A generation ago the automobile industry was unknown. It has been created out of whole steel in the past thirty years, particularly and especially in the past ten. It is probably the most mechanized and most modern of all the world’s industries. Ten thousand years ago farming was well known. Save hunting, it is the most ancient of all economic crafts. Motor car making and agriculture thus stand at the extreme left and the extreme right, respectively, of the economic field. Yet each suffers from the same handicap. Both are readily capable of producing far more units than the market can absorb, with resulting disastrous competition, wasteful selling effort, and chronic unemployment. In the massed ranks of other industries, reading from left to right, I can call to mind but very few in which the blight of overproduction is not endemic. Throughout Western civilization—with reservations in respect to France—the malady takes a frightful toll, which is clearly mounting with the years.
In April, 1929, the automobile plants of the United States were capable of producing 8,000,000 units a year. Plant-expansion programs have gone forward since that date. Yet in 1929 the entire world bought only 6,295,000 new cars, including the output of all foreign plants as well as American. To make matters worse, in 1923 3,000,000 people in the United States became, for the first time in their lives, the proud owners of new cars, whereas in 1929, the potential market had been so far exploited that there were only 500,000 such persons. A lush virgin territory has been reduced to cut-over lands; a new market has largely given way to a replacement market.
Jumping now across the economic front to agriculture, we find that the basic problem of the American farmer lies in his “surplus.” The government at the present writing has bought and holds in storage millions of bushels of wheat in a heroic and possibly calamitous attempt to keep the surplus from crushing wheat farmers altogether. Four factors, according to Dr. O. E. Baker, have speeded up the agricultural surplus in recent years, and promise, moreover, to speed it even faster in the future:1
1. Mechanized farming.
2. Better seeds, stock, soil treatment and land use.
3. Drastic shifts from less productive to more productive crops per acre—from corn to cotton in the South; from hay to fruits and vegetables all over the country, particularly in California.
4. The extensive shift from beef cattle to dairy cattle, hogs, and poultry—the latter producing far more human food per unit of animal food consumed.
A man can be fed for a year in theoretical calories on two and one-half acres of hay stoked into milk cows, but to keep alive on beef steaks, he calls for eleven acres of grain, plus several acres of pasturage thrown in. Agricultural engineers are outdoing themselves computing these chemical and mathematical comparisons; farmers are following their logical and scientific deductions—and the surplus promises to rise to heights hitherto undreamed of.
In brief, the better we do things, the worse off we are. Or again the more potential goods with which we are capable of blessing mankind, the worse for us and for mankind. (That echo of a sardonic laugh is from the shade of William Morris.)
Overproduction, particularly in this year of world-wide depression, is on every man’s tongue. What precisely does it mean? There are indeed distinguished savants who affirm there is no such thing. In one sense they are perfectly correct. Let us look into the term a little more carefully. The actual overproduction of goods destined for the ultimate consumer, in the sense that they never reach him but have to be thrown away, is a reasonably rare phenomenon. Cases have been cited of shiploads of bananas and carloads of vegetables making gay the waters of Manhattan because they could not be given away, but the authenticity of such reports is dubious.
Far more frequent is a conflux of goods upon the market which can be absorbed, but only by a very painful lowering of the producer’s price—often below the cost of production. The phenomenon is however a very ancient one; the consumer often secures some advantage from it, if not the producer; while the nation-wide policy of hand-to-mouth buying by both manufacturers and merchants, inaugurated after the depression of 1921, has tended to reduce the ravages of overstocked shelves and sacrifice sales.
The average wage in the United States is somewhere in the vicinity of $1,500 a year. If the gentle reader has ever tried to support his family on that sum he knows the number—the very considerable number—of goods he would like to purchase but must forego. In respect to the whole body of finished goods, it is not so much over-production as underconsumption which is the appalling fact. As a nation we can make more than we can buy back. Save in certain categories, there is a vast and tragic shortage of the goods necessary to maintain a comfortable standard of living. Millions of tons of additional material could readily be marketed if purchasing power were available. Alas, purchasing power is not available.
