TIME: Almanac 1993/TIME Almanac 1993.iso/time/election/48elect/48elect.010

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                                                                                January 10, 1949

BUSINESS IN 1948

The New Frontiers



     In mid-1948, the president of Dallas' Rio Grande National
Life Insurance Co. gave out an exuberant shout. "This is a great
world," cried Robert Baxter, "and the U.S. is the greatest
country in the world -- and Texas is the greatest state in the
U.S. and Rio Grande is the greatest insurance company in Dallas.
" This bit of bragging, down to the last note in its descending
scale, was a fairly faithful expression of the exuberance and
confidence of businessmen in 1948. They thought that the U.S. had
plenty to brag about; it had poured forth the greatest flow of
goods and services in history. It was the first real postwar year
in the sense that most of the Cellophaned dreams of the admen
could be readily bought, even if most of the prices were high.

     The gross national product -- the value of everything made or
grown and all work done -- rose to $253 billion, 10% above 1947's
Himalayan peak. U.S. builders started 1,250,000 houses, 45% more
than in any other year. Automakers, working at high speed,
brought out a glittering parade of radically changed postwar
models -- all square, squat and as alike in appearance as cans in
a crate. Out rolled more than 5,200,000 cars and trucks, about 8%
more than 1947. The textile industry spun out 13,621 billion
yards of cloth, enough to reach 311 times around the earth. Out
of the whirring factories came 540 million pairs of nylons (10
pairs for every U.S. woman), 4,710,000 washing machines, 27.3
million radios, toasters and irons, more than 80 million auto
tires.

     The U.S., which had been accustomed in prewar years to
turning out 35% of the world's good (though it had only 6.8% of
the population), surprised even itself; it made over 50% of the
goods in 1948.

     The Yeast. The year was full of yeasty ferment; it bubbled
up with new industries, gave new leaven to old ones. The
television industry, which had optimistically hoped to make
600,000 sets, proved a bad guesser; it turned out 800,000, by
year's end it was working at a 2,000,000-a-year clip. In its
revolutionary sweep, television scared the wits out of radio
(radio set production dropped 24% under 1947) and Hollywood
(which hastily decided to join rather than try to beat the
enemy). It promised industry an entirely new technique in remote
control in plants (in New York, a supervisor in a power plant
kept tabs on his plant by means of a television screen).

     General Electric Co. started building the first pilot plant
to convert nuclear fission to electrical energy, although the use
of atomic power to generate electricity on a commercial scale
seemed at least a decade off. On U.S. railroads, the diesel
revolution was in full spin; of 1,159 new locomotives put in
service during the first ten months, 1,082 were diesels. Jet
engines swooshed into their own; of the 3,661 new military planes
ordered during the year, 2,209 were jet-powered.

     The Bakers. In the unparalleled production marathon of 1948,
many a U.S. businessman marched in seven-league boots. Charles E.
Wilson's General Motors turned in the biggest profits of any
single U.S. company (estimated $425 million), and by tying wage
increases to the cost of living, showed a statesmanlike concept
of management-labor relations. Montgomery Ward's Sewell Avery put
on his own special one-man show; since midyear, he had fired or
accepted the resignations of his president and seven other
executives, but he still turned in the biggest profits (about $65
million) in "Monkey" Ward's history.

     The flop of the year was Preston Tucker; he spent over $20
million turning out 39 handmade cars, and at year's end was sadly
muttering: "All I need is money." If there was a Businessman of
the Year it was Automaker Paul G. Hoffman, who left his job as
president of Studebaker and climbed into the driver's seat of
ECA, the biggest politico-business enterprise in world history.
He got it running with a minimum of gear clashing, and Congress
found little need for back-seat driving.

     The Turn. With its boom the U.S. had high prices. Yet the
notable event of the year was not that prices had scooted up to
the highest peak of the postwar boom -- as they had in midsummer
-- but that by autumn they had started to come down. U.S.
businessmen who had been preaching to the world that production
-- and not rationing and controls -- was the cure for inflation
had finally shown the preaching to have the ring of economic
gospel. The buyers' market swept in with old-fashioned price-
cutting competition.

