Lords of Creation

by Frederick Lewis Allen

  Large profits permitted the payment of very large dividends. Let us glance for a moment at the record of these same three companies, all of them big makers of munitions or war supplies. Bethlehem Steel paid $22.50 per share in 1917 and also declared a 200 per cent stock dividend; in addition, it offered its shareholders an opportunity to subscribe for further new stock at par; in 1918 the company handed out $10 a share on both the old and the new stock, thus giving shareholders the equivalent of $30 a share on their original investment. (Bethlehem’s president, Eugene G. Grace, received bonuses of over a million and a half for 1917 and over a million and a third for 1918!) The Steel Corporation paid $16.75 per share in 1917 (of which one dollar was intended to be passed on to the Red Cross) and $16 per share in 1918. And as for duPont, perhaps the most striking testimony as to this corporation’s endurance of the hardships of war is to be found in a passage from its annual report for the year 1918, in which I take the liberty of italicizing one clause:

  “… 1915–1918, the total dividends on the common stock of E. I. duPont de Nemours Powder Company and on the exchanged securities of E. I. duPont de Nemours & Company have amounted to 458 per cent on the par value of the original stock. It is difficult to imagine a more satisfactory result, especially in view of the fact that the liquidation of the balance of the military powder investment as it stands today cannot materially alter the conditions above described.”

  There were companies whose rate of profit was even higher than this. For instance, according to figures published in the Nye report in 1935, the Calumet & Hecla Mining Company made 800 per cent on its capital stock in 1917; the Utah Copper Company, 200 per cent. Some other concerns, one must remember, did not make money on their war orders; some sustained heavy losses by reason of expanding their plants in 1918 and finding their contracts canceled at the close of the war and their new equipment useless. Nevertheless that passage from the duPont report has a peculiar significance. Perhaps it had best be forgotten by those who write inscriptions for soldiers’ monuments.

  Another result of the war—and this, of course, must be borne in mind in weighing the figures given above—was that prices rose rapidly. By the time of the Armistice the cost of living had climbed 61 ½ per cent above where it had been in July, 1914. The wage-level likewise climbed; in fact, in some vital war-time occupations the shortage of labor caused it to rise to remarkable heights—till the wearing of silk shirts by shipyard employees became a matter of common talk. The shortage of labor (combined with the halting of immigration) also made it easier for workmen to organize and impose demands; the government was conciliatory, partly because of its liberal sympathy with labor and partly because of the need for maintaining enthusiastic and uninterrupted production; therefore there was a rapid growth in the membership of labor organizations of all sorts, conservative and radical: the total union membership rose steadily toward its postwar peak of over five millions. Labor wanted a place in the sun: was not the war being fought for democracy? Not until the war was over did the government withdraw its protecting hand and permit this new offensive on the part of the workmen to meet an equally determined offensive on the part of unreconstructed employers who preferred what they ingeniously called the “American plan”—meaning no traffic whatever with labor organizers.

  Another class whose rising fortunes during the war were to have significant after-effects was the farm population. The demand for food was huge. The cry of “Food will win the war” echoed through the country. Prices rose to unprecedented heights. In the spring of 1917, for instance, wheat leaped to $3.45 a bushel; and the price of $2.20 which was shortly afterward fixed by the government, though it looked low by comparison, was a very high figure beside the normal peace-time level. At this price of $2.20 the government offered to take all the wheat that could be grown. The demand for other staples was likewise intense. Hence a great increase in the acreage planted, an increase in the use of farm machinery, and the beginning of a boom in farm lands which was to collapse a few years later, with paralyzing effects upon an unhappy farming class.

  The government’s financial program for the prosecution of the war also left its marks upon the American economy. To reduce to the simplest possible terms the immense problem to which this program was the answer, the situation was this:—

  First, the Allies had to be financed—no longer, of course, through private operations conducted by the House of Morgan, but through direct extensions of government credit—to the extent of no less than eight billion dollars. And second, to pay and equip and supply the American forces and pay the other costs of American participation required another twenty-four billions. Thus the total cost of the war to the United States was over thirty-two billion dollars—a staggering sum. (As Noyes points out, it was more than ten times the cost of the Civil War to the Union!) How could such an incredible amount of money be raised?

  Despite the insistence of a large group of representative economists that the country must pay as it went, in order to avoid inflation, only about a third of the sum was raised by taxation—chiefly by great increases in the income taxes (with surtaxes running up to 65 per cent for the wealthy) and by excess-profits taxes. In other words, some of the money was collected by diligently taking away a part of the winnings of the fortunate corporations and of those who were fattening upon their dividends.

