A Patriot's History of the Modern World

by Larry Schweikart

  At any rate, trade and capital flows to England accelerated to double the prewar levels by the time America eventually entered the war. With almost three fourths of U.S. overseas trade going to Europe, and the majority of that arriving in Britain, certainly the isolationists’ charge that bankers were drawing the United States into the war was not entirely wrong, although certain military realities took precedence over economic interest.80 Either way, American credit shifted the world’s financial center from London to New York, a position that city would not relinquish until, briefly, Tokyo assumed it in the 1980s. When Wilson permitted U.S. bankers to sell bonds for the Entente, J. P. Morgan’s son Jack placed $500 million worth of securities with investors through a network of more than two thousand banks despite the vocal opposition of Irish and German groups.81 Throughout the course of the war, the Morgan banks would handle orders for more than $3 billion from the Allies, and after America joined the war, Morgan loaned the U.S. Coast Guard the Corsair, his father’s famous yacht where the U.S. Steel agreement with Carnegie had been consummated, for duty as a submarine chaser. While the “merchants of death” theory has been effectively destroyed by scholars, there was little question that America’s sympathies—and wallets—rested with Britain and France.82

  Wilson, however, could not admit that financial considerations played any role in his policy decision. Nor would he admit that it was in American national security interests to ensure that Prussian militarism was not successful on the Continent. Wilson campaigned on the slogan “He kept us out of war,” defeating Charles Evans Hughes, a former New York governor, by a mere 3,000 votes in California to win a narrow victory of 277–254 in the electoral college. (Some have attributed Hughes’s California defeat to the flub he made during a campaign swing through the state when he stayed in the same Long Beach hotel as Republican governor Hiram Johnson. Unaware that Johnson was in the hotel, Hughes failed to meet with him, leading Johnson to think he had been snubbed.) During the campaign, Hughes had been forthright about his intention to prepare America’s military in case war came, which Wilsonian papers played as an attempt to drag the nation into the conflict. Wilson also benefited from a temporary German suspension in U-boat warfare. When the Russian revolution of March 1917 threw out the last nondemocratic Allied power, in Wilson’s mind a clear case of “democracy vs. autocracy” emerged. Actual entrance into the war needed only another slight push. Wilson got two.

  The first was the Germans’ announcement on January 31, 1917, that unrestricted submarine warfare would resume on February 1. Even before the official announcement, German submarines had continued to sink American ships, including the Housatonic and the California, meaning the United States already had ample grounds for war. Resumption of unfettered U-boat attacks destroyed the façade of civilian government in Germany, and Chancellor Theobald von Bethmann-Hollweg was forced out in July 1917 after his ability to restrain the military ended in January with the announcement of the U-boat offensive.

  The second push came when, in anticipation of the renewed U-boat offensive, German foreign secretary Arthur Zimmermann dispatched a telegram on January 16, 1917, to the German ambassador in the United States, Johann von Bernstorff, who forwarded it to the German ambassador in Mexico. It sought to lure Mexico into a military alliance if the United States entered the war and promised to return to Mexico California, Arizona, New Mexico, and Texas, states lost during the Texas Revolution and the Mexican War. The Zimmermann telegram was intercepted and decrypted by the British, who naturally shared it with the United States on March 1. The telegram outraged Americans, whose memories of Pancho Villa’s depredations remained fresh. Henry Cabot Lodge observed that it aroused the country more than any other event, and Secretary of State Robert Lansing said it transformed the apathy of the western states into “intense hostility to Germany” and “in one day accomplished a change in sentiment and public opinion that otherwise would have required months to accomplish.”83 This finally prompted Wilson, on April 2, to seek a declaration of war from Congress, which it granted four days later.

