Being Pushed Into Socialism

LIEUT.-COLONEL GEORGE A. DREW, President introduced the speaker.

MR. SANDWELL: I do not consider myself a stranger to this organization, for you were kind enough to invite me to speak to you in past years, when I was engaged in what may be described as a passion for increasing the respect paid to the Science of Economics. I do not know that that passion has had any important results so far, except one, and that is the result of bringing the appointment of an economist, more or less, to the editorial chair of Saturday Night. (Laughter.) I may say that result gives me the highest possible satisfaction; and in as much as the Empire Club contributed quite materially to the passion for giving respect to an Economist, I may say I owe my present position very largely to the influence of this Society. (Applause.)

I feel that the acceptance of that position materially impairs my oratorical powers. For the last seven years I have been a free lance, engaged in business for myself, engaged in selling the products of my brain, when it produced anything, to any one who could be induced to buy. It is an arduous business, and there is a good deal of freedom about it, and I am afraid that in those few years I developed a freedom which I will have to slough off considerably as I get deeper and deeper into the cushions of the editorial chair. (Laughter.) At the present moment I am about half way in. Still I feel like a free lance, and yet I feel that everything must be considered with great care on account of its effect on the circulation and the advertising, the prestige and the interests of the paper of which I am, after all, only a humble member. (Laughter.) So do not, I beg of you, look to me for any of that bright and frivolous kind of stuff that Colonel Drew referred to. I cannot use it any more; I have to talk as an editor should talk. (Laughter.)

I want to talk very briefly on the subject of the new world into which we are entering. Fourteen years ago today we were talking a good deal about the new world which we thought was going to emerge as a result of the ending of the war. We were inclined to be rather optimistic about its character. I remember Mr. Lloyd George having said that it must be worthy, and he was going to make the world fit for heroes to live in. Well" during the years that have elapsed since that undertaking, I' do not know that it has been very adequately carried out except for the fact that it has required a good deal of heroism to live in the world. (Applause.) But as a matter of fact, gentlemen, the new world did not arrive for us after the war. The war was not finished in 1918. The economics of the war are now, I trust, somewhere nearer the finish. You are within five years or so of getting rid of the war economically. The real new world which results from any great cataclysm such as the world war does not arrive with any degree of rapidity. It is brought about, not by the mere war itself, but by various economic foibles and follies. The new world which we are going to live in-and which we cannot help living in-is going to be developed much more rapidly in the next five years, and I want to say a few things to you about what we may expect in it" and what we need to do to adjust ourselves to it.

The changes which are bringing about a new world are not merely in the nature of its political institutions. The abolition of monarchy in Germany did not effect so great a change in Germany as something else that took place several years later, and which caused fundamental changes in Germany, of the kind we are now undergoing in the rest of the world; for the mast important factor in bringing about the new world is the great major change in the price-level. That- great change in the price-level in Germany had the effect of making an entire revision of the position between the creditor and the debtor, a revision that took place with the change of the German currency, and altered the whole social structure of the people of Germany, as our social structure is going to be changed by the change that has taken place in the world more recently.

You gentlemen are largely business men, and there is a sad but inevitable tendency among business men to look at prices frown the point of view of the particular articles in which they are interested, and the position of business in their lines, rather than as absolute and separate and independent phenomena to be studied by themselves. In other words, I think you have a tendency-I have noticed it among all business men in the world-to believe that price-levels are purely a matter of the demand and supply of particular commodities. In the case of the mass of commodities and in the case of the long run of movement of the price-level, this is not true. It is the movement of the price level which produces, governs, controls business conditions. Business conditions have very little to do with the long run of price-levels. My views are merely those of the orthodox economist, that such conditions are the result of the ordinary run of price-levels and the demand for money-a demand multiplied by the proper proportion of credit and the demand for carrying on business transactions; and the interaction of those two forces meet a given result in business itself. But the actual fact of the demand for metal on one side, and the number of transactions and the size of transactions to be carried out on the other hand-are the two forces that govern and control the major movement of business conditions.

Now, we have been going through that since I last spoke to your Club; and this is a crucial fact, because it is more than three years since T last addressed you. We have been going through the greatest effort in the value of unit currency that has ever happened in the history of metal. In the United States-which hats still the gold dollar, and there is some dispute whether we have or not--(Laughter)--the commodity price-level is about 33 per cent below what it was less than four years ago. Wholesale prices have declined just about one-third in a little over three years. That is an impressive enough figure by itself, but this figure becomes more impressive if you turn it wrong-side-up. For if you turn this figure you find that the value of the gold dollar has increased 50 per cent in the four years. There is no record of that kind in history. It never happened before. There have bears sharp changes, but usually as a result of reaction from a strong movement in the opposite direction. There has never been a change of that kind in so short a time; and. that change was not a reaction from a change in the opposite direction; it was a continuation of a distinct movement that had been going on frown 1921, and which had led us from the high peak of that year to a much lower level in 1924 and 1925" a level from which the decline of 1928-32 that I have just referred to took its beginning.

