Big Business and Defense
THE relationship between government and big business has been put to an unexpected strain by the defense emergency. The official admission that the rearmament program is fully 30 per cent behind schedule in its production of bombers, fighting airplanes, and munitions for this country and England gives unfortunate emphasis to this fact.
Yet the basic causes for this slowdown will not be hard to find when Congress gets around, as it will, to assessing responsibility. Part of the blame will fall on interdepartmental jealousies, red tape, and bureaucratic inefficiency. The real bottleneck, however, reaches beyond questions of organization to purely subjective factors which are not discernible on blueprints or charts of accomplishment.
Aroused by the threat to our security, the country expected that the production of urgently needed defense supplies would be given the ‘green light’ and assigned, as a matter of course, to the best industrial brains available. Yet the plain fact is that men as influential in directing government policy as A. A. Berle, Leon Henderson, and Lauchlin Currie, because of their own critical attitude toward the system of free enterprise, cannot quite bring themselves to entrust this full responsibility to business men. The gulf of misunderstanding, so sharply revealed at hearings of the Temporary National Economic Committee, remains as wide and dangerous as ever.
President Roosevelt, recognizing this need for mutual collaboration, declares that ‘in this joint effort there must be provided proper rewards for labor, proper incentive for enterprise, and proper return on investment.’ The crucial problem which confronts the new four-man board for armament production headed by William S. Knudsen is how to reconcile that declaration with other governmental policies which lead in an entirely different direction.
National unity and national production are hardly furthered when another important branch of government, the Department of Justice, decides to proceed, the emergency notwithstanding, with wholesale prosecution of many branches of industry for violation of the antitrust law. Encouragement is thereby given to other government officials to continue the attitude of suspicion and distrust which, during the past decade, has so often frustrated normal recovery.
Thus the ideological conflict between government and business continues, with disastrous consequences to defense. Unfortunately, the impression is created that the nation’s external danger is secondary to the necessity of providing for the public’s ‘protection’ against the natural functioning of the nation’s economic machinery. The underlying idea apparent in all the new regulatory devices created and projected is that we must defend ourselves against foreign aggressors possibly, but even more against an assumed rapacity of a privately administered enterprise system!
The nation accepts without question the belief, so powerfully stimulated by the Nye Senatorial Committee munitions investigation of a few years ago, that ‘profits must be taken out of war.’ To achieve this, we see the government, despite billions of idle private capital, acting as banker for a large part of the defense activities. Even though industry protests, the RFC finances the purchase of vital raw materials and the building of new industrial plant facilities. Any factory can be taken over summarily on Presidential edict while Congress rubberstamps the demand that wealth, along with man power, shall also be conscripted.
This drafting of wealth becomes, under present and prospective revenue acts, a near actuality. Earnings are no longer a right of capital; they are merely a permissive return, now regulated by government. All ‘excess’ profits over and above a nominal rate — not on defense contracts, but on all corporate income—are being sequestered by government. The justification for this is that such earnings were made possible only by what the government spends and that morally the government should reclaim a large part of the resulting benefit.
Now the point need not concern us here whether or not these steps are necessary in the existing emergency. What is important is the pattern they project for the future, the motivation of policy, and the definite distrust of business that are thus clearly revealed. Of all these the American people are largely ignorant. Yet these steps fit in logically one with another, and add up to an inescapable conclusion. This is that the public is being skillfully and psychologically conditioned for one of two impending eventualities.
There is, of course, the ever-present possibility of direct involvement in the war itself. Here the spectre is not only the additional sacrifices that would be called for, but its very first consequence. Immediately effective then is the famous ‘M’ plan, which overnight completely socializes the national economy.
The second eventuality is, of course, the vital transition period that will arise once the capital outlays for the defense program are completed. Government economists are already at work planning how to prevent a new slump in business, or a new depression of even greater dimensions than the last. Thinking in terms of such dimensions, Dr. Richard V. Gilbert, Harvard economist, Assistant Secretary of Commerce, and adviser to the Defense Commission, forecasts that in all probability it will then be necessary to raise federal expenditures to the still higher unprecedented total of 17 billion dollars per year!
These uncertainties, grave as they are, are further complicated by the fact that no business man now knows from one day to another exactly where he stands. Anxious and willing to serve the nation as best he can in the emergency, conscious of this distrust of industry, he literally does not know what is expected of him. He may be summoned to Washington to confer with War and Navy Department officials on how to expedite munitions shipments to Great Britain. He may also find that his office has been invaded by Department of Justice agents with subpœnas for books and records and an order to stand trial as a monopolist for violations of the Sherman Act.
