Giant into Armor
Early in 1950, the London Economist's Geoffrey Crowther, a footloose editor with a nose for news, made his annual inspection trip of U.S. industry. "I came here expecting to see a boom," he said, "but nothing I had read prepared me for this. The very air smells of boom. For the firsttime, the U.S. is beginning to smell like 1929 again."
There was certainly a lot of 1929's heady, champagne flavor about the U.S. in 1950, right down to the biggest bull market in 20 years. Gold-Digger Lorelei Lee was a reigning musical-comedy queen; F. Scott Fitzgerald had not only been enthusiastically revived, but was the hero of a novel that led the bestseller lists. Nightclubs were jammed, theater tickets occasionally went for $50 apiece, and useless luxuries--men's garters trimmed in 14-carat gold, mink scarves for three-year-olds, diamond-studded car keys--were salable items again. In an offhand manner, a Houston oilman sent a new Cadillac to Europe to have a $5,000 custom body put on its chassis, with instructions to "throw the old body away."
But these were only the wasteful surface symptoms of a boom which had a diamond-hard foundation based on production and efficiency. The U.S. had worked so hard, produced so much and expanded so fast in 1950 that it had met its most serious challenge: the creation of a strong and flexible economy thoroughly capable of switching over to full-scale rearmament. In the fight against Communist slavery, this was a more important fact than the intervention in Korea or the Brussels conference.
In 1950, by pouring out the greatest abundance of goods in history, the U.S. fashioned gigantic new standards to measure its new industrial might:
P: The automakers, who had scarcely expected to match 1949-8 record-smashing production of 6,500,000 trucks and cars, rolled out about 8,000,000 units, at a rate of 15 a minute--about five times more than the rest of the world combined.
P: In the greatest housing boom in history, builders started 2 1/2 new houses a minute. The 1,360,000 begun during the year (v. 1,020,000 in 1949) were enough to house a population as big as Chicago's.
P: All year long, in the sky over Pittsburgh, Youngstown and a dozen other steel towns, there was a pillar of smoke by day and the glow of fires by night, as the mills worked at capacity. They ladled out 97 million tons of the metal, almost 10 million more than in the peak year of World War II, and twice as much as all the steel mills in the rest of the world.
P: The U.S. productive machine popped out more than 7,000,000 television sets, almost triple 1949; 7,212,000 electric irons, 4,525,000 electric toasters, 4,212,000 washing machines, 1,830,000 ranges, 890,000 home freezers, more than 1,000,000 Hopalong Cassidy suits, and enough nylon stockings to give every woman in the U.S. eleven pairs.
On the Ball. This enormous outpouring was due partly to the fact that more people were working; the employment peak in 1950 was 62,367,000--750,000 more than the previous high in 1948. But a bigger reason was the fact that almost everybody worked more efficiently. Example: about 15% more workers in the auto industry turned out 23% more cars. And the nation's gross national product (total of all goods and services) rose to $280 billion, up $24.4 billion from 1949.
For its better job, labor got a bigger slice of the economic pie; the average U.S. manufacturing wage in 1950 rose 14%, from $56 a week to an alltime high of $64. Corporate profits also scaled a new peak. The estimated grand total after taxes: $23 billion, up about 27% over 1949. As their share, stockholders split their biggest melons in history. But dividends of $8.5 billion were still a much smaller percentage of profits than in pre-World War II years, largely because corporations were pouring so many billions into expansion.
The pleasant "results of this flow of goods and money were a high standard of living and an era of industrial good feeling. Management and labor lived together in such reasonableness that man-hours lost from strikes were about 28% lower than '49. As industry shouldered its new social responsibilities, pensions for employees became an accomplished fact, so much so that the year's worst strike, Chrysler's 80-day stoppage, was not over whether pensions should be paid but over the method of paying them.
But the real significance of 1950's industrial record was that it provided the best measure of the economy's strength to perform the job of arming the U.S. and much of the free world. At year's end the question was not only, "How did the boom grow so big in 1950?" It was also, "How big must the economy grow in 1951 to carry its vast new burden?"
What Goes Up. . . The year began inauspiciously. Although industrial production in January was up 14% from 1949's midsummer recession low, there were plenty of signs that it might fall again. Unemployment stood at 4,480,000, the highest since World War II's end; the stock market, which had been climbing steadily for seven months, took a sharp drop. Motorcars were so plentiful that they could be bought readily off any dealer's floor; auto men even shaved their prices. Was a recession on the way? Croaked Montgomery Ward's Sewell Avery: "The time is not far away."
