THE FIRST YEAR OF WAR ECONOMY

When Franklin Roosevelt last week told reporters that he would speed aid to Britain by eliminating the silly-fool dollar sign from the transaction, he stamped 1940 as a year in which a U. S. Revolution came out in the open. In that symbolic phrase, and in the year of gathering fears and tensions that had led up to it, the whole eight-year course of the New Deal seemed suddenly to be photographed in lightning. Politicians had steadily taken power from businessmen. And now in A.D. 1940, with the world in the grip of war economy, even dollars had ceased to be as important as something else.

The U. S. businessman never loved dollars as metal or paper, in the grim, sensual way in which Frenchmen loved francs. The U. S. businessman, in the days before the Revolution, was George Babbitt, a booster--a booster because he was a believer. He believed in money because it represented something else: power, as some called it; freedom, as others called it. Power, freedom and money were an indivisible atom. Therefore, dollars mattered.

Hitler and Roosevelt came to power at almost the same time. It was that spring in which all banks were closed in the country where dollars mattered. Few businessmen could read that portent. Most businessmen retained their faith that this depression would pass like others. Not until the Second and Third New Deals did businessmen begin to suspect that the New Deal was splitting the Money-Power atom; that henceforth money would be just money, while Power was going to belong to politics. A.D. 1940 was the year in which that suspicion was confirmed.

This month, when the National Association of Manufacturers gathered for its annual Congress in Manhattan, its outgoing president, Henning W. Prentis Jr., of Armstrong Cork, bespoke the general uncertainty when he asked the Government to define the businessman's new role. A few at that Congress already understood that the best deal they could make with the Revolution was as men of skill and money, not of power. They sensed that their role in it was simply to make money--hard, sterile money, but money to which the world's only remnants of freedom were still attached. The Revolution frowned on challenges to its power. It smiled on men who still wanted to get rich.

In San Francisco Gastrointestinal Specialist Dr. Felix Cunha charted the incidence of stomach ailments against the Dow-Jones average. Result: a rough X, showing that when business goes down, businessmen's stomach troubles go up. Said Business Week: "Logical as that thesis is, though, we'd like to work on the reverse of it--that when businessmen get stomach trouble, business recedes."

Confidence and prosperity are the chicken-&-egg of economics. Does confidence turn the wheels, or do turning wheels churn up confidence? A.D. 1940 settled the second half of this dilemma: they don't necessarily. There never was a year in which Business had less confidence, or in which industry moved faster.

The year 1940 opened and closed in gloom. Around Labor Day 1939, Business had begun to prepare for big orders. Assuming that World War II would resume where World War I had stopped, manufacturers started buying frantically from each other in order to be ready. The FRB production index headed straight up; then--when the export orders failed to materialize--it dived. So 1940 opened to the twinge of a familiar business headache: inventory trouble, just like stagnant 1938's.

Suddenly everything changed. First Finland, then the rest of Scandinavia was blocked off. The price of unbleached sulfite pulp in the U. S. jumped $6.60 a ton. Two months later, with Holland, Belgium and France gone, and Italy in, the U. S. had lost an export market (including Scandinavia) amounting to $568,000,000 in 1939. The stockmarket broke 35 points from May 1 to June 15, lay paralyzed with fear. But the U. S. swung into the greatest production boom in its history.

The signal for it came not from Business, but from events. Within 15 days of France's fall, the Army & Navy began to dump orders of $41,000,000 a day in industry's lap. The important fact about these orders was that they were for capital goods. For the first time in more than a decade, industry's prime mover--capital-goods expansion--agitated the indexes again. The steel rate soared from 60% of capacity (April) to 92% in September. At 11:30 p.m., on Dec. 9, steelworkers finishing the second shift also finished an era. They cast the years 60,835,000th ton of ingots, and thereby put 1940 ahead of the previous peak steel year of 1929. The FRB production index, its base broadened by FRB statisticians in August, touched its all-time high two months later, kept on going up. Confidence was not an issue; the only issue was production, and that fast.