Now, it is shifts like that in the value of money that bring about earthquakes in the social structure. You will find this as far back as the Middle Ages. All the grand social upheavals of the Middle Ages were preceded" and very largely caused, by violent shifts in the value of money. People at that tune were not worried by it, not having any price index; all they felt was that they were being discommoded by the prices of the articles with which they had to deal. But such shifts in those days were not to be compared to the shifts in the present day, because in the last 150 years of the world, and most of all in the last 30 years, we have enormously magnified the amount of wealth, of value, represented in the world by tokens of debt. Of course there is no real wealth except goods. But the equity in those goods is represented, more than ever in history, by promises to pay, expressed in terms of money, dollars,, pounds sterling. A shift in the value of money does not affect me very much, as my labors have bought the same amount of wheat, and. that leaves me, the same amount for my rental. If the prices of wheat have gone down or up I shall be very much where I was. I am assuming that I am a landlord who owns the whole equity on my land to be put into wheat; but if I am a landlord whose equity in land is overcrowded by a heavy mortgage, or the equity in whose factory or other productive assets is overlaid by a very heavy bond issue, such a change in the value of money is going to make a tremendous difference to the position, because it will offset the share of the business which the owner may take for himself, and he must dispossess himself of it in favor of his creditors.

The shift in the value of money has therefore become greater by the enormous increase in the value of documents for future payment in; terms of money received. You will remember that practically through the whole period from 1900 the average price of everything began to rise, and bonds became the popular method of financing, and they became more or less extensively employed in every succeeding year. It was very nice for the borrower. The borrower was getting his bond, his equivalent for the land or real estate he gave in exchange for the promissory document, the value of which I do not suppose he could absolutely assure himself would not continue to go down indefinitely. But it looked as though there was no prospect of his having to pay himself in commodities, in the way of interest and return of principal in the future for the value of the commodities he got when, he bought. Bonds became, for that reason, more and more popular until the climax came, when the interest which bondholders were getting was declining, and there began to be a move to common stock, and it was said that it was better to own a claim in equity than a claim in the bond issue.

Not only have we merely increased the size of the equity in our real property, represented by the bond issues, but we have almost to a startling extent removed the possibility of redressing, re-arranging, re-valuing that equity when it becomes possibly burdensome to the debtor.

There was another period of declining prices during the whole of the latter half of the Nineteenth Century, and there were a great many bankruptcies following the decline; but all that happened was that the holder,, not :being able to get his money, the actual dollars for which he stipulated, took over the document and got what he could out of it, the original holder of the property being eliminated. But the extent to which that can be done at the present time is very seriously diminished by two factors. One factor is the extent to, which bond issues, credit documents, long promises, are now being put out on the credit of governments and not on the credit of a private corporation, and not on the strength of any particular body of assets of a private power company or private railway. After alt, it is only railway concerns, with their annual charges devolving on them, that the creditors take over. I believe that 90 per cent of the United States railways passed from the hands of one type of owner to another type of owner during the latter half of the Nineteenth ,Century. But you cannot do that with a public undertaking. A creditor cannot hand over the Canadian National Railway to the bondholders, because the bondholders did not invest on the strength of what the railway possessed, they invested because of their faith in the tax payers. They figured that they would pay the interest when it came due, or the adjustment of the value that was granted.

The other factor is the extraordinary growth of what I term the innocent holder of the bonded investments. By that I mean the extent to which the bonds of private undertakings are now held as a sort of price-enormous bodies of insurance policyholders and those holding all kinds of similar investments; those who have put their money into these things, who have not deliberately decided to take a chance on the prospects of an electrical power development in Northern Alberta, or to back a tramway system in Kingston, or anything of that kind, yet had their money put ice, these things by people who were acting as legal trustees. I have left insurance as reaching the point where it will be practically impossible to allow any very serious depreciation in the claims of policyholders, or the review of their policies" as a matter of public policy. I do not think the people would stand for that; but if it is necessary that the state should step in for the sake of individuals or the policyholders as a whole, I think the State would have to stand for it.

