I have no information regarding whether R' Yisrael Salanter said such a thing but regarding our inability to give tochacha, the gemara in Arachin 16b has the following to say:
מנין לרואה בחבירו דבר מגונה שחייב להוכיחו שנאמר (ויקרא יט, יז) הוכח תוכיח הוכיחו ולא קבל מנין שיחזור ויוכיחנו תלמוד לומר תוכיח מכל מקום יכול אפי' משתנים פניו ת"ל לא תשא עליו חטא תניא א"ר טרפון תמה אני אם יש בדור הזה שמקבל תוכחה אם אמר לו טול קיסם מבין שיניך אמר לו טול קורה מבין עיניך אמר רבי אלעזר בן עזריה תמיהני אם יש בדור הזה שיודע להוכיח
From where do we know that one who sees an objectionable thing in his fellow is obligated to rebuke him? As it is written (Leviticus 19, 17) "you shall surely rebuke". If he rebuked and it wasn't accepted, how do we know that he should return and rebuke? The verse says "surely rebuke", under all circumstances. One might have thought even if his face changes [i.e. you rebuke him in public and he is embarrassed (Rashi)], so the verse teaches "do not bear a sin". We have a teaching: R' Tarfon said "I would be astounded if there is someone in this generation that can accept rebuke; were one to say 'remove the splinter from between your teeth', he would respond 'remove the beam from between your eyes'." R' Elazar ben Azariah said "I would be astounded if there is someone in this generation that knows how to give rebuke"...
The gemara goes on to discuss a couple of stories in which various Rabbis were involved in either giving or not giving rebuke and at which point is one legally exempt from giving rebuke.