1962 was a year when businessmen thought something worse was just around the corner, and it turned out not to be.
Measuring their final profits statements against their yearlong apprehensions, many businessmen at year's end might sigh along with Mark Twain: "I have known a great many troubles, but most of them never happened." It was that way in nearly all the world's industrialized nations—a year of growth but not of boom. Western European businessmen, lately accustomed to seeing their economies expand by more than 7% a year, had to content themselves with growth rates that ran as low as 4%. Japan's tycoons cried recession because their nation's expansion rate sank from a spectacular 19% in 1961 to "only" 5% in 1962. But the only real sick man of the free world was politically tormented Latin America, where there was serious unemployment and inflation, and trade deficits soared.
In the U.S.. 1962 was a disappointing year largely because it had been overbilled to begin with. In January President Kennedy's economists extravagantly predicted that the gross national product would spurt ahead 10% during the year. But the great growth fallacy exploded in the spring as overpriced stock markets suffered their worst crash since 1937, and unemployment (mostly of the unskilled) rose to a level previously unknown in a period of prosperity. Businessmen began muttering about, and taking precautions against, a recession dead ahead. But in fact by the end of the year most economic barometers were on the rise.
The Other-Directed Economy. Though most businessmen would look back on 1962 with contained enthusiasm, it was a time of significant opening out to the future. It was the year when the world's businessmen became fully aware that in place of many national markets there was emerging a single international market encompassing the whole free world.
Since the days when cockleshell Phoenician galleys first began to crisscross the Mediterranean, men have made fortunes trading abroad. But in 1962 as never before, business strategists made their day-to-day decisions and long-range plans in the light of the challenges and opportunities of a world market. Says Georges Villiers, president of France's National Council of Employers: "Like the Moliere character who spoke prose without knowing it, we are engaging in supranationalism without knowing it."
Nowhere was this more visible than in the U.S., where both business and government frequently based their most impor tant economic actions on the need to become more competitive in world markets. The turning point of the year for the U.S. economy—the great steel crisis—seemed a peculiarly domestic fuss. But when U.S. Steel Chairman Roger Blough decided to raise steel prices $6 a ton less than a week after his company had signed its first noninflationary labor contract since the Korean war. he used foreign competition as a justification for his move. Overseas competitors, paying lower wages and operating more modern plants, were able to sell nails, barbed wire and construction rods in U.S. markets at prices that U.S. manufacturers could not match. The foreign challenge in steel was costing the U.S. 40,000 jobs and almost $1 billion in sales a year. What U.S. steelmakers needed, Blough contended, was fatter profits with which to finance modernization of their aging plants.
John F. Kennedy's hasty and white-lipped counterattack against Blough showed the President's belief that he had been doublecrossed: in persuading the United Steelworkers to hold the wage line, the President thought that he had an unspoken promise from Blough to hold the price line. But Kennedy, like Blough, based his case on the exigencies of the world market. A price rise in steel. Kennedy told the nation on TV. would set off another U.S. "inflationary spiral'' that "would make it more difficult to withstand competition from foreign imports, and thus far more difficult to improve our balance-of-payments position and stem the outflow of gold.''
The S.O.B. Club. When things cooled down, many businessmen concluded that Blough had been wrong, and that if the President had only held his temper, the workings of the free market at a time of softness in steel demand would have forced Blough to rescind his price rises within a few weeks anyway. The President won a backdown from Big Steel when Chicago's Inland Steel refused to go along with Blough's move. Inland executives have repeatedly implied that they would not have raised prices even had the President not intervened.
But whatever they thought of his economics, virtually all U.S. businessmen were outraged by the tactics Kennedy used against Blough; the Administration's threats to deny U.S. Steel defense contracts and to harass the company with trustbusters and internal revenue agents raised business hackles as they had not been raised since the days of F.D.R. A number of grown-up businessmen sported "S.O.B. Club'' pins. Behind the anger was the fear that the Government would meddie in every labor settlement, clamp down on every price rise, and thus discourage all businessmen from undertaking any expansion or modernization. Said Chase Manhattan Bank President David Rockefeller: "The steel episode demonstrated the tremendous economic power that the executive branch of Government now wields, and that it is prepared to wield it hard and fast. It seemed to imply that the price structure was going to be shaped not by the laws of supply and demand, but by the Government's feelings.'' (Asked last week on his hour-long television interview whether he had perhaps acted too vigorously in the steel dispute, President Kennedy replied: "There is no sense in raising hell, and then not being successful.")