Hundreds of such cases are now on the dockets of the Federal courts. Industries like cement, building materials, agricultural fertilizer, electrical appliances, glass, petroleum, and railroads are under blanket indictment. Whatever their legal merits, such proceedings do create, in the public mind, the unfortunate impression that industry is still unregenerate, that business executives are less loyal to the government than the labor they employ, and that high profits are industry’s sole objective. Illustrative of this zeal for persecution, one typical instance may be briefly examined here.
Bausch & Lomb, one of the best optical instrument manufacturing firms in the world, has been an American institution since 1853. Among its products are gun sights, range finders for battleships and artillery, anti-aircraft height finders, searchlight lenses, and so forth — all indispensable items among the precision instruments required in modern war.
Ever since the Civil War, Bausch & Lomb has collaborated, on a most intimate basis, with the Army and Navy. Despite its German name, no breath of suspicion ever attached to the company, even during the first World War, and its loyalty is unquestioned today.
However, like many other American companies, Bausch & Lomb has had a number of important foreign business affiliations. For years it has had a contract with the world-famous Zeiss Company, of Jena, Germany, manufacturing and selling many Zeiss products in the American market. This agreement lapsed during the first World War, but was revived in 1921 and revised in 1926. One of its provisions carefully safeguarded the firm’s relationships with the United States Government. In the course of time the Zeiss firm became a foundation in which the German firm’s employees and managers, together with the Reich government, held a stock interest. All these facts were known to Washington authorities.
The new contract had, as one of its major aims, the bringing together, in closer collaboration, of the research activities of the two German and American firms, each maintaining its own scientific organization. Another provision more clearly delimited, as between the two companies, the selling arrangements for different foreign countries. This was the weak spot in the contract. The Department of Justice has attacked this agreement as constituting a ‘monopoly’ which contemplated a ‘division of world markets.’ Despite the close association with the Army and Navy, it is doubtful if these departments were consulted before the attack was launched on Bausch & Lomb. The suit received wide publicity, the inference being drawn in the press that the German Government, by reason of its ownership of stock in the Zeiss firm, actually dominated Bausch & Lomb and thus controlled the American optical instrument market. The contention was that the German Government might thus obstruct the American defense program! Rather than face prolonged litigation, the company, which was already jammed with defense orders, pleaded nolo contendere, was fined $40,000, and went ahead with its work.
In some respects this case resembled the prosecution and conviction of a score of major oil companies in 1939. At the instance of the Department of the Interior, these companies had formed, during the early days of the depression, a pool to purchase ‘distress’ gasoline and crude oil and thus aid small producers and refiners. That the operation had been in the public interest and without profit was conceded by the government. Yet the court refused to permit the introduction of the Ickes document of approval in evidence, and the companies were duly convicted of having ‘conspired to restrict competition.’
Similarly, eleven corporations have been haled into court charged with conspiracy to control the supply and prices for both Chilean and domestically produced nitrates, an essential ingredient for commercial fertilizer and high explosives. The odd feature of this case is that the indictments were kept secret for an entire year before being served, in December 1940, upon the defendants. Thus another vital defense industry faces prosecution at the very time it is being called upon for a maximum productive effort.
Next to monopoly, the most important word in the lexicon of the Department of Justice is ‘competition.’ Competition not only is the great motivating force in the American economic system, but for generations past it has been an ‘issue’ of great potency in American political campaigns. However, as to the meaning of competition the Department of Justice and industry differ widely.
To Assistant Attorney General Arnold, a specialist in procedure, the test of competition as an active force in the economy is determined solely by whether prices move up or down and are freely responsive to supply and demand. Absence of such movement or prolonged price stability within a given industry is taken as prima facie evidence requiring grand-jury investigation of possible secret agreements or an open fixed-price policy such as prevailed until recently among the steel companies under what was called ‘Pittsburgh plus.’
Within industry, the concept of competition is quite differently interpreted. While competition is still a powerful and dominant force, without need of artificial legal stimulants, its form has changed. Today, competition is for business volume, in which price is usually secondary to extra services provided the customer by the manufacturer through coöperative advertising and merchandising, special allowances and discounts, and so forth. Such inducements have been found more effective in creating business velocity than mere price incentives. Even when trade associations endeavor to keep an eye on observance of price schedules within an industry, they are strictly forbidden to inquire too closely into the ‘trade practices’ which their members pursue. Not only are such practices often abused, but they are today the principal source of many of the difficulties that beset all business.
Nothing is more abhorred in stabilized lines of business activity than an oldfashioned ‘price war.’ No sensible business man wishes to undermine, as a matter of deliberate policy, the basic margin of profit that is now more necessary than ever in maintaining a healthy enterprise.
