It simply isn't natural law to make goods with machinery which we have quit using or to make profits with capital which we have quit using. We can use the new machinery to produce new capital, and we can use the new capital to produce the new machinery, but when we write off the machinery, we must write off the capital, or natural law will step in and do it for us. This is the determining principle underlying the railroad problem with which you are dealing-but not only the railroad problem.

In other words, in every period of prosperity business habitually gets busy doing two things: First, increasing production by the use of better methods, and, secondly, building up a structure of capital and debt to take the place of the one which has recently fallen down. For every period of depression wipes out old capital and old debts, and until the liquidation is sufficiently complete, prosperity cannot set in again. When the liquidation has been completed, however, business is freed from the necessity of earning dividends on capital which is no longer in use, and, the system of production being more efficient than ever, business rises to new heights of prosperity.

During these periods of increasing prosperity business men almost uniformly demand that the political government shall keep its hands off, but it is continually employing new processes and abandoning old ones, while trying to make the new processes not only pay for themselves but pay for all the dead horses that are strewn along this path of progress. The inevitable result is that the time comes when property gets such a strangle-hold on functional industry that business cannot continue successfully until a large part of these burdensome debts is liquidated. When this necessity arises, however, business men almost uniformly reverse their attitude toward government and appeal to government to help maintain the structure of capital and debt and thus prevent the liquidations which are decreed by natural law.

In such an emergency, the usual appeal to government is to assist somehow in raising the level of commodity prices; and since business thinks at such times in terms of immediate expenses and financial obligations, not in terms of how the existing mechanism may best serve the interests of the masses of people, this appeal to help raise the price level is invariably accompanied by wage reductions, thus putting real prices beyond the reach of more and

more consumers.

I am not one of those who believe that the political government can successfully regulate this business process. I believe it can and should cooperate with business in a way which will automatically work toward business prosperity; but if it attempts to assist business in the way in which many panicstricken business leaders think that business can be assisted, the inevitable result must be to prolong depression, to create more unemployment, to keep the masses paying for dead horses instead of buying new motor cars, to put real prices of the necessities of life beyond the reach of more and more millions of people, and generally to injure the businesses which it seeks to help. To avoid business depression-to escape from these violent, periodic breakdowns, resulting from failure to coordinate production, distribution, and finance business should look upon liquidation as a necessary, normal process, and should be ready at all times to take losses when, because of changing conditions, the investments involved can render no further human service. I realize that it is asking a good deal of our business men to ask them to take this attitude. But the only alternative is to put up with these violent dpressions. Business health demands this constant liquidation. The economic body, no less than the physical body, must eliminate its dead cells if it is to keep in good condition.

Loans which cannot in their very nature result in the production of new wealth must be canceled or scaled down as soon as their futility is discovered, or business, in its attempt to pay interest on such loans, must withhold some of the service which it is physically equipped to give. It doesn't matter, when we consider the question according to the natural laws from which we cannot escape, whether these are foreign loans used to destroy wealth in war, or whether they are loans to our farmers, made on the supposition that farming was entering on a period of super-prosperity. It doesn't even matter from the standpoint of natural law what widows and orphans may be in possession of the bonds concerned. Natural law will see to it that interest cannot be paid on useless, foolish, or destructive loans except by taxing the mechanism of the production and distribution of wealth in such a way that it cannot give full, normal service to the consuming masses.

Our financial leaders seem to be quite generally convinced by this time that we should and must scale down our foreign debts. Unfortunately, this does not necessarily mean that the principle involved is understood. If it were understood by financial leaders generally, finance would not be in such a predicament as it is. The principle is that loans, to be successful, must be employed for useful purposes, and that they must be profitable alike to borrower and lender. Whatever our statutes may say about it, the only security for loans which is recognized by natural law is that the loan itself shall be constructive, and that borrower and lender shall cooperate in making it as easy as possible to collect the loan.