     By year's end, prices of electrical appliances
(refrigerators, irons, washing machines, etc.) were down 25% from
their peak; cotton cloth was down again to OPA levels and below.
Some prices were still rising (autos, metals, etc.), but the
"cost-of-living" items (food, clothing, furniture, etc.) were
coming down. A drop in retail sales had scared department stores
into a rash of pre-Christmas price cutting. Even then, stores
barely managed to sell as much as in 1947.

     Many an auto buyer, cold-shouldered by dealers in May when a
"new used" Chevrolet sedan went for $2,260 ($984 above the list
price), found that he was loved in December. Lincolns, Kaisers,
Frazers and Hudsons could be bought right off dealers' floors. So
could trucks and farm equipment, once as short as Chevvies. After
a long climb, employment and production in some industries were
both dropping "unseasonally" at year's end. Though employment, at
60.1 million, was almost one million above the end of 1947. The
Bureau of Labor Statistics' cost-of-living index, which reached a
postwar peak of 174.5 in August, had steadily moved down to about
172.

     Miracle of the Wheat. What brought it down chiefly was the
greatest crop in U.S. history. In Oklahoma and Kansas, the
farmers marveled at the "miracle" wheat crop. The miracle was
repeated almost everywhere. The corn crop, which had been poor in
1947, was the biggest ever. All told, the U.S. harvest was 11%
bigger than ever before.

     As grain elevators were filled up and wheat was piled in the
streets of many a town, the price of wheat skittered down. By
mid-October all grains except rice were at or below their support
levels. For what they lost on falling prices, farmers more than
made up in the size of their harvest; their income of about $31
billion was over the record of 1947.

     Consumers got only part of the benefits of the bumper
harvest, because much of it didn't go to market. Over 342 million
bushels of grain had been stored away under Government loan or
purchase agreements under the support law. In midyear, President
Truman had demanded price controls, to bring prices down;
Congress refused them. By year's end, his administration had put
out over $1.2 billion into support loans to keep prices up.

     All this moved Borden President Theodore G. Montague to sum
up gloomily: "The boom is over." It was far from that, but the
evidence was plain that the boom had reached its peak and passed
it. On the way down, would it flatten on a high plateau just
below the peak, or would it sink into something like a recession?
The question was important not only to businessmen but to the
world. The U.S. had taken on the enormous burdens of ECA and
rearmament, hoping to keep the peace while it helped the world
rebuild itself. These burdens could best be borne by a free
economy that was stable and prosperous. At what point would there
by stability?

     In Balance? The U.S. had been badly fooled by that question
in 1948. In the early months of the year, the economy seemed to
have reached a nervous balance of a sort, subject to scares and
sudden gyrations, but still generally steady. The Federal Reserve
Board index (adjusted) of industrial production had reached 194
(1935-39 average: 100) and started edging down, though "shortage"
was still a much used word. But there were signs that
inflationary pressures were easing. In February the first great
break came, hard on the heels of reports of the bumper wheat
crop. May wheat plummeted $.52 in two weeks; corn fell $.54 1/2;
most other grains went down. (One shrewd short-seller made a
$200,000 profit in a week.) Retail sales flattened out a little.

     Said the rockbound National Association of Manufacturers'
Morris Sayre: "We are now on our way to taking the cap off the
high cost of living."

     He spoke too soon. If the pressure of domestic demand seemed
to have flattened out, the pressure of meeting the U.S. promises
abroad had just started. The economy was working at such high
pressure that any added burdens -- even though small compared to
total production -- were bound to blow price valves. In April
Congress appropriated $5.3 billion for ECA. The U.S. soon found
out that this was only the first installment demanded by the cold
war; the next was the $12 billion for rearmament.

