The New Frontiers
In mid-1948, the president of Dallas' Rio Grande National Life Insurance Co. gave out an exuberant shout. "This is a great world," cried Robert Baxter, "and the U.S. is the greatest country in the world--and Texas is the greatest state in the U.S. and Dallas is the greatest city in Texas and the Rio Grande is the greatest insurance company in Dallas." This bit of bragging, down to the last note in its descending scale, was a fairly faithful expression of the exuberance and confidence of businessmen in 1948. They thought that the U.S. had plenty to brag about; it had poured forth the greatest flow of goods and services in history. It was the first real postwar year in the sense that most of the Cellophaned dreams of the admen could be readily bought, even if most of the prices were high.
The gross national product--the value of everything made or grown and all work done--rose to $253 billion, 10% above 1947's Himalayan peak. U.S. builders started 1,250,000 houses, 45% more than in any other year. Automakers, working at high speed, brought out a glittering parade of radically changed postwar models--all square, squat and as alike in appearance as cans in a crate. Out rolled more than 5,200,000 cars and trucks, about 8% more than 1947. The textile industry spun out 13,621 billion yards of cloth, enough to reach 311 times around the earth. Out of the whirring factories came 540 million pairs of nylons (10 pairs for every U.S. woman), 4,710,000 washing machines, 27.3 million radios, toasters and irons, more than 80 million auto tires.
The U.S., which had been accustomed in prewar years to turning out 35% of the world's goods (though it had only 6.8% of the population), surprised even itself; it made over 50% of the goods in 1948.
The Yeast. The year was full of yeasty ferment; it bubbled up with new industries, gave new leaven to old ones. The television industry, which had optimistically hoped to make 600,000 sets, proved a bad guesser; it turned out 800,000, by year's end it was working at a 2,000,000-a-year clip. In its revolutionary sweep, television scared the wits out of radio (radio set production dropped 24% under 1947) and Hollywood (which hastily decided to join rather than try to beat the enemy). It promised industry an entirely new technique in remote control in plants (in New York, a supervisor in a power plant kept tabs on his plant by means of a television screen).
General Electric Co. started building the first pilot plant to convert nuclear fission to electrical energy, although the use of atomic power to generate electricity on a commercial scale seemed at least a decade off. On U.S. railroads, the diesel revolution was in full spin; of 1,159 new locomotives put in service during the first ten months, 1,082 were diesels. Jet engines 4 swooshed into their own; of the 3,661 new military planes ordered during the year, 2,209 were jet-powered.
The Bakers. In the unparalleled production marathon of 1948, many a U.S. businessman marched in seven-league boots. Charles E. Wilson's General Motors turned in the biggest profits of any single U.S. company (estimated $425 million), and by tying wage increases to the cost of living, showed a statesmanlike concept of management-labor relations. Montgomery Ward's Sewell Avery put on his own special one-man show; since midyear, he had fired or accepted the resignations of his president and seven other executives, but he still turned in the biggest profits (about $65 million) in "Monkey" Ward's history.
The flop of the year was Preston Tucker; he spent over $20 million turning out 39 handmade cars, and at year's end was sadly muttering: "All I need is money." If there was a Businessman of the Year it was Automaker Paul G. Hoffman, who left his job as president of Studebaker and climbed into the driver's seat of ECA, the biggest politico-business enterprise in world history. He got it running with a minimum of gear clashing, and Congress found little need for back-seat driving.
The Turn. With its boom, the U.S. had high prices. Yet the notable event of the year was not that prices had scooted up to the highest peak of the postwar boom--as they had in midsummer--but that by autumn they had started to come down. U.S. businessmen who had been preaching to the world that production--and not rationing and controls--was the cure for inflation had finally shown the preaching to have the ring of economic gospel. The buyers' market swept in with old-fashioned price-cutting competition.
By year's end, prices of electrical appliances (refrigerators, irons, washing machines, etc.) were down 25% from their peak; cotton cloth was down again to OPA levels and below. Some prices were still rising (autos, metals, etc.), but the "cost-of-living" items (food, clothing, furniture, etc.) were coming down. A drop in retail sales had scared department stores into a rash of pre-Christmas price cutting. Even then, stores barely managed to sell as much as in 1947.
Many an auto buyer, cold-shouldered by dealers in May when a "new used" Chevrolet sedan went for $2,260 ($984 above the list price), found that he was loved in December. Lincolns, Kaisers, Frazers and Hudsons could be bought right off dealers' floors. So could trucks and farm equipment, once as short as Chevvies. After a long climb, employment and production in some industries were both dropping "unseasonally" at year's end. Though employment, at 60.1 million, was almost one million above the end of 1947, the Bureau of Labor Statistics' cost-of-living index, which reached a postwar peak of 174.5 in August, had steadily moved down to about 172.
