1942: Business

Expenditures for defense by the United States in 1919, the year of maximum financial effort in the first World War, amounted to $10,900,000,000, or about one-sixth of the national income of $63,000,000,000 for that period. By contrast, in 1942 about $55,000,000,000 was spent on the war effort or 47 per cent of the national income of $117,000,000,000. In 1943 it is expected that the war program will absorb $90,000,000,000 out of a national income of $135,000,000,000, or two-thirds. Figures such as these serve to crystallize in no uncertain manner the tremendous readjustments required in the business life of the country.

Customary indexes of business activity and production have lost most of their usual significance. Most of them can be used today to stress the tremendous readjustments which are being made in our business life, rather than as measures of normal activity or expansion. Conversion to an all-out war effort characterized developments in this country during 1942. This task has been completed to a large extent. The year also marked significant progress in solving the problem of assuring an adequate and balanced flow of raw materials to meet the well-nigh insatiable demands of our converted industries. Much still remains to be done in this direction, however, particularly along the lines of getting a better system of allocating raw materials to competing urgent demands. A final problem, which will be confronted in 1943, is one of an over-all shortage of both manpower and materials in relation to demands for them. The solution of this problem will involve further curtailment of production for civilian consumption, as well as the addition of large numbers of women to the working force and the transfer of workers from non-war to war industries.

Expansion of Durable Goods Industries.

The major business development of 1942 was the great expansion of durable goods industries. The monthly index (Except where otherwise indicated all index numbers cited in the present article are seasonally adjusted Federal Reserve Board indexes, on the basis of the 1935-1939 average equaling 100.) of total industrial production advanced from 168 in December 1941 to 191 in November 1942. The steadiness of the increase in productive activity during 1942 is indicated by the fact that in no month was the index lower than that for the preceding month. Almost the entire increase took place in the field of durable goods, the index of production of which stood at 273 in November 1942 as compared with 214 in December 1941. Production of non-durable goods increased in the same period from 141 to only 145. The index of the production of minerals was actually lower in November 1942 than in December 1941, the respective figures being 129 and 132.

Indexes for many individual industries were not published during the greater part of 1942 because of their immediate bearing upon military matters. However, even in such cases very good estimates of achievements are possible and will be discussed in further detail later in this article. Such indexes as are still available show wide variation in the individual components of the index of general industrial production. The production of iron and steel continued practically at capacity throughout the year. The increase in the index from 191 in December 1941 to 207 in October 1942 resulted almost entirely from additions to productive capacity during the year. There was little change in the index of production of non-ferrous metals during the year. Here, too, capacity output was maintained whenever possible. Lumber production showed a decline from 132 in December 1941 to 124 in October 1942. Corresponding figures for cement were 191 and 174 and for plate glass were 67 and 32. The very low index here is largely the result of the stoppage of manufacture of automobiles for private use.

As already mentioned, official indexes of production are no longer published for certain durable goods industries more closely connected with the direct war effort. However, indications of spectacular increases are readily available, notably in aircraft production and shipbuilding. The aircraft industry in 1938 had an output valued at about $125,000,000. This figure was nearly doubled in 1939. The 1940 output was nearly two and a half times that of 1939, that of 1941 more than three times that of 1940, and that of 1942 reached about $4,500,000,000 or two and a half times that of 1941. The industry expects that in 1943 its output will reach a production value of $10,000,000,000.

Shipbuilding shows a similar picture. Tonnage of sea-going merchant shipping launched in 1939 was 241,000 tons. In 1940 the figure increased to 445,000 tons, in 1941 to 775,000 tons, and in 1942 to 8,200,000 tons. It is confidently expected that the goal of 16,000,000 tons for 1943 will be exceeded. This record is all the more remarkable when it is recalled that the shipyards of the country are also turning out the largest volume of naval craft in history, as well as carrying the heavy load of repairing damaged ships and converting ships from one use to another.

The tremendous expansion of our aircraft, shipbuilding, and other war industries is dependent upon the machine-tool industry which has turned in an outstanding performance, although one that does not catch the public eye. This industry consists of about 300 companies, some 60 of which normally turn out completed machines. None of the companies are large by current business standards; the largest had assets of only $17,000,000 just prior to the outbreak of war in Europe. this industry sold about $1,400,000,000 of its products to munitions makers in 1942. This represents an 82 per cent increase over 1941, more than three times the output of 1940, nearly seven times the sales of 1939, and about fourteen times the 1930-1939 average. As a result of its magnificent production record the industry, for the first time since 1939, has reached a stage where current output exceeds incoming orders, although there is still an unfilled backlog of orders of about $1,000,000,000.

The construction industry in 1942 turned out the greatest volume of business in its history; the estimated aggregate of $14,000,000,000 exceeded by some 20 per cent the previous peak in 1928. Housing construction declined about 30 per cent in the first nine months of 1942 from the corresponding figure in 1941. This decline resulted in large part from governmental restrictions on residential construction as a result of shortages of materials. The expansion and new locations of major war industries have posed a serious housing problem, and nearly all of the residential construction in 1943 will be devoted to alleviating the housing shortage for war workers. The decline in residential building in 1942 was much more than offset by other construction, particularly that for industry, the army, and the navy. The greater part of this type of construction has already been completed, with the result that the industry as a whole faces declining activity in 1943. Estimates of the decrease to be expected run as high as 50 per cent.

Non-Durable Manufactures.

So far as non-durable manufactures are concerned, fluctuations in output for the most part have not been very pronounced. The major exceptions are, of course, those consumers' goods the output of which has been restricted in one way or another as a war measure. During 1942 increased employment and wages led to increased consumption of many lines of consumers' goods that were still available. This demand, coupled with the requirements of the armed services, accounts for increased indexes of production in certain lines of non-durable goods. Among such goods were textiles, the index of which rose from 154 in December 1941 to 156 in October 1942. More noticeable increases were in manufactured food products from 137 to 151, in alcoholic beverages from 116 to 138, and in tobacco products from 129 to 145.

Various kinds of restrictions on production or consumption played a role in explaining declines in output of other lines of non-durable goods. Among these were leather and its products, the output of which declined from 128 in December 1941 to 112 in October 1942, paper and paper products declining from 155 to 130, and petroleum and coal products from 139 to 120.

Employment Indexes.

The relatively much greater degree of expansion in the durable goods industries than in the non-durable, which has already been referred to, is further emphasized by relative indexes of employment (1923-25 average equals 100). In November 1940, for the first time since the pre-depression era, the index for employment in the durable goods industries passed that for non-durable goods. In December 1941 the durable goods employment index stood at 144.3 while the non-durable was 126.0. By September 1942, the former had increased to 167.2, while the latter had declined to 123.8. The same trend is much more strikingly brought out by payroll indexes published by the Bureau of Labor Statistics (without seasonal adjustment, 1923-25 average equals 100). This index for the durable goods industries advanced from 183.3 in September 1941 to 274.9 in September 1942. Corresponding indexes for the non-durable goods industries were 139.5 and 159.6, respectively.

