Pilgrim's Progress
In the early months of 1949, in the mid-continent city of Indianapolis, Mrs. Irene Horn, a housewife, felt frightened of the future. She "just had a sort of fear." The fear was so great that she was saving every nickel, buying only bare necessities, and praying for prices to come down. By year's end, Mrs. Horn's fears had vanished. She and her husband had bought a farm in Ohio, and the future looked rosy. As she looked out over her 30 acres, her well-filled bins and fat cattle, she said: "I think things are pretty steady now."
In capsule, that was the story of the whole U.S. economy in 1949. As the year began, the nation too "just had a sort of fear." The greatest boom in history was over the crest, and U.S. business had begun the perilous, booby-trapped road back to what it hoped would be "normalcy." The journey was not unlike Christian's trek in Pilgrim's Progress. The wayfaring nation started in the Slough of Dispond, went through Vanity Fair, passed the lion-guarded House Beautiful, profited from the counselings of Prudence, stumbled on the Hill called Difficulty, defeated Apollyon, a fiend, saw through the hollow words of Mr. Worldly Wiseman, encountered the contradictory Works of the Law, viewed the Delectable Mountains, encountered the doubletalk of Mr. By-ends of Fair-speech, and finally came to the Hill called Clear. But nowhere did anyone find Normalcy.
Slough of Dispond. The year began in an air of political unreality. The Administration gabbled of plans for new controls to fight an inflation that was already ebbing. With hard words for business, which was charged with failing to live up to its promise to lick inflation by production, President Truman talked of Government-financed steel plants, demanded $4 billion more in taxes and stand-by controls. Before long, he knew that he was wrong.
The steel industry caught up with the last great materials shortage and began closing down marginal mills. Retail sales lagged; orders in the textile, appliance and shoe industries melted away like ice in the spring sun. The Federal Reserve Board index of industrial production, which had reached a postwar high of 195 in November 1948, began to drop.
In January it stood at 191, in February at 189, and from March through June fell an ominous 3% a month. Not even at the start of the '29 depression had industrial production taken such a dismaying tumble. Even the prophets of doom, who had feared & forecast a recession for four long years, had hardly expected such a change from boom to something that looked suspiciously like bust.
In June, the falling stock market, with $3.5 billion in paper values wiped out in three months, had its worst bear-shaking and hit its lowest point since 1945. There was reason for pessimism. By July, unemployment, said the Administration, had almost doubled and stood at 4,000,000, the highest in seven years. Unionists grumbled angrily that the Government's figures were cockeyed, that unemployment was really much higher. Croaked Henry Wallace's Progressive Party: "The depression is here."
Mr. Blind Man. It wasn't. By midyear, production had dropped 17% but it also seemed, at last, to have found a solid footing. And the "recession," it seemed, had at least in part been caused by a great miscalculation. U.S. businessmen, roaring mad at those who had underestimated the ability of U.S. production to lick inflation, had made a similar mistake themselves. They had underestimated the appetite of U.S. citizens to consume. At the year's start, the supply of goods on hand and in the pipelines seemed enormous--$58.5 billion worth, enough to last the U.S. for three months even if not a wheel of industry turned.
Thus, when recession-minded merchants felt the first touch of sales resistance, they canceled orders and started to live off inventories, lest they be caught in a slump. But sales slipped only 5% in the firs-L- six months. Since production dropped more than three times as fast, the U.S. was soon using up far more than it was producing. Then deep price cuts in such big consumer items as clothing brought even the most reluctant customers hustling back with wallets in hand. On top of that, consumption got a few healthy midyear boosts.
Congress passed a bill to spend $7 billion on 800,000 dwelling units over the next several years. The Federal Reserve Board, which had been cautiously tightening up on credit to fight inflation, belatedly reversed its field and loosened credit. Wartime's Regulation W, which had kept a tight control on installment buying, expired--to the loud hurrahs of most merchants.
