Gulliver Unbound

"The whole world is watching us, amazed at the exhibition of a giant who cannot pull himself together even to take care of his own needs." Like the pangs of conscience during a hangover, these words of wise old Bernard Baruch in mid-1946 were perhaps overfraught with a sense of guilt. But at the time they seemed fully warranted.

For the U.S. in 1946 rid itself of wartime controls as a giant might escape from a straitjacket--roaring, ripping and kicking, with little regard for himself or the bystanders. Nevertheless, Gulliver, freed, defeated most of the Blefuscudians --the shortages of foods & goods. And the great drop in Government spending ($45 billion less than in 1945) was made up by private spending. U.S. retail sales reached a record of $96 billion; $105 billion was poured out in wages & salaries, and net corporate profits totaled an estimated $12 billion, some 20% more than 1944's record high. Farmers raised the most profitable crop in history. And the nation's gross national product (goods, services, construction, etc.) soared up into the ionosphere. The total product--an estimated $195 billion--was some 61% more than in any other peacetime year.

Most of the worst shortages had ended by year's end. Once-bare shelves were heaped with white shirts; nylon and meat lines melted away; "sale" was reintroduced into the language. There was more than there had ever been--at a price. In turning it out, the U.S., by any temperate standard, had done a giant's job.

Great Expectations. Yet no one seemed satisfied. (Americans never are.) For the great expectations had been greater than even Gulliver unbound could fulfill.

The auto industry had dreamed of making 6,000,000 cars and trucks; it made only 3,000,000. Of the 1,200,000 houses blueprinted under Wilson Wyatt's program, the U.S. finished only about 700,000. And even the overall glitter of profits proved fool's gold in many an industry. Example: Westinghouse made more peacetime goods than ever--and had an operating loss of $50,000,000, twice as much as during the three worst years of the depression.

Nor did the first full postwar year see any realization of the bright, Cellophaned dreams that had been projected for it. Almost everything that was made had a prewar look. Even the Air Age, which alone got a wing through the door, failed to come through. U.S. planes circled the globe--and brought back red ink for most of the companies that flew them. Typical of the year's disappointment were the millions of ball-point pens, all of which looked like the very latest thing, but many of which would not write at all.

Such fumbling on the part of the U.S. giant was vastly irritating to many a U.S. citizen. But to the citizens of the world it was worse than irritating; it seemed dangerous -- as if the giant were actually in danger of toppling. For this reason, the question of why the U.S. had faltered --and how much -- became of paramount importance to everyone.

Great Mistakes. The fault was due primarily to a grossly mistaken notion: that reconversion consisted chiefly of replacing the machines that made guns with the machines that made butter. This replacement had been done so fast that it made the beginning of 1946 look like the arbored entrance to a primrose path. But the U.S. forgot that reconversion was also a mental matter. The fruits of victory were impatiently thought of as higher wages, bigger profits, and a rich, ready flow of milk, honey and Cadillacs -- that would begin to pour out immediately the right button was pressed. The U.S. forgot that only by working could it make good on the promises to pay with which the war had stuffed the nation's pockets.

Now that the war was over, everyone wanted to get his while the getting was good. As one Illinois farmer said while buying cattle in Kansas City : "All through the war, I hewed to the line. Did everything the Government told me. I even gave up my three boys, and they are back now and I'm grateful for that. But now that the war is over, I am going to take these cattle back to Illinois, feed them good corn, and then I am going to be one black-market son of a bitch." This sad psychology put a crimp in everything. It struck at the efficiency of labor and management, made furtive bargainers of forthright men, turned market places into dark holes, and dark holes into market places.

The Labor Gambit. The year had hardly begun before U.S. labor grabbed for its share of milk & honey--and thereby succumbed to the greatest epidemic of willful idleness in the annals of unionism.

In steel, the nation's second biggest industry, the tall stacks were cold and smokeless against the sky. In its biggest city, all but the most essential activities were paralyzed for 18 hours. Main Streets were darkened as in war; trains were stilled as if trackless. Hardly anywhere in the U.S. was there a man or a machine that did not feel the strikes in some way.

The strikes cost the U.S. nearly $1 billion in wages, some 16,000,000 tons of steel, 103,000,000 tons of coal, about 110,000,000 man-days of work. Even the fruits which labor plucked--a general, average rise of some 13-c- an hour--turned bitter as they were being swallowed.