The great increase in the durable goods payroll index can be explained as a combination of increased employment, longer hours of work, and higher basic hourly wage rates. Indexes showing the increase in employment have already been given. Figures compiled by the Bureau of Labor Statistics show that average hours worked per week in the durable goods industries increased from 42.3 to 44.6 between September 1941 and September 1942. During the same period, average hourly earnings rose from 84.3 cents to 99.4 cents. In the non-durable goods industries, hours worked increased only nominally from 39.5 to 39.6, while average hourly earnings rose from 66.8 cents to 75.0 cents.

At a time when manpower shortages are becoming acute, the work week of 44.6 hours is regarded by business as inexcusably short. The farm organizations have recently announced that they favor a 54 hour week for industrial labor, at regular hourly wage rates. The attainment of a longer working week poses a major problem to be settled by the present administration.

Wage and Labor Problems.

Likewise, the handling of the wage problem has not been satisfactory in every respect. Labor seems to have been unable to reconcile itself to the fact that, at a time when the war needs are consuming nearly two-thirds of our national output, the standard of living of labor should decline along with that of all other classes of society. The war labor board seems to have adopted the policy of granting wage increases proportionate to the rise in the cost of living. Since wages are a major element in the cost of living, there is danger that the two will chase each other merrily upward in an endless inflationary spiral. Wage stabilization promises to be one of the major problems of 1943.

So far as strikes and work stoppages are concerned, the participation of the United States in the war brought about sharp improvement over the unfortunate record of 1941. Shortly after Pearl Harbor, the A.F. of L. and the C.I.O. agreed to abandon the strike as a labor weapon during wartime. However, it is quite clear that union officials do not have complete control over their members since serious work stoppages have occurred in violation of the orders of union officials. No satisfactory method of handling the situation has been worked out. The taking over of a plant by the Government may merely penalize management for the crimes of labor. Jurisdictional disputes have assumed serious proportions at times during the year. At the moment of writing, 25,000 anthracite coal miners have stopped work in protest against an increase of 50 cents a month in their union dues. The occurrence of such an event at a time when oil-starved New England is threatened with a serious shortage of anthracite coal would seem to be evidence of a seriously inadequate labor policy on the part of the Federal government. The problem of labor turnover, and of an extraordinarily high rate of absenteeism, due neither to sickness nor strikes, is a matter of serious concern to industry.

Increase in Farm Production.

Increased farm production, coupled with substantially higher prices for many farm products, is estimated by the Department of Agriculture to have raised farm income in 1942 to about $15,900,000,000, an increase of more than $4,000,000,000 over 1941. Income from sales of farm products alone in November 1942 was 225 per cent of the 1935-39 average as compared with 153 per cent in November 1941. The index of prices received by farmers (1909-14 equals 100) stood at 163 in September 1942 as compared with 122 for the year 1941. Corresponding figures for the prices paid by farmers were 154 and 131, respectively. This means that whereas in 1941 the ratio of prices received to prices paid was 91 per cent, it stood at 106 per cent in 1942, and the relative buying power of the farmer increased sharply during the year. Pressure of the farm bloc was responsible for the failure of Congress to deal aggressively with the problem of farm prices during 1942, and the increase in farm prices is one of the strongest inflationary forces in the country. Unfortunately further pressure from the farm bloc of a nature inimical to the national welfare seems to be in store in 1943.

Agricultural output in 1942 was for the most part at peak levels not attained for many years. The Nov. 1, 1942, crop estimates of the Department of Agriculture for 1942 included the following: Corn, 3,185,000,000 bushels (1941 production — 2,673,000,000 bushels); wheat, 984,000,000 bushels (1941 — 946,000,000); and cotton, 13,329,000 bales (1941 — 10,744,000). Production of dairy products, meats, and wool also attained high figures in 1942. The demands of our armed forces, lend-lease shipments to other nations, and our home economy assure a market in 1943 for all the foodstuffs we can produce. A third successive year of bumper crops is a little too much to expect, and if it does not materialize we may be faced by serious shortages. The maximization of output is complicated by manpower shortages and by the rationing of agricultural machinery, tires, and gasoline.

Price Stabilization.

The efforts of the Government to stabilize prices in 1942 were fairly successful except in the fields of labor and agricultural products, where organized political pressure groups seem in many cases to have forced concessions at the expense of the rest of the nation. The Bureau of Labor Statistics wholesale price index (1926 - 100) for all commodities rose from 93.6 in December 1941 to 100.1 at the end of November 1942. The component parts of this index for corresponding dates show farm products rising from 94.7 to 110.8, foods from 90.5 to 103.6, and all other commodities from 93.7 to only 96.1. In 1941, likewise, farm products and food had shown much sharper price increases than had been shown by other commodities.

In spite of price fixing attempts by the Federal government, rising wages and wholesale prices were reflected in 1942 in a further substantial increase in the cost of living. From December 1940 to December 1941, the Bureau of Labor Statistics index of the cost of living (1935-39 equals 100) advanced from 100.7 to 110.5, and by October 1942 it showed a further increase to 119.0. The significance of this sharp advance is indicated by the fact that the index during the five years 1936-40 fluctuated between a low of 99.1 in 1936 and a high of 102.7 in 1937. The pressure of increased purchasing power applied to a rapidly decreasing supply of consumers' goods is a well-nigh irresistible one. Increased taxation, forced saving, rationing, and direct price fixing are all weapons that will probably be used by the Government in an effort to restrain inflation. However, it would seem that the most that can be expected is that these restraints will hold inflation to a slower rate than would otherwise exist. We can expect a gradual and substantial rise in the index of the cost of living as time passes, with the danger of an explosive increase if restraints are removed too rapidly in the post-war period.

Retail Trade.

In spite of tremendous restrictions on the manufacture and sale of civilian goods during 1942, the dollar volume of retail trade for the year is estimated at about $56,000,000,000, an increase of about 3 per cent over the previous peak attained in 1941. The attainment of this new record is ascribed in part to the higher price level and in part to the using up of stocks of goods which were on hand but no longer produced. In other words, a sharp contraction in retail trade is looked for in 1943 when stocks of many goods can no longer be replenished as exhausted. The Federal Reserve Board seasonally adjusted index of stocks on hand in department stores (1923-25 average equals 100) reached a high of 140 in July 1942 as contrasted with 82 in the previous July. By October 1942 the index had decreased to 115, as contrasted with an increase to 97 in October 1941. The similar index of department store sales was 128 in October 1942 as compared with 105 in October 1941. The high level of department store sales is, of course, offset by the fact that retail sales in some lines of trade, such as automobiles, have largely disappeared.

Expansion of Exports.

Primarily as a result of a large increase in lend-lease shipments, our exports expanded sharply in 1942. During the first ten months of the year merchandise exports totalled $6,233,000,000, an increase of more than 50 per cent over the figure for the corresponding period of 1941. At the same time, the cutting off of Far-East supplies of silk, tin, and rubber, as well as the shortage of shipping for bringing many products from other markets, caused a decrease in imports from $2,721,000,000 in the first ten months of 1941 to $2,212,000,000 in the first ten months of 1942. The use of our entire tonnage of ocean-going shipping is now completely under the control of the Federal government.

