Quotas in Detroit

Automakers released to U.S. defense last week an estimated 70,000 skilled workmen, 1,380,000 tons of steel (nearly 2% of U.S. capacity), 124,850 tons of rubber, 5,500 tons of aluminum, 29,040 tons of copper, 2,640 tons of tin, 60,170 tons of lead, 5,275,600 Ib. of nickel. Two days later they made available an additional $35,000,000 of machine tooling, 15,000,000 more man-hours of production, much of their best engineering talent.

The first was the statistical meaning of an announcement of OPM's William Knudsen, late a motormaker himself, that each company in the nation's No. 1 consumer industry had agreed to cut 1942 production by one-fifth. The second came from an announcement by Alfred P. Sloan Jr., head of General Motors and top spokesman for his industry, that G.M. planned no new models for the 1943 season. Other manufacturers were expected to follow: the 1942 models that come out late this summer will be the standard U.S. cars for the duration.

As a sharp tack away from the business-as-usual guns-and-butter theory on which the U.S. began its defense effort--these two developments were the biggest news since the defense program began. The calm with which Detroit took them was news worthy too as a sign of a new national understanding that defense is now a primary job. Detroit, in fact, was reconciled to rationing long before Knudsen spoke last week. Last month Sloan (whose company is the world's greatest consumer-goods producer) urged heavy excise taxes on all consumer goods whose full production conflicted with defense. Already the industry had made up its mind that 1942 models would have only superficial changes requiring a minimum of retooling (plus the substitution of plastics and other materials for metals whose supply is particularly tight).

The auto industry employs about 500,000 men in its factories. In 1939 it used 80% of all rubber consumed in the U.S., 51% of malleable iron, 34.2% of lead, 18.1% of steel, 14% of grey iron. In the field of essential defense materials where the pinch is greatest, it used 23% of the nation's nickel, 13.7% of copper, 11.4% of tin, 9.7% of aluminum. Now defense needs some of these men and materials.

Knudsen's announcement was important as an example of the kind of surgery upon peacetime industry required for an all-out defense effort, but the operation is being performed as gently as possible. The cut will be based on 1941 model production, which expects to reach a peak 5,200,0000 before the motor year ends Aug. 1--a record exceeded only by glittering 1929. Thus the quota for 1942 models (both passenger cars and trucks) will be about 4,160,000 units, and only in six years has U.S. production exceeded that figure. Moreover, the cut comes at a time when the market is presumably close to saturation: production for the calendar 1940 was 4,480,000 units; this year's figure will be even higher, and at no time in its history has the industry been able to sell over 4,000,000 cars in more than two successive years.

Profitwise, the production cut is not likely to affect the industry much. The motor companies have undertaken defense contracts which will take up any slack, may even tax their ability to find management and workmen (General Motors has $725,000,000 in defense contracts on its books, and some companies, like Packard, are already as busy on defense work as on cars). Workers are being switched into making airplane engines, tanks, bomber parts, guns and shells. It has been estimated that the industry would have to employ 150,000-200,000 new men to handle the defense orders.

Moreover, the big automobile manufacturers would have had to turn over to the Government most of the profits they might have made on the cars banned by the quota agreement. G.M., with an estimated excess-profits exemption of $180,700,000, earned $236,388,227 last year before excess-profits tax deductions. Chrysler, with an exemption of $32,500,000, earned $44,802,279 last year. Since all earnings of $500,000 or more above the exemption are already subject to a 50% excess-profits tax after paying the maximum 24% regular corporation levy may be taxed still more heavily next year, any decline in earnings would lower tax payments 62-c- for every $1 cut in net profit.

The Future. Knudsen's announcement termed the present cut "initial," thus left the door open for future restrictions if more men and materials have to be poured into defense. In World War I, motor-makers remember they took much more than a 20% cut. All through 1918 they had trouble getting materials, and in the second half the War Industries Board made them hold production down to 423,800 cars, based on one-fourth of their 1,874,000 output for the twelve months of 1917. For 1919 they were warned that they might not be allowed to build any cars at all.

Implicit also in Knudsen's announcement was a hint that other industries may soon follow automobiles into the quota lists. Already OPM has its eye on refrigerator trays (aluminum), other consumer goods which use material that defense manufacturers are finding hard to get. In 1918 the War Industries Board ordered a 50% cut in production of sewing machines, oil stoves, electric heating appliances; a 30% cut in watches and cases; a 25% cut in metal stamps and stencils, metal tags, rubber stamps. Since 1918, U.S. industry has expanded, but so have the rules of warfare.

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