The only American financial institutions which, to my knowledge, have been expanding lately are the credit unions; and they have been expanding most rapidly, even in these depressed times, because their policies directly conform to these natural laws. Credit unions with assets now of over $50,000,000 and under the supervision of the same banking laws as other banks, have stood up when banks by the thousands went down; for in the credit unions, the borrower and the lender have had a common aim, and every possible effort has been made to reduce instead of increasing the interest rates. Although the loans of the credit unions generally have been accompanied by no security which the banks would recognize as security, their percentage of losses on such loans has been, in good times as well as bad, really negligible and therefore far less than the losses suffered by the banks in supposedly well-secured loans to us business men. I suggest a careful inquiry into the principles and practices of the credit unions, before any conclusive step is taken looking toward the reconstruction of American finance.

There is as yet an abundance of idle money in America, and an abundance of needed work-producing credit. But the money is not being used as capital, and is not available for use as work-giving capital, mainly for the reason that our whole society is charged with expenses from which society can not possibly receive any benefit. While the masses are so short of buying power that they can not consume the products of our improved machines, a large section of the population is still hoarding money individually or putting it in banks where it is not being constructively employed. It can not be construc tively employed, in fact, unless the masses have adequate buying power; and because it can not be so employed, we have not only unemployment, but the fear of unemployment, both of which still further reduce buying and aggravate the whole situation.

Unemployment, at a conservative estimate, has for some time been costing America above a hundred million dollars a day. The unemployed produce nothing, whereas, if employed with modern machinery and under scientific management, they might be producing and in the main consuming much more than the volume of wealth represented by the figure stated. Instead of using our money and credit, however, to put the unemployed producing the things which the unemployed need, we have been using it in efforts to sustain a top-heavy structure of debt under which industry has found it impossible to operate profitably. By means of the Reconstruction Finance Corporation and other credit resources, we have hoped to keep the mechanism of industry going, and in the end to provide employment. The most that has been accomplished. however, and the most that could possibly be accomplished by approaching the problem from that angle, has been to defer necessary liquidation and main tain the stranglehold of property upon our industrial functions.

I say this as a believer in the institution of property. But such an approach to our problem constitutes an actual menace to the institution of property, and plays into the hands of Socialists, Communists, technocrats and others who can see nothing in the present situation excepting that we have built up a machine capable of supplying everybody with such an abundance of everything that we have all decided to sit down and starve to death.

To preserve social order is the first essential of government, but no social order which ignores social evolution can be preserved. Government therefore must deal not only with those efforts aimed to destoy the social order, but with those which aim, in the name of preserving the social order, to preserve all its unendurable burdens.

I believe that the reduction of wages and salaries is an even more important factor in prolonging and intensifying the present crisis than is even unemploy ment itself. I believe this so intensely that when the company of which I am president recently reduced wages and salaries, over my protest, I felt compelled

to make a public statement that I believed the act to be a most unwise and unbusinesslike step. When I say "unbusinesslike," of course, I do not mean that it was unlike the policy of American business in general; nevertheless, any move which tends to reduce the buying power of the masses must be bad for business, and must tend to rob business of the mass market which is now vitally necessary for business success.

Unemployment and wage reductions must necessarily reduce buying, not only because the unemployed and those whose wages have been reduced, can not continue to buy as usual, but because other masses of people fear to buy as usual, and hoard their money instead. I know of no more effective single step toward dispelling this fear than unemployment insurance. I do not mean a dole. I mean unemployment insurance which will not only insure workers against destitution in the event of unemployment, but will tend to insure them against unemployment itself. The cost of this insurance should not be levied on the employers, in the present emergency, to the extent that it should when it is well underway and its business advantages are generally understood I say this because the times are excessively abnormal now, partly because of business failure to organize such unemployment insurance in days when it could have been done with relatively little difficulty. This system should be set up immediately, not merely to relieve the unemployed, but to give assurance to those who are hoarding that they need not hoard in order to be assured of at least the necessities of life.

In every State, however, in which an unemployment insurance system is set up, the greatest care should be taken to avoid one of the traps which may at any time turn unemployment insurance into a dole. Every unemployment insurance law should contain a clause giving employers the option of setting up their own unemployment insurance system, providing only that the benefits and safety of the funds are equal in every respect to those of the State system. The more alert and wideawake employers, then, would be certain to set up their own system, so as to escape paying for unemployment caused by less alert and less progressive employers. The more backward employers would rely upon the State system; and when unemployment developed, we could expect little from them in the way of providing new employment. The good business executives, on the other hand, to save the costs of paying unemployment insurance to their own unemployed, would seek better ways and new ways of employing all those who otherwise might be laid off. With such a set-up, I am confident, the bulk of Ameican business would soon be in the hands of progressive, wideawake employers who were keenly conscious of the business necessity of maintaining employment. Inasmuch as unemployment is national in its effect, more State laws can not adequately cope with it; and Congress should go as far as it constitutionally can to bring about Nation-wide unemployment insurance of the right kind.

