NEW WORLD STEPS FORTH

In 1942 U.S. business captured a new strategic position in America. For in 1942 business on its production record proved that it is the real Paul Bunyan of American life. Monetary theorists might attribute the vast upsurge of military output from an annual rate of $24 to over $70 billions just to increased Government "spending." But all the billions which the Treasury poured out would have been only fluttering banknotes had it not been for the fundamental strength of U.S. industry. Not dollars, but tanks, guns, planes and, above all, ships and the means of transportation were what counted. And these were not made of money. They were made of steel, tungsten, aluminum. They were fashioned by manual and managerial skills which, whether planted at Detroit or Fisherman's Lake, Liberia--whether in civvies or in uniform--were still the American productive genius at work.

Yet when the power of American production began to be felt at last, U.S. business no more than any other civilian class could rest on its achievement. Despite British victory in Egypt and the North African campaign, there was a long, tough war ahead. But also important, the very idea of victory raised up its own immemorial problems. Business had delivered the sinews of war; had it exorcised the ghosts of peacetime unemployment and depression? The men who asked this question were not the smart Wall Street traders who try to hedge the future by switching into peacetime equities. They were the industrialists, great & small, who at year's end were employing and were responsible for more men and women on their taut production lines than at any time before in history.

A.D. 1942 was the year whose big achievement raised a proportionately big challenge. Business did not assume that war's end would automatically bring, as in 1918, a return to old-style competitive capitalism. But it could assume that peace could yield a fairer chance of re-establishing a healthy U.S. economy, based primarily on private initiative, than had been offered in years. For somewhere along the road to war a new spirit had been born, new hopes aroused and an old assurance reasserted itself. And business had acquired too much responsibility over the present not to have to make a decisive choice about the future.

Annus Mirabilis

The gain in responsibility can be documented whether one turns to the factory floor, to Washington or whether one asks finally what class in America among civilians has in fact given more to and taken least from the war effort. Production-wise 1942 was a year of miracles, not the least of which was the change that came over the economy when the illusory defense era ended. In 1940 and 1941 Government tried to tell business how to run its plants without itself going to war. Japan forced the issue. And when Government itself accepted war and made its acceptance palpable by offering huge specific military contracts, industry did not need to be told how to convert. In large part it showed the way to the Government.

In 1942 the machine-tool industry, which up to 1940 had never produced more than a half billion dollars worth of products, turned out $1.3 billions. Alcoa, damned and doubly damned for the aluminum mess of 1941, smashed the ingot shortage and ended the year by producing about 88% of all aluminum in this country. Bethlehem Steel under the close-lipped Eugene G. Grace proved itself as finely tempered a war instrument as under the flamboyant Charlie Schwab. Detroit smothered some of its bitter labor-management rows under an uncataloguable output of tanks, Oerlikons, bombs, shells, time fuses and jeeps. The aircraft industry, drawing on Detroit for engines and parts (and in the case of Consolidated Aircraft on the unreconstructed Tom Girdler for management), turned out an incredible $7.5 billions worth of products--nearly four times the normal output of automobiles in this country.

But the crucial battle of the year centered not in production but in transportation (see map). As the Army predicted, it was above all the year of logistics. A few hours after Pearl Harbor the Santa Fe's Super Chief and the Union Pacific's City of Los Angeles were holed into sidings to let the first troop and munition trains thunder westward to the Coast. From then on the rails, which during 1940 and 1941 looked ripe for socialization to New Deal enthusiasts, turned in a record which made the socialization argument academic. Passenger-miles increased from 29 billion to 50 billion, or over 70%; freight ton-miles jumped from 475 to 630 billion, or 33%. Carloadings were practically unchanged from 1941, but loadings per car were way up, indicating a near Utopian efficiency of operation.