     Out of Kilter. On top of these burdens, Congress cut taxes
by $4.8 billion. In the sense that the cut put extra cash in the
hands of consumers to spend, that also proved to be a burden on
the economy. Retail sales started up again. The businessmen of
good will -- such as International Harvester's Fowler McCormick
-- who had cut prices in hopes of starting a healthy down-trend
all around, had to change course; they put prices up again. The
hope had been that the U.S. would be able to add the burdens of
ECA and rearmament without more inflation; that they would merely
take up the slack in the economy as it developed.

     What little slack there was suddenly disappeared. Industrial
production moved up again; the National Industrial Conference
Board's consumers' price index shot up to the highest point in
its 34-year history; employment, which had been holding steady,
began to climb; in July it reached an alltime peak of 61,615,000.
The labor shortage, in the words of one depressed Chicago
personnel manager, "is worse than steel." And the U.S. had its
first $1-a-pound roundsteak.

     Third Round. The rearmament program was notably good news to
the aircraft industry, which was saved from disaster by $2
billion in plane orders, but it scared many another businessman
into a wild scramble for materials. The new inflationary
pressures drove the cost of living up, month after month. And
this gave labor a potent argument for its "third round" wage
increases, another sharp spur to galloping prices.

     Most industrialists took one look at soaring sales and
decided it was smarter to raise wages -- and then prices -- than
to risk strikes. (Man days lost from strikes dropped to 34
million, lowest in three years.) On its part, labor had developed
a healthy respect for the hated Taft-Hartley Act, and in most
cases it spoke softly.

     The Winner? Whether due to the Act or to a more moderate
attitude on the part of labor, the fact was that management came
off better in the third round than it had in the first two.
Unions generally ended up accepting just about what management
had offered in the first place (average increase: 5% an hour).
The average weekly wage rose about 6% during the year to about
$54.65.

     There were other compensations for management. Productivity,
which had been none too good in 1947, had become, in the cautious
words of one industrialist, "satisfactory." Said the National
Industrial Conference Board: about 67% of the companies it
surveyed reported that productivity had increased from 1% to 28%
over 1947, with an average increase of 7 1/2%. In short, with 4%
more in the industrial labor force, the nation turned out 9% more
goods.

     The Payoff. Capital, too, proved worthy of its hire. Net
profits for the year were an estimated $21 billion, compared to
$17.4 billion the year before. (Industry's slice of the national
pie was still slightly smaller than its record in 1929.) Though
some of this profit was fictitious, i.e., a profit on inventory
rather than actual sales, many an industry had done so well that
even a drop in profits next year would leave it well off. As one
businessman put it: "Our earnings have been superduper. From now
on they'll be merely super."

     Work to Do. Eying profits, many a consumer asked whether
industry had done its share to keep prices and inflation down.
Many a company had not. Said Commerce Secretary Charles Sawyer:
"In some cases, price increases have been more than necessary to
cover costs, and have contributed to the inflationary spiral."

     To the extent that certain industries did this, it was their
own fault that Congressmen raised an outcry for a excess-profits
tax even though the U.S. may end the current fiscal year with a
budget surplus. Warned Wyoming's New Dealing Senator Joe
O'Mahoney: "My theory is that any industry earning excess profits
from full employment or Government spending should pay more
taxes."

     There was more to the argument over high profits than that.
To step up production to meet the gargantuan demand, industry had
expanded its plants to the tune of $18.7 billion during the year.
Much of the expansion had been bought with profits and reserves,
because there was a grave shortage of risk capital to finance it.
As Jersey Standard's Gene Homan said: "Without our high profits
we couldn't have expanded the way we did." The oil industry,
which had rolled up the biggest profits of any industry ($2
billion), was a classic example of the way profits had been put
to work.

     Job Done. As 1948 began, oil was so short that oilmen
worried about a return to rationing (during one cold spell, New
York City had to beg oil from the Navy to keep its hospitals and
schools warm). To stave off rationing, oilmen earmarked %5
billion for expansion in 1948-49 and worked as never before.
Wildcatters roamed the U.S. far & wide, looking for oil in the
most unlikely places.