Labor thought it could get its wage raises without raising prices because the Government had promised to keep the lid on prices. Perhaps prices might have stayed down--if productivity had increased enough to make up for the raises. Instead, productivity fell, prices rose, and labor found that economic laws were greater than even OPA. By year's end A.F.L.'s William Green was moaning: labor stands to lose as much as it gains by any more of the same sort of raises (i.e., with consequent boosts in prices).

Management Moves. The readjustment of prices--management's grab for its share--was no less disorderly. Starting with the shutting of some two-thirds of its 5,500 local boards in January, OPA rapidly surrendered point by point either too soon or too late. But a pseudo-critical skirmish clouded each real issue, or lack of one. Never before had so many businessmen rushed to Washington with clenched fists, then rushed home either to 1) tear their hair, or 2) hold on to goods for a price rise, or OPA's death.

OPA, to a great extent, was the cause of its own fatal disease. Paradoxically, it controlled too much in some industries and not enough in others. By keeping controls on capital goods, e.g., weaving machines, it discouraged industry from turning out the machines to make badly needed goods. By not controlling cotton (the greedy congressional cotton bloc made that impossible), OPA had no choice but to see textile prices rise steadily as cotton soared. And as the Administration let wages go, not even Gulliver could hold down prices.

So when, ripped and riddled, OPA fell, dying, in July, empty stockyards became the scene of stampedes; out came the held-back goods; up went prices.

In Chicago a confused grocer listened to price complaints, blurted: "For goodness sakes, ladies, I agree with you. Why don't you stop buying the stuff? It isn't worth it." In three weeks the Government's index of wholesale food prices jumped 29.1 points to 142.

OPA was revived next month, but the only thing proved was that no one believed in ghosts. Plenty changed into shortages again until the ghost was finally laid--along with most other wartime controls--in December.

One Game Ended. Finally on its own again after five long years, U.S. business seemed too nervous to give its markets stability or even rational consistency. Actually, decontrol was far less of a shock than OPAsters had direly predicted.

In the year, wholesale commodity prices moved up about 30%. It was uncontrolled cotton that made the headlines. Cotton, which sold for only 14-c- a pound in 1941, had climbed to 25-c- at the start of 1946. On Oct. 2 it hit 39.78-c---then collapsed when Speculator Tom Jordan had to sell out his enormous holdings.

Clearly out of relation with supply & demand, the prices of some other commodities also began to slide. There was not enough time left in 1946 for a general turn in the inflationary tide. But commodities--and retail prices--had leveled off (see chart). The Commerce Department's retail price index rose 28.9 points to above 170 (1935-39 average: 100). But except for rents (and there was little popular support of the effort to take the ceilings off them), the violent adjustments in prices had apparently been made.

The BLS cost-of-living index was still creeping up at year's end (at 153 it was 40% up from 1941). But few doubted that it too would soon start down.

No Heroes. As in every melee, few heroes stood out. G.E.'s Charles E. Wilson cried--and tried--to hold prices, but was swept upwards with the rest. Young Henry Ford II's determined effort to fix union responsibility fell short. Henry J. Kaiser might have turned out to be the hero of the year if he had turned out cars the way he had turned out his ships. But his car-making stuttered along like an 1896 horseless carriage. For great performance, U.S. business had no Man of the Year in 1946.

There was, nonetheless, an Event of the Year, possibly the event of many years. Early in 1946, long before anyone had expected or even hoped for it, the U.S. achieved the semi-utopian goal of full (i.e., optimum) employment in peacetime. In September, the number of people at work reached a record peacetime high of nearly 58,000,000 (the unemployed numbered less than 2,000,000, of whom 700,000 were recently discharged veterans). The millions in the armed forces had been smoothly absorbed into civilian life -- and jobs. And the fact that the Chicago Tribune at year's end was carrying some 70 columns of help-wanted ads daily gave proof that jobs were still going begging.

But where were all the glorious, benefits that full employment was to bring? The answer was that full employment was only half the prize; the other half was full production. To full employment the U.S. reacted much like a man who suddenly finds himself astride a powerful, rip-snorting bronco, with no bridle to rein him in.