But the movement of troops and supplies to seaboard was only a beginning. Henry J. Kaiser emerged as the most publicized businessman of 1942, not only because of his immense energy and drive but because he applied them to the most critical of all problems--the supply of shipping. Kaiser had never built a ship up to the time that Hitler invaded Poland. He had built highways, helped build Boulder Dam, and had learned, in his own phrase, to handle "the heavy materials." Kaiser's ability to handle heavy materials allowed him to cut the time for delivering a Liberty ship from an initial 197 days to an average of under 40 days in his Portland yards, as against an average for the industry of about 56 days. It allowed him to build more cargo ships in his Portland yards in one year than Hog Island built in four. It allowed him to launch one vessel in four days, 15 hours, and another which, 51 days after keel-laying, turned up with cargo in Australia. From the Kaiser empire, sprawling from Seattle to Portland to Los Angeles, came one out of every three Libertys built. And though the U.S. built only a fraction of the ships it needs, it achieved its 1942 production goal of 8,000,000 tons.

Yet shipping alone, even when it buttressed England's immense efforts, could scarcely guarantee victory. It took 850 ships, most of them British, to land the British First Army and the U.S. expeditionary force of more than 100,000 men in North Africa. Yet this--as compared with the conquest of Germany--can be looked on as a colonial campaign. The direct transportation of aircraft to the fighting fronts has been America's part answer to the staggering logistic problem of global war. And, here, U.S. airlines (which in 1942 rang up 1.4 billion passenger-miles of flying in this country) pioneered the way for the U.S. Army. By year's end there were three huge transatlantic skyways, linking the New World with the Old; the northern route, sweeping from New York to Newfoundland, to Greenland, to Iceland and to England; the mid-Atlantic route over which Pan Am maintained its regular clipper service between Miami and Portugal; and the South Atlantic route connecting Natal, Brazil, with the West Coast of Africa and the West Coast with Khartoum and Cairo. Over this route during the summer of 1942 went critical planes and supplies to the British Eighth Army. Over it too went transports which flew on to India to bolster China National Aviation Corp. (part owned by China, and part by Pan Am) which connects Calcutta and Chungking. Crossing the Himalayas just south of the Tibetan plateau, working without beacons, without beams, usually with no more than a radio direction finder, C.N.A.C. pilots have done some of the most spectacular and useful transport flying of the war.

Late in 1942 the Army set up a duplicating transport service in China, and also took over Pan Am's South Atlantic and trans-Africa routes. Pan Am bitterly resisted. But however important the controversy to Juan Trippe and to Lieut. General Arnold, the nation was more apt to applaud the achievement than to take sides. Private industry had helped link East and West together during the interregnum after Pearl Harbor; it had pioneered the way for the future; and it is supplying some of the key operators (Colonel C. R. Smith, former president of American Airlines, and onetime Traffic Manager Colonel R. W. Ireland of United Air Lines) to the Army to carry on the job of keeping the skyways open.

Somervell Demands the Best

The absorption into uniform of key private personnel was not confined in 1942 to the Air Command. The migration of key industrialists into the armed forces was almost as pronounced as the migration to Washington of $1-per-year men during 1940 and 1941. Yet outside of air transport, the threatened "takeover" of the economy by the armed services did not materialize. Instead on the Washington scene inefficient, second-string businessmen were ruthlessly weeded out of key jobs, and first-string, tougher administrators were put in their place. Slowly, if painfully, Washington returned towards the conception of wartime control evolved by Baruch in World War I. The heart of that conception is that businessmen of the tough breed have the makings of public administrators in economic affairs, and that private industry can be trusted to carry out their orders.

The man who dramatized this issue was not a businessman, but a three-star general, Brehon B. Somervell, as tough a freebooter as Kaiser or Trippe or Tom Girdler. A veteran of World War I, Somervell had mixed in civilian life through the '30s, when he reorganized New York's WPA. In March of 1942 General George C. Marshall appointed him to head the Army's newly formed. SOS (Services of Supply), with full authority over all Army procurement, and almost immediately the Army was charged with trying to take over the whole civilian economy. To that charge Somervell simply pointed to the plan which the Army as early as 1939 had demanded. This called for a real War Resources Board along the Baruch model, of whose management Hindenburg had ruefully said: "They understood war." Instead the Army had been given the old National Defense Advisory Council, the twin-headed OPM wherein Knudsen and Hillman had equal authority, SPAB and finally WPB headed by Donald M. Nelson.