I do not presume to know what Congress might do in an effort toward making such legislation general. But I do know that such insurance would further prevent hoarding, restore confidence among the masses of potential buyers, and renew mass buying, without which business can no longer be successful. I am not suggesting additional governmental expenditures. I am suggesting simply that appropriations be employed constructvely to remedy or, better yet, prevent such situations as the present, which necessitates still greater expenditures for more relief. I know, of course, that relief is necessary, but it would be an excellent use of public money to disburse all aid to the unemployed through this unemployment insurance set up in each State; for the present system of unemployment relief is, at best, a dole, with the extreme disadvantage of carrying with it no suggestion of security, and nothing, therefore, to allay the fear which causes even those who have money to hoard it.

The attempt to treat unemployment as if it were a local matter has aggravated the situation incalculably. It is not a State matter. It is not even wholly a national matter; for the same fear which paralyzes buying on the one hand, and credit on the other, has disrupted world trade and is making international relations increasingly difficult.

The most common expression of this fear is the fear of war-a fear by which all the nations of the world seem driven to all sorts of violations of economic law, even when they know that they must suffer the penalty.

The whole world is suffering under the burden of armament, and there is scarcely a nation in the world that would not welcome world disarmament.

Nevertheless, all the nations are inhibited from any definite action toward the commonly desired goal, and our disarmament conferences seem to get almost nowhere. If we could but realize the extent to which the war problem, the unemployment problem, and this whole problem of business depression are the same problem, our Congress could, I am sure, take definite action at this time toward dispelling this world-wide fear which not only places upon each nation this great burden of armament, but causes each nation to conduct its business affairs in an absurdly expensive way.

Our own Nation is no exception. If our world trade had increased at the rate in which our technical ability to serve the world has increased, we would not find ourselves in the present plight. But our world trade was suddenly cut in two, and thereupon reduced again and again; not, however, because the other nations did not need our goods, not even because they had found ways of supplying all their own wants, but because they were trying to conduct their business as if they did not need any imports from other nations. No nation, not even our own, was economically independent of the rest of the world; but the fear of war has caused every nation to try to become self-sustaining.

Now, at any previous stage of industrial development, such an attitude might be economically sound. But it is economically unsound now. To do our work most economically today, we must do it with a mass of machinery so large that, to operate it successfully there must be a great mass market. To employ mass production methods to serve a small market would be prohibitively expensive. On the other hand, if mass production methods are not employed. more expensive methods must be employed, which means that, even if wealth were equitably distributed, there would still be a relatively low standard of living generally. Where old-fashioned industrial methods are employed, however, there will be no equitable distribution of wealth. It remained for mass production to discover the necessity, not only of lowering prices so that a greater and greater number of people would buy more things, but of raising wages as better methods of production were discovered, so that masses of wage earners would have more buying power.

This attempt of all the nations to become economically self-sustaining does not permit the successful employment of genuine mass-production methods. Each nation is anxious, of course, to sell goods to other nations, but this is rendered impossible, by simultaneous attempts to keep the goods of other nations out. Mass markets are destroyed, and uneconomical methods of production and distribution, which necessarily lower the standard of living everywhere, are employed. This is brought about, often, by governments which know that the economic principles involved are unsound. Tariffs and trade barriers are erected and "buy at home" propaganda is let loose because of the fear of war, in which event any nation which is not self-sustaining may be subjected to starvation or conquest by the enemy nation.

I trust, then, that this committee will not think that I am moralizing about world peace, or that I am drifting in the slightest degree from the business problem which is before it, when I speak of the business necessity of the present time for American cooperation with the other powers in a definite movement to reduce this world-wide fear of war. I refer particularly to the situation in Manchuria.