     All told, 37,000 U.S. wells were sunk, including one 27
miles out in the Gulf of Mexico; 8,000 miles of pipelines were
laid, and 62 tankers were being built to bring in oil from South
America and the Middle East. Domestic demand kept rising also
until it reached 622 gallons per capita, v. 464 in 1941. Yet oil
production at year's end was 17% above the wartime high; the
shortage had been licked so thoroughly that some oil prices had
started to drop.

     Not all industries could point with such pride. There was
still a shortage of electricity in the Midwest and along the
Pacific Coast, though utility men had worked frantically to
expand. They spent $2.3 billion and hoped to spend another $3.3
billion to expand in the next five years. Despite the hopeful
speeches of many a steelman that supply would soon meet demand,
the great steel shortage was almost as bad at year's end as at
the year's start.

     Steel production of 88.5 million ingot tons, while it was
about 4% above 1947, was still below 1944's record production.
Although steelmen blamed the shortage on "abnormal demand," the
fact was that steel capacity and production had not even kept
pace with the normal growth of population. In 1948, capacity per
capita was only slightly more than it had been in depression
1932; production per capita was below 1941. Those who talked of
"abnormal demand of the boom" failed to take into account the
fact that much of it would be normal demand from now on, not only
for steel, but for oil, autos, schoolhouses, homes, clothing and
everything else. At year's end the population stood at 148
million, up 3,000,000 more consumers during the year.

     New Face. Despite the laggards, the overall expansion of big
& little business was remolding the U.S. industrial face. The
greatest growth was in the Midwest, which seemed more & more like
the industrial heartland (in Peoria, a barbershop proudly
advertised: "Joe's place is a two-chair shop now"). In the
Southwest, another empire was abuilding.

     On the salt domes and along the shores of Texas, the
cracking towers and silvery balls of synthetic rubber, plastics
and fertilizer plants had created a new chemical empire. Profits
had helped pay for expansion. An excess-profits tax would not
only nip the expansion but, if the wartime formula was followed,
would hit the most progressive companies hardest (Jersey Standard
would pay more heavily than U.S. Steel). As Vermont's Senator
Ralph Flanders said: "You can say so much against it (an excess-
profit tax) that I have difficulty in understanding what anybody
has to say for it."

     Enter: Bull. The stock market paid little heed to the fat
profits or to any of the other household gods that traders once
swore by. Ever since it had collapsed in fear of a recession in
1946, the market had been seesawing, trying to make up its mind
whether the boom had really come to stay. Looking at some of the
props under the boom-plant expansion, ECA and rearmament orders --
investors celebrated the tax cut by finally placing their bets in
May.

     In a fast 22-day climb, led by the oil stocks, Dow-Jones
industrial averages went from 180.28 to 191.06, and the rail
averages went from 57.97 to 62.27. Both of them "broke through"
their previous high marks, established in 1947. For the large
number of investors who swear by the Dow theory, the
"breakthrough" meant that the bear market was finally over, the
bull market had arrived.

     Exit: Bull? If it had, it did not stay long. The industrial
averages rose to 193.16 before the baby bull, scared by the
Berlin blockade, the threat of war, and a possible squeeze on
profits, languished and died. On the election of President Truman
the market fell 10.82 points in a week, the worst break since the
spring of 1940. At year's end the averages were at 177.30, down
slightly from the year's start, and Wall Streeters were more
confused than ever on whether the market was bound up or down.

     Judged by earnings alone, the direction should have been up.
Seldom had there been such bargains in stocks; the 30 blue chips
included in the Dow-Jones industrial average were selling at only
7.8 times earnings. On the other hand, stockholders were no
longer getting an old-fashioned share of the earnings; the cost
of doing business and expanding had soared so high that many a
company that once distributed 75% of its earnings in dividends
now distributed only 40%.

