World Gamble
In 1947, the U.S. production machine let 'er rip. The unfettered, unguarded U.S. economy turned out an abundance of things such as the country had never known.
The gross national product (total goods and services produced) was $230 billion, 13% higher than the record peacetime peak of 1946. Like the New Look, some of the astronomical figures of dollar volume were not so impressive as they seemed. The rise in the gross national product was due in part to price rises. But in items turned out, 1947's industrial production was 23% above 1946's surprising total.
Off the smoothly rolling production lines came 17,000,000 radios, 3,000,000 vacuum cleaners and 3,500,000 washing machines, about double prewar production. The automobile industry crowded its throttle; 4,794,000 cars and trucks rolled off the lines. It was a gain of 55% over 1946, and 34% above 1939's production. The U.S. production machine also had time to turn out a flood of knick-knacks--from bubble gum and atomic rings to a doormat that automatically scrubs shoes, rings the doorbell and turns on the porch light. The U.S. alone turned out well over 50% of the known industrial production of the world compared with 30% before the war.
The Players. It was done with some of the feverish zeal of the war, and in spite of some of the same shortages of materials. Steel was flown by plane to factories to keep production lines rolling; "expediters" hunted down parts and materials tucked away in obscure corners, or prowled in grey markets for steel and lumber; newspapers headlined the Scoreboard of production like bulletins from the front.
In the great peacetime battle of production, Henry Kaiser got back some of the luster of his wartime fame. His Willow Run plant turned out 145,000 cars and he was able to brag in full-page ads that he was now "the world's fourth largest producer of automobiles." It was true in the sense that only General Motors, Ford and Chrysler topped Kaiser-Frazer. Actually, production of seven of the Big Three's individual divisions topped K-F's figure.
After 20 years of test and experiment, television finally moved out of the laboratory and into 170,000 houses and bars. From comparatively nothing, television grew into a $100,000,000 industry giving Philco's President John Ballantyne reason to predict: "1948 should see 500,000 television sets [made] with a value of over $200,000,000."
By any standard, industry's job in 1947 in the face of shortages of men & materials was a monumental achievement.
The Bet. Yet no one felt that the nation had garnered all the fruits of this production victory. In throwing off all controls, the U.S. had bet that industry could pour out enough goods to lick the wartime inflation. However, the cost of living went up from 153.3 to 166 during 1947 (1941 figure: 105.2). Inflation, if judged only by $1 a pound butter, 85-c- a dozen eggs and 89-c- a pound bacon, was worse at year's end than at the start.
But this was not the only yardstick. The demand for food was still on the rise, but the demand for many another item was already going down. Example: the dollar value of all retail sales was $109 billion, up 13% over 1946. But the unit volume, i.e., the number of items sold, went down an estimated 10% during 1947. Part of the drop was due to the increase in production, which tended to satisfy demand, and part to the rise in prices. In a free economy, prices can also be a cure for inflation--if a harsh one. As London's Economist put it: "Rising prices and inflation are . . . associated together, like scarlet fever and rising temperatures. . . . But so far from being the same thing, one is nature's cure for the other. Inflation is an excess of demand over supply and one way in which the two can be brought into balance is by such a rise in prices that the available supply absorbs the demand. . . . Nobody in his senses would advocate an indefinite rise in prices as an end in itself. But it does bring the inflation to an end, whereas holding all prices down merely guarantees that it... shall go on forever."
President Truman, in a burst of feeling for a free economy, had denounced controls as marks of a police state, but near year's end he pleaded for authority to clap them on again. He cried: "It is far too late in the fight against inflation to place our main reliance" on businessmen. Had U.S. industry failed?
Spin of the Wheel. The trouble that rising prices caused in 1947 was due in part to the fact that both industry and Government had gone into 1947 with a misconception of the task that lay before them. Both had correctly measured the degree of inflation in the U.S. But they had woefully neglected the inflation in the rest of the world--which was producing far less than its share of goods. What was worse, Government and industry had mistakenly thought that somehow they would isolate U.S. inflation from the world's and quickly cure it even though the rest of the world remained sick.
In January 1947, Federal Reserve Board Chairman Marriner S. Eccles said: "Inflation has largely run its course. Shortages in many important lines have been met and in many other lines are rapidly being overcome."
