All Out

(See Cover)

One afternoon last week, while the lazy Washington sunshine lay thick as honey, two of the most important citizens in the U.S. sat on a park bench in Lafayette Square, across the street from the White House. Pigeons strutted along the paths, inspecting the ruins of peanuts; sweaty tourists, slung with cameras, pounded past the corroded, green bronze of Andrew Jackson on a hobbyhorse, surrounded by toy cannons.

The two men were sitting in the park because only there could they get away from purring telephones and the endless shuffling of papers. One of them, lean, very tall (6 ft., 3 1/2-in.), with a middle-parted mane of thick, snowy hair, cool, amused, shrewd eyes, was dressed conservatively and expensively, his crossed legs revealing old-fashioned high-lace shoes, with a boot pull at the back. The other, of medium height, fat, young, voluble, looked like an aggressive laundry bag; he was dressed as if various garments had been thrown on him as he hurried past.

The older man was Bernard Mannes Baruch, 70. Beside Mr. Baruch's right ear, the good one, sat Leon Henderson, 45, earnest, gesticulating, mildly profane.

History brought the Messrs. Baruch and Henderson together. One had made it; the other has read it, and now will have to make some himself.

War Is Hell. The primary fact about wartime economics is that war tears the guts out of the national economy--invariably, inevitably, always. Each major war in U.S. history has been accompanied by an irresistible, skyrocketing price inflation, with catastrophic results to the peacetime economy (see chart, p. 18). A corollary, with serious implications to the U.S. today, is that to increase actual over-all production is difficult during a war, since all of the production increase tends to go into the terrible luxury of armament, while civilian consumption drops.

In a pre-war economy the problem is to expand all production enormously, to insure reserves of butter before the time when most production will be of guns. The nation's essential goods must be produced and procured without wrecking the economy.

Prices are fundamental in the problem. Up-spiraling prices mean up-spiraled production costs. Two dollars are needed to buy one dollar's worth of goods; a billion must be spent for a half-billion's worth. Later, deflation doubles the cost of the war to future taxpayers.

There are two general ways to get more goods: by encouraging the expansion of capacity or by letting prices skyrocket until producers get in motion under the urge of big profits. The first seems preferable to Henderson and the New Dealers, and is the direction in which the U.S. is rapidly moving; the second is the theory of free-price advocates, who believe that the profit motive alone is sufficient incentive in U.S. industry.

Baruch believes in fixing a rigid ceiling over all prices as of a certain day. Then prices of all items of which there is no shortage are free to operate below the roof. Henderson is not convinced that this is a wise policy for today; he knows the big 1941 Buts to it, and believes enough of the free-price theory to favor the rise of some prices in order to insure greater production in some lines. Result today: stiff controls of the prices of most shortage items (critical, strategic and vital materials); but only a weather eye on the prices of many commodities. In effect, half a roof has been built over prices.

History of a Sacroiliac. Henderson made his New Deal reputation in 1937 with February memos that predicted the September economic collapse. As the boom went bust, so did Henderson; his health faded, from a diet of violent work, violent play and no sleep. He went to Johns Hopkins Hospital for advice but he also went to the office early many mornings, worked all day and part of the night. He went on like that through 1938 and 1939; his sacroiliac began to weaken from carrying his magnificent paunch around. In May 1940, the doctors ordered him to take a long rest; but the President appointed him price commissioner of the National Defense Advisory Commission, and the vacation was off.

In January 1941 he was physically worn out. He was also utterly disgusted with the defense progress, weary of battering his big triangular head against the stone wall of men running the program without knowledge of the real situation or the historical causes. The President sent him away for a month, told him they would re-examine the situation on his return. Henderson went south. Columnists said he was washed up, through; and they were almost right.

