The Business Earthquake

VOLUME 170

NUMBER 5

NOVEMBER, 1942

85th YEAR OF CONTINUOUS PUBLICATION

by LEO M. CHERNE

IN THE “it can’t happen here” days, American businessmen would have scoffed at the idea that they would ever voluntarily close their doors at the government’s request. But they have learned that economic warfare compels tough decisions. We have all been taught — the hard way — that in total war we do not have the luxury of alternatives. A war economy gives orders we dare not disobey. For the only alternative is the grim certainty of defeat.

Now comes a new control: concentration of industry. The whys and wherefores of industrial concentration are as easy to grasp as the fact that we do not have enough materials to make both ships and stoves.

Suppose you own a stove factory. In peacetime you never had to worry about getting enough iron and other materials to make your stoves. Today you can easily get enough orders to swamp your factory — but when you try to get iron, your order comes back marked by the priorities man: “Sorry, the Army needs this for tanks and guns. There isn’t much left for stoves.”

If you cannot feed your machines more than about 25 per cent of the raw material they used to get, you do not have to be an efficiency expert to see that you are wasting three quarters of your labor, machines, power, factory space. And you may well be a frightened citizen when you realize that this wastefulness prevails in the plants of all the other stove manufacturers in the country, and in the many other industries that are up against the same raw-material problem. The total is a staggering amount of waste — waste that is intolerable at a time when the country desperately needs every ounce of its productive strength.

Concentration of industry is a program designed to eliminate that waste.

But what happens to the companies that get the death penalty under a program like this — the ones that are not chosen as “nucleus” plants? Are they dead ducks? Or are they merely in a state of suspended animation? They need be neither.

Copyright 1942, by The Atlantic Monthly, Boston, Mass. All rights reserved.

Some of them, of course, get over into war work, and thus live to produce another day. But many of them — and there will be a great many before the year is out — are left without a civilian or military order to stand on; and their plight would be severe if nothing were done about it.

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England, two years ahead of us on the bumpy road of war, has developed four methods of concentration which make some equitable arrangements for the plants that are forced to close down entirely. The first method eliminates any distinction between the nucleus firms and the closed-down companies by merging the whole industry under common ownership. The owner of a factory, under this plan, may have to close his particular plant, but lie is still in business as part-owner of the nucleus firms that keep going.

The second method is even simpler. The selected nucleus firms, taking all the orders of the industry and getting the entire income of the industry, pay over a definite part of the profits to the companies that go out of business.

The third method is particularly suitable in an industry where trade-marks and brand names are important. It is a kind of pooling arrangement. A company is formed in which all the firms hold shares in proportion to their pre-war standing in the industry. The nucleus plants are then leased by their owners to this new company, which thus receives all the profits of the industry for distribution. The production of the nucleus plants is arranged so that articles bearing the trademarks or brand names of all the old companies stay on the market.

The last device is an agency agreement. The nucleus plants manufacture the articles as the agents of the closed-dowm companies. Those companies buy the products from the nucleus plants at cost, and sell them to the public through their old, peacetime distributing setup.

The War Production Board knows that there is dynamite in industrial concentration, and it will not be applied capriciously.

But we may expect the vise to tighten, despite hardship and painful dislocation, where one or more of the following situations exist in an industry: —

1. Some or all of the companies are needed for war work.

2. Civilian production is cut down so drastically that the continued operation of all the plants in the industry results in great waste.

3. A substantial part of the production of civilian articles is being carried on in regions where military production is tripping over the big feet of civilian manufacture, because there are not enough labor, power, warehouse, and transportation facilities for both.

One of the important reasons for the urgent interest of the WPB in speedy concentration is the serious labor shortage that faces the country. There are not enough men on the farms; there are not enough men in the factories; there are not enough men in the armed forces. Concentration is an important technique of distributing labor supply and of avoiding waste of labor which is critically needed in war production.

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The first American guinea pig to go into the compression chamber under a concentration program was the non-electrical stove industry, on August 1, 1942. Already thirty additional industries are slated for the same treatment by the War Production Board. These include agricultural machinery; metal furniture; office and store machines; oil burners; sanitary ware; plumbing supplies; boys’ bicycles; bedding; warm-air furnaces; construction, dairy, and other types of machinery; sugar refineries.

What decides which firms in an industry will be allowed to stay in business and which will get the concentration axe? Just common-sense principles. For instance, since large plants are usually better equipped to handle war contracts, they will ordinarily be the ones converted to war work, and smaller plants will get the whole package of the industry’s civilian orders.

Similarly, a firm is not likely to be tapped as a nucleus plant if it is in a section of the country where labor is urgently needed for war work, or where a lot of cross-hauling would be necessary. As a matter of fact, one of the important aspects of the concentration program is that the careful geographical choice of nucleus plants makes it possible to relieve the critical drain on labor, power, transportation, and storage resources.

In making up its mind as to which of several concentration plans to use, the War Production Board will be guided by certain basic factors. For instance, one question it is sure to consider is: Will this plan foster postwar domination of an industry by a few companies? WPB will also be keeping a weather eye out for any program which the Office of Price Administration may work out for the concentration of the distributive channels of an industry.

Concentration is a necessary development in our war economy. It is one of the results to which the compulsions of total war force us, whether anybody likes it or not.

Like us, England started out by cutting civilian production with a straight percentage slash. But then it came up against the bugaboo of waste. In the case of luxuries the answer was, “Cut them out completely!” In the case of clothing it was decided that about half the peacetime production could safely be allowed to continue. In most cases an average of some 25 per cent of pre-war production for civilian manufacture was sanctioned.

And then the final step was taken — the concentration of the allowable minimum of civilian manufacture in a few nucleus plants. If an industry did not come through with its own program of concentration, the government imposed one.

In England, the government redesigned all essential goods; products which now come off the concentrated production lines are called “utility models.” Seventy-five per cent of all clothing made in England now is of utility design — and the percentage is steadily increasing.

Though we are not so hard-pressed for materials and production as England is, we are already familiar with “Victory models” in this country. It is in this direction that the American public will first feel the impact of concentration. There will be fewer goods soon, more rationing and little variety. The housewife will not have forty brands of peas to choose from. She will not have a choice of many styles, sizes, or makes of articles.

If you are a worker in a concentrated industry, the program may mean unemployment for you. If you are the owner of a closed-down plant, it is going to mean a long, hard trek uphill to recapture your markets at the end of the war. Your best bet now is to try to be chosen as a nucleus firm or to get into war production. Failing that, be sure arrangements are made for some compensation if you are forced out of business. And in order to keep your business identity for the post-war period, see if you cannot keep your sales and distribution departments intact. Either arrange for the nucleus plants to sell some of the product under your name, or arrange to act as a distributing agency for the nucleus plants, selling their output under your own name.

Concentration of industry unquestionably smashes at the foundation of American enterprise by destroying competition. For fifty years we have pursued an antitrust policy with more or less vigor. Only once before has there been official relaxation of the anti-monopoly program — during the hectic days of the NRA, when the firms of an industry were permitted for the first time to share data on prices over a conference table and agree on competitive practices without danger of antitrust prosecution. Industrial concentration will make the NRA’s efforts in this direction look like child’s play. It is, in plain English, America’s first approach to voluntary, government-supervised private cartels — closed, highly centralized industrial groups. Because such cartels can, if they get out of control, spell the final destruction of America’s traditional free enterprise system of private capital, concentration of industry is the most important and significant single change which the compulsions of total war have thus far forced on American business.