How American Business Saved Civilization

The unsung heroes of World War II did not wear a uniform or fire a gun, according to historian Arthur Herman. The true heroes were the businessmen, engineers, production managers and workers, both male and female, who built the arsenal of democracy that gave the Allies the tools to defeat the Axis. This included 86,000 tanks, 2.5 million trucks, half a million jeeps, 286,000 warplanes, 8,800 naval vessels, 5,600 merchant ships, 2.6 million machine guns and 41 billion rounds of ammunition. All this and the world’s most advanced super bomber—the B-29—and the atomic bomb.

When Stalin, Roosevelt and Churchill first met in Tehran in 1943, Stalin raised his glass in a toast “to American production, without which this war would have been lost.”

One might expect to find some commemoration, a plaque maybe, to this effect somewhere in Washington, a town whose streets and squares are crammed with memorials of all kinds. One might look in vain. Hence, Herman wrote Freedom’s Forge: How American Business Produced Victory in World War II.

Herman tells the story through the narrative experience of two very different business leaders: William “Bill” Knudsen and Henry Kaiser, who managed through sheer force of will and minimal help from Washington, to organize the nation’s resources, such as they were. From 1918 to 1938, the U.S. military had shrunk from the 4th to 18th ranked power—about on a par with Romania and just behind the Netherlands. In 1939, Hitler had 2,000 tanks. When General Patton took command of Army’s armored brigade, he had 325 tanks. The Army Air Corps had less than a fifth of the Luftwaffe’s 8,500 fighters and bombers.

Knudsen, a Danish immigrant who came to America to build bicycles, worked his way up from the shop floor to become president of General Motors. Kaiser was a problem child who grew up in upstate New York and moved west. His company was one of the six that built the Hoover Dam. One fellow knew how to make things with metal. The other could build stuff. Neither had an MBA. Some of their colleagues didn’t even attend college.

Many paid the ultimate price for their efforts. The number of workers who suffered death or injury in war-related industry was 20 times greater than the deaths of wounded servicemen in the 12 months of 1942. At General Motors alone, 189 senior executives died on the job due to work-related causes. Bestowing belated Purple Hearts would not be out of order.

Reading Herman’s account of Knudsen’s efforts, it is a miracle that the U.S. was able to switch from peacetime production at all. Ever suspicious, the New Dealers in FDR’s administration did little to help him, conceding grudgingly that “he knew how to make things.” With no official title or power, Knudsen and Kaiser leveraged their knowledge of the enterprise system to put U.S. industry on a war footing. In the process, America raised itself to an entirely new level of coordination and complexity, one that paralleled what was going on in the uranium plants in Oak Ridge, Tennessee, and presaged what the country could do to reach the moon 24 years later. Chief Executive spoke with Herman recently.

You say that American business won the war but lost the narrative. Why was business denigrated by the New Dealers and why, after the New Deal had gone, has business not gotten the credit you think it deserves?

Your questions go beyond the scope of Freedom’s Forge, but I’ll tell you what I discovered with this book that helps to shed some light on [these issues]. Obviously, the big narrative of the 1930s was that business and specifically Wall Street were responsible for the Great Depression. The American public, to a large extent, was willing to believe that the root of the difficulty was untrammeled capitalism, corporate greed and the Wall Street crash. Textbooks always sort of elide from the Wall Street crash to suddenly the bread line. The accepted narrative is that only the intervention of the federal government changed this.

We know that this is, in fact, not true. For example, Amity Shlaes’s book, The Forgotten Man, documents that actions the New Dealers took not only didn’t revive the economy but unnecessarily prolonged the Depression. Both Bill Knudsen, and Alfred Sloan, who by 1937 was chairman of General Motors, believed that the real solution to getting the American economy back and reducing unemployment was a revival of business and of business productivity—prefiguring supply-side economics before its time in the 1980s.

