Private ownership still stands

GEORGE E. SOKOLSKY

A skeptical essay on the fruits which will accrue from the projected plans for socialized industries

■ THE PROSPECT OF FEDERAL SOCIALISM.— The end of a period of depression is inevitably an open season for economic planners. Invariably many of the more learned and theoretical minds turn to the panacea of government ownership and control. The more conservative limit government ownership and control to public utilities which in the modern world may include many and diverse criteria. The Communist would take over our entire economic life, farms, factories, railroads, electric light plants, even the Five-and-Ten-Cent Stores and turn them over to the government for operation. In between are some quite thoughtful persons who dread government control and operation for many reasons, yet have found private enterprise in this country since 1925 somewhat distressing. Finally, there is the capitalistic die-hard who would keep the government out of business, out of production and distribution altogether.

It would seem that a discussion of this question ought to be without sentimentality. A follower of Karl Marx can afford to be a sentimentalist because he alone knows what is right, but the rest of us have to consider a question pragmatically: Will life become more efficient? Will the burden of taxes be lessened? Will opportunities for earning and accumulating and investing the rewards of labor and thought and thrift be greater? In a word, what would be the advantage of throwing over the capitalist system and substituting in its place Federal Socialism—a socialization of the means of production and distribution in many fields by the Federal Government? Is there any evidence that the welfare of the average man is better in a country with a large measure of Federal Socialism, such as exists in Australia, or of absolute Communism, such as exists in Soviet Russia, than in the United States where capitalism has been able to withstand the battering onslaughts of four years of depression without the ravages of revolution?

® The term Capitalism has become exceedingly unpopular, largely because capitalists, who had gained public commendation and respect, have erred. In the swing of public opinion after the glorious debauch of 1929, industrial and financial leaders who had built magnificent and sound economic structures, also built upon them flimsy pyramids which came toppling down. In their anger and even dismay, the public has demanded legislation to conserve the basic structures but also to prohibit errors in judgment, the human tendency to go to excesses in moments of elation (economists call this inflation), and the operations of the imagination not only of captains of finance but of the public itself. They would legislate man out of the capitalistic habit of turning a dollar into a dollar and ten cents. They would have a planned, a perfect society —almost as perfect as that which Lenin's planning produced in Soviet Russia.

Several possibilities face us. We may ad-here to controlled capitalism, which has been current in the United States since the operations of Anti-Trust Laws and State and Federal regulation of public utilities. Little if any objection will be found in the United States to regulation, but experience has indicated that government regulation has translated itself into government control; and that government control, particularly in the field of public utilities, tends to encourage those who earn their bread by politics to support the idea of government ownership. In this field there is no darkness. Experience in the United States and Canada has been plentiful. There can be little question as to the unsatisfactory results of government control of the railroads through the Interstate Commerce Commission —to that reference will be made in detail elsewhere in these articles. Ample evidence has piled up to indicate that government regulation of public utilities has been of value, hut that government ownership of public utilities, in the United States and Canada, has not been as successful as private ownership—and with regard to that there will be a detailed discussion.

■ THE MEANING OF SUCCESS.—The term "successful" requires definition and limitation. An enterprise is successful when it is profitable for those who own it, when it provides adequate and efficient service at a reasonable expenditure, and when it does not become burdensome to the State by involving further increases of the public debt or taxation. From that standpoint, it is possible to say that privately-owned enterprises on this continent have been more successful when regulated but not controlled by the government than government-owned enterprises. The preponderance of the evidence supports regulated capitalism against government ownership.

There are institutions under government ownership and management such as the Port of New York Authority, operating in fields usually accepted as within the governmental sphere, which have been successful. Most such enterprises involve private underwriting of a government enterprise and may be excluded from a consideration of the government ownership of production and distribution.

The Federal Socialist or the Communist would wipe away any discussion based upon a yardstick of success, by assuming that the task and duty of the government is to engage in operations in the field of production and distribution either for the objective of equalizing private wealth or abolishing it altogether. Their cure for all the defects of the present period is altogether to abolish the current economic system. They would enter upon a vast experiment. Before then the question of government ownership and operation even of public utilities is to be considered, it would be of some advantage to review exactly what the effect of the depression has been upon the capitalist structure.