Vanity Fair. Businessmen saw the signs and began to act accordingly. They hit the door-to-door trail of salesmanship with some of their oldtime evangelical fervor. Cried the Southern Wholesale Confectioners Association: "Early to bed, early to rise, work like heck and advertise." Businessmen did indeed advertise--the more than $400 million spent in newspapers in 1949 was the greatest ever. They also cut prices, squared off against their competitors, and ran their own private giveaway programs. Many appliance sellers threw in $40 worth of frozen meat with every freezer; in Milwaukee, a furniture store offered a free airplane ride with every $50 purchase. In Denver, a used-car dealer gave every purchaser a second car for i-c-. House builders, who had yawned at any request for a house under $20,000, hustled to turn them out at less than $15,000. And as buyers depleted stocks, production was forced up again with a rush.
House Beautiful. By year's end the full-throated roar of industry was only a decibel below the volume it had had at the start. The gross national product (total expenditures for all goods and services) reached $259 billion, only about 2% under 1948's alltime peacetime high.
Many an industry even topped its 1948 production. Automakers turned out about twelve cars and trucks every minute of the year for a grand total of 6,200,000--well above their estimate and some 800,000 above their previous record in 1929. Builders, who had anticipated a drop in construction, started two houses every minute for a total of about 1,000,000 housing units--some 60,000 more than 1925's all-time record.
The television industry grew the fastest of all. It doubled production to 2,500,000 sets; at year's end it was rationing them to dealers. The breadth and variety of U.S. business' production drive could be gauged by random statistics: U.S. business turned out 1.7 billion pairs of stockings, 1,000,000 electric ranges, 4.2 million refrigerators, 2.5 billion Ibs. of candy and, for good measure, some 40 million pieces of western gear for city kids who want to play cowboy.
Prudence. Businessmen readily admitted that the drive could not have been so strong except for a remarkable improvement in labor productivity, which had been a hissing and a byword in the first postwar years. Much of the improvement was due to better management, a smooth flow of materials unhampered by shortages, and better machinery in the new plants on which management had spent about $18 billion during the year. But there were other reasons. Something like a buyer's market in labor had returned and labor had prudently worked harder. In all, an average of 43 million nonagricultural workers had been employed during the year to turn out almost the same amount of goods that 45 million had turned out the year before--a rough, rule-of-thumb increase in productivity of 4.5%.
For working harder, labor got more money. The $136 billion in wages and salaries paid out were up $1.5 billion over 1948. Management, which also worked harder, did not fare so well. Estimated net profits for 1949 were about $16.4 billion, down 22.6% from the alltime high in 1948 (though still the third greatest in corporate history). Actually, the loss was not so great as it seemed. More than $3 billion of 1948's bonanza were profits on inventories. If profits were lower in 1949, businessmen were also on the firmer footing of money actually made on things sold.
The Good Companions. No one was on such a good footing as General Motors. In turning out 2,500,000 cars and trucks (about one-third of those sold), G.M. rang up profits of an estimated $640 million, almost equal to the entire U.S. national income in 1799, the first year of record. If mere size of production alone was the measurement, then G.M.'s Charles Erwin Wilson was the businessman of the year. Yet a more startling performance in the auto industry was turned in by Stude-baker's Harold S. Vance. In a year when the lot of the independent was as rough as a transcontinental run in 1910, Studebaker increased its sales about 30% (from 233,-457 to 304.845) and marched into fourth place in the industry, right behind the Big Three.*
Long Island's William Levitt, who was easily the house-builder of the year, announced he had built 4,604 houses by year's end. In television, the man of the year was Admiral Corp.'s Ross Siragusa, who had stubbornly and shrewdly kept stepping up production despite the midsummer slump. By year's end, he had turned out 400,000 sets and was edging up on leader RCA.
Victory over Apollyon. Yet the most notable fact of the year was not that businessmen had run their productive machine superbly well. It was the much more important fact that they, and the U.S. in general, had showed a doubting, socialistic and control-minded world that a free-enterprise system could stabilize itself, that boom need not turn into bust.
Few economists would say that in 1949 the U.S. economy had achieved stability. But the U.S. had started down from the dizzy and dangerous peak of inflation without breaking its neck. Food and apparel prices had come down 3.8%, wholesale prices of manufactured goods about 5% and the total cost of living 1.1%. In short, prices which had gyrated upward in giddy, uneven swings were coming down in an orderly manner. The bogy of recession that had haunted everyone for four years was not completely laid, but it was a vanishing specter.
