What Worked in Digging Out of the Great Depression, Part II

Arthur Herman’s new book “Freedom’s Forge”, Jon Gertner’s “The Idea Factory”, Burton Folsom’s “FDR Goes to War” as well as books by Niall Ferguson, Thomas Fleming, John Keegan etc. on World War I have been revelatory about how much false history we’ve been taught. World War I was an economic disaster for everyone involved and it’s economic destruction resonates to this day. Rather than serving as an economic stimulus as war is often declared to be, the world economy was in perhaps it’s peak condition with every country growing and modernizing rapidly in rising living standards for the general population amid a cascade of meaningful innovations. So assuming the next World War was a panacea for economic growth takes ignoring most evidence and grabbing at straws. It noticeably broke the British Empire. But the U.S. did emerge far economically stronger in 1945 than it had been since just before World War I. How?

The credibility of the New Deal political solutions had worn thin with as many unemployed after 8 years of these policies and deficit-fueled economic stimulus. Putting enough people on the public payroll just prior to the 1936 and 1940 Presidential elections, and telling them their jobs depended on an FDR win so vote that way…and then laying many off after the election was faltering (Burton Folsom points out how $5 billion in federal stimulus dollars were used to buy the 1936 Presidential election, a pattern we saw again in 2012.) The deficit’s accumulation to a vast size compared to annual federal revenues, and raising tax rates on everyone to the point FDR was pushing for 100% income tax rate on top earners, and got a 97% rate, meant Keynesian stimulus was becoming impossible to sustain (much like 2013’s realizations.)

What worked? (sorry for the long prologue)

One of the most skillful manufacturing managers in the nation’s largest industry Bill Knudsen who’d built both Ford and General Motors over the previous 30 plus years was put in charge of mobilizing for the war FDR was stumbling into. Knudsen got over a THOUSAND new factories built across the U.S. in 3 years, many making entirely new products with new workforces and management , new tooling, a focus on vastly greater production, and using the latest technologies, materials, processes. Those factories were put on and learned to instantly innovate, implement new quality control processes that Bell Labs and Western Electric had been working out to make the finicky vacuum tubes (W. Edwards Deming and Joseph Juran came from there and ignited the century’s quality movement that also rebuilt the Japanese economy after the war.) Instant model and technology changes stress an organization quite painfully and can be avoided in peacetime but the pace of reacting to enemy improvements taught powerful lessons that made the U.S. manufacturing world beaters again. The uncertainties of the Great Depression closed many manufacturing plants, stunted industries, and left most plants with the same production equipment and processes that they’d worked out between 1890-1929 in the same facilities. That was a reliance on cheap semi-skilled labor, limited availability of powered tools, massive machine tools required decades of experience to use effectively, old materials stretched to poorly fit new purposes, and a reliance on complex mechanisms with many moving parts that needed constant adjustment and repair. Knudsen recognized the cost of tooling and building new factories and made sure that was factored into the prices the government paid for it’s stuff, essentially the opposite of Wal-mart and a lot of federal procurement that ignores those costs and considers ephemeral orders requiring long-term investment to fill just a convenient prerogative of big buyers (leaving a lot of wreckage and waste in their wake.)

New industries were forming that created hundreds of thousands of good jobs and new companies for decades forward. Electronics emerged in the 1920’s and 1930’s at Bell Labs, MIT/Raytheon, Tuxedo Park’s private lab/tech incubator run by Henry Loomis, Fred Terman’s work with the telecom and power companies around Stanford and his protegees Hewlett & Packard, Lee DeForest and Philo Farnsworth’s work in pioneering television and radio networks and would change most industries as well as create many more with wartime applications moving them forward in size, capacity, durability, flexibility, and cost incredibly quickly.

Computers took off then (not when later noticed by the media) with IBM already providing computers to large organizations since before 1900 (when it was Herman Hollerith’s firm) and MIT’s Vannevar Bush building more flexible computers for cracking the Japanese codes in the later 1930’s for U.S. Naval Intelligence. Vannevar Bush is the father of Route 128 around Boston and Raytheon directly as well as DARPA and the Internet. Konrad Zuse’s computer development work in Germany is mostly ignored here as are the substantial British computer development work fueled by German code-breaking needs under Alan Turing’s guidance. Austrian refugee/Jewish scientist John Von Neuman who’d come to Princeton’s Advanced Studies thinktank to flee the Nazi’s had at least as profound an effect on U.S. science and mathematices, especially computer science, as fellow refugee and Princeton AS scholar Albert Einstein, but is now mostly forgotten (there’s a terrific biography of Von Neumann by a retired editor of The Economist.)

