow the seeds for a third World War.

My first great worry, as I mentioned, is about inflation. We are having now in the United States one of the three great inflations in our history. It is not something that is coming, it is something we are facing, it is something that is with us.

On certain measures to combat that inflation there is general agreement. Every one agrees--some people think it is the full answer but it is not--that we need increased productivity and need to avoid interruptions in production. Everyone agrees to that. Everyone agrees that we should have a sharp curtailment in governmental expenditures but nobody does anything about that. At least we haven't done too much yet. Of course, everyone agrees that there should be a promotion of all types of savings, including, perhaps, particularly savings in government bonds.

Those measures we agree on. There is a sharp and wide divergence of view as to whether we should reimpose consumer rationing, wage and price controls, and what to do about the control of bank credits. I am firmly convinced that the reimposition of rationing, consumer rationing, price controls in the United States would bring disappointing and perhaps disastrous results. I think that both you and we should distinguish between the responsibilities of our government to help stabilize the general price level and the impossibility of government in peacetime, from the standpoint of establishing price relationships to specific prices.

In other words I know our United States Government cannot possibly in peace time tell all our people what they they should buy, when they should buy it, and what they should pay for it. That just isn't a feasible foundation for a government to take over in a free economy.

I think as far as the United States is concerned, and we are not the law-abiding people you are, I will admit that quickly--the attempt would make the black markets we had during the war look picayunish. The controls could not be reimposed within six months at the earliest and to carry out the programme would necessitate the employment of tens of thousands of people on the part of the government that would take us in just the wrong way as far as government expenditures are concerned.

Now, when it comes to control of credit we have a somewhat different situation in the United States than you have here. If I am correctly informed it has always been a function of your government here, and you have accepted that responsibility, to control both volume of money in circulation and also the volume of bank credit. Our Government, of course, has also controlled the volume of money, but it has only partially controlled the volume of bank credit. Last year the total volume of our bank credits on balance went up six billion dollars. They went up six billion dollars at a time when we had full employment and were producing almost all the goods we could produce, so almost the only way that that six billions of credit could work itself out was in the form of higher prices.

It isn't the only contributing factor to higher prices but I think everyone agrees it was a very important contributing factor.

I think there is now widening agreement that perhaps one of the great instruments we have to fight inflation in the United States at this time and under these circumstances is through a better control of the volume of bank credit. The Government moved on that in December when it changed the export price for the purchase of government bonds, with the result that we had a contraction of bank credit. They are moving in other directions, most of us hope, and this is my encouraging message to you, because our inflation is your inflation in a way. Most of us hope that .the measures already taken and under contemplation will dry up that source of inflation.

We have got one job to do in the United States and we haven't started, at least we haven't made a good start. That is food conservation. Many of us feel that we don't have a right to 3450 calories a day as long as the people in Europe are getting along with 1800. Most of us feel a food conservation programme is very much in order in the United States and if properly keyed would meet a fine response from our people. We rather think this is one thing that is necessary to bring food prices down. There has been a very excellent restraint, believe it or not, on prices of manufactured foods in the United States, and that is continuing. The General Electric made a move, a rather dramatic move to reduce prices in the days of the rising costs. I think you will see responsible action on the part of Industry in the United States in so far as pricing policies are concerned.

Speaking for the automobile industry, as you may know the profit margin per car has increased only very little over prewar. It is in the neighbourhood of $75.00 per automobile. That is all throughout the industry. It could be $300 more. Give us just a little credit for having exercised restraint, Gentlemen.

My next worry is about our European Aid programme. We are given to free and open discussion in the United States and there have been millions and billions of words spoken and written on the subject of European Aid, most of which in my humble opinion have widely missed the mark. The proponents of the Marshall Plan for Foreign Aid have held forth humanitarian reasons. They have tried to give the impression that with $20,000,000 we could stop the spread of Communism.

On the other hand, the opponents of the Marshall Plan claim giving a dime to Europe destroys their self-reliance and makes them a beggar people from now on.

Both views are distorted. It seems to me that the key to the salvation of Europe rests in a sharp step-up in European production by the European people. That is the only answer. Only the European people can save Europe. The people in the United States cannot save Europe nor can the people of Canada save Europe. Only the European people can save Europe.

I think the question we should face is whether the degree of aid we can wisely and safely send will result in such a step-up. If it won't we shouldn't start. If it will we certainly are bound to go through with it.

Now, what are the facts? Here I think I am on the subject with which I am somewhat familiar because I served on the Harriman Committee that prepared the Harriman Report, and we worked many hard long weeks in the summer when I would much rather have been doing something else than working on the question of European Aid.

