The World Remade

by G. J. Meyer

  Georges Clemenceau, premier of France, 1906–1909 and 1917–1920

  “My foreign policy? I wage war! My domestic policy? I wage war!”

  Another positive development, the importance of which would not become clear for some time, was the fourth change of French governments since the beginning of the war. It mattered because it made Georges Clemenceau prime minister. For half a century he had been the wild man of French politics and journalism, and at age seventy-six he remained a force, boiling with energy and hatred of the Germans, known to everyone as Le Tigre. He would prove a one-man antidote to the defeatism that staggering casualty numbers had made epidemic in France. He refocused attention on the defeat of Germany to the exclusion of everything else and enabled his weary countrymen to feel a final surge of hope.

  The outlook remained bleak all the same. If the collapse of Russia continued, during the coming winter the German high command would be free to move many divisions from the Eastern Front to the west. In these divisions would be scores of thousands of seasoned troops whose successes against the Russians and Romanians had filled them with confidence. Meanwhile General Pershing remained adamant that the AEF would still be neither big enough nor well trained enough to take the field when winter ended. In fact, he said once again, it would not be ready until the spring of 1919. All the United States could do in the meantime, aside from using her navy to protect transport ships and hunt U-boats, was save the Allies from going down to defeat because of shortages of munitions, equipment, raw materials, or food.

  There was tremendous pressure on the White House to produce everything the Allies might need and deliver it in astronomical quantities. This was a management challenge above all, and the first of the questions it raised was who should do the managing. The administration’s answer could hardly have been more sensible: responsibility for getting various industries to supply what the war required should be in the hands of the men who knew those industries best—who had demonstrated their ability to manage production and delivery by actually doing it. The entire structure of the wartime economy would be erected on that decision.

  In midsummer 1917 President Wilson announced the creation by executive order of a War Industries Board (WIB) with responsibility for overseeing and coordinating production on a nationwide scale. The WIB stumbled in the early going, in part because it had little statutory authority, but eventually the men chosen to run it learned to use a combination of cajolery and pressure (threatening public denunciation of misfeasance, for example) to induce manufacturers to standardize products, adopt the latest methods of mass production, and cooperate in the allocation of raw materials. Just as important, they learned also to dispense rewards generously. Where producers needed financing, the board could even make government money available.

  The WIB became useful in two areas where neither it nor other government agencies had any actual authority: the setting of prices for industrial products, and the settlement of labor disputes. Priority was given to maximizing production, an understandable decision considering the situation in Europe; as with the army’s cantonments, cost was a secondary consideration where it was not altogether ignored. Following the example set by Secretary McAdoo in managing the railroads, the board urged companies to accede to union demands that were not downright extortionate, so long as the unions in question were otherwise cooperative and not suspected of disloyalty. The companies were happy to comply, because the WIB rarely objected to their raising prices and thereby passing the increase in labor costs along to their customers, the biggest of which was the government. They were likewise pleased to find that the Justice Department was no longer attempting to enforce the antitrust laws; it turned a blind eye to more than a little profiteering. Most delightfully of all, unprecedented levels of profitability were now virtually guaranteed. Small wonder that the result has been called a “war welfare” economy.

  Generous as it was, this approach was not impressively effective in raising productivity. The country’s gross national product increased by less than 4 percent from 1916 to 1918. While agricultural output rose marginally, production of copper, pig iron, iron ore, and rolled iron and steel actually declined. This happened largely because of the disruptions inherent in shifting from the manufacture of goods for the civil economy to the materials of war, and because the war ended before converted factories could achieve maximum efficiency. David Lloyd George was being unfair, and probably disingenuous, when he called it “one of the inexplicable paradoxes of history” that “the greatest machine-producing nation on earth failed to turn out the mechanism of war after eighteen months of sweating and toiling and hustling.”

  The real paradox, but not a mysterious one, is that industry overall prospered so handsomely under the government’s wartime regimen that more than a few of its leaders hoped they would not have to revert to the prewar system when peace was restored. Not all businessmen were so approving. Some refused government contracts that would have interfered with their use of child labor or imposed the eight-hour day, but they were exceptional.

  The way old-fashioned competition came to be supplanted by guaranteed profits is illustrated on a grand scale by the WIB’s arrangements with the steel industry. Demand for steel—its importance in armaments, shipbuilding, tank making, and the equipage of modern warfare generally—was causing a dizzying rise in prices that also affected the markets in ore, coke, and pig iron. The WIB, knowing that this price inflation was running far ahead of producers’ costs, appealed for restraint and got no response. The Federal Trade Commission (FTC) made noises about a possible federal takeover of the industry. A resolution introduced in the Senate carried a similar threat, but the industry saw all this as bluffing and responded with threats of its own.