The story that I tell in Freedom’s Forge is of Franklin Roosevelt’s realizing the country is going to war in about two years, maybe less. There were absolutely no resources with which to deal with it. There was no defense industry. The navy department and the war department had no idea how they would get the kinds of weapons that they would need to fight this new, modern war.

In desperation, Roosevelt called Bill Knudsen, the president of General Motors, and said, “Can you help?” The narrative for Freedom’s Forge is how Knudsen then steps forward to do that. But underlying it was Knudsen’s realization that what Roosevelt was really doing was asking American business—and the know-how that they had—to turn around this situation that went far beyond just the question of American military readiness.

At the very beginning, Knudsen realized that he had at his disposal a way in which he could use this wartime production effort as [a] means to revive American business and industry and [to get] the economy moving forward—because the tools that were necessary were there in the business community all along.

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.

Freedom’s Forge centers on Knudsen and Henry J. Kaiser, and one is tempted to compare business leaders of that era to business leaders of today.

Sometimes people say, “If only we had people like Bill Knudsen again.” Actually, there are a lot of people like this today running major corporations but also smaller ones. I’m thinking about [others in the 1940s besides] Bill Knudsen, such as Henry Kaiser and K.T. Teller at Chrysler, who is the one that Knudsen called when he said, “I need tanks. Can you build tanks for me?” And Teller said, “I don’t know. I’ve never seen a tank. Tell me what it is and I’ll tell you if I can.”

There are many characteristics that stand out, but there is one that is eternal and pertinent to today. All these executives never forgot that they were entrepreneurs first and managers and CEOs second. General Motors was, at that point, the biggest corporation in the world; but it had at its head in 1940, Bill Knudsen, someone who had worked his way up from the shop floor and had helped to set up the very first mass-production assembly lines.

Roy Grumman of Grumman Aircraft used to test-fly his own planes. He couldn’t do it officially. Maybe the board would have swooned if they found out. When Grumman built the Wildcat or the F6F Hellcat, he took it out for a spin to see what its performance was like. That kind of hands-on experience is a common theme all the way through to the current generation of business executives. They know that profit follows value. This is precisely what Steve Jobs used to do.

In your concluding chapter, you mention that the advisors of the Office of War Mobilization warned President Truman that the end of war production would mean the end of prosperity. In fact, Paul Samuelson, the author of the classic economics textbook, warned Truman that there would be a huge increase in unemployment caused by industrial dislocation, which would be greater than the Great Depression. None of this happened. In fact, as you note, in 1946 there was a tax cut imposed on the reluctant President led by a coalition of Republicans and conservative Democrats, which revived the economy. These events are completely at odds with the standard, received notion of how the economy revived after World War II. What is the lesson for today?

The elites were tethered to the mistaken notion that the war production effort was the visible hand of God and that once you pulled that visible hand away—and don’t forget, too, 10 million returning veterans would be looking for jobs—this would swamp the American economy. Taxes had been very high during the war, but it was the mechanism of the tax cut that allowed the shift of private capital back into the economy. A lot of these businesses made a lot of money in the course of the war, but they had nothing on which to spend it.

The tax cut helped, and equally important was capital mobility. Money could now flow back into the areas that were going to be the most productive parts of the American economy, as a result of lifting wartime restrictions, rationing and so on. In addition, there was labor mobility. People had gotten used to the idea of going where the jobs were. The attitude of returning veterans was to go where the opportunities were.

These two big changes set up the post-war recovery because [they] put the productive resources back where they really counted, which was the private sector. Although the private sector had gotten the war effort underway and had sustained it by drawing on its skills and experience, it was the private sector that got back to doing what it did best by 1946. Washington’s key role, as it usually is when it comes to getting prosperity going, was to get out of the way and let those who know best do what they do best.

I would be very suspicious when people cite Washington’s role in World War II as an example of what governments do either to revive the economy or to get America going on a big national effort. Remember who really made the war production miracle possible. It was American business.

J.P. Donlon :J.P. Donlon is Editor Emeritus of Chief Executive magazine.