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Within two months of the January 1942 budget message, the Department of Commerce produced the first GNP statistics. These figures distinguished only among major categories of expenditures, but they succeeded in bringing the war-production trade-offs into the picture. Earlier statistical analyses tended to provide overly grim assessments of the risks of shortages of civilian goods and inflation because, among other errors, they underestimated the productive capacity of the United States. When first published in March 1942, GNP offered a new framework for assessing the feasibility of the 1943 war program by comparing it with 1941 national output. Two months later, the Commerce Department provided historical GNP statistics for 1929–41.71 The January 1942 budget message had foreshadowed the new statistical terms presented in the GNP, mentioning for the first time in a fiscal policy context “consumer durable goods” and “industrial plant and equipment.”
Understanding the pressures of the proposed huge war expenditure program required consideration of competing expenditures in the economy—most simply, expenditures for the war versus expenditures for everything else. The expenditure components of GNP provided the material for that comparison. Because economists measure GNP in market prices and therefore include taxes and depreciation allowances, not included in national income, this estimate exceeded national income in 1941 by 25 percent ($23 billion) and provided a better approximation of aggregate U.S. productive resources. The inclusion of business taxes and depreciation resulted in a production measure that was more appropriate for analysis of the war program’s burden on the economy, in part because those flows were potential sources of program funding. For example, during wartime, business might delay spending for the replacement of capital goods (i.e., old factories, machine tools) to free up resources for the production of more war materiel.
Economists define GNP as a comprehensive measure of the production of goods and services in the economy valued at market prices. In addition to being measured as the sum of production components, one can measure GNP as the sum of expenditures on goods and services for final uses, plus the change in business inventories. Put in other terms, GNP represents the sum of value added by all industries in the economy.
Because data on expenditures were not fully available in early 1942, Nathan and Kuznets had to use other estimates to approximate GNP figures in their early feasibility estimates. They accomplished this by adding business taxes and depreciation to the existing national income statistics, using the budget and other government sources to obtain approximations of government spending. They estimated investment (“gross private capital formation”) from business records, including tax returns, and estimated durable goods sold to consumers from census bureau and other government data.
Before GNP became available, analysts sometimes erroneously subtracted projected defense expenditures from projected national income, producing a residual that was interpreted as the amount of production left for nonwar goods and services. For example, in early 1942 analysts subtracted the president’s proposed 1943 defense expenditures of $56 billion from projected 1943 national income of $110 billion, leaving a residual of $54 billion. Comparison of the 1943 residual with the same residual for 1941, $81 billion, indicated that the government would have to find a way to cut income by a third if the resources required for the war program were to be available. The assessment was overly grim: national income fell short of the total market value of goods and services produced, of which defense spending was a component.
Substitution of GNP for national income in such an analysis revealed that the effect of war mobilization on living standards would be less dire than predicted and that an even larger war program might be attainable. This was true not only because GNP was larger in value than national income (because analysts measured it at market prices, not factor costs), but also because the expenditure composition of national product showed how the income generated from national production was being spent. The expenditure composition of GNP suggested that, despite a potentially large forced reduction in nonwar spending, the nation could absorb much of the decrease by reductions in private investment and consumer purchases of durable goods rather than in consumer purchases of nondurable goods and services—purchases of food, clothing, and shelter—in other words, basic needs. The analysis suggested that only a 4 percent, price-adjusted reduction in the consumption of nondurables and services below the 1941 level would be required to meet the president’s war program goals for 1943, while private investment would have to decline by 80 percent and the consumption of durables by 70 percent. Put another way, the GNP analysis showed that economic growth brought about by increases in employment and productivity spurred by the war program and the diversion of heavy industry from civilian to war production could provide more than 90 percent of the additional resources needed for the 1943 program.72
This puts the final nail in the coffin for the idea that the United States paid for the Victory Program by reducing the amount of resources available for consumer purchases. As the consumption of nondurable would only be reduced by 4 percent, the president and his economic team knew early in the war that mobilization would require little consumer sacrifice and that they could achieve virtually all required production by economic expansion. Almost all that was asked of consumers was that they postpone purchases of large durable items such as cars and washing machines.73 Furthermore, economic statistics for the war indicate that consumer spending in the United States actually increased throughout the war.74