Thus one horn of the dilemma is a money and credit system which does not throw off purchasing power as fast as factories can throw out vendable commodities. It is the more acute with the entrance of mass production upon the economic field. While average income creeps slowly upward, potential industrial output may increase at twice, five times, a hundred times the pace.
Which brings us to the other horn. The most immediately critical factor in the whole “overproduction” situation, to my mind, is excess plant capacity—which means more mills, more mines, more machines, aye, more farmers’ fields—than can be used. Not only is this equipment almost always in excess of purchasing power, but frequently, if you please, it is in excess of consumption requirements, granted unlimited purchasing power. American shoe factories are equipped to turn out almost 900,000,000 pairs of shoes a year. At present we buy about 300,000,000 pairs—two and one-half pairs per capita. There is admittedly a considerable shortage of shoes, but could we wear out, or even amuse ourselves with, five pairs per capita? I doubt it. For myself two pairs a year satisfy both utility and style. Yet if we doubled shoe consumption—gorging the great American foot as it were—one-third of the present shoe factory equipment would still lie idle. There are more shoe factories than we have any conceivable need for, either here or in Utopia.
Whether the capital equipment exceeds money power to buy, or man power to consume, the hobgoblins in the picture are overhead costs. Taxes, insurance, interest, depreciation, obsolescence, repairs, the services of watchmen, executive and clerical salaries, general office expenses—all go merrily onward whether a wheel turns or not. If few are turning, they will eat up the profits earned on those wheels, and keep the plant as a whole operating at a loss. The greater the plant, the greater the overhead; the bigger they come, the harder they fall. But nobody in his senses builds a plant with any idea except that of continuous, profitable operation. Rosy sunrises illumine every factory chimney which climbs upward. The promoter knows that, granted continuous operation, his overhead expense per unit of output can be kept to a minimum. The greater the volume, the lower the overhead cost; and of course the bigger the plant, the greater the volume. He never stops to consider—the American success saga does not permit him to consider—the reverse of the shield, to wit, the bigger the plant, the greater the costs of possible idleness.
Abnormally low costs when everything is humming. Abnormally high costs when everything is slack. As more plants and greater plants invade any particular field, the chances in favor of slackness are bound to grow. Unless, of course, purchasing power grows equally fast, which it does not. And there we are.
Why do plants so consistently outrun demand? The figures make it perfectly plain that they do, but why does capital take such gorgeous risks? Who, in the light of the facts just cited, would be fool enough to build a new shoe factory? The reasons are many. Promoters do not know the facts; indeed some do not seem to want to know them. A new device, an improvement on an old device, a happy advertising slogan, a new technical method of manufacturing, a rumor of great profits being made by those already in the field, a patent, a selling contract secured in advance—all offer the chance for rushing in where angels fear to tread. And rush we do; others may have failed, but we shall succeed. It is all very human, and profoundly in accord with the American tradition. I bemuse myself sometimes in speculating upon the amount of new capital which has gone into dentifrices, cosmetics, and fat reducers simply on the strength of an advertising man’s showing of copy in advance of any plant construction whatsoever. The plant may make money, lots of it, while the public craze for the article lasts, but it becomes superfluous concrete and steel when the craze subsides.
There seems to be no urgent social need for the 78 sizes of bed blankets now upon the market, or the 278,000 types of men’s sack suits, or the 6,000 varieties of single-bit axes; or for numberless other over-styled commodities concerning which the American Standards Association can give you the most appalling information. Yet every style and size requires as a rule special equipment and added investment.
Untold plants, furthermore, have expanded to meet a peak demand—a demand which never comes again. Thus during the War new coal mines were opened right and left. After the War demand fell away by 100,000,000 tons, and will probably never climb again to the dizzy peak of almost 600,000,000 tons. The War is responsible for current excess capacity in many industries.
