The Great Gamble
In 1951, said Defense Mobilizer Charles Wilson, we took "a gamble . . . perhaps the greatest gamble in our history." By "we," Charlie Wilson meant the United States of America.
The gamble was that U.S. business could expand fast enough to 1) produce the armaments needed for possible war, and 2) furnish the U.S. people with all--or almost all -- the civilian goods they wanted.
With the year's end, the reckoning is in: the U.S. both won and lost. U.S. industry expanded at a rate undreamed-of at the-start of the year, and kept civilian-and even luxury-goods production at a phenomenal high. But the U.S. fell shockingly short of building up its strength against the threat of a major war. It failed even to turn out the arms needed for its immediate safety in Korea and Europe.
"Business as Usual." By working furiously, the U.S. added machines and plants for the basic sinews of war roughly equal to 69% of the national output of England. Steel, oil, chemical and electric power production and expansion reached new highs. Then why the arms failure? The chief reason was that the Administration was more worried by a presidential campaign in 1952 than a world war. It tried to run the arms program in a way to inconvenience no one--worker, employer or consumer. "Business as usual" was the prevailing slogan. Unions gave up none of their wage demands or strike privileges; businessmen, in the words of one top executive, "too often moved heaven & earth, politically and otherwise, to keep civilian production going on as usual."
"Business as usual" cost the U.S. most heavily in planes, for which a third of the entire $94 billion arms appropriation was earmarked. As the year began, President Truman cockily predicted: "Within one year, we will be turning out planes at five times the present rate of production." Actually, the rate barely doubled. Against Truman's goal of 15,000 planes, the U.S. produced fewer than 5,000--and many of these were trainers and transports. The same failure marked the rest of the arms program. At midyear, guided-missiles production was 70% below schedule, tanks 40%, electronics 30%.
But part of Charlie Wilson's gamble --part of his policy, in fact-- was to build up the U.S. productive capacity so that, in the event of all-out war, U.S. industry could shift to all-out war production without stripping a gear. In this expansion, the U.S. was successful to a degree realized by few at home and almost no one abroad. "Dynamic," often a businessman's cliche, was the right word for U.S. industry in 1951.
Shoot the Works. From the standpoint of total production, the U.S. was never more productive or more prosperous. Output of goods & services rose to $325 billion, nearly 15% above the previous peak, in 1950. Almost half this gain was due to higher prices, but the important half was due to increased productivity, thanks to more and newer machines.
The auto industry rolled out 6,806,000 cars & trucks, nearly half again as many as it had expected. The television industry popped out 5,250,000 sets, only one-quarter less than 1950's alltime record. All the goods of peace spewed forth in prodigious quantities: 3,455,000 washing machines, 12,500,000 radios, 4,120,000 refrigerators, 2,900,000 electric toasters, 612 million pairs of nylon stockings. Builders, who had expected to finish fewer than 850,000 new homes, actually built more than 1,000,000.
Businessmen spent a record total of $23.1 billion on new plants and equipment, aided by tax certificates permitting them to write off the bulk of the cost in five years instead of the usual 20. The oil industry alone, spending a record $3 billion on new wells, refineries and pipelines, boosted its output by 14%. Steelmakers, who began $1.2 billion of new plants, poured out 105 million tons of metal, 8% more than in 1950. They ended the year with a capacity of 109 million tons, 5% greater than World War II's peak. Utilities kept the wires crackling with $2.5 billion of new generating plants, added 1,900,000 new customers, made electricity available to 95% of U.S. farmhouses. Synthetic rubber, under controls at the year's start, was so plentiful by year's end that the U.S. had enough to start exporting it.
Break the Bank. Nowhere was the growth of big & little business more evident to the eye than in an area round Los Angeles' Municipal Airport called "Airport Alley." Two years ago it was nothing but farmland. In 1951, it was the fastest-growing industrial beehive on the humming West Coast. More than 50 plants sprang up almost overnight. Near the Douglas and North American aircraft assembly plants are new factories making everything from jewelry to bathing suits, from power saws to bedding. In two years the value of the land shot from $4,000 to $43,560 an acre ($1 a square foot).