There were three striking paradoxes of the 1940 boom:

1) For the first time in ten years, unemployment ceased to be U. S. Problem No. 1. Yet even this month there were still some 8,000,000 unemployed. At the same time, many industries complained of a skilled-labor shortage. Perhaps, like Britain, the U. S. could not absorb all its unemployed because its industrial mobilization never would be complete.

2) Agriculture is the one sector of the U. S. economy that depends heavily on exports. Farm crops were also the chief U. S. export which, in 1940, the rest of the world could not buy. Many farm surpluses in 1940 were higher than ever; for farm prices, "parity" remained just a slogan. Yet farm income for the year was estimated at $9 billions, highest since 1937. Thanks were due less to the production boom than to Government aid of $1,300,000,000.

3) Eeriest paradox of all was Wall Street. A capital-goods boom was under way with almost no help at all from private investment. The corporate securities markets did $1,666,805,000 of refundings during eleven months of 1940, but raised only $660,799,000 of new money. As the year ended, Wall Street, its best barometer, was huddled in the storm cellar with Confidence.

Reason for this was plain. Despite the production boom, nothing Business really wanted had been achieved. Taxes, far from easing, were made tougher by an excess-profits tax and likely to grow more so. Government spending was multiplied; the 76th Congress appropriated more than $17 billions. Interest rates on capital continued to fall. The National Labor Relations Board underwent a personnel shakeup, but Wagner Act modification was less likely than ever. Government regulation in general, previously little more than a list of "Don'ts," began to turn into positive control. Every well-editorialized reason why Business should hold back was more conspicuous than ever.

Knowing the economic consequences of war, businessmen naturally disliked the defense boom. They were swept downstream almost against their will, steering as cautiously as they could. They ploughed their profits back into debt retirement or new plant, drove good bargains with the Government in answer to its demands for industrial expansion. When the boom ends, this caution may help Business to face a buyer's market with efficient plant, low overhead--may ease post-war adjustments. But the engine of industry did not speed up because of confidence burning within. It was sped up from without by the energy of wartime economy. Not moneymen but politicos had started it, and supplied the power to keep it going.

Yet of all who helped enthrone politics above economics in 1940, the three most important were businessmen.

Henry Edward Miller, East St. Louis barber, borrowed $150 from the RFC for a new chair. The salesman skipped town with the $150, never delivered Miller's chair, but the loan was repaid with interest: $2.50.

The Hjalmar Schacht of the U. S. Revolution was brought to Washington by Herbert Hoover. He was a Texas businessman who had almost gone broke in Depression. By 1940 he was rich again, and the Revolution had made him Secretary of Commerce and Federal Loan Administrator. Business thought of Jesse Jones as its friend at court, the Old Deal's borer from within the New. Tactful and unobtrusive, Jesse Jones did not act like a revolutionary. He did not set up any industrial TVAs; he merely "took what the banks left over." By Dec. 1, 1940 he had made commitments of $14,842,000,000 to banks, insurance companies, railroads, industries and other Government agencies. He had in fact usurped the first J. P. Morgan's job as U. S. moneybags No. 1.

Throughout 1940, Business still looked on Jesse Jones as its man. Yet he was tolerated by the New Deal as a candidate for two of its most sacred jobs: 1) integrating the U. S. with Latin America; 2) being President in 1944. If businessmen were unlucky to have the avowed New Dealers as enemies, they were not much luckier to have the New Deal's Schacht as a friend. He saved Business from the courts in order to put it to work for the Government. He helped make the Revolution respectable--more like evolution than it might have been.

In the tenth month of war, the Party of Business gathered at Philadelphia for one of its most historic conventions. Running its Resolutions Committee, favorites for its nominations were men most of whom did not believe in the emergency the President had proclaimed. They were isolationists: Taft, Dewey, Vandenberg, James, MacNider. Suddenly the Republican Party awoke. Aroused by the fall of France, the smaller, younger, more imaginative believers in Business scattered the bosses, nominated Wendell Willkie. If he had had only Big Business' support, Wendell Willkie would have got no further than Frank Gannett. Instead, he led the most fervent crusade the U. S. had seen since William Jennings Bryan. On some 300 platforms he boasted of the fact that he was a businessman. After eight years in the doghouse, other businessmen were also blinded by the light.