In their prospectuses, neither Sir William Beveridge (Full Employment in a Free Society) nor Henry Wallace (Sixty Million Jobs) had described how to fashion such a bridle. Beveridge merely outlined the problem: "So long as freedom of collective bargaining is maintained, the primary responsibility of preventing a full-employment policy from coming to grief in a vicious spiral of wages and prices will rest on those who conduct the bargaining on behalf of labor. . . . How real is this possibility [of inflation] cannot be decided on theoretical grounds. . . . But the fact remains that there is no inherent mechanism in our present system which can with certainty prevent, competitive sectional [i.e., industry-by-industry] bargaining for wages from setting up the spiral."

In 1946, the U.S. gave proof that the possibility was very real indeed. In a seller's market for labor, labor's leaders did exactly what they berated management for doing in a seller's market for products--they held out for high returns. The holdouts were one of the two big reasons (the other: shortages of materials, to which the holdouts contributed) why the U.S. fell so far short of maximum production. With some 4,000,000 more at work than ever before, the Federal Reserve Board index of industrial production never got above 185, falling far short of the peak war rate. In short, though the U.S. did pour out the greatest flood of products in peacetime history, it took far more than a proportionate increase of workers to do it.

The Goat. The paradox of the year was the stock market. The big bull market, which had been rampaging upwards for four years, showed no signs of tiring as the year opened. Through the steel, auto, coal and thousands of little strikes, the market went serenely onward & upward, in a sort of economic Indian rope trick, as profits--and production--went from bad to worse in the first half of the year (see chart). So many little people rushed in to buy that the Stock Exchange spent $750,000 in newspaper and magazine ads to warn the lambs away from the wolves. On May 29, the Dow-Jones industrial averages reached 212.5, then turned queasy. But it was not till Sept. 3 that the collapse came. In five hysterical hours, 2,900,000 shares were traded as the averages plummeted 10.51 points, biggest one-day drop since 1937. In the next few weeks, the average dropped to 165.17, and some $14 billion in paper values were wiped out, though production was then rising. It continued to rise till coal strike No. 2 caused it to slump temporarily at year's end. But as the market stayed down, everyone finally knew that the longest bull market in U.S. history was dead. What killed it?

It was not caused by sunspots, although Dun's Review, in all seriousness, devoted 13 columns to a discussion of sunspots and business activity in its first postmortem issue. It was caused partly by 1) the old fact that stock prices had generally risen far out of line with actual and visible profits, and 2) the new fact that too many people expected a recession, as the bastard result of full employment, high wages and too-high prices. Never had a coming slump been given such loud and passionate advance advertising.

By year's end, everybody, from the President to pants-pressers, was talking about it. Most of the recession guesses, including President Truman's, were punctuated with big Ifs. Some were as specific as alarm clocks. One forecaster, whose formula is based on tides, picked July 22, 1947, as the day for "a very sharp mark-down." Some said there would be no slump, just because it was being so widely heralded. All this smoke obscured the fire.

The Big Event. The fact was that as 1946 ended a recession in demand and prices had already begun. The break in stock and commodity markets could be explained in no other way. Nor could there be any other reason last month for one of the year's characteristic paradoxes: thousands of cut-price sales at the height of the greatest Christmas shopping spree in history. The real question was: How long and how bad would the decline be?

The answer was just as tangled as the mixture of inflationary and deflationary forces which were at work as 1947 began. Light industries (clothing, processed food, etc.) were already cutting production, but heavy industries (autos, houses, etc.), which give the U.S. its economic red meat, had hardly begun to satisfy demand. The fact was that no one could say, with certainty, just how long or deep the recession would be. But a balance sheet could be cast up of what could make it comparatively slight, or comparatively deep.

Black Ink. On the credit side was the enormous demand for autos, refrigerators, durable goods of all kinds. During the war years the normal split between spending for durable and nondurable goods got way out of whack (see chart). Consequently, much of the enormous savings of $137 billion piled up since 1941 will now be spent for durable goods. (How much was still an important question. One survey showed that only 30% of the population held 76% of the savings.) In 1946, big spending year though it was, the U.S. still went on saving, though down to a more normal rate of some $16.2 billion yearly. The U.S. had the money to buy its current "basic"needs: 11,000,000 autos, 3,000,000 houses, 450,000 railroad cars--billions of dollars' worth of goods. Even with 1946's high-geared economy, it would take years to satisfy those demands.