Lastly, and very much to the point in connection with our discussion of purchasing power, the margin between total costs and selling price has been so high in the well-situated establishments that an enormous amount of net profit has been available for new investment. The living expenses of the rich have absorbed only a small fraction of their total incomes. The balance has flowed into new enterprises, some of them extremely necessary enterprises, many of them only adding to an industry already overequipped. If more of the gross receipts had been returned in wages, industry would have stood on a more solid base, with less loose capital seeking even looser investment. In brief, a bad distribution of income has done much to foster excess plant capacity. Instead of being used, capital has been abused. It used to be widely held that if profits were tampered with, “capital would leave the country.” We might have been better off to-day if it had. We have altogether too much capital in relation to purchasing power.
Excess plant capacity is inescapable under the blessings of an economic system founded on the basis of free competition and laissez faire. Ever since James Watt put his first steam engine into a cotton mill it has plagued western civilization. But for a century or more it was held, with some show of reason, that the virtues outweighed the defects. If A had a monopoly and was making an undue profit, it was to society’s advantage to have B build a similar plant, invade the market, and bring prices and profits back to normal, If C, similarly inspired, came in too late and had to scrap his plant, it was wasteful and unfortunate to be sure, but C’s loss was overbalanced by A’s, B’s, and society’s gains. A, B, and C furthermore were all individual entrepreneurs; little capitalists with little money, drawn from a limited investment field. The procedure was not unlike the ebb and flow of independent retailers to-day—the new shingles on Main Street about equaling the petitions in bankruptcy in any given year. The shores of the system were strewn with wreckage, but the wrecks were small, and the system functioned.
Now, however, in a great and increasing segment of industry, the day of the small capitalist, the little plant, is over. Billion-dollar corporations are almost as thick as airplanes overhead. Even where the plant itself has not vastly expanded, one concern will operate a string of smaller mills. The ebb and flow of free competition, the rush of capital to the point of high profits—like levels of water in connected tanks—is not the fluid thing it used to be. Where it once took thousands, it may now take millions of dollars of capital effectively to invade a given field, particularly where mass production is dominant. No longer can we view with benign equanimity the operation of majestic laws. The units are too great, the investment too heavy, the employees too numerous, the possibility of waste and loss too enormous for us to look with anything but the liveliest apprehension upon bankruptcies, shut downs, part-time functioning, indeed anything but capacity operation of these mammoth structures.
If competition also had gone, we might have something to be thankful for. Great monopolies articulated to consumer demand, producing according to the latest findings of the technical arts, running at approximate capacity the year around, might mean monopoly profits (if unregulated), but would also mean no waste of capital, far less unemployment, no excess plant capacity, no overproduction—even as the Telephone Company now functions.
But alas, competition, far from declining, has accelerated. While it is more difficult for the new concern to enter the field, the concerns already in it, by constantly improving their technical methods, introducing new machines, scientific management, research work, have enormously increased their potential output, and achieved the same result. Competition among giants is liable to be more bloodthirsty than among pygmies. Clans of giants, furthermore (under the general style of trade associations), move against other clans in related industries (lumber versus bricks), while super-clans making essentials do battle with super-clans producing luxuries (motor cars versus food or housing).
All down the line competition has intensified. Out of the pressure has grown the Higher Salesmanship, “service,” annual models, installment contracts, contact men, red and blue charts—the whole gaudy phenomenon of modern distribution. Generally speaking these efforts, while often effective to begin with, cancel one another in the end (as when all products are endorsed by the same stars), thus placing an enormous additional burden of waste on the mechanics of distribution, which must be added to the retail price, and thus further limiting purchasing power. To-day it is estimated that the producer takes but half the consumer’s dollar on the average; the rest goes into advertising, selling, and transportation.