Avery was never more wrong. Like many another businessman, he had overlooked the stimulating effect of easy credit. Unwilling to risk even a slight depression in an election year, the Administration in 1950 had greatly liberalized housing credit, poured out hundreds of millions in RFC loans and farm subsidies.
The $7.4 billion in FHA and VA guaranteed loans made it possible for a veteran to buy an $8,000 house for as little as $56 a month with no down payment. Consumer credit soared above $20 billion, up about $2 billion in a year. Warned gaunt, grey Economist Edwin G. Nourse: the U.S. was traveling too fast down the "slippery road" of credit.
. . . Must Go Up. By spring, autos were in such demand that customers again had to wait as long as three months for delivery. Makers of TV sets and refrigerators began to ration their output. By June the economy was at the highest production peak it had ever been in peacetime. Industrial production had climbed to 199 in the Federal Reserve Board's index (1935-39 = 100), four points higher than 1948's boomtime top. Employment rose almost 2,000,000 in a single month. In mid-June, the stock market officially blessed the new growth of the boom by soaring to a 20-year high.
Two weeks later, war in Asia began.
Thus ended the first half of economic 1950, a time during which President Truman had repeatedly stated that "peace was never nearer."
Business as Usual. The news from Korea knocked the bull market to its knees. Wall Street traders, well aware that war always disrupts business, sold stocks in such a frenzy that the Dow-Jones industrial average fell 17.63 points in four days. But in retail and wholesale markets, the cry was "Buy!" With memories of World War II shortages still fresh, housewives stampeded the nylon counters, grabbed for sheets, towels, soap, sugar, and everything else that had been short only a few years ago. In cities like Dallas and San Francisco, department store sales rose more than 40% over 1949.
Industry, strong in its World War II expansion, poured out such a flood of civilian goods that the shelves were restocked in jig time. Panic-buying gradually subsided; prices had had but an imperceptible rise.
All during the summer, the Administration's soothing watchword was "business as usual." When Congress hustled through $11.7 billion more for arms, and a Defense Production Act that gave President Truman broad powers to mobilize the economy for war, Harry Truman strongly insisted that he did not need the powers. To Harry Truman, "business as usual" also meant that no businessmen would be called to Washington. Big Business was still a favorite whipping boy of the Fair Deal. In a score of suits, the Fair Deal's trustbusters went right on attacking the companies whose size and strength had won World War II's production battle.
This time, said the President, there would be no dollar-a-year men, no WPBs to help speed production. If big businessmen were needed, they would serve only in an advisory capacity. To drive home his point, he scattered the Defense Act's mobilization powers among a dozen existing bureaus. Through the summer and fall, industrial mobilization crept along, hobbled by indecision and conflicting authority. The only cry for action came from the NSRB's Stuart Symington.
Vice into Virtue. Then, overnight, as in World War II, the "vice" of bigness became a sudden virtue. To build the hydrogen bomb plant, the Government called in Du Pont, one of antitrust's prime targets. After that, the Administration eased up on trustbusting all around.
The atmosphere changed in other ways. To clear the tracks for war production, the Administration at last called in International Telephone & Telegraph's white-maned President William H. Harrison, an old WPB director, to run the new National Production Authority. Harrison cut back civilian use of some scarce materials (mostly metals) and set up steel allocations. But these were largely paper orders, because the Defense Department failed to put out any war orders in quantity. The Pentagon's hesitation stemmed, in part, from a dislike of mass-producing tanks or planes which might soon grow obsolete, in part from a fear that too sudden a buildup might "strain" the economy. It was one of the strangest paradoxes of Washington's confusion that the Pentagon's generals worried about the civilian economy while some civilian administrators worried about the dearth of tanks and planes.
Nobody was more confused than businessmen who, when they went to Washington to try to find out what war goods they could make, got only a gabble of doubletalk and "wait-till-you-hear-from-us." North American Aviation's Chairman J. H. ("Dutch") Kindelberger told of meeting a fellow executive wearing a button inscribed with the letters B.A.I.K. Explained the wearer: "It means, 'Brother, Am I Konfused.'" To the inevitable observation that "confused" is spelled with a "c," the wearer replied: "That shows how confused I am."
The confusion was compounded when Alan Valentine, ex-president of the University of Rochester, took on the price & wage control job which nobody else wanted. Valentine soon found out why. His first fumbling effort at a rollback was on automobile prices. This set off a whole rash of price & wage rises in other industries alarmed by the prospect of a general "freeze." Despite the World War II experience which saw much of the U.S. meat supply diverted from normal distribution channels, Valentine talked blithely of new controls on meat. Sighed Harvard's wise, white-thatched Economist Sumner Slich-ter: "Whatever else the U.S. may be short of, it does not lack for thousands of experienced black marketeers."
