by James Grant
The natural retort to critics was that there was a war on, but after the Armistice the debate was joined, and after the next war, an economist offered a novel alternative to the then customary regime of wartime controls. Ludwig von Mises, a professor of the Austrian school, prescribed a first step of financing as much of the cost of a war as possible out of taxes, thereby reducing civilian consumption and expanding the purchasing power of the Army and the Navy. Since incomes would suffer and the demand for civilian goods would decline, businessmen would spontaneously converge on the growth market of armaments. Baruch had always said that voluntary conversion would be too slow. Von Mises countered that if prices were allowed to run their course, sizable profits would accrue to the firms that converted fastest. For that reason, he maintained, conversion would be lightning fast, and production would soar. Because business would be governed by market forces, no government planning apparatus would have to be built (except to ensure that the government itself knew what it wanted), and if the war were financed by savings and taxes, there would be little or no inflation. The Wilson Administration, however, objecting to the principle of profit in wartime, was led to intervene heavily in the market, deciding (when it could decide) how much ought to be produced, by whom, and at what price.
It did so in 1917 in the most basic battlefield commodity, gunpowder. E. I. du Pont de Nemours & Company, the world’s leading explosives manufacturer, had been selling to Allied governments at an enormous profit, and in 1916 (while Baruch was still in Wall Street) a munitions tax was passed to recoup some of the windfall for the Treasury. The company condemned the tax as discriminatory and ex post facto, but it nonetheless managed to report a 1916 profit of $82 million, a sum more than three times its gross sales in 1914. If the war enriched Du Pont, however, it also worried its management, and as early as 1916 the company petitioned the government for permission to build a hydroelectric plant for the recovery of nitrogen from the air at Muscle Shoals, along the Tennessee River. Nitrogen yields nitrates, which form the basis of explosives and fertilizer. America imported its nitrates from Chile, but the success of German submarines led Du Pont to plan for alternate domestic sources of supply. The atmospheric recovery technique, on which it held patents, required waterpower, a commodity made scarce by federal conservation policy. Hence the company’s request of the Administration to build at Muscle Shoals. Congress not only refused, but it also authorized construction of a government-owned nitrogen-from-air works in the same location. Just then Secretary of the Navy Daniels also underscored the importance of public gunpowder plants to compete with private manufacturers, meaning, chiefly, Du Pont.
All this Du Pont baiting preceded the war. After US belligerency, the government was slow to decide how much powder it needed, or how soon. By July 1917 the sum total of contracts let by the Army and Navy to Du Pont was 123 million pounds, an order that could be comfortably filled with the factory capacity already built. But in the fall, following drastic upward revisions of American powder requirements, negotiations were begun with Du Pont for a gearing up of production.
Talks proceeded smoothly, and on October 25 the biggest government contract in American history up until then was signed by the company and by Major General William Crozier, Army chief of ordnance. The contract stipulated a doubling of Du Pont smokeless-powder capacity at a cost of $90 million and an initial order of 450 million pounds of explosives at a cost of about $155 million. The taxpayers would bear all construction costs; Du Pont would earn a building commission, a 5-cent fee on each pound of powder produced and an extra incentive for low-cost production.
Baruch’s recollection of General Crozier was of a brilliant but slightly frayed-around-the-edges officer—“Many was the night I sat with him in the War Department, working on production requirement schedules while his wife sat knitting in a corner.” The general, in the beginning, hardly thought of Baruch or the War Industries Board at all, and the Board was, indeed, forgettable. It had been formed in July to succeed the Advisory Commission, but its powers, too, were wholly advisory, and its first chairman, Frank Scott, had already resigned in ill health and frustration. Nonetheless, its Committee on Explosives investigated the contract, found fault with it, and passed on its criticisms to the Secretary of War, Newton D. Baker. By background and temperament, Baker was inclined to side with Du Pont’s critics. As the city solicitor of Cleveland, he had supported the municipal ownership of streetcar lines; and as mayor, the municipal ownership of utilities. In Washington he shared the Wilsonian animus against Du Pont’s profits on Allied business, and he was sympathetic to the idea of government-owned munitions plants. Crozier had submitted the contract expecting routine approval, but on October 31 Baker wired instructions to cancel it.