There are several changes which have the effect of increasing the opening, of pushing more widely open the door for the State, and throwing the creditors' obligation on the State to step in and carry on and administer and conduct the business which, owing to the change in the price-level, has become unprofitable to its original owners, and is unable to pay its debts to the original creditors. Of course increases in the price level tend to increase the scope of the State under any article in which they may come.

The fact that you gentlemen are owners of the Canadian National Railways-and much joy may they bring you -(Laughter)is very largely due to the fact that there was a rising price-level during the years following the construction of most of those railways, and the earnings of those railways were so largely controlled and I do not say that we, the State,, are responsible for that, because on this North American Continent we own such a small financial fraction-the earnings were controlled by the increasing price-level, and some of the roads were forced into bankruptcy; but we saw to it, through our regulative powers, that they should be taken over by the Dominion of Canada.

They point I want to leave with you-arid this is the whole message-is that the new world in which we are going to live for the next 50 years is still capable of being conducted by what you and our statesmen and the statesmen of the rest of the world can, manage to do. If the capitalistic system is to continue-though I do not like to call it capitalistic, which is a term of abuse hurled by Socialists and Communists, just as Communist is a term of abuse hurled by Capitalists, and I try to avoid both-I would, not say the system of Capitalism, but the system of individual enterprise, the system of competition,, the system which relies on the profit motive if this system is to continue, one condition is indispensable, and you gentlemen, and your rulers will have to see to it that that condition is applied to it. That condition is a reasonably stable monetary unit. (Applause.) There is no other alternative.

You will have a stable monetary unit or you will find yourselves getting along with no monetary unit at all. There are two ways to do that. You can revert to barter, or you can say, by selecting a system, that the value of money does not very much matter, that money has no value except that which is assigned to it, as in Russia. Money does not matter very much in a socialistic system; the control of industry, the distribution of goods, is effected by other means. Money is a minor matter. You can have a socialistic state; you can have a primitive state of barter. You can retain the present system. But you must have a stable currency. A system which changes its value every four years is practically impossible. Personally I am not violently partisan to one side or the other. I do not think Socialism is going to be absolutely ruinous to us. You have a good deal of it in Ontario, and I think we can practice it with better success than the Russians, for I think we are better politicians and better businessmen than the Russians. If we have to adopt the Socialistic system I think we can live under it with tolerable comfort. On the other hand, I have no objection to any system of Capitalism. I like to be left free to make my own choice as to the things I want to get and the things I want to do. I like competition. I have a strong feeling towards the view that, taking men broadly and roughly, if you bring out the abler man, given him the opportunity to put his abilities at the public service, leaving less able men where they are, they will accept the direction of the more able men. I beg of you to have no resentment about profits. The idea that somebody may profit out of something has done great harm in the life of Canada, and is liable to do more.

Under a stable price-level, profits are the legitimate reward of individual enterprise and courage and industry. Under an unstable price-level, profits are very largely the result of chance. Every shift in price-level which decreases the value of what mangy holds, or does anything to bring it about" tends to bring the profit system into disrepute. If you are going to maintain the profit system, or the system of individual effort, you must see to it that the distribution, of profits shall not be interfered with, and that there shall be no unjustifiable profit.

We are part-way, I suppose we are somewhere near the end, of the depression-the Americans have got through their election-(laughter)-and they can now proceed to do something useful. (Laughter.) In the past few months they have lost a very able government which might have accomplished something; therefore I judge we are right near the end of this depression. Anything they do will probably have some effect on the price level. But we cannot afford to go on relying on the accidents of American politics, or the accidents of international relations, or the accidents that may result every time an election happens. You can either rely on having those conducting your business affairs, the government, give us a much more socialistic system than the rather socialistic system that we have at present, or you must make up your minds to trust the whole unit of your currency to a government that will make up its mind to promote it with the object of making the price level stable. I do not care which you do.

I heard a very illuminating story recently about what was done in Russia in regard to some tractor plows. They naturally could not sell them" and they decided to distribute them on the basis of the largest mileage of plowing guaranteed by the various tenderers. After the tractors had been used for a given time, the Commissars went out to examine the work, and they found that the one who had made the best record was holder of a very small parcel of land, and he had made up for the amount by plowing this small space five or six times over. (Laughter.) That is an example of what you are going to get from people who are not out for the profit motive, but who are trustees of the community, the people at large. I do not hail with any enthusiasm an exploitation. of that sort of thing in Canada, and therefore I am mildly in favor of a continuance of the individualistic system; but we shall not have it unless we have a stable price level. (Loud applause.)

The President expressed the thanks of the Club.