  The Progressives’ War

  American preparations for war commenced, giving Wilson latitude to implement his Progressive vision, only part of which had been enacted before 1917. Wilson and his Progressive allies had no scruples about reinterpreting the Constitution for their own devices, and recognized no limitations on government (particularly executive) authority. “America is not now and cannot in the future be a place for unrestricted individual enterprise,” Wilson intoned.84 Presaging today’s advocates of the Constitution as a “living document,” Wilson wrote in his book Congressional Government that “government is not a machine, but a living thing.”85 Constitutionalism was a phase, but government, Wilson wrote in another work, The State, “does now whatever experience permits or the times demand.”86 What he called “living political constitutions” (as opposed to Lincoln’s concept of the Constitution) “must be Darwinian…. it must develop.”87 More important, Americans needed to abandon their “blind devotion” to the Constitution. As Jonah Goldberg has noted, “Wilson was the first president to speak disparagingly of the Constitution,” mocking “Fourth of July sentiments.”88 Wilson’s disparagement of the Constitution went deeper, to the very root of American exceptionalism and foundational dogma—Wilson had no higher view of liberty, as the concept had “no permanent nature.” Liberty had “different meanings in different epochs,”89 a frightening position for an American president.

  Wilson subscribed to the Progressive view of the individual’s place in society espoused by Jane Addams: “we must demand that the individual shall be willing to lose the sense of personal achievement, and shall be content to realize his activity only in connection to the activity of the many” (emphasis ours).90 This view was a dangerous and absolute departure from the Lincolnesque view of society as a collection of individuals, each empowered, ambitious, separate, and distinct, with inherent volition and autonomy. For Wilson, society was the primary focus, with individuals as tools to an end. Fellow Progressive and founder of the “Social Gospel” movement to which Wilson allied himself, Walter Rauschenbusch, insisted, “New forms of association must be created. Our disorganized competitive life must pass into an organic cooperative life.”91 For Wilson, “men are as clay in the hands of the consummate leader,” who “cares much—everything—for the external uses to which they may be put.”92 As the “consummate leader,” Wilson had no regard for the opinions of others. The masses, he said, “must get their ideas very absolutely put, and are much readier to receive a half truth which they can promptly understand than a whole truth which has too many sides to be seen at once.”93

  Wilson’s brand of Progressivism borrowed heavily from the Germans he now had to fight. He was particularly enamored with Otto von Bismarck—the “moral force of Cromwell and the political shrewdness of Richelieu; the comprehensive intellect of Burke [and] the diplomatic ability of Talleyrand.”94 Describing Bismarck’s welfare state as an “admirable system…the most studied and most nearly perfected in the world,” Wilson staffed his agencies with economists trained in German universities. A 1906 survey of 116 top economists and social scientists in the United States revealed that half had studied in Germany—Johns Hopkins University was built on the German blueprint—and whether or not they all accepted “top-down socialism” as practiced by Bismarck, many were hostile to capitalism. Richard Ely became the leading light of the Progressive economists. His Wisconsin brand of socialism, Teddy Roosevelt once said, “first introduced me to radicalism in economics and then made me sane in my radicalism.”95 Hitler would later agree with Wilson on the applicability of Bismarck’s top-down socialism and the usefulness of war to implement it, noting that war would enable solutions to problems that “could never have been solved in normal times.”96 Like Ely, the atheist John Dewey saw the war as full of “social possibilities.”97 He relished the notion that war would force Americans to “give up much of our economic freedom…. We shall have
to lay by our good-natured individualism and march in step,” killing off “individualism” and elevating “public need over private possessions.”98 Even Jane Addams was “eager to accept whatever progressive social changes came from the quick reorganization demanded by the war.”99

  Having implemented the income tax and centralized banking in the United States under the Federal Reserve system, Wilson’s Progressives now mobilized for war. Whether Wilson actively desired war is unclear, as he maintained the conflict would threaten his domestic agenda: “every reform we have won will be lost if we go into this war. [We have the new tariff] and currency and trust legislation…. They are not thoroughly set.”100 But he had enthusiastically sent American forces into Mexico. Once the war started, however, Wilson and his Progressive planners recognized an opportunity to remake the United States in the image they desired. Ely, for example, praised the draft, arguing that the “moral effect of taking boys off street corners and out of saloons and drilling them is excellent, and the economic effects beneficial.”101 There were, Wilson noted, “some splendid things that come to a nation through the discipline of war.”102 His predecessor Teddy Roosevelt, also a Progressive, agreed: “The military tent where they all sleep side by side will rank next to the public school among the great agents of democratization.”103