At that point no one was in charge of the U.S. World War II economy. The situation steadily worsened; some prices began to get out of hand, dragging others with them. Returning from Europe, the President's confidant, Harry Hopkins, found Henderson waiting to greet him at the San Juan, P.R. Clipper stop. They talked. Hopkins flew to Washington. Soon Henderson was called back, few weeks later given the job of U.S. Price Boss. He felt fine; tanned, refreshed, his enormous girth down many inches. Again he began charging about like a stung rhinoceros, roaring to all who would listen: "By God, we should have learned a few things from the last war!"

He went to see Baruch constantly; by last week they had resorted to the park bench to guarantee against interruptions. Henderson read aloud from stacks of memos and together they examined the economic problems of World War II.

Two Men on a Bench. The older man, who counts both prime ministers and horse trainers among his friends, had examined U.S. industry for a half-century with the detachment of a biologist. The younger, a three-letter Swarthmore athlete, explosive, bluff, gruff, rough-&-tumble, had plowed through economics like a line-plunging fullback. Both are public-spirited patriots--and both are dead certain they can do most things better than anyone else, and are ready to prove it at a hat's drop. Both are beagles for the facts, indifferent to theories not based on rigid proof. Both have always worked in the same way: get facts, facts, facts; draw straight-line conclusions; then back your judgment till hell freezes.

Baruch is immune to panic and impervious to hot-flush enthusiasm, a stranger to mercurial emotions, remorseless in decision. Henderson is a walking panic, either marrow-frozen or running a death-watch fever, and is given to so many enthusiasms at once that he looks like the last 30 seconds of a Japanese tumbling act.

Baruch was a speculator and a creative investor who amassed enormous wealth outside of industry, who went to help his Government in time of need, and has made a later career as an adviser to five Presidents, an economic Nestor, a sage of war planning. Henderson was a research-foundation economist who has refused repeated offers to turn an honest business dollar, who has always felt his Government needed him, and has proved it. Both have a startling ability to deduce facts from figures, the event from the process. Each likes and respects the other.

Baruch can be powerfully simple and direct, but he is a person of extraordinary sophistication, a master of charmingly indirect talk which suddenly opens to leave an inference the size of a bomb crater. He has spent a great part of his years holding his tongue. Henderson is a great babbler who wakes up sounding his "A" and holds it all day, roaring through his work in a rich torrent of cuss words, grunts and bellows, like a bull of Bashan.

Henderson's Lesson. The first lesson of history is to read it. That Leon Henderson has done. Bernard Baruch is a man of peace, but of the 1918 U.S. economic effort, which Baruch managed, Field Marshal von Hindenburg wrote: "Her brilliant, if pitiless, war industry had entered the service of patriotism and had not failed it. ... They understood war."

The U.S. start in World War I was excruciatingly slow. The nation, living under the delusion that each war was the last, came unprepared, as usual, into another.

In 1915, after the sinking of the Lusitania, the word "preparedness" took hold. President Woodrow Wilson declared for a U.S. Navy second to none. Congress began to appropriate big sums for national defense; finally, in August 1916, set up a body called the Council of National Defense, a group composed of six Cabinet officers, gave them a $200,000 appropriation. This bill was debated for six full months.

In October 1916 President Wilson appointed a Defense Advisory Commission headed by Daniel Willard, then and until last week president of the Baltimore & Ohio Railroad (see p. 86). The white heat of necessity shriveled up the Council itself; the Advisory Commission became the real executive branch.

The Commission, under Willard's chairmanship, worked steadily through the vital winter months of 1916-17. Before the declaration of war, when the nation and the President thought there was still a chance of peace, the seven men devised a system of purchasing war supplies, planned a press censorship, designed a system of food control (even selected Herbert Hoover as its director), determined on daylight saving (then revolutionary), discussed the draft, and in effect, revised the Government for war.

Two weeks before war was declared, after six weeks of intensive effort, Baruch, commissioner in charge of raw materials, had set up organizations for total war: industrial committees of leaders in the great materials groups: leather, rubber, steel, wool, nickel, oil, zinc, coal, spruce wood. Then, at a time when War Department officers had no plans, even hypothetical, for the organization and equipment of an army of any size, the Advisory Commission began calculating what an army of 1,000,000 men would need.