The WPB looked good, on paper, but by mid-year Somervell had shown that it was soft, inefficient and disorganized. The softest spot was the allocation of raw materials, which in the last analysis is the key to economic control. The U.S. was suffering from something as bad as fiscal inflation--the inflation of priority "paper" dished out by the Army & Navy Munitions Board, by WPB, and by the Maritime Commission. Worse still, these agencies were at odds over how much raw materials each should get. When Jerry Land walked out of a meeting of WPB's Requirements Committee with the curt: "Gentlemen, you have my requirements for steel plate; it's up to you to split up the rest," it was good dramatics, but the sign of bad organization.

Somervell's repeated threat that if the raw materials mess was not cleaned up the Army would take over finally had its effect. Into WPB's aircraft division came Charles E. Wilson of General Electric and Ferdinand Eberstadt, the outstanding lone wolf investment banker of the '30s. Eberstadt was given carte blanche to draw up a new raw-materials plan to supplant WPB's first effort, PURP (to Army men Burp). The basic advantages of Eberstadt's Controlled Materials Plan (TIME, Nov. 9) are: 1) it forces the Army, Navy and other contenders for raw materials to make up their minds in advance about what they need, and sees to it that no more raw materials are allotted than exist; 2) it places on prime contractors responsibility for scheduling raw-material flows and taking care of their subcontractors.

In effect CMP centralizes important decisions, yet decentralizes their execution, putting enormous responsibility on the individual businessman. The system of allowing everyone to order all that he wanted of everything had resulted in a prospective 1943 schedule which called for some $15 billions of new plant (which brought forth the bitter comment of an Army officer that it was about time that the U.S. decided whether it was fighting World War II or preparing to fight World War III). By year's end Washington had at last learned that in the matter of raw materials even the richest nation in the world must choose between harsh alternatives.

Not Enough Men?

The same could scarcely be said about the shortage of men. Manpower problems, which received more wordage in the press than any other domestic issue, remained throughout the year a confused hubbub. Organizationally, progress was made when Paul V. McNutt was appointed supreme manpower czar by the President, taking over not only industrial mobilization but Brigadier General Lewis B. Hershey's Selective Service as well. Mr. McNutt promised that sooner or later the U.S. would get a civilian selective law similar to Britain's. But whether McNutt, the politician, would prove as shrewd an organizer of men as Eberstadt, the businessman, was proving of materials, remained to be seen.

Moreover, the whole manpower question rested on certain basic issues still to be decided. One question was: how big an Army does the U.S. want? By the year's end the total of men in the armed services was 6,300,000; estimates for 1943 ran as high as nine million and for 1944 twelve million. But while the Army and Navy talked these huge figures all through 1942, they offered little evidence that the U.S. could in fact equip such a huge number of troops, or get them to the fighting fronts, without abandoning the policy of Lend-Lease to Britain and tp Russia.

But even if the Army scales down its estimates, there would be two more hurdles. The U.S. is still working under a 40-hour-week law designed not to economize but to expand employment. In the war industries, where Government paid the overtime, the work week ran up to 55 hours. But in the consumer industries the average work week was below 40 hours, indicating a vast untapped work potential in the consumer, and especially the service fields. So embedded was the 40-hour-week law in the whole wage structure that its repeal might create more problems than it would solve. But the fact remained that the U.S. while talking "total war" was still fighting on an average overall work week of only 42 hours, as against 50 hours for a heroic Britain.

Or, Too Much Money?

And the second great factor in the manpower problem was that throughout the year the civilian economy boomed. Not only did the U.S. produce some $81 billions of consumer goods and services, far more than in 1929, but consumption of these goods ran far ahead of actual output due to a huge drain on inventories. When the President, touring the Washington shopping district last fall, exhorted shopkeepers to hide their "luxuries" in the attic, he was simply responding to the statistical fact that in October and November retail sales were practically at an alltime peak. And, at Christmas, buying was bigger and more lavish than at any time in the country's history.