To many a U.S. businessman, at that time, the buyers' market looked no farther away than the next customer (one auto dealer even predicted that by autumn customers would be able to "walk in and buy 'em off the floor"). Economists, with the same instinct that causes flying pigeons to wheel in unison, largely and solemnly agreed on the exact date for the interment of inflation. The recession, they said, would come in the spring. As Barron's financial weekly put it: "The 1947 depression, recession, or shakeout, whichever one calls it, has advanced from a fear to a fad. Not to believe in its imminence stamps one an ignoramus."
In April came the first wind of what seemed to be the recession storm--the blow which would knock the props from under prices. U.S. production slid from the postwar high of 190 to 187. Industrial employment went down. Commodity prices, which had reached a postwar peak of 149.5, began to slide. Businessmen quickly felt the wind on their cheeks. Lest they get caught with their inventories up and sales down, they hurriedly cut their buying by $607,000,000 and total inventories dropped.
The Red? To this extent, the cries of "recession" had served a useful purpose. Forewarned businessmen were ready for any blow--and there was no panicky dumping of goods. Soft goods sales slumped, and many a mill in New England's textile and shoe centers shut down. The big four (Firestone, Goodyear, Goodrich and U.S. Rubber) cut tire prices 10%. Cut also were prices of soap, radio sets, furniture, paints.
Businessmen who had found no drop in demand for their products painfully searched their consciences: Were their prices too high? Were they killing the market? Many prices went on going up--notably food prices. The seers of Government ominously advised: "Wait and see what's going to happen." Indignant housewives picketed stores. The quiet town of Newburyport, Mass, and its price-cutting plan became a month-long wonder. Nevertheless the slump in dollar volume of retail sales became a two-month worry. New York University Economist Marcus Nadler said: "The long expected and long advertised recession is here."
The U.S., in effect, seemed well on its way to curing its inflation by the classic--and painful--method of going into a slump: lower prices, but also fewer jobs and a harder time for business, especially small business.
Washed Out. The big reason the recession never came lay outside the U.S.; the rest of the world could not wait to let the U.S. take the drastic cure. In 1947, the world exported to the U.S. approximately $9.3 billion of its inflation. It did this by purchases of U.S. goods for which it did not pay in kind. For the $15 billion in U.S. goods--almost one-eleventh of the U.S. total sales--the world exported to the U.S. only $5.7 billion. Thus, besides its own enormous domestic demand, the U.S. added $9.3 billion from foreign nations to its "inflationary gap." Industry's power had come close to raising production to meet demand. It was thrown out of kilter again mainly by the foreign trade gap.
If left to themselves--as they could not have been with starvation and Communism among them--the nations of the world would have cured themselves of their importing spree by running out of cash. They came close to it; exports began to drop in midyear (see chart).
Change in Rules. Eyeing this weakening prop under the boom, many a U.S. businessman was convinced that the break in prices had finally come. But when Secretary of State George Catlett Marshall stepped out on the platform at Harvard last June, he did more than suggest the Marshall Plan: he caused a profound change in business thinking.
The Plan meant that the export boom was not going to collapse; foreign nations were going to get the cash to keep the boom going. The U.S. hoped that with the European Recovery Program other nations would get on their feet again, and by their own production close the gap in foreign trade. Result: those in the U.S. who had patiently held off their buying, waiting for the drop in exports to ease the pressure on prices, had to jump back into the market.
At summer's end, businessmen began to build up their inventories. The drop in prices, such as it was, had not lasted long or gone far. Domestic demand began to creep up again. Most significant example: the housing boom, which had been almost busted by high construction prices in the spring, turned into a boom again. By year's end, the U.S. had started an estimated 860,000 housing units (up 28% above 1946) and was building in the last quarter at the rate of well over 870,000 starts a year.
Big Money. So the U.S. paid for its first try at bailing out the world with higher prices all around. Everyone, as expected, put the blame on everyone else. Foreign nations blamed the U.S. for the high prices, which had sucked away their cash, without conceding that their buying had helped boost the prices. Corporations took a big cut out of the income pie; net corporate profits after taxes (including the "paper" profits on inventories) of $17.4 billion were up 39% over net profits in 1946. (But corporations still had a smaller share of the total income than in 1941 or 1929.)