Amid all this stumbling and groping by a dozen warring Government bureaus, rearmament virtually came to a stop. Only the onslaught of the Chinese Communists pushed it forward again. President Truman then did what he should have done months before. He called in a top production man. Charles Edward Wilson, president of General Electric Co. (another antitrust defendant), went to Washington to get war production moving. As chief of the newly created Office of Defense Mobilization, Wilson demanded and got more power over wages, prices and production than anyone except the President had ever held, even in World War II. Wilson needed them. It was his job to organize the free-enterprising American economy for the defense of the free world.
Flexed Muscles. "There are really no absolute limitations," said Charlie Wilson, "on our ability to produce in peace or war. The limitations are relative ones--the relation of manpower and materials and facilities and electric power to one another." In the relation of all these things to one another, in 1950, the U.S. was better off than it had ever been. The booming economy was a bright contrast to the rusty industrial machine, full of depression's cobwebs, with which the U.S. had entered World War II. Items:
P: In steel, the basic sinew of war, the U.S. had a capacity of 100,500,000 tons a year (about 12% more than World War II's peak), and was expanding by 9,500,000 more tons.
P: In chemicals, the U.S. had almost doubled its capacity since war's end.
P: In electric power, the $8.6 billion poured out to expand since 1945 had increased capacity 38%.
P: In rubber, the U.S. had $780 million worth of synthetic plants which did not even exist when World War II began. By mid-1951 they will be producing some 900,000 tons a year (v. World War II's peak of 820,000 tons). Said B. F. Goodrich's President John L. Collyer: "With synthetic and stockpiled natural rubber, the U.S. has enough to meet all military demands for a five-year war and still have enough for essential civilian uses."
Nevertheless, until output was stepped up, the U.S. faced grave shortages in such metals as aluminum, copper, nickel, cobalt, etc., whose production was not yet up to World War II's level.
The U.S., which had to spend $12.7 billion to build new plants during World War II, still had a reserve of 450 plants to put back into defense production. There was no argument, as there had been in the early days of World War II, over the need for further industrial expansion. At year's end businessmen, who had spent $83 billion on expansion in five years (including $18 billion in 1950), planned to expand even faster in 1951 by spending $5 billion in the first quarter alone.
The Men. In manpower, the U.S. was slightly ahead of World War II. The potential labor force was 66 million v. World War II's peak of 65 million. But the difference was more than in quantity. It was also in quality. The U.S. had an immense, immeasurable reserve in war production know-how stored in the heads and hands of millions of workers and thousands of vigorous, tough-minded executives who had learned the production tricks during World War II.
Moreover, these executives possessed the flexibility gained from quick switching from civilian to war production and back again. L. Clifford Goad, 49, now third in command of General Motors, is the only man who converted auto plants to the production of complete airplanes. Ford's second in command, 53-year-old Ernest R. Breech, turned out radar, parachute flares, ammunition boosters and 6-17 wingtips as wartime boss of Bendix Aviation. Du Pont's boss is 48-year-old Crawford H. Greenewalt who, after getting the Hanford plutonium project in operation, now has the main responsibility for building the H-bomb. Chrysler's 45-year-old new president, Lester Lum ("Tex") Colbert, turned out 18,413 World War II 6-29 engines as boss of Chrysler's Chicago Dodge plant. Huge General Electric Co. is bossed by 50-year-old Ralph Cordiner, who helped Charlie Wilson iron out the kinks of World War II's WPB.
The Money. To men & machines, the nation had to add dollars. How was the vast arms program to be paid for? With a debt of $260 billion, the U.S. could not afford to run deficits as high as World War II's peak of $55 billion without debauching its currency completely. In 1951 the job of paying for arms would not be hard, because actual spending on arms has lagged far behind appropriations, just as in World War II. Then, the biggest appropriations came in 1942, but spending did not build up to its peak until 1945. Now, spending is far slower.
Of the $46 billion appropriated for defense in fiscal 1951 (which ends in July), only $7 billion was spent in the first six months. In the entire year, an estimated $25 billion will be spent. With new corporate and income taxes in effect, the U.S. will take in an estimated $50 billion in the current fiscal year. Thus, with $25 billion spent on defense and $25 billion on nondefense, the U.S. budget might well be balanced on a cash basis at the end of the current fiscal year.