I am using United States figures: In 1948 the national income in the United States will be approximately 200 billion dollars. We have 140 million people. In the sixteen European nations who form part of the so-called Marshall Programme, plus Germany, the national income will be approximately 100 billion dollars, with 278 million people-twice as many people on half the income. It seems perfectly reasonable to believe that if those people are given the proper kind of aid they can sharply step up that production. That seems clear to me and that is a pretty hard-headed conclusion that I reached because I don't believe we should start on a programme that will not be productive. Unless we are sure the aid will bring this result it is dangerous to offer it. But who can doubt that that 278 million people, most of them your kind of people, our kind of people, if given the proper kind of aid can increase that production fifty per cent or bring their income up to 150 billion dollars within four years? If they equal the United Sates it will be 400 billion, not 150 billion. If given a chance they can perhaps double that. If they had 150 billion national income in Europe in my opinion there will be sufficient prosperity so Communism will have no chance to spread because the answer .to the spread of Communism, in my opinion, or one of the answers, is prosperity, and if we can bring prosperity to Europe we won't need to worry about it and we all have a tremendous stake in Europe. It isn't a question of whether we get our 15 or 20 billion dollars back. If we have a prosperous Europe, a prosperous Canada and a prosperous United States we will all benefit in all directions. We will benefit materially, we will benefit politically and we will benefit spiritually.

It is a tremendous objective we are striving for. The aid, however, must be administered soundly. I think we must have a very tough administration of this Foreign Aid Program. By tough, I mean I think that we--you and we--are in a position to impose conditions that will save Europe because Europe itself proposed the conditions to us. They said that as a part of their programme they must get their fiscal house in order. So we have a perfect right to say: Gentlemen, before any aid can be forthcoming, get your fiscal house in order.

In the case of France we know that much of the present stagnation is largely due to the unwillingness of the French peasants and the French merchants to sell good wheat and good merchandise for bad francs. It is that simple. You have that problem in several other countries. It is for us to say: You suggested this yourselves. Before we send goods and services we should send food to give the strength to work, fertilizer to aid the crops and tools to produce. Before we start that you do what you said you should do.

With that kind of programme, that kind of administration and with a checking on results every three weeks we can render a service to those European countries that they may never thank us for. I would say that if either Canada or the United States goes into a foreign aid programme with any thought that anybody is going to say "Thank you", we better stay out. That shouldn't be our reason. It is not important to get the "Thank you". But a prosperous Europe, a prosperous England is terribly important to you, and terribly important to us.

I, of course, have been whole-hearterly in favour of the United States, on the conditions I have named, extending aid and enough aid to have this result we all want forthcoming.

My third worry, and perhaps the most fundamental worry of all is about the survival in the world of the type of economic system you in Canada and we in the United States have developed. I hope that my comments on what we are doing in the United States to preserve it will have some application to your situation in Canada. Even if it does not I assume you will agree with me that if the United States shifted from a free to a planned economy it would have immediate repercussions in your country. Beyond this, if your country and mine made such a shift, we would blot out any prospect of a return to free economies on the part of countries that have already veered far to the left. We can start the world back towards freedom but we have got to be sure we preserve free economies in the United States and here as almost the first essential in reaching that objective.

At present in the United States the defense of our economic system consists largely (1) of arguments in favour of capitalism as against statism, and (2) of speeches and advertisements proclaiming .the accomplishments of capitalism.

I question the wisdom of our spending much time or money on arguing in behalf of capitalism as an economic theory. Frankly, I, for one, cannot wax enthusiastic about capitalistic systems of prewar France, Germany, Italy, China or, for that matter, England--just to mention a few about which I have some knowledge. Our capitalism has been dynamic; their's has been static. Without exception all of these systems were characterized by state protected cartels. Too often the capitalists in the countries I have mentioned worked hand-in-glove with the politicos to the mutual advantage of both, but at the expense of the people of their countries. As a matter of fact, I am sure you will agree that capitalism as practised in prewar England was close to a conspiracy between the government, the capitalists, and the labour unions against the customer. The customer is in for fairly tough going when a government permits labour unions to engage in monopolistic practices. But when it permits and encourages not only the labour unions but also management to engage in such practices, the poor customer is in a hopeless situation.

We, in the United States, and you, in Canada, believe in competition and that has been a tremendous factor because competition really is the life of trade. We believe in it. They didn't believe in competition in Europe.

Instead of dissipating our energies in an over-all advocacy of Capitalism, I suggest we concentrate on our particular brand. Adam Smith unquestionably gave us the frame, and within an enlargement of that frame we have developed this unique system. In its fundamental concept it is the opposite of all systems in which the state rather than the citizens own the tools of production.