There is no question but that the American people are frightened by the results of the depression. Such spectacles as Insult and Kreuger afforded are not altogether isolated. It should, however, be noted that Insull's companies were regulated by state commissions and that it was always within the power of the law to protect investors in Insult's companies from corrupt practices. No acts of Samuel Instill are more illegal today than when he committed and widely advertised them. It is a significant fact that the two most regulated and controlled economic activities in this country, the incorporated banks and the railroads, suffered most from the Depression. As a matter of fact, out of about 30,000 banks existing in this country in 1921, about 10,000 were forced to close in the succeeding eleven years. On June 30, 1929, there were 23,511 banks in the United States; by March 1, 1933, 5,488 banks, with deposits of $3,479,741,000, had failed. Every one of these banks had been supervised, regulated and controlled by either the Federal or State Governments.

■ TIGHT CONTROL OF RAILROADS. The railroads have been regulated and supervised and controlled not only by the Interstate Commerce Commission but by State Commissions. Rates have been fixed; the hours of labor have been fixed; the size of crews has been fixed; in every field the railroads have been subordinated to government control. Yet no group has suffered, on the average, as drastic a decline as the railroads. Their earning capacity was limited to prevent them from setting aside adequate reserves; they were encouraged, almost forced, to engage in disastrous competition; the price at which every obligation issued by them should be sold to the public was determined by the Interstate Commerce Commission. Yet, down they went in value.

If control has proved so disastrous in these respects, why should it be assumed that a greater control, even ownership, would prove beneficial? In an address delivered on May 10, 1933, L. F. Loree, President of the Delaware and Hudson Railroad, shows how if the railroads could be relieved of some of the most distressing regulations, they could save $931,600,000 and in his forceful way he adds, "the railroads might then well be eliminated from the picture of economic depression and no longer be so universally damned, but rather recognized as the useful and indispensable servants that they really are."

In the instance of the incorporated banks, government control has served neither to protect the depositor nor the owners of the banks. In the case of the railroads, government control has resulted in I damaging the value of an industry the ' par value of the stock and bonds of which in 1930 in the hands of the public amounted to nearly $20,000.000,000. In the case of the banks, public opinion has been demanding a greater control; in the case of the railroads, the tendency has been to grant them greater freedom. In either case, it must be assumed that the control has either been incompetent or corrupt. It was not intended to set up Commissions to lessen the value of the railroads or to permit the banks to go broke. As both occurred, the only assumption possible is that the government did not or could not do the job of controlling. With that as I an experience, why should it be assumed that, in this country, the government is capable not only of control, but of ownership and management of public utilities and other means of production and distribution?

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THE STRENGTH OF PRIVATE ENTERPRISES.—It is interesting to contrast the condition of the banks and the railroads with industries which have not been similarly controlled and regulated. 1 have before me a list of sixteen of the principal industrial and distribution companies in the United States. I have analyzed them to show plant, gross revenue, total current assets in cash and cash items, total current liabilities and excess of current assets over current liabilities as of December 31, 1932. The figures indicate how these principal industries have withstood the effects of the Depression. These sixteen companies now have an excess of current assets over current liabilities of more than $2.000,000.000. At a time when confidence was so shaken in business management. these sixteen companies had cash and cash items on hand of nearly $700,000,000, of which nearly $80.000.000 was in U. S. Government securities. In the instance of several of these companies, the account of cash and cash items was greater in 1932 than in 1929. The names of the companies are omitted from this account to avoid the charge of being a stock tipster, but the fact stands out that such a list could be compiled at the end of three years of depression—and the list does not include all the organizations which might have been so analyzed.

For instance, the Insull collapse gave the impression that all the companies in his group had completely gone under. As a matter of fact, many of the Insull operating companies have quite weathered the storm and show up as solvent going concerns in spite of Insull's stock-jobbing operations. Of sixteen so-called Insull concerns analyzed, only two were in the red on December 31, 1932, whereas on December 31, 1929, five were in the red. The operating companies, managed efficiently and conservatively, were not affected too severely when the stock-jobbing pyramid collapsed, for the operating companies represent the workings of private ownership in public utilities, whereas the so-called bull market, as manipulated by Insull or anyone else, is the burlesque fagade of the structure. It is no more logical to eliminate private ownership of public utilities because this industry developed an Insull, than it is to eliminate a man because he developed a wart.