Old industrial centers like New England, Pennsylvania, Ohio and Illinois, which had once, in the economists' phrase, looked "mature," were young again. Pennsylvania was actually leading the expansion parade; its $1.2 billion in defense-plant write-offs topped the nation's. Its new $400 million Fairless Works for U.S. Steel is the biggest single steel complex ever begun at one time. New England, for all the decline of its textile plants, was buzzing with expansion of electronic and aircraft industries. In East Hartford (Conn.) alone, United Aircraft's Enginemaker Fred Rentschler was building $40 million in new plants to speed the production of jet engines. Along Cleveland's eastern lakeshore a whole new chemical empire had sprung up. In Chicago, new industries sprawled all over the suburbs,"Men Wanted" signs hung everywhere, and Bell & Howell kept its employment offices open nights, Saturdays & Sundays "to make it convenient for people to come in."
New Players. The biggest growth was on the nation's relatively new frontiers--notably Texas and the South. Texas was second only to Pennsylvania in its defense-plant write-offs ($998.7 million). In the sleepy farm town of Rockdale, Alcoa was building a new $100 million aluminum plant to tap the energy of nearby lignite deposits, potentially even cheaper than natural gas. Along the Gulf Coast, Texas' already immense chemical empire was mushrooming, and a big new Bell helicopter plant was rising near Fort Worth. All over the South, new plants were changing the landscape and the economy; cotton-hands, displaced by mechanical pickers, were shifting to assembly lines. Louisiana alone had $311 million in new plants planned; between them, Alabama, Kentucky and Florida had $458 million.
The Rocky Mountain area was ahum with its first major oil boom, centering in North Dakota's Williston Basin. A whopping $175 million was being spent to explore and develop it. Colorado Fuel & Iron was spending another $30 million on a seamless-tube plant to supply the drilling pipe. In California, Pacific Gas & Electric in ten years built as much new power capacity as in all its 65 years prior to Pearl Harbor, planned to double it again in the next decade. Despite the failures, there were some production miracles. Only ten months after Chrysler's President Lester Lum Colbert broke ground for a new tank plant at Newark, Del., the first tank rolled out.
New Rules. Not only growth but industrial revolution was in the air. New synthetic fibers, such as Du Pont's Dacron and Union Carbide's Dynel, threatened to displace wool, just as nylon had displaced silk. For the first time, men's summer suits made of synthetics outsold worsted; the new fibers also invaded rug and carpet manufacture, wool's last stronghold.
The harnessing of atomic energy for peacetime was no longer an "if." It became a problem of "how and when." The Atomic Energy Commission let eight companies begin studying how to finance & operate atomic-powered electric plants. General Electric and Westinghouse continued work on atomic engines for submarines; Pratt & Whitney and G.E. were working on similar engines for planes. Patriotically, some companies were also giving their know-how to the AEC without cost, for the rapid development of the whole atomic program. For a $1 fee, Du Pont's President Crawford Greenewalt agreed to build the $900 million plant near Aiken, S.C. to make components for the development of the hydrogen bomb. For the same fee, G.E. was managing a $200 million expansion of the Hanford, Wash, plutonium plant. Union Carbide took on the management of a new $500 million U-235 plant abuilding at Paducah, Ky.
Blue Chips. Wall Street saluted this growth with the biggest bull market since 1929. Two days after New Year's, the Dow-Jones industrial average stood at 238.99, a handsome 26 points above 1946's bull-market peak. But for 1951 that was the year's low. The industrial average charged up to a 21 1/2-year record of 276.37 in September. Dividends, which rose from 1950's $9.2 billion to $9.5 billion, helped spur the market. So did the fear of inflation. The blue chips got the biggest play, but all year investors scrambled to buy "growth" stocks. Investors were not betting on the prosperous present so much as on the even more prosperous future. Not even war scares or the inroads of new taxes on profits gave Wall Street more than a momentary quaver. After every shake-out the market climbed right up again. At year's end it was close to the peak and seemed to be gathering new strength.
Stripped Shelves. The year of industrial growth began in fear and foreboding. In January, the U.S. still quivered from the shock of the Red Chinese intervention in Korea and the U.N. retreat. Consumers, fearful that war production would wipe out civilian goods, started a great wave of panic buying. Department stores, whose business normally skids after Christmas, found sales skyrocketing--and prices right along with them. To try to stop the rise, Price Boss Mike Di Salle put ceilings on all prices. The effect was to reward the chiselers who had already jacked up their prices and punish those who had tried to hold the line.
