Forecasting the Management Problems of 1944


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

Delivered before the Society for the Advancement of Management, National Conference, New York City, December 4, 1943

Vital Speeches of the Day, Vol. X, pp. 253-256.

DURING the past two years American enterprise has performed the almost incredible task of converting our nation from a militarily inferior power to the strongest and best armed force in the theatres of war.

Management and labor have fully justified the expectations and exacting demands of our military leadership. Only an Olympian observer or a future historian can fully appreciate the accomplishments in converting from a civilian economy to a total war economy in the short span of two years. Occasional strikes, frictions, and managerial incompetence are but scattered, isolated flaws on an imposing canvas of overwhelming impressiveness.

Anyone who attempts to forecast the economic events in 1944, is therefore, strongly tempted to take an optimistic view. It would please our ego to assume that our wartime unity of purpose, single-mindedness of action, and unqualified determination will continue undiminished even after victory in Europe is won.

Such a forecast for 1944 would be neither true to facts nor cognizant of the forces operating beneath the surface of our economy.

A sound prognostication of coming events cannot be based either on a mere projection of the past trend nor on wishful thinking. To be acceptable it must envision events that are either certain to happen or which will occur with a high degree of probability. It is against the background of such probable events that we can trace in broad outlines the scope and nature of the problems which will confront business management.

Let me summarize at this point the events which in myopinion will occur next year. They are the events that will form the backdrop against which American business management will be called upon to perform its responsible tasks.

First, the only event that will happen with certainty in 1944 is the election in November.

Second, less certain, but highly probable, is the defeat of Germany.

Third, the inflationary spiral will get into motion again shortly after New Year.

Fourth, manpower and womanpower shortage will grow in intensity during the first half of the year but will lessen perceptibly during the second six months. This trend will be paralleled by an increase in the number of men discharged from the Services either because of injuries suffered in battle, physical incapacities, over-age, and some decrease in the size of the Services after the defeat of Germany.

Fifth, growing labor unrest in the wake of reconversion. Its symptoms will be a revival of jurisdictional disputes, a fight for the preservation of wartime gains in rates of pay, and a demand for a reduction in hours of work.

Six, the adaptation of the wartime priorities system to the needs of an economy partly released from the requirements of total warfare. This means, in the phraseology of leading government officials, "priorities in reverse."

Seven, a gradual acceleration in the rate of cut-backs of war orders accompanied by a shift in the weapons of war that will still be manufactured.

And last, but not least, a political climate loaded with dynamite because many decisions on important economic issues will be left hanging in mid-air. They will be left hanging in mid-air for the simple reason that partisan interests and conflicting political ambitions tied in with the November election will prevent real action.

In summary, 1944 promises to be a year in which we shall witness the defeat of Germany, the revival of economic frictions, and a widening gap between the legislative and executive branches of our government.

Thus, management will face, for the first time since Pearl Harbor, a host of new challenges. Some of these challenges will be unprecedented. They will be the long-range product of the war itself and its impact on our economic thinking and vision. Some challenges will be the temporary consequences of an economy converting from total war to a partial war footing. And some challenges will represent a re-emergence of pre-war problems that were unsolved on the day of Pearl Harbor and have been suspended during the period of all-out war.

Let me now trace for you the details of the pattern of managerial problems that in my opinion lies ahead.

First, the war has been directly responsible for a worldwide acceptance of the belief that nearly full employment of manpower and maximum utilization of productive capacity are within the realm of the possible. The records of war production are an eloquent testimony to this fact. In every country governments have succeeded, under the terrific pressure of war requirement, in reaching a level of production and a rate of employment unprecedented in the history of each of those countries. The old nineteenth century economic doctrine that the weapons of war can only be forged at the expense of the civilian plow-share has been disproven. We've shown that we can produce guns and butter.

Look at our own current record. In the year 1943 we shall have produced a Gross National Product of almost $190 billions. After full allowance is made for the increase in the price level since Pearl Harbor, this still represents more than $150 billions in gross output or an incredible increase of 50 per cent above our total pre-war output. And all that within the short span of two years.

At the same time, our volume of consumers' goods produced in 1943 will be greater than in 1941. We have, in other words, accomplished the Herculean task of superimposing the war economy upon a record-level civilian peace economy. While creating the greatest arsenal of military weapons in the history of this or any nation, we have succeeded in providing for our civilian population a greater volume of the necessities of life and semi-durables than we ever produced in our most prosperous peacetime years.

