For instance, the Internal Revenue Bureau of Mr. Henry Morgenthau’s
Treasury Department dictated, through its review of income tax
returns and its rules and regulations, the amount a manufacturer
might charge against the cost of his product for the use of his
tools. The manufacturer, having in mind the many elements of this
problem, such as the wear and tear on machines, the life cycle of the
product he was selling, and many other complex factors, would charge
against each item of manufacture what he judged to be its proper
share of the cost of the tools. The more he charged, the less was his
profit for a given year. In the long run the whole thing washed out.
But the Internal Revenue Bureau, sitting in judgment of each case and
anxious to prove high profit in order to assess higher taxes, was
interested in reducing this depreciation charge as far as possible.
Bearing no responsibility for the survival of a company, and having
little knowledge of, or interest in, the technical details of the
manufacturer’s problem, it tended to set up over-all rules which,
even though applicable to one case, might be far out of line for
another. And since munitions manufacturers were generally unpopular,
they had two strikes on them from the beginning. Real investors,
understanding this handicap, were not interested in risking their
dollars on this kind of enterprise, nor were the enterprises
interested in seeking their money.
Now, if the public policies of the period dried up the flow of
capital to private industry, or even reduced it to a trickle, the
Arms Embargo Act put the finishing touches upon the process. All
Chancellor Hitler had to do to make a “belligerent” out of France was
to open war on France, and since the French were now buying aircraft
in the United States, the sooner he did the better. On September 1,
1939, Germany invaded Poland; on September 5, France declared war
on Germany. President Roosevelt immediately issued his proclamation
of neutrality, thus putting the Act into effect and cutting off
shipments to belligerents.
Meanwhile, however, the frantic French, desperate by now, had, in
a last-minute effort to buy time, insisted upon our creating a
new plant and accepting new contracts. Our only course under the
circumstances was to insist that they advance the entire amount of
the cost of the new facilities, some eight million dollars, and
finance the additional contracts for aircraft by advancing working
capital under terms agreeable to us. However, under French law, the
state was prohibited from investing its funds in a capital outlay on
foreign shores. Further, the French, at the time, were pursuing the
opposite policy at home; they were expropriating and nationalizing
their own industry—a policy that reduced the country from a position
of world leadership, following World War I, to one of abject
dependence upon American aviation in World War II. How they could
agree to go ahead with us under the circumstances we could not see,
especially with the Arms Embargo Act hanging over them. But go ahead
they did, and under our terms.
Meanwhile, during the protracted negotiations, we went right ahead,
in our new War Plans Division, with all the blueprints and schedules,
working in close collaboration with our architect, Albert Kahn. We
broke ground for the new French plant on October 10, 1939, pushing
automobiles out of the parking space on which we had determined
to build it. The shop was to have an area of some 300,000 square
feet and be tooled to handle about 300 engines per month of our
1830 model. Since this was an engine rated at approximately 1,000
horsepower, we figured that we were going to get 300,000 horsepower
per month out of the new plant; in three months we could build enough
engines to generate the power of Niagara. Title to the new facility
would rest with United Aircraft. On November 5, 1939, Congress
repealed the Arms Embargo Act.
Shortly afterward, the British government came into the market
for aircraft. This was a surprise, for but a short time earlier,
Lord Beaverbrook, then visiting this country, had snorted at the
suggestion that Britain might have to look to America for assistance.
Yet Sir Henry Self, formerly of the British Air Ministry, arrived
in Washington and joined with M. René Plevin of France, in a new
coordinated procurement program.
It was shortly after this, on an evening early in 1940 while we were
sitting in the library at home, that the telephone rang. It was the
watchman over at the plant.
“Secretary Morgenthau has just walked in,” he said, “and he would
like to see you.”
CHAPTER TWENTY-FIVE
An Unfavorable Climate
As I backed my convertible out of the garage, and eased it from the
driveway onto Albany Avenue, I speculated as to what might have
brought Secretary Morgenthau to Hartford in the middle of the night.
It might, I thought, have something to do with the new British
inquiry which had been discussed earlier in Harry Collins’s office
in the Treasury. There, a number of aircraft manufacturers had met
to be introduced to Sir Henry Self and a newcomer to the French
negotiations, M. René Plevin. Sir Henry, very British, had tried not
to appear condescending to us provincials, but it was apparent early
that he had brought his trading vest along, determined to give us a
sample of British tradesmanship.
I had noticed at the time that Col. Paul Jacquin, with whom we had
had such intelligent dealings, was not present. M. René Plevin, the
new Frenchman, looked to me like the story-book Frenchman, suave,
polished, and clever. It occurred to me that Colonel Jacquin might
need a little help from us, and this was confirmed by the drift of
the conversation. Sir Henry Self made it clear that he and M. Plevin
would act in unison in all matters of future procurement. They had
looked over the earlier contracts and concluded that the terms had
not been as advantageous to the customer as must any future terms.
