1941: Business

Business and the War Program.

The major problem of business in 1941 was to coordinate its development with that of the national war program, and plans for 1942 are completely dominated by the necessity for intensifying that effort. Thus a study of the achievements accomplished in 1941 and the problems faced in 1942 in this connection seems to provide a more appropriate survey of basic business conditions than the more customary statistical reviews. Detailed statistics may be found in the article on Production and Trade.

The stimulus to business activity resulting from the defense program in 1941 carried various indexes of production, employment, payrolls, and trade more or less steadily upward to new high levels never before attained in this country. While this recovery was in general a broad one affecting most lines of activity, it is of course true that those phases of business activity most directly connected with the defense effort advanced much more rapidly than the general averages. In contrast, certain lines of more or less nonessential activity began to be sacrificed, particularly in the closing months of the year, to the exigencies of an all-out defense effort. This development promises to be probably the most important one to be met by business in 1942; that is, a very substantial part of out total productive capacity must be converted to other lines of production which in many cases bears little or no relationship to normal output. The ability of the business leaders of the nation to achieve this conversion rapidly, smoothly, and effectively, will play an important role in determining how soon American resources can play a decisive role in the present world struggle.

Business and the Federal Government.

One of the important factors to be kept in mind in this connection is the relationship between business and government. There is no need of stressing the unfortunate fact that, as a result of developments in this country over the past decade, business and government gradually developed a mutual distrust of each other. It is equally needless to say that in the present emergency both are trying to cooperate wholeheartedly in achieving a common goal, namely military victory. It should be equally clear, however, that regardless of good intentions it is impossible to eliminate overnight, particularly among the extremists on both sides, this deeply ingrained distrust. The experience of business in government and government in business during the past year or two has not been a particularly happy one. It suggests that, in so far as possible, government problems might well be left to government experts, and business problems to business experts.

Business and Labor.

The labor situation was one of the major problems of business during 1941. Prior to the actual attack upon Pearl Harbor in December it seemed that labor was capitalizing upon the national emergency to force from business a series of major concessions during the year, notably in the field of wage increases and closed shop agreements. In spite of the national emergency, man-days of labor lost through strikes exceeded 19,000,000, or nearly three times the total for the preceding year. The coal strike of April 1941 was the single most serious strike of the year, nearly 6,000,000 man-days of idleness resulting from it. The refusal of railroad labor in November to abide by the decision of President Roosevelt's mediation board in the railway dispute, and the threat to strike in the face of that decision, seriously discredited a method of handling railway labor disputes which had been in successful operation for 15 years. When labor did not get what it wanted from the first decision of the board, it threatened to strike, forced a reconsideration of its demands, and in the end was pacified by getting a final decision more favorable to it. This seems to many to establish an unfortunate precedent.

A somewhat similar situation existed in the so-called captive coal mines. The point at issue was the closed shop, and in opposition to repeated requests by President Roosevelt, John L. Lewis called a strike. After explaining that the Government could not put itself in the position of forcing the closed shop on an industry, President Roosevelt succeeded in persuading both sides to accept the decision of a three-man arbitration board. The deciding voice in favor of the closed shop was cast by the Government representative, though he was not acting in any official Government capacity.

Public impatience with the labor situation, particularly with respect to jurisdictional strikes, showed itself in widespread demands for Congressional legislation restricting strikes, but action was forestalled by the attack on Pearl Harbor early in December. Following that attack labor showed itself more cooperative, and agreement between labor and business was reached on three points: (1) no strikes or lockouts, (2) all disputes to be settled by peaceful means, and (3) the President to set up a War Labor Board to handle disputes. It should be noted, however, that no agreement was reached on the question of the closed shop. It is also clear that as yet the Government has adopted no consistent, firm, or clear-cut labor policy comparable to that during the First World War. The price of labor peace in the present emergency has not yet been determined.

Question of Taxation.

Another major problem affecting business, as well as all other classes of society, is that of taxation. Business taxes, as well as those on individuals, were sharply increased in both 1940 and 1941, and further sharp increases seem to be inevitable. A compilation by the National City Bank indicates that for the first 9 months of 1941, reserves for income and excess profits taxes alone absorbed 55 per cent of the aggregate profits of 140 leading manufacturing companies for which figures were available. The corresponding figure for 1940 was 29 per cent. In spite of the great increase in taxes, however, the net profit of these corporations after taxes was 22 per cent higher in the 1941 nine months' period than in that of the previous year. This cannot be taken as indicative of any such increase in profits for business as a whole in the full year 1941.

