Boom, Shortages, Taxes, War

The U.S. economy has just finished the most active and productive year in its history. Impelled by Government spending which last month reached a level of $72,000,000* each business day, the national income reached an alltime high and so did industrial production. War materials replaced everything else as the nation's No. i industry. It began to put other industries out of business.

Yet when war came at last, the U.S. suddenly realized that its vast new industry had not prepared it for war at all. It was still just another industry, a peripheral hubbub, an invasion of the economy whose deepest salient was 17%. When it entered the war the U.S. still had an economy. It did not have what its enemies have: a total war machine.

The central controls of that economy, which in 1940 passed from business to Washington (TIME, Dec. 30, 1940), in 1941 bounced through Washington's streets like a red-hot football. They rolled from the White House to the Social Security Building to the Capitol and back again; but nobody fell on the ball. Washington had undertaken to replace business, as the source of power, but organization did not replace freedom, nor mastery drift.

The policy of Franklin Roosevelt in 1941 was not total defense, but all-aid-short-of-war-to-the-allies. That policy became obsolete on Dec. 7, but it gave its tone to business in 1941. Washington spent defense money at a record rate. A war industry was launched which made itself felt in the life of virtually every U.S. citizen. Some of them felt it as unemployment, the victims of priorities; but most of them felt it as an unexampled prosperity. The Administration's Cato, Walter Lippmann, was moved to characterize 1941 last week as "this disgraceful boom."

Money. In 1940 Washington split Business' money-power atom, taking the power but leaving business free to make money. In 1941 Business made plenty of money (even, to its surprise, after taxes). But for the individual businessman the money, thanks to the personal income tax, began to lose its value.

Furthermore the butter, so golden and freshly churned, was by autumn melting off the arms boom. For the first time in 24 years, the Land of Plenty confronted shortages.

The people had more money to spend than ever before in their lives. Total retail sales for the year were more than $54,000,000,000, which was $10,000,000,000 more than 1940 and $6,000,000,000 more than 1929. Since all retail prices (thanks to Leon Henderson) rose no more than 8%, the country lived better in 1941 than it ever had before.

Yet before the year was over, all this money was losing its value just as surely as though the inflation had been of an obvious, free-price type. For there got to be fewer & fewer things, especially durable things, the people could buy. Building, hardware, automobiles, were all under restriction by fall. Before inflation really got started, rationing set in.

Outstanding installment credit reached an alltime peak of $6 billions in August, just before the FRB put restrictions on it.

As for those businessmen who had money left over after taxes for investment, they also found little use for it. The underwriting fraternity siphoned $1,000,000,000 into new private investment, which would have been a respectable sum in a less prosperous year. Meanwhile RFC had by Dec. 1 poured $851,000,000 into new plants and enterprises for defense. Jesse Jones was no longer a village banker preoccupied with risk and interest rates; he was putting the Government into the munitions business, partly because it was no kind of business for private investors. But meanwhile private investors found other outlets blocked by the shortage of materials and equipment.

Materials & Men. The shortages which sprang from U.S. soil in 1941 like armed men from dragon's teeth took most businessmen by surprise. Ed Stettinius got his surprise as early as February, when the vast expansion of the plane program forced him to retract his previous reassurances and put aluminum, as well as machine tools, under the first full mandatory priorities. By year's end the defense demand had also elbowed civilian demand out of the market for copper, brass, nickel, tungsten, zinc, magnesium, tin, and even steel.

The most unexpected shortage was steel, since the U.S. owned 45% of the world's steel capacity. In February Engineer Gano Dunn estimated defense steel needs for 1942 (including export) at 18,984,000 tons. Seven months later Donald Nelson estimated the same demand as 35,000,000 tons. Meanwhile steel expansion had been authorized to the extent of 10,000,000 tons. Yet when 600 steelmen came to Washington in November, OPM's Arthur Whiteside estimated their 1942 production at only 82,600,000 tons--200,000 tons less than output in 1941. For by then a new shortage had arisen that would more than offset the capacity increase: a shortage in steel's own raw materials, especially scrap.

From 1935 to Jan. 1941, the U.S. exported over 20,000,000 tons of iron & steel scrap, chiefly to Italy and Japan.

In his first fireside talk after Pearl Harbor, Optimist Roosevelt reported: "A review this morning leads me to the conclusion that at present we shall not have to curtail our normal use of articles of food."