  Most of all, war enabled Wilson to raise taxes, and in fact, a year before the United States entered the war, Congress passed the 1916 Revenue Act, which doubled the bottom tax rate (to a still-low 2 percent) and almost tripled the top rate (from 6 percent to 15 percent). It is important to recall that support for the Sixteenth Amendment had been won only because voters had been promised that: 1) rates would be low, with most people exempt from any taxes at all; 2) the law was extremely simple, essentially consisting of a page or two for most people; and 3) it eliminated all the “backroom politicking” over tariff schedules that resulted in perceived inequities for different groups of people. Now the Revenue Act of 1916 wiped out the first benefit altogether, adding excise taxes and new “excess business profits” taxes. As the U.S. Treasury’s own Web page itself notes in retrospect, “Driven by the war and largely funded by the new income tax, by 1917 the Federal budget was almost equal to the total budget for the years between 1791 and 1916.”104 Another Revenue Act was passed in 1917, and where prior to this act, a taxpayer had to have $1.5 million in income to be subject to a 15 percent tax, afterward, anyone making $40,000 was subject to such a rate, while the income earner making $1.5 million was subject to a stunning tax rate of 67 percent. Nor was Wilson’s Treasury Department through, raising taxes again in 1918, this time to an astonishing top rate of 77 percent. Significantly, the lowest rate now stood at 6 percent, or the same amount the richest of the rich paid when the income tax amendment was ratified!

  J. P. Morgan anticipated that tax rates would rise effortlessly to an oppressive level, pleading for the Treasury to finance the war solely through bonds, but the goal was more than merely funding the military effort. Progressives intended to keep the high tax levels in place after the war—Wilson’s designated successor, Dayton, Ohio, newspaperman James M. Cox, made this plain. High income taxes would thereby permit the redistribution of wealth that many of the more honest advocates of the income tax celebrated when they passed the amendment. As a historian of the income tax noted, “Central to the appeal of a highly progressive income tax during the 1890s was the claim that it would both reallocate fiscal burdens according to ability to pay and also help restore a virtuous republic free of concentrations of power.”105 Redistribution of wealth constituted one of the three Progressive planks that the reform of war could provide, heavy regulation of business and massive centralized planning being the other two. War gave the Progressives the excuse they needed to remake the American economy.

  An Industrial Dry Run

  As it had in the American Civil War, the U.S. government acquired weapons and supplies from the private sector rather than establishing large numbers of government-owned plants, armories, and factories. During the Civil War, virtually all of the advanced weapons acquired by both the Union and Confederate governments came from the labs and workshops of private inventors—Richard Gatling’s machine gun, Christian Sharps’s breechloader, Ambrose Burnside’s carbine, George McClellan’s saddle, Christopher Spencer’s repeating rifle, John Ericsson’s ironclad Monitor, Horace Lawson Hunley’s submarine, and a host of heavy cannon from Thomas Rodman and Robert Parrott (both were officers, but Parrott resigned his rank to work for a private firm and Rodman worked with a private foundry). Even at the more basic level of supply, John D. Rockefeller and others provided massive amounts of boots, uniforms, buttons, packs, and bayonets, not to mention railroad locomotives and rolling stock. Political scientist Richard Bensel’s contrast of the two governments at war concluded that the Union, in large part, won because it was the freer, more capitalistic economy, and the North could “skim off the top” of its private sector economy without disrupting the wealth-generating mechanisms needed to also provide capital for the war.106

  Smaller-scale wars, such as the Mexican War and the Spanish-American War, had not demanded as much from the American industrial system, although Samuel Colt, whose bankrupt armory was just being revived when the war with Mexico began, provided thousands of his new pistols, which made a critical difference in at least one battle.107 At first it appeared that World War I would follow the pattern of the Civil War. Already Ford had introduced a four-wheel trailer designed to be pulled by a Model T, making the use of trucks for transport a reality; by 1917, truck convoys running from Detroit to Baltimore proved the feasibility of long-distance truck transportation.108