The veto—pending a review of the facts, the Secretary said—started a commotion. The War Industries Board, in particular Robert Brookings, the chief price controller, and Baruch, raw-materials chairman, marshaled points against the contract, while Crozier and Pierre S. du Pont, president of the company, defended it. For the defense it was argued that Du Pont bore substantial costs and risks and that the profit figures under discussion were overstated. Brookings, for the WIB, maintained that the company would gain unconscionably in powder manufacturing. (Once he made a revealing confession: “[I] would rather pay a dollar a pound for powder for the United States in a state of war if there was no profit in it than pay the Du Pont Company 50 cents a pound for powder if they had 10 cents’ profit in it,” he said.)
Although Baker, for one, and Baruch, for another, were prepared (in Baker’s words) to “win this war without Du Pont,” if it came to that, Daniel Willard, the current WIB chairman, wasn’t so sure. A compromise proposal of his was presented to Pierre du Pont by Baker (who added that, if he had his way, the company would be out of the running altogether); it was relayed to the board and was rejected. There was another counterproposal, this time from the company, but it too got nowhere. Baker’s view, which Baruch shared, was that the government should somehow do the work itself. Baruch said that he happened to know just the man to get it done, his mining-engineer friend Daniel Jackling. Calling the candidate long-distance at his suite at the St. Francis Hotel in San Francisco, Baruch said: “I do not know whether they will accept you, but I would like to have you come anyhow.” Jackling came to Washington, and when Baker, a few days later, asked Baruch to bring his man in, Baruch could say that he was already there. Jackling got the job.
All that remained was for him to get it done, building a plant, or plants, to produce one million pounds of powder a day without the help of the world’s chief explosives manufacturer. When Thompson-Starrett Company, a construction firm that Baker had earlier approached about the work, informed Jackling that it could manage, at best, one half of what he had in mind and even then would require Du Pont’s advice, the government’s man called on Pierre du Pont; du Pont agreed to help. But Jackling was still in need of a contractor for the other half of the project. Since there was no more logical choice than Du Pont, Jackling asked Baker whether he might not reopen talks with Pierre.
In the months following the cancellation of the original contract, conditions on the home front had deteriorated. There were shortages of ships, coal, railcars, uniforms, small arms, and cannon. The coldest and snowiest winter in years froze underclad troops at hastily built wooden camps. In Congress, an investigation was under way into the conduct of the war, and there were appeals for either the creation of a Cabinet-level munitions post to supplant the Secretary of War in the matériel department, the Secretary’s head, or both. In the circumstances, Baker had warmed to Du Pont, and the company, reasoning that it would be blamed by the public for a shortage of powder, whether or not it was at fault, decided to let bygones be bygones. A new contract, specifying a tiny construction profit and a commission of 3½ cents a pound of powder, down from a nickel, was signed, and ground for the plant was broken near Nashville, Tennessee, in January 1918, nine months after the declaration of war.
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Baruch’s advice to Jackling, when he took the powder job, was to stay out of uniform to preserve his freedom of action. But the Du Pont men at the Nashville site, who were also in mufti, found that their freedom of action was being drastically curtailed by Jackling. To start with, the company was told that each man on the job would be treated as a government employee, “. . . subject to all rules and regulations relating to government employees.” For another thing, federal agents controlled purchasing decisions and plant design down to such details as the size of steel rails. In an attempt to lift the bureaucratic fog, Pierre du Pont made an offer. Instead of building another plant, as the government asked him to do in March, he proposed that the size of the Tennessee job be expanded. This he offered to do for the sum of $1 if the government would relieve the firm of financial risk and only let it alone. A deal was struck, and in the absence of federal hovering, the foreman reported, “Things began to ‘hum.’ ” By the Armistice, the job was ahead of schedule and the plant had produced 35 million pounds of cannon powder. All told the cost of the work was $129,535,000, for which Du Pont earned the nominal after-tax, all-in profit of $439,000. In this sense—in the satisfactory narrowing between what Du Pont had wanted and what it got—Baruch and his colleagues had won, yet just as clearly the taxpayers had lost. The Thompson-Starrett Company had produced no powder at all, but spent (on the basis of comparative unit costs) some $13.5 million more than Du Pont would have needed for the same work. On the basis of the numbers, the war effort would probably have been better served if the original Army-Du Pont contract had been allowed to stand; that is, if Baruch and the War Industries Board had never become involved.