Those not very reassuring words at present foreshadowed the possibility of the most incredible shortage of all.

It was all the more incredible to those who recalled that the farmers had been notoriously excluded from the 1940 boom. Then came Lend-Lease, and with it Secretary Wickard's appeal for huge quantities of dairy, poultry and pork products. Although the wheat, cotton and corn surpluses remained oppressive, the demands for food crops had begun a price rise, which the Congressional hayseeds, smelling Utopia, quickly climbed aboard. It took a Roosevelt veto to stop them from freezing the surpluses; but nothing could stop them from raising the floor under farm prices, nor from demolishing Leon Henderson's gingerly attempts to give them a ceiling. Result: farm prices led all prices upwards; farm income reached an alltime high of $11,200,000,000 for the year. Two days after Pearl Harbor, Ed O'Neal, for 17 years a farm lobbyist, remarked: "For the first time in history a farmer can plant a crop and know that he will get fair prices for it."

In hinting that the U.S., despite this crop boom, might face a food shortage, the President was thinking of a new X in the war equation: the U.S. manpower reserve. Farmers had already had hired-man trouble as a result of the industrial boom and the draft. If the U.S. now raises and equips a really big army, it will draw still more on the unmobilized muscle of the farms. In that case, can the U.S. farmer feed that army, the U.S. and the Allies too? At year's end, the President had under advisement a proposal to create a referee for these competing musts--a National Man (and Woman) Power Administration.

But men-in-the-mass were not yet a serious problem in 1941. The most interesting manpower problem lay in management.

The Managerial Migration. By year's end some 300 U.S. businessmen had taken $1-a-year jobs in Washington. The number who went to Washington in search of priorities, defense contracts or mere information passed all count. The Mayflower Hotel's 1941 telephone bill was $300,000, 50% more than 1940, 200% more than 1929; and its total liquor sales, which were $410,000 in 1940, rose to $570,000.

This mass migration of management, at least in its early stage, was partly the President's idea, who thought it a means to national unity. If he also thought it a preparation for war, he was wrong.

The managers who took Washington jobs in 1941 were for the most part business' trade-association and front men, not its technicians. (Mr. Knudsen was a technician, but he was given a policy job.) They gave freely and patriotically of their time and effort. The U.S. owed them its gratitude for making the necessary educational mistakes. In 1941 these mistakes cost merely time and reputations; in 1942 they will cost lives.

Their chief mistake was that they thought of defense as a sort of glorified Community-chest drive. Business, as they saw it, was glad to contribute. But to afford the contribution, business had to go on making its living in the usual way.

Ed Stettinius and John David Biggers were typical of the socially-conscious businessmen who came to Washington at Roosevelt's call. Stettinius had inherited wealth and a feeling for public service; when he went to Washington he resigned his board chairmanship of U.S. Steel. Biggers had reached the presidency of Libbey-Owens-Ford by way of the secretaryship of the Toledo Chamber of Commerce.

At OPM, Stettinius had charge of raw materials and priorities; Biggers of production. They were to be the bridge between Army & Navy procurement and the U.S. industrial machine. In the political atmosphere of most of 1941, it would have taken tougher and more ambitious men than Ed & Jack to give orders to either party. Instead, Army and Navy were asked if they felt the U.S. had enough raw materials for their needs; since their own needs at first were small, they said yes. The businessmen, for their part, were asked to do thus and so for the Government as a favor.

When the materials shortages developed, priorities were freely handed out. But since there had been no overall measurement of supply & demand ("They kept raising the sights on us"), priorities orders were soon as unredeemable as Confederate money. Manufacturers, hot for certainty, began to hide and hoard materials; and Ed Stettinius was kicked upstairs to be Lend-Lease Administrator.

On the factory end, the basic assumption was that the new U.S. arsenal should be built from scratch, alongside its civilian economy. The fact that there would not be enough materials to supply both was not foreseen. Another assumption (all too true, as it turned out) was that defense contracts would be closely scrutinized for profiteering; by putting up with a Truman Committee now, munitions makers might avoid a Nye Committee later. Thus many of the most important contracts signed had noblesse oblige written all over them.

Such contracts were designed for plants whose post-war usefulness was in doubt. They meant that the Government, after the war, might own a good piece of the aluminum capacity of the country, as well as gun capacity. Meanwhile, for the contractors, they meant that however deeply their patriotism was engaged in war work, their money and their self-interest were not. On its first $32,000,000 deliveries of all defense products, Chrysler's profit was 1-25th of 1%.