The Willkie crusade was Business' chance to stop the Revolution. But the Revolution could not be stopped. Willkie was for helping the farmer, for the Wagner Act, for aid to the old, the poor, the unemployed. He might have been for all these things and still have stopped the Revolution. But he could not recognize the emergency and still stop the Revolution--for the emergency is political and its very force gives politicians control over businessmen. It was a fact that he had to face. In facing it he and his supporters gave two-party sanction to the Government to spend, tax, unbalance the budget, control industry for the duration.

Willkie's version of the Revolution would have been different from the New Deal's. He promised a new atmosphere, a new friendliness, a new and more efficient Government personnel, but most of all, he tacitly promised that the Revolution would end when emergency ended. He awakened Business' conscience, restored (for a few months) its belief. It was in fact his cause, democratic capitalism, which the U. S. was arming to protect. Yet Willkie failed to identify himself with that cause in the public mind. And the cause of Business' prerevolutionary, isolationist right wing was meanwhile left without a champion.

After it was over, Mrs. Elizabeth (The Red Network) Dilling, who voted for Willkie, decided that all the time he had been a New Deal stooge.

The third revolutionary businessman of 1940 was William S. Knudsen. When Franklin Roosevelt in May reached past the queue of Business' front men and picked the production genius of General Motors for the Defense Advisory Commission, a shrewd New Deal insider grunted: "Knudsen's a hostage for at least 2,000,000 votes." To many a citizen tired of New Deal Business-baiting, he was a symbol of the hope that Business and the New Deal could work together.

Knudsen was no front man. Every speech he made contained a few grammatical crudities (although he speaks half a dozen languages). His enormous frame and hands suggest a son of toil (although he plays Mozart on a spinet). He was a trouble shooter who reeked pleasantly of lubricating oil. When he went to Washington, Business put its know-how at the disposal of the Revolution. Before summer was out, some 100 important executives had joined Bill Knudsen in the $1-a-year-or-less brigade.

Knudsen represented the fact that a large segment of Business itself cooperated with the 1940 Revolution. To the other, perhaps larger, segment, he was the Revolution's most convincing legate. He spoke to them as one production man to another. He also spoke to them as Government to Business.

To the whole problem of war orders in 1940, most U. S. manufacturers reacted patriotically but with caution. The Nye Committee was too fresh in their memo ries to give them any stomach for the munitions-makers role. The result was an apparent lack of ardor in the way industry went after war business. But with that coolheaded attitude, coolheaded William S. Knudsen was equipped to deal.

It was best represented by three giants: Du Pont, Chrysler, General Motors. Once a munitions-maker, Du Pont had diversified its business to the point where powder was less than 2% of its sales. Chrysler and G. M., too, wanted no part of the war as an investment. Each of these could have refused the unwelcome orders. None did. With bottomless resources, they could have expanded mightily into munitions, cleaned up for a few years. They did not do that either. Each mobilized its men and skills, agreed to build and operate munitions plants for a very nominal sum above cost, the Government to own the plants. Result of this combination of patriotism and restraint: at industry's own request, a large part of the U. S. arms business was in effect nationalized.

In so acting, Du Pont, G. M., Chrysler and others like them had made their peace with the Revolution. They showed the rest of Business a way both to stay in business and to keep out of trouble. In making that deal, Business might or might not believe in the emergency; it did not care to say. It was of no moment, for Business was no longer in power.

Among things bought by Government during 1940 were 250 copies of M. F. Hopper's How to Play Winning Checkers (Simon & Schuster), for the Navy.

Few were the industries which 1940's boom passed by. But none was more violently struck than aircraft. The planemakers began the year with an order backlog of $675,000,000 and 60,000 men at work. They ended the year with a $3,500,000,000 backlog, 164,000 men at work. Yet, corporately speaking, they ended the year as they had begun: small fry.

The aircraft industry was young, had never been weaned from the Government teat. When 1940's orders poured in, it almost choked to death. Its product had revolutionized the world's ideas of speed; it production methods had not caught up with modern standards of speed in production.

