Distribution and Purchasing Power


By LEO M. CHERNE, Executive Secretary, Research Institute of America

Delivered before Boston Conference on Distribution, October 6, 1942

Vital Speeches of the Day, Vol. IX, pp. 76-79.

ONE of the odd facts about people is that they accept many profound realities when presented as generalizations but tenaciously resist the implications of that which they have accepted. This is no less nor more true of the business, industrial or economic community than it is of any other. And it is because most speakers, even if they have not completely thought it out, do, nevertheless, realize the hiatus between the general and the specific that they present their most important intellectual contributions in phases so general that no exception can be possibly taken to them. The thread of this irony runs through most pronouncements—from those which themselves create history, like the Atlantic Charter, to unimportant addresses, such as I am now making. For example, the Declaration of Independence said that all men are created free. But many of the men who signed that Declaration themselves owned slaves. The Atlantic Charter assures a warring world free access to the materials of the world; but many a controversy will still haggle the extent and terms of that freedom.

Yes, the statement of such general principles is easy enough to make, but the enthusiasm for the ideals thus articulated too frequently obscures the fact that there is many a slip between the cup that holds the high-sounding principles and the lips of the men, women and children who want to drink of that cup.

Take, for instance, these words of Sumner Welles,* and I quote: "The problem which will confront us when the years of the post-war period are reached is not primarily one of production. For the world can readily produce what mankind requires. The problem is rather one of distribution and purchasing power; of providing the mechanism whereby what the world produces may be fairly distributed among the nations of the world; and of providing the means whereby the people of the world may obtain the world's goods and services. Your Government has already taken steps to obtain the support and active cooperation of others of the United Nations in this great task; a task which in every sense of the term is a new frontier—a frontier of limitless expanse—the frontier of human welfare. . . . Given sound national policies directed toward the benefit of the majority, and not of the minority, and real security and equality of opportunity for all, reliance on the ingenuity, initiative, and enterprise of our citizens rather than on any form of bureaucratic management, will in the future best assure the liberties and promote the material welfare of our people."

Or consider the words of the Dean of Harvard's Graduate School of Business Administration when he said, "We must look forward to changes in the thinking of businessmen in order to bring business in alignment with the changed social and economic conditions."

These are statements to which we all subscribe, but is our subscription more than an emotional response, a token lip-service? It had better be more—because in these two quotations lies the final challenge for private enterprise—the challenge to provide full production for victory with minimum hesitation and maximum resourcefulness and imagination; and to provide full employment, full distribution, full production in a post-war enlargement of our democratic society.

The danger is, only too apparently, that the applause which greets statements of high principle too frequently drowns out the voice trying to remind us that these principles must be actualized or they mean nothing.

And the actualization, itself, is a matter of tedious detail accompanied by no trumpet's fanfare. The actualization is a job of economic engineering, of careful planning, of realistic computation of the economic compulsives which the war has brought. There is the challenge.

It is easy enough to speak of this war as a revolutionary war. It is very difficult to move men to understand the implications which follow from that fact—implications which must be faced and understood if the private enterprise system is to accept the challenge and the responsibility of the war.

But let's forget words like "revolutionary." Let's avoid generalizations. Let's recognize that our first job—and the job which is the sine qua non—is to see clearly exactly what this war has done to our economy in actual everyday living terms—in terms of its real impact on the economy of the nation.

First, we are faced with the greatest military drain on manpower that history has ever seen. The implications of this one fact alone are staggering in their significance. We are led by the compulsion of that fact to a program for labor

mobilization. Again, let us look behind the word to see the actual fact. Labor mobilization means central control over the working destiny of men and women. It means that for the first time in our history the government is telling men and women where and when they may or may not work and under what conditions of payment they may or may not work. When you put content like this into a word like revolutionary, you begin to see that that word as applied to our present-day situation has a tremendous amount of actual meaning.

Add to the picture wage freezing and a declining standard of living ruthlessly forced on the nation by the compulsives of war. Open the frame of the picture to include rationing as wide as America itself. Paint in price control pinching every economic step we take on the road of war economy. Swing back to labor for a moment to recognize that as payment for the sacrifices it is called upon to make—as payment for wage freezing and labor mobilization—labor will be thrown a sop of union security and universal union shop. Turn for a moment to consider the impact of smashing taxes and compulsory savings of a kind which would have been considered fantastic only two or three years ago.