Hill Called Difficulty. In such a stabilized economy, the power of labor and capital was more nearly in balance than it had been in years. The unions flopped dismally in their No. 1 political objective of wiping out the Taft-Hartley Act, even though their fears that it would cripple collective bargaining had proved false. They had almost no success in their scattered demands for fourth-round wage increases; the drop in prices made such demands untenable. But in the issue of security and pensions, they found a flaming new standard.
When the pension issue came to a head in October in the 42-day steel strike that idled 500,000 workers, steelmen showed a notable lack of industrial statesmanship. U.S. Steel tried to rally support, as a matter of principle, for its contention that workers as well as management should contribute to pensions. But precedent was against its plea. As far back as 1904, Du Pont, for example, had set up a noncontributory plan; there were an estimated 4,500 other such plans in operation in the U.S. When steelmen finally gave in and guaranteed $100-a-month pensions (including federal aid), their final offer was higher than the amount that the union had been willing to settle for in the beginning. Even then, the price that industry paid for peace was not large. Bethlehem Steel's Chairman Eugene Grace, who had broken the strike stalemate, said that the annual cost to his company would be $10 million, only a "small part" of his total wage bill.
Many other industries expanded old pension plans or started new ones, adding millions to the cost of doing business in 1949. The changes did not settle the problem; they did sketch its enormous size. At year's end there were still about 11.5 million unionists without pensions, and union labor hoped to straighten this out in 1950. Part of the cost of pensions was a burden that industry could, and should, bear--if labor's demands were reasonable. But many businessmen also argued for a liberalization of the Federal Government's social-security payments, lest the burden on private enterprise grow too big.
Mr. Worldly Wiseman. It was John L. Lewis, during 1949, who proved that there is a limit to how much an industry can afford to pay for labor's security. In the years of fuel shortages, Lewis had strait-jacketed the coal operators with the highest industrial wages ($1.94 an hour) and the biggest pensions ($100 a month without federal aid) in industry. The operators could afford to pay the successive boosts because they could pass them on to consumers in higher prices. With the return of a competitive economy in 1949, all that changed.
The sky-high costs that Lewis had imposed on coal had just about priced coal out of the market. Result: Lewis suffered his first contract defeat in years. Production royalties to his pension fund dropped so low by year's end that payments were stopped. Coal production, which had been close to a peak of 680 million tons in 1947, dropped to about 460 million tons last year. With oil about as cheap as coal (and cleaner and easier to handle), the industry got sicker by the month.
Railroads had stepped up their conversion to oil; of 1,800 new locomotives built last year, all but 60 were diesels. Homeowners,, tired of an insecure coal supply, shifted increasingly to oil; some 552,000 new domestic oil burners were installed in 1949, more than double the number sold in 1948. So great was the oil demand that the industry, which had turned out an average of 5.5 million barrels a day in 1948, came close to matching even that record. On top of all that, King Coal was shaken by the surge of another revolution in the U.S. fuel supply.
Talk of Wonders. The revolution was symbolized in midsummer when New York's Mayor William O'Dwyer stepped up to a pipe at Staten Island, turned a wheel and brought the first natural gas hissing into New York through the Big & Little Inch pipes from Texas, more than 1,000 miles away. Other pipelines snaked all over the U.S., connecting cities with the huge and still largely unused gas reserves of Kansas, Texas and Louisiana. For consumers, the effects were pleasant. When the new fuel supply reached Milwaukee, the local utility, which had made gas out of coal, cut its rates 20%. Though natural gas still provided only 18% of U.S. fuel requirements, it was climbing fast. Last year alone, 7,000 miles of pipelines were added to the web of 27,000 miles woven over the U.S. since 1942. Before 1954, the pipeline industry planned to lay another 17,700 miles at a cost of another $1.8 billion.