The industry expanded, but not enough. Soon outsiders were creeping in--with no better results. G. M. went painfully into chicken-feed production with its liquid-cooled Allison. Packard bravely took the $125,000,000 British Rolls-Royce order that Henry Ford turned down. In November, Ford himself, who had earlier talked of 1,000 planes a day, took a $122,000,000 order for Pratt & Whitney Double Wasps. His engineers went to Hartford to find out how to make them.

But the smaller fry who make up most of the industry were not production-minded. Rich, pink-cheeked Bomber Builder Reuben Fleet of Consolidated Aircraft, sensing the uncomfortable pressure of his biggest customer (the Navy) complained of the "risky margin" of 2 1/4% at which he might be forced to make planes. Having got some new plant as a gift from the British, many planemakers wanted a similar gift from the U. S. By year's end, U. S. aircraft was in an obvious mess. This month little Republic Aviation laid off 50 men because it could not get parts. Deliveries for the year were about $625,000,000; are now running around $55,000,000 a month. At that rate, it would take the industry over five years to put its $3,500,000,000 backlog in the air.

Its German source cut off, Tahiti began buying tattooing machines from a man in Los Angeles.

The aircraft makers' best alibi was the machine-tool industry. It too began the year as a little industry, and though it more than doubled its 1939 sales to over $400,000,000, it remained so. When the planemakers began dumping real volume orders on the machine-tool market in February, Niles-Bement-Pond (one of the biggest of the lot) could call a mere $9,000,000 backlog the biggest in its history. Most toolmakers resisted defense-expansion pressure as much as they could, wanted instead to ration their customers. Automen, normally the biggest machine-tool customers, began to worry. So did the British, who got about a fifth of the industry's 1940 production.

By year's end the industry had expanded its floor space 30%. But its backlog was growing faster, was equal to about a year of capacity operation. On Dec. 4 a large new list of machine tools was subjected to export priority control. Bill Knudsen scolded the industry for not doing more subcontracting. Meanwhile, investors showed less interest in machine-tool stocks than they might have if their low capitalization had not marked them for plucking by the excess-profits tax.

The City Council of Burlington, N. J. complained that Pennsylvania Railroad trains were breaking the city speed limit of 5 m.p.h. A police sergeant clocked them as high as 15 or 20 m.p.h.

The railroads were not a bottleneck in 1940. But debate raged as to whether they would become a bottleneck in 1941.

From the first, the railroads insisted they could handle any traffic load the defense boom might produce. When Burlington's Ralph Budd joined the Defense Advisory Commission, he did not seem worried either. In July, when traffic had risen to over 700,000 carloadings a week. Commissioner Budd urged the roads to fix up their bad-order cars, keep them below 6%. The Administration wanted him to force orders for 100,000 new cars at once, 500,000 by 1942. Mr. Budd preferred not to interfere with rail managements.

By November, U. S. railroads had scrapped 54,000 cars, put about as many new ones in service. Meanwhile, the equipment makers, tired of waiting, took new business offered by other sectors of defense. American Car & Foundry filled part of its echoing, long-empty car sheds with $21,500,000 in tank orders, which (along with nearly $30,000,000 of shells, armor plate, etc.) almost put its common back into the black. American Locomotive got $38,000,000 of Army orders, paid off $5 a share on preferred arrears. Even Pullman, ever faithful to the rails, took on some arms work. If defense traffic sends the roads into the equipment market next year, they will find a crowd ahead of them.

When the American Express Co. sold off its motorized wheel chairs after the New York World's Fair, Fair President Harvey Gibson bought three to scoot around his estate.

In 1940 the construction industry had its best year (nearly $11 billions) since 1930. Before defense set in, public construction was on the decline. But by December the Government (including States and municipalities) was spending twice as much for building as in 1939.

Including FHA houses, private construction gained faster than public. This month it ran 300% ahead of 1939. For the year, construction of new factories was double 1939's. Some of this was Governmentinstigated and -underwritten. But heavy construction, public and private, crossed the $4 billion mark for the first time in U. S. history. If residential building continues upward, 1941 may be a record year.