You begin to see that we are not in the realm of theory today, but of hard, brute reality. Remember that these brute facts of our economic situation today have one-way tickets into the future marked on them. The economy is not a rubber band which after the stress of war will snap back to pre-war conditions. It is more like a series of bridges which are burned behind us as we inarch along to war. The marks—and yes, scars—of the controls which will increasingly be applied in the areas I have just mentioned, will probably never be fully healed.

The private enterprise system can go forward with these controls to a brave new world of tomorrow without regret that the bridges have been burned. But it can only do so if it opens its eyes and its brains, if it takes off the blinders of wishful thinking and recognizes the facts for what they are and makes an objective effort to understand the direction in which those facts are leading us.

In peacetime we could allow ourselves the luxury of considering alternative possibilities in economic method. We could even afford to argue about how many angels danced on the point of an index number. But total war blasts alternatives out of the picture.

No one can understand our economy today or determine the direction in which it is moving if he does not understand that the law of free supply and demand has been repealed and we are living under the rule of economic compulsives—under rules compelled by the nature of total war.

When a chemist puts two ingredients in a test-tube, he knows exactly what reaction will occur, and he knows that only that one reaction will occur. Similarly, when war picked up the test-tube of our economy and put into it as one ingredient the scarcity of many necessary materials and as another ingredient the great and over-riding need of outs military machine, only one reaction could take place: namely, priorities. There was no alternative and no room for argument. That is an example of an economic compulsive in operation.

Take another case. When war mixes the ingredient of increased purchasing power with the ingredient of a cut in the production of consumer goods, only one reaction can take place: namely, price control . . . unless you want inflation. There's another economic compulsive.

To be honest, you do have an alternative. The economic test-tube reaction is not as inevitable as the chemical one. You can disregard the economic compulsion. But the cost of that alternative in total warfare is, plainly, defeat. Ifwe are not willing to pay that price, we must accept the fact that there is no way of avoiding, minimizing or compromising with the compulsives of total war.

For a time we did try to compromise. We tried to feed our cake to the war machine and have it, too. But today we're beginning to realize that we can't compromise with compromise any longer without seriously jeopardizing our chances of victory.

We are beginning to understand that it is no exaggeration to call these past months a revolutionary period. If there were any possible doubt, it was completely dissipated on August 1, 1942 when another revolutionary—and remember that I am using that word advisedly—change in American economic history came to this nation.

I suggest you mark down August 1st as the day when the first charge of real dynamite was exploded under the swivel chairs of every business office in the country. On that day an entire American industry went under an industrial concentration program.

Out of 273 firms in the non-electrical stove industry, only 195 are now in the business of making stoves. They get all the civilian orders for the entire stove industry.

Industrial concentration of this type was inevitable once we began to be faced with shortages of materials. With the stove industry unable to get enough iron to go all around, the various companies were operating way under capacity. That spells waste. Multiply all the industries in the country where shortage of materials has resulted in curtailed production. You get a staggering amount of waste.

England, two years ahead of us on the war road, reached the stage where such waste was critical some time ago. England's answer was concentration of industry . . . a program designed to squeeze every drop of value out of the limited energy, manpower, and materials available for civilian production.

Since England's recent past is in many economic details our immediate future, it will interest you to know that concentration had already hit the following English industries by April 1, 1942: bedding, bicycles, shoes, braces, carpets, corsets, cutlery and razor blades, fountain pens, gloves, hosiery, jewelry, leather goods, linoleum, musical instruments, paper boxes, photography, pianos, pottery, sports goods, toilet preparations, toys, umbrellas, iron and steel, glazed tiles, woodworking, jute, silk, wool, cotton and rayon, paper mills, and dealers in sheepskins. Quite a list . . . and more to come!

Of the 6,578 companies working in those industries, 2,203 (representing roughly 75 per cent of the capacity of the industries) had been taken for conversion and 4,315 small plants (about 25 per cent of the capacity) had been allowed to carry on as "nucleus" plants.

Although we don't face as severe a shortage in materials and production as England, these facts offer important clues as to where and in what degree concentration is going to hit American industries.

Already in this country . . . by the end of July to be exact . . . some dozen industries, in addition to the stove industry, were slated for concentration. I'll run through the list, because one way or another every part of the nation will feel the impact as these industries go under the controls: Agricultural machinery, metal furniture, office and store machines, oil burners, sanitary ware. Also, plumbing supplies, toys, bicycles, bedding, warm air furnaces, construction, dairy and other types of machinery.