Average hourly earnings in 25 industries reached 85.3-c- in October, highest on record, 10.7-c- over October 1940.

As the nation's banker, the Government was generous. It contracted to put some $5,800,000,000 of new plant at industry's disposal, on terms which appeased industry's financial vice presidents. But Government also became the nation's No. 1 customer in 1941; and in that role Government was neither generous nor smart. Its contracts offered no risk, and left no margin for entrepreneurial initiative. Almost none were devised, for example, that provided a bonus for early delivery, or for extensive subcontracting. Defense left untapped one of the greatest U.S. resources: the profit motive.

As a crowning irony, left-wing critics accused the $1-a-year-men of stealing the country. But the $1-a-year-men sacrificed more than the country knew. Few of them are really rich. They depend on their salaries (which their companies usually continued to pay) for a living. This living includes the large insurance premiums which many executives have substituted for the stockmarket as the path to security. After deducting those, taxes and expenses of his family back home from a $50,000 salary, the typical $1-a-year-man was lucky to have $10,000 left.

Life in Washington took that. He paid the Mayflower up to $10 a day for a cubbyhole. He paid $2 for lunch at the Occidental when he could get" into the place; he shared a two-by-four office in the Social Security Building with three other men; he held his confidential talks in the corridors; and he commuted on weekends to New York or his home town in order to keep sane. By year's end most $1-a-year-men would have been glad of a thank-you letter from the President and a chance to go back to the factory. There, where they knew the ropes, businessmen could really win the war.

One of the problems that completely buffaloed these strangers to Washington was the U.S. Army & Navy. It even buffaloed Sears, Roebuck's ace purchasing agent, Donald Nelson.

Technician Nelson was able to save the Army a lot of time, money and unnecessary unpopularity. When the Quartermaster Corps wanted to order cot wire of a kind that U.S. mills no longer make, he persuaded the Corps to change specifications. He taught the Corps how to place its huge orders in ways that would least disrupt the economy.

But the U.S. Army & Navy welcomed technical assistance only up to a certain point. They had the greatest respect for the technical ability of the few corporations they knew. But the horde across the OPM bridge were mostly strangers to the Army & Navy; their ability to produce to exacting specifications was unproved. The average officer in charge of clearing orders understandably felt safer with his regular peacetime suppliers. If Westinghouse or G.E. pulled a brody, nobody could take away his stripes for that.

Result was a pile-up of orders on the leading suppliers, while the unknowns starved. By October, 95% of the Army & Navy's dollar obligations were in the hands of 3,022 corporations, and 82.6% of that was in the hands of 100.

OPM, meanwhile, instead of the bridge it was meant to be, tended to become a mere extension of the Army & Navy gate. It was not OPM's place to overrule the Army & Navy--or so the OPMites felt, and the President, for one, did not contradict them. Meanwhile OPM generated more & more office space and paper functions for itself, and took less & less initiative. By December it was a weird, inert, complicated, self-suffocating octopus, its gently waving tentacles lined with Army & Navy rubber stamps.

Army contracts let included $17,000 for a comfort station at the Arlington National Cemetery.

The New Industry. Despite the bungling and confusion, the U.S. gave birth to a new industry in 1941. The tooling-up phase, as Knudsen had described it in 1940, was over; as he promised it would, production began.

Biggest defense industry in terms of contracts is aircraft, with $6,000,000,000. Second biggest (nearly half its orders are aircraft orders) is the automotive industry, with $5,000,000,000. Of the four biggest single contractors, two are automakers: Bethlehem Steel, $1,300 millions; G.M., $1,200 millions; Curtiss-Wright, $980 millions; Henry Ford, $925 millions. Of U.S. industry's part in defense--and vice versa--there was no more instructive example than Detroit.

Detroit led all defense industries in diversification. General Motors alone had 60 different plants, in 13 States, working on defense. Their output was $56,600,000 in the first quarter, $75,200,000 in the second, $115,900,000 in the third, $200,000,000 in the fourth. Meanwhile at Ypsilanti, Ford began to build the biggest bomber plant in the world. Chrysler completed the world's biggest tank arsenal and began turning out the first U.S. medium tanks (five a day). Packard early got into production on Merlin engines for the British; Buick, Chevrolet, Studebaker, Ford all went to work on Pratt & Whitneys; Hudson & Pontiac made Oerlikon anti-aircraft guns; everybody made something.