In World War II, construction of the Big and Little Inch lines had been a minor wonder--and a major expense that only government could afford. Yet last year, when Claude Williams' Transcontinental
Gas Pipe Lines Corp. began a new $190 million Texas-to-New York line that was bigger (30 inches) and longer (1,840 miles) than the Inches, the event went almost unnoticed. California was building its own "Super-Inch," stretching 506 miles eastward across the desert to meet another 1.100-mile pipeline stretching westward from Texas and New Mexico. To handle all the expanded supply, the gas utilities themselves would have to spend another $2.5 billion, another venture whose vastness would have made it a laughingstock only a few years ago.
Works of the Law. Yet it was the phenomena of bigness which stirred up the major business argument of the year and brought an all-out attack by the Department of Justice. No longer, as in Trustbusting Teddy Roosevelt's day, was the cry made that bigness and monopoly forced high prices on the consumer. Instead, cheaper prices and greater efficiency seemed to be grounds for prosecution. In trying to break up the Great Atlantic & Pacific Tea Co. into seven separate grocery chains, the U.S. complained that A. & P. failed to mark up prices the normal amount. There was no question of monopoly, for A. & P.'s share of total business had shrunk from 11.6% in 1933 to 6.4% in 1949. In the same manner, Antitrust went after Wilmington's Du Pont empire, called it "the largest single concentration of industrial power in the U.S." But did this mean that it was thus, automatically, too big? Should the test be mere size or should it be efficiency?
In 1949, businessmen did a forthright, statesmanlike job in defining the true test of how big is too big. The test, as General Electric's President Charles E. Wilson told a House committee investigating monopoly, was whether bigness gave the consumer more for his money. "When any concern fails to give the consumer a satisfactory product at a fair price," said Wilson, "it will lose the customer ... its size, and ultimately its very existence."
Du Font's own President Crawford H. Greenewalt filed his own cogent brief. Only because of Du Font's size, said Chemist Greenewalt, was his company able to spend ten years and $27 million on the "difficult and sometimes bitterly disappointing research" to develop nylon--and thus give rise to many new U.S. businesses. To illustrate his point, Greenewalt held a 1.2-lb. package of nylon (price: $1.60) in one hand and a woman's nylon dress in the other. The dress had been processed by six companies--spinner, throwster, weaver, etc.--and was priced to retail for $49.95. By 1948, said Greene-walt, "60% of Du Pont sales consisted of products that did not exist or were not in large-scale commercial production just two decades ago." Among them: moisture-proof Cellophane, and the new, tougher synthetic "orlon," which may replace nylon. All of them had cost tremendous sums to develop.
"This means," said Greenewalt, "that if we risk $6,000,000 in research on a nylon there are perhaps $24 million spent on unsuccessful ventures that must be paid for by the one that does come through." No magic guaranteed that the new products could be sold. "The only power corporations have, whether large or small," said Greenewalt, "is the right to stand in the market place and cry their wares."
To cry new wares and improve the old ones, U.S. business spent millions for industrial research in 1949. The successful experiments dotted the land. Indianapolis, which had produced 800 jet motors a few years ago, boasted that it was the "jet capital of the world," where General Motors' Allison plant turned out more than 2,000 jet engines in 1949. (General Electric and Westinghouse were not far behind.) The Bakelite Corp. found a new use for vinyl resins in making window shades, predicted an annual market of 85 million shades in that field alone. New Bedford, Mass, got its first all-nylon mill; in Taftville, Conn., the Virginia-Carolina Chemical Corp. transformed field corn into a new fiber called "Vicara," to be used for ties, scarves, etc. In Ohio, found-rymen excitedly poured experimental batches of "nodular iron," hoped that the new process, using magnesium, might revolutionize the whole casting industry.
There was no sign that the market place lacked for new criers to compete with bigness. At year's end, the Commerce Department estimated that 300-400,000 new businesses had opened their doors in the U.S. during the year (about 10,000 had been forced to close them) and that nearly half of the increase had come where it was needed most, in the Far West, Southwest and South.
Doubting Castle. Nowhere could the fever chart of 1949 be read better than in the stock-market tables. For three years, the market had been a baffling barometer of the state of U.S. industrial health. It had crashed in 1946 on the eve of the greatest boom in U.S. history, tumbled badly again in 1948 when the boom was at its peak. Though the market had not been able to detect a boom, it started out in the early months of 1949 to prove that it could certainly see a slump.
