NEWSREEL NARRATOR: Harry S. Truman, four months after taking office as president, leads his country finally to victory and peace. Mr. Truman and his cabinet meet in emergency session as the president breaks the momentous news of Japan's surrender.

President HARRY S. TRUMAN (14 August 1945): I have received this afternoon a message from the Japanese government in reply to the message forwarded to that government by the Secretary of State on August the 11th. I deem this reply a full acceptance of the Potsdam Declaration, which specifies the unconditional surrender of Japan.

NEWSREEL NARRATOR: In New York City, as throughout a rejoicing nation and world, vast throngs of grateful, happy people celebrate the end of fighting, the dawn of peace. Two million New Yorkers jam Times Square. It's official! It's all over! It's total victory!

NEWSREEL NARRATOR: J.W. Snyder, to whom the tremendous job of reconversion has been entrusted, talks about post-war jobs.

JOHN W. SNYDER: Every man in government is still at battle stations as far as reconversion is concerned. There will be no let up until our men and women are back at work in steady peacetime jobs.

JACK NUNN: Defense industries are different. One has to be concerned about those industries that have application to your national security.

NARRATOR: Does government have a role, even an obligation, to help military industries whose annual revenues can exceed $20 billion change from war production to civilian consumer products in peacetime?

JACQUES GANSLER: The government's role is not to get a company to do conversion, the government's role, it seems to me, is to remove the barriers that prohibit a company from doing conversion.

NARRATOR: Can we identify lessons from the enormous post-World War II industrial restructuring to apply to the current struggle to restructure our post-Cold War military industries?

GREGORY BISCHAK: I think that this post-Cold War period actually built positively on the lessons from the World War II experience.

["AMERICA'S DEFENSE MONITOR" program introduction.]

NARRATOR: Franklin Roosevelt christened it the "Arsenal of Democracy." Eleven million Americans, almost as many as were in uniform, worked in it. "Rosie the Riveter," celebrated in song and media, was its symbol. It built almost 5000 merchant ships, on one occasion completing an entire ship in a single day. Little wonder that America's military industrial base is called the "fifth service."

Since World War II, however, the industry has been called many other things. It is often portrayed as part of the rigid, interlocking "iron triangle" of politicians, the Pentagon and industrial contractors who promote military spending and seem impervious to political change.

[17 January 1961, president address]

President DWIGHT D. EISENHOWER: In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic process.

NARRATOR: Despite Eisenhower's warning, the military-industrial complex today commands immense influence in Congress and the White House. Understanding why, in the absence of a credible threat, we still spend more on our military than on all other discretionary spending combined, we must look back over the 55 years since America last geared up for a major war.

Gregory Bischak is executive director of the National Commission for Economic Conversion and Disarmament.

Dr. BISCHAK: The entrance of the United States into World War II was a very fortuitous event from the point of view of the economy. There was tremendous unused capacity, high unemployment. The economy was there to be used, essentially, all these unused resources. The war provided a means by which the nation could mobilize these resources, put people back to work into plants that were producing not cars, but aircraft and tanks, ships for wartime purposes. There were tremendous capabilities unleashed by the war.

NARRATOR: Many Americans still think that America's mass production capability enable industry to respond quickly to war production requirements.

Dr. GANSLER: I don't think it was that rapid. It was actually years rather than people's perception in hindsight, I think, is a little different than the reality. If you remember, Roosevelt warmed them up a little bit, certainly with the Lead/Lease, and then it actually reached full production towards the end of the war, not the first few years.

NARRATOR: Dr. Jacques Gansler is executive vice president of the Analytical Science Corporation and vice chairman of the Defense Science Board, a panel that advises the secretary of defense on major Pentagon weapons programs.

If the ramp-up to massive war production was slow, it was prodigious. In the 36 years between the Wright brothers' successful powered flight at Kitty Hawk and 1939, US industry produced 50,000 airplanes.

ROBERT R. NATHAN: The pace or rate of production by the American economy, the number of planes -- we produced 45,000 planes in 1943 and actually, in 1944, it was up around 100,000.

NARRATOR: Robert Nathan was deputy director of the Office of War Production and Reconversion at the end of World War II. The economic impact of the war's end was equally immense. With victory in Europe, the Pentagon cancelled 20,000 contracts worth $3 billion in 1945 dollars. The victory in Asia, V-J Day, brought more cancellations. By the end of August, over 70,000 contracts worth $15 billion had been terminated. Job cuts followed rapidly.

By mid-September, 2.5 million defense industry workers were released from war production jobs. Within two years of the war's end, the defense sector's share of the economy, measured in terms of gross national product, fell from about 40 percent to 6 percent.

For government leaders in the mid-1940s, how to reabsorb so many people into the postwar economy without triggering another depression was a monumental task.

JOHN W. SNYDER: We want to create in America jobs for all those who are ready and willing to work, an economy that will provide a steadily rising standard of living. We want a stable economy which will avoid the disasters of inflation and deflation.

[Universal Newsreel]

Mr. NATHAN: It's no exaggeration to say that in 80 to 90 percent of the plans were "get out of the way," you know. In other words, the return to peacetime production was anticipated to be quite orderly and fairly easy.

NARRATOR: Americans wanted to forget war and war restrictions. Demand for homes, cars and other good mushroomed as Americans turned to civilian jobs, education and the good life.

Dr. GANSLER: The assumption made was that after the war was over we would go back to total civilian production, there would no longer be a need for a defense industrial base, if you will, and that, therefore, we had to plan that reconversion process.

Dr. BISCHAK: I think the government's role was extremely important in reconversion efforts. The planning efforts were far more important than many free market advocates suggest today.

NARRATOR: Government programs such as the G.I. Bill of Rights were major contributors to postwar America's economic health. Moreover, the fact that only the United States emerged from the war physically unscathed spurred the rapid and nearly total reconversion of industry from swords to plowshares.

Mr. NUNN: We had basically the only undamaged material base globally. And we had a market, a postwar market, that once the economies got settled so that they could start to buy things and they started to need things, we had a market for our goods.

NARRATOR: Jack Nunn, a defense consultant, was a project manager in the Office of Technology Assessment, where he directed a 1991-1992 multi-volume study of the defense industrial base.

Reconversion on this scale had never been attempted before. It had to be done well, done widely, and applied to a nation that in four years had been transformed from a rural, small town, agrarian culture into the world's leading military and industrial superpower.

Dr. BISCHAK: The problem was unique. To go from civilian production to wartime production, and then back to civilian production without losing employment and output, to not return to a depression was the dominant concern.

NARRATOR: Robert Nathan recalls that there were some problems.

Mr. NATHAN: We really had to push for a set-aside for small enterprise, and industry did agree to that because they didn't want more controls, they wanted to get out. And so, to avoid controls in the demobilization, they cooperated very strongly.

Footage from Universal Newsreel:

Newsreel Narrator: Store windows are once more blossoming as they did before Pearl Harbor with every gadget dear to Americans. And by the thousands, people are flocking to automobile display rooms for a preview of the new automobiles. Sixty-thousand visited one salesroom in five days for a peak. Now we'll have our rewards of victory. Peace, it's wonderful!

NARRATOR: By the start of the 1950s there was no question that reconversion had succeeded. But the Korean War made it plain that the US would have to retain some military-industrial capability. The questions were how large, how expensive and how would it operate in relation to civilian industry.

Dr. GANSLER: Over the last 40 years, the defense industry has become increasingly isolated because it has specialized requirements, military specifications, different weapons and so forth. So today what we have is -- at least at the prime contractor level, largely a differentiated defense industry from the commercial economy. The characteristics of these are such that the defense industry portion of it is a relatively non-responsive, relatively expensive system.

NARRATOR: Cost quickly became a secondary consideration. The Pentagon and industry's approach produced the best that money can buy and "what's good for the country is good for business" was an approach that deliberately established a de facto link between business profits and public policy. Nor was the expanding specialized military-industrial base reticent about using the employment issue in their lobbying for continued high military budgets.

Today, even without a credible enemy, military industries continue singing the same siren song of jobs, jobs, jobs. Contractors astutely raise the political stakes for any in Congress who dares vote against new weapons by spreading work for the Pentagon across the nation. For example, parts for the F-15 fighter plane are made or assembled in 46 states.

Dr. GANSLER: The sooner we can convert this isolated industry into one that's integrated, the better the taxpayer will be because they will gain the benefit of that integrated production. In other words, the cost of military goods will plummet once integration can be achieved.

NARRATOR: This failure to distinguish between national needs and corporate profits is apparent in the recurring "special pleading" by many defense industries. Segment after segment -- tank-automotive, nuclear propulsion, submarine and aircraft carrier builders, munitions, rations and military aircraft producers all assert that their products are among the few that are "absolutely vital" for a strong military.

The extent of this pleading reflects the dependency on military spending of this special sector of the US industrial base, a sector that had no parallel in 1940-1941.

Dr. BISCHAK: After the Cold War we have many dedicated defense producers that essentially grew up, thrived, became giants in the aerospace field, or electronics field, or shipbuilding fields after many decades of serving Defense Department procurement needs.