     Dollarwise, dividends rose to $7.4 billion, higher than they
had ever been, but on percentage, the stockholders' cut of
profits was smaller than at any time since 1929. In short, the
return was not great enough for the public to enter the market in
a big way -- the prime requisite for a roaring bull market.
According to the old Wall Street saw, the public would stay out
"until its avarice grows stronger than its fear."

     Out of the Sock. The low state of the market was one big
reason why corporations had to finance so much of their expansion
from profits: they were able to raise only $431 million from
stock issues in the first nine months of the year. But there was
no shortage of credit for loans, chiefly because of the
Government's policy of guaranteeing a market or "pegging" the
price of long-term Government bonds above par. Thus, banks or
insurance companies could get more cash for loans simply by
unloading Government bonds on the Federal Reserve Bank.

     The credit expansion added so much to inflation that some
bankers loudly called for lowering the peg or abandoning it
entirely, thus forcing bondholders to keep their bonds. Most
bankers disagreed, chiefly because they feared that abandonment
of the peg would bring Government bond prices tumbling down, as
they had in 1920, and would tighten credit so drastically that
the U.S. would be plunged into a new depression.

     Into the Vault. Paradoxically, FRB had also tightened credit
by upping the reserve requirement of New York and Chicago
commercial banks from 20% to 26%, thus cutting down the amount
available for loans. Furthermore, Regulation W had been clamped
on again, nipping installment credit. Bankers, worried over the
soft spots spreading in industry at year's end, had also done
their part by tightening up on loans all down the line. Result:
the total of business loans had, in FRB's words, shown a "most
striking development"; some worried economists called it an
"alarming" development.

     At year's end, the increase in loans was one-third less than
in previous postwar years. As the demand for loans dried up, the
dumping of bonds was stopped; they rose above the peg. Thus the
argument over the peg became academic, for the time at least. But
it had highlighted the sudden tightening of credit which, more
important than soft spots and falling prices, had shown a
significant change in the inflation wind. Did it mean, as a few
economists said, that the U.S. should stop worrying about
inflation and start worrying about deflation?

     Into the Ball. Looking ahead, most businessmen kept their
fingers crossed. They predicted that profits and sales would show
little decrease, at least for the first six months of 1949.
Beyond that they could not see, but they expected business to
drop. Most economists made the same tentative forecast.

     But few talked depression or even "recession"; the new
phrase was "stability at a high level." Theodore O. Yntema,
research director for the businessmen's Committee for Economic
Development, summed up: "We can't have the collapse as we did in
1929-32. It was then that the whole banking situation got into
difficulty, and that is impossible now . . . But we are still
vulnerable to a sharp break such as occurred in 1937-38, in which
inventory and credit readjustments played leading roles."

     There would also be "adjustments" in prices to lower levels:
Alden's, Inc., fourth biggest U.S. mail-order company, cut prices
and average of 15% to 15% on many items in its spring and summer
(1949) catalogue. Sears, Roebuck & Co., a wider cross section of
the economy, cut prices an average of 1.7%. The building
industry, which had slumped more than the seasonal decline in the
closing months of 1948, estimated that it would put up 9% fewer
houses in 1949. Inventories, which had grown by $5 billion to the
fantastic level of $54 billion in 1948, had stopped growing by
year's end. Plant expansion was expected to taper off in 1949.

     Out of Pockets? On the hopeful side, no letup was seen for
such basic industries as autos and steel. Automakers hoped to
turn out 5,300,000 cars and trucks in 1949, and consumers had
plenty of cash left to buy. The high prices and big spending in
1948 had not cleaned them out. In 1948, they had tucked away $14
billion in savings. Significantly, they had put away the most in
the second half of the year (when retail sales were slipping). It
looked as if smart consumers were only waiting for lower prices,
to start buying again.

     While they waited, ECA and arms spending would put a greater
burden on the economy. Although ECA's Hoffman had allocated $4
billion of his cash for the first year to ECA orders, only about
half of it had been spent, much of it for food. In 1949, ECA
would would cut down on food, which the U.S. could easily spare,
and step up shipments of not so easily spared durable goods. In
the same way, many of the orders placed for arms in 1948 would be
delivered in 1949. Example: planemakers had got $2 billion in
plane orders, but none were delivered in 1948. Furthermore, arms
spending would be stepped up $3 billion a year in 1949, even if
the armed forces held to their lowest budget estimates.