A day in the life of the chairman of the raw-materials committee of the War Industries Board, as revealed in an office memorandum to Baruch dated February 11, 1918:
Call Colonel McRoberts.
Did you receive an invitation for Dancing Class at the Willard this evening? If not, they would like very much to have you drop in.
Henry Mayer, who came down on the train with you yesterday, would like your assistance in making an appointment with the Secretary of War to take up the subject of a client’s contract on the Panama Canal.
Mr. Hibbs phoned to say that Mr. Norwalk, with a letter of introduction to you from Mr. Jake Field, was at his office and would like to know what hour he might call you for an interview. Telephone: M. 545.
Mr. Brand phoned that you said you would see him at any hour he named this afternoon; he stated he would be here at 3 o’clock.
Baruch was chairman of the War Industries Board for the last eight months of the war but labored in the relative obscurity of the commodities and raw materials committee of the Board and of its predecessor agencies for a full year before that. It was a frustrating apprenticeship, because he was full of advice that wasn’t taken, and of plans that weren’t followed. Despite his harping on the lack of nitrate of soda, for example, the shortage was allowed to become chronic, and except for some deft work by him it might have become critical. (Not until December 17, 1917, did the WIB get around to withholding licenses for the manufacture of nonmilitary fireworks.) Once, he wrote, he was close to despair over the nitrate situation when a naval intelligence officer walked into his office with some intercepted cables. The cables showed that the Chilean government had some gold in Germany which it was unsuccessfully trying to get out. “This gave me something to work on,” he wrote. “When the Chilean Ambassador called on me soon after, and began complaining about the difficulty of controlling inflation in his country, I was prepared to make him an offer. If Chile would seize the 235,000 tons of German-owned nitrate in Chile and sell it to us, we would pay for it in gold.” Much to Baruch’s relief, the trade was done.[32]
Baruch recorded his disgust in homely intermittent diary entries. For example: “Fiddle while Rome burns,” “What is everybody’s job is nobody’s job,” and, apropos of a fruitless meeting to discuss the fixing of nickel prices: “It seems useless to have the whole board meeting and not deciding.” (A detached and guarded chronicler of his personal life, he described a Sunday with his family as follows: “Walked with my daughter in the morning [in fact he had two daughters]. . . . Spent afternoon with wife and son.”)
By the close of 1917 it was clear that something was fundamentally wrong. “The entire war machine seemed to be grinding slowly to a halt,” wrote a historian of the WIB. “General Pershing forecast disaster for the spring offensive, given the present flow of supplies; the railroad snarl along the east coast brought federal control on December 26, . . . ” In the Senate an independent-minded Oregon Democrat, George E. Chamberlain, opened hearings into the conduct of the war with the result of embarrassing revelations concerning Army supply. In newspapers there was a hue and cry for a new munitions agency; George Peek, a WIB man, wrote a friend who was about to come east: “By the time you arrive here, there may be no War Industries Board. . . .” Borne along by the tide of disclosure, Baruch incautiously appeared before the Chamberlain committee to call for an improved central supply organization headed by one man, a position he had argued in private for months.
Although Baruch hadn’t suggested an executive by name, his own first choice was himself, and he worked to push his candidacy along. Someone who was pushing in the opposite direction was Secretary of War Baker. Baker didn’t like Baruch or his Wall Street past, or, for that matter, the War Industries Board, which he correctly viewed as a threat to his supply flank. At the time, however, the Secretary’s star was falling while that of McAdoo, Baruch’s friend, was rising. (Baruch’s name, in fact, had been mentioned by McAdoo to President Wilson for the War Department in case Baker were forced out.) Under White House pressure, Baker was led to endorse a new and fortified WIB along the lines suggested by Baruch. The question was who would run it.