Other Major Industries and the War.

The spectacular achievements of the aircraft industry, the shipbuilding industry, and the machine-tool industry, which are directly and closely connected with the war effort, have already been referred to in detail. Outstanding performances have also been turned in by other major industries. The railroads carried the largest volume of freight and passenger traffic in their history with a minimum of interruption and delay. Their performance has been widely acclaimed as an outstanding contribution to the war effort. Meritorious as it was, however, the problem of the industry was fundamentally an expansion of its peacetime functions.

An outstanding example of the complete conversion of a major industry from a peacetime to a wartime economy is furnished by the automobile industry. In 1941, the industry turned out peacetime products with a value of about $4,500,000,000. In 1942 its arms production, consisting of a tremendous range of products including airplanes, tanks, guns, trucks, tractors, etc., exceeded the prior year's production by 30 per cent. Employment in the industry has risen to 930,000, an increase of approximately 25 per cent over the peacetime peak. Output of the industry in 1943 is expected to attain $9,000,000,000, or double its 1941 output.

Tremendous strides were made in 1942 in the field of chemistry, in the output of aluminum and magnesium, and in the production of high-octane gasoline. The rail equipment industry was converted in large part to the production of arms. Air transport performed an outstanding service, and despite reduced equipment resulting from Government expropriations, it did the greatest volume of business in its history. The coal industry, particularly labor, seems at times to have been a little slow to appreciate the extraordinary demands facing the country. A thirty-hour or even a thirty-six hour work week does not seem to make due allowance for the national emergency and the manpower shortages that are developing. Farm machinery manufacturers are converted for the most part to armament production. The electric power industry has thus far managed to meet all demands placed upon it. The restriction of its expansion program, as a result of its inability to get necessary materials, may prove to have been shortsighted if the war continues indefinitely. This remark applies, incidentally, with equal force to restrictions that have been placed upon railroad maintenance and acquisition of equipment. A year ago the radio industry was congratulating itself on having done an annual business of about $300,000,000. Today it is confronted with a $4,000,000,000 program for the armed forces in 1943-44.

Business Problems.

Manpower.

The manpower problem is one of the most serious confronted by business at the close of 1942. Included in this problem are such matters as over-all shortage of labor, women in industry, allocation of scarce labor to competing demands, training for skilled jobs, labor absenteeism and to a lesser degree, strikes, and the whole question of wages. The political aspects of the labor situation make the problem one which the administration and Congress have been extremely unwilling to handle realistically and effectively. More aggressive dealing with the manpower problem can be expected in 1943 as shortages grow more acute.

Scarcity of Materials.

A second major problem confronted by business is that of scarcity of materials. So far as basic raw materials are concerned, the original priorities and allocations programs of the War Production Board gradually became bogged down as more and more difficulties arose in manufacturers' getting the supplies allocated to them. A new system of allocations was devised near the end of 1942 which it is hoped will alleviate these difficulties. The problem of scarcity, however, is a much broader one than that of basic raw materials. In the field of finished consumers' goods, reduced outputs of some products, coupled with the army-navy and lend-lease demands, have resulted in a scarcity of many lines of consumer goods, particularly in relation to the vastly increased purchasing power of the public. Rationing seems to be the fairest way of meeting such scarcities. It has already been applied to a limited number of products, such as sugar, coffee, gasoline, and fuel oil. Shortages are imminent in butter, meat and canned goods, and rationing is shortly to be applied to them. A rapid spread of rationing can be anticipated during 1943 as further shortages develop.

Price-Fixing.

The Government's price-fixing policies are also a matter of major concern to business as well as to consumers. Where prices are fixed at more than one level in the productive process, obviously the Government's policies can determine the amount of profit which manufacturers can obtain. Other significant factors affecting business profits are contract renegotiation, which has already been applied on a widespread scale to contracts with the army and navy, and tax uncertainties. In spite of the present high level of business taxation, the expanded scope of anticipated Government expenditures suggests that even higher rates of taxation on business may well materialize in 1943. An additional unknown factor which is of vital importance to business in the long-run, and one with which it is now concerning itself, is the question of the nature and extent of governmental controls and restrictions upon business which will be retained at the close of the war, or which will be placed upon it subsequently as a part of 'normal' peacetime conditions.

In conclusion, it may safely be stated that on the whole, business has done a remarkable job of production in 1942.

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.

1940: Business

Impact of World Crisis on Business.

Business activity in the United States during 1940 was very largely dominated, directly or indirectly, by the course of events abroad. War orders produced a sharp and direct stimulus to a certain rather limited group of industries in this country, and on the other hand many industries, notably agriculture, suffered a serious reduction in the foreign demand for their products. The course of foreign war led to the inauguration of our domestic defense program which has been, and for some years may continue to be, the cause of a high and constantly spreading degree of business activity. The defense program in turn, has led to questions of public finance, particularly taxation, which are of paramount importance to the nation as a whole. Business activity in 1940 followed a general pattern quite similar to that followed in both 1938 and 1939, namely, a fairly severe recession in the early months of the year, followed by a sharp recovery, the highest point of which was reached near the close of the year.

The general pattern just referred to was followed by most of the more important components of business activity. Industrial production, construction and railroad traffic all reached comparatively low levels in March or April and recovered spectacularly by the close of the year. Price fluctuations, both wholesale, retail, and for farm products, were surprisingly small in relation to the swings in business activity. Both industrial and farm incomes were increasing, there was little variation in the cost of living, and the volume of retail trade was increasing. Unemployment decreased substantially. Our exports reached the highest total since 1929, with the excess of exports over imports, the misnamed 'favorable' balance of trade, being the highest since 1921.

Banking conditions reflected a huge import of gold, rapidly increasing excess banking reserves, and a continued slow decline in the already low level of interest rates. Stock prices failed to reflect the high level of business activity, closing the year at a level substantially below that at which they had opened it. Average monthly volume of trading on the New York Stock Exchange was the lowest since 1913. Heavy Federal deficit spending continued during the year; the rate of such spending increased substantially during the closing months as the defense program began to move forward. (See also BANKS AND BANKING.)

Business and the Defense Program.

For ten years the people of America waited in vain for the emergence of some new durable goods industry important enough to revitalize the business of the nation. Ironically enough, such an industry, defense, has now arrived. Almost overnight we are faced with problems relating to maximizing production, rather than those of idle plants and idle men. The New York Times Index of Business Activity reached its all-time high in December 1940, and all indications point to the attainment of even higher levels in the coming year. This index, which is expressed in terms of 100 as the estimated normal, closed 1939 at 111. It fell rapidly and uninterruptedly to a low of 98 in April and rose to 109 by the end of June. After dropping to 107 in July, the index rose with minor interruptions and at a rapidly accelerating rate in the later months, to close the year at the all-time high of 121. This closing figure compares with previous peaks of 115 in 1929, 111 in 1937, and 112 in 1939. The Federal Reserve Board Index of Industrial Production (Revised, 1935-39 = 100) followed the general pattern of the index of business activity although the fluctuations were greater in the former. Industrial production stood at 126 in December 1939, dropped to 111 in April 1940 and advanced to a new high level of 132 in November 1940. The fact that the present recovery is one resting fundamentally upon the durable goods industries, as contrasted with the nondurable, is shown by comparing the Federal Reserve indexes for the two (1935-39 = 100). Production in the former was 140 in December 1939, 113 in April 1940, and 153 in November 1940; figures for the latter were 117, 107, and 120, respectively.