In summary, the revolution in economic statistics reached a point in 1940 where those few economists intimately familiar with their intricacies could use them to determine, with a considerable degree of accuracy, how much and how fast U.S. industry could expand to meet wartime demands. It was a truly remarkable coincidence that such a valuable statistical tool was created and perfected in the decade just before it was needed to help win humanity’s greatest struggle. Moreover, Kuznets, May, and Nathan, the three men in America with the firmest grasp of what the statistics said about the production potential of the United States, by the time the war started, were all firmly ensconced within the Planning Division of the OPM. Here they were able to lay the groundwork for America’s great wartime economic expansion. There was one big change in their relationship, however. Kuznets’ former student and employee, Robert Nathan, was now the boss, while the other two men worked for him.75
CHAPTER 5
The Production Organizations
To comprehend the debates over feasibility, the historian requires some knowledge of the various organizations responsible for military procurement, along with some understanding of their relations with each other and the personalities involved. Clarity will not be attained by exhaustively detailing every organization that the president authorized from 1939 until the end of the war. This section, therefore, will highlight the main developments and then focus on the final organization this book concerns itself with, the War Production Board (WPB). It should be noted that the WPB was not the final or most powerful of the war production agencies. This distinction belongs to the Office of War Mobilization and Reconversion (OWMR), which was created after the events discussed in this work took place, and which therefore is not covered in any detail here.1
In response to the attack on the Low Countries and France in May 1940, Roosevelt had established the Office of Emergency Management inside the Executive Office of the President. This new organization helped coordinate and direct emergency agencies, which were beginning to proliferate. Three days later he created, by executive order, the National Defense Advisory Commission (NDAC), with the Office of Emergency Management serving as a secretariat for this new advisory commission. Congress had passed legislation sanctioning these bodies in 1916 and had never repealed its authorization. The Commission was made up of key cabinet officials—the secretaries of war, the Navy, commerce, the interior, agriculture, and labor—whose departments were essential to mobilizing for war. Its seven civilian leaders (chosen with typical po
litical astuteness by Roosevelt) were Edward R. Stettinius Jr. (adviser for industrial materials matters), William S. Knudsen (adviser for industrial production), Sidney Hillman (labor), Leon Henderson (price stabilization), Chester C. Davis (agriculture), Ralph Budd (transportation), and Harriet Elliot (consumer protection). They reported individually and directly to Roosevelt. The NDAC (the emphasis lay on the third word in the title—“advisory”) met often, but it had neither a chair nor decision-making authority.2
However it was divided and subdivided, and no matter the caliber of the people in it, the NDAC was not the agency to supervise industrial mobilization: it had no formal leader (critical in an organization with powerful men who saw themselves as equals), and, more importantly, it possessed no authority. According to Robert Nathan, the NDAC’s two cochairs, Knudsen and Hillman, got along very well, but did not accomplish a great deal. Nathan further related that Knudsen, although he was a very dedicated, loyal, and patriotic man, was neither politically nor broad policy oriented. As for Hillman, Nathan claims he did not know much about either defense mobilization or the problems involved in the conversion of the peacetime economy to war production.3
The NDAC, however, did bring Nathan into the military planning arena for the first time as associate director of Research and Statistics. In this position he worked directly for a man he had never met before, Stacy May. Nathan later related that May was a good operator and was deeply committed, and that he developed a great respect and affection for him. Nathan was put in charge of studying military requirements and soon found that assignment to be nearly hopeless.4
According to Nathan, the military would not hazard a guess as to what any future conflict would look like. Many years later he still believed that establishing the requirements for alternative scenarios could have been accomplished easily and that useful rough approximations could have been provided. At the time, however, Nathan did not possess enough clout to break that bottleneck; he was frustrated that other higher-level officials also seemed to lack the authority to force the military to provide the required data. Much later, he wrote in disgust, “It was very frustrating, and we got nowhere.”5
NDAC was not totally ineffective, however. William Knudsen proved particularly successful in generating the facilities that would eventually lead to construction of the greatest air armada in history. British and French purchases in early 1940 (and only the British thereafter) helped lay the foundation for unprecedented growth in the aviation industry, but Knudsen’s work on the conversion of the automobile industry for aircraft production was certainly essential. Creative funding to build the necessary aircraft manufacturing plants was also an initiative of the NDAC. Leon Henderson, a commission member, and Donald M. Nelson, an adviser to the commission, came up with a five-year amortization scheme to permit industrialists to write off plant construction costs more rapidly than the tax code allowed, if these were expended for building munitions factories. Knudsen carried the ball for this proposal in testimony before the Senate Finance Committee, where it passed eleven to ten in July 1940, spurring new construction at a critical time. After Pearl Harbor the government generated the funds for most factory construction, but Roosevelt would have found it impossible to get this kind of direct funding in the political climate of 1940.6
Although by general agreement Knudsen was not the right person for the job at NDAC, because he was not capable of dealing with the political currents or forcing his will on a diverse group of political appointees, one cannot overstate the importance of his contribution in moving the aircraft industry toward mass production. In 1946, in a talk at the Industrial War College, Knudsen outlined the problem:The first thing that confronted us was President Roosevelt’s appeal for fifty thousand airplanes a year. We had been making about fifteen thousand in ten years at that time.