This prosperity did not cover everything. The private plane industry flew through an overcast of bankruptcies; most prefabricated housing still remained in the box. The airlines dropped an estimated $13 million in the most disastrous year they ever had, and the big plane companics sat, hat in hand, in Washington, pleading with the Government to save their industry.
Big business, generally, did not charge all that the traffic would bear--e.g., a new Chevrolet which a dealer sold for $1,500 was actually worth $2,300 on a "used" car lot a block away. But many an industry did not charge as little as its prospect of profits would have allowed. Nor did some industries, notably textiles and shoes, reduce prices when sales slipped. Instead, they preferred to close some plants or curtail production to keep prices up.
Most businessmen showed a greater sense of their responsibility. In all, they spent $15.2 billion to expand their production by new plants and equipment. Still this did not satisfy some critics--not all left-wingers--who cried that inflation was mainly caused by "artificial shortages" rather than by the enormous demand.
The intramural argument of the year was over steel: Was the 91 million tons of capacity enough to meet the needs of full employment? Steelmakers, haunted by fear of a recession and idle plants, stoutly said that it was. But the grey market in steel, which sold at double and triple the established price, said that it wasn't. So did many a manufacturer who bought a steel plant and went into the business to make sure he got what he needed. Toward year's end, the steelmakers hedged their arguments and started to spend some $2 billion for expansion. (They also started to haul back desperately needed scrap from Germany and the jungles of Pacific islands.) But few thought the expansion enough to end the great steel shortage which had cut down production all along the line.
Labor's Cut. Union labor pointed at the fat corporate profits and demanded a bigger cut too. (Average weekly wages in all manufacturing industries rose 9.87% to $51.75.) There was also a significant shift in the size of the cut that the different segments of labor got. John L. Lewis' mine workers, once $24-a-week workers, were the aristocrats of labor; their wages averaged more than $70 a week. The auto workers, once about the best paid, were passed in the wage parade by a handful of others.
But remembering the great strike of 1946, unions approached management in the latter half of 1947 with a sweet reasonableness that was further sugared by the Taft-Hartley Act. Management was reasonable also; it granted wage boosts, then raised prices to absorb them.
Before & after the wage increases, management argued that the U.S. was still getting no full dividend from full employment (60,000,000 jobs). Shortages tended to choke the full flow of production, and many a worker was so little worthy of his hire--and so little worried about losing his job--that productivity per worker was little if any better than in 1946. In short, 1947 could have been still better if everybody had worked harder and more efficiently.
Farmers took in some $30 billion cash on their bumper crops, 22% more than in 1946. Financially the farmers, after four prosperous years of war and two of peace, were better off at 1947's end than they had ever been before. Yet they were less than satisfied. One midwesterner (with possible exaggeration) wrathfully wrote his Congressman: "For one fat hog we can get a carpenter for two days. For one 14-month-old steer, at 25-c- a pound, we can get ten pieces of 1 x 2 inch board, 10 feet long, second quality." Though farmers complained of a squeeze by labor and industry, their prices had risen more than either of the others.
Daisy Chain. By mid-1947, the daisy chain of wage and price boosts had yanked up break-even points of many a corporation to the danger point. Warned the National Industrial Conference Board: "Many executives express great concern over the much higher break-even points today than in prewar years. Instances are reported where a moderate sales decline would wipe out all profits and result in deficit operations."
There were only a few examples of the kind of industrial statesmanship that was needed to break the chain. Gambling that business would continue good, young Henry Ford II and International Harvester's Fowler McCormick both tried to help by reducing their prices. Both were forced to put their prices up again. It was not till year's end that another potent hand was laid on the chain. General Electric's Charles Edward Wilson announced that G.E. was cutting prices from 3 to 10% on about half its consumer products, an estimated saving of $50,000,000 a year for consumers. Said Wilson: "It's time industry and labor faced up to this danger. This building up of prices continually cannot take us anywhere except to disaster." G.E.'s price cut would not let much wind out of the inflation. But Charlie Wilson, by showing the way it could be done, had made an open and trenchant appeal to business for a price cut, to labor to stand on its wage-side. Unless G.E.'s example were followed by other key industries (e.g., steel, motors, oil), Charlie Wilson's gesture would remain a gesture.