Most hopeful thing about all this was not the 1941 output but the fact that Detroit's best engineering brains were at last interesting themselves in war machines. Charlie Sorensen, Ford's production chief (he got vitally interested when Germany invaded his native Denmark), used to visit Ford's European plants every year and knows the history of the German production miracle. Said he last month: "Their output won't be a patch on ours."

Conversion? But as Detroit typified U.S. industry's triumph, so it typified its problems and shortcomings in converting to Total War. For throughout 1941, Detroit's main business was still passenger cars. Of these it made and sold 3,750,000, more than in any year except 1937.

The first man to propose publicly that this emphasis be reversed was not a businessman, but a labor leader. Walter Reuther, youthful vice president of U.A.W., is the kind of labor leader Westbrook Pegler has yet to dope out. He was seriously concerned about two things: 1) Hitler, 2) the fact than when the U.S. ran short of materials, it would cost his autoworkers jobs. As early as December 1940 he proposed to beat Hitler and secure the jobs by converting auto plants to the mass production of planes.

The Reuther plan was replete with technical impossibilities, which OPM was quick to point out. It also contained a practical idea--the idea of conversion--about which OPM did nothing. Wrote Walter Lippmann eleven months later: "That piece of Philistinism cost us not merely an unconscionable delay in using the resources of the motor industry but it cost us the enthusiastic participation of labor in national defense."

Six days after Pearl Harbor, Reuther was back on the radio, with a new version of his plan. He bluntly aired his fight with Knudsen, who had given him the brush-off by claiming that he had no authority to take him through an auto plant to count the convertible machines. His new proposal was that when G.M., Ford and Chrysler got big orders for identical 30-ton tanks, the three should pool their facilities and subcontract to each other. This is a method of simplifying production which many industries (under the name of the Lyttleton plan) have been forced to in Britain. But the year closed before anyone knew whether Pearl Harbor was the U.S.'s Dunkirk or not.

A few businessmen grasped the dimensions of total war sooner than most labor leaders in 1941. But the quickest to do so were not business' social servants, the $1-a-year ambassadors to the New Deal. They were the Old Guard, whose hatred of Roosevelt kept them out of Washington altogether.

The Lone Wolf. The first to mobilize was Tom Girdler. His career of devil-may-care unpopularity had come to a climax in a 1940 Roosevelt campaign speech, when the President used his name as a synonym for enemy-of-the-people. Shortly thereafter Girdler put out feelers to Washington and decided to quit fighting C.I.O. That was now kid stuff; the big leaguers were fighting Hitler.

Even among steelmen, Girdler had always been a lone wolf, a throwback to the days of Carnegie and competition. He approached the defense program from a viewpoint opposite to that of the pack. There was a fight inside the industry over Washington's proposed steel expansion; there were long and hard negotiations over the terms on which the Government should finance the new mills, and there was pressure to prorate the expansion so that no competitor could expand out of line. But while the others horsetraded with Jesse Jones, and the steel supply got shorter, Lone Wolf Girdler had already launched a vast expansion of electric furnaces (which make special arms steels), much of it with Republic's own money. In 1940 Girdler passed Timken as No. i producer of electric steels; in 1941 he more than doubled this lead even though Timken expanded, too.

Girdler is also an enthusiast for the light metal revolution, by which aluminum, magnesium, etc. are overtaking steel in importance every year. Here, in 1941, he took an even more spectacular plunge. He made steel his part-time job, helped put together the biggest U.S. aircraft combine, and became its executive head.

In California breezy Major Reuben Fleet's huge Consolidated plant had for months been a headache to the Army & Navy. The situation did not warrant a strong-arm purge, such as the Army had used on Air Associates; but a production and engineering shakeup was called for. The Government was utterly unequipped to provide it. Sensing this, Girdler seized the opportunity of doing what was, after all, a businessman's job. He and associate Victor Emanuel engineered the stock deal whereby Aviation Corp. bought Fleet out, and Girdler--now Washington's fair-haired boy--took over the job of making Consolidated tick for the Army & Navy.