At any rate they appeared out of line with what had been customary
in Old England. The British were in the market for large quantities
of war material, but England was a poor country and we must learn to
sharpen our pencils and cut prices. England had shielded us during
the first war, but she was not now so strong, etc., etc.
Sir Henry had expressed interest in negotiating for the construction
of new facilities from which aircraft engine production could flow;
he had wondered if we might not now undertake immediate expansion of
our facilities—but of course under more favorable terms to England
than we had apparently exacted from France.
To this I pointed out that the French terms had been arrived at
after painstaking negotiation under the commission headed by Col.
Paul Jacquin. They had not been predicated on chiseling tactics,
but designed to give us every incentive to take the heavy risks
paramount to quick deliveries. We had found no reason to question
that procedure but had, on the other hand, experienced many incidents
in which the wisdom of this procedure had been proved. Time had been
of the essence and time had proved to be something that could not
be bought. With less time now, we could see no basis for further
discussion of the terms.
As a matter of fact, I explained, we would not undertake to even
negotiate another contract for plant expansion until we saw our way
out of our present difficulties. We suffered from chronic indigestion
and had no intention of making it acute. And even if the time came
when we believed our already overloaded organization might take on
greater responsibilities, there was one serious road block that must
be resolved. We had accepted the French order without resolving this
difficulty because we had been in a serious predicament for business;
today we could not accept that handicap.
I referred to the matter of plant depreciation and the rules and
regulations of the Treasury Department. Unless these were changed,
a sudden cessation of hostilities might leave us with an enormous
excess of plant on our hands. The burden of depreciation, however
light under maximum output, would prove overwhelming after shutdown.
The day-to-day burden of writeoff would force on us serious losses
that would, in time, bankrupt the company. I pointed out, of course,
that this was a matter for the United States Treasury rather than
the British Purchasing Commission, but that we could not undertake
to construct new facilities even under terms similar to those in the
French contract, until after our Treasury Department had resolved
this problem of plant amortization and depreciation.
Now, as I sped down Albany Avenue to North Main Street and turned
left there down the Morgan Street hill to the Bulkely Memorial
Bridge, I reviewed the atmosphere of that meeting and began to
rehearse what I would say to Secretary Morgenthau, should he bring
the matter up. I recalled that Sir Henry Self had listened to my
statement with an expression of amused tolerance. No doubt he had
in mind the power of the Treasury and the influence of the banking
fraternity as means of bringing us upstarts into line. But we were
under no great obligations to others; we were free—free to do what in
our own judgment was in the long-term interest of getting on with our
job.
And as I turned into the main gate of the aircraft factory at East
Hartford, the lights were ablaze all over the place. I parked my car
in the garage under the office building and ran upstairs to my office
where the Secretary of the Treasury awaited me. After a greeting, Mr.
Morgenthau expressed a wish to see the new French addition, and we
walked together down through the main shop and across to the new one.
We had scheduled the new building for completion in three months, and
three months had seen it finished. The new machinery, earmarked long
in advance by War Plans and ordered even before the final contract
had been signed, was already coming in. Bare spots revealed the
wood-block floor of the vast girdered structure, but millwrights were
busy sliding machinery onto prearranged spots and uncrating late
arrivals. One complete production line was already set up and working
to relieve a bottleneck in the main shop.
After a look-see, the secretary and I made our way back to my corner
office upstairs. He sat down in one of the big chairs and I slid
into the swivel seat behind my desk. On my walls hung the mementos
of bygone days. There in a silver frame was my commission as a
commander, and beneath it, all the others from passed midshipman
on up; beside it hung my certificate of graduation from the Naval
Academy. On other walls were collected the photographs of my friends:
Admiral Moffett, pipe in hand, with that alert look; Admiral Reeves,
from an oil painting by his own son, bearded like the seamen of the
old school and with that gleam in his eye; Chance Vought, dapper with
his waxed moustache; George Wheat, wise in the ways of a newspaper
man; Comdr. Charles E. Kennedy-Purvis, Royal Navy, a friend of my
Grand Fleet days; Hap Arnold, of the Army Air Corps; Jack Towers, of
Naval Aviation; and Captain Marco Zar, Argentine Navy. They were a
goodly company. The secretary glanced at them and then came to his
point.
It was the British matter all right. Time was fleeting and he thought
we ought to get down to business and sign the contract. In reply, I
pointed out our position. We had accepted the French order without
first getting a commitment from the Treasury Department to treat
plant depreciation on a more realistic basis. We had, however, set
up our own books on the basis of synchronizing the plant writeoff
with the shipment of the product called for on the engine contract;
on this basis the plant would be completely written down when the
product shipments had been completed. That would tend to reduce our
taxable income for the period, but it would have the advantage to
our own government that all subsequent products of that facility
could be invoiced to it at no charge for depreciation of plant. In
case we became involved in a war, and that now seemed probable, the
government would recover in reduced costs everything it might now
lose in taxes.