Construction has a prodigal stepson for which a real feast is spread about once a generation, usually combined with war: shipbuilding. And 1940 was its festal year. For Admiral Stark's two-ocean Navy, shipyards launched a naval vessel every twelve days; few were the Washington glamor girls who had not smashed a bottle on a prow. The Maritime Commission at year's end had 932,000 gross tons of merchant shipping under construction, was launching a vessel a week (last week's: the 17,500-ton Rio Parana, for New York-South America service). The venerable Cramp yards in Philadelphia reopened with a $106,380,000 Navy order; eight Navy, 23 private yards worked at top speed. Last week, for dessert, the British attempted to offset their shipping losses by placing a $100,000,000 order for 60 10,000-ton (dead weight) freighters in the U. S. For this, the largest single merchant-ship order ever placed, Todd Shipyards started building two new yards, one in California, one in Maine.

A. F. of L. electrical workers picketed the Triangle Conduit & Cable Co. in Flushing, L. I., then President John McAuliffe's house, then his country club.

Like earlier New Deal years, 1940 was good for operating utilities, tough for utility holding companies. SEC forced Howard Hopson's weird Associated Gas & Electric into receivership, and watched sick Howard Hopson tremble and snore the year out in a criminal court. In St. Louis, it surprised North American's Union Electric Co. in the embrace of the State Legislature, and helped send its management to jail.

The sellers of electricity, despite their owners' troubles, had another record year. Total kilowatt-hour sales were 11% over 1939; industrial sales were up 16 1/2%, rising weekly. The industry spent more money on new capacity ($580,000,000) than in any year since 1930 ($919,000,000), increasing its installed kilowatts by 1,380,000 net to 40,330,000. It also planned 6,076,000 new kilowatts for 1941 and 1942. The defense-conscious Federal Power Commission wanted them to up that by 1,500,000 kw. But the question was whether Westinghouse and General Electric, already swamped with defense business from a dozen other sources, could find enough skilled labor for such utility expansion.

An executive of U. S. Steel, left out of a fishing trip because he snored, invented an anti-snorer to wake him up when he rolled on his back.

By the time the Great Lakes opened for ore traffic last March, steelmen had made their forecast of the year's demand by letting the price of ore crack (the cracker: Henry Ford) for the first time in steel history. A month later, they dropped the price of steel by $4 a ton too. Their hope was to stay above their break-even point of 55% of capacity. By November they were not only at 96% of capacity, but confronted by an unfamiliar shortage in their coke and ore supplies. They even found themselves accused of not having capacity enough.

For ten years steel's most spectacular moneymaker was cigar-chewing Ernest Weir, whose modern mills put competition back into the steel business. In 1940 he yielded his news value to others. Mr. Weir is a salesman, and in 1940's market all the salesmen went fishing. It was a productionman's show. Shrewd Old Dealer Eugene Grace opened his mouth just wide enough to lap up the cream of the business. He also took the lead in cooperating with the New Deal's exhortations to expand: $100,000,000 worth, half of which was Government money. On the rest, he got a favorable amortization deal from the Treasury for tax purposes.

More remarkable was the case of Republic Steel's Tom Girdler. During the campaign his name was used by Candidate Roosevelt as a synonym for enemy-of-the-people. At year's end, tough Tom Girdler's emissaries were in Washington and Wall Street, working on a deal to carry out one of the President's pet ideas: an integrated steel company on the West Coast (there is none) to supply booming Pacific shipyards.

In a war of planes, the key material is not steel but aluminum. Already harassed by an anti-trust suit that predated even Thurman Arnold, Aluminum Co. of America faced a much more important test of social responsibility in 1940. It entered 1941 with a 380,000,000-lb. market, enough to keep it at capacity. But latest forecast for 1942 is that aircraft alone would need 300,000,000 Ib. It was announced that Aluminum Co. by then would have 825,000,000 Ib. of capacity.