  In September negotiators for the WIB (themselves recruited out of the steel industry for temporary government service) met with representatives of the producers (their former and presumably future employers) and hammered out an agreement. Thenceforth the government would pay $3.25 per hundredweight of steel plate. This was less than a third of what the producers had been demanding and therefore could be publicized as a huge victory for the WIB. In fact, however, the WIB was inflicting no real pain on the producers but rather was bestowing the government’s blessings on a windfall for the whole industry. An FTC report showed that at a price of only $2.90, U.S. Steel Corporation could generate profits amounting to 50 percent of its sales.

  The WIB’s guiding principle being the production of enormous quantities of steel (and many other things) as quickly as possible, there was little choice except to pay all manufacturers the same price for specific products such as plate. A more sophisticated approach, one taking into account the fixed and operating costs of particular factories or companies, would have been time-consuming, beyond the WIB’s resources, and in any case easily manipulated. The simplest answer was to set prices at levels that allowed even the least efficient operators to make an acceptable return. But these same prices, when applied to the biggest, most up-to-date facilities, translated into returns beyond the dreams of avarice. In 1918 the American steel industry would report an overall return on investment of 20.1 percent. Concealed behind this number, munificent enough on its face, were the accounting maneuvers used by companies (often enough with the government’s implicit approval) to minimize the impact of the excess-profits tax, and the far higher returns reaped by the industry’s leaders. U.S. Steel’s earnings, $81 million in 1913, were already at $271 million in 1916 with still better to come; in 1918 the dividend on its common stock would be 14 percent. In that same year, in a foreshadowing of the investment banking industry of a century later, four officers of Bethlehem Steel shared a then-colossal bonus of $2.1 million.

  Steel was by no means unique. In 1917 the after-tax profits of lumber companies represented a 17 percent return on investment. Copper producers increased their average return from 12 percent in 1913 to twice that in 1917, all the while refusing pay increases to the IWW. Two of the meatpackin
g companies most often accused of cheating farmers, Swift and Armour, more than doubled their earnings between 1913 and 1916. (Armour’s nearly tripled.) The Cuban-American Sugar Company reported a profit of $365,000 in 1913, $8.2 million three years later. The WIB should perhaps not be blamed for ignoring the conflicts of interest inherent in using recruits from industry to negotiate with companies to which they were likely to be returning after the war. The administration’s priorities and approach built conflicts of interest into the system.

  Cost-plus contracts, which allowed profits amounting to a set percentage of whatever companies spent to complete some assignment, were not limited to the building of cantonments. And the results could be interesting. One contractor was found to be using high-quality new timber, badly needed for construction, to burn the bodies of dead horses, fattening his bottom line with every dollar thus wasted.

  There was much to criticize, but it would have been awkward for the government’s representatives to draw too much attention to industry practices. Doing so would have raised questions about the patriotic rhetoric of the Wilson administration, according to which corporations no less than the men in uniform were sacrificing their own interests in order to liberate the world. Those on the inside of the process, however, were sometimes repelled by what they witnessed. The president of the National Lumber Manufacturers Association (a man doing double duty as head of the Council of National Defense’s lumber committee) wrote to an associate that in Washington’s negotiating rooms “patriotism, in most cases, is nothing much more than a thin veneer.” The chairman of the United States Shipping Board, having been drawn into the perpetual negotiations of transportation companies and unions, said that “I find no patriotism on either side when it comes to money.” Food czar Herbert Hoover complained late in 1917 that “the law of supply and demand has been replaced by the law of selfishness.”

  One of the ironies of the situation is that the lengths to which the administration went to increase output, including the burden imposed upon future taxpayers as government borrowing snowballed, might not have been necessary. The industrial capacities of the United States were so immense that the nation was able not only to meet the needs of the Allies and create its own war machine but to do so with surprisingly little disruption of the civilian economy. Industry not only continued to produce automobiles for the commercial market (albeit at a gradually declining rate) but was able to stockpile steel to guard against future shortages. Some fifteen months after the declaration of war, only some 10 percent of the nation’s then-numerous automakers had switched to military production.

  Price controls that were so lax as to sometimes amount to no control at all, generosity to approved unions, the accumulation of immense amounts of government debt—all this was ferociously inflationary, creating an upward spiral that fed on itself as higher costs of production and a higher cost of living led to fresh demands for higher prices and wages. It also marked the death of President Wilson’s hopes of financing the war on a pay-as-you-go basis. That the president’s political position was not as solid as it had been early in his presidency, or during the surge of patriotic fervor that accompanied the declaration of war, is evident in the readiness with which Congress approved ