24-1 Everybody Ought to Be Rich (1929)

John J. Raskob John J. Raskob (1879-1950), associated with Du Pont and General Motors, served as
chairman of the Democratic National Committee, the choice of Al Smith. Himself an
investor in the stock market, here he provides some investment tips for one of the pe-
riod's popular magazines, Ladies' Home Journal (see text p. 772).

Source: From Samuel Crowther, "Everybody Ought to Be Rich: An Interview with John J.
Raskob,» Ladies' Home Journal (August 1929). Copyright 1929, Meredith Corporation. All
rights reserved. Used with permission of Ladies' Home Journal.

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Being rich is, of course, a comparative status. A man with a It may be said that this is a phenomenal increase and .,
million dollars used to be considered rich, but so many that conditions are going to be different in the next ten
people have at least that much in these days, or are earning years. That prophecy may be true, but it is not founded on
incomes in excess of a normal return from a million dol- experience. In my opinion the wealth of the country is
lars, that a millionaire does not cause any comment. bound to increase at a very rapid rate. The rapidity of the
Fixing II bulk line to define riches is a pointless perfor- rate will be determined by the increase in consumption,
mance. Let us rather say that a man is rich when he has an and under wise investment plans the consumption will
income from invested capital which is sufficient to support steadily increase.
him and his family in a decent and comfortable manner-
to give as much support, let us say, as has ever been given
WE HAVE SCARCELY STARTED "

by his earnings. That amount of prosperity ought to be at-

tainable by anyone. A greater share will come to those who Now anyone rriay regret that he or she did not have ten
have greater ability.... thousand dollars ten years ago and did not put it into Gen-
It is quite true that wealth is not so evenly distributed eral Motors or some other good company-and sigh over a
as it ought to be and as it can be. And part of the reason lost opportunity. Anyone who firmly believes that the op-
for the unequal distribution is the lack of systematic invest- portunities are aU closed and that from now on the country
ment and also the lack of even moderately sensible invest- will get worse instead of better is welcome to the opinion-
ment. and to whatevt;r increment it will bring. I think that we
One class of investors saves money and puts it into have scarcely started, and I have thought so for many years.
savings banks or other mediums that pay only a fixed in- In conjunction with others I have been interested in
terest. Such funds are valuable, but they do not lead to creating and directing at least a dozen trusts for investment
wealth. A second class tries to get rich all at once, and buys in equity securities. This plan of equity investments is no
any wildcat security that comes along with the promise of mere theory with me. The first of these trusts was started
immense returns. A third class holds that the return from in 1907 and the others in the years immediately following.
interest is not enough to justify savings, but at the same Under all of these the plan provided for the saving of fif-
time has too much sense to buy fake stocks-and so saves teen dollars per month for investment in equity securities
nothing at all. Yet all the while wealth has been here for only. There were no stocks bought on margin, no money
the asking. borrowed, nor any stocks bought for a quick turn or re-
The common stocks of this country have in the past sale. All stocks with few exceptions have been bought and
ten years increased
, enormously in value because the busi- held as permanent investments. The fifteen dollars was
ness of the.'country has increased. Ten thousand dollars in- saved every month and the dividends from the stocks pur-
vested ten years ago in the common stock of General Mo- chased were kept in the trust and reinvested. Three of these
tors would now be worth more than a million and a half trusts are now twenty years old. Fifteen dollars per month
dollars. And General Motors is only one of many first- equals one hundred and eighty dollars a year. In twenty
class industrial corporations. years, therefore, the tqtal savings amounted to thirty-six
24-1 Everybody Ought to Be Rich (1929) 237

hundred dollars. Each of these three trusts is now worth Managers Securities Company. This supplies an important
well in excess of eighty thousand dollars. Invested at 6 per interest which can exercise a large influence in shaping the
cent interest, this eighty thousand dollars would give the policies of General Motors.
trust beneficiary an annual income of four hundred dollars
per month, which ordinarily would represent more than
FROM $2.5,000 TO A MILLION
the earning power of the beneficiary, because had he been
able to earn as much as four hundred dollars per month he The holdings of the members in the securities company are
could have saved more than fifteen dollars. adjusted in cases of men leaving the employ of the com-
Suppose a man marries at the age of twenty-three and pany. The plan of the Managers Securities Company con-
begins a regular saving of fifteen dollars a month-and al- templates no dissolution of that company, so that its hold-
most anyone who is employed can do that if he tries. If he ings of General Motors stock will always be en bloc. The
invests in good common stocks and allows the dividends plan has been enormously successful, and much of the suc-
and rights to accumulate, he will at the end of twenty years cess of the General Motors Corporation has been due to
have at least eighty thousand dollars and an income from the executives' having full responsibility and receiving fi-
investments of around four hundred dollars a month. He nancial rewards commensurate with that responsibility.
will be rich. And because anyone can do that I am firm in The participation in the Managers Securities Com-
my belief that anyone not only can be rich but ought to be pany was arranged in accordance with the position and
rich. salary of the executive. Minimum participation required a
The obstacles to being rich are two: The trouble of cash payment of twenty-five thousand dollars when the
saving, and the trouble of finding a medium for invest- Managers Securities Company was organized. That mini-
ment. mum participation is now worth more than one million
If Tom is known to have two hundred dollars in the dollars.
savings bank then everyone is out to get it for some ab- Recently I have been advocating the formation of an
solutely necessary purpose. More than likely his wife's sis- equity securities corporation; that is, a corporation that
ter will eventually find the emergency to draw it forth. But will invest in common stocks only under proper and care-
if he does withstand all attacks, what good will the money ful supervision. This company will buy the common stocks
do him? The interest he receives is so small that he has no of first-class industrial corporations and issue its own
incentive to save, and since the whole is under his juris- stock certificates against them. This stock will be offered
diction he can depend only upon his own will to save. To from time to time at a price to correspond exactly with the
save in any such fashion requires a stronger will than the value of the assets of the corporation and all profit will go
normal. to the stockholders. The directors will be men of outstand-
If he thinks of investing in some stock he has nowhere ing character, reputation and integrity. At regular inter-
to turn for advice. He is not big enough to get much atten- vals-say quarterly-the whole financial record of the cor-
tion from his banker, and he has not enough money to go poration will be published together with all of its holdings
to a broker-or at least he thinks that he has not. and the cost thereof. The corporation will be owned by the
Suppose he has a thousand dollars; the bank can only public and with every transaction public. I am not at all in-
advise him to buy a bond, for the officer will not take the terested in a private investment trust. The company would
risk of advising a stock and probably has not the experi- not be permitted to borrow money or go into any debt.
ence anyway to give such advice. Tom can get really ade- In addition to this company, there should be organized
quate attention only from some man who has a worthless a discount company on the same lines as the finance com-
security to sell, for then all of Tom's money will be profit. panies of the motor concerns to be used to sell stock of the
The plan that I have had in mind for several years investing corporation on the installment plan. If Tom had
grows out of the success of the plans that we have followed two hundred dollars, this discount company would lend
for the executives in the General Motors and the Du Pont him three hundred dollars and thus enable him to buy five
companies. In 1923, in order to give the executives of Gen- hundred dollars of the equity securities investment com-
eral Motors a greater interest in their work, we organized pany stock, and Tom could arrange to payoff his loan just
the Managers Securities Company, made up of eighty se- as he pays off his motor-car loan. When finished he would
nior and junior executives. This company bought General own outright five hundred dollars of equity stock. That
Motors common stock to the then market value of thirty- would take his savings out of the free-will class and put
three million dollars. The executives paid five million dol- them into the compulsory-payment class and his savings
lars in cash and borrowed twenty-eight million dollars. would no longer be fair game for relatives, for swindlers or
The stockholders of the Managers Securities Company are for himself.
not stockholders of General Motors. They own stock in a People pay for their motor car loans. They will also
company which owns stock in General Motors, so that, as pay their loans contracted to secure their share in the na-
far as General Motors is concerned, the stock is voted as a tion's business. And in the kind of company suggested
block according to the instructions of the directors of the every increase in value and every right would go to the
238 Chapter 24 The Great Depression

benefit of the stockholders and be reflected in the price and takes a secured bond or mortgage at a fixed rate of inter-
earning power of their stock. They would share absolutely est-then that is supposed to be an investment. In the case
in the nation's prosperity. of the debt, the principal sum as well as the interest is fixed
and the investor cannot get more than he contracts for. The
law guards against getting more and also it regulates the
CONSTRUCTIVE SAVING
procedure by which the lender can take the property of the
The effect of all this would, to my mind, be very far-reach- borrower in case of default. But the law cannot say that
ing. If Tom bought five hundred dollars' worth of stock he the property of the debtor will be worth the principal sum
would be helping some manufacturer to buy a new lathe or of the debt when it falls due; the creditor must take that
a new machine of some kind, which would add to the chance.
wealth of the country, and Tom, by participating in the The investor in a debt strictly limits his possible gain,
profits of this machine, would be in a position to buy more but he does not limit his loss. He speculates in only one di-
goods and cause a demand for more machines. Prosperity rection in so far as the actual return in dollars and cents is
is in the nature of an endless chain and we can break it concerned. But in addition he speculates against the inter-
only by our own refusal to see what it is. est rate. If his security pays 4 per cent and money is worth
Everyone ought to be rich, but it is out of the question 6 or 7 per cent then he is lending at less than the current
to make people rich in spite of themselves. rate; if money is worth 3 per cent, then he is lending at
The millennium is not at hand. One cannot have all more than he could otherwise get.
play and no work. But it has been sufficiently demon- The buyer of a common share in an enterprise limits
strated that many of the old and supposedly conservative neither his gains nor his losses. However, he excludes one
maxims are as untrue as the radical notions. We can ap- element of speculation-the change in the value of money.
praise things as they are. For whatever earnings he gets will be in current money val-
Everyone by this time ought to know that nothing can ues. If he buys shares in a wholly new and untried enter-
be gained by stopping the progress of the world and divid- prise, then his hazards are great, but if he buys into estab-
ing up everything-there ~ould not be enough to divide, in lished enterprises, then he takes no more chance than does
the first place, and, in the second place, most of the world's the investor who buys a debt.
wealth is not in such form it can be divided. It is difficult to see why a bond or mortgage should be
The socialistic theory of division is, however, no more considered as a more conservative investment than a good
irrational than some of the more hidebound theories of stock, for the only difference in practice is that the bond
thrift or of getting rich by saving. can never be worth more than its face value or return more
No one can become rich merely by saving. Putting than the interest, while a stock can be worth more than
aside a sum each week or month in a sock at no interest, or was paid for it and can return a limitless profit.
in a savings bank at ordinary interest, will not provide One may lose on either a bond or a stock. If a com-
enough for old age unless life in the meantime be rigorously pany fails it will usually be reorganized and in that case the
skimped down to the level of mere existenc.e. And if every- bonds will have to give way to new money and possibly
one skimped in any such fashion then the country would be they will be scaled down. The common stockholders may
so poor that living at all would hardly be worth while. lose all, or again they may get another kind of stock which
Unless we have consumption we shall not have pro- mayor may not eventually have a value. In a failure, nei-
duction. Production and consumption go together and a ther the bondholders nor the stockholders will find any
rigid national program of saving would, if carried beyond great cause for happiness-but there are very few failures
a point, make for general poverty, for there would be no among the larger corporations.
consumption to call new wealth into being.
Therefore, savings must be looked at not as a present
BENEFICIAL BORROWING
deprivation in order to enjoy more in the future, but as a
constructive method of increasing not only one's future but A first mortgage on improved real estate is supposedly a
also one's present income. very safe investment, but the value of realty shifts quickly
Saving may be a virtue if undertaken as a kind of men- and even the most experienced investors in real-estate mort-
tal and moral discipline, but such a course of saving is not gages have to foreclose an appreciable percentage of their
to be regarded as a financial plan. Constructive saving in mortgages and buy in the properties to protect themselves.
order to increase one's income is a financial operation and It may be years before the property can be sold again.
to be governed by financial rules; disciplinary saving is an- I would rather buy real estate than buy mortgages on
other matter entirely. The two have been confused. it, for then I have the chance of gaining- more than I paid.
Most of the old precepts contrasting the immorality of On a mortgage I cannot get back more than I lend, but I
speculation with the morality of sound investment have no may get back less.
basis in fact. They have just been so often repeated as true The line between investment and speculation is a very
that they are taken as true. If one buys a debt-that is, hazy one, and a definition is not to be found in the legal
24-1 Everybody Ought to Be Rich (1929) 239