Baruch’s name was proposed by, among others, Secretary of the Navy Daniels, whom Baruch had at first taken for a “good, honest, simpleminded jackass.” (He revised his opinion, and Daniels and he became friends. So far had their friendship come that in the spring of 1918, when Baruch’s older daughter announced that she wanted to join the Navy, his wife, not one to impose on strangers, felt free to take up the matter with Daniels himself.) Baruch was, in truth, politically loyal, financially independent, experienced, and decisive—in 1917 Theodore Roosevelt had described him as the “ablest man around the Administration”—but the Baruch boom met with some opposition. Secretary of Agriculture Houston, Secretary of Commerce Redfield, and Democratic National Committee Chairman McCormick all questioned his executive capacities. Robert Lovett, a WIB member who had been president of the Union Pacific and Southern Pacific railroads, opposed him. Baker was opposed, as was Interior Secretary Lane. The United States Chamber of Commerce was doubtful. On the other hand, Baruch enjoyed the support of Joe Tumulty, the President’s secretary (and a fellow sufferer in the peace-note leak affair); David Lawrence, the newspaperman; Samuel Gompers, president of the American Federation of Labor; and, of course, McAdoo.
Baruch’s spirits rose or fell in February according to the latest odds on his candidacy. At a meeting with President Wilson on February 7, he reiterated his ideas on the necessity of one-man control of the Board, but left with the impression that that one man would be Edward Stettinius. Stettinius, however, was a Morgan partner and a Republican, qualifications that (at least to Colonel House) were even less desirable than that of being a Jew. (Baruch himself was uneven on this subject. Shortly after his appointment as chairman, he told Daniels that it would be bad politics to name another Jew to the Board, but later in 1918 he gave $10,000 to the Palestine Restoration Fund, a Zionist cause.) While McAdoo fenced with Baker, who still opposed Baruch, the candidate nervously waited. Meyer advised him not to worry, and Baruch told his friends that if he didn’t get the job he would probably join the Railroad Administration. At the same time McAdoo was sizing him up for a job on the War Finance Corporation, and he wrote to ask the President his advice on the matter.
Wilson had made other plans, however. “My dear Mac,” he wrote back, “I am mighty sorry but I can’t let you have Baruch for the Finance Corporation. He has trained now in the War Industries Board until he is thoroughly conversant with the activities of it from top to bottom, and as soon as I can do so without risking new issues on the Hill I am going to appoint him chairman of that board. This is entirely confidential.” On Monday, March 4, 1918—a low ebb in Allied fortunes, coming one day after Russia formally withdrew from the fighting and just three weeks before a major German offensive—President Wilson summoned Baruch to the White House to make the news official. Wilson handed him a letter setting out the duties of the chairman of the War Industries Board and of the reconstituted Board itself. Baruch accepted the letter, slipping it into his pocket (and not losing it), and walked out into the cold rain. As he left the White House he said to himself: “Now when you say ‘no,’ you must mean ‘no,’ and when you say ‘yes,’ you must mean ‘yes.’ Whatever you do, you must make your own decisions and never delay or wobble. You must decide.”
Baruch had never been the head, or chairman, of anything before except of his household and office, and Annie managed the household and Mary Boyle, his secretary, supervised the office. Not having built an organization or even worked in one very much, he was unpracticed in the day-to-day style of executive leadership. He was naturally decisive, but the decisions he was used to making on Wall Street usually touched only the market and himself or a few partners. On the Stock Exchange he had been one governor among dozens. Yet so easily and well did he fill the shoes of command that his subordinates respectfully began to call him “Chief.” (Daniel Willard, whose resignation as chairman of the WIB created the vacancy that Baruch filled, wrote his successor years later: “Even while I was Chairman of the Advisory Commission . . . and you one of its members, you were at the same time the most potent member, not even excepting the Chairman. . . .”)