Red Ink. On the debit side were 1) high prices, and 2) organized labor's new wage demands. High prices had already choked off buying in many soft goods. They could do the same in 1947, in durable goods. Recessions, and even depressions, had always come despite great demand.

Labor demanded a bigger cut of the pie on the grounds that 1) wages & salaries had declined from 70 to 65% of total income payments while net profits had increased (see chart), and 2) in 1947 profits would increase still more. Labor forgot that 1) its cut of the pie had increased faster than management's during the war years, and 2) overall profits are often a deceptive and fallacious yardstick. Sample phony argument: the auto industry, which actually lost some $5,500,000 after tax credits in the first nine months of 1946, should be able to pay an increase because industry as a whole made money.

Labor could reasonably expect a bigger cut of the pie only if the present full employment brought maximum production in 1947. But few businessmen expected maximum production, simply because there were not enough materials for it; many a shortage, notably steel and tin, would probably last well into 1947. Industry had made a notable effort to step up production of basic materials. It had spent $13 billion in new plants and equipment, another $160,000,000 to buy up Government-owned steel plants. Many of the major Government war plants had been integrated into private industry. Still there was not enough to go around. So, until maximum production, with its lowering of costs, was reached, higher wages would mean higher prices,

In Balance. If prices of durable goods are forced too high--and consumers refuse to buy--then the recession could be fairly deep. But management--and unions--have shown a new awareness of price problems and dangers. The prime problem was to keep up buying power; the prime danger was that privileged labor unions would force the price of the products they made out of reach of the less-privileged mass market. Unions, remembering what happened to 1946's increases, have been conservative, by their lights, in their demands for 1947. And with the Administration, which won most of labor's increases in 1946, off labor's team, and a Republican Congress, labor will have its hands full keeping what it has.

In short, labor may bring a reasonableness, notably absent in 1946, to the bargaining table. And as most companies, even those in the red for most of the year, were finally making money at year's end, management too was ready to give a little. So the new round of demands might be resolved without 1) another round of strikes, and 2) price rises of durable goods. If that happened, then the recession might turn out to be no more than the reasonable downward adjustments in prices to be expected as supply met demand in a free economy. The consumers' turn would finally come. Said G. E.'s Wilson: "I don't believe it's fair to 140,000,000 Americans to ask them to accept higher price levels. It is time to apply ourselves diligently to getting prices down."

Object Lesson. What would happen to the U.S. economy in 1947 was inextricably tied up with a bigger long-run problem: What would happen to the world's economy? J. P. Morgan & Co., Inc.'s President George Whitney said: "If this country is to prosper we must try to help raise in some measure the standard of living in other countries and thereby bring about a wider market for our goods."

In 1946 the U.S. had the widest market for its goods in its history. Exports topped $10 billion. But the U.S. imported only $5 billion, and the unbalance between U.S. imports and exports sucked many a nation almost dry of cash with which to buy. Unless the U.S. was willing to start lending the enormous sums that other nations needed to buy U.S. products, then the U.S. would have to lower its tariffs so that foreign nations could sell more to the U.S. to get the cash to buy. To many incoming Republicans this had the sound of treason to U.S. industry. But the step could be urged on the U.S. for practical, if not idealistic reasons: drained by war, the U.S. for a long while would need far more lead, copper, tin, natural rubber, etc., than it could hope to produce or substitute synthetically. And in the long run, the U.S. would not be able to absorb all of the tremendous flow of goods which it is capable of producing, would need bigger outside markets to buy them.

And if the U.S. wanted to make its ideas of free trade work, it had to devise ways to make them work. In 1947, 17 members of the United Nations will try to lay down final rules for world trade, on a basis already proposed by the U.S. But all who approved U.S. free-trade ideas, in principle, kept their fingers crossed, in fact. They had been frightened by the gyrations of the U.S. economy in 1946. They agreed to go along only if the U.S. could prove, by stabilizing its own economy during 1947, that free enterprise was a going concern.

In its world-trade proposals, the U.S. Government had properly defined the fruits of victory as a "limited and temporary power to establish the kind of world we want to live in." In 1946, by wild exertions, the U.S. established and freed its own economy. In 1947, its big task would be to prove that it could drive a disciplined free economy in harness. Only then would the U.S. have a chance to establish the kind of economic world it wanted to live in.

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