Fifty-three million men and women gainfully employed and 10 million more in the Armed Services have witnessed the miracle. They have seen how American ingenuity translated into reality a blueprint which a short two years ago was regarded as fantastic not only by our enemies, but also by quite a few in our own midst. Will it surprise you if these 65 million men and women at war's end demand that we do almost as well in peace as we did in war in creating opportunities for employment and a volume of output commensurate with our present accomplishment?

True, this opinion will not become fully crystallized in the second half of 1944. The spectre of 4 million unemployed at the end of 1944—the estimate of the Research Institute—will not stir up any violent reactions. It will be accepted as the inevitable short-run consequence of partial reconversion. It will be accepted with many mental reservations. Management will not be blamed for the occurrence of unemployment at that time—at least, not yet. But management will already be on trial just the same. Its failure in the second half of 1944 to lay the groundwork for increased employment opportunities after the defeat of Japan—which will probably occur between 12 and 18 months after the surrender of Germany—will certainly cause unrest and perhaps even serious convulsions in our economic and political body.

Thus, thorough, comprehensive, and effective post-war planning by business both collectively and individually becomes the foremost responsibility of management in the coming year.

The second challenge to management will come from the inflationary spiral. Present indications point very strongly to the probability that the anti-inflation dam is going to be breached early in 1944. The fissures will be small at first. But they will widen and widen rapidly under the repeated onslaughts that will come from wage earners, farmers, businessmen and other groups. These pressures will grow in intensity as the defeat of Nazi Germany grows more certain.

At the same time, complaints about economic inequalities that have been more or less dormant during the crucial years 1942 and 1943 will echo louder and louder across the political arena. And they will find a receptive ear because of the approaching election.

Here I come to one of the paradoxical and, at the same time, most serious features of the inflationary spiral. As long as inflation is nothing but a future possibility, fear of its consequences is usually sufficient to keep everyone in line. Neither individuals nor groups are willing to start the avalanche. But, break the line at any point, set the spiral in motion, even though slowly, and a mad scramble follows. Every group stampedes for the inflationary bandwagon; caution and reason are cast to the wind. Everyone tries to salvage for himself a maximum of what he believes to be anti-inflation protection by pushing for as much of an increase in his price as he can possibly obtain. That he thereby accelerates the rotation of the spiral and its destructive effects escapes him.

The spiral can be checked only if there is firm determination on the part of the legislature and the executive to apply drastically and unhesitatingly strong measures. Unfortunately, I can't be optimistic about such prospects. Knowing the political climate in Washington, I fear that the inflationary spiral will be permitted to run its course.

Inflation and all that it implies poses, therefore, the second set of problems for management. In fairness to its stockholders and investors, management must protect the real value of its equity and assets. In fairness to its workers, it must adjust their wage scale to the declining purchasing power of the dollar. In fairness to the market, it must keep prices from running wild.

The charting of a safe course through the dangerous reefs of inflation will be made more difficult by the fact that Germany's defeat will in all likelihood be followed by a decline in business activities in a number of our economic segments. Areas which have been fully converted to war production and which will suffer a severe cut-back in orders will experience a rising volume of unemployment, shrinking markets and unused capacity.

Other war areas will be able not only to maintain their present level, but to intensify their production schedules because of the shift in war demands. Expanding prosperity in some parts of the country, maintenance of the present high level in other parts, and depression conditions in still other parts—such is the economic outlook for the second half of 1944.

The third challenge will arise in the labor market. Until Germany is defeated, both manpower and womanpower shortages are apt to increase. Manpower will become an increasingly more serious problem as the Armed Services approach the limits of their scheduled sizes. At the same time, shortages in the available supply of women will become more acute. It is unfortunate but true that women have been quitting jobs in industry at a faster rate than replacements have been coming in.

This tendency set in with the defeat of Italy and has been accelerated by the favorable news from the various theatres of war. The outward movement of women from industry promises to continue at a faster pace after the defeat of Germany.

Manpower help through a national labor draft law is unlikely. It will be up to management to do everything in its power to stop the withdrawal of women. By now it should be obvious that the wheels of municipal governments turn far too slowly to be of any material assistance in this job. Although the hour is late, it will still be possible for management to adopt in the first half of 1944 some measures that will enable housewives, mothers, and single women to do a full job in industry with less inconvenience than at present.