  The remaining two-thirds had to be raised by borrowing on an unprecedented scale in five war loan campaigns. Yes, one may say, but how did the American people have so much to lend? One answer is the profits above mentioned. Another is that corporations purchased bonds with their surplus earnings. Another is that men and women sold other securities: the stock-market, which had boomed during 1915 and 1916, showed strikingly the effects of such selling while America was in the war. A fourth answer lies in the extraordinary breadth of the Liberty Loan campaigns, which tapped the savings and surplus earnings of men and women who had never before invested in securities of any sort. A fifth answer is that people borrowed from the banks to buy bonds—in other words, that they bought them out of anticipated earnings: a process which added greatly to the already large volume of credit outstanding and sharply accentuated the generally inflationary effect of the war upon the American financial system.

  The Liberty Loan campaigns—ingeniously contrived, intricately organized, and advertised with an altogether unprecedented patriotic ballyhoo—were successful. The war was financed to a finish. We emerged from it the strongest and by all odds the richest nation in the world. But we also emerged from it with our public debt not two or three or four times larger than it had been when Wilson called upon Congress to declare war, but twenty times larger. Furthermore, we emerged from it with the Allied governments owing us upwards of eight billion dollars—a debt which was to cause endless trouble. And although it was pleasant to reflect that we were now a creditor nation, this fact, too, was to cause us trouble, because we did not quite know how to play our new economic rôle.

  One more word as to the significance of these figures. It might aptly be said that during 1915 and 1916 the House of Morgan had been engaged in conducting a huge public-works campaign—raising the money for it, placing the orders for it—and that in 1917 and 1918 the Government took over this task on a much enlarged scale. From the point of view of “scarcity economics” this campaign was devoid of one embarrassing result which conservatives discern in public-works campaigns in peace time: it did not “compete with private business” by producing useful goods which would remain to satisfy the population and limit their desire to buy. What it produced was conveniently useless except for purposes of destruction, and much was promptly blown sky-high. But inflation it did produce on a gigantic scale. Those who distrust governments which run into debt in order to feed the hungry should reflect that in less than two years the American government went over twenty billion dollars into debt and other governments went other billions into debt—with consequences which plague us to this day—not to feed the hungry, but to kill an
d maim and destroy. There is no surer engine of inflation than war.

  5

  When the Armistice was signed and the guns ceased firing along the Western front—on November 11, 1918—there was wild jubilation everywhere. After the anxieties and horrors of war, the prospect of a return to the ways of peace seemed incredibly happy. But sober financiers and economists faced the future with some disquiet. War contracts were at an end; a powerful stimulant to prosperity was now suddenly to be removed. Three and a half million Americans were about to strip off their uniforms and look for jobs. The governments of the world were bowed down with debts. Many other wars had been followed by long periods of economic exhaustion, and surely Europe, if not America, must be exhausted now.

  The events of 1919 and 1920, however, took a strange and unexpected turn. For a few months there was an anxious pause as business tried to adjust itself to altered and confusing circumstances; then there began, not a decline, but a furious boom.

  So many cross-currents of economic tendency and of emotion were running during those years of demobilization that it is difficult, even at this late date, to present a clear interpretation of the forces that made this boom, gave it its peculiar qualities, and then destroyed it. Yet the attempt must be made, for here again the forces proved to have long-term consequences.

  To begin with some of the economic factors: It was quite true that Europe was groaning with debt. But for a time she continued to live on borrowed money. For example, she went right on purchasing from America on credit—not materials of war, but materials of reconstruction. (In the year after the Armistice the Allied debts to America made a further growth from a little over eight billions to more than nine and a half billions.) In the second place, a considerable part of the world had gone for a long time without the necessities of normal life and was in a mood to buy them wherever they could be bought—for a time at least. It was these two factors which set the 1919 boom in motion; there was a sudden jump in American exports during the months when the peace commissioners were laboring at Paris, and this jump in exports sounded the note for an advance.

  The emotional factors in the 1919 boom were complex. In the first place, the war had been conducted under a pressure of terrific enthusiasm; this enthusiasm did not disappear at once, but was at first transferred to other causes and enterprises, taking strangely varied forms. It brought about, for example, the ratification of the suffrage amendment—and the prohibition amendment. It sent Wilson to Paris to try to establish a League of Nations which would end war once and for all. It led thousands of Americans to dream of the establishment of a socialized economic order, to endorse the Plumb plan for permanent government ownership of the railroads, to back the demands of labor for a larger share in the fruits of industry. It led business men and financiers to entertain extravagant hopes of making the United States a nation pre-eminent in foreign trade. And it also led labor to feel that now its day had come. American workmen had had an unprecedented bargaining power during the war, they were better organized than ever before, having secured at last a toehold even in the steel industry; they saw labor parties rising to power in Europe and the proletariat even winning its way to dictatorship in Russia; and they forgot, perhaps, that when the troops were fully absorbed into the working population the bargaining power of labor would be diminished. Suffragists, drys, Wilsonian peace-lovers, radicals, exporters, labor leaders—all of them, in 1919, resolved in their varied ways to carry to a conclusion the “lessons taught by the war.”

