Wednesday, April 11, 2012

Steel


"My father always told me that all businessmen were SOBs. But I never knew how right he was until now." -- John F. Kennedy, April 1962

January 17, 1961. Dwight Eisenhower says goodbye, by laying down a warning.



The Military Industrial Complex: the very Complex he allowed to be created, by the Dulles brothers -- one he never sought to control or to contain.

***

As 1962 began, U.S. steelworkers threatened a nation-wide strike once their union contract expired in May, similar to the 1959 walk-out that crippled financial markets for weeks. President John F. Kennedy was particularly concerned with the prices of raw materials, which he saw as key to the problems of inflation and the balance of foreign payments, as the U.S. was still then in a home-grown, industrialized economy. Kennedy and Labor Secretary (and former Steelworkers general counsel) Arthur Goldberg jawboned the workers and their leader David McDonald into accepting the most minimal settlement agreed to by a 20th-Century industrial union: an agreement with no wage hikes and a mere 2% rise in fringe benefit costs -- in exchange for Big Steel not increasing prices for a period of two years. (In the ten years prior to Kennedy's inauguration, steel prices had more than doubled.) The union contract was signed on April 6, 1962. With the new bargain, growing competition from lower costs of competing metals, and skyrocketing industry sales and capacity numbers, most establishment economists argued for substantial reductions in the cost of steel.

On April 10, 1962, United States Steel President Roger Blough announced -- in a face-to-face Oval Office meeting with Kennedy, while the same announcement was being mimeographed to the Press -- the double-cross: U.S. Steel, Bethlehem Steel, plus four other companies would increase steel prices by over 4% per annum, $6 per ton.



As President of the United States, John F. Kennedy refused to send troops to South Vietnam, Indonesia, Laos, the Berlin Wall and Cuba -- opportunities presented and backed with full force by most members of his own government. Kennedy (with his Attorney General brother) did send troops to deport Santos Trafficante, John Rosselli, Sam Giancana, and Carlos Marcello off the streets of the country. They sent troops to the University of Mississippi in September 1962 and the University of Alabama in June 1963 to protect the entrance there by young black students. And in the Spring of 1962, troops were sent to kick Big Steel executives out of their beds in the middle of the night.

Among other actions.

1. Kennedy ordered the cancellation of all existing or soon-to-begin contracts between the U.S. Defense Department and the six treacherous Big Steel members, shifting the work to companies not in violation of the settlement -- cancelled contracts making up over 10% of the Big Six steel companies' budgets.

2. Ordered Secretary of Defense Robert McNamara to shift future steel orders to foreign overseas companies if necessary to keep work away from the Big Six.

3. Attorney General Robert Kennedy convened a Federal grand jury to investigate price fixing within the Big Steel network.

4. RFK convened a separate grand jury to investigate the violation of anti-trust laws by Big Steel.

5. Aftering ordering a cadre of reluctant FBI agents to wake up the top steel execs (including Roger Blough) in the middle of the night, RFK ordered those same agents to ransack the execs' business offices and nearby areas the next morning. Subpoenaed were expense accounts, travel records, compensation records, company accounts.

6. The Federal Trade Commission was ordered to open an investigation into monopolistic practices within the steel business.

7. IRS audits were launched against steel executives and their companies.

8. Legislation was submitted to Congress -- called the Steel Price Emergency Act of 1962 -- eliminating Big Steel's investment tax credits and depreciation allowances.

9. An anti-trust action was entered into the courts seeking the break-up of Big Steel.

10. Senator Estes Kefauver began hearings of his Anti-Trust subcommittee citing top steel executives for refusal to reveal cost data.

***

In the words of poet Robert Frost: "Oh, didn't he do a good one! Didn't he show the Irish all right?" All members of the defiant Big 6 eventually backed down, reversing the increase. Kennedy also backed down, in public, regarding all businessmen being sons-of-bitches. In private he told aide Arthur Schlesinger: "They are a bunch of bastards -- and I'm saying this on my own, not because my father told it to me."

Schlesinger continues:
"It was true that he accepted an economic system founded on private ownership and that his policies were designed, in effect, to lure business into investment and growth. But this was not enough. The fact remained that he was outside the business ethos, that he did not regard the acquisitive impulse as man's noblest instinct nor the pursuit of profit as man's highest calling, that he was unimpressed by great accumulators of wealth, that he did not consider successful businessmen as the best brains or the most enjoyable company, that he saw then as a faction to be propitiated and not as a force to be followed, that he brought few of them around in the evening."
The reaction of the political and financial establishment was explosive. Kennedy was seen as an anti-capitalist dictator. The Wall Street Journal: "The Government set the price. And it did this by the pressure of fear -- by naked power, by threats, by agents of the state security police." U.S. News and World Report: "We reject all those who believe in a planned economy and reject the President acting like a Soviet commissar. " The Republican National Committee: "The Kennedy brothers are using Gestapo tactics." Richard Nixon: "I think we should be able to solve crises such as this one without using the third degree at 3 o'clock in the mornning." Time Magazine: "He has never attacked Khruschev, Castro or any other enemy half as hard as he attacked our own businessmen." While those businessmen wore "S.O.B. Club" buttons on their lapels and "Help Kennedy Stamp Out Free Enterprise" bumperstickers on their cars. Yet the steel price hike was rescinded. The steel companies did back down.

Yet. The lead editorial in the May 1962 Fortune Magazine asked the question: "Why did the financial interests behind U.S. Steel announce the price increase in such a way and at such a time as to deliberately provoke the President of the United States into a vitriolic and demogogic assault?"

Fortune's editorial answered its own question:
"There is a theory -- unsupported by any direct evidence -- that Blough was acting as a business statesman rather than as a businessman judging his market. According to this theory, Kennedy's prior appeal to steel executives not to raise prices, leading to the contract settlement between company and union, had poised over the industry a threat of jawbone control of prices. For the sake of his company, the industry, and the nation, Blough sought a way to break through the bland harmony that has recently prevailed between government and business. That the threat of jawbone control was no mere bugaboo was borne out by the tone of President Kennedy's reaction and the threats of general business harassment by government that followed the so-called affront."
As Julius Caesar was warned of his coming assassination: "Beware the ides of March" -- Fortune gave the title of its editorial: "Steel: The Ides of April."

***

Two months after the crisis, in a funny and impassioned commencement address at Yale University, JFK spoke about the role of government in a civilized and human society.