I had the impression, as I talked, that the secretary did not
entirely follow me. I therefore went on to explain the situation
more fully. The rules promulgated by the Internal Revenue Bureau
might or might not be satisfactory to some ordinary peacetime
businesses. I suspected they were not, as the desire to assess taxes
currently might easily lead to poor judgment for the long term. This
was a serious matter, since it tended to increase product costs by
retarding the purchase of improved machinery and thus impaired the
whole capital replacement problem. With us it was even more critical
because our situation was most unusual and called for broad vision
and judgment. I then took a long breath and said the little piece I
had rehearsed in the roadster on the way over.
“Mr. Secretary,” I said, “for the Treasury to treat this problem in
a way other than the one which we have set up would put the Treasury
in the position of profiteering—through excess taxation—on munitions
contracts let here by foreign governments. We aircraft manufacturers,
having been maligned as profiteers, would not like to see our
government in the same boat.”
The secretary blinked at this, but did not reply.
“Mr. Secretary,” I continued, “we feel so strongly about the
principles involved here that we have taken a firm decision: we will
not go ahead on your British plant, until we have assurance of the
treatment we require.” The secretary still appeared unimpressed.
However, he did reply in his flat voice.
“I will see that it is done.”
The problem of plant expansion was but one of our many headaches. In
due course we signed the British contract calling for an addition
over half again as large as the French addition, and on generally
similar terms. For the next several years we waged fierce battle with
the Treasury Department over that problem of accelerated depreciation
and amortization of emergency facilities, only to learn that the
basic law precluded such treatment and could not be amended save by
act of Congress. But as luck would have it, when the Treasury finally
turned us down, the tax rates had been boosted so high that their
adverse decision actually gave us a better break than we would have
had with an earlier approval. And though this proved gratifying from
the balance-sheet point of view, the principle remained an issue
until finally resolved after the outbreak of the European war.
To a harassed manufacturer, intent on production, it seemed
incredible that we Americans could be so stupid. At the time, we
ascribed it to ignorance. In our shop experience, no deliberate
saboteur could throw such backlash into a production line as just
comes naturally when a dumb-bunny do-gooder gets to messing around.
In the light of subsequent revelations, I am not so sure.
CHAPTER TWENTY-SIX
A Spark Is Struck
Don Brown’s death left a big gap in our ranks with no file closers
available to fill it. United Aircraft, once the only company in the
business with real depth to its management, had got thin on top.
In reorganization, the directors elected Fred Rentschler chairman,
with responsibility under the by-laws for the general conduct of the
business affairs of the company. I was elected president with the
authorities and responsibilities of chief executive officer. Raycroft
Walsh succeeded me as senior vice-president, and J. F. McCarthy
continued as controller with responsibility direct to the board of
directors in financial matters. This rounded up a top organization
in which the several personalities complemented each other in a way
calculated to promote the closest kind of teamwork. In the four
divisions, Jack Horner headed Pratt and Whitney, Sidney Stewart
succeeded Raycroft Walsh in Hamilton-Standard, and C. J. McCarthy
became general manager of the Vought-Sikorsky Division.
Then came May of 1940. The President of the United States in his
fireside chat electrified the country with his announcement of a
fantastic airplane production program. The total mentioned was 50,000
airplanes. Only two weeks earlier, a House of Representatives’
Report on the War Department Appropriation Bill had lopped all but
57 airplanes off the Army Air Corps’ own modest request for 496. By
that time, some 2,800 airplanes had been contracted for under the
previous year’s appropriations, of which some 2,200 had been training
planes. Practically the entire capacity of the American aircraft
industry had been allotted to foreign sales. On the morning following
the Presidential foray into the numbers racket, I sat behind my desk
working on the mail.
Through the open door to the anteroom, I could see my secretary,
Mrs. Dexter, typing out some of the faultless copy with which she
kept our business flowing. She had come up to the front office
with me from Chance Vought Aircraft, and was one of the leading
women of the inner circle of highly trained and competent women who
managed the routine of the top executive offices. As the only member
of my office staff, she sorted out the mail and handled visitors
or outside calls. On the mail, she slid into the wastebasket the
bulk of it that was obviously part of the advertising matter which
Uncle Sam so kindly subsidizes at great expense to himself and
the recipient. A large part of the remainder Mrs. Dexter answered
outright—and more effectively than if I had handled it. The part that
called for decisions came to me—and even that was enough to keep
a man scrambling to try to keep the desk clean. How Mrs. Dexter,
singlehanded, could manage the flow of mail and calls was more than
I could understand but some wag of a punster had opined that she was
dexterous indeed. As I turned to my own pile of papers, the phone
bell jingled and she reached for the receiver.