From 181.54, the Dow-Jones industrial average slid steadily downward until by June it hit 161.60, the lowest point since 1945. In the rush to cash in on the slump, the short interest soared to the highest point since 1932. Only the most optimistic eye could find a bull anywhere in Wall Street. Then, perversely, the market started up. Scoffed the experts: a mere "technical rebound." But it was far more than that. Through the coal and steel strikes, it kept right on rebounding. By year's end, a 40-point rise had chased the bear out of the market place and brought in a well-muscled bull. At 200.13, the industrial average was at its highest point since 1946. Chief reason for the bull market was that earnings were high and investors were convinced that they were going to stay high.
The birth of the bull market was matched by an equally impressive phenomenon: the growth of the investment trusts. They went after the inexperienced little investor in the low-salaried brackets and, by selling him shares in their funds (which in turn were invested in stocks) brought some $250 million of new investments into the market. By year's end, the funds and the lure of the bull market had given small investors a bigger stake in business than they had had in years.
The Delectable Mountains. What was the outlook for business in 1950? Seldom had there been such happy agreement. Said Donald B. Woodward, second vice president of the Mutual Life Insurance Co.: "Business forecasting this year entails virtually no risk at all." Agreed Alan H. Temple, vice president of the National City Bank of New York: "So far as the next few months are concerned this is one of those relatively rare occasions when the dominating facts stand out clearly and when they point to but one conclusion."
The one conclusion, in the minds of economists, businessmen and assorted Government soothsayers, was that business, shored up by high employment, high wages and big Government spending, was going to be as good, for the first six months at least, as it had been in 1949. As to prospects after that, most prophets became shy. But the more venturesome spirits thought that there would then be a downturn, though a moderate one. By moderate, they meant that the total drop in the gross national product for the year would not be more than 10%. If that happened, industry's high break-even points and the built-in inflationary characteristics of high wages might bring a sharper drop in profits.
In industry after industry, the high hopes for 1950 were matched by high production targets for the new year. The automen expected to roll out at least 6,000,000 cars & trucks, a shade below 1949's record. But General Motors expected to meet or exceed its own peak. "There is danger," said G.M.'s Charlie Wilson with a look backward, "of underestimating the capacity of America to consume more and better goods. There are millions of worn-out cars on the road today . . . and the basic market is importantly greater than before the war, perhaps as much as 25%."
Chipper steelmen expected a strong start in 1950, hoped to meet 1949's tonnage of 77.5 million. Just to make up the shortages created by the strike, said U.S. Steel's Chairman Irving S. Olds, meant capacity production well into 1950.
The pent-up demand for housing was still far from filled. Builders expected to start close to 1,000,000 new housing units in 1950, almost as many as in 1949. Said Henry H. Heimann, executive manager of the National Association of Credit Men: "The construction industry will experience only a slight letdown from the 1949 peak."
The television industry expected to turn out 3,500,000 sets in 1950, a 43% increase; Westinghouse alone planned to step up its television production 75%. Even many TV broadcasters, who had been losing their shirts while attracting audiences, expected to turn the profit corner in 1950.
In the textile industry, said W. Ray Bell, president of Manhattan's Association of Cotton Textile Merchants, "shrinking backlogs of orders were the common experience a year ago . . . Now, mills are substantially sold up for 1950's first quarter and have booked a very considerable business into the second quarter." Manhattan's hardheaded Merchandiser Bernard F. Gimbel predicted: "Retail sales will beat 1949's, both in dollars and in units."
Such optimism had a solid foundation. U.S. citizens still had more than $170 billion in savings tucked away in bonds, stocks, property and bank accounts, etc., and they had managed to save another $14.4 billion last year. Moreover, the number of potential consumers was growing all the time. The U.S. population, expected to reach only 140,500,000 by 1950, was already far beyond that, stood at 150,000,000, of which 2,500,000 were added in the last year alone.
As usual a few grey clouds obscured the rosy glow of the predictions. Plant expansion, which had stood at $18 billion a year for three years, was tapering off; it would be down 20% in 1950. Many consumers were running out of cash and going into debt faster than ever before. Consumer credit was up to about $18 billion, a rise of almost $2 billion in the last six months alone.