form of a security or in limiting the possible return on the ments. The installment plan of paying for automobiles,
money. The difference is rather in the approach. when it was first launched, ran counter to the old notions
Placing a bet is very different from placing one's of debt. It was opposed by bankers, who saw in it only an
money with a corporation which has thoroughly demon- incentive for extravagance. It was opposed by manufactur-
strated that it can normally earn profits and has a reason- ers because they thought people would be led to buy auto-
able expectation of earning greater profits. That may be mobiles instead of their products.
called speculation, but it would be more accurate to think The results have been exactly opposite to the predic-
of the operation as going into business with men who have tion. The ability to buy automobiles on credit gave an im-
demonstrated that they know how to do business. mediate step-up to their purchase. Manufacturing them,
The old view cif debt was quite as illogical as the old servicing them, building roads for them to run on, and car-
view of investment. It was beyond the conception of any- ing for the people who used the roads have brought into
one that debt could be constructive. Every old saw about existence about ten billion dollars of new wealth each
debt-and there must be a thousand of them-is bound up year-which is roughly about the value of the farm crops.
with borrowing instead of earning. We now know that The creation of this new wealth gave a large increase to
borrowing may be a method of earning and beneficial to consumption and has brought on our present very solid
everyone concerned. Suppose a man needs a certain prosperity.
amount of money in order to buy a set of tools or anything But without the facility for going into debt or the facil-
else which will increase his income. He can take one of two ity for the consumer's getting credit-eall it what you
courses. He can save the money and in the course of time will-this great addition to wealth might never have taken
buy his tools, or he can, if the proper facilities are pro- place and certainly not for many years to come. Debt may
vided, borrow the money at a reasonable rate of interest, be a burden, but it is more likely to be an incentive.
buy the tools and immediately so increase his income that The great wealth of this country has been gained by
he can payoff his debt and own the tools within half the the forces of production and consumption pushing each
time that it would have taken him to save the money and other for supremacy. The personal fortunes of this country
pay cash. That loan enables him at once to create more have been made not by saving but by producing.
wealth than before and consequently makes him a more Mere saving is closely akin to the socialist policy of di-
valuable citizen. By increasing his power to produce he viding and likewise runs up against the same objection that
also increases his power to consume and therefore he in- there:: is not enough around to save. The savings that count
creases the power of others to produce in order to fill his cannot be static. They must be going into the production
new needs and naturally increases their power to consume, of wealth. They may go in as debt and the managers of the
and so on and on. By borrowing the money instead of sav- wealth-making enterprises take all the profit over and
ing it he increases his ability to save and steps up prosper- above the interest paid. That has been the course recom-
ity at once. mended for saving and for the reasons that have been set
out-the fallacy of conservative investment which is not
conservative at all.
THE WAY TO WEALTH
The way to wealth is to get into the profit end of
That is exactly what the automobile has done to the pros- wealth production in this country.
perity of the country through the plan of installment pay-

Questions
1. What essentially is Raskob's advice?
2. What challenges does he believe face those who want to be rich?
3. Which problems does Raskob ignore?

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