Then the Federal Reserve Board, which has little faith in price ceilings or blunderbuss methods, unsheathed a rapier aimed at the heart of inflation: the enormous supply of money and credit. FRB tightened up its installment curbs, then boldly touched off the financial fight of the year; it challenged the cheap-money policy of the Fair Deal and Treasury Secretary John Snyder. In the showdown, it forced Snyder to retreat from his cheap-money policy and let the interest rates on Government bonds--which affect all other interest rates--start slowly upwards, thus tightening the money and credit supply and choking off spending.While spending dropped, manufacturers poured out goods as fast as ever (in the first half of the year, for example, the auto industry made as many cars as in the first half of record-breaking 1950).
Stuffed Mattress. All this had its effect. Then consumers began saving their money, tucking it away at a rate of $20 billion a year, almost twice the 1950 rate. Warehouses bulged with $69 billion in inventories. Auto dealers' lots were crowded with unsold cars; sales of washing machines and appliances tumbled by half, and TV-makers, with a tenfold rise in their unsold sets, slashed production by nearly two-thirds. In June, after the U.S. Supreme Court outlawed blanket price-fixing sections of the fair-trade laws, the biggest price war in decades burst upon the startled and delighted U.S. consumer. In Manhattan, Macy's and Gimbels sent squads of scouts to flash back the latest reductions, cut prices so fast that an item could be cut twice while a clerk was selling it. By December, many price ceilings were meaningless.
The thrifty shopper could find cut-rate sales of everything from refrigerators to nylons, at prices from 30% to 50% below January. But at year's end, consumers were still not in a free-spending mood. Christmas sales were 4% under those of 1950. For the year, dollar volume of retail sales was up 3%. But discounting price rises, unit sales were actually down and counters stayed loaded with goods.
From Gallop to Walk. Thus the galloping inflation of January and February was slowed down to a walk. President Truman's economic advisers had predicted that the cost of living would shoot up at least 10%; instead, it rose only 6%. Labor's wages rose 5% to a record average hourly wage of $1.62, thus almost keeping up with prices. Food, on which the farm-conscious Administration studiously avoided effective controls, shot up 9%, but even there, increased production checked a further rise. By year's end, prices of food and many commodities had turned down.
There were two added reasons for the leveling-off in the cost of living. Civilian production was bigger than anybody had expected, and arms production was worse than anyone had feared. Charlie Wilson had gone to Washington with all the glamour of his peacetime and World War II production wizardry--and with more powers than the U.S. had ever given to any man except the President. Yet somehow he had not been able to work his oldtime magic, and many of the worst mistakes of World War II were made all over again.
As top boss, Wilson naturally got the blame--and some of it unquestionably belonged to him. Some of it also belonged to the military men who procrastinated endlessly in telling Wilson what they wanted and how much, and what they wanted first. "All our orders," they said, "are urgent." In trying to get everything at once, they often got nothing. Much of the delay was caused by nothing more than the immense complexity of the new weapons. Aircraft, which had been scheduled on the basis of World War II production experience, simply could not be produced that fast, because airplanes are now infinitely more complex. Examples: the B-29 bomber took 1,700,000 engineering man-hours to produce, Boeing's B-47 jet-bomber takes 3,464,000; the B-29 had ten miles of wiring, the B-47 has 20 miles in its bombing system alone, 21 miles of other wiring. On some jet bombers, the electronic equipment alone exceeds the entire cost of two old B-29s. To help build this complex equipment, Chairman David Sarnoff shifted giant RCA to 50% war production, but deliveries have been delayed.
One cause of such delays is that the military, rightly wary of "freezing" the designs of weapons which might quickly grow obsolete, carried its caution to such an extreme that very little was standardized quickly enough for big production.
Blunders & Bottlenecks. Inexplicably, the mobilizers' worst blunder was one which World War II experience should have made impossible. If World War II taught anything, it was the crucial importance of machine tools--the machines which make machines, and without which defense plants cannot tool up to make jet engines, airframes, tanks or anything else. Yet Wilson failed to realize that machine tools held the key to the whole armament program. I.T. & T.'s William H. Harrison made the original blunder by refusing to treat machine tools any differently from "pots or pans," denying them priorities. Price Boss Mike Di Salle compounded the blunder by refusing to give toolmakers the price relief needed to step up their output. Wilson did not discover either of these errors soon enough. Not until August did he decree price relief for machine tools. Not until December, at last fully awake to the gravity of the shortage, did he give tool-builders the same top priorities held by the Atomic Energy Commission. In the lost time, jet engines could not be built for lack of tools; airframes piled up for lack of engines.