Adapting for war production with material flowing from across the country out every coast and border simultaneously as well as drawing inputs from the rest of the world meant the transportation system grew for export and transcontinental capacity in a way it hadn’t since the original railroading boom in the 1850’s-1880’s (Stephen White’s “Railroaded” is a superb guide to how irrational that truly was based on government funding/subsidies/and policies exploited by a rogues gallery.) The interstate highway system, the Lincoln Highway built during the 1930’s, was eclipsed with vastly expanded seaports, river barges, cargo aircraft/new airports and airbases, bigger cargo trucks and millions more of them, new locomotive engines requiring much smaller crews/less maintenance and new rolling stock allowing for much longer trains, new bridges and highways to service new war factories/mines/oilfields, new oil pipelines across the country and new refineries, additional electrical transmission for new war factories and thousands of new residents in those towns…the country became both far better interconnected and far more able to serve export markets simultaneously. The pressures of the war and the sheer scale of building trumped the “Not in my backyard” that now paralyzes such efforts as well as putting so many political plums out there for politicians to grab at, much of the investment still managed to go where it made sense instead of just political nonsense.

The U.S. left the Great Depression with a workforce that had gone through much of their working lives unemployed, badly employed, or intermittently employed. Unemployment rates of 25-70% (adult white males with just 1 in 4 out of work, racial minority and teenagers 7 out of 10 out of work) had put as much as 10% of the workforce roaming the country as hobos searching for seasonal work like harvesting or construction projects. Thousands of businesses and farms had failed so millions of Americans used to self-employment and management responsibilities were available for the workforce like never before and rarely since (now being another such time as was the late 1970’s-early 1980’s.) The lack of jobs meant about 3 times more students stayed in school and graduated high school than in the 1920’s while many colleges closed or nearly failed with greatly diminished enrollment despite only 2-5% of Americans trying college back then. High schools didn’t assume a college education or trade school was next so directly job-related skills and knowledge dominated the curriculums from extensive shop classes to business courses to applied science leaving their students far better prepared for good jobs than the later focus on college prep and abstract learning would.

There were about 12 million people in the official workforce (measurements were dicey and then as now leaving out large swathes of the population from unemployment estimates helped the current administration stay in office.) By 1943 12.5 million Americans were in the military and jobs opened up, good ones, for the historically left out U.S. adults (blacks, Mexicans, Indians, married women, single women, teenagers to age 14, adults over 52 (the maximum draft age), the maimed and crippled (WWI injuries, rampant polio, industrial and farm accidents), the uneducated, the remote rural residents, Southerners, Westerners, small town residents, farm kids, recent immigrants, urban poor, etc.. And to everyone’s surprise (the Ku Klux Klan had peaked in the 1920’s so tolerance was less common than we think) , they all did very well at work previously considered impossible for them to do. Millions got an opportunity, training, new confidence, cutting-edge skills instead of using a shovel to sling gravel in a WPA/CCC make work project, and earned significant wages they were forced to save (not much to buy) that prepared them for home ownership/mortgage downpayments, buying cars and appliances, starting businesses, buying farms, going to college or sending their kids there, moving to places with better opportunities than where they grew up, etc.. It created a far bigger middle class of eager consumers and a far bigger skilled and motivated workforce (and set the stage for effective civil rights and social justice changes for decades to come.)

Finally and I’ll go into this in another upcoming piece, it probably wasn’t the federally funded college educations, the G.I. Bill, after the war that’s credited (by colleges especially) with the post-war boom. Working for years on workforce training and on campuses disabused me slowly and thoroughly that higher education plays nearly as much of a role in developing people ready for useful work of any kind as it claims. Where Americans learned to be more valuable wasn’t in college lecture halls but in the workplace (vast training had to be undertaken at most plants, formal training which was fairly new and now mostly forgotten in business, as logical as campers forgetting how to make fire) and in the military. Today and I suspect back then, the type and intensity of training provided in the military made the difference. Selected by rational aptitude tests rather than appearance or personal relationships for jobs and then run through general and steadily more specialized training full time, mastering more content and application than many years of leisurely and fragmented civilian learning provided was standard results. Learning advanced mathematics, applied physics, considerable health care, trained in physical fitness with some attention paid to nutrition, taught organizational structures and processes that worked for large ventures compared to a small group that could be managed informally and quite directly like a farm crew or small business, exposed for years to foreign markets/cultures/languages/ geography and the logistics to reach those markets has to have fueled U.S. exporting for decades. And accomplishing the fiendishly difficult if not impossible many times builds considerable self-confidence, hope, and problem-solving flexibility that grows economies just like failure, fear and self-doubt shrink them.

The success of reversing the New Deal made imposing it again only bigger, as Truman tried and LBJ would later succeed in the 1960’s, politically impossible after the war and sustained an economic boom well into the 1960’s. Real wages went up 3-4x, most of the population moved up into middle class suburbs from hard-scrabble farms and tenement slums, and a wide array of new industries grew to vast economic engines…despite a decade trapped in the Great Depression by an administration focused on retaining office rather than fixing the problems.

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