Indeed, many companies incur criticism from government economists by curtailing operations in periods of business recession rather than attempting to sustain volume by price reductions. This so-called price ‘rigidity’ is accused of creating unemployment and maladjustments in the entire economic structure. But unless wage and raw material costs are simultaneously reduced, the margin of profit may have disappeared without any compensating advantage’s being gained. The point is that prices do not stand alone; they are merely a part of a highly involved and intricate mathematical formula which underlies industrial management and which can be disregarded only at a serious risk. Mass production constantly provides more for less, but its basic corollary is a constantly growing production volume.
Business men are completely mystified concerning the forces at work which energize this punitive spirit toward industry. But they are even more at sea when it comes to understanding the philosophic background of these professional economic advisers who are now so influential in government councils.
This philosophy is a strictly American product without counterpart elsewhere. It is something of a cross, mixing Marxian and Fabian Socialism with a native ideology evolved through the American social worker’s passionate sympathy with the lot of the ‘underprivileged.’ It stems far back in American history and traces a lineal descent down through populism, agrarianism, free silver, and the ‘progressive movement’ which came to flower in Theodore Roosevelt’s ‘square deal’ and Woodrow Wilson’s ‘new freedom.’
This new political creed, skillfully tuned to the popular ear, rests upon three major tenets now widely propagandized: (a) that the present economic system has not succeeded in doing its job; (b) that the modern corporation has brought about so great a concentration of economic power that the power of the state itself is challenged; and (c) that neither the claims of ownership nor those of management should be permitted to stand against the paramount interest of the community. These themes run through an extensive literature which has grown up in recent years.
The question is first posed: ‘What is an economic system for?’ The answer is, of course, ‘To provide the great majority of the people with at least a minimum standard of living.’ Thus the burden of proof is skillfully placed on the enterprise system to justify its existence. So long as any substantial proportion of employable persons cannot find jobs, so long as surpluses exist which might provide everyone with a minimum standard of living, industry must remain on the defensive, condemned as having failed to meet its primary obligation. To correct these defects, government steps in and takes over essential economic functions. This leads to fresh modifications of the free enterprise system, its further undermining, and possible eventual replacement by a new order of society.
A few sentences from Berle and Means’s The Modern Corporation and Private Property provide the key to this concept of social change: ‘It remains only for the claims of the community to be put forward with clarity and force. Rigid enforcement of property rights as a temporary protection against plundering by control would not stand in the way of modification of these rights in the interest of other groups. When a convincing system of community obligations is worked out and generally accepted, at that moment the passive rights of today must yield before the larger interests of society.’
Social agitation in the United States has developed along quite different lines from those followed in Europe. Until comparatively recently, it had little contact with either the socialist or the tradeunion movement that so largely shaped trends abroad. Critics of American industry have been drawn not so much from labor as from among teachers in schools and universities and from among ministers, sociologists, and young lawyers and writers.
While this agitation began initially, as did that of the British Fabian movement, as a protest against the greed and selfcomplacency of the late Victorian and McKinley eras, it thrived for other reasons. It was a by-product of the liberalizing of university education which went forward concurrently, and gave expression to that fundamental adventurous American spirit that rejects an easygoing status quo in order to explore new horizons and to crusade for this or that cause designed to ease the lot of mankind. Sympathy with the underdog, as well as the desire to get ahead in the world, is a definitely ingrained trait of the American character.
Only in recent years have industrialists become aware of and concerned over this deep social undercurrent which, as the depression wore on, became quickly translated into a major political force. Its intellectual leadership sprang from a comparatively small group remote from the public; particularly noteworthy were John Dewey, Charles A. Beard, and Rexford Tugwell, of Columbia; Felix Frankfurter and James M. Landis, of Harvard; A. A. Berle, Jr., Assistant Secretary of State, Leon Henderson, of the Securities and Exchange Commission, and Dr. Lauchlin Currie, probably the President’s most influential economic adviser; Lloyd Garrison, of the University of Wisconsin, and Paul Douglas, of the University of Chicago. On a different plane, and in part the movement’s inspirational source, were the two great liberal dissenting justices of the United States Supreme Court, Oliver Wendell Holmes and Louis D. Brandeis.
The intensity of conviction held by this group as to what is wrong with the present economic system may be illustrated by two quotations. The first is taken from a colloquy which took place between Senator Bailey, of North Carolina, and Professor Tugwell, when the latter was being examined for confirmation to the post of Undersecretary of Agriculture. After reading from Dr. Tugwell’s bitter philippic against business, The Industrial Discipline, Senator Bailey said: ‘You argue to this effect: When industry is government and government is industry, the deepest conflict in our modern institutions will be abated.’
Dr. Tugwell: ‘Yes.’
Senator Bailey: ‘That is your destination?’
Dr. Tugwell: ‘Yes, sir.’
Senator Bailey: ‘That is your goal? And with that background, you argue that business will be destroyed by planning and you argue here that it must be destroyed, otherwise government is hopelessly corrupt.’