Effect of Defense on Selected Industries.

Further analysis shows the tremendous impact of the war and the defense program upon certain important industries. Deliveries of aircraft manufacturers in 1940 totalled about $625,000,000, approximately equal to the total production in the four preceding years. However, unfilled orders are about 5 times the 1940 production. Floor space was doubled in 1940 and will be doubled again in 1941. Frames can be produced more rapidly than engines and the engine factories are now working 24 hours a day. The production of the machine tool industry in 1940 was $400,000,000 as compared with $200,000,000 in 1939. Production at the close of 1940 was running at the rate of $500,000,000 per year, and production in 1941 was expected to reach $650,000,000. The American shipbuilding industry is booked solid for years to come. Three years ago there were only 6 companies in the United States engaged in producing sea-going merchant ships. Today there are 16 such companies, and additional yards are under construction. All three of the industries just mentioned are faced with a serious problem in the shortage of skilled labor.

Among the major industries of the country which indicate confidence in their ability to meet any burdens likely to be placed upon them may be mentioned: petroleum, railroads, automobiles, chemicals (smokeless powder production is being spectacularly expanded), coal, railroad equipment, electric power, rubber, and pulp and paper. The steel industry is in a debatable position. At only rare and brief intervals has it ever operated at anything approaching full capacity. Practically full capacity operations were reached in the Fall of 1940, and orders were being received in excess of production. Priorities in the filling of orders were beginning to be voluntarily applied by the industry, which felt, contrary to the views of certain government officials, that the construction of substantial additional capacity was not required. The aluminum industry is rapidly expanding its productive capacity and expects to be able to meet any predictable demands upon it. (See also UNITED STATES: National Defense.)

Increase in Employment.

The increased production during the year naturally led to increases in employment, payrolls, and national income. The nature of business recovery was such that employment increases in the durable goods industries were much more noticeable than those in the nondurable. Following the low of the year of 95.2 reached in April, the Federal Reserve Board adjusted index of employment (1923-25 = 100) advanced to 108.2 in October, as compared with the December 1939 level of 100.1. Corresponding figures for nondurable goods industries were 103.3, 106.9, and 108.9, respectively; the October 1940 recovery level was thus still below that of December 1939. So far as total numbers are concerned, aggregate unemployment was reduced by more than 2,500,000 between January and October 1940. The figure of 6,644,000 unemployed in October was still about 1,000,000 greater than the lowest figure reached in the 1937 recovery. However, seasonal decreases in industrial employment were not as large as usual in the closing months of 1940. The National Industrial Conference Board estimates that unemployment will decline to 4,404,000 by June 1941, as contrasted with the June 1938 figure of 10,959,000.

Factory Payrolls.

Indexes of factory payrolls tell about the same story as the indexes of employment, although the amplitude of the fluctuations is somewhat greater. The increases in employment in certain of the defense industries have been spectacular, whereas there have actually been decreases in most of the major nondurable goods industries. (For a detailed discussion, see the article on PRODUCTION AND TRADE.) In many industries actual or probable shortages of skilled labor are a serious threat to the attainment of scheduled production programs. Increases in production, employment, and payrolls led to a substantial increase in national income during 1940, to a figure estimated at between $74,000,000,000 and $75,000,000,000. This is more than $4,000,000,000 greater than the recovery peak reached in 1937, and compares with $74,211,000,000 in 1930 and the all-time 1929 high of about $80,000,000,000. The second largest cash farm income since 1929 was reached in 1940 as a result of abundant farm production coupled with average farm prices above those of 1939. In the first 9 months of 1940 farm income from marketings amounted to $5,633,000,000, while income from government payments was $542,000,000. Corresponding figures for the first 9 months of 1939 were $5,233,000,000 and $558,000,000, respectively.

Labor Disputes and Policies.

Man-day idleness as a result of labor disputes was only one-fourth as great in the first eight months of 1940 as in the corresponding period of 1939. However, the trend during the year was upward and current high levels of business activity would normally lead to an increase in strikes. At the present time, the demands for speed in the defense program lead to the belief that strong Federal pressure may be brought to hold strikes to a minimum. Compulsory or semi-compulsory arbitration may replace strikes as the means of settling labor disputes in key industries. Whether the exigencies of the defense program will result in legislative action outlawing strikes and suspending application of the 40-hour week are questions that only the future can answer, but there is a distinct possibility that such action will be taken, particularly if the lack of it results in important production delays.

In October 1940 the 40-hour week took effect in all industries affected by the Fair Labor Standards Act, better known as the Wages and Hours law. As was the case with the previous 44-hour maximum established in October 1938, and the 42 hours in October 1939, the new maximum hours (higher-rate of pay for overtime) took effect at a time of rapidly increasing business prosperity, and no serious repercussions seem to have been felt. Although the mandatory 40-cent hourly minimum wage provisions of the Act will not take effect until 1945, the Administrator, upon the recommendation of industry committees, had, by October 1940, established minimum wages ranging from 32½ to 40 cents an hour in 11 major industries employing on the average more than 2,100,000 workers.

The National Labor Relations Board's administration of the Wagner Act (National Labor Relations Act) was searchingly investigated and scathingly criticized by a Committee of the House of Representatives. The report of the Committee demanded changes in both the personnel and the administrative policies of the Board. Important changes in personnel accompanied the appointment of Dr. H. A. Millis to succeed J. Warner Madden as a member of the Board. In spite of the resignation of John L. Lewis from leadership of the C.I.O., in accordance with a preelection pledge, there seems to have been little or no progress made during 1940 in healing the four-year-old breach in the ranks of labor. The 'trust-busting' activities of Assistant Attorney General Thurman Arnold during 1940 were directed against labor unions, particularly in the building trades, as well as business.

Building Construction.

Residential construction during 1940 attained the highest levels reached since 1929. The Federal Reserve Board seasonally adjusted index (1923-25 = 100) of contracts awarded for such construction rose fairly steadily from 53 in January to 82 in September. Total residential construction for the year is estimated to have exceeded that in 1939 by about 10 per cent. Industrial building was pushing ahead vigorously in the closing months of the year, in opposition to the usual seasonal trend. Engineering construction awards in December were exceeded only by the October total of $703,000,000, which in turn was nearly three times that for October 1939. The national defense program was, of course, largely responsible for the great increase in both public and private building activity in the last half of 1940, and the outlook for increasing levels of activity in 1941 is an encouraging one. The large volume of contracts already awarded assures a high level of activity in the first months of 1941; additional requirements for the defense program, as well as the upward trend of general business, strengthen the longer run prospects for the industry. Construction costs, incidentally, were rising fairly rapidly in the closing months of 1940. (See also HOUSING DEVELOPMENTS.)