Loaded for Bear. Business anger was expectable. What came as a surprise was the impact the steel crisis had on the public. Throughout the palmy postwar era, continuous inflation had boosted U.S. corporate profits and inspired millions of Americans to invest in stocks as a hedge against rising prices and a bet on future boom. The angry debate over steel brought home to the public the fact that inflation had been all but stopped for two years. When this realization sunk in. what had begun as an orderly decline in an overpriced stock market abruptly turned into a rout.
In scenes of pandemonium reminiscent of 1929, the grey, fortresslike New York Stock Exchange shuddered and shook. Glamour stocks such as Brunswick Corp., Fairchild Camera and Xerox, which had been selling on the strength of capital-gains potential rather than current dividends, crashed to half or even a quarter of their 1961 highs. Mighty IBM, which had become more of a cult than a stock, plummeted from 578½ in January to a low of 300 in June. Dropping like a shot goose, the market lost $23 billion in paper values during a single hectic week in late May, and $21 billion more on Blue Monday, May 28. By the time it hit its low for the year on June 26. the Dow-Jones average of 30 leading industrial stocks stood 27% below its record high of De cember 1961. Investors who in bull market days had been discounting future growth now seemed to be discounting the fall of the republic.
Crash Damage. Partly out of fear that the market was in some intuitive way telegraphing a recession, businessmen be gan to act as if a recession had already begun. They put off decisions on building new plants or buying new machines, and chopped away at their payrolls. U.S. Steel cut its work force by 10%, and for the first time since the Depression sliced into its executive ranks to fire 1,000 supervisors. Manufacturers cut their stockpiles to the bone, and inventories were reduced to their lowest level in relation to sales in seven years.
As a result, new orders for durable goods fell 3.3% in June, and throughout the three summer months industrial production remained sullenly flat. By the end of the second quarter, economists in such major corporations as General Electric were urging their companies to base their planning on the assumption that the economy would turn down late in 1962 or early in 1963.
Raising Keynes. But what went down did not stay down. A fortuitous combination of actions by business, the public and the Administration, plus the happenstance of foreign affairs, changed the mood. The Administration launched a drive, at first greeted with great suspicion, to regain business confidence. It began paying attention to one of the lesser-known dicta of British Economist John Maynard Keynes, an intellectual godfather of the New Deal. The Keynes' dictum: "Short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit."
In July, as it had long promised, the Treasury authorized businessmen to claim greater tax-free depreciation allowances on their existing plant and equipment, and thereby gave them more cash to spend on the new machines they needed to match their European and Japanese competitors. In September, at the President's urging, Congress approved a 7% income tax credit for corporations investing in new equipment. Then, in the most important economic legislation of the year, Congress passed the Trade Expansion Act, giving the President wide powers to bargain down tariffs. In vivid testimony to their rejection of economic isolationism, U.S. businessmen generally applauded the Trade Act. Said Chairman Carl Gilbert of Gillette: "The Trade Expansion Act has done much to heal the break between the President and business."
Cuba & Comeback. The first sizable sign of a business upswing came in October, when Detroit rolled out a high-styled line of '63 cars that had more built-in maintenance than the '625—at the same price. The new models were gobbled up by a public that was earning record income and had fattened its savings accounts with money from stocks sold during the crash. Auto production in the fourth quarter climbed to 2,000,000 cars, higher even than the great record year of 1955.
This late-year surge gained speed after the Cuban crisis. In board rooms around the country, businessmen were impressed that President Kennedy had talked even tougher to Khrushchev than to Roger Blough. Heartened too by signals of economic upturn, managers stepped up their spending for plants and machines in the fourth quarter to a record yearly rate of $38.4 billion. On Wall Street the big mutual funds and pension funds moved back into the stock market (though badly singed small investors continued to spend their money elsewhere), and the market recouped 55% of its $96 billion paper loss. The mood in business changed profoundly: instead of looking for a sharp recession in 1963. most economists foresaw only a slight dip in the first half, and some predicted an unbroken rise.
Taxing the Forecasters. Those who anticipate a dip in 1963 believe that auto sales can scarcely hold their current pace, argue that there is so much unused industrial capacity around that U.S. business is unlikely to step up significantly its spending on new plant and equipment. Optimists argue in rebuttal that inventories are lean and Government defense spending will rise by about $3 billion next year, that some builders look forward to building at least as many houses (1,400,000) in 1963 as in 1962, and that steelmakers expect their production to rise from this year's 98 million tons to just over 100 million tons.