For this plant-doubling, Aluminum Co. set aside $150,000,000 of its own money, earned 1940's gold medal for silent, voluntary expansion for the Defense program. Its soft-shirted, soft-voiced management took the Revolution in its stride. When a new TVA appropriation came up last summer. Aluminum men, who knew they would need extra kilowatts if Defense lasted, helped the Administration lobby it through Congress. Yet the year's end found even Aluminum, Co. behind on deliveries. Sadly it prepared an advertising campaign for the peacetime customers it wants to keep. The copy: "If you find it difficult at the moment to get all the aluminum you want when you want it, you will know that aluminum has gone off to defend your home and country."

Minnesota Indians had to stop making beaded moccasins. Their supply of beads from Czecho-Slovakia was completely cut off.

Ultimate beneficiaries of a confidence boom are the consumers. For a time, excitedly watching their spending theory get its first real test, some New Dealers boasted that consumption would get the long end of this boom too. But 1940 killed any hope that Defense spending might be a short cut to plenty and graceful living. The imminence of rationing in steel, in aluminum, in tools, in a dozen lesser consumer-goods necessities made 1941 look like an uncomfortable year. In 1940, consumers did benefit; 1940 produced more guns and more butter. But 1941 would have to produce still more guns and--perhaps--less butter.

In threading the narrowing gap between capacity and Defense production, none footed it so featly as the automakers. As soon as the President called for 50,000 planes, people figured Detroit would make few cars that year. But before anyone could say whether or not Detroit should have the necessary tools, its retooling was already under way.

When Detroit's production lines, as though fleeing conscription, raced down the last quarter at 120,000 units a week, pessimists anticipated an inventory accumulation. Yet sales were too fast for dealers to keep more than one month's stock on the floors. Meantime the factories, still dodging priorities, managed to get in some advanced retooling (more facelifting) for the 19425. Having led every U. S. boom since 1921, Detroit could not be counted out of 1940-5. And it managed to keep its arms work (G. M. contracts alone totaled $400,000,000) as a sideline to its consumer market.

If consumers bought new cars partly in fear of priorities, they bought other things because they had money to spend. Retail sales in 1940's last quarter ran about 10% ahead of 1939. Sears and Montgomery Ward, whose sales reflect farm buying, set new sales records in 1940--10-15% above 1939

In Buffalo, Barcalo Manufacturing Co. made and marketed a combination screw driver, screw cap wrench, punch opener, hammer, bottle opener, cutting edge and slot-to-make-a-can-pouring-lip.

Charles Kettering has often said that U. S. industry lived for more than a decade on the fruits of its World War I research. The 1940 Revolution subjected Business still more to the rule of politics, but it spurred such technological advances as have made U. S. Business great.

The year's No.1 technological achievement owed nothing to war. But when Du Pont made nylon a commercial reality, they not only invaded the silk-hosiery business but gave Irving Air Chute Co. a new non-Japanese source of parachute cloth.

Rubber could no longer be taken for granted in 1940. Standard Oil and Goodrich built plants to make synthetic rubber (which is no trick) and to make it cheaply and in tonnage (which is). Meanwhile, among hundreds of unsung corporate pioneers, Champion Paper & Fibre made newsprint from Southern pine, and Dow Chemical extracted magnesium from the sea water that laps Freeport, Tex. What may yet prove the year's most useful discovery was less romantic: at South Bend, Studebaker was testing out a turret-lathe that could turn one shell a minute.

The worst that could be said about U. S. Business in 1940 was that the defense boom took businessmen by surprise. It was not their boom, and they joined it with reluctance. The last time the economic controls shifted to Washington, the aftermath was not pleasant. In 1940, they prudently remembered 1921.

At year's end, interest-paying New York Central 4 1/2s sold at 58. That meant a yield of 8% to anyone willing to buy those bonds--a sky-high yield for 1940, even before taxes. Their price discounted every economic horror imaginable, including a peace depression which might put roads like the Central into receivership. If the war and defense lasted, the bonds were safe from everything but inflation. What they were worth depended on your view of the future. The price of Central 4 1/2s was Business' prevision. Since Business no longer controlled the future, its view was glum.

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