     How Big? The imponderable which would shape the economy more
than any one force was the size of the federal budget. There
seemed small hope of holding it at this year's fiscal total of
$42.2 billion. A key fact was that the "costs of government" in
the old sense were only a small part of the current costs. The
big items were crop loans, veterans' payments. ECA and
rearmament, all with enough potent proponents to stave off any
cut; many would argue persuasively for increases.

     Though President Truman had put a ceiling of $15 billion on
arms spending, Congress might look at the U.S.'s military
position before the warring world and decide to boost it as it
had in 1948. To spend much above the present level, warned
Presidential advisor Edwin G. Nourse, would be to "force us out
of the free-market procedures of a peacetime economy and drive
us to the acceptance of a number of direct controls" -- price
controls and allocation of skilled labor and scarce materials to
priority industries.

     What Price Arms? On the record, the need for additional
controls on the economy, short of war, seemed questionable, at
least; it had been made so by the enormous uncontrolled out-
pouring of 1948. But in the argument over how much should be
spent on rearmament, businessmen had a big stake. With close to
10% of the national product already going for military and
foreign expenses which do not contribute to production of
consumer or capital goods, the economy was in danger of being
controlled by federal spending. But in the argument over arms
spending, businessmen had already filed a cogent brief. In a
report filed by canny Ferdinand Eberstadt, who had untangled the
wartime mess in WPB with his Controlled Materials plan, the
Hoover Commission said flatly that the armed services were doing
a poor job of spending their billions; they had often ordered
more than they needed, and lost track of what they had. In short,
the U.S. was not getting its money's worth, and the job was to
see that it did before more billions were piled on. Was the U.S.
getting its money's worth with ECA?

     What Price Socialism? It was too soon to tell, but first
returns indicated that ECA was doing an efficient job. They also
indicated that the U.S. had underestimated the size of the job
and the roadblocks that Russia, socialism, and the economic
controls of many a "free-trading" nation would throw in the way.

     The European Council for the Marshall Plan estimates that by
1952 (when ECA had been expected to bring imports & exports into
balance), the 16 ECA nations would still be running deficits of
over $3 billion a year. Yet ECA had helped close up the gap
between U.S. exports & imports which had drained the world of
dollars and, in effect, made ECA necessary. It had not increased
exports. Actually, U.S. exports had dropped from $15.3 billion in
1947 to $12.6 billion in 1948, and as imports had risen from $5.7
billion to $7 billion, the gap had been closed from $9.6 billion
to $5.6 billion. But the world still had a long way to go before
it could get along without the bounty of the U.S. and trade with
it on something like equal terms.

     The Challenge. The U.S. had taken a long step in 1948 toward
creating a more stable world. It had also shown that it had the
tools to stabilize its boom so that it could form the keystone of
a new world economic arch. But would it use the tools wisely and
do the job?

     The problem for 1949 was for the nation to do so, adjust
itself to a boom which had changed its character. It was no
longer chiefly based on scarcities and stored-up war demand, but
on full employment, and replacement demand, shored up by enormous
federal spending. Businessmen would have to cut their prices to a
new pattern of shrinking markets in many lines; labor would have
to recognize that decreasing employment would bring a sort of
buyers' market there also. It might have to reconsider "fourth
round" wage demands in the light of benefits from a drop in the
cost of living. By reasonablness on both sides, there was the
prospect and possibility that the great American boom could be
leveled off on a high plateau, broad enough to bear the weight
of the burdens that the U.S. had assumed during 1948. Ahead lay
the new frontiers which the new technologies in 1948 had dis-
closed. Peering at them, Westinghouse Electric's Gwilym Price
saw "an economy whose horizons will be almost as far beyond those
of the present as today's are behind those of of our boyhood."