Electric Power.

Electric power reached a new record high level of production in 1940 at an estimated 118,500,000,000 kilowatt hours of electricity, rising 11.1 per cent above the previous peak level attained in 1939. The industry added more than 1,200,000 kilowatts to its productive capacity during the year, at an estimated cost of about $580,000,000, and an even higher rate of additions to generating capacity is expected for 1941 and 1942. Lower average prices received for power translated the 11 per cent increase in output into an estimated 5 per cent increase in gross revenue for the industry in 1940. This gain, furthermore, was almost, if not entirely, offset by increased taxes and operating costs; net income of the industry for 1940 is thus expected to be about the same as for 1939. The average domestic consumer paid a new low price of 3.81 cents per kilowatt hour in 1940; as compared with 4.00 cents in 1939; his average annual consumption was 952 kilowatt hours as compared with 897 in 1939.

Railroads.

The railroad industry, while falling far short of reaching the new high level of activity that characterized the public utility industry, is comparable with the utility industry insofar as a large part of the increased gross revenue of the year was absorbed by higher operating expenses and higher taxes. The higher level of business activity during 1940 resulted in aggregate freight car loadings being about 7 per cent higher than the 34,100,000 total for 1939. Loadings of coal and iron ore were particularly heavy; shipments of grain and cotton declined as a result of waning export markets for these products. Passenger revenues were unfavorably affected by the refusal of the Interstate Commerce Commission in March 1940 to permit a continuation of the 2½ cent fare, thus compelling a return to the 2 cent level. Labor relations in the industry were calm during the year. The I.C.C. was given regulation of the inland waterways and a special commission was appointed by the President to study the relative economy, fitness, subsidies, and taxation of rail, motor and water carriers. During 1940 the Interstate Commerce Commission approved reorganization plans for a number of important roads in the hands of receivers. The chief characteristic of such plans was a drastic reduction in funded debt and fixed charges; in many cases the holders of preferred and common stock received nothing. For the first year since 1930, no class 1 road entered receivership. The present outlook for continued expansion of heavy industry makes the outlook for the railroads the brightest since 1930. It was estimated at the close of the year that 1941 traffic might exceed that for 1940 by about 12½ per cent. (See also RAILROADS; and INTERSTATE COMMERCE COMMISSION.)

Business and the Federal Government.

Although for the most part the industry is internally in fairly sound operating and financial condition, its relations with the Federal government place major uncertainties before it. In the first place, the Securities and Exchange Commission is bringing increased pressure to bear to enforce the reorganization of the holding company set-up of the industry. In the second place, the Commission, in connection with its approval of new issues of securities, is exercising increasing control over the depreciation policies and financial structure of the companies. In the third place, the problem of Federal Government competition, which had lain partially dormant since the TVA — Commonwealth and Southern settlement in 1939, is again becoming a matter of prime concern to the industry. Federal projects in the Pacific Northwest may ultimately develop into a program for public ownership which will dwarf the TVA situation. The uncertain outlook for the industry is reflected in the relatively unfavorable market record of public utility stocks during the year.

Major Price Movements.

Although certain more sensitive prices were advancing at the close of 1940, price movements as a whole for the year were not so great as increasing levels of general business might have led one to expect. The closing months of 1939 had witnessed a rapid speculative advance in many price groups as a result of the outbreak of war in Europe. This speculative advance was sharply reversed in the early months of 1949 and the gains in the later months of the year were in many instances insufficient to bring prices back to the high levels reached in 1939. Moody's Spot Commodity Price Index, for example, covering 15 leading commodities (Dec. 31, 1931 = 100), stood at a low of 138.4 in August 1939, a high of 172.8 in September 1939, and closed that year at 168.8. By August 1940 the index had fallen to a low of 149.3, and a fairly steady and rapid advance carried the index back to 171.8 by the close of the year. Similar wide price swings were shown by the Dow-Jones Index of Commodity Futures.

The Bureau of Labor Statistics all-commodity wholesale price index showed only minor fluctuations. The index (1926 = 100) was 79.9 in the week ended Dec. 28, 1940, and 79.4 a year earlier, having reached a low of 77.4 in August. The National Industrial Conference Board index of the cost of living likewise showed very little fluctuation during 1940. Underlying aspects of the current economic situation, unless restrained in one way or another, should result in substantially higher price levels for many products. Increased employment, wages, and national income, accompanied by the abnormally large demand for industrial materials resulting from the defense program, should result in rising prices, particularly in view of the existing easy money conditions. However, large supplies of many agricultural commodities, pressure exerted by the Temporary National Economic Committee's investigations which continued during 1940, and pressure by the National Defense Advisory Commission, are all combining to restrain runaway prices. Further steps in the same praiseworthy effort would be reasonable restrictions upon unlimited wage demands by labor, and the placing of more rigid restrictions upon the present almost unlimited credit expansion possibilities.

Controls for Inflation.

The dangers of price inflation inherent in the monetary position of the country were heightened during 1940 by the addition of unprecedentedly large net imports of gold to our already unwieldy reserves, and the further large increase in the already large excess reserves of the Federal Reserve Member Banks. In the first 11 months of 1940 net gold imports amounted to $4,617,000,000 as compared with the previous high of $3,574,000,000 in 1939. Excess Member Bank reserves stood at $6,620,000,000 at the close of 1940, as compared with $5,270,000,000 a year earlier. Interest rates on government obligations and other high-grade bonds reached the lowest level in our history. Money in circulation at the end of December 1940 was $8,733,000,000, an increase of $1,152,000,000 over the previous year. Recognition of the inflationary dangers inherent in the monetary situation was shown in the terms of a five-point program for credit control laid before Congress by the Federal Reserve Board on Jan. 1, 1941. This program called for giving the Board wider controls over bank reserve requirements, terminating the President's authority to devalue the dollar and to issue greenbacks, repealing the power of the treasury to issue silver certificates, excluding from the credit system all further gold purchases, curbing the sale to banks of new government securities, and further increasing taxes.

Profits of Leading Corporations.

Based on National City Bank calculations, profits of leading corporations in the first 6 months of 1940 were 55 per cent ahead of those for the corresponding period of 1939, the increase being nearly 100 per cent in those industries directly affected by the war and defense programs. In spite of the increasing rate of industrial activity in the third quarter of the year, the increase in profits in that quarter was only 22 per cent, due in large part to the heavy deductions that were made to meet the increased corporate tax requirements of the Second Revenue Act of 1940. The First Revenue Act of 1940, signed in June, had substantially increased the income taxes payable by individuals, and increased by only 1 per cent the corporate tax rate. The Second Revenue Act, signed in October, further increased the normal corporate income tax rate to 24 per cent, as compared with 18 per cent in 1939. Furthermore, the Act levied a high rate of taxation on income in excess of the 1936-39 average income or of 8 per cent on invested capital, whichever base the taxpayer might choose. The combination of the normal and excess profits rates would take for the government 62 per cent of any excess corporate earnings of more than $500,000. Further increases in both personal and corporate income tax rates seem indicated for 1941. (See also TAXATION; and INCOME TAXATION.)