Miracle of the Wheat. What brought it down chiefly was the greatest crop in U.S. history. In Oklahoma and Kansas, the farmers marveled at the "miracle" wheat crop. The miracle was repeated almost everywhere. The corn crop, which had been poor in 1947, was the biggest ever. All told, the U.S. harvest was 11% bigger than ever before.
As grain elevators were filled up and wheat was piled in the streets of many a town, the price of wheat skittered down. By mid-October all grains except rice were at or below their support levels. For what they lost on falling prices, farmers more than made up in the size of their harvest; their income of about $31 billion was over the record of 1947.
Consumers got only part of the benefits of the bumper harvest, because much of it didn't go to market. Over 342 million bushels of grain had been stored away under Government loan or purchase agreements under the support law. In midyear, President Truman had demanded price controls, to bring prices down; Congress refused them. By year's end, his administration had put out over $1.2 billion into support loans to keep prices up.
All this moved Borden President Theodore G. Montague to sum up gloomily: "The boom is over." It was far from that, but the evidence was plain that the boom had reached its peak and passed it. On the way down, would it flatten on a high plateau just below the peak, or would it sink into something like a recession? The question was important not only to businessmen but to the world. The U.S. had taken on the enormous burdens of ECA and rearmament, hoping to keep the peace while it helped the world rebuild itself. These burdens could best be borne by a free economy that was stable and prosperous. At what point would there be stability?
In Balance? The U.S. had been badly fooled by that question in 1948. In the early months of the year, the economy seemed to have reached a nervous balance of a sort, subject to scares and sudden gyrations, but still generally steady. The Federal Reserve Board index (adjusted) of industrial production had reached 194 (1935-39 average: 100) and started edging down, though "shortage" was still a much used word. But there were signs that inflationary pressures were easing. In February the first great break came, hard on the heels of reports of the bumper wheat crop. May wheat plummeted 52-c- in two weeks; corn fell 54 1/2&162; most other grains went down. (One shrewd short-seller made a $200,000 profit in a week.) Retail sales flattened out a little.
Said the rockbound National Association of Manufacturers' Morris Sayre: "We are now on our way to taking the cap off the high cost of living."
He spoke too soon. If the pressure of domestic demand seemed to have flattened out, the pressure of meeting the U.S. promises abroad had just started. The economy was working at such high pressure that any added burdens--even though small compared to total production--were bound to blow price valves. In April Congress appropriated $5.3 billion for ECA. The U.S. soon found out that this was only the first installment demanded by the cold war; the next was the $12 billion for rearmament.
Out of Kilter. On top of these burdens, Congress cut taxes by $4.8 billion. In the sense that the cut put extra cash in the hands of consumers to spend, that also proved to be a burden on the economy. Retail sales started up again. The businessmen of good will--such as International Harvester's Fowler McCormick--who had cut prices in hopes of starting a healthy downtrend all around, had to change course; they put prices up again. The hope had been that the U.S. would be able to add the burdens of ECA and rearmament without more inflation; that they would merely take up the slack in the economy as it developed.
What little slack there was suddenly disappeared. Industrial production moved up again; the National Industrial Conference Board's consumers' price index shot up to the highest point in its 34-year history; employment, which had been holding steady, began to climb; in July it reached an alltime peak of 61,615,000. The labor shortage, in the words of one depressed Chicago personnel manager, "is worse than steel." And the U.S. had its first $1-a-pound roundsteak.
Third Round. The rearmament program was notably good news to the aircraft industry, which was saved from disaster by $2 billion in plane orders, but it scared many another businessman into a wild scramble for materials. The new inflationary pressures drove the cost of living up, month after month. And this gave labor a potent argument for its "third round" wage increases, another sharp spur to galloping prices.
Most industrialists took one look at soaring sales and decided it was smarter to raise wages--and then prices--than to risk strikes. (Man days lost from strikes dropped to 34 million, lowest in three years.) On its part, labor had developed a healthy respect for the hated Taft-Hartley Act, and in most cases it spoke softly.
The Winner? Whether due to the Act or to a more moderate attitude on the part of labor, the fact was that management came off better in the third round than it had in the first two. Unions generally ended up accepting just about what management had offered in the first place (average increase: 5% an hour). The average weekly wage rose about 6% during the year to about $54.65 (see chart).