There was one cloud that some businessmen thought might turn into a thunderhead. The cloud: deficit spending. As private spending tapered off, a high level of business activity was becoming more & more dependent on Government spending. But in 1949 the bill had become too big for the U.S. to pay. In the greatest period of prosperity in its history, the Government could not live within its income.
Mr. By-ends of Fair-speech. The Administration had not planned it quite that way. For fiscal 1949-50, it had expected a deficit of $873 million. But it had overestimated its income and underestimated its outgo. The probable deficit: $5.6 billion. The bulk of this increase could not be charged off to spending on arms and foreign-aid programs. These were below estimates. But the Administration, which like Mr. By-ends tried to be all things to all men, would spend $3 billion more than estimated on domestic lending programs, e.g., housing and the farm support program.
For the fiscal year starting July 1, the outlook was almost as gloomy. The prospect was that the budget would be at least $42 billion (see chart). With an estimated income of $38 billion, there would still be a federal deficit of $4 billion.
Was all that enormous spending necessary? Few wanted the U.S. to weaken its defenses, or welsh on any commitments to strengthen other free nations against Communism. But even such a stalwart Administration supporter as Illinois' Senator Paul H. Douglas thought that $4.5 billion could be saved by cutting the armed services appropriation, trimming foreign aid, slashing pork-barrel measures and abolishing certain farm subsidies.
Even if the Administration wanted to do this job--and there was no sign that it did--the increase in welfare plans, subsidies, payments to veterans, etc. made it harder as every month went by. By year's end, one out of every nine U.S. citizens was getting payments, in one form or another, from the Federal Government. To the Administration this was merely the "Fair Deal." To businessmen, it was soft socialism.
Hill Called Lucre. By year's end, there were signs that some of the chief beneficiaries of Government spending were beginning to balk at the increasing cost of welfare. Prime example was the farmer. With the guaranteed market of the support program, farmers had raised the second greatest crop in history. Although there were surpluses everywhere, net farm income of $15 billion was down only 15%, thanks to the fact that the Government was spending at a rate of about $2 billion a year to support crops and keep them off the market. With more than $3 billion tied up in crop loans and purchases, it was plain that the whole support program was rapidly becoming unworkable. The spotty attempts to control crops by cutting acreage had flopped. Despite such cuts, farm mechanization, better planting and fertilizing techniques had pushed harvests to the point where ever-increasing surpluses seemed inevitable. When Secretary of Agriculture Charles F. Brannan brought out a new plan of control which would, in effect, have permitted the Government to fix the size of the farmer's income right down to the dollar, the powerful American Farm Bureau Federation revolted. It denounced the plan as a "nationalization of agriculture and the distribution system," plumped for a plan that would let the market price have a bigger share in regulating production.
Hill Called Clear. In 1949, the U.S. showed the world that the free market with its interplay of prices and production could successfully stabilize the enormous outpouring of goods on a high level. But in stabilizing its own consumption and production, the U.S. had had little success in stabilizing its consumption and production of the world's goods. The balance between U.S. exports and imports in a world still struggling to get back on its productive feet was as dangerously out of whack as ever. The hope that EGA would somehow close the huge gap between imports and exports had gone glimmering in 1949. At year's end, the U.S. had sold an estimated $12.5 billion abroad and had imported only about $6.5 billion; the gap was almost as big as it had been at ECA's start. Even the desperate remedy of devaluation by foreign nations had not helped them to compete in the U.S. market.
At year's end the big question was still: How could the world compete with the U.S.? The solution was not a permanent form of EGA to pay for U.S. goods given away but to teach the world how to compete through the export of U.S. capital and industrial know-how. Such a program, harassed by all manner of restrictions and threats of expropriation abroad, would not work until other nations gave U.S. businessmen and capital the same freedom they had at home. In short, the economic solution was the same as the political solution: the world needed more freedom. By its progress through 1949, the U.S. had shown where the path lay to the Hill called Clear.
* Henry Kaiser, who had proclaimed that only a year ago he was the fourth biggest automaker, dropped down to eighth and was saved from shutting up shop only by a $44.4 million RFC loan.
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