While purchasing power received some stimulation through the device of installment selling (to be precise, about six billions of stimulation), the bulk of it went into luxuries and semi-luxuries, creating a top-heavy industrial structure. With the present depresion, the boomerang comes back. Laden down with installment contracts, the wayfaring man cannot buy simple food and clothing in the volume that would be good for him, and especially good for industry at this time. As the New York Times editorially remarks: “It is hardly unreasonable to suppose that when the glamour of full employment and exceptional business profits met with a sudden check, the mere continuance of payments on such installment contracts, made at the height of speculative enthusiasm, must have added to the public’s inability to make new purchases.” The mass production plants in the luxury fields, fed by the glass tube of installment sales, are now particularly and dangerously exposed to the paralysis of overproduction. Some philosophers, like Mr. Paul Mazur, held that through high-pressure selling the formula for Utopia had been won. It now appears that the formula has only made confusion worse confounded.
England, the mother of the industrial revolution, working in big units for specialized markets in coal, cotton, and shipbuilding, finds herself to-day on the verge of economic collapse due to shifts in market demand and the idle plant which has resulted. Two hundred thousand coal miners will never enter the pits again, while 2,000,000 workers are unemployed the country over. The total creeps steadily upward, with no relief in sight. Germany has now (July 15, 1930) 2,774,000 unemployed, with the promise of 5,000,000 by Christmas. Italy has nearly half a million out of work; little Austria 300,000; Poland and Sweden abnormally high totals. Indeed the only major exception to serious overproduction (in one or more of its definitions) and unemployment, seems to be France. France has not embraced mass production and big industrial units with any such loving solicitude as has distinguished her sister nations. She has clung to handicrafts, small units, peasant proprietorship. Her people work long hours for a low standard of living (measured in dollars if not in human satisfaction), but the blight of unemployment has largely passed them by. This calls to mind a shattering sentence from the pen of Mr. Virgil Jordan, sometime head of the National Industrial Conference Board, and so one of the leaders of American Big Business:
It is probable that the system of small agricultural holdings, and of handicraft manufacturing which existed between the breakdown of feudalism and the advent of the industrial revolution, was the most stable of all the forms of economic organization that have been so far developed—although it did not supply as high a standard of living for parts of the population as has been seen since.
The penalty which an uncontrolled Machine Age exacts is overproduction and loss of economic stability. Mr. Jordan may stand convicted of heresy, but hardly of violence to the truth.
The United States has kept its nose above water until the present depression because of its enormous home market (denied to England), its prodigious natural resources (now beginning to fail), its mounting population curve (which is flattening out), the automobile, which created 4,000,000 jobs (and in the first half of 1930 was turning men away), installment selling (as a temporary stimulant), and the policy of the economy of high wages (which never went far enough). Overproduction has repeatedly cramped our style, but never really frightened us. As the white-headed boy of the West, the world was our oyster.
We are beginning to be frightened now. The professional optimists are fading from the front pages. The business temper is increasingly one of an honest facing of facts. Here are a few of them:
The New York State index of factory employment for June reached the lowest level ever recorded. Automobile production for the first six months of 1930 fell by a cool 33 per cent below the same period in 1929 and is now functioning at a small fraction of its capacity.
American oil wells are capable of producing 5,950,000 barrels a day, against a market demand of 4,000,000 barrels, according to the figures of the Standard Oil Company of New Jersey. This registers an excess cpacity of 48 per cent. Better gasoline cracking methods will make it worse. Oil in storage mounts steadily and now stands at over 300,000,000 barrels. In only one year in the last seven has any draft (net) been made on reserve stocks. Meanwhile a California well is merrily shooting into space 75 million cubic feet of gas a day, enough to supply the whole city of San Francisco. Due to overproduction, fuel oil is dumped at low prices, “far below its equivalent value to coal on a thermal basis.” This drives out coal, making for overproduction in that unhappy industry, and wastes potential gasoline. According to Sir Henry Deterding, United States oil producers average only 3 1/2 per cent on their investment; in 1927 the return shrank to one per cent. Small wonder that the industry is moving heaven and earth to circumvent the Sherman Law and eliminate free competition, overproduction, and its appalling waste. Last year, according to Mr. Thomas B. Hill, one company alone was equipped to produce all the taffeta the nation called for. The Wool Institute reported for 1927 a mill capacity of $1,750,000,000 against actual production of $656,000,000. Woolen mills, like shoe factories, are thrice too many.