We got all the airplane manufacturers together and talked with them. They were leery because there was a lot of money per unit in airplanes. They cost all kinds of money, around ten dollars a pound. I knew that, of course, but I didn’t take much stock in it, because I knew if they ever got the quantity, the cost would come down. It so happened that we started with ten dollars a pound and ran it down to 3.6 dollars per pound simply by getting quantity manufacturing.
I had the dickens of a time getting them to understand that you could have certain units of the airplane made by other kinds of manufacturers. The first fellow who had a wing contract in Detroit lost seven hundred thousand dollars on the wings. He didn’t know what he was about. I had to hold his hand for about twenty-four hours, down here in Washington. As a matter of fact, he became an outstanding airplane manufacturer of parts, and not only got his seven hundred thousand back, but quite a considerable amount more.
There were either no drawings or the drawings were very crude and rough. I am not giving away any secret when I tell you that the airplane manufacturers spent a lot of time telling me that nobody else could do what they did.7
Up to the eve of World War II, the production of airplanes and aircraft had been a job for specialists and craftsmen. What drawings existed were basically guidelines to be used by experts, who cut out the pieces and fitted them together by hand, milling here and there until they had constructed a superb piece of equipment. This was a nightmarish situation for industrialists, who thought in terms of mass production. The blueprint was an indication of what had to be done, but it was not an exact mathematical guide. Detroit engineers had to disassemble several aircraft and their engines into their component parts, weigh and measure each piece, and then create an entirely new set of blueprints for each aircraft with mass production in mind. When Packard undertook this job with the Rolls-Royce engine, it took a regiment of engineers and an investment of more than $6 million—but after that they were producing engines as easily as roller skates.8
Without Knudsen’s early pushing, with the full weight of the NDAC behind him, the aircraft industry would have accomplished none of this preliminary work in time for the mass conversion of Detroit’s auto industry in 1942. As a result, by 1944 the United States was producing twice as many aircraft in a month as it had produced in all of 1939. Where Roosevelt’s call for an air force of fifty thousand aircraft had once seemed impossible, America produced more than three hundred thousand planes in less than half a decade. Much of this success resulted from the mass-production techniques brought to bear on the problem by the auto industry, but the aircraft industry did more than its share. With NDAC’s encouragement, its leaders formed several councils to coordinate the sharing of technology, research, specialists, and excess material. The industry president at North American Company went so far as to call in department heads, engineers, and designers and told them, “From now on, we are giving our competitors anything we have—processes, methods, even tools and materials—that we are not planning to use immediately. Anyone failing to do so would have his name handed to the draft board.”9
One practical result was that when a Douglas plant building dive-bombers found itself short of two thousand feet of binding braid, critical for the aircraft’s final assembly, it was able to find excess in a North American Company plant nearby. Following the North American president’s directions, the firm rushed the excess over to the Douglas plant, which finished the bombers. These same dive-bombers were then rushed to the Pacific where they arrived just in time to join the carrier group heading for Midway, where they launched the decisive strike that turned the tide of the war in the Pacific.10 If NDAC had brought about only that one achievement in the year it existed, it was enough.
Another NDAC commissioner, Leon Henderson, who was responsible for price stabilization and who later became the director of the Office of Price Administration (OPA), came to the fore at this time as a power with whom leaders of industry had to reckon. Henderson was an early New Dealer, but more importantly he was an outspoken “all-outer.”11 All-outers were civilians who fervently believed that the United States would soon confront war with Japan, Germany, or both, and who
wanted an all-out effort begun immediately to prepare for such a contingency. All-outers were still rare enough in Washington’s 1940 power circles that everyone knew who they all were. Because he was an early New Dealer, Henderson enjoyed unparalleled access to the White House and was not shy in assuming the political power of the president onto himself. Although he had no legal power to establish price limits while part of NDAC, that fact did not stop him from employing political power to keep prices in check whenever possible. Throughout 1940 and 1941 many executives got calls from Henderson saying, “I hear you are going to raise prices. I trust you won’t. It will go bad for you if you do.”12
Henderson was a driven man who had only one goal—beating the Axis powers. When the president offered him the role of U.S. price administrator, Bernard Baruch told him that if he took it he would be the most hated man in the country.13 Undeterred, Henderson plunged into the job. He did become, arguably, the most hated man in the country, at least among the segment of the business population that wanted to raise prices, but he did the job and held inflation substantially in check throughout his tenure. In 1940, however, his powers remained circumscribed and there were limits to how hard and how far he could push, leaving the always active Henderson time to delve into other matters.