Looking to the future, I would say you may expect the vise of concentration to tighten wherever some or all of the firms in an industry are needed for war work; or where civilian production is so restricted that efficient operation of all the

individual companies in the industry is impossible; or where a significant part of civilian production is taking place in areas where military production is tripping over the big feet of civilian manufacture because there aren't enough labor, power, warehouse and transportation facilities for both.

Just plain common sense will determine which companies in an industry will be allowed to stay in business and which will get the concentration axe. 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.

On this same basis, you're not likely to find a firm being tapped as a nucleus plant if it's in a section of the country where labor is urgently needed for war work, or where substantial cross-hauling would be necessary. As a matter of fact, one of the most 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 that exists in many sections of the country.

One of the wrenches with which concentration tightens up the nuts and bolts of civilian production is standardization. To get the most out of available materials all frills, ornaments, gadgets, etc., are lopped off. In England, all essential goods got a close shave by the government. For example, seventy-five per cent of all clothing made in England today is of utility design—and the percentage is steadily rising. We are, of course, familiar with our own Victory models in various types of products. With concentration you can expect standardization and simplification to spread until they reach almost every single civilian article.

And with concentration you can expect a sharp increase in rationing.

No group—with the exception of the concentrated companies themselves—is going to be hit as hard by concentration as distributors. Before it is finished, concentration is going to turn all ordinary distribution operations upside down. It will hit every phase of distribution activity—buying and selling, shipping, general merchandising, advertising . . . planning for the post-war period.

The most smashing impact of concentration lies in the fact that it means a change in the basic framework of our entire business scene. It steamrollers the foundation of American enterprise by destroying competition. This impact will live with you for many years beyond the war. Its fundamental significance will reverberate throughout our entire economic structure.

For fifty years we have pursued an anti-trust 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. 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, industrial concentration presents a decisive challenge to private enterprise. Such cartels must be accepted during the war because they are compulsives which cannot be avoided, but we have the great responsibility of seeing that they are kept within bounds. A backfire set to fight a forest fire is no help if it gets out of control and does more damage than the forest fire itself.

But the greatest importance of industrial concentration lies in none of these impacts, vital as they are.

The over-riding significance of this war compulsive lies in the fact that it typifies the way in which our economy can rise to meet the burdens war places on it. It shows that when we really want to we can cut across all the barriers that stand between our economic machine and its fullest use—we can slash through old methods, traditional ideas . . . we can even throw out profit as a motive and competition as a goad.

Just one short year ago what American businessman would not have dismissed as fantastic the possibility of a program of industrial concentration, with all its revolutionary implications, in the United States? What American businessman today does not recognize the inevitability of this control, its necessity, the implacable reason for its presence? In this change of attitude lies the decisive and the critical challenge for private enterprise . . . because it leads immediately to the fundamental question: Will our economy rise, of its free will, to meet the burdens PEACE will place on it, as it has risen under the compulsives of total war to meet the burdens war placed on it?

Milo Perkins has said: "Full blast production for a gradually rising standard will be as necessary to win the peace as all-out production now is to win the war. It will be physically possible. Our number one post-war job will be to make it fiscally possible. If we can do that, private enterprise will enter upon an era of unparalleled activity." That, in a nutshell, is the critical challenge for private enterprise. At war's end we will have on the one hand a world capable of producing abundance. On the other hand we will have a world needing and wanting things—food, clothing, houses, the whole panorama of consumer needs and wants. Are we going to get those two hands together? Or are we going back to the days when there were a thousand and one "Economic" reasons why a child famished for milk couldn't get it while surplus milk was being fed to hogs or just being dumped? If the private system lets that kind of thing happen, if it doesn't recognize its responsibility to produce and distribute a decent standard of living for all the people, it is going to be called into the nation's court. Call this one man's personal prophecy if it makes you uneasy and you want to take the sting out of it. But if you are the same men who had the brains, the skill, the courage, the perseverance that developed the private enterprise system to the heights it has reached, you recognize the truth—the stark truth—of that prophecy.

You will know, too, that your fellow citizens have now seen with their own eyes the magnificent production and distribution potential of this country . . . and that they are going to ask why that magnificent potential can't be swung to making decent food, clothing, houses, available for all the nation when it no longer has to produce bombers and tanks and ships.