  Another emotional factor—which likewise took various forms—was a very natural desire to be rid of the constraints and duties of war-time. Among many business men it took the form of an intense resolve to get away from government regulation and red tape, to throw off the burden of high taxes, to cease what they considered a dangerous and economically unsound truckling to labor. They wanted independence again. They wanted to be running things again. Some of them wanted to speculate again. Again, among many workmen this same revulsion against restraint took the form of a feeling that now they could strike and not be called unpatriotic—and that they would do it and get what was due them.

  Finally, there was the growing mood of disillusionment—the gradual spread of a feeling that the high resolves of war time had been too high, that the Wilson program was a lovely pipe-dream, that Utopia was a long, long distance away, and that in the meantime you might as well decide what you wanted and grab it, for this was the way of the world. Slowly disillusionment began to tarnish the remnants of war-time enthusiasm, and to transmute the desire for independence into ruthlessness and greed.

  The result of these interworking forces in 1919 was a brief and utterly undisciplined boom in business, combined with a bitter conflict between labor and capital. When American foreign trade began to pick up in the spring of 1919, business men regained their confidence and proceeded to make the most of the new prosperity. There was wild speculation in commodities, which lifted prices sky-high; there was speculation in stocks, an intemperate expansion of exports, and in general a sharp inflation. This boom was punctuated by a series of grim strikes: a great steel strike, a coal strike, even a police strike in Boston. The employers (particularly men like Gary, whose refusal to recognize labor unions had the full support of the masters of Wall Street) held fast, and fought the unions with the aid of company police, espionage, government injunctions, and a great deal of patriotic flag-waving to convince the public that they were defending the American order—“American principles of liberty” was Morgan’s phrase—against Bolshevism. Meanwhile the crazy purchasing of goods against a supposed world shortage continued apace—until the spring of 1920, when the inevitable and long-postponed collapse began. Even after it had begun, the speculators of Wall Street continued to sport with the shares of Baldwin Locomotive and Mexican Petroleum and Crucible Steel, and there was a spectacular corner in the shares of the Stutz automobile company.

  The collapse which began in 1920 continued for considerably over a year, and the damage it did was widespread. South American and Cuban buyers of American goods canceled their contracts, and the export bubble was punctured. A widespread buyers’ strike against high retail prices took effect, and down came prices, fast and far; there was a dismal writing-down of inventories for American business concerns in 1921. Down came farm prices in particular, bringing with them real estate values in the formerly rich farm lands and ruining a great number of little banks which had been formed during the war and the succeeding year or two. Down came steel operations to eighteen per cent of capacity. And down came the hopes of union labor too. Adverse economic conditions, combined with post-war disillusionment and with that curious distortion of patriotism into a frightened Toryism which I have described at length in Only Yesterday, broke up the labor offensive and restored to the managers of American industry their former independence.

  6

  With the depression of 1921 the war period of American finance and economics may be said to have closed. As the recovery began, in 1922, the abnormal influences of the war had in some degree worked themselves out; things had begun to approach a normal balance. Let us pause for a moment and take stock of what these eight years had done to change the economic scene and prepare the way for a new era.

  1. They had greatly stimulated industrial production and efficiency; had intensified the use of machinery; had developed new industries and had matured others (such as the automobile industry).

  2. They had perhaps interrupted somewhat the process of concentration—but an increasing number of mergers of banks and industrial companies showed that the trend was still toward concentration and that the process was ready for thorough-going resumption. (For instance, the railroads were now back in private hands, and in the Esch-Cummins Act Congress had actually given permission for their consolidation into large systems, if this could be managed to the satisfaction of the Interstate Commerce Commission.) Furthermore, the passage of the Webb-Pomerene Act in 1918, which permitted corporations to combine
forces for foreign trade purposes, inevitably had opened the way toward combinations for domestic trade purposes. Not that this Act allowed companies to agree on domestic prices and other domestic policies. This was still forbidden. But if a group of managers are permitted to meet and fix prices on exports, it is very easy for them to discuss domestic prices too without anyone’s being the wiser. Another breach had been made in the Sherman Act’s wall of defense against monopoly.

  3. The national debt had become enormously larger. Not only that, but the expansion of governmental functions which had begun during the pre-war reform period (under the impulse to regulate business and provide services to the public) had continued during and after the war, the result being that the yearly expenditures of the Federal government had jumped from about three-quarters of a billion dollars in 1915 to over six billion dollars (including interest on the national debt) in 1920, and that the expenditures of state and local governments had similarly multiplied. Apparently there was no escape from the principle that as the trend toward centralization continued, so must the trend toward growth of governmental functions and of taxes continue.

  4. Meanwhile there still remained the Allied debts to the United States; and as Europe was still prostrated, there remained a tendency toward a lop-sided balance of trade. Since the United States did not see fit to lower its tariff and thus permit Europe to pay its debts (and balance its purchases from the United States) in goods, the only way of achieving a balance was the dangerous method of lending the necessary money to Europe. This, in effect, was what we had done during the war, and the results had been very persuasive. Yet it was a strange method to adopt for permanent use, and there was some question how long it could be resorted to without trouble.