Similarly, there is an uncontrolled criticism of banking institutions because they were careless in the management of their stock affiliates and the extension of credit on collateral— principally mortgages which now appear to be of lower or even doubtful value. The public say that some of them were crooked; the hankers admit that their judgment was in error. The most criticized of banks is the National City Bank because its chairman collided with the government in an Income Tax case, for which he is now being tried before a jury. The fact remains, however, that the bank stands with Assets and Surpluses over Liabilities of $180,000,000, with an additional reserve of $56,000,000 to take care of any future losses. It is interesting to note that with a few minor exceptions, none of the so-called private hanking houses, the unincorporated and therefore uncontrolled banks, failed during the depression. Even the Morgan investigation has only adduced evidence to prove that this private banking bouse is extremely conservative in protecting its assets and in keeping them liquid and usable.

No conclusion can be drawn from the above summary that government regulation is an evil. Rather the point is being made that government control of certain economic agencies has not prevented abuses, dishonest operations and failure; that other agencies, regulated only by the law, not subservient to government commissions, but adhering to legal and efficient business practices, are coming out of the depression sound. These two facts taken together tend to discourage the idea of more intense government control and possibly ownership and operation.

It is also not altogether possible to draw the conclusion that no government, under any circumstances, could own and operate means of production and distribution. It is not necessary to fall into the habit of the Federal Socialist and the Communist to generalize beyond the evidence, which is that in the United States, when politics enters into business and industry, the enterprise tends to become expanded beyond all requirements, that the immediate objective of the politicians tends to be to satisfy some particular voting group at the expense of the entire population which must assume the burden of additional taxes, that politicians on the whole disregard expert opinion when it is in conflict with an effectively articulate special interest, thus making an enterprise often costly and sometimes impossible to operate. In connection with municipally owned and operated electric light and power enterprises, with the various government enterprises to peg commodities, in the instance of the Shipping Board, the Farm Board, Muscle Shoals, the Ontario HydroElectric in Canada, this has been the experience. In a subsequent article, some of these government owned and operated efforts will he discussed in details.

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THE CONTRAST OF THE SYSTEMS.— The point of the matter is that under I lie capitalist system or under the Communist system, psychological factors have to be considered. The capitalist emphasizes individual initiative; the Federal Socialist and Communist emphasize social responsibility. In either case, men do the work; men, not machines, do the planning, the constructing, the operating. Under the capitalist system, men are rewarded by wealth and position; under the other systems, no one knows what the reward is to he. Under the capitalist system, except as inheritance or good fortune may bring wealth, the rewards go to the competent. In the wear and tear of production, the most competent get the plums. In this country, the tendency has been for men to rise in their own organizations, to find economic security for themselves by service to their own organizations. Even labor tends to place surplus earnings in the particular enterprise with which it is connected.

On the other hand, government enterprises in this country have never brought great rewards either in money or in position. In Washington, competent men are hidden away earning a comparative pittance on jobs which would bring them greater returns in private enterprises. Often this is interpreted as indicative of a superior allegiance to the public welfare. Most often it represents a psychological defect; timidity, uncertainty, an inability for application, etc.

MEN UNDER BUREAUCRACY. -There are, of course, men in every government department who are socially minded; there are others who enjoy such work and prestige as come with service in the Army, Navy or the State Department, hut the general run of government officials seek a safe berth, protected by the Civil Service, from which they cannot he removed unless the job is abolished by act of Congress. Such nachalniki are to he found in government employ throughout the world. They know, when they enter service, what they will get each year until they are retired. They never do too much because there is no compensation for extra effort. They cannot be dismissed for incompetence without a trial—and who is there to say that one of them is incompetent?

Those who are exempt from Civil Service get their jobs as remuneration for local political activity. They are either deserving Democrats or deserving Republicans. These deserving ladies and gentlemen have no economic security; they seek some slight additional income to get over a had period. They are rarely competent to make their way in the world, or the small compensation of a government job would not tempt them for a four year—or even a shorter—period. No matter who heads a government enterprise, these two classes of office-holders really operate it—men who have little ambition for themselves, less for the enterprise. Their main objective is to stay where they are.