“The Secretary of the Treasury is calling, sir,” she said, and then
added, “just a moment, Secretary Morgenthau.” I lifted my receiver.
“Could you come down to Washington,” came the flat voice, “and have
supper with me at my home Sunday evening?”
“Certainly, sir,” I replied.
“Would you mind,” the voice inquired, “if I invited a competitor?”
“Not at all,” I answered. “May I ask who you have in mind?”
“Vaughan,” came the reply. “Guy Vaughan, of Curtiss-Wright.”
Something impelled me to try to inject a little humor into the
colorless colloquy.
“An honest competitor,” I laughed, “but with an inferior line.” The
phone clicked and I sat back to try to dope out what was going on. A
50,000-plane program and the two big suppliers of aircraft engines
dining at the secretary’s home on a Sunday night! Shades of Franklin
D. Roosevelt, Senator Black, and Postmaster General Brown! Phil
Johnson, of United Airlines, had chanced to drop in on an informal
conference called in the daytime to take away from him air-mail
contracts he had won under competitive bidding and Congress had
crucified him for it! It all seemed to depend upon whose political ox
was to be gored.
I met Guy Vaughan in the Carlton Hotel on Sunday afternoon. Guy had
already scouted the terrain and discovered from “Tommy the Cork,”
so he said, that the bright boys intended to give us the works at
supper and force us to agree to license the government to build
aircraft engines under our patents. Why they should resort to the
cloak-and-dagger technique remained a mystery; they already had such
rights under numberless Army-Navy contracts. But there seemed no
mystery about why they wanted the licenses; the big idea was to set
up a string of big government-owned-and-operated aircraft factories
in the several distressed areas of the country to give relief to the
unemployed, and votes to their new employers.
Our quiet little supper party with Secretary Morgenthau did seem to
bear out Guy’s dope. For afterward, the secretary informed us that
since we were already overloaded with the foreign business, our
government would have to look elsewhere. He served notice on us that
we would be expected to license the government under our patents.
Guy Vaughan, on being questioned, advised the secretary that in his
opinion Curtiss-Wright could build all the engines the government
might require, and stated further that his company would not license
the government voluntarily on a program that would put competitors
into his business—and at government expense—who would, after the war,
put his company out of business. In reply to the same question, I
stated that we would license others to build our engines.
The secretary indicated some surprise and inquired what our price
would be. When I replied that we would license them without fee, the
secretary appeared to disbelieve the statement and remarked that he
had never seen anything yet that was worth more than it cost. To this
I replied that there was a catch to it, and now the secretary seemed
ready to believe me.
From here I went on to point out that the manufacture of an aircraft
engine was an art that required skill, experience, and know-how;
few organizations anywhere had been successful in this field. If
we licensed someone to build our product, we must still accept
responsibility for its performance—a responsibility that we had
always accepted. And since we accepted the responsibility, then
we must insist upon retaining authority over the choice of our
licensees. We had thought this through long ago as a part of our
war plan; a major war would stop production of many articles and
throw men out of employment. It would break up organizations and
teams that had the know-how of production and had demonstrated their
competence in their own lines. We would train such organizations
in the specialized technique of our business and thus get a good
job. As examples we suggested such organizations as the Ford Motor
Company, of Detroit, the Buick, Chevrolet, or Cadillac Divisions of
General Motors, the Nash-Kelvinator Company, the Packard Company,
Studebaker—in fact, you could go down the whole list and find a great
untapped source of skilled production experts.
I went on to contrast this with the possibility of government
undertaking the job. Without mentioning the difficulties peculiar to
government business, I stressed the responsibility that goes along
with aircraft production. When the engines fail, the airplane cracks
up and young men get killed. We had got many gray hairs carrying
this responsibility. If the government wanted to take it off our
shoulders, that was their privilege, but they should go into it with
their eyes open.
It was apparent by now that their eyes were fully open and we said
good night with mutual expressions of esteem. Soon George J. Mead,
once chief engineer of United Aircraft, then serving as vice-chairman
of the National Advisory Committee for Aeronautics, had been
appointed to supervise the Treasury Department’s functions in the
50,000 program. This was good news indeed. For aside from the fact
that George Mead knew his airplanes, there was the further and more
important consideration that George knew the Army and Navy each had
skilled organizations, schooled in the procurement of aeronautical
materials, and was likely, after the details of the still nebulous
program had been determined, to give the highly technical procurement
job back to the Armed Forces. For had fate left this problem in the
hands of one of the political agencies then springing up all over the
place, we might today be slaves of Hitler, Mussolini, Hirohito, and
Joe Stalin.