Increased corporate profits in 1940 and the outlook for further increases in business activity did not lead to higher stock prices in 1940. As a matter of fact, at the close of the year the Dow-Jones average of industrial stock prices stood at a level of 12½ per cent below that at the close of 1939, railroad stocks were off 11½ per cent, and utility stocks, largely because of government regulation and competition, were off 22½ per cent. Stock prices at the close of 1940 stood about at their 1938 averages, whereas industrial production had increased by 50 per cent. Volume of trading on the New York Stock Exchange continued the rapid decline that has been in effect for several years. Total volume of 207,509,740 shares was off 22 per cent from 1939, 60 per cent from 1936, and was less than ½ that at the bottom of the depression in 1933. The last sale of a stock exchange seat during 1940 was at a price of $32,000, the lowest level reached since 1899.

Figures published by the Commercial and Financial Chronicle showed that in the first 11 months of 1940 the volume of capital financing was about 10 per cent larger than that of the corresponding period of 1939. Of the corporate financing of $2,328,000,000 in it months of 1940, no less than $1,667,000,000 was represented by refunding issues brought about in large part by the extremely low level of interest rates prevailing during the year. In 1939 an even larger proportion had consisted of refunding issues.

Trade.

Retail trade in 1940 exceeded that of 1939 in nearly all lines. Automobile sales increased by about 25 per cent, and chain and department store sales rose. The Federal Reserve Board seasonally adjusted index of department store sales (1023-25 = 100) stood at 106 in December 1940, as compared with the 1939 high of 96, also in December. The index for chain store sales (1929-31 = 100) was 124 in November 1940 as compared with 117 a year earlier, and for rural retail sales the corresponding indexes were 137.9 and 122.7, respectively.

The export trade total of more than $4,000,000,000 for 1940 was marked by sharp increases in the export of war materials to Britain and Canada, sharp declines in the export of many important agricultural products, and the complete cutting-off of many hitherto important export markets as a result of war developments. The export total was the largest since 1929, and the excess of exports over imports of about $1,400,000,000 had not been reached since 1921. Exports to South America made substantial gains at the expense of nations blockaded by the British fleet. The activities of the Export-Import Bank in financing trade with South America should further stimulate exports to that region. The declining significance of exports of agricultural products is shown by their decline from 22 per cent of total exports in November 1939 to 8 per cent in November 1940. Copper, tin, and rubber accounted for the greatest gains in imports during the year.

Summary of Business Trends.

Business in the United States closes the most active year in its history confronted with a volume of actual and potential orders which will carry it to new high levels of productivity. The fact that this volume of activity is based upon the completely abnormal and economically unsound basis of a war and defense program confronts business with a number of major uncertainties, the outcome of which will drastically affect its volume of activity, its levels of profit, or both. Military developments in the war will decide whether defense production is intensified or diminished; the steps taken to finance defense expenditures will have an important bearing both on business profits and on price levels. Heavy reliance upon taxes will reduce profits and tend to prevent runaway price levels; the effect of relying more largely upon government borrowing would be just the reverse. The probabilities are that maximum productive activity will be called for and that taxes will be further increased. See also WORLD ECONOMICS; INCOME IN THE UNITED STATES; and INSURANCE.

1939: Business

The Year's Trend.

The effectiveness of the stimulants to business recovery applied last year disappeared by the beginning of 1939 and a new recession began. It was by no means as severe as the recession in 1937, though it was aggravated by a war crisis in April. By early summer, another recovery had begun and the actual outbreak of war caused a very rapid improvement in many lines of industry. Prices which had been declining continuously since the crisis of 1937 rose sharply, further stimulating the recovery. Railroad facilities were congested. Income payment rose and retail trade expanded. However, the recovery in business sentiment was not sufficiently strong to cause increase either in new construction for private purposes or in new capital issues, both of which had been at low levels during the first half-year. Banking conditions had been favorable during the whole year with rapidly mounting excess reserves fed by gold imports. Interest rates, already low, had declined still further. Security prices recovered quickly under the speculative influence accompanying the outbreak of the war but they paused thereafter in spite of the very substantial recovery in production. The United States Government continued its policy of heavy deficit spending to provide stimulus to industry and later to increase armaments. The strength of the opposition in Congress which succeeded in preventing the passage of the Lending Bill in July served to encourage business sentiment. The settlement of the dispute between the Tennessee Valley Authority and the Commonwealth and Southern Public Utility Company strengthened it further. The Temporary National Economic Committee continued to investigate monopoly conditions and the Department of Justice prepared to prosecute under the Sherman Anti-Trust Act both trade associations and labor unions in the building trades.

The Business Index.

The level of business at the beginning of the year was at the high point of the stimulated recovery of 1938. The business index of the New York Times (estimated normal = 100) stood at 93. It began to decline immediately, however, and continued to do so without break until the second week in May when it reached 85. It then rose to 91 on June 24 and stood at 92 on Aug. 19. With the outbreak of the war, it shot up rapidly to 97 on Sept. 9, and then continued to rise more slowly until on Nov. 11 it was 107. Thereafter, it maintained a fairly constant level. This recovery in 1939 was even more spectacular than that in the middle of 1938 and carried the level of business activity nearly to that at the peak in 1937.

Although the index of business is a composite showing trends in many lines of activity, this year the pattern is repeated with great consistency. In manufacturing, the general index (Federal Reserve Board, 1923-25 = 100) which was 104 at the end of December fell to 92 in April, rose to 103 in August and 120 in October. Both durable and non-durable goods industries followed similar courses though the amplitude of fluctuation of the former group was much larger. Among individual industries, there were, of course, certain divergences. Steel, textiles, meat packing and petroleum refining, all conformed to the average pretty closely. Wheat processing and sugar melting (after allowances had been made for seasonal variations) remained high in the spring, declined in the summer and then rose in the fall. Mineral production was better sustained throughout the year through industrial production though the strike in the bituminous coal industry, counterbalanced somewhat by a rise in anthracite production, gives the index a superficial appearance of similarity.

Effects of War and War Scares.

The effects of war and war scares on production were various. In the spring, when the general level of business was declining, the crisis accompanying the annexation of the remains of Czecho-Slovakia by the Reich proved a deterrent to industry. The general index of business dropped from 89.1 on April 1 to 86.0 two weeks later. Most industries were similarly affected as were the money and security markets (see below). But in the fall, when business was already rising, the first effects of the war were a rapid rise in productive activity. The figures for the general index are noted above. Certain industries were particularly affected. Notable among these were steel and bituminous coal production, cotton textiles and paper. Wheat and sugar production rose somewhat but not in an amount comparable with the retail demand, the high level of production in the spring having provided ample inventories of these products. The impetus to industry which came in the first months of the war carried business to a high level which was sustained but not exceeded in the later months of the year. The peculiar character of the warfare abroad led to doubts as to the kinds of supplies needed. Removal of the embargo on arms stimulated munitions and aircraft works, but restrictions on trade made business hesitant about long term commitment.

Construction Industry.

This hesitancy was probably a factor in the lack of response of the construction industry to the new conditions. In the early months of the year the amount of new construction had declined. At the end of 1938, the average daily value of construction contracts awarded (adjusted for seasonal variation) had been $15,900,000, but by June it was only $10,728,000 — a decline of a third. In September, it did increase a little to $12,163,000, but in October it was only $10,021,000.

Transportation Industry.

The varying volumes of production and construction produced concomitant changes in railroad traffic. In the early months of the year, freight car loadings declined. With the decline in revenues, profits declined rapidly and net operating income for Class I railroads which had been $49,373,000 in December were only $15,258,000 in April. Net income, after fixed charges, disappeared entirely in each of the first six months of the year and deficits of from $1,000,000 to $27,000,000 appeared. The war traffic of the fall was a boon to these companies. Traffic increased so much more than was anticipated that there was almost a shortage of freight cars. Repair shops were pushed to capacity and orders for new cars and new rails became higher than in any year since 1937. Earnings increased so that in September net operating income was $86,435 compared to $54,586 in August. Since the fixed charges remain practically constant this must mean large scale increase in net income but figures are not available.

Rise of Wholesale Prices.

The changes in business activity were also accompanied by sharp changes in wholesale prices. During the first part of the year wholesale prices had been declining as, indeed, they had been continuously since the break in 1937. The index of the Bureau of Labor Statistics (1926=100) at the end of 1938 was 77 and 75 in August. This movement was entirely consistent with the mild recession then in progress. The outbreak of war brought immediate speculative changes in prices. The Bureau's index jumped five points in a month, while the sensitive price index (Times Annalist) heavily weighed with prices of basic materials rose 33 per cent in the same period. In October, there was a slight decline in these averages as the first speculative wave passed. Strangely enough, in spite of the relative appreciation of the dollar in the foreign exchange markets the price of imported basic materials such as wool, zinc, cocoa, rubber, tin, silk, and burlap, rose the most. Among domestic commodities, basic commodities responded most quickly and of these agricultural prices come first. They, however, declined again slowly while industrial basic commodities continued to advance. At the end of October, the latter group were some 28 per cent above their level at the first of September while basic agricultural products, which rose 20 per cent in the first week, were only 12 per cent higher than at the outbreak of the war. Speculative sentiment about war prices had been tempered by consideration of accumulated surpluses in many agricultural lines.

Income Payments.

Incomes as well as prices were responsive to the changes in business activity though in a less marked degree. Total income payments to people in the United States, according to the adjusted index of the Department of Commerce, were remarkably steady during the first seven months of 1939 at 83 to 84 per cent of this amount in 1929. In August, the index rose to 85 and, in October (latest figure), it was 88. The actual amount in October was $6,204,000,000 compared to $5,886,000,000 a year before when a considerably larger amount of work relief payments were included. The steadiness of incomes was in part the result of steadiness in employment and payrolls. The employment index (Federal Reserve Board, 1923-25=100 adjusted) declined only from 95 to 93 in the spring. With the outbreak of the war, it rose to 101 in October. Durable goods industries still lagged though their improvement in the fall was much more rapid than the non-durable goods industries. A factor adversely affecting retail trade in many districts was the number of strikes. Labor relations were more disturbed than in 1938. The bituminous coal industry suffered heavily from a strike in the spring, and the automobile industry in the fall. Agricultural incomes were more variable than industrial incomes. The adjusted index of cash income from farm marketings (1924-29=100) which stood at 67 in January, declined to 60 in June. The speculative rise in prices at the outbreak of the war carried it to 79 in September, but in October it had declined to 73.

Retail Trade.

With the steadiness of income went relatively favorable conditions in retail trade. Sales for department stores declined only by 5 per cent in the spring and more than recovered the loss in September. Their inventories were relatively low. Chain store sales of groceries were somewhat higher than in 1938, while the sales of variety chain stores increased a little. Rural sales of general merchandise ran high in the first nine months of 1939, averaging some 11 per cent above what they did last year. In the fall, in spite of the increased income, such sales decreased although they remained well above the levels of last year. Automobile sales were more than a third higher than they were last year, but did not reach the levels of 1936 or 1937.

The increases in sales of goods at retail give a fair estimate of the actual volume of goods sold for retail prices and were very steady in the early part of the year. In September even retail prices were influenced by speculative rises. Some products such as sugar increased spectacularly in price and supplies in the retail stores were exhausted. The general index of food prices (National Industries Conference Board 1923=100) which was 77 in August rose to 80 in October, but the index for cost of living as a whole rose only one point and both indexes were almost exactly what they had been in October 1938.

Foreign Trade.

Foreign trade in the early part of the year was similar to what it had been last year with the exception that exports were a little lower and imports a little higher than before. Declines in exports of cotton and foodstuffs more than counterbalanced rises in manufactured and semi-manufactured articles. Imports of all categories increased but the rises in imports of crude materials and semi-manufactures were most important. The effects of war are difficult to trace. The declines in the values of most foreign currencies should have increased the imports from those countries and some increase did appear. The adjusted index of imports (1923-25=100) rose from 57 in August to 67 in October. Exports after seasonal adjustment had risen in August to the highest level in more than a year and maintained this level in the fall. The increase in trade in August and September came principally in exports to France and England and cotton was the chief commodity involved though there were increases in manufactured articles. In October, this trade declined and exports to Canada increased correspondingly. At the end of the year, business men were still very hesitant about the future course of foreign trade. The raising of the embargo on arms allowed increases of trade in some items, particularly in aircraft. It seemed possible, too, that efforts would be made to supply deficiencies in shipping tonnage if the sea warfare continued for any length of time. The cash and carry provisions of the Act were another disturbing factor. At the moment the allied powers had ample funds to supply their needs but their funds were not limitless. Because of the possibility of future deficiency or purchasing power the building up of facilities especially for this trade seemed doubtful wisdom. The closing of the combat areas to American ships, the embargoes placed by the belligerents and the shortage of ships tended to restrict seriously other trade with the warring nations. Thus many normal markets were cut off. Of course, the export trade of the warring countries had been curtailed. Partly by embargo, partly by lack of shipping and partly by prohibitions on export of necessary goods, their opportunities to send out goods were restricted. It was possible that the United States would have an opportunity to fill some of these gaps. Opportunities for trade with South America seemed especially promising. But these, too, were none too secure. Such of the belligerents as had access to the sea would have to replenish their supplies of foreign exchange eventually by pushing exports as much as possible. Besides many of the South American countries were in dubious financial condition with currencies which were none too stable. Then, too, they had vast amounts of defaulted securities left over from the period of the twenties. The American import trade also was affected as much as that of other countries. Rising shipping and insurance costs were factors as well as actual embargoes. At the end of the year, it was still too early to determine what the effects of the war would be. Meantime, business paused.

Security Prices.