The causes of this civilian boom which used manpower and resources were two. One was the Government's policy of freezing prices, which in most retail lines effectively prevented the action of price from curbing demand. The other was the failure to bring civilian buying power into line with output of goods. Against goods and services of $81 billions, income payments to individuals after personal taxes were about $108 billions in 1942. In 1943 income payments after taxes are likely to be $118 billions to purchase some $75 billions of goods and services--the goal towards which Washington hopes to "cut back" the civilian economy.

The cutback is absolutely necessary if the U.S. is to produce anything like the $87 billions worth of military goods which is the 1943 military goal. But the cutback will also be rendered difficult given the huge civilian demand. Joseph L. Weiner in the Office of Civilian Supply may labor prodigiously to get a balance of civilian output through drastic allocation of raw materials and through a "concentration" of civilian industries into the hands of a few firms. But how men and women are to be jarred out of the service industries with civilians able to pay good cash for services is by no means so clear.

The one central control needed to drive manpower out of services into war production, to bring the civilian economy back into control is, of course, fiscal policy. Yet fiscal policy is precisely the Achilles heel of the whole war effort. In fiscal 1943 the U.S. Treasury will probably pour out $80 billions in expenditures, take in only $21 billions. In the next fiscal year it will be as bad. Yet even these figures are deceptive. For the taxes which the Congress imposed upon the country have little to do with the curbing of civilian demand. In large part they consisted of big corporation levies, and soaked the well-to-do, thrifty middle classes who are the relatively high savers, the relatively low spenders of the community. During 1942 the income-tax base was broadened, but the Treasury turned down an overall sales tax and accepted the 5% Victory tax only under pressure. In 1943 there will certainly be more taxes, probably a huge forced-savings program. Yet already the Treasury is worried whether it can collect the taxes now on the books due to delinquencies.

Winner, Take Prices

The failure of the Treasury to prepare far enough ahead was important in multiplying the difficulties of maximum conversion to war; it also will, of course, lead to more inflation-than the Administration has thus far conceded. Nor is it difficult to predict who will get the rap for inflation as it develops. It will be hapless Henry Morgenthau Jr., sitting at the central Treasury controls. Yet all the ills of too much money cannot be attributed to Henry Morgenthau. No nation, has ever fought a major war without substantial inflation; and few nations have ever entered a war with the cards more stacked against the Treasury than did the U.S.

Henry Morgenthau Jr. stepped into the Treasury in 1934 fresh from organizing the Farm Credit Administration and on the flush tide of farm-labor revolt against the evils of Wall Street. The pattern of war finance and the civilian economy show the revolt brought to its logical conclusion. The farm bloc ganged up with the labor bloc to smash Henry Morgenthau's dreamboat of a withholding tax. The farm bloc, ganging up with the Silver States, kept the absurd silver legislation on the books. And the farm bloc made hash of inflation control. Though wholesale prices during the year rose only by about 10%, farm prices skyrocketed 22%.

The rise in food prices and the cost of living threw the doors wide open for labor's demands--which were two. First, as collateral against its no-strike pledge, labor demanded and got union-maintenance agreements which to many an industrialist looked like the closed shop in sheep's clothing. Secondly, labor demanded that wages be raised as fast as the cost of living advanced. The result of this demand was the War Labor Board's famous cost-of-living formula which allowed wage increases in all cases where rates had not been adjusted upward more than 15% since January 1941. The wage increases were of course tantamount to pumping new money directly into the spending stream.

The farm bloc and the labor bloc were really attempting to fight a war without conceding that the people, including themselves, have to pay in real terms. In 1942 the sleight of hand was successful because of the huge outpouring of goods and services and the rapid drawing down of inventories. In 1943 something will have to give. Part of the give may come in the form of increased savings--voluntary or compulsory. But much of the give will also come in open or black market price increases.

