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The Nationalization of Credit

2. Bureaucratic Management or Profit Management of Banking?

The poor performance of public enterprises is usually blamed on bureaucratic management. In order to render state, municipal, and other public operations as successful as private enterprise they should be organized and directed along commercial lines. This is why for decades everything has been tried to make such operations more productive through “commercialization.” The problem became all the more important as state and municipal operations expanded. But not by a single step has anyone come closer to the solution.

Deumer, too, deems it necessary “to manage the national banking monopoly along commercial lines,” and makes several recommendations on how to achieve this.4They do not differ from many other proposals in recent years or from those which under the circumstances could and have been achieved. We hear of schools and examinations, of promotion of the “able,” of sufficient pay for employees, and of profit-sharing for leading officials. But Deumer does not see the essence of the problem any more clearly than do any others who seek to make the inevitably unproductive system of public operations more productive.

Deumer, in step with prevailing opinion, seems to believe erroneously that the “commercial” is a form of organization that can easily be grafted onto government enterprises in order to debureaucratize them. That which usually is called “commercial” is the essence of private enterprise aiming at nothing but the greatest possible profitability. And that which usually is called “bureaucratic” is the essence of government operations aiming at “national” objectives. A government enterprise can never be “commercialized” no matter how many external features of private enterprise are superimposed on it.

The entrepreneur operates on his own responsibility. If he does not produce at lowest costs of capital and labor what consumers believe they need most urgently, he suffers losses. But losses finally lead to a transfer of his wealth, and thus his power of control over means of production, to more capable hands. In a capitalistic economy the means of production are always on the way to the most capable manager, that is, to one who is able to use these means most economically to the satisfaction of consumer needs. A public enterprise, however, is managed by men who do not face the consequences of their success or failure.

The same is said to be true of the leading executives of large private enterprises which therefore are run as “bureaucratically” as state and municipal operations. But such arguments ignore the basic difference between public and private enterprises.

In a private, profit-seeking enterprise, every department and division is controlled by bookkeeping and accounting aiming at the same profit objective. Departments and divisions that are unprofitable are reorganized or closed. Workers and executives who fail in their assigned tasks are removed. Accounting in dollars and cents controls every part of the business. Monetary calculation alone shows the way to highest profitability. The owners, that is, the stockholders of a corporation, issue only one order to the manager who transmits it to the employees: earn profits.

The situation is quite different in the bureaus and courts that administer the affairs of the state. Their tasks cannot be measured and calculated in a way market prices are calculated, and the order given to subordinates cannot be so easily defined as that of an entrepreneur to his employees. If the administration is to be uniform and all executive power is not to be delegated to the lowest officials, their actions must be regulated in every detail for every conceivable case. Thus it becomes the duty of every official to follow these instructions. Success and failure are of lesser importance than formal observance of the regulation. This is especially visible in the hiring, treatment, and promotion of personnel, and is called “bureaucratism.” It is no evil that springs from some failure or shortcoming of the organization or the incompetency of officials. It is the nature of every enterprise that is not organized for profit.

When state and municipality go beyond the sphere of court and police, bureaucratism becomes a basic problem of social organization. Even a profit-seeking public enterprise could not be unbureaucratic. Attempts have been made to eliminate bureaucratism through profit-sharing by managers. But since they could not be expected to bear the eventual losses, they are tempted to become reckless, which then is to be avoided by limiting the manager's authority through directives from higher officials, boards, committees, and “expert” opinions. Thus again, more regulation and bureaucratization are created.

But usually public enterprises are expected to strive for more than profitability. This is why they are owned and operated by government. Deumer, too, demands of the nationalized banking system that it be guided by national rather than private considerations, that it should invest its funds not where the return is highest, but where they serve the national interest.5

We need not analyze other consequences of such credit policies, such as the preservation of uneconomical enterprises. But let us look at their effects on the management of public enterprises. When the national credit service or one of its branches submits an unfavorable income statement it may plead: “To be sure, from the viewpoint of private interest and profitability we were not very successful. But it must be borne in mind that the loss shown by commercial accounting is offset by public services that are not visible in the accounts. For instance, dollars and cents cannot express our achievements in the preservation of small and medium enterprises, in the improvements of the material conditions of the ‘backbone' classes of population.” Under such conditions the profitability of an enterprise loses significance. If public management is to be audited at all, it must be judged with the yardstick of bureaucratism. Management must be regimented, and positions must be filled with individuals who are willing to obey the regulations.

No matter how we may search, it is impossible to find a form of organization that could prevent the strictures of bureaucratism in public enterprises. It won't do to observe that many large corporations have become “bureaucratic” in recent decades. It is a mistake to believe that this is the result of size. Even the biggest enterprise remains immune to the dangers of bureaucratism as long as it aims exclusively at profitability. True, if other considerations are forced on it, it loses the essential characteristic of a capitalistic enterprise. It was the prevailing etatistic and interventionistic policies that forced large enterprises to become more and more bureaucratic. They were forced, for instance, to appoint executives with good connections to the authorities, rather than able businessmen, or to embark upon unprofitable operations in order to please influential politicians, political parties, or government itself. They were forced to continue operations they wished to abandon, and merge with companies and plants they did not want. The mixing of politics and business not only is detrimental to politics, as is frequently observed, but even much more so to business. Many large enterprises must give thousands of considerations to political matters, which plants the seeds of bureaucratism. But all this does not justify the proposals to bureaucratize completely and formally all production through the nationalization of credit. Where would the German economy be today if credit had been nationalized as early as 1890, or even 1860? Who can be aware of the developments that will be prevented if it is nationalized today?

  • 4. Ibid., p. 210.
  • 5. Ibid., p. 184.
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