How American Business Saved Civilization

How entrepreneurialism and innovation inspired business leaders across the country to mobilize the “arsenal of democracy” that allowed the Allies to triumph
in World War II.

March 12 2013 by JP Donlon

Given that FDR’s attitude toward business ranged from active dislike of such leaders as Samuel Insull of Commonwealth Edison and Tom Girdler of Republic Steel to, at best, ambivalence, why was he ready to entrust Knudsen?

You are right that Roosevelt bashed business and blamed “corporate greed,” but there was a personality factor involved. Knudsen did not represent any threat to FDR’s power. He was an entrepreneur who liked to build things. He came to Roosevelt and said, “If you try to mobilize for war preparedness and build all the tanks and aircraft and ships that you’d need by a top-down, interventionist model, it isn’t going to work.” In effect, he was saying you’ve already tried that with the New Deal to get the economy going and it didn’t work, so don’t expect [that] it’s going to work with getting wartime mobilization.

Instead, he suggested using the opposite approach. He favored a bottom-up, voluntary system by which those who think they can produce something the best will volunteer to do so and get government contracts on that basis. He felt that by doing so, what you’ll mobilize [are] the [already]-existing subcontractor networks that existed in business in the automotive industry, in the durable goods industry, in the steel [and] aluminum industries. And in the process, you’ll have the kind of drive and energy and innovation that exists in the commercial sector mobilized and committed now to the same kind of productivity and innovation in the military sector.

Knudsen stressed this idea that you don’t ask the factory to convert immediately over to wartime production. You add the military orders on top of the civilian orders, so that companies like, for example, International Harvester, start making parts for aircraft engines and machine guns along with its tractors. This approach allows for gradual retooling and new hiring, so when war really comes, plants [would have] learned how to do this.

Why did Roosevelt, the anti-business President, the No. 1 federal interventionist President of the 20th century, endorse this kind of a plan? There were two reasons. One was the role of Harry Hopkins, his No. 1 trusted advisor, who was in many ways the key spirit of the New Deal in 1930s. Hopkins was convinced by his friend, Jim Forrestal, from Dillon, Read investment bank, that if he tried to push reform as a way to get the economy going and get the federal government involved in reviving it, it was going to fail. Hopkins signed on because, in part, they needed results right away and Knudsen seemed to be the only one who had a way to do that.

The second reason lies with Roosevelt, himself. Roosevelt realized that if he gave in to the demands of his New Deal advisors, which were to appoint a war production czar, someone who would take over and coordinate the entire war effort and have far-reaching powers flowing to him from the executive powers of the President as Commander-in-Chief, it would create a rival power. Roosevelt was not a man about to share power with anybody. He saw in Knudsen’s plan a way in which he could get the results he wanted without ever relinquishing any kind of power himself or any kind of control over the process. [This was because Knudsen wasn’t interested in power; he was interested in making things and in getting the economy back on track.

Despite Knudsen’s achievements, he fell out of favor with the New Dealers and the President, himself. Considering that he was the linchpin of the “arsenal of democracy,” a phrase he coined, what happened?

They didn’t see him that way, even from the very beginning. And as the book points out, the really crucial period was the time from the summer of 1940 to December 1941, before we [went] to war, when Knudsen basically had to push this cart uphill by himself with the help of his fellow business colleagues. Congress wouldn’t help. There was no money authorized for a massive expansion of wartime production. It came grudgingly. It all had to be done through the networks within the businesses and industry.

The New Dealers hated the system. They always felt that if there had been a production czar [like] they always wanted, the numbers and the production would have come faster, that they would have gotten instant results. So when war did come, they now had their excuse and turned to Roosevelt to say, “He’s got to go. Get rid of Knudsen in his advisory capacity,” which he still really was. He didn’t have any kind of power, except to review contracts. Roosevelt let him go in a way that was less than gracious. Knudsen found out that he’d been fired on a radio newscast.

[However], here’s the irony. By December 1941, just as Knudsen had promised, war production was already approaching that of Nazi Germany. When the War Production Board was appointed under Donald Nelson, a former head of Sears & Roebuck, [they were] far from having to expand wartime power, far from having to increase the level of federal intervention. What Nelson realized was the best way to proceed and the best way to grow [the] war production effort to unimaginable heights was to continue the Knudsen system, which is what he did. This [policy] got him into trouble with the New Dealers, who had hoped for somebody to be more interventionist.

To what extent do you see a parallel between the events you describe in your book and present attempts to direct and control sectors of the U.S. economy, such as healthcare, finance and more recently, energy?

It’s hard to persuade people under the spell of John Maynard Keynes that the best way to address a massive national issue is not through Washington but through mobilizing the people who are actually on the ground and know the problem best. Inevitably, you end up repeating the same mistakes.

This also answers your first question about ignoring the role free enterprise business played in making this massive wartime production effort possible, not to mention figuring out how it could be done. This [fact] was shoved aside because those who made their careers in Washington decided that, after all, it was the federal money that had made all this possible, not the people who were actually running the plants or working in the factories or organizing the shipyards, such as the production of Liberty Ships that Henry Kaiser had [accomplished]. This is how we end up with this kind of model that assumes that when Washington takes the lead, we get the best, the most productive results. History, including that of World War II, shows the opposite.