I have no quarrel with those who make speeches and spend money for advertisements featuring the past accomplishments of our system. I have made such speeches myself and I have contributed to the advertising campaigns of that character. Furthermore, I defer to no one in the pride I take in the fact that no other economic system has created so much wealth in so short a time. No where else on earth since the beginning of time have so many people had such rich opportunities to make use of their capacities and to grow intellectually and spiritually, as they have right here on the North American Continent. However, I am certain that the one best way to assure the maintenance of our system is to search out its weaknesses and take prompt action to correct them. By so doing we can spread its benefits to more and more people. We should always keep in the forefront of our minds that our system's survival will be determined by what it does for the average man.

It does not take much searching to discover our system's greatest weakness-its instability. I am speaking of the United States but you have had some of that up here. In the United States during the last hundred years we have had twenty-six depressions, of which the bust of the '30s was the worst. Why have we had to contend with the boom-bust cycle? The answer is simple. Instability in our economy results from instability in effective market demand. But the answer as to why market demand is unstable is not simple. It is very complex indeed. Market demand is the total amount that individuals, business, governments, and foreign purchasers are willing and able to buy. I repeat: willing and able to buy. The "willingness" and the "ability" are equally essential. No amount of money or credit or income would be large enough to assure adequate demand if individuals and businesses will not use it for consumption or investment. Purchasing power is indispensable and strongly influences the willingness-but ability to buy, of itself, does not create demand. That is something that some of the philosophers in the economic field have forgotten. You can throw money around but if people aren't willing to spend it nothing happens.

Paradoxically, this question of willingness to spend becomes a more significant factor with every increase in our standard of living. If most of us are barely able to earn a living, we will have little choice as to what we buy or when we buy it. Our money will go for food, clothing and shelter. On the other hand, the more money we have beyond what we must use for basic needs, the more chance we have to choose what we buy and the larger the number of purchases which we can-and often do-postpone even if we have money in the bank.

What is true of the individual buyer is true of business. Business can also postpone many of its purchases. Business men will make investments in capital goods only if there is promise of a reasonable profit; and when chances of profit are dreary, such purchases are often put off even though ample cash reserves are on hand. That is something we wish some of the so-called "leftists" would remember, that we can't get business investment unless there is prospect for a profit.

The amount of money available for spending beyond basic needs is far larger than most of us realize. It is estimated, for example, that in 1946 in the United States not less than 60 billion dollars were spent for purchases which could have been postponed. If all this spending had been withheld, the country would have gone into a disastrous tailspin. Conversely, if part of it--the right part--had been withheld, it would have been a restraining influence on inflation.

In other words, it is this overlay of optional buying power, that is the post-ponable buying power, that is the basis of our instability. It is a fact we must keep in mind.

If this analysis of our economic system is sound, then, to keep our country dynamic and prosperous, we must, as we make decisions affecting our domestic economy, keep uppermost in our minds the necessity of keeping people working hard, thinking hard, working together well, and at the same time we must find measures to moderate the wide fluctuations in the level of business activity which have plagued us in the past. You may well ask what kind of a programme will yield us dynamic stability.

Perhaps you agree that the complexities of the problem are such that (1) it will take the collective wisdom of all of us-government, business, labour, agriculture and the educators-to help us work our way toward our goal; (2) that there is no money magic, no one formula, no one cure for the boom-bust cycle. Nevertheless, if we fail to check a climactic boom, or if we have a disastrous depression, it will not be because of an act of God or a convulsion of nature; it will be because of the acts of men and women--people like you and me.

Looking backward, we can see that all past depressions were caused by things men did, things which they could have refrained from doing, and by things they failed to do which they could have done.

This being so, if men act more sensible in the future than they have in the past, fluctuations in the business cycle can be moderated. There is no excuse for either violent booms or busts. By adopting appropriate .measures, the drop between the peaks and valleys can, I believe, be held to fluctuations of 20 per cent, or perhaps 15 per cent. We can live with that. We cannot live with a crash such as that which took place between 1929 and 1932 when national income in the United States dropped more than 50 per cent.