On July 8, 1917, the War Industries Board was set up. This was a great organizing step forward. But the mercurial press, disgusted with the complication of board and bureaus and general fumbling, thoroughly blasted the confused setup. Not until March 4, 1918 did Wilson appoint Baruch chairman of the War Industries Board, or clothe him with Presidential authority. The U.S. had been at war eleven months.

By that time the invariable wartime economic pattern had gone far. Shortages had developed, competitive bidding by Government agencies and civilians had sent all prices into an almost vertical rise (see chart, p. / Baruch Thesis. In peace, the old Law of Supply & Demand operates, except in the strategic areas controlled by monopolies. Competition is the life of trade; price normally controls the size of demand, according to the classic "other things being equal" law--which seldom happens. But in war such things as chemicals for explosives, for which normally there is little demand, become the aim of all endeavors. When there is a peacetime shortage, the highest bidder takes all. In modern war, the Government does.

In wartime there can be no such thing as competition. There is more business than all the industry of the country can handle. Competitors must cooperate with each other to meet even minimum Government demands. The Government, not the price, controls demand. The old Law of Supply & Demand is given a holiday.

That is the Baruch thesis--and now Henderson's text, with 1941 modifications --but the U.S. never saw its full effect in World War I because the Armistice came first. Shoes were reduced to two types and to black, white, tan. Manufacture of pleasure automobiles was to cease. Housing had stopped dead. In another year the whole civil population would have been clothed in a cheap but serviceable sort of uniform. Flaps from pockets would have disappeared. At Alice Longworth's recommendation, steel had been taken out of women's corsets. There were gasless, meatless, sugarless, fuelless days. And the nation's cartoonists played day in & out with a colorful character named High Cost of Living.

Economic War II. A plain fact about the U.S. preparation for the Second World War is that very few men concerned with its administration bothered to profit by the experience of the War Industries Board, and specifically, from Baruch's well of wisdom. The general assumption last year was that, since the military aspects were different, so were the economics. Franklin Roosevelt, as a close friend of Baruch's for 25 years, naturally consulted him, but many of the Janizariat regarded him as senile, an old croaker whose economics were dimmed. But Baruch continued going to Washington, seeing the President, patiently conferring with the President's appointed defense chiefs. Two days a week he held court in The Carlton.

Months went by and things in Washington didn't go very well or very fast. The President had called together a Council of National Defense, which he immediately superseded with a National Defense Advisory Commission. Finally he set up the Office of Production Management, under the Knudsen-Hillman twins. He moved again, vitalized the Office for Emergency Management, set under it all defense bureaus. OPM became the mere physical workshop of defense.

The plain conclusion was plainer: Franklin Roosevelt had not yet found the man to run the U.S. wartime effort, was doing it himself, at great cost to his own strength and to the country. But he had found Leon Henderson, to manage one vast phase of the effort as long as his sacroiliac held out.

Butcher Boy. Henderson was the kind of boy who is called "high-spirited" unless he goes to jail. He was the boy who dressed up the Abraham Lincoln bust in the Millville, N.J. high-school auditorium in a straw hat, bow tie and glasses; the school villain who lined up all the senior girls on a dam to "take their picture" and then gave the gatekeeper the nod to duck them all. He delivered newspapers, showing up early on rainy days to earn double pay by carrying the routes of boys who dodged the weather.

Although a devotee of Harrigan pool (Western for Kelly pool) he seemed so industrious and studious that several Millville citizens chipped in to send him to college. At Swarthmore he got six "A"s and one "B" in a single semester, and a sharp reproof from one backer, who growled: "You always were weak in math, weren't you?'' He worked his way through by some 15 part-time jobs, earned letters in baseball, football and basketball, and a combination of the appetites for work and play that later earned him a description as "the Paul Bunyan of Bureaucracy" (which he likes), and as "a spittoon economist" (which makes him mad).