The Government will no doubt strictly control the price of various essentials and ration them. But the notion of rationing all consumer goods, stoutly espoused by well-meaning liberals, is simply not in the cards. Administratively it would be impossible. Psychologically it would, scarcely be wise. The worker of World War II, like the worker of World War I, is earning big money. But the worker of World War I was free if he chose to bid up silk shirts to $12 or $15. As goods get really scarce, it is a safe bet that the U.S. worker will demand the same privilege. Faced by the real implications of total controls along the German model, or a controlled inflation, the U.S. worker will take the latter, though all the time blaming the price increases on the vested interests.

Yet of all classes which have not contributed to inflation, and which in fact are beginning to adjust to a siege economy, U.S. business is the outstanding example. Though salaries advanced during 1942, business profits after taxes actually declined, as compared with 1941. And when the year closed, net profits were back to their 1939 level as compared with a 63% rise in hourly earnings and a 117% rise in farm cash income.

Loser, Take Power

What these figures spell out in effect is an actual redistribution of income from owners to employes. To the professional reactionary this may seem high crime and misdemeanor, entailing the final liquidation of the business classes. On broader grounds it can be argued that the redistribution in income which went on during 1941 and 1942 is one of the best investments which the conservative classes of the U.S. ever made.

Though the time has come when in fact both labor and the farmer will have to begin to pay more for the war, a case can be made for having postponed part of the agony. Farm-labor support was the sine qua non of Lend-Lease and pre-Pearl Harbor foreign policy. Farm-labor support was essential in allowing the Administration to get through the first real year of fighting. What the businessman thought and what he suffered were politically inconsequential. His reward was, and will be for the duration, not income but a key place in the national effort.

And, in the end, it may be that business has made a better deal with the gods than is often supposed. The adventurers of World War I were the profiteers who found the going tough in the post-war reconstruction and when the '20s collapsed. The adventurers of World War II have assuredly been the farm and the labor leaders, whose inheritance yet remains to be decided. But if it is true that he who goes about his job (whether of necessity or of free volition) and gets it done effectively without kicking over the traces is in a sounder position than he who kicks the harness to bits, then the prospects of business in the post-war world would seem to be anything but gloomy.

As 1942 closed, the problem was less whether business would survive and more what it would do with the increased but still largely unrecognized prestige it was rapidly acquiring. And the heart of that problem lay precisely in what kind of government business, if given the opportunity, would like to see. Granted that it was fed up with the New Deal, was it yet astute enough to accept New Deal gains? With over 70% of all prime war contracts in the hands of less than 100 corporations, the war was creating a huge potential problem in monopoly. Would business concede that government should attempt to restore competition when peace came?

The war, as well as Mr. Morgenthau, was on its way toward creating a national debt of over $200 billions. Would business recognize that the Government budget and Government debt policy can have a massive effect on employment or disemployment? The war through Lend-Lease had cut across old tariff and trade patterns, and had linked the economic health of England, and, through England, a dozen other nations, to that of the U.S. Would business recognize a world of internationalism--or would it retreat again to isolationism?

Of all questions, that probably was the crucial one. A.D. 1942 was the year when, in Churchill's phrase, "the New World with all its power and might [steps] forth to the rescue and liberation of the Old." Part of the might assuredly belonged to U.S. business. Yet U.S. business has not gone to war, any more than U.S. labor, or U.S. agriculture, just to save the Old World. The business of business is still with the New and with the future. The question was what kind of future did business believe in?

On this question the ranks of business began dividing. One school looked back--back to the demobilization of 1918, back to the '20s, back to the labor-government-industry imbroglio of the '30s. The other school, the school typified by Prince of General Electric, by Hoffman of Studebaker, and by Kaiser, looked forward to the creation of post-war jobs and employment ; to a better cooperation with government; to an implementing of Franklin Roosevelt's Atlantic Charter and a system of world security. The issues would not be decided until 1944. But 1943 was not too soon to begin asking whether business would this time help deliver something better than Warren Gamaliel Harding's return to "Normalcy."

This file is automatically generated by a robot program, so reader's discretion is required.