At the moment, as I have made clear, our attention is rightfully focussed on checking inflation. But some of our experts say that before long we shall be faced with combating deflation. If that happens we shall be asked to consider emergency measures to cope with that situation. Therefore, while formulating a quickie programme to combat inflation, we must seek the development of policies which will continuously exert pressures against both inflation and deflation. In other words, we need policies that will continually exercise a stabilizing influence from swings in either direction. That is the only way we can hope to achieve our goal of reducing the range of business activity from 50 per cent to 15 per cent. To illustrate the measures which we in the United States should adopt to make our economy stable, and at the same time keep it prosperous, I suggest two or three out of fifty that I might give. I suggest that

1. Management and Labour cooperate to the fullest extent so that as a result of better planning and better machines, together with an honest effort on the part of workers and management, output per hour constantly improves. The only sure remedy for inflation and the one key to real and lasting prosperity is increased production and through increased productivity.
2. Unemployment compensation insurance be extended as far as possible to cover all workers. This insurance operates automatically to sustain market demand when business activity is falling. Thus it is an important stabilizing factor. Furthermore, certainty of basic income removes an unstablizing factor often overlooked-the fear of unemployment. Prior to the advent of unemployment compensation insurance, the mere rumour of a layoff was often enough to paralyze a community. I urge you industrialists to remember the psychological factors that bring on the freeze, and fear of loss of a job on the part of the average man is one of the most important of those factors. Certainly there has been mal-administration in the handling of unemployment compensation insurance, I grant you that. But I can tell you, speaking for our little town of South Bend that unemployment compensation insurance has done wonders for us in stabilizing our little economy.
3. Our federal tax system to be recast to make it contribute more toward prosperity and stability. Today, it is a hodgepodge. I don't know anything about your tax system. I claim for ours it is the worst. It is the result of wartime rates superimposed on an overloaded, antiquated, prewar tax structure. It has been patched time and again, as a result of the annual search by government for tax measures which would yield the required revenues and at the same time lose the fewest votes possible.
In 1665, jean Baptiste Colbert, the French statesman and financier, remarked that "The art of taxation consists in so plucking a goose as to obtain the most feathers with the least amount of hisses." This casual approach might have been all right back in the days
when federal expenditures amounted to less than a billion dollars a year and there were geese in every back yard. But this year, federal expenditures will be close to 40 billion dollars. Unless our tax system itself is made basically sound, our chance to maintain a stable economy and improve the standard of living of every man, woman and child in the country may be lost to us.
Now, here is one that I ask the business men to pay particular attention to
4. Business should exercise much more scientific control over sales and advertising expenditures. The record shows that in boom times we advertise extravagantly, and spend lavishly in our sales departments, but when times start getting tough, we start slashing our advertising expenditures and fire our salesmen. Obviously, this is precisely the opposite of what we should do. When demand exceeds supply, we should spend sparingly; when depression threatens, we should promptly intensify our sales and advertising expenditures.

That makes sense. At one meeting in New York I showed a copy of the bound volume of the Saturday Evening Post for the last quarter of 1929 and the last quarter of 1930. In 1929 it was so thick--in 1930, it was down here. We had stopped advertising. We had fired our salesmen and then complained bitterly about a depression.

These four recommendations are merely examples of the type of measures which should be brought into play to give us dynamic stability. There are still others which hold much promise but upon which further study is needed.

For example, we must find ways to stabilize the availability of credit. Credit has been too easy to get when times were good and too hard to get when times were tough. That is a problem for the bankers. They have to face it and lick it. I have seen times in my business career when with the same statement of assets and liabilities the bankers were after me to take some money, and six months later I couldn't get a dime. We have all experienced the same thing.

Also, in the proper management of our huge public debt we have a potential contribution to make to greater stability. Fortunately, under the terms of the Employment Act passed by our 79th Congress, responsibility for overall economic policy was specifically lodged with two new agencies--the President's Council of Economic Advisers, and the Joint Congressional Committee on the Economic Report. The membership of both of these new agencies is of high calibre.

I bring that message here because it is the one great hope we have in the United States for a programme of measures that will make some sense. We have had about twenty-five agencies, each figuring up their own ideas and the result has been some mild confusion up to now. We are hoping we will have coordination from now on.

It is going to be tough. It will be no simple task for you to keep Canada strong and free, and for us to keep the United States strong and free and assist Europe in getting back on her feet. But if we are willing to fight to win the peace as we fought to win the war, there can be no doubt whatever as to the outcome. Will Rogers said years ago that we have won every war and lost ever peace. It is time we started winning the peace. If we do what we should do in your country and mine, somewhat along lines I may have indicated here, we can give to the world dramatic proof of the character and strength that freedom and free institutions give to a people. And if as a result of that a free world should ensue, not for us, but perhaps for our children and our children's children, and they are the important group--we are no longer so important--most of us are far along--but our children and our children's children are more important and they are entitled to live in a free world, and if that free world does ensue, this atomic age upon which we are entering, and I speak soberly, become the golden age about which men have dreamed through the centuries.

Thank you!