There were other compensations for management. Productivity, which had been none too good in 1947, had become, in the cautious words of one industrialist, "satisfactory." Said the National Industrial Conference Board: about 67% of the companies it surveyed reported that productivity had increased from 1% to 28% over 1947, with an average increase of 7 1/2%. In short, with 4% more in the industrial labor force, the nation turned out 9% more goods.
The Payoff. Capital, too, proved worthy of its hire. Net profits for the year were an estimated $21 billion, compared to $17.4 billion the year before. (Industry's slice of the national pie was still slightly smaller than its record in 1929.) Though some of this profit was fictitious, i.e., a profit on inventory rather than actual sales, many an industry had done so well that even a drop in profits next year would leave it well off. As one businessman put it: "Our earnings have been superduper. From now on they'll be merely super."
Work to Do. Eying profits, many a consumer asked whether industry had done its share to keep prices and inflation down. Many a company had not. Said Commerce Secretary Charles Sawyer: "In some cases, price increases have been more than necessary to cover costs, and have contributed to the inflationary spiral."
To the extent that certain industries did this, it was their own fault that Congressmen raised an outcry for an excess-profits tax even though the U.S. may end the current fiscal year with a budget surplus. Warned Wyoming's New Dealing Senator Joe O'Mahoney: "My theory is that any industry earning excess profits from full employment or Government spending should pay more taxes."
There was more to the argument over high profits than that. To step up production to meet the gargantuan demand, industry had expanded its plants to the tune of $18.7 billion during the year. Much of the expansion had been bought with profits and reserves, because there was a grave shortage of risk capital to finance it. As Jersey Standard's Gene Holman said: "Without our high profits we couldn't have expanded the way we did." The oil industry, which had rolled up the "biggest profits of any industry ($2 billion), was a classic example of the way profits had been put to work.
Job Done. As 1948 began, oil was so short that oilmen worried about a .return to rationing (during one cold spell, New York City had to beg oil from the Navy to keep its hospitals and schools warm). To stave off rationing, oilmen earmarked $5 billion for expansion in 1948-49 and worked as never before. Wildcatters roamed the U.S. far & wide, looking for oil in the most unlikely places.
All told, 37,000 U.S. wells were sunk, including one 27 miles out in the Gulf of Mexico; 8,000 miles of pipelines were laid, and 62 tankers were being built to bring in oil from South America and the Middle East. Domestic demand kept rising also until it reached 622 gallons per capita, v. 464 in 1941. Yet oil production at year's end was 17% above the wartime high; the shortage had been licked so thoroughly that some oil prices had started to drop.
Not all industries could point with such pride. There was still a shortage of electricity in the Midwest and along the Pacific Coast, though utility men had worked frantically to expand. They spent $2.3 billion and hoped to spend another $3.3 billion to expand in the next five years. Despite the hopeful speeches of many a steelman that supply would soon meet demand, the great steel shortage was almost as bad at year's end as at the year's start.
Steel production of 88.5 million ingot tons, while it was about 4% above 1947, was still below 1944's record production. Although steelmen blamed the shortage on "abnormal demand," the fact was that steel capacity and production had not even kept pace with the normal growth of population. In 1948, capacity per capita was only slightly more than it had been in depression 1932; production per capita -.as below 1941. Those who talked of "abnormal demand of the boom" failed to take into account the fact that much of it would be normal demand from now on, not only for steel, but for oil, autos, schoolhouses, homes, clothing and everything else. At year's end the population stood at 148 million, up 3,000,000 more consumers during the year.
New Face. Despite the laggards, the overall expansion of big & little business was remolding the U.S. industrial face. The greatest growth was in the Midwest, which seemed more & more like the industrial heartland (in Peoria, a barbershop proudly advertised: "Joe's place is a two-chair shop now"). In the Southwest, another empire was abuilding.
On the salt domes and along the shores of Texas, the cracking towers and silvery balls of synthetic rubber, plastics and fertilizer plants had created a new chemical empire. Profits had helped pay for expansion. An excess-profits tax would not only nip the expansion but, if the wartime formula was followed, would hit the most progressive companies hardest (Jersey Standard would pay more heavily than U.S. Steel). As Vermont's Senator Ralph Flanders said: "You can say so much against it [an excess-profit tax] that I have difficulty in understanding what anybody has to say for it."
Enter: Bull. The stock market paid little heed to the fat profits or to any of the other household gods that traders once swore by. Ever since it had collapsed in fear of a recession in 1946, the market had been seesawing, trying to make up its mind whether the boom had really come to stay. Looking at some of the props under the boom--plant expansion, ECA and rearmament orders--investors celebrated the tax cut by finally placing their bets in May.
