First Disillusion

For the sixth successive week stock prices in New York fell--to 22% below the highs of last May. Businessmen could no longer ignore the warning of this barometer. There was stormy weather ahead. How severe they thought it would be depended a good deal on their distance from New York.

A Chicago retailer exclaimed: "New York gets discouraged by a seven-point drop in the stockmarket but by the time the flash gets here, we're only two points discouraged. Five points get lost in the Illinois corn."

By the time the stockmarket slump reached Southern California, it had become for many a storybook affair concocted of wishful thinking. "It's manipulation and you know it is," snapped an angry Los Angeles businessman.

Distance was not the only factor which insulated many businessmen against belief in a bear market and the business slump it presaged. The volume of retail trade was also good insulation. Throughout the U.S., retail trade was 30 to 35% above a year ago; retail profits were even higher. Last week Sewell Avery's Montgomery Ward reported $20,558,000 net profit for the six months ending July--nearly three times as much as a year ago. There was other insulation: Bror Dahlberg's Celotex Corp. (wall board, asphalt and gypsum products) piled up profits of $2,436,330 for the nine months ending July 31, 400% over 1945.

Cold Reality. But these were the exceptions. For the first half of 1946, profits in general, as gauged by 301 corporations chosen by the New York Times, were 15% under those of last year. Last May's stock prices were based on rosy hopes for big 1946 profits; last week's stock prices were based on the realization that many 1946 profits would be quite modest. The market drop was far sharper than after World War I (see chart] because the shock of disillusionment in the "postwar boom" was greater. Biggest shocker: the Pennsylvania Railroad would lose money this year for the first time in its loo-year history, unless it got a 25% freight increase (estimated loss: $14,616,000 after carryback tax credit).

In asking ICC for the boost, which all the railroads want, New York Central's Gustav Metzman also painted a dark picture. Said Metzman: even with the increase, the New York -Central will lose $18,652,000 next year, will have no carryback credits to soften the blow. Reason: the costs of wages and materials of rail roads, and all industry, have soared since war's end far beyond estimates.

More for Less. The "break-even" point of many a mass producer--i.e., the point at which rising volume cuts unit costs enough to show a profit, has also soared upwards. Example: the Ford Motor Co. which, before the war, was assumed, along with other automakers, to break even at 35% of capacity, must now operate at 75% of capacity to break even. This year it has -made 280,000 cars so far--and lost $38,000.000 net. Last week Young Henry Ford got a 6% boost in his car ceilings. G.M. is also seeking a boost. But somewhere consumer resistance would be met.

The automobile industry, whose prices were already 22% above 1942, did not know whether to cheer or tremble. Higher prices might easily reduce its sales to a point at which it could not make money with its increased break-even points. Shortages could turn into surpluses with surprising speed in the face of a market contracted by sky-high prices.

Even the booming retail trade received a warning from R. H. Macy's economist, Q. Forrest Walker, that it must trim its inventories against the day when public buying slackens and prices drop.

Dream of Riches. What, if anything, had been wrong with last spring's calculations? Although Americans had poured out untold wealth to fight the war, had they not emerged from it with their hands (and their customers' and employers' hands) full of engraved promises to pay? What more was needed to assure prosperity? Nothing, except for Americans to produce enough goods to pay off their promises to themselves. They were producing at a greater rate than ever before in peacetime--yet failing to meet their own demand.

In part the difficulty now was psychological. People did not feel that they had to work so hard as before to earn a living. Labor productivity was down in almost all plants, due in part to strikes and material shortages. The 58,000,000 people working in the U.S. were not turning out any more goods, dollarwise, than 54,000,000 had during the war years.

But in part the difficulty went beyond labor inefficiency to the sheer size of the goal that the U.S. had set itself. This year the nation had hoped to produce 6,000,000 automobiles, start 1,200,000 houses and other goods in like proportion. This overall program was so great that neither materials nor labor were sufficient to meet it in a single year. Materials were spread so thin that shortages held back all production, until neither the normal efficiency nor normal profits of mass production could be achieved.

Dream of High Wages. If businessmen were being disillusioned, so were labor leaders, who had also dreamed of big earnings from the big demand for labor. This month A.F.L. told members that they would lose as much as they gained by further wage increases. C.I.O. leaders admitted that the idea of wage increases without price increases was a pipe dream.

Nor could OPA hold down prices while wage stabilization went out the window. Zenith Radio's Eugene F. McDonald Jr. nutshelled this fallacy. Said he: "This raising.of prices and wages is like a ball game. First the people in the front row stand up so they can.see better. Then the second row stands up, then the next row and so on. Soon everybody is standing and nobody can see better."

Top labor leaders also had finally realized that price controls had failed, that wage stabilization was dead. Said one last week: "They're all dead. I hate to take a defeatist attitude but there is no other course open. All governmental control over fundamental economic forces must be dropped."

Whether or not the controls were lifted, the time had about arrived when the dislocations in wages and prices were so great that the fundamental economic forces had started to reassert themselves. Some prices which had soared too high on the illusion that materials were scarcer than they really are were bound to fall. Some prices which had been held artificially low were bound to rise. And businessmen who had found that high production was not bringing high profits were thinking about retrenching. Retrenchment brings unemployment--and a slump.

The readjustment might be as quick and painful as the stockmarket drop. That had been one signal of the weather ahead. Last week there were others.

Vanishing Boom. All parts of the country, even those which have yet to lose last springtime's optimism, reported that plans for business expansion were being deferred or abandoned. G.M., which had planned to spend $600,000,000 in the first postwar year, had cut this amount by two-thirds. In some cases where companies had pulled in their necks, materials shortages were responsible. Other causes: failure to get Government approval; the rise of costs; the market slump which made financing too difficult. (Last week an offering of 2,040,000 shares of Cincinnati Gas & Electric Co. soured with 950,000 shares left unsold on the hands of the underwriters. )

Whether the slump would hit in the next six months, or not for another year, was anybody's guess. But businessmen who took the long view were still sure of a sustained boom when the slump was over. Real postwar prosperity could not arrive until Americans had been jolted out of their futile scramble for goods that did not exist, and get down to the sober job of making the goods they want. Said Studebaker's Paul Hoffman: "The stock-market decline was bound to come, perhaps should have hit us sooner than it did. But we're not alarmed. It's a normal leveling off, the first sign of a return to prewar."

The history of postwar booms and depressions has been that both are as brief as men's war-born illusions.

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