But in fiscal 1952 there will be no such easy solution. Defense appropriations may reach at least $65 billion in an overall budget of $80 billion, and actual spending will probably rise to at least $50 billion.
Could the U.S. be put on a pay-as-you-fight basis? Many a politician was doubtful. But many a businessman at year's end thought that the job could be done by trimming at least $5 billion of fat off non-defense spending, imposing heavier income taxes for individuals and corporations, new excise taxes on nonessential goods, and closing the loopholes that exempt the incomes of insurance companies, farm cooperatives, etc. from taxes. The burden would be heavy. Even though the federal income will rise with the new tax rates and the steadily expanding economy, the Government would have to impose an estimated extra $17.5 billion in taxes to get on to a pay-as-you-go basis.
How Big? The U.S. had the men and machines to shoulder the arms job easily, and, by raising taxes, had made a good start toward finding the money. But at year's end, the outlook for war production was still poor. Since the armed services had not made up their minds what they wanted, no businessmen knew what to give them. From the President down, the vague generalities out of Washington gave no true measurement of the size of the job; instead, they tended to minimize it.
In declaring a national emergency three weeks ago, the President said: "We will have a very rapid speedup in the production of military equipment. Within one year, we will be turning out planes at five times the present rate of production . . . Combat vehicles will be coming off the production line at four times today's rate . . . Production of electronics equipment for defense will have multiplied four-and-a-half times."
That sounded like a fairly rapid speedup; actually, it wouldn't be. Quintupling present plane production would mean about 15,000 planes a year, about 5,800 more than one month's production at World War II's peak. Military electronic production is small; quadrupling it will be an easy job for the enormous new electronics industry. (In 1950, Motorola's $175 million output of radio and television sets alone was about equal to the output of the entire radio industry in 1940.) Combat vehicle production is also negligible. At year's end the U.S. had only 1,000 tanks on order, and was producing only a small number of combat vehicles. Despite all the Washington talk of stratospheric increases in arms production, the cold figures on orders and published estimates hardly bore them out.
Without any precise goals set for war production, the Government began to cut back civilian production by stepping up the stockpiling of such vital materials as cobalt (for radar), copper, columbium (for jet motors) and aluminum. Since the size of the stockpiles is a military secret, no one except the stockpiles knew whether they were too big or too small. But they had already brought about some fairly deep cuts in civilian production--and would obviously bring many more.
Playing by Ear. For lack of copper for radiators, automakers decided to cut their previously planned first-quarter production in 1951 by anywhere from 15% to 25% (which would still put it above 1950's first quarter); appliance makers planned to cut production 25%; TV makers were cutting about 15%. The cuts had already brought manpower dislocations: thousands of skilled workers had been laid off civilian jobs--and had no war jobs to go to. Said Stewart-Warner's white-thatched Chairman & President James Knowlson: "Business doesn't worry about being converted to war production. It only worries about being liquidated in the process."
Under Charlie Wilson's prodding, contracts were now rolling out faster from the Pentagon: G.M. got the job of building Republic's Thunderjet fighter planes; tank orders went out to Chrysler, G.M. and American Locomotive; Kaiser-Frazer got the job of making Fairchild's Cng troop-carrier planes at Willow Run. But it would be months before the companies got into actual production. And the great majority of businessmen who had no war orders and didn't know how long they would be able to make civilian goods could only plan their 1951 production and sales by guess and by God. "All we can do," said Hot-point's President James J. Nance, "is play the thing by ear."
The Score. In playing by ear, businessmen took note of the economics of military spending. Out of the big military appropriations, almost half would go for maintenance of the armed forces, soldiers' pay, food and clothing--which should cause little strain in a nation with vast food surpluses and idle textile mill capacity. Less than half the remainder would be spent on military "hardware" (tanks, planes, etc.), which would cut into production of civilian hard goods (cars, refrigerators, etc.). Since only part of the military appropriations would be spent in the current fiscal year, only about $14 billion would go for military hardware--roughly 15% of the current production of civilian hard goods ($93 billion). If & when spending reaches a rate of $45 billion, probably by the end of 1951, the military hard goods requirements would still be less than 25%. On the basis of present conditions, businessmen thought that civilian production in 1951, while well under 1950, would be considerably better in many products than in some postwar years.
Despite its first-quarter cutback, the auto industry still expected to produce at least 4,000,000 cars in 1951, only about 20% under 1949. Despite the dire predictions which wiped out the television industry every other week, television's own prodigy, Admiral Corp.'s Ross Siragusa, expected the industry to turn out as many as 5,000,000 sets, only three-quarters of 1950's production, but still about double 1949's.