An able management engineer, Mr. Wallace Clark, finds his clients normally operating at 40 to 60 per cent of capacity. The printing trades are 50 per cent overequipped, while paper mills are now suffering acutely from overproduction. The steel industry was rated in 1929 at 66,000,000 tons. Production in that abnormally busy year ran to 56,000,000 tons, yet extension programs for 1930 call for 4,000,000 tons of additional capacity. My guess would be that with 66,000,000 tons capacity in 1930, actual production will be not more than 42,000,000 tons. Overhead “costs will continue relentlessly on the whole 100 per cent.
The machine-tool industry has operated at 65 per cent of capacity for the last ten years. Oil refineries do somewhat better at 76 per cent, according to Mr. J. E. Pogue. Plants manufacturing gas function at 66 per cent. Flour mills, says the Federal Trade Commission, utilize only 40 per cent of their capacity on the average (due partly, of course, to peak demands in grinding cereals).
There is plenty of chance to quibble as to the exact meaning of “capacity” in the above recital, but none at all as to the alarming extent of excessive plant and equipment in industry after industry. The normal definition of capacity is eight hours’ operation a day, for 800 days in a year. Obsolescence confuses the issue, particularly in textiles, where many New England mills possess batteries of venerable and completely outmoded looms. Perhaps such plants should be excluded from the capacity computations altogether—though one can hardly exclude the financial troubles and unemployment of their owners and operatives. Certain industries, such as lumbering and canning, are profoundly affected by the seasons, and under present methods of storage can hope to operate but a few months in the year.
But with all due allowance for such factors, the acute presence of overproduction throughout industry, even as we noted it in motor cars and agriculture at the beginning, is only too manifest. It is needless to document it with additional figures. Every other business man you meet on the street is lying awake at night trying to work out a plan to come to terms with his competitors; to formulate an agreement, legal or illegal, whereby price cutting may be mitigated, territories divided, marginal mills closed down, and some sort of order and reasonable security established in what is now a roaring chaos. In the last month I have happened to be an innocent bystander in the formation of three such agreements. The whole merger movement, basically, is a flight-often with all the earmarks of panic—from overproduction.
The dilemma in its simplest terms is that the credit system has not kept step with the technical arts. We cannot buy back what we make. This is good in that we have been stopped—some of us—from choking ourselves with unnecessary luxuries (say two radios per family), but bad in that we have (at an average wage of $1,500 a year) been forced to forego many needed essentials. It is bad because of the wasteful piling up of half-utilized plant, with the resulting financial spasms—peaks, depressions, unemployment. It all leads back to unlimited freedom of competition, a naive faith in the automatic benefits of laissez faire—eighteenth-century ideas, in the twentieth-century world of a billion horse power.
Is there any way out?
We can always drift with the tide. This may mean years of acute depression, a quite possible lowering of living standards, terrible unemployment, and, one suspects, a retreat to the French formula of self-sufficiency. Or it may mean a temporary boom in the United States (induced let us say by drastic retail price reductions), another little ride with the Prosperity Chorus ringing bells and dropping nosegays, and so to a more resounding crash. Mounting overhead and mounting distribution costs are not things which can be permanently overcome by ringing bells and thinking the right thoughts.
Under a policy of drift, all signs point to a situation increasingly critical. Owing to the growing interdependence of industry—what I have called elsewhere technological tenuousness overproduction in one field automatically calls it forth in other fields. Too much motor car capacity forces too much steel, rubber, glass, and accessory capacity. Too many oil wells engender too many filling stations and refineries. Too many acres of cotton call forth too many textile mills. Again, much of our capital investment has been erected to meet the demand of a country with a rapidly growing population. Now it appears that the population curve is flattening out towarperhaps a dead level in another generation, thus tending to make the burden of excess capacity even more pronounced. As virgin customers in new commodities (radios, electric refrigerators) give way to replacement customers, demand is bound to slacken, the time interval of turnover to increase, with the inevitable and lamentable effect on overhead costs. I realize that Jeremiahs, however logical, are frequently undone by the final triumph of the policy of muddling through. But just how we are to muddle through this impasse escapes me altogether—even as I failed last summer to see how the stock market was going to muddle through. Our rise to industrial dominance has been compounded of energy and luck. The luck is running thin, and the energy will but build more needless plants. Only brains can save us.