Fever Chart. The Government, which berated industry for raising prices, did the same thing itself. In the commodity markets, it was Government buying, more than anything else, that boosted grain prices. They helped pull up the wholesale commodity price index (1926 average: 100) from 141.5 to 162 in a year. No one disputed that the Government had to buy grain for relief abroad. But did it have to buy it the way it did? In five months, it gobbled up some 400 million bushels of grain, despite the short corn crop which put pressure under all grain prices. In one two-week period, the Government bought more grain than had been exported in an entire year.
Speculators, cried President Truman angrily, were to blame for much of the increase in food costs. But it was the Government's buying-in-a-bunch rather than spreading it out that helped make speculation a sure thing. So the U.S. had its first $2.95 a bushel cash corn in its history; its first $3 cash wheat in 27 years. When the Government temporarily stepped out of the market toward year's end, with most of the grain it needed by mid-1948 already bought, the price of May wheat futures dropped 10-c-.
No Fever. In all the optimistic bustle, there was only one area of quiet deflation: the stockmarket. The great wartime bull market had died in 1946, scared to death by fear of the recession that is not yet here. Yet the stockmarket went right on acting as if recession were just around the corner. Wall Streeters wryly quipped that New York Stock Exchange President Emil Schram "was the one man in the country to reduce prices."
As the market seesawed up & down, making false prophets out of the experts who tried to call the trend, it paid no attention to the rise in commodities, production or fat earnings (see charts). The Dow-Jones industrial averages hit a low of 161.38, a high of 187.66. They ended the year at 181.16, just about where they started. Prices of many a blue chip were as low as seven times earnings (at the height of the wartime bull market, when the averages were 213.36, some had been as high as 23 times earnings). So few people wanted to buy that trading on the New York Stock Exchange was at its lowest in five years--and members raised commissions to keep brokerage houses out of the red.
Some of the stockmarket money had gone off into the commodity market, where profits were swift and sure--and speculation cheaper. Margins had been sometimes as low as 13% compared to the stockmarket's 75%. But the stockmarket, where traditionally the nation's "smart money" is invested, had its own warning message to the U.S. It had little faith in the boom, which it felt was jerrybuilt on too high prices, too low productivity (in spite of its fabulous dimensions), and on an export boom that could last no longer than the U.S. financed it.
Crystal Gazers. The majority of the professional prophets violently disagreed with the stockmarket. They saw no slackening in the boom--at least not for six months and maybe not for a year. But some, who had given the prophets no honor in 1947, were not ready to honor them in 1948. Said one: "The people who claim to have their fingers on the economic pulse of the U.S. economy are usually holding their own wrists. On one side we hear that the boom will go on forever, on the other that the crash is drawing nearer and nearer. Sometimes my feet itch to kick these so-called economists in the seat of their inflated pants."
The "socalled economists" of the boom marshaled their arguments: high prices had not really cowed buyers--and they still had cash to buy. Despite their big spending in 1947, they had managed to tuck away $14 billion in savings, down from 1946's peacetime top of $14.8 billion, but still far above 1939's mark of $2.7 billion. They were going into debt, but not dangerously so. Total consumer credit rose $5 billion in the year to $15 billion. Though almost double the prewar total, it was not out of line with the new size of the economy.
The economy was bigger in more than dollars. The population had increased by 12,000,000 since 1940--and all were new consumers. The demand for such durable goods as autos and tractors seemed as big as ever. The Department of Commerce, with few ifs or buts, pasted up its prophecy for 1948. It predicted an increase of 25% in new building to $15.2 billion and a step-up in production to 6,000,000 cars and trucks. As for steel and other materials, it expected the shortages to ease enough to step up production all around.