I believe that what I shall say on this problem will be as much in the interest of the Japanese people and of Japanese business, as it is in the interest of the American people and American business. But all of us must face the facts. For 15 years, the world has been trying to find a way to peace. Most of the nations have officially outlawed war, and are committed to policies of arbi tration and conciliation; and the League of Nations, often with friendly, if unofficial cooperation by America, has struggled along year by year to set up some mechanism of peace. It has accomplished many things; but in the atmosphere of insecurity and suspicion in which it has necessarily labored, it has not yet convinced the people of any nation that it is safe to look to any sort of world understanding for its national safety. Each nation has therefore worked desperately for its own defenses, and, in spite of what all international movements could do to prevent it, the staggering burden of armament is greater than it was before the war.

Today the world is faced with a crisis which will determine whether there is or is not any possible world security to be expected from international agreements. I do not mean to indict Japan. Her course is quite understand

able in the light of traditional diplomacy. Many of the great powers have, in the past, acted in much the same way. But this is not the past. This is a new time. This is a time when the prosperity of every nation, including our own, is obviously dependent upon removing the fear of war; and if Japan is permitted to continue in the course she is taking, no matter how it may be justified by ancient precedents, the people of every nation must become convinced that our international peace machinery is not to be relied upon. and they will turn more madly than ever toward the policy of national preparedness. Such a policy, however, even if it did not eventuate in another world war, is necessarily deadly to business everywhere. The mere cost of the armaments is probably negligible compared with the cost involved in doing business in the way it must be done if the various nations continue their attempt to become self-sustaining instead of employing the economical mass production methods which cannot be employed successfully unless the barriers to international trade are removed.

America must not be misled by the fact that our country seems more nearly self-sustaining than any other, and that, even in normal times, our world trade is but a small percentage of our total production. That is, of course, fortunate, and enables America to do many things that other nations cannot do. But our world trade, nevertheless, constitutes a very important part of our business upon which a large part of our other business depends. One cannot afford to lose his right eye on the theory that it constitutes such a small percentage of his body. Not as a moralist, then, but as a business man anxious to help dispel the business depression under which all the nations are suffering, I urge upon this committee the necessity of our supporting the policy of the League of Nations as expressed in the Lytton Report, the report of the Committee of Nineteen, and by Secretary of State Stimson. I am stressing this for business reasons. If there were any conflict, of course, between business advantage and the common good, Congress should consider only the common good. But industrial advance has reached a stage where this cannot be true. Because our productive capacity has increased to a point which necessitates mass buying, and a constant raising, therefore, of the standard of living of the masses everywhere, the interests of business and the interests of the whole world have inescapably become one.

Without the cooperation of America, the League of Nations could probably do little toward removing this present menace to world security. I refuse to call it the Japanese menace. It is, as I see it, just a test case which, if it had not arisen in Japan's dealings with China, was bound, sooner or later, to arise somewhere. America is faced with the issue of whether or not we shall go on to a world of international understanding, or go back to a world in which military force is the only known law, and, in doing that, continue a situation in which this business depression will be indefinitely prolonged, in which supertariffs and supernationalism will go on destroying commerceconditions under which we know by sad experience business cannot operate successfully and the masses cannot be served.

It is imperative, then, that America join with the other powers in whatever economic sanctions may be necessary to prevent the course which Japanese militarism has set out upon. Our failure to do this, especially if we were to permit the shipment of any military supplies from this country to Japan, could result only in continuing and intensifying this depression.

For the same reasons, although I shall not go into any details now, it is imperative, I believe, that we should immediately recognize the Government of Russia.

Few of our problems are merely ours any longer. Certainly we can not collect international debts when conditions in every nation are such that they can not find means of paying their debts. Nor is it enough merely to scale down these debts according to the capacity of the various nations to pay. What is necessary in such world cooperation that all nations may utilize their capacity to produce, a process which need be limited only by the capacity of the whole world to consume.

To-day almost all nations, including our own, are frantically trying to balance the National Budget, mainly because they have used their resources in ways that do not result in the production of wealth. Of course, the balancing of our National Budget is fundamental. Our failure to do so means destruction of our credit system and possibly of the gold basis of our money. The cry everywhere is to economize; but no adequate economy is possible unless the