If we prefer not to drift, various constructive suggestions are in order. Can the credit system, like Newcomen’s monstrous pumping machine, be modernized by some financial Watt? Messrs. Foster and Catchings have already presented their credentials. Mr. Scoville Hamlin is about to present his in a forthcoming book, The Menace of Overproduction. Others are in the offing. The details of the several plans lie beyond the scope of this essay, but there is unquestionably much to be said for a deliberate, nation-wide fostering of a high-wage policy, and a better distribution of income. There is always the danger that a rush of new purchasing power would promptly be taken in charge by the high-pressure fraternity and devoted largely to luxuries and non-essentials, even as was the little pool accumulated through installment selling. Furthermore, high wages, while enormously helpful, would furnish no guarantee against overproduction in its upper registers. Wasteful over-equipment might still continue. As we have seen, the shoe industry is already beyond salvation by increments in purchasing power.
It has been proposed that we sell our surplus abroad. Unfortunately this has also been proposed in all other nations, many with the same kind of exportable surplus. Doubly unfortunately, all follow, or propose shortly to follow, our spirited lead in penalizing imports by a tariff wall as high as the Tower of Babel. If these walls by mutual agreement came tumbling down, the situation would certainly be ameliorated but hardly liquidated. The United States, for example, exports only about 10 per cent of its total output, and even if this were doubled by unlimited free trade, the effect on industries now overequipped by 50 to 300 per cent would not be marked. More powerful medicine is needed.
In my judgment the only final way out lies through planned production. We have got to scrap a large fraction of laissez faire, and deliberately orient productive capacity to consumption needs.
In Russia they build no more shoe factories than are necessary to supply Russians with shoes. The Kremlin is attempting scientifically to articulate supply to demand, and the results so far under the Five Year Plan have given the whole world pause. Our ways are not Russian ways, but have we less in the way of brains, human wisdom, and human foresight? I am enough of a patriot to doubt it. But I am cursed with sufficient prophetic sense to be profoundly sure that if we do not embark upon a program of industrial co-ordination after our own fashion, and that shortly, we shall be driven some day, after God knows what suffering and bloodshed, to the Russian formula. The challenge presented by overproduction in the age of a billion horsepower is, to my mind, just as ominous as that.
This essay is an attempt to state a problem. The details of its solution are unknown to me, unknown to any individual. It will require a pooling of the best brains we possess to work out the needed blueprints. My function here is to call for those brains. Some may hold that I have unconsciously darkened the picture to add urgency to the call. Perhaps. But overproduction is a double-edged sword, striking the worker through unemployment, the business man and the farmer through overhead costs, and so cutting its savage way through every social class. It gathered momentum during the whole “prosperity” period. From many points of view it is fortunate that prosperity has come to an end, shocking us into a realization of our true condition; forcing us to terms with the invader.
For America, industrial co-ordination must probably take the form of a drastic revision of the anti-trust laws; an alliance between industry, trade association, and government to control investment (i.e., plant capacity) on the one hand, and to guard against unwarranted monopoly prices on the other; a universal system of minimum wages and guaranteed hours of labor to frighten off fly-by-night entrepreneurs and to stimulate purchasing power; and finally, and perhaps most important of all, the setting up of a National Industrial Planning Board as a fact-gatherer and in turn an adviser to Congress, President, industry, trade union, banker, state government, on every major economic undertaking in accordance with a master blueprint.
Mr. Hoover once made a gesture in that direction. If any President ever does it in earnest he will go echoing down the aisles of history as one who served his country as greatly as did Washington or Lincoln.