In a fast 22-day climb, led by the oil stocks, Dow-Jones industrial averages went from 180.28 to 191.06, and the rail averages went from 57.97 to 62.27. Both of them "broke through" their previous high marks, established in 1947. For the large number of investors who swear by the Dow Theory, the "breakthrough" meant that the bear market was finally over, the bull market had arrived.
Exit: Bull? If it had, it did not stay long. The industrial averages rose to 193.16 before the baby bull, scared by the Berlin blockade, the threat of war, and a possible squeeze on profits, languished and died. On the election of President Truman the market fell 10.82 points in a week, the worst break since the spring of 1940. At year's end the averages were at 177.30, down slightly from the year's start, and Wall Streeters were more confused than ever on whether the market was bound up or down.
Judged by earnings alone, the direction should have been up. Seldom had there been such bargains in stocks; the 30 blue chips included in the Dow-Jones industrial average were selling at only 7.8 times earnings. On the other hand, stockholders were no longer getting an old-fashioned share of the earnings; the cost of doing business and expanding had soared so high that many a company that once distributed 75% of its earnings in dividends now distributed only 40%.
Dollarwise, dividends rose to $7.4 billion, higher than they had ever been (see chart), but on percentage, the stockholders' cut of profits was smaller than at any time since 1929. In short, the return was not great enough for the public to enter the market in a big way--the prime requisite for a roaring bull market. According to the old Wall Street saw, the public would stay out "until its avarice grows stronger than its fear."
Out of the Sock. The low state of the market was one big reason why corporations had to finance so much of their expansion from profits: they were able to raise only $431 million from stock issues in the first nine months of the year. But there was no shortage of credit for loans, chiefly because of the Government's policy of guaranteeing a market or "pegging" the price of long-term Government bonds above par. Thus, banks or insurance companies could get more cash for loans simply by unloading Government bonds on the Federal Reserve Bank.
The credit expansion added so much to inflation that some bankers loudly called for lowering the peg or abandoning it entirely, thus forcing bondholders to keep their bonds. Most bankers disagreed, chiefly because they feared that abandonment of the peg would bring Government bond prices tumbling down, as they had in 1920, and would tighten credit so drastically that the U.S. would be plunged into a new depression.
Into the Vault. Paradoxically, FRB had also tightened credit by upping the reserve requirement of New York and Chicago commercial banks from 20% to 26%, thus cutting down the amount available for loans. Furthermore, Regulation W had been clamped on again, nipping installment credit. Bankers, worried over the soft spots spreading in industry at year's end, had also done their part by tightening up on loans all down the line. Result: the total of business loans had, in FRB's words, shown a "most striking development"; some worried economists called it an "alarming" development.
At year's end, the increase in loans was one-third less than in previous postwar years. As the demand for loans dried up, the dumping of bonds was stopped; they rose above the peg. Thus the argument over the peg became academic, for the time at least. But it had highlighted the sudden tightening of credit which, more important than soft spots and falling prices, had shown a significant change in the inflation wind. Did it mean, as a few economists said, that the U.S. should stop worrying about inflation and start worrying about deflation?
Into the Ball. Looking ahead, most businessmen kept their fingers crossed. They predicted that profits and sales would show little decrease, at least for the first six months of 1949. Beyond that they could not see, but they expected business to drop. Most economists made the same tentative forecast.
But few talked depression or even "recession"; the new phrase was "stability at a high level." Theodore O. Yntema, research director for the businessmen's Committee for Economic Development, summed up: "We can't have the collapse as we did in 1929-32. It was then that the whole banking situation got into difficulty, and that is impossible now . . . But we are still vulnerable to a sharp break such as occurred in 1937-38, in which inventory and credit readjustments played leading roles."
There would also be "adjustments" in prices to lower levels: Alden's, Inc., fourth biggest U.S. mail-order company, cut prices an average of 10% to 15% on man)-items in its spring and summer (1949) catalogue. Sears, Roebuck & Co., a wider cross section of the economy, cut prices an average of 1.7%. The building industry, which had slumped more than the seasonal decline in the closing months of 1948, estimated that it would put up 9% fewer houses in 1949. Inventories, which had grown by $5 billion to the fantastic level of $54 billion in 1948, had stopped growing by year's end. Plant expansion was expected to taper off in 1949.