NARRATOR: But if government in post-World War II America was not inclined to support critical wartime industries, such as machine tools, electronics and steel, why should it support industry today?

Mr. NATHAN: I don't think the American people were prepared this time -- even though they want to be safe, but I don't think they're prepared for large government spending.

NARRATOR: Furthermore, the nature and timing of our Cold War "victory" were unanticipated. Without a shot being fired, the Eastern Bloc disappeared into the trash heap of history. But we had no ticker tape parades; no huge and boisterous crowds flooded Times Square. In 1945 we knew we had won a hard fight, but it had been won. Optimism abounded. There was money to be spent.

Mr. NATHAN: The reconversion from war back to peace was also very extensive, although very short because everybody wanted to get away from the war production once the war was won.

NARRATOR: By contrast, today we struggle to pay public and private debts. Government is being cut. Many legislators call for "free markets," but then oppose proposals to open industry to the full play of the market. Such artificial barriers, absent in the post-World War II era, do nothing but frustrate reconversion.

Dr. GANSLER: What happened in the 1940s was we allowed market forces to take the defense sector and return it to the commercial sector. One of the things we're doing today, Congress particularly is doing is trying to maintain the industrial base. By that they mean keep the old production going. And so, that's a barrier to that conversion to the commercial economy. I think that at that time what we did in the 1940s was we removed a lot of those barriers and we encouraged the conversion.

NARRATOR: Industry's answer to the Pentagon's reduced procurement budget has been to cut jobs and consolidate. But job shedding in military-oriented firms really began in the late Reagan years. From a 1987 high point of 4.4 million workers, defense industry employment dropped to 3.1 in 1990 and 2.4 million in 1995. Conversely, non-military employment has grown by over 14 million in an economy employing over 123 million workers today.

But for some these economies are not enough. The 50-year habit of searching for threats, sounding alarms and constantly preparing for war translated into continued high defense costs. When old enemies die, the Pentagon "discovers" new dangers that "require" us to raise and maintain large military forces.

Mr. NATHAN: It's awfully hard to know what we're preparing for. And if we don't know what we're preparing for, it's very difficult to think of magnitudes -- how many ships, how many planes, what kind of equipment we will need.

NARRATOR: Part of the survival strategy of large defense firms is straight forward: Get even larger by merging with or buying other defense firms, so as to get a bigger portion of the smaller defense market. The only rule is keep pressure on Congress and the White House to fund billions of dollars of new weapons the military wants and some it doesn't want.

Dr. GANSLER: In most cases in the defense sector, we now have too many suppliers, excess capacity and market forces should be allowed to shrink that down. Of course, Congress would prefer not to shrink down in their district. They prefer to shrink down in general, but not in their districts.

NARRATOR: Having survived the Pentagon's procurement pause, the new mega-firms, such as Lockheed-Martin, McDonnell Douglas, Northrop-Grumman, Boeing and General Dynamics are positioned to respond to Pentagon plans for weapons buys that are programmed to jump from $39 billion per year to $60 billion per year for as many as 30 years. That adds up to $1.8 trillion for new airplanes, submarines and other weapons even though the current models will remain the world's best well into the 21st Century.

But there is also a new wrinkle to military industrial survival: Have the Pentagon subsidize mergers. Normally, mergers result in lower overhead costs which translate over time into lower costs to customers. But military industries want the Pentagon to rebate part of these savings -- called "cost avoidances" -- to offset merger costs.

From the taxpayers' perspective, this proposal is highly anti-free market. It assumes that government has an obligation to pay firms to remain in the defense market because government, operating independently of the markets, is the only customer for "national security" products.

At the end point of this logic is the conclusion that military industry firms are financial captives of the Pentagon. Thus, even when Pentagon weapons buying slows, Congress must continue to pass large military spending bills. But does Congress really know what it is they are voting for -- its size, its shape, its real cost to the taxpayers?

Mr. NUNN: When I was at the Office of Technology Assessment, we were doing a series of studies on what kind of defense technology and industrial base we ought to have in the future. And what became clear at the time was that there was insufficient knowledge of even what the base looked like at the time. No one knew what the trends were. So, at the very least, someone dealing with national security ought to keep track of what the trends are in the industries that are of particular concern.

NARRATOR: Ironically, Jack Nunn's former office, which could have produced a study on defense industry trends, was closed by Congress in 1995.

Defense industries had started to restructure as the Pentagon budget leveled off in the late 1980s. President Clinton, in the early months of his administration, called for a four-year, $20 billion program to assist companies to diversify from military to consumer products.