Throughout the year financial conditions were favorable to business. In the early months of the year loans of the commercial banks had declined a little. At the end of December, those for member banks of the Federal Reserve System had been $13,208,000,000 and in June only $13,141,000,000. Meantime, deposits had increased somewhat, from $22,293,000,000 to $23,587,000,000, and reserves had been increasing rapidly, from $8,745,000,000 to $10,085,000,000. With the decrease in loans and the increase in reserves went, declining interest rates. Security prices drifted downward with the general recession in business. Upon these easy credit conditions and general stagnation of the financial markets was superposed in April the brief crisis caused by Germany's annexation of Czecho-Slovakia. The stock market immediately broke to new low levels; the index (Standard Statistics, 1926=100) dropped in one month from 92 to 82. But interest rates in the open market did not tighten. Prices of United States Government bonds even rose.

Influx of Gold.

The crisis did cause one pronounced change, however; gold began to pour into the country from abroad at a rate even more rapid than in the fall of 1938. In January, only $156,000,000 had come into the country, but in April the amount rose to $606,000,000 and the level remained above $240,000,000 every month thereafter through September. This import of gold went primarily into excess reserves though some of it was held under earmark. During the summer months, business activity began to increase, but the demand for loans increased but slowly. With such a volume of unused credit available rates for loans became exceedingly low. Treasury bills sold at nominal rates. Such was the dearth of short term investments available that the Federal Reserve Banks let their portfolios of bills run out so as to provide more business for the market. The stock market began to revive a little and the index rose from 82 to 86 in August.

Government Control Measures.

When the war broke out on Sept. 3, the financial markets were in a very strong position. The stock market was rising, interest rates were low, and the excess reserves of the banks and the stocks of gold were such that all conceivable demands could be met easily. But the demands did not develop. Rapid application of control measures abroad prevented the export of capital and the sale of securities in the United States. Only in the United States Government bond market and, to a less extent, in the market for public utility securities did the demand for liquidity show itself. In these markets severe declines in prices did appear. The price of Treasury issues dropped from 108 in August to 102 in September, for instance. Even the short term market for Treasury bills was affected. The Federal Reserve Banks, at this juncture, began buying securities to prevent further declines. In three weeks, they acquired $400,000,000 of such securities. The Treasury put off its usual September financing drawing on the general fund balance instead. But the other financial markets were buoyant. The index for common stock prices as a whole rose from 86 in August to 95 in October, while that for industrials went from 101 to 113 and that for rails from 25 to 33.

During the remainder of the year, financial conditions changed only a little from their position at the end of the crisis. The reserves of the commercial banks, which had been $11,640,000,000 at the end of September were $11,620,000,000 at the end of November (latest figure). Gold had continued to come into this country, but only very slowly compared to earlier months. The total for October was $70,000,000 a figure maintained in November. Transfers from earmarking added to the increase in the total monetary gold stock. For October, the increase was $160,000,000 and for November $166,000,000. Much of this transfer of gold was necessary to pay for the excess of exports from the United States. In spite of these imports of gold, excess reserves changed but little. Demand deposits were increasing a little. For reporting member banks, they rose from $18,333,000,000 at the end of September to $18,604,000,000 on Nov. 15. Loans also increased from $8,350,000,000 to $8,549,000,000. The net effect of all these changes, however, did not alter the fundamental situation of enormous capacity for credit expansion with little demand for the facilities. As a consequence interest rates on commercial loans continued to decline and the rate for Treasury bills and notes dropped sufficiently so that in November the fall financing was carried through at satisfactory rates.

The stock market after the crisis remained at a higher level than before but there was a tendency for prices to drift downwards a little. The reasons for this are difficult to trace. Business activity continued to rise for a month and a half after security prices reached their maximum, and a gap developed between expected profits of corporations and the prices of their securities. It is true that by November the community anticipated a decline in productive activity early in 1940 but the revision was not expected to be severe.

The same factors which affected the security markets also affected issues of new securities. New capital issues in the first part of the year had been low. Those that did appear were mostly refunding and, even among these, government securities formed the major portion. The first effect of the war was to cut the volume still further. As mentioned above, the Federal Government put off its September issues. In October, the total rose again, but there were almost no corporate issues. Thus, as in the case of contracts for new construction, there was further evidence of lack of confidence in the future course of business under such new war conditions.

Government Spending Program.

Throughout the year, the Government took an active interest in business affairs. The spending program of the previous year was continued through the spring. As the recession developed, the administration decided to introduce into Congress a bill to provide for further increases in spending through a new lending program. This bill was defeated. However, increased expenditures for national defense promised to maintain the level of spending through the remainder of the year. This spending served as an encouragement to those elements in the business community which support the pump priming theory while the failure of the Lending Bill encouraged those who believed in economy. Meantime, the Government debt mounted to $41,036,000,000 and is expected to approach the debt limit next year.

The relations of government to industry seemed at times to be somewhat more conciliatory this year. The TVA finally bought the Commonwealth and Southern's properties in Tennessee, thus removing this object of dispute from the center of public attention. In November, however, a new dispute began between these two groups concerning power transmission lines. The NLRB modified its policies somewhat so that the business community came to regard its activities with less hostility. The second step of the Fair Labor Standards Act was introduced raising minimum wages to 30 cents per hour and maximum hours to 42. The increase in business activity in the fall eased the introduction of the higher standards.

Federal Investigation of Business Practices.

The TNEC held hearings during a large part of the year. In January, they were still engaged with a consideration of patents. They next took up the problems of monopoly and price fixing in their general aspects and the policies of certain specific industries, including the steel industry. The Federal Trade Commission testified concerning the enforcement of the Sherman Anti-Trust Act and the Clayton Act. The reasons for the lag of credit expansion in the present cycle were considered next, including an analysis of government spending as a method of stimulating recovery. Representatives of consumers took up such problems as the necessity for government standards for retail goods similar to those now in force for drugs. The Committee, then turned to an investigation of special industries. Conditions governing the production and marketing of milk, oil and beryllium were discussed and the building industry, the insurance business, and investment banking were considered. At the end of the year, the Committee had not passed beyond the fact finding stage. Meantime, the Department of Justice prepared to bring suit under the anti-trust laws against organizations, both of capital and of labor, in the building trades.

The International Field: Reciprocal Trade Agreements.

A final phase of government activity was in the international field. New reciprocal trade agreements were made with Venezuela and Turkey. A financial agreement with Brazil provided for loans to stabilize the currency and to allow the unfreezing of American commercial credits and the renewal of the service of the debt. The Export-Import Bank made numerous loans to finance the purchase of American exports. Important among these loans were those to China, Brazil, Argentina and Poland. Numerous conferences were held to promote trade relations and to adjust problems in specific industries. Pan American trade was fostered. Conferences on wheat and cotton were held in the late summer. The former failed because of inability to determine quotas for the various countries interested, while the latter adjourned because the outbreak of the war made all international trade uncertain. On the whole, however, the administration has pushed foreign trade vigorously. In one instance only did the year bring retrenchment. Because of difficulties in the Orient, the United States denounced its commercial treaty with Japan. This action will take effect next year and will lead to a curtailment of trade with the Orient. See also BANKS AND BANKING; FINANCIAL REVIEW, UNITED STATES; PRODUCTION AND TRADE; UNITED STATES: End of the Year; WORLD ECONOMICS.