During one of the hearings held at Washington by the Temporary National Economic Committee, our Assistant Secretary of State, A. A. Berle, Jr. testified: ‘The government will have to enter into direct financing of activities now supposed to be private, and a continuance of that direct financing must mean inevitably that the government will ultimately control and own those activities. . . . Over a period of years the government will gradually come to own most of the productive plants of the United States.’
Events may be bringing a realization of this goal even sooner than Mr. Berle anticipated.
Thus an entirely unforeseen situation, of which the nation is not fully aware, has been precipitated by the defense emergency. Great decisions are now shaping our economic destiny for generations to come. These decisions are being made for the most part by men who have no direct responsibility to the people. They are men of great ability and reputation, summoned from the fields of science and education as disinterested experts, and thus given an unrivaled opportunity for public service.
In a world of growing economic and political complexity and uncertainty, the rôle of the social and economic analyst and interpreter must, of necessity, become an increasingly important one. It has already become so in Great Britain. In studies such as the Macmillan Commission Report and the work of permanent career officials of the British Civil Service, this new profession has achieved extremely high standards.
America has not had such a fortunate experience. We have few Lord Stamps who are permitted to serve government and industry with the same degree of impartiality. The record would seem to indicate that the American economic expert, when called to Washington, brings with him a set of theories which often admit very little practical compromise with the existing situation. Lack of previous experience is no handicap to the writing of new and untried economic prescriptions.
And so to the problems that confront industry — government distrust and hostility, widespread prosecution, the indictment of the enterprise sytem itself — is now added an even greater impending danger.
The necessity of defense has given, of course, fresh emphasis to theories of government spending as motivating forces in the economy. Professor John Maynard Keynes’s famous ‘Multiplier’ thesis is now being tried on a gigantic national scale, with results that are likely to alter profoundly the future status of private industry. As with the Schacht plan in Germany, based upon the same theory, we are embarking upon a tremendous experiment, the outcome of which remains unpredictable.
A basic premise of the Keynes argumeat is that capital financing by the use of government credit increases national income by more than the amount so spent. A dollar put into such capital outlays is supposed to multiply itself by from one and three-quarters to three and one-half times. Thus 10 billion dollars in capital financing is counted upon to increase the national income by between 17 1/2 billion and 35 billion dollars. To the criticism that this prescription has failed in the government’s CWA, PWA, and other projects, the answer is now given that such expenditures were not on a sufficiently large scale!
One of the leading exponents of this short-cut-to-prosperity program is Mr. Berle. Before the New School of Social Research in 1939 he thus expounded its philosophy: —
Apparently one result of a rapidly industrialized society is that a large amount of that spending which is required to create a continuous accretion to wealth is of the variety which cannot adequately be handled by private capital. Perhaps the social needs of the community have been neglected as the private commercial needs have gone forward. It is even possible that, as the great urban developments took place, the social, or non-commercial, needs increased in arithmetic progression, that is to say, faster than the net commercial needs. It may even be that there is today a necessary field in the national economy for non-commercial spending which did not exist before: such fields as low-cost housing, public power developments, the health system of the country, the necessary hospital and municipal developments with which we are familiar in cities like New York and the like. All of these, properly considered, are nothing more than the organization of men and materials to create needed wealth. When you have a situation like that it may well be that public spending is more a question of national accounting than of political principle.
Many business men not only regard all such theories with deep misgiving, but are concerned over still another aspect of their possible consequences. They see that once the point is reached where approximately half the nation’s annual income is being channeled for expenditure, either directly or indirectly, through government, it becomes more and more difficult for a system of private enterprise to sustain itself. For it is industry that must largely foot the bill for what government spends.
Taxes and dividends flow from the same source: industrial production. Under the compulsion of an ever-widening necessity, the government increasingly ignores the principle of an equitable distribution (which Mr. Roosevelt has himself stressed), and commandeers a larger and larger share for itself. As has been demonstrated abroad, when government becomes so big as to dominate half the economy, the transition from private enterprise to state capitalism is well on its way to completion. With governmental expenditures still rising toward an unpredictable total, America is rapidly approaching that danger point.
Finally there is the task that confronts America when the war is over. Turning to the United States for help will be a bankrupt Europe, an impoverished and exhausted British Empire. In some way or other, the shattered fabric of international commerce must be mended, currencies stabilized, and millions of jobs found for demobilized armies. The first essential for rebuilding democracy abroad is to create, as its foundation, permanent economic security for its peoples.
Our own future may depend upon the skill with which this job of world reconstruction is handled. It can only be handled by an America that is economically strong, that has not been profligate of its resources, that has competent and intelligent leadership. That leadership calls for unity, not division of effort; for the release of the unmatched energies of the American people, not for the repression and controls of supergovernment, which, after all, cannot rise above the finite minds in its service.
This is the lesson that America must learn for itself while there is yet time.