After the defeat of Germany, labor problems will increase rather than diminish. The number of wounded soldiers who will be demobilized will grow rapidly as the second front is opened up. Management has not only the legal but the moral and inescapable duty to provide employment opportunities for these returning warriors who have fought our battle. These men will pose a problem for personnel management that calls for the exercise of tact, understanding, and full cooperation in facilitating and expediting the readjustment of these ex-soldiers to industrial life.

After the defeat of Germany the rate of demobilization will probably be stepped up quickly. These men, too, although not wounded in battle, pose a problem of readjustment. For them, too, an effective solution must be found. There is no precedent in our history for the number of men who wilt return from Army life to industrial life. Nor is there a precedent for the determination of these men to obtain jobs rather than relief, to sell their skills at the work bench rather than on street corners.

The fourth challenge will come from the dismissal of workers in war industries and the reduction in working hours. These are sure to follow our victory in Europe. They will cause both labor unrest and jurisdictional disputes. While everyone knows that weekly pay envelopes in many industries have increased very substantially during the war, it is no longer a secret that trade unions and other labor organizations will fight hard to retain their wartime gains in basic hourly rates. They will also fight with equal stubbornness for the preservation of their jobs.

If we are to emerge from this war into an era of sustained high level of production, then jobs are the key. These jobs will have to be provided by business management to assure itself of a market able to absorb our national output. These jobs will have to be provided by business management if free enterprise is to continue as the driving power in our economy. It is wishful thinking to assume for one single moment that continued large-scale unemployment will be accepted any longer as the inescapable consequence of an immutable economic law.

You, the managers of American business enterprises, should and must realize, even if many of our economic theorists have not yet done so, that two basic laws that were widely hailed J in the nineteenth century have been repealed by the irresistible forces of economic life in the twentieth century. I am referring to Malthus' law of population and the law about the inevitability of the business cycle and its by-product: unemployment.

These two laws have been accepted for more than a century as inexorable. They have been looked upon as natural laws above and beyond the control or power of man.

Malthus advanced the view that while the food supply could be increased in an arithmetic ratio— 1, 2, 3, 4, 5, etc.— population had the tendency to grow in a geometric ratio— 2, 4, 8, 16, etc. Thus, Malthus concluded that population would grow at a far greater pace than the food supply. The only major checks to this unbalanced ratio were seen by Malthus in the periodic recurrence of wars, misery, disease: in brief, a high mortality rate.

The second law said that in a dynamic economy dominated by free private enterprise, the periodic ups and downs of the business cycle are the price which we must pay so that the strongest may survive and the weaker elements in the business community be eliminated. Unemployment flows as the consequence of this process of elimination of the inefficient and inferior producers and competitors.

To be sure, those who formulated these laws were not all sanguine about them. However, they saw no other alternative except the absence of private enterprise. Since they looked upon the presence of private enterprise as infinitely more desirable than any other economic system, they were willing to accept insufficient food supply and its consequences, as well as unemployment and its effect.

Hitler has repealed the law of Malthus, and the law of unemployment.

Hitler will soon have disappeared both from the political and economic stage of the war. But the fact and the record will remain after his exit. The fact is that Hitler was one of the first men in responsible public office to recognize that the Malthusian law of population no longer applied. He realized that it was not the shortage of food supplies which led to wars in the twentieth century, but the presence of unused manpower. He skillfully took advantage of the fact that a large army of unemployed may be easily induced to don uniforms, forge the weapons of war, and seize the productive capacity of other countries, thus creating additional employment opportunities for the conquering nation.

Hitler next realized that the unemployed can be put to work by the State even though their accomplishments were not "profitable" as measured by the yardstick of free enterprise.

Thus, the Fascist State represents a functional disproof of the two nineteenth century laws. We can see clearly now that a third World War will become inevitable and will be far more brutal than World War II unless available manpower is used constructively in creating goods and services for the satisfaction of human desires. Unless we accomplish this task, no economic law, no social philosophy, no man or group of men on earth can stop another holocaust.

The second lesson we must learn is that the national government cannot stand passively by while the business cycle takes its own course and creates ever more violent fluctuations. And it doesn't make any difference what the political composition of that government happens to be. The national government in the twentieth century cannot afford either politically or economically to fall from a record level of prosperity into the depths of depression and unemployment. To the same degree to which private enterprise fails to absorb the pressure of disemployment, exactly to the same degree will the national government be compelled to provide work in one way or another. Neither slogans nor refresher courses in past history will lessen the insistence of the disemployed for jobs.