The desirability of preventing business from profiting at the national expense in the present emergency has been officially stressed again and again, and so-called 'excess' profits taxes have been levied for this purpose. In fairness to business two points should be mentioned: first, the so-called 'excess' profits taxes have in many cases hit 'normal' profits to some extent as well as 'excess' profits; and second, with the exception of a few voices crying in the wilderness, there seems to be no recognition of the analogous desirability of taxing 'excess' individual incomes arising from the defense program. In other words, as yet no individual income taxes are based upon the excess of present incomes over those received in 'normal' times. The question of the nature of the large additional taxes to be levied in 1942 is significant to business not only from the standpoint of return to investors, but also from that of financing plant additions and increased volume of business.

Problem of Supplying Increased Demands.

Another major problem facing business at the outset of 1942 is that of adjusting a relatively limited quantity of many products to a relatively large demand for them. A foretaste of this problem was received in 1941, but it promises to be probably the biggest business problem of 1942. The United States has rapidly reached the point where 'guns and butter' can no longer be supplied. Not only must 'butter' be sacrificed, but some 'guns' are much more important than others. In normal times the relatively free movement of prices determines how the supply of goods is distributed over various elements in demand. At the present time, however, the requirements of all-out defense necessitate that certain categories of demand receive preference over others. Moreover, it is quite clear that from the standpoint of national welfare it would be extremely dangerous to let those desiring goods raise the prices for them by freely bidding against one another. The result is that various methods of meeting this problem are being worked out. Price-fixing, priorities, allocations, and rationing are all involved in this problem of scarcity.

Price-Fixing Measures.

The obvious way of preventing the many serious dangers of freely moving prices at the present time, including particularly the threat of unrestrained inflation, is to fix prices by law. Thus far price-fixing in this country has taken the form of a more or less informal, but on the whole successful, regulation by Government authorities of a gradually widening range of more or less strategic raw materials important to defense. Pressure has also been brought to bear on manufacturers' prices for a wide range of consumer goods, ranging from automobiles and refrigerators to sugar and cigarettes. Fixing of retail prices is thus far conspicuous by its almost complete absence. Retail prices of only two products have been fixed, flashlights and tires; rationing exists for the latter, not the former.

Congress has been dallying halfheartedly with price control legislation for nearly six months. It is apparently unwilling to recognize the fact that such legislation, to be really effective, must cover farm products and wages as well as industrial products. Thus far wages have been omitted from the proposed legislation, and the political pressure of the farm bloc has so emasculated restrictions on farm prices as greatly to weaken the chances for really successful price control. One of the first tasks of the new Congress is to enact adequate price control legislation. Obviously complete price control of raw materials, wages, and selling prices would permit the price administration to dictate the business profits of the nation, and is thus a matter of great concern to business.

System of Priorities and Allocations.

When the role of freely moving prices is once eliminated as the automatic control over the allocation of supply to demand, then some other means of control must be devised. The system of 'priorities' was used for this purpose during most of 1941. This system involved the assignment to various classes of consumers of scarce materials of a numerical rating which established the order, relative to other consumers, in which their requirements should be met. After some months this system began to break down as it was found to result in many manufacturers of equal priority ratings getting radically different supplies in practice. Even comparatively high-rating priorities could not be met in full since they were granted in too large volume.

As the bogging down of the priorities system became clearer, the system of 'allocations' gradually began to take its place. Under this system, the demands of individual manufacturers were studied in detail and definite physical quantities of materials were allocated to each. There might still sometimes be difficulty in obtaining the amount allocated, but every effort is being made to keep aggregate allocations within the productive facilities of the nation. The system of allocation can, of course, be used to eliminate completely the production of any items not regarded as essential. It has already resulted in the closing down of the production of automobile tires and passenger automobiles for private use.

Allocation of goods at retail to individual retail buyers is more commonly referred to as rationing. No official retail rationing took place in this country in 1941, though there was occasional local and temporary rationing of such items as sugar and silk stockings under special circumstances. In the opening days of 1942, retail sales of automobile tires were so strictly rationed as to be entirely cut off for most buyers. Similar action is being taken with respect to automobiles. As scarcities of retail goods increase, and as price increases are not permitted to control their distribution, a rapid spread of some form of retail rationing may confidently be expected. It is certainly much to be preferred to a first-come first-serve policy. The significance of this development to general retail business needs no elaboration. Restricted prices, restricted volume, and possibly the keeping of elaborate records, are not an encouraging outlook for many lines of trade.

Problem of Increased Production Goals.

During 1941 business in many important fields was confronted with the necessity of drastically increasing output; the necessity for much more drastic steps in this direction in 1942 is rapidly becoming clear as the estimated demands of the defense program are reaching ever higher totals. The goal of increased production may be achieved in several ways. The first and most obvious method is by the increased utilization of already existing productive facilities. In certain lines of production it is possible to operate two or three shifts of workers per day instead of one. This method has the advantage of a fairly prompt increase in output, and may be exemplified by the putting of many aircraft manufacturing companies on a triple shift schedule during 1941. The delays of this method relate to the obtaining of the necessary additional supplies of raw materials, and, more important, the securing through training or otherwise of large increases in the supply of labor with varying degrees of skill.