THE SNAG—POLITICS.—The crux of the difficulty in the building of a working, efficient personnel lies in the very nature of politics. Experiments with government-owned power plants reveal these conditions;

First, the inability or unwillingness of politicians to accept expert advice when that advice runs counter to what appears at the moment to he public opinion;

Secondly, the accounting procedure to which politicians constantly resort of substituting one department of the city for another so that operating results of the favored department will appear to be splendid, even though strict accounting would indicate a loss.

The political explanation for this is that politicians dare not admit error. To admit error is to help elect the opponent.

Furthermore, politicians support each other after a fashion which could not he tolerated in privately owned enterprises, in which it is the habit among executives to tear a proposition apart until it stands on its own merits. These business executives make costly mistakes, hut their method is sound and their motive is to produce an efficient organization which will bring profits.

Often the politicians support each other on the sole basis of an exchange of favors. Log-rolling is ever productive of increasing expenditures by the federal and state governments; the politicians do not support each other in reducing the costs of government operations.

Now, the point is often made that Great Britain and Soviet Russia have succeeded in developing civil services that successfully operate vast business enterprises. The British Civil Service is undoubtedly the finest example of governmental efficiency; it is a development of many centuries and its integrity has been unquestioned for many decades. But British business is capitalistic; the British government has consistently supported the capitalistic structure. The regulation of industry and finance in Great Britain remains within such well-defined limits that capitalism does not feel that every new measure is an assault upon the structure.

The Russian experiment with Communism is interesting and worth watching, hut there is no evidence available to justify the opinion that government operation of the means of production and distribution has been as successful as similar operations under the capitalist system in the United States. The struggle with the kulaki,the sabotage of the peasants, the necessity to remove entire populations from their native villages to enforce the will of the government, charges of and punishment for corruption, and the inability to complete the Five-Year Plan on time would seem to he evidence that Heaven has not descended upon Moscow.

Quite apart, however, from these considerations is the most pressing one that our political structure is unlike that of either Great Britain or Soviet Russia and it is not likely that we shall change it. We are likely to remain a country of forty-nine elected governments with elected congresses, senates, and legislatures. W'e are likely to continue with elected municipal governments controlled by local political machines. This is not the plea of defeatism, as some planners suggest; it is a statement of political tendencies. One might hang one's head against this stone wall of the political structure of this country and shout that it is less perfect than London or Moscow. It would be more efficient to assume that democracy offers compensations for the lapses of public officials, making allowances for the fact that no governmental system yet devised has been perfect and that progress toward perfection is only possible within the traditions of a people. That being so, it is not supportable that in this country it is advisable to turn over the operations of business to a complicated, unevenly efficient, and constantly changing political machinery.

EFFICIENCY AND GOVERNMENT TECHNIQUE. —Efficient management demands that the credit structure of a particular enterprise he kept alive, whereas the credit of a municipality is measured by its taxing power which is limited only by the maximum that the public will hear.

Nevertheless, the politicians arc now facing the same problem as the business men; their credit has been impaired during the Depression and the people are resisting further tax imposition. Since 1927, 539 electricity plants have changed from municipal to private ownership and according to Professor Paul Jerome Raver, 91 per cent of the changes took place prior to 1930. On the other hand, during the same period, only ninety new municipally owned plants came into existence. In the last census on the subject, which was in 1927, 95.5 per cent of the kilowatt hour output of this country was produced in private plants.

Only one more point need be made in this general survey of the problem: if the United States is to remain capitalistic, there must he a clear delineation between the functions of government and the functions of private property. If the government assumes the task of ownership and operation of production and distribution, supported by taxes, then private investment becomes impossible, and private property, except in minor respects, is abolished.

It has to he proved then that it is beneficial for the American people to accept Federal Socialism or Communism as a principle, and if that is proven, then our economic system can he changed by due process of law or by revolution. The tendency, however, for the government to compete with private capital, to so control and regulate it as to limit the efficiency of its operations as has been done with the railroads, or to legislate tendenciously until there is uncertainty as to the advantages of investment in a particular industry, is a whittling process destructive of economic safety.

In the next article, the discussion will be continued with specific analysis of government ventures in ownership.