Out of Pockets? On the hopeful side, no letup was seen for such basic industries as autos and steel. Automakers hoped to turn out 5,300,000 cars and trucks in 1949, and consumers had plenty of cash left to buy. The high prices and big spending in 1948 had not cleaned them out. In 1948, they had tucked away $14 billion in savings. Significantly, they had put away the most in the second half of the year (when retail sales were slipping). It looked as if smart consumers were only waiting for lower prices, to start buying again.
While they waited, ECA and arms spending would put a greater burden on the economy. Although ECA's Hoffman had allocated $4 billion of his cash for the first year to ECA orders, only about half of it had been spent, much of it for food. In 1949, ECA would cut down on food, which the U.S. could easily spare, and step up shipments of not so easily spared durable goods. In the same way, many of the orders placed for arms in 1948 would be delivered in 1949. Example: planemakers had got $2 billion in plane orders, but none were delivered in 1948. Furthermore, arms spending would be stepped up $3 billion a year in 1949, even if the armed forces held to their lowest budget estimates.
How Big? The big imponderable which would shape the economy more than any one force was the size of the federal budget. There seemed small hope of holding it at this fiscal year's total of $42.2 billion. A key fact was that the "costs of government" in the old sense were only a small part of the current costs (see chart). The big items were crop loans, veterans' payments, ECA and rearmament, all with enough potent proponents to stave off any cut; many would argue persuasively for increases.
Though President Truman had put a ceiling of $15 billion on arms spending, Congress might look at the U.S.'s military position before the warring world and decide to boost it as it had in 1948. To spend much above the present level, warned Presidential Adviser Edwin G. Nourse, would be to "force us out of the free-market procedures of a peacetime economy and drive us to the acceptance of a number of direct controls"--price controls and allocation of skilled labor and scarce materials to priority industries.
What Price Arms? On the record, the need for additional controls on the economy, short of war, seemed questionable, at least; it had been made so by the enormous uncontrolled outpouring of 1948. But in the argument over how much should be spent on rearmament, businessmen had a big stake. With close to 10% of the national product already going for military and foreign expenses which do not contribute to production of consumer or capital goods, the economy was in dan ger of being controlled by federal spending. But in the argument over arms spending, businessmen had already filed a cogent brief. In a report filed by canny Ferdinand Eberstadt, who had untangled the wartime mess in WPB with his Controlled Materials plan, the Hoover Commission said flatly that the armed services were doing a poor job of spending their billions: they had often ordered more than they needed, and lost track of what they had. In short, the U.S. was not getting its money's worth, and the job was to see that it did before more billions were piled on. Was the U.S. getting its money's worth with ECA?
What Price Socialism? It was too soon to tell, but first returns indicated that ECA was doing an efficient job. They also indicated that the U.S. had underestimated the size of the job and the roadblocks that Russia, socialism, and the economic controls of many a "free-trading" nation would throw in the way.
The European Council for the Marshall Plan estimates that by 1952 (when ECA had been expected to bring imports & exports into balance), the 16 ECA nations would still be running deficits of over $3 billion a year. Yet ECA had helped close up the gap between U.S. exports & imports which had drained the world of dollars and, in effect, made ECA necessary. It had not increased exports. Actually, U.S. exports had dropped from $15.3 billion in 1947 to $12.6 billion in 1948, and as imports had risen from $5.7 billion to $7 billion, the gap had been closed from $9.6 billion to $5.6 billion. But the world still had a long way to go before it could get along without the bounty of the U.S. and trade with it on something like equal terms.
The Challenge. The U.S. had taken a long step in 1948 toward creating a more stable world. It had also shown that it had the tools to stabilize its boom so that it could form the keystone of a new world economic arch. But would it use the tools wisely and do the job?
The problem for 1949 was for the nation to do so, adjust itself to a boom which had changed its character. It was no longer chiefly based on scarcities and stored-up war demand, but on full employment, and replacement demand, shored up by enormous federal spending. Businessmen would have to cut their prices to a new pattern of shrinking markets in many lines; labor would have to recognize that decreasing employment would bring a sort of buyers' market there also. It might have to reconsider "fourth round" wage demands in the light of benefits from a drop in the cost of living. By reasonableness on both sides, there was the prospect and the possibility that the great American boom could be leveled off on a high plateau, broad enough to bear the weight of the burdens that the U.S. had assumed during 1948. Ahead lay the new frontiers which the new technologies in 1948 had disclosed. Peering at them, Westihghouse Electric's Gwilym Price saw "an economy whose horizons will be almost as far beyond those of the present as today's are beyond those of our boyhood."
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