  But World War I was destined to be run differently, following Progressive ideology. Even though production had soared since 1914, bringing the U.S. economy to near full capacity by 1916, Wilson’s administration broke with tradition and funded government shipyards and munitions factories. More than five thousand agencies vied with one another for turf, overlapping their mandates, replicating work, and leaving gaps in responsibilities. As a result, the Army spent more than $14 billion in a three-year period due to an inefficient supply system. Ignoring private innovation, government bureaus specified both how to manufacture an item and the performance standards the item would have to meet. Failure to follow the government’s direction or meet the government standard even if the factory followed the government’s processes exactly constituted grounds for product rejection. Such all-encompassing control of industry yielded extremely high prices for government contracts to cover losses created by Uncle Sam himself.

  Of most immediate concern, even before the U.S. declaration of war, was shipping, since it was subject to constant U-boat attacks. High risk for transport demanded high rates, in turn prompting Wilson’s treasury secretary William Gibbs McAdoo to accuse shippers of an “orgy of speculation” and of charging “absurdly high” rates.109 In a sharp break from the successful policies of the past, Wilson asked Congress to create the Emergency Fleet Corporation in 1917, giving the U.S. government absolute control over all merchant shipping related to the war. He wisely put steel man Charles Schwab in charge, and Schwab replaced the “cost-plus” system at shipyards with a “fixed price” system (always preferable when the design is known and risks few), but also allowed for bonuses to be paid to companies that exceeded their quotas or beat their timelines. When necessary, Schwab paid bonuses out of his own pocket; he gave pep talks to shipyard workers; and he buttonholed Rear Admiral Frank Fletcher, convincing him to award medals and flags to overachieving plants.110 Carnegie called it a “record of accomplishment that has never been equaled,” but the Emergency Fleet Corporation was an exception.

  Schwab, like many of the “Dollar-a-Year” men (so called because the law prohibited the government from accepting free services, thus they were paid a dollar a year), represented the fusion of business and government. As the ranks of businessmen running programs inside the bureaucracy swelled, their opinion about t
he ills of government softened. Not surprisingly, after World War I, many spoke less harshly about Uncle Sam’s interference and more favorably about regulation if there was money to be made in government contracts. At the same time, government agencies observed firsthand how executives planned their operations, leading to the introduction of business models and planning throughout Washington, most notably in the establishment of the Bureau of the Budget (later, the Office of Management and Budget). Created under the Budget and Accounting Act of 1921, the bureau was charged with monitoring government expenditures and planning for new revenues.

  But in 1917, the newfound affinity of business for government, and vice versa, failed to introduce massive new efficiencies into the procurement of weapons. After a sputtering start, when some thirty-five committees handled forty basic industries—and the committees were begetting more committees—the Wilson administration sought to streamline procurement through the War Industries Board (WIB) created in July 1917.111 The WIB continued to flounder until all power was handed to Bernard Baruch as chairman in March 1918. Branded as an “indefatigable worker of industrial miracles,” Baruch had lobbied for military preparedness for two years as a partner in the A. A. Houseman & Company brokerage firm.112 In 1916, he had left Wall Street to serve on the Advisory Commission to the Council of National Defense. His main challenge upon assuming his new position as chairman of the WIB was determining what needed to be produced first. As Baruch explained it, “Should locomotives go to [General] Pershing to carry his army to the front or…to Chile to haul nitrates needed to make ammunition…? Should precedents be given to destroyers needed to fight the U-boats or to merchant ships…being decimated by the German subs?”113 Endowed with powers not granted before to a government agency, the WIB under Baruch had the authority to seize and operate plants and to deal with labor management disputes. Baruch chose subtle methods when possible. He cajoled, bribed, and persuaded, playing on business’s traditional respect for the federal government, and it worked to a degree: production increased 20 percent, although nowhere close to the levels American production would attain in the next war.