Not till year's end did the Pentagon finally draw up a priority list of weapons and component parts--the thousand & one supply items which had become another major bottleneck holding up the final assembly of weapons.*
For all these reasons, arms deliveries, which had been scheduled to reach $3 billion a month by year's end, actually rose to only $2 billion a month. But the showing was not quite so bad as it looked. Hundreds of planes, tanks and other weapons were all but finished, lacked only minor parts before they could be turned over to the armed forces. And the pipelines of defense plants were bulging with vast quantities of metals which had already been turned into parts and should shortly be assembled into weapons. The hope at year's end was that all the administrative mistakes had been made--and corrected --and that the U.S. still had time to make up the ground it had lost.
Ways & Means. In financing the guns & butter gamble, the U.S. made out better than anybody expected, but only because the spending on guns fell behind. Instead of the deficit everybody predicted, the Treasury actually ended fiscal 1951 in June with a $3.5 billion surplus. If arms spending continues to lag, the cash budget will probably still be in balance through fiscal 1952. But in the fiscal year starting next June, all Government spending will rise to an estimated $80 to $85 billion (nearly $65 billion of it for arms). With only $70 billion in estimated revenues under present tax laws, the prospective deficit is $10 billion or more. Can the U.S. bridge the gap with higher taxes?
Most businessmen think not. In two years, $13.7 billion in new taxes have been loaded on corporations and individuals, including $9 billion in 1951, the biggest tax boost in U.S. history. Federal, state and local taxes now take 30% of the entire national income. Taxes and inflation have dented the dollar to the point where a U.S. couple with two children must earn $6,072 a year to enjoy the same standard of living that $3,000 a year brought in 1940. And the higher the income, the higher the ratio (see chart).
Everybody felt the bite of the new taxes, and nobody more than business. Not only was the tax on corporate profits hiked to a record 52%, but in addition, 1951's excess-profits tax boosted the maximum possible tax to 70% of all earnings. The result: corporate profits went plunging.
Corporate profits will probably drop lower in 1952 as civilian production is cut back and arms production, on which the profit is much smaller, takes its place. Most economists think that taxes have just about reached the point of no further return; increases will defeat themselves by robbing corporations of the money to expand and individuals of the money to buy and the incentive to produce more.
If the U.S. is to live within its income, it looks as if it will have to levy a general sales tax, which Congress shuns because it hits all voters equally hard, and trim out $6 billion or more of needless non-defense Government spending. It might even have to spread the peak arms expenditures over a longer period so that the present tax yields will pay for them.
Rising Hazards. At year's end, many a businessman was calling for re-examination of the rearmament program in the light of grave new problems. In promising to underwrite the security of Western Europe, the U.S. was beginning to learn that the burden of NATO will be bigger than anyone had realized. ECA, which ended in 1951 after three years and the expenditure of $11 billion, had gone a long way to restore Europe's economy. Its industrial production rose 40% above prewar levels; its dollar shortage was whittled in ECA's two years from $8.5 billion to $1 billion.
In ECA's place, Congress has authorized a maximum of $6 billion in fiscal 1952 for economic aid and to help Europe rearm. But the rearmament effort has already wiped out much of ECA's gain. In the last 18 months, Europe's prices shot up (France's by 30%), her currencies weakened, and the dollar gap widened at year's end to $3.5 billion.
This trouble arose because there was so little slack in the European economies to take up the arms load. Furthermore, despite all the missionary work of ECA and U.S. businessmen, European industries are woefully inefficient by U.S. standards, still favor cartels and monopolies rather than the U.S. brand of free enterprises. European businessmen blandly ignored the example of the U.S. in 1951; they, too, could expand their economies to bear the arms burden more easily, if they only prized competitive freedom as highly as personal freedom. Without such a change, the vast new plants which the U.S. threw up in 1951 will make it harder than ever for European nations to compete in world markets -- or sell in the U.S. In short, barring fundamental economic reforms, the weakness of Europe appeared so great at year's end that many a businessman thought that the bill to arm it and shore up its economies might come to as much as $15 or $20 billion.
Dwindling Wealth. Apart from money, the U.S. had to reassess how far it could stretch its own natural resources. The vast new expansion was using up such minerals as iron, copper and lead far faster than anyone had anticipated only a few years ago. In many ways the U.S., once the owner of seeming inexhaustible natural treasures, was in danger of becoming a have-not nation. The end of the fabulously rich ores of the Mesabi Range was already in sight. Steelmakers not only began shipping in ore from South America and Liberia, but in 1951 they began operating plants to make the poor-grade taconite ore usable. Copper became so scarce that some metal producers talked of a permanent copper shortage (and saw aluminum taking its place in many ways). In 1951, the U.S. tried to fill its need for raw materials by grabbing them in the world market. But in 1952, the U.S. would have to do more sharing with Europe, and tailor its domestic needs more closely to the needs of all the Western nations.