The housing industry expected to turn out from 400,000 to 600,000 dwelling units. Johns-Manville's hardheaded Chairman Lewis H. Brown predicted that the U.S. could handle all the demands of rearmament with no more than a 10% to 15% cut in overall civilian production.
Bull Notes. The stock market, which usually mirrors what businessmen think will happen, took the same optimistic view of the future. After the slump following the start of the Korean war, the market had steadily climbed upward in a flurry of stock splits and extra dividends, paying only momentary attention to the scares of war, new taxes, controls, and the prospect that conversion to war production would mean smaller profits for many companies. Traders also thought that a smaller supply of civilian goods would mean higher prices and more inflation--and that stocks were a good hedge against inflation. At year's end, in the biggest sustained burst of trading of the year, the Dow-Jones industrial average rose to 235-41 (up 35.28 points for the year), only .06 points under the 1950 bull market high.
Fever Line. How high was the fever line of inflation? By year's end the rise had not lived up to the political hullabaloo over it. During the year, the Government's cost-of-living index rose about eight points (to 174), matching the rise in World War II's first year of U.S. fighting. But the increase was well behind 1950's 14% rise in wages. However, there would be further retail price rises because consumer prices had not yet gone up as fast as farm and wholesale manufacturing prices.
For all its bungling of war production, the Administration made a good start in fighting inflation by choking off some of the huge supply of credit which had fed the boom. By tightening up on installment and housing credit, and raising bank reserves to the limit, the Federal Reserve Board had sharply cut the demand for autos, houses, appliances and other retail goods. The same controls will cut buying still more.
But instead of waiting to see if credit controls would do the trick, Economic Stabilizer Valentine blundered into an attempt to freeze all wages and prices by a complicated system of "voluntary" direct controls which no one, including Valentine, seemed to understand. By arbitrarily ruling out price rises for any businessman whose profits were as great as his average in 1946-49, Stabilizer Valentine took the position that profits alone should bear the burden of wage and material increases. All such a program did was squeeze the efficient producer, grant price rises to the inefficient, and harm the entire economy.
The Impossible? Actually, the Administration's attempts to hold down prices by direct controls could not have much effect so long as food prices--which make up 40% of the Government's cost-of-living index--were uncontrolled. And they would be uncontrolled until Congress changed the Defense Production Act, which forbids control of farm prices until they reach the sky-high level of parity. Until then, there was little that Stabilizer Valentine could do about food prices. Even the Administration seemed to see the folly of trying to control everything but food. At year's end, President Truman announced that for the time being, the nation would go along with "voluntary" controls--which, in most cases, meant no controls at all.
Nobody thought that inflation could be stopped completely, since tight controls had failed to do it during World War II. Economists guessed that the U.S. would be doing well if the general price level rises only 10% a year during rearmament. The great danger was that in trying to do the impossible, the Government would so straitjacket the economy with controls that the battle for production would be lost.
This week the President's own Council of Economic Advisers issued a stern warning: "Care must be exercised not to swing between extremes from day to day, asserting one day that everything will be accomplished by voluntary cooperation and asserting the next day that it is too late for anything but compulsion. Under the American system, a constant blending of authority . . . and flexibility is essential ... If we ever lose the desire or ability to achieve this blend we shall have lost the greatest single asset in our total strength as a nation."
Indomitable Spirit. The strength of the nation lay in the fact that the U.S. economy, which had tripled in size since it was formally pronounced "mature" by New Deal hare-braintrusters in 1936, was still capable of gigantic growth. No one thought that it could grow big enough--or fast enough--in the next few years to pour out civilian goods at 1950's rate and also rearm the nation. But most economists and businessmen knew that, barring the sudden arrival of all-out war, it could grow fast enough to keep the standard of living close to the present level and still meet the arms quotas.
Its ability to grow and expand along with a constantly growing nation was the real measure of its strength. If it grows in 1951 only as fast as in 1950, the gross national product will reach an estimated $310 billion. By stepping up the work week from 41 to 48 hours, the nation could get a windfall of 1,000,000 more workers, thus produce more goods than in 1950. If the production target was set high enough, American productive genius would do the rest. A summation of that genius had been well stated a quarter-century ago by a rising young politician who counted himself an expert on capitalism. Said he:
"American efficiency is that indomitable spirit which neither knows nor will be deterred by any obstacle, which plugs away with businesslike perseverance until every impediment has been removed, that simply must go through with a job once it has been tackled."
The speaker was Joseph Stalin.
This file is automatically generated by a robot program, so reader's discretion is required.