Prices: Aluminum Foiled

Is it better to be loved than feared, or the reverse? The answer is that one would like to be both, but because it is difficult to fit them together, it is much more secure to be feared than loved, if it is necessary to do without one of the two.

—Machiavelli in The Prince

When it comes to his relationship with the business community, Lyndon Johnson does not believe that it is necessary to do without either—but he is certainly acting like a man who knows where the choice lies. Last week, after an intricate and mystery-shrouded confrontation that would do honor to Machiavelli, Johnson forced the $2.9 billion aluminum industry to bow to Government pressure and retreat from a price increase. It was the first such backdown since the steel industry’s retreat before John Kennedy’s wrath in 1962, and it marked the beginning of a new phase in Johnson’s relations with U.S. business.

Long Regret. Johnson got what he wanted—but he paid a price. Though the clash did not wipe out the good will that Johnson has accumulated among businessmen—partly because the President carefully stayed behind the scenes—that old feeling will never be quite the same again. Even before the aluminum industry backed down, Chase Manhattan Bank President David Rockefeller warned: “We are in danger of backing inadvertently into a managed economy; this is not the high road to the good life.” After the backdown, many businessmen expressed disappointment and chagrin. Even on Johnson’s own staff, there were grumblings.

The aluminum industry is only a sacrificial symbol of Lyndon Johnson’s wider war on inflation, which he feels he must wage to keep the economy healthy and to restore the balance of payments. The aluminum industry—one twenty-third the size of construction and one-tenth the size of automaking—is unlikely to cause an inflationary spiral by itself. Even some Government economists concede that the industry has as good a case as any for higher prices: it is earning a mere 4.9% on its investment, is running at 100% of its 2,700,000-ton capacity. Its price boosts—three in the last two years—have not kept pace with its wage hikes; the most recent wage increase, a guidepostshattering 4% rise, was greeted with no outcry from Washington.

Nonetheless, Lyndon Johnson decided that he had to show a strong hand. He has always regretted that he did not oppose the 4.8% auto settlement of 1964 that began the round of wage increases. Since then, more inflationary tendencies have continued to appear in the economy. Johnson looked beyond aluminum to the steel industry, which many economists believed was getting up courage for a price rise, and realized that he would not be able to block any steel increase unless he did something about aluminum. Assured by Chief Economic Adviser Gardner Ackley that the aluminum industry’s profits were high and that any price rise would be unjustified, he set out to force back the 10 price rise to 25¢ per Ib.—which still left the metal selling for 1¢ per Ib. below its 1960 peak.

Poker Game. What followed resembled in some respects a war game, in others a game of poker. First the Administration announced that it would sell 100,000 tons of excess aluminum from the Government’s huge stockpile, hoping to pressure the companies by weakening prices (yet denying any such aim). As the Aluminum Co. of America joined the price rise, the Government raised that total to 200,000. Then Alcoa Executive Vice President Leon Hickman, chief negotiator for the industry, vowed that the aluminum producers would stick by their price boosts. Furious at this open defiance, the Texas White House issued further orders to up the ante.

By this time all the orders were being fielded in Washington by Defense Secretary McNamara, who received word from Presidential Special Assistant Joe

Califano at the Texas White House that he was to run the aluminum show, thus enabling Lyndon Johnson to keep in the background. McNamara quickly moved into the limelight in front of Gardner Ackley, Treasury Secretary Henry Fowler and Commerce Secretary John Connor (who opposed the stockpile dumping as unworkable, confined his own action to a speech defending the Administration after the price hike had been rescinded). McNamara used roughly the same technique that the U.S. had used on the Russians during the Cuban missile crisis: turn the screw only half a notch at a time, then release it to enable the foe to back off. Turning the screw again, McNamara let word be issued that the Government would now dump 300,000 tons of aluminum, an amount that the industry feared would rock the aluminum market.

No Time to Shave. That twist was enough to do it. The same day Alcoa President John D. Harper hurried from Pittsburgh to McNamara’s mammoth third-floor office in the Pentagon’s guarded E ring, began negotiating for a truce. Harper was back in the Pentagon the next day, too, and he and McNamara also spoke several times by telephone. At 8:35 p.m. on Wednesday, Harper phoned McNamara from Pittsburgh to surrender: Alcoa would cancel its price boosts. Lest the company change its mind overnight, McNamara called in newsmen for a 9:45 conference, acting so quickly that he had no time either to shave off his 5 o’clock shadow or don the blue shirt he always wears for TV.

Magnanimous in victory, McNamara insisted that the beaten executives had performed “a patriotic act of industrial statesmanship.” Now that he had so successfully used the stick, he also skillfully brandished a carrot. Said he: “As Secretary of Defense, I am the biggest buyer of aluminum. The department will buy between 300,000 and 400,000 tons of aluminum in 1966 [double its 1965 consumption] which I believe is 10 or 15% of the industry’s production.” Why buy aluminum when the Government has so much in its stock pile? The explanation was that stockpile aluminum is not completely processed, and the Government owns no facilities for processing it; the aluminum the Government buys from industry is fabricated for special purposes, such as helicopter landing pads or guns. The other aluminum companies got the point, quickly rescinded their price increases.

Subtle Shift. Through it all, Lyndon Johnson kept both his thoughts and deeds about the aluminum squabble cloaked in silence. Yet even by proxy, the President had shown that business men with the sturdiest of convictions are no match for the economic muscle of the White House. “It’s very unfortunate,” says Inland Steel Chairman Joe Block, “to have such consistent and strong Government intervention in both wages and prices.” Chairman Richard Chapman of Boston’s New England Merchants National Bank called the episode an “overuse of federal power in what should be normal procedures in a competitive private economy.”

The real significance of aluminum’s defeat is that it signals a new hardening of the Administration’s intention to hold down price hikes at any cost. Subtly shifting the emphasis of Government policy, the economic advisers now believe that this, rather than more pressure on the economy to grow faster, is the way to ensure continued prosperity. Johnson’s tougher stance may produce more tests of his relationship with businessmen, including sterner measures to discourage overseas investment by U.S. firms. If the President is really intent on heading off serious inflation, however, he will have to consider using his indirect powers to let the U.S. banking system raise its interest rates—a move he has so far resolutely opposed. That would not only serve to keep a restraining lid on the economy’s exuberance, but it might materially help the balance of payments problem that is also a major concern of the Administration.