The Shape of '48. In all the rosy predictions there was one big imponderable--the European Recovery Plan. The final shape of ERP would do more than anything else to shape the economy in 1948. Against 1947's exports, the demands for ERP for the first 15 months, as drafted by the President, did not bulk overlarge. The biggest dollar item of all--food and feed--was 27% less (by volume) than the U.S. shipped abroad in the last 15 months. Iron & steel (3,104,000 metric tons) totaled only 37% of the last 15 months' exports; fuel was 80%; the $378,200,000 worth of machinery and equipment was only 14% and the 87,000 trucks and freight cars were less than a fourth of the 396,000 shipped in the last year and a quarter. ERP called for 43,250,000 metric tons of coal compared to the 85,593,000 the U.S. had shipped in the last 15-month period. Some of the raw materials would cause no strain at all, e.g., tobacco, which was in long supply.
Besides the $4,239,000,000 in goods which Truman's ERP called for from the U.S. in the first 15 months, the rest of the Western Hemisphere was down for another $3,346,000,000 (mostly U.S.-financed). Most of these billions would probably be spent eventuallly in the U.S. for U.S. exports.
The fallacy in much thinking about ERP was that it would increase overall U.S. exports, thus increase inflation. But it would not do so, even though the U.S. was handing out the cash to other nations to pay for the exports. ERP's exports would merely replace most of the exports which foreign nations could no longer afford. With ERP and loans from the World Bank and other sources, U.S. exports in 1948 might run only as high as $12 billion. But they would still be $3 billion under 1947, and the more ERP was shaved by Congress--and the more delay there was in passing it--the greater would be the drop.
Job for 1948. The task for U.S. factories and farms for 1948, big as it looked on paper, was not as big as the job it had been doing. In 1948, it would get more outside help in supplying food, the burden that had put the greatest strain on the U.S. There were good crops in Australia and Argentina, and even hope that Europe, after eight years of bad crops, would have a normal harvest. The peak of the export boom had passed and, with a loosening of raw materials all around, there would be more goods for the U.S. in 1948. While the U.S. still worried over finding some magic nostrum to curb inflation, some slight curbs were already at work. Credit was being tightened up; the Federal Government was running a surplus, also deflationary.
Actually the only magic nostrum was more production, which would help the world to help itself. Looking at the export-import gap, no trader could soundly think that this was going to be an easy job. In 1947, the U.S. had made a tiny down payment on the job of reviving world trade. It had agreed to cut tariffs. Tariff cutting was meaningless unless other nations were able to make the goods to sell the U.S. And 1947 had shown that the gap between what they received and what they shipped was too big to cross without a new kind of bridge. Thus, to the small down payment at Geneva, most enlightened businessmen voted for the big down payment of ERP.
By supplying the tools to France, Britain, Italy and the other 13 nations, the hope was that production would be expanded, Russia contained, the flow of goods increased in world trade, and the cause of free enterprise furthered.
Freedom v. Control. In one sense, the job that a free U.S. industry had done in 1947 was brightened by what the controlled economies of the world, notably Britain and Russia, had failed to do. Those who shuddered at the rise in U.S. prices--and thought that there was some painless magic in controls to bewitch inflation and the laws of economics--had only to look at Russia. There, what the London Times called the "baleful Bourbons of Muscovy" ruthlessly tried to end their high prices--and low production--simply by taking spending money away from the people. Nor had the controlled economies been able to supply any incentives in 1947 to match free enterprise.
In disillusionment at year's end, Socialist Arthur Koestler wrote of Britain: "The problem of incentives is the most difficult and most important problem of Socialist economy [and yet] the massacre of incentives continues. The last bit of fun has been exiled from their drab lives in this country of Virtue and Gloom, with its mean vindictive Work or Want posters on every street corner; a slogan fit for a state orphanage or reformatory school, and which makes every self-respecting worker's stomach turn in disgust. . . . Two more years of this, and Labor will have irretrievably wasted its historic chance."
Under such circumstances, many a businessman kept his fingers crossed on ERP's prospects of success. There was some doubt that enough industrial know-how could be exported to permit devastated nations to supply their share of the goods in world trade. In most European nations industrial efficiency was far below that of the U.S.
Nevertheless, most businessmen were willing to try ERP. As 1947 had shown more plainly than ever before, the U.S. could not isolate its economy from the world any more than it could isolate its politics. And if the controlled economies needed an incentive, the U.S. had that too. In 1947, U.S. industry had shown the world what a free economy could do.
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