The Immediate Pinch. What is the outlook for the U.S. in 1952? For guns, it looks immeasurably better. Many of the plants now building will come into production; finished weapons should begin to flow in constantly increasing quantities. But this will happen only if U.S. business, labor and the general public are willing to bear the dislocations which bigger arms production must bring. The lesson of 1951 was that the U.S. cannot get the guns it needs without disrupting more of the economy. In 1952, many less essential businesses may go broke for lack of materials. Unemployment will rise as workers are shifted from peace to war production. (In Detroit, 7% of the workers were already jobless at year's end.) And the U.S. will have to do with far fewer peacetime goods. As more & more metal is used up for arms, autos, refrigerators and all consumer hard goods will be cut.
But the pinch will be only relative --nothing like the protracted shortages of World War II. For one thing, U.S. homes are already well stocked with all the apliances bought in the big buying waves in late 1950 and early 1951. For another, business is still loaded with a record $70 billion in inventories. Overall production of hard goods will be cut to about 40% of its 1951 rate. As the mobilizers see it, the U.S. will be able to turn out at least:
P:3,000,000 new automobiles, 1,400,000 fewer than 1951.
P:850,000 new houses, 150,000 fewer than 1951.
P:10,900,000 new radios, 4,400,000 television sets, 3,062,000 refrigerators, 2,005,000 washing machines, an average cut of 24% from 1951.
P:All the clothes that anybody wants. The pinch should ease after the first six months. The supply of steel will be tightest in the first quarter. After that, expanding capacity (scheduled to hit 118 million tons in 1952 and 120 million tons in 1953) should make more civilian steel available. The total output of goods & services will expand to an estimated $356 billion at the end of 1952. But with rising incomes there will be more money available than goods & services to spend it on, i.e., an "inflationary gap" of about $12 billion. Last year's high saving was abnormal, and such trends are quickly reversed. A return to normal could start prices climbing as hard goods grow scarce. Moreover, the price climb will be accelerated if the present uneasy balance between prices & wages is upset by a big new round of wage boosts.
On the other hand, many businessmen worry less about inflation than recession --not for 1952 but for the years after that. They point out that only arms production kept last year's sales slump from being much sharper. What, they ask, will keep the economy going when all the expansion is completed, and arms spending is cut back from its peak?
Ultimate Plenty? For one thing, even after the leveling-off stage in arms production is reached, the security program calls for a permanent arms budget of at least $50 billion a year. The expanded U.S. economy can shoulder such a load--and the present $70 billion tax program can finance it.
Moreover, the whole country is growing along with its plants. The 1951 crop of about 3,900,000 babies outran the Census Bureau's predictions by 450,000. The population, now about 155 million (a 15% gain in a decade), was expected to reach 170 million by the 1960 census, but now it looks as if it might reach 180 million. The U.S. has already reached a higher plateau of consuming as well as producing capacity.
Because of this growth, the U.S. has no deep reason to worry about finding use for the tremendous expansion in its productive machine. The backlogged demand for all civilian goods will be accumulating during the period of cutbacks. Detroit automakers estimate that fully one-third of the 42 million cars now on the road are over 15 years old. The roads themselves are no longer adequate for today's high-speed cars, and many fell into disrepair during the war years; an estimated $40 billion is needed to modernize them alone. The oil industry believes it will have to spend $11.2 billion in a decade, expand by one-third merely to keep abreast of rising demand. The U.S. will need at least 6,000,000 new homes by 1960, merely to house the increased population, and the estimates of all home-building and repairs needed run as high as $10 billion a year.
The future looks good. But in a war-menaced world, the good future will come to pass only if the nation has the economic strength and the arms to protect itself. Neither alone is sufficient. In 1951, the nation proved it has the strength. In 1952, it must get the arms.
*Snarling everything was the usual amount of red tape. A Detroit automaker got a jet-engine letter of intent in January 1950, sent Wright Field a complete list of the machine tools needed. Wright Field returned the list, saying: "This is not the right way; use code 76." The rewritten list was also returned with the message, "Sorry, we have decided to use different forms; make 39 copies." After 39 copies, each weighing 5 1/4 lbs., were dispatched, Wright Field requested that "this be done over." The engine, which should have started coming out in February 1951, will not be in production until next May.
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