Milo Perkins† put it well when he said: " . . . the chains of the ages have snapped. The one thing the people won't do is take 'no' for a final answer to their cry for full employment. Not after this suffering; not when they see themselves surrounded by too much of what they need most and yet might not be able to get. Idleness, be it of men or money or machines will be the one unforgivable sin of the post-war world."

Donald Nelson has pointed out that we are now putting into operation the most magnificent productive plant any nation ever dreamed of, and we are learning things about production, about the use of materials, about the way to make more out of less, that we "never knew before."

If that powerful economic machine is to remain in the hands of private enterprise, private enterprise would seem to have a basic responsibility to run it—in peace as well as in war—at full power so that we never again have to face

the terrible anachronism of poverty in the midst of plenty or one-third or one-tenth or one-thousandth of the nation ill-clothed, ill-fed, ill-housed. There is the nub of the challenge.

On demobilization day, the American businessman will be faced and tested by several tough pressures. You don't have to be a crystal-gazer to foresee them. The basic problem will be the maintenance of consumer purchasing power, which in other words is the problem of full employment. How are some 27 to 30 or more million men and women going to be demobilized from the armed forces and war factories? Where are they going to find jobs . . . especially when a large percentage of American industry will be occupied less with production than with retooling and readjusting for peacetime production? What are they going to live on until they find jobs?

All other pressures of demobilization day are merely aspects of this fundamental problem. True, American business will have to face and adjust to the fact that at the end of the war over half of our industrial output will be going to one customer—the government, and that immediate stoppage of that purchasing power would result in bankruptcy. Certainly, business can expect to have to continue operating under many government controls. Distribution will share the burdens which our staggering national debt will have placed on the country. Distributors will suffer all the dislocations which reconversion of industry to peacetime pursuits will bring. They will face new competitors, coming to capture their old markets with new products, new materials, new services—unless, of course, they are themselves preparing to take advantage of our new knowledge and techniques. They will be confronted with large—and stimulating—challenges in methods of merchandising, advertising, retailing.

But the basic demand will be for the new kind of thinking the Dean of Harvard's Graduate School of Business Administration spoke of. The responsibility of distributors in meeting the post-war challenge is as paramount as it is obvious. Unconsigned goods piled in warehouses do not represent real wealth. It is only when those goods begin to flow through the channels of distribution to consumers who can pay for them that our economic system begins to function. But the old, limited concepts of distribution will not be sufficient to meet the challenge of demobilization day.

American business will have to recognize . . . if private enterprise is to enlarge its future . . . that its activities arecharged with public interest. Business will be forced to set policy not only in terms of reasonable profit but in terms of the social results of its action. That isn't as revolutionary as it sounds. Large areas of the American business community have for years been recognized as charged with public interest, and have not been free to operate as they pleased. Public utilities, of course, are examples. What has been happening is that the concept "affected with public interest" has, under the compulsives of war, been extended to include areas traditionally exempted. But you can't turn history back; and we are clearly and steadily moving toward further extension of that concept. If private enterprise is wise enough, if its self-interest is sufficiently enlightened, if it really owns the morality it claims for itself, then far from fighting against this extension it will urge it and cooperate to the fullest in setting up social good as the goal of all production and distribution.

Let me repeat Sumner Welles' Statement: "The problem which will confront us . . . is not primarily one of production. It is rather one of distribution and purchasing power; of providing the mechanism whereby what the world produces may be fairly distributed. . . ."

Is private enterprise up to providing that mechanism? That is the challenge. If it is met, a limitless new frontier opens up to the private enterprise system . . . what Mr. Welles called "the frontier of human welfare."

The facts I have noted are the economic compulsives of total war which cannot be avoided. The pattern that emerges from these facts is clear, their trend into the future is plain. Their message is unmistakable: With the peace private enterprise will face its most critical challenge. It will very literally be do or die for the private enterprise system. I know that facing facts, especially facts like these, is not a popular pastime; but we are not talking about popular pastimes. We are talking about survival, and the responsibilities that survival entails. If private enterprise does not have the brains and guts, the imagination, vigor, and resourcefulness to accept that responsibility, then, frankly, does it deserve to survive? If it cannot rise to meet this challenge, then, frankly, I think we will stand condemned out of our own mouth, before our own bar.

Many will flinch at the crisis, being afraid. I might point out, as Milo Perkins did in a recent speech, that the Chinese write the word crisis with two characters, one of which means "danger" and the other "opportunity" . . . and say, as he did, that that's worth remembering.

*Vital Speeches June 15, 1942.

Vital Speeches August 1, 1942.