How the economy performs in 1963 will depend largely on whether the President can persuade Congress to vote a sizable cut in income taxes. U.S. businessmen, enthusiastically on the President's side for a change, view the proposed tax cut much as a company might view a loan. Says influential Wall Streeter Sidney Weinberg, partner of the investment banking house of Goldman, Sachs & Co.: "It's just like when General Motors invests in a new plant—it gets its money back over a period of years."
Manhattan Economist J. Carvel Lange, who a year ago correctly foresaw that the stock market was "highly vulnerable to a sharp reaction before mid-1962" now predicted a bullish 1963 if a sizable tax cut comes in time. "For maximum effectiveness for growth," said Lange, "the reduction must come while the economy is still rising." If the tax cut is enacted by midyear, he predicted a "strong—perhaps booming—acceleration" that would last well into 1964.
Other businessmen, however, see no dynamic new force on the horizon likely to send the well-fed, well-housed, abundantly equipped U.S. into a new boom. Instead, some fear that the U.S. may have to rely for domestic growth chiefly on its normal population increase—which seems to expand the economy at a disappointingly modest 3% a year. Faced with this prospect, which the economists have dourly christened "high-level stagnation." U.S. businessmen in 1962 increasingly looked abroad to markets where millions for the first time had money to spend for much beyond the bare necessities. ''When the aluminum market went soft at home." says Kaiser Aluminum's Chairman Edgar Kaiser, "we almost made up for it by the volume of our business in England."
Berlitz & Button-Downs. Some U.S. businessmen, of course, have been looking abroad for quite some time: Coca-Cola, Caterpillar Tractor, National Cash Register and Colgate-Palmolive get 40% or more of their sales abroad, and their trademarks are as recognizable abroad as at home. The armies of American executives who became global commuters in 1962 helped to increase the volume of international air travel by 20%. From Scotland to Singapore, the button-down collar was as familiar a symbol of the footloose businessman as the carpetbag in the Reconstruction South. To welcome the new invaders, the Banco di Roma issued a fat catalogue of investment opportunities in English. Berlitz, which had only 300 U.S. executives studying on company time in its language schools in 1952, had 3,000 last year, even though most businessmen sit down overseas expecting to talk only English and the universal language of money.
Out of all this came a steady increase m U.S. investment around the globe (see map). Singer Manufacturing, the sewing machine maker that rings up 57% of its $640 million annual sales abroad, last year opened new plants in Nigeria and Ceylon. American Machine & Foundry introduced automated bowling alleys to Japan, and in Buenos Aires Rockefeller-backed supermarkets began to undersell corner grocers by 25% or more.
But since the Common Market came into being in 1957, the tide of U.S. business activity abroad has been steadily shifting toward Europe, and in 1962 U.S. investment in the Common Market rose to a new yearly record of $881 million. In October alone, U.S. firms made 21 major advances into the European market, ranging from Du Pont's acquisition of a German film manufacturer to U.S. Steel's fifty-fifty partnership with Italy's government-owned Finsider complex in a new fabricating plant. Among the burgeoning American enclaves in Europe was the town of Genk, Belgium, where a subsidiary of Allegheny Ludlum broke ground for a rolling mill just across a canal from the site of a new $73 million Ford plant. In all, U.S.-owned plants in Western Europe in 1962 produced some $12 billion worth of goods, three times the value of U.S. exports of manufactured goods to Europe, and more than the combined gross national products of Austria and Finland.
Headroom for Big Charlie. Partly because so many U.S. companies have already established their European beachheads, U.S. investment in the Common Market entered a new phase in 1962: U.S. firms are shifting from wholly owned European branches to convenient marriages of capital and knowledge with European companies. American Motors, whose foreign sales have risen from 16,000 cars in 1960 to 53,000 in 1962, closed a deal under which France's Renault will assemble its Ramblers, and won an order from Charles de Gaulle for a bulletproof sedan. (Big Charles presumably likes the Rambler's headroom.) In another international alliance. Republic Aviation joined forces with planemakers from four Common Market countries and Britain to design a jet fighter for NATO. U.S. business operations abroad are getting to be like those new international movie productions whose stars come from all over and speak in many accents.
The tide does not run just one way. France's Saint-Gobain, the world's biggest manufacturer of glass, opened a highly automated $40 million plant near Kingsport, Tenn., in 1962, and Paris-based Pechiney. Europe's biggest aluminum maker, bought control of New York's Howe Sound Co. A resourceful lady from Tokyo turned a tidy profit in New York's financial district with a restaurant catering to the lunchtime tastes of the 1,000 Japanese brokers and businessmen now operating in downtown Manhattan.