A second method of increasing output is by the conversion to the desired end of productive facilities already used in somewhat related lines of activity. This would be exemplified by the use of already existing facilities of the automobile industry for the construction of airplanes and tanks, by the use of pipe manufacturers to turn out shells, or by the use of liquor companies in the manufacture of industrial alcohol. This method is inferior to that first discussed inasmuch as it has the additional disadvantages of delay and expense of conversion. The delay and expense of course vary widely. Some cases of conversion are very simple and inexpensive; others are almost as complicated as the construction of entirely new facilities would be. A corollary problem connected with this method of increasing output concerns the difficulties which may result for the normal business of the plant or business being converted. In many important cases, such as the automobile industry, normal business is being completely abandoned. In other cases, such as the railroad equipment industry, war orders are involving conversion of part of the productive facilities, while normal output occupies the remainder. Conversion of facilities has made the biggest stride in large companies of major industries. The possibilities of farming out sub-contracts to small producers throughout the country have been utilized only to a minor extent, although detailed attempts are now being made to accomplish this.

The third method of increasing output is the construction of entirely new productive facilities from the ground up. This method is typical of industries in which either the tremendous volume of output required or the technical complexities of the productive processes involved make the first two methods inadequate. This method has the great disadvantage of expense and delay in attaining output but in the long-run it may be the best method to follow. Examples of this method of increasing output are smokeless powder factories and shipyards.

In some cases, where the necessity for increased production is particularly great, all three methods are utilized in one industry. In the manufacture of aircraft, for example, the year 1941 saw many existing aircraft plants increase the operating shifts, many other plants converted to the production of aircraft or aircraft parts, and the construction of many new plants for aircraft manufacture.

As already suggested, the conversion and expansion of the industrial capacity of the nation is an expensive and time consuming process. By Aug. 31, 1941, Federal Government appropriations for new plant and equipment totalled $6,200,000,000, of which $3,600,000,000 had already been awarded in contracts. In addition, private manufacturers had also embarked upon a self-financed program of plant expansion of $1,000,000,000. Recent drastic increases in the production goal of the national war program will undoubtedly add substantially to the above figures. Some idea of the huge magnitude of the above outlay may be gained from the statement that the net book value of all the manufacturing plants and equipment in the United States is estimated to have been only $22,500,000,000 in 1940. The entire automobile industry, frequently looked upon as the outstanding example of the magnitude and efficiency of American industry, had a net value of corporate assets of about $1,000,000,000 in 1938.

Problem of Plant Expansion.

Business faces many serious problems in connection with plant expansion. First and foremost is the problem of what will be done with the increased facilities when the emergency is passed. The impossibility of utilizing much of the more specialized facilities for normal peacetime purposes explains in part the large proportion of construction being paid for by the Government. Plants for guns, explosives, ammunition, shells, bombs, ship construction, aircraft construction, and others, must be constructed far in excess of any normal uses and the Government is building most of them. In other cases, the Government is financing plant expansion because of the inability of private industry to do so upon the requisite scale. In cases where private business is financing defense construction, it is receiving special depreciation allowances so that costs may be defrayed in the relatively short period of 5 years.

The training of a requisite supply of skilled labor, the financing of greatly increased working capital requirements, and the obtaining of requisite materials and machinery are serious problems. The ultimate effect of plant expansion is of course increased output, but while the plants are being built a substantial proportion of scarce materials is being diverted to that end with the result that current output of finished products is actually less than it would be were expansion not occurring. Another interesting aspect of expansion is that it is being so located as to tend definitely to decentralize the industrial production of the country. The question of the extent to which government-owned productive facilities will compete with private industry after the war is one to which a tentative answer is being sought at the present time. Many plants being financed by the Government are leased to private business subject to option to purchase.

Operating Results in Major Industries.

A brief discussion of the operating results of certain selected major industries during 1941 and their outlook for 1942 seems a fitting conclusion to the present survey. The construction industry is obviously geared closely to the plant expansion phases of the defense program, with the result that contracts for nonresidential construction during 1941 were at a level never before attained. Even residential construction, as a result of increased employment and payrolls, reached a volume not attained since 1928. During nearly all of 1941 the building industry operated with little restriction. Near the close of the year, the use for residential construction of many metal products such as pipe, heating equipment, plumbing fixtures, and like supplies, was restricted to designated defense areas. Thus the building industry in 1942 will be purely a war industry, concentrating on war plants and homes for arms workers.