[11 March 1993, at Westinghouse Electric Corporation]

President BILL CLINTON: Rather than strictly military applications, we'll be better able to integrate research, to strengthen defense, and to promote our economic security here at home.

Dr. BISCHAK: THere's a huge block of money that was devoted in the immediate post-Cold War period to sort of a defense-unique conversion problem. It was called the Dual Use Technology Initiative. The centerpiece was the Technology Reinvestment Project. The idea was that the federal government could invest in certain technologies that had a dual use -- one military, one civilian -- but that the same technology could serve those same purposes.

NARRATOR: But some products and processes -- Jack Nunn puts it at 25 to 35 percent of Defense Department purchases -- are exclusively military, or almost so.

Mr. NUNN: Stealth technology relies a lot on new composite materials. Well, you can use those composite materials in aircraft, commercial aircraft production, and increasingly we will be doing that. What is militarily unique or military-unique in that area is how one fashions the shapes on those aircraft that become radar-evading.

NARRATOR: But what should we be doing now, in the late 1990s, when America is not militarily threatened, when we are still king -- albeit with our crown a bit askew -- of the economic hill?

Dr. GANSLER: I think that someone needs to sit down and say this is where we're going to be in the year 2003 with the defense industry and we're going to take all the actions lined up to do that. Now some firms will suffer, no question about it. In the model that I have in mind, more of the firms that can, in fact, achieve civil-military integration will be better off. The ones that are defense-unique will have to justify their existence, and there will be some who can't.

Mr. NUNN: The government should not be in the business of ensuring that a particular firm stays in business. The government should be in the business of ensuring that a particular capability that it feels is necessary should be available in the future.

NARRATOR: But Congress has chosen to avoid the hard calls. Instead of realistically evaluating dangers and confining production of the newest weapons to our own military and to those of our closest allies, Congress has given industry a green light to sell weapons virtually anywhere they can find a buyer -- a far different situation from the 1940s.

Dr. GANSLER: I think in the 1940s the issue was not to worry about trying to make sales of military equipment to stay alive, but rather to simply try to quickly get out of the defense business and become commercial. Today, there's a tendency to try to maintain the industrial base through foreign military sales, which in a sense becomes a self-fulfilling prophecy. Because now that we've supplied them with -- the rest of the world with the best equipment in the world, we have to now build better equipment in order to fight our own equipment. There is an alternative clearly to that.

INTERVIEWER: Which is?

Dr. GANSLER: Which is to try to achieve multinational arms control of the sophisticated equipment and to try to cut back on the proliferation.

NARRATOR: The world has always been "dangerous" to some greater or, as now, lesser degree. Until we can be sure that it will remain "lesser," we will have to maintain military forces and the industrial capacity to produce weapons. But our assessments must be carefully and critically made, both of the threat and of those industries and capabilities that are truly critical to our ability to raise and sustain military strength.

Mr. NATHAN: The question that arises first is, what is the military production and the military program, what is it designed to achieve?

Mr. NUNN: We need to think about what we need, where we can get it, and then make a decision as to whether or not we need to spend particular government funds to ensure that we can get it.

NARRATOR: In the end, unless taxpayers make their voices heard in Washington, the defense industrial sector will remain above and be largely unaffected by market forces and military necessity. Military spending will remain tightly gripped by the Cold War era iron triangle -- politicians, the Pentagon and the military-industrial complex.

Dr. GANSLER: I think one thing that we had in the 40s that we don't have fully today is a vision of where we are trying to get. In other words, at the time at the end of the war, even in '43 when we started, there was a clear vision of what we wanted, which was the total conversion back to the commercial economy. We wanted to take steps towards that objective. Today, the objective is very ambivalent.

Dr. BISCHAK: What we really need to do is change our mindset about how we achieve security.

[FADE TO BLACK]

ADM JOHN SHANAHAN (USN, Ret.): By the Autumn of 1945 no one outside the Pentagon was the least bit interested in finding new enemies to replace those we had just defeated. Most Americans wanted to forget war, forget the killing, and to get on with living. Unfortunately, new enemies found us and for 50 years we have been paying trillions of dollars to maintain a specialized military-oriented industrial complex.

Today, the Cold War is history, but its legacy and entrenched military, industrial and political triangle that costs the taxpayers more than a quarter of a trillion dollars annually endures. It's time to revise this legacy, that we again base our national destiny on peace, not war. Only then will we be able to discover who we are and to chart the course for what we would become.

For "AMERICA'S DEFENSE MONITOR," I am Jack Shanahan.

[End of broadcast.]