He taught school, worked in Chautauqua, worked for Gifford Pinchot as an economic adviser. He moved over to the Russell Sage Foundation as an economist. In 1934 he went to Washington to squawk about NRA, squawked so loud and well that General Hugh S. Johnson snarled: "If you're so good, why don't you go to work here?" "I'm game," said Henderson, and hung up his hat.

With NRA's collapse, he was drafted by Harry Hopkins to work as WPA's economist. He moved on, getting his education, which he estimates has cost the New Deal about $2,000,000--investigations, surveys, etc. He was a Presidential adviser, executive secretary and moving spirit of TNEC, and SECommissioner.

Belligerent, ruggedly individual, he was one of the New Dealers in only a general sense; as late as February 1938 he had never had a full discussion of his economic ideas with any of the Corcoran-Cohen-Jackson group. For one thing, he had learned too much about business and industry from the businessman's point of view to be patient with the legal-financial jargon some of the New Dealers talk instead of English.

No matter how neatly Henderson is sent away from home in the morning, his appearance is that of a medium-sized ruin the minute he sits down. He loves huge cigars, and waves them about so carelessly that his suits are usually sprinkled with what appears to be an unusually heavy dandruff. He plays golf vigorously and erratically, hooking and slicing impartially but powerfully. Recently he has had almost no relaxed home life. One of his friends said last week: "When he gets down there to his Chesapeake Bay cottage, Wild Rose Shores, he likes to put on a pair of rubber boots, get into his little boat, put a glass of whiskey on the gunwale, turn on the radio and sing. ... I can see him now. There is a man who has a great lust for living."

He married Myrlie Hamm in 1925; has three children, Beebe (10), Lynn (7), Leon Jr. (3). Many a morning he charges from his home, shortly before dawn, in the direction of the venerable red brick James G. Elaine mansion on Massachusetts Avenue. Here he is within shouting distance of his chief assistants, youthful Joseph L. Weiner, until last week a sparkplug of SEC's utility program, mentally fast, tough and smart; Cousin John Hamm, a 32-year-old Princeton product, who is Henderson's chief deputy; Dave Ginsburg, a trigger-minded economist, 29, out of Harvard; and John K. Galbraith, 32, ex-Harvard instructor, who unfolds to the impressive height of 6 ft. 8 in.

Henderson is without legal authority except as he operates as the President's arm. This lack of authority is not yet a problem, and may not be. Henderson believes -- and Baruch's experience bears him out -- that persuasion and patriotism are many times more effective than coercion. Henderson's chief weapon, of course, is priorities. But perhaps second only to priorities is publicity. No industrialist wants to be nationally named as a saboteur of defense. Henderson has the best frown in Washington, and he is a virtuoso of the soft art of sweet talk. And he has very definite and clear ideas about the U.S. economy.

He is eager to argue with those who believe that civil consumption can be cut down by allowing prices to rise as they naturally would. He points out that in copper, steel and other basic materials, price increases would not draw out really significant new capacity; he notes that in copper no price rise within reason would avert the necessity of copper imports, now averaging 25,500 tons a month; that almost every shred of present steel capacity is being utilized, even to moving Negro families out of old beehive ovens in the South. He points to the automobile industry's recent 20% production curtailment, says that if you tried to get the same diversion of capacity by letting prices rise, you would have a big rise in used car prices, then in replacement costs, and the small consumer would be trebly hurt, while his dollars would be wastefully diverted from defense savings.

Henderson believes that the avoidance of inflation means attack all along the line: by heavy taxation, by various methods of compulsory saving, by expansion of production, by control of prices. Therefore he does not work alone, makes no final price decisions without complete agreement up & down the Government.

He also believes that the U.S. must plan for a long war. And he believes that the democracies will win, but, not unless they swamp Hitler with production, while maintaining morale by avoiding inflation. He believes, in short, in what he considers the lessons of history.

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