The defense program is also directly dependent upon the machine tool industry which has made an outstanding record of production in recent years, and is going on to new high levels in 1942. A few figures tell the impressive story. The output of the industry rose from $22,000,000 in 1932 to $225,000,000 in 1939, to $425,000,000 in 1940, to $750,000,000 in 1941, and 1942 production is confidently expected to exceed $1,000,000,000. Current unfilled orders exceed $2,000,000,000.

The bituminous coal industry is operating at a high level of production and is confident of being able to meet any demands that may be placed upon it. The industry produced about 500,000,000 tons of coal in 1941, and expects that both production and transportation of 550,000,000 tons in 1942 can comfortably be taken care of.

The railroads of the country performed an outstanding job in 1941 and, assuming that they can get delivery of the necessary rolling stock, are confident of being able to meet any demands that may be laid upon them in 1942. Improved operating efficiency and equipment enabled the railroads to handle the greatest ton-mileage of freight in their history in spite of a 20 per cent to 25 per cent reduction in rolling stock as compared with earlier periods of peak traffic. A 10 per cent rate increase is being urgently pressed so as to enable the roads to meet a recent wage increase.

The rail equipment industry received orders in 1941 for 1,436 locomotives and 118,371 freight cars. About 70 per cent of the locomotives and 55 per cent of the cars were actually built. The industry has the capacity to meet any demands for rail equipment actually placed upon it. It was hampered in 1941 by inability to get certain materials, particularly steel plates, that it needed. That factor, together with the conversion of much of its capacity to the manufacture of more direct war materials such as tanks, will explain any eventual inability to meet the requirements of the railroads for new equipment in 1942.

The steel industry operated at practical capacity throughout 1941, and will continue to do so in 1942. Increased capacity resulted in the attainment of an output in 1941 of 84,000,000 tons of steel ingots, an increase of 25 per cent over the previous peak year of 1940. Annual capacity was increased by about 4,000,000 tons during the year, and further additions are being made. The direct demands of the defense program are sharply limiting the supply of steel for civilian use and a rigid system of priorities and allocations has been developed.

The output of non-ferrous metals was likewise pushed to capacity during 1941. Many of them, such as magnesium, aluminum, copper, zinc, tin, and lead, are essential to the production of military supplies and therefore civilian consumption is constantly being more and more rigidly restricted.

The electric power industry, which has for years been beset by a constantly increasing degree of Federal regulation, control, and competition, gave a good account of itself during 1941. The adequacy of the country's electric power production facilities is the subject of bitter controversy at the present time. No serious actual shortages developed in 1941, and such local shortages as there were came for the most part from drought conditions which may be an even more serious factor in 1942. Total output in 1941 of an estimated 168,000,000,000 kilowatt hours of electricity exceeded the prior peak year of 1940 by about 15 per cent. The heavy expansion program of the industry was slowed up somewhat in 1941 by labor difficulties and priorities. The latter factor will probably continue to affect progress in 1942.

Aircraft and shipbuilding are the two major mushroom growths of the defense program, having grown spectacularly from month to month and year to year. The value of aircraft production in 1940 was equal to that of the four preceding years; production in 1941 was about $1,500,000,000 or 2 times that for 1940. Present plans call for 1942 production of nearly 3 times that for 1941, and for a further doubling in 1943. Floor space of the industry has increased more than 5 times in 3 years, employment is 10 times what it was 3 years ago, and further huge increases are in process. The industry is obviously confronted by a very serious problem of post-war readjustment.

Twenty years of comparative idleness had reduced the country's shipbuilding industry to a low ebb two years ago. The volume of orders given that industry, and its expansion in facilities to meet those orders are fantastic. Actual production of merchant shipping in 1939 was 241,000 tons, in 1940 was 445,000 tons, and in 1941 was still only 775,000 tons. Unfilled orders on hand last November totalled 6,076,000 tons, or 8 times the 1941 production, and further huge increases in orders are expected.

Other major industries of the country, such as chemicals, rubber, petroleum, electrical products, food products, textiles, farm machinery, and automobiles are being placed on a war footing where civilian needs are placed second to military needs. The automobile industry well illustrates the extreme nature of readjustments that must be made. That industry, one of the outstanding industries of the nation with a normal peace time output valued at about $4,000,000,000, is being converted practically 100 per cent to a supplier of military needs. This tremendous program well drives home the meaning of all-out war and serves to illustrate that the year 1941 has finally silenced any faint belief that the war program could be superimposed upon normal business. War is the determinant of business policies in this country for an unknown time to come. See also PRODUCTION AND TRADE; FINANCIAL REVIEW; PUBLIC FINANCE; and WORLD ECONOMICS.