Sprouting from Brussels. The new Europe, though disturbed by its own slowdown, is the Western world's fastest growing economy. The Common Market Six led the world in international trade in 1962, were second only to the U.S. in automobile production (4,700,000 cars), and were rapidly gaining on the U.S. and Russia in steel production (about 79 million tons). In its fifth year, the Common Market forced itself on international consciousness as the world's third great economic power.
It was by no means immune to outside economic forces; its stock markets fell in sympathy with Wall Street and rose on Wall Street's rebound. But. with a confidence born of its growing strength and unity, the Common Market last year did more to shape the emerging world market than any other force. From all over the globe, importunate ambassadors and chiefs of state flew into Brussels to impress on Walter Hallstein. German-born president of the Common Market Executive, the damage that they feared the Market's prospective single tariff wall would do to their national economies. In response the Marketeers began to work out special arrangements for such genuine hardship cases as Greece. Israel and Turkey. But when President Kennedy offended Belgium by raising tariffs on carpets and glass, the Common Market retaliated by raising duties on the products of three U.S. industries noted for their protectionism: chemicals, paints and textiles. To protect European farmers, who are far less efficient than European manufacturers, the Marketeers stiffened their agricultural tariffs to discourage a wide array of imports—and shrugged off the protests of U.S. Agriculture Secretary Orville Freeman.
The Sincerest Flattery. Outsiders responded to the spectacular growth of the Europeans with envy or fury. Nikita Khrushchev called the Common Market nations aggressive agents of imperialism, while simultaneously urging his tattered satellites to emulate them. Britain agonized over the stiff conditions the Marketeers set as the price of British admission to their club, and as a result found its businessmen nervously postponing modernization and expansion plans. So eager was Spain's Francisco Franco to make his nation's application for admission to the Market palatable that he issued sweeping new decrees rescinding many of his government's rigid controls over the Spanish economy. In Latin America. Africa, the Arab world and Southeast Asia, underdeveloped nations talked of starting little "common markets'' of their own. In the U.S.. Detroit's Henry Ford II summed up: "In the years ahead. U.S. business will find its biggest opportunities and toughest challenges in Europe's Common Market."
The Big Spenders. Europe's fastest expanding markets now are for consumer goods—appliances, clothes, convenience foods—which batten on fatter paychecks. In 1962 wages and fringes climbed 10% to 15% in Germany, France and Italy, and though the European worker is still paid only half as much on average as his American counterpart, he is getting to be quite a spender and customer. This year for the first time, private consumption grew faster than capital investment in the Common Market.
How deeply the U.S. can penetrate this market will depend upon how smoothly Europe and the U.S. manage the integration of their economies. And this in turn depends heavily upon whether Britain finally gets into the market. A key clause in the U.S. Trade Expansion Act permits the President to abolish tariffs entirely only on products for which the U.S. and the Common Market between them account for 80% of world trade. With Britain in the Common Market, there would be 15 such areas, ranging from cos metics and organic chemicals to soap and cars. With Britain out, the list shrinks to two—airplanes and shortening.
Starting High. Even if Britain does not join the market, the U.S. has much to gain from coming to a tariff agreement with the Six—partly because U.S. trade barriers are higher than theirs already, and reductions of the same percentage on both sides would still leave U.S. barriers higher. (Where the Six impose tariffs of 25% or more on only seven categories of goods, the U.S. does so on no.) And the Common Market nations have shown a readiness to go more than half way in meeting the U.S. This year, the Six trimmed tariffs on a wide range of U.S. imports valued at $1.6 billion a year, in return accepted U.S. tariff cuts on Common Market exports amounting to only $1.2 billion. Because its six member nations rely on foreign trade for one-third of their gross national products, Common Market President Walter Hallstein says: "We simply cannot afford to be protectionist."
Provided that the Common Market practices what it preaches, and the U.S. is correspondingly flexible and farsighted, there could open a new era in world economic history. Says Chairman John Brooks of California's Lear Siegler Inc.: "If we play it right, this country should be in a position ten years from now where doing business with West Germany would be like doing business with Texas." The promise is not only economic. The interlocking of markets, the sharing and spreading of prosperity are objectives that move businessmen. The side effect of this effort, not specifically intended by businessmen but welcomed in their calculations, is the political health and strength of all who join in the alliance.