Neither in steel nor in aircraft was Girdler afraid of overexpansion. In both he was being competitive and individualistic. Consolidated planes will carry many a bomb before they carry passengers and freight; but on that day Girdler (or his heirs) will have a commanding position in the new transport industry.

The Symbol. The most spectacular comeback of 1941 was that of an even more aboriginal capitalist than Tom Girdler. Nobody had hated Roosevelt as had Henry Ford. All his life he had fought Wall Street bankers; when Washington became the nation's banker, his hatred of bankers and the New Deal merged. In addition, he hated war worse than he hated Hitler. Yet in 1941 Henry Ford joined Roosevelt's Army in a way that put OPM to shame.

Henry Ford fired Bill Knudsen as his general manager in 1921. At least it would be characteristic of Ford if he thought of Knudsen as a discharged employe. When Roosevelt picked Knudsen (rather than, for example, Edsel) as his top production man, it was received in Dearborn merely as new evidence that Roosevelt never did anything right.

Like the rest of the industry (in line with OPM's policy), Ford went on making cars in 1941. But Henry Ford does not like to do things by halves. He can see red lights and green lights, but is blind to yellow--which was the prevailing color at OPM. As soon as Ford saw that OPM could not guarantee enough materials to keep him in the automobile business, he lost interest in the passenger-car market and began looking around for a new customer. The All-America customer on the 1941 horizon was, of course, defense.

Ford started work on the Pratt & Whitney job before he even had an order. He also, without an order, turned an engineer loose on a new V12 liquid-cooled aircraft engine of his own. When a Navy man related his troubles about training cadet mechanics, Ford built a $1,000,000 training school and gave it to the Navy. When an Army man told him his troubles about getting a complex fire-control instrument, Ford put the problem into his shop. Every time a man in uniform had lunch with Henry, his lieutenants groaned: they knew they were in for more work.

To keep his production lines occupied, Ford tried to get an order for Army trucks. Fordmen felt they were being discriminated against on trucks by OPM, which had standardized the truck program to Chevrolet, Yellow Truck and Dodge specifications. But by this time, union-hating Henry Ford had a new salesman: Knudsen-hating Walter Reuther. (The U.A.W. maintains a four-man office in Washington.) Reuther knew that the Army, despite the standardized program, was still short of trucks, and that trucks were also the second biggest export item (after food) on Lend-Lease. He therefore proposed to Knudsen that the Army take all the standardized G.M.-Dodge output, and that all Lend-Lease trucks be standardized on Ford. From where the reluctant Knudsen sat, it looked as though the toughest old man he knew, and the toughest young man, had become partners.

When OPM's tank program ran short of transmissions, Ford avowed that his auto and truck plants contained the necessary gear-cutting equipment. He would do the job without having to burden the overworked toolmakers with orders for new machinery. He started negotiating for the transmission in September, will soon be making the whole tank.

Yet like the economy as a whole, the unparalleled resources of Ford were barely tapped in 1941. His biggest job, the Ypsilanti plant, was all new; a mere handful of presses were transfers from the mighty Rouge.

The case of Ford symbolized the problem of the nation in 1941. He was ready, and needed, to win Washington's war. He was also rich, perhaps the richest man in the U.S. If he had died in 1939, the inheritance tax would either have socialized his business or forced his estate to raise cash by selling stock to the public (which, in Ford's philosophy, was just a longer drawn out way of becoming insolvent). But by the end of 1941, Ford's very insolvency in terms of the inheritance tax posed the basic question in the minds of all U.S. businessmen: Will the U.S. go socialist?

The question answered itself. Henry Ford in effect said to Washington: "You can take me over for taxes, and in a perfectly legal way if you just wait long enough. But do you want to? Can you run this business more efficiently than I can?" Ford's defense record in 1941 made the answer self-evident. The most useful things he did were not those OPM did for him, but those he did by himself.

1941 was the year in which Business began to learn that it was incompetent to run Government, and in which Government began to learn that it was incompetent to run Business. Each job was too technical for the other to handle. Business' job was not social service but making money out of taking orders. Government's job was not handing out subsidies, but giving clear policy directives to the economy and seeing that all its resources --including the profit motive--are fully used. By the end of 1941 the U.S. had had a bellyful of Business posing as Government, and Government hiding behind Business. In 1942 the U.S. would need both Government and Business, and it would need each functioning on its own side of the fence.

*The British Government is spending $48,000,000 a day.

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