There is no doubt that the American people are still overwhelmingly in favor of private business meeting this responsibility. But there's no doubt in my mind that a large army of unemployed will turn its back on private business and insist on action by the national government if private enterprise doesn't come through.

But if jobs are the key to economic reconstruction after the war, then progressive and sound labor relations are the handle on the door. Labor has gained both in social legislation and economic experience. It is now a force far more organized than ever before. It is rapidly maturing. And in many areas it still has a distance to mature.

One fundamental lesson that must be learned by both I management and labor is that nothing which restricts production or prevents consumption would be helpful or desirable to the nation. Flowing from this is the certainty that conflict is stagnation.

None of the potential powder barrels I've mentioned need necessarily lead to an explosion. Consider them time bombs that are now deeply buried in our industrial structure. They can be made harmless through skillful handling and removal of the fuses. They certainly cannot be made safe either by being ignored or kicked around.

The fifth challenge will flow from the partial reconversion to civilian output Present indications are that the peak in war production will be reached around March 1944, with output at a monthly rate of about $8.5 billions. Following this peak, the rate will be cut down until at the end of 1944 our monthly volume of war production will be in the neighborhood of $6.5 billions or even less. At the same time there will be a notable shift in the type of war goods produced. We already have sufficient supplies of light equipment, ammunition, tanks, trucks, and similar materiel to maintain our forces at battle strength. From now on the emphasis is going to be upon replacement and repair parts for this type of equipment.

However, we shall probably continue our ship-building program and even expand it with a view to the requirements of the Pacific war. For the same reasons, we shall make some shifts in our plane program in the direction of heavier long-range bombers and fighter planes.

It is very probable that war industries on the Pacific Coast 11 obtain not only a larger percentage share in the volume of war production than they now have but also a larger absolute amount of dollar orders.

However, it would be fallacious to conclude that the reduction in our war output will immediately and automatically release a corresponding quantity of critical materials for civilian production. Such a development appears extremely unlikely.

Instead, there will be a more than proportionate release of raw materials that go into the manufacturing of military soft goods. But even these raw materials will not be released indiscriminately. Plans are rapidly maturing in Washington's official circles to initiate a system of "priorities in reverse" immediately after war production declines from its peak.

Under such a system, raw materials will be released for civilian production on the basis of two considerations. First, is the end product highly essential for civilian consumption? Second, and this is likely to be the more important criterion, how many man hours of work will be created by a given unit of the raw material to be released?

The sixth challenge to business management will arise in the field of foreign economic relations. Until Pearl Harbor our international economic philosophy was one of isolationism. The barricades of a protective tariff had been accepted for more than a century as the foundation of a sound American economy. At least they have been accepted in this light by our legislature and the average man in the street.

It is ironic and paradoxical, however, that Big Business, although doing extensive lip service to the doctrine of political and economic isolationism, has long been internationally minded. Big Business discovered the "One World" long before Wendell Willkie took his trip.

Pearl Harbor has taught us that political isolationism will not stem the tide at our doors. The war itself should teach us that we shall not be able to enjoy economic prosperity in this country if the rest of the world remains in ruins. The billions of dollars worth of securities which the American public purchased so eagerly in the 1920's, and which are now almost worthless, must serve as a reminder that foreign trade is a two-way affair. To export we must import. If we want our customers abroad to buy from us we must enable them to sell to us.

If you accept these premises, then the conclusion is inescapable. We shall have to make those adjustments in our economy that will enable foreign nations to find an outlet in our market for goods they are able to sell to us and with which they can pay for the purchases made from us. To accept such a program does not imply that we are willing to become a global philanthropist. It does not involve a philosophy of charity. Basically, it is nothing but a philosophy and a program of hard-boiled, realistic economic thinking. It is far more expensive for us to become a relief agency of unlimited duration than to turn quickly into a two-way trader. It is far less expensive to develop a two-way traffic in goods and services than to prepare for a one-way traffic of soldiers and ammunitions and a return trip of dead heroes.

1944, therefore, will be a crucial year. Few, if any, of the problems that I have outlined will or can be solved in a short span of twelve months. But we can either provide a sound foundation for a gradual and healthy solution; or we may plant the seeds for renewed international disputes and another world war. We shall either create a climate in which frictions can be dissolved and basic issues sensibly and reasonably examined; or we shall charge the political and economic atmosphere with so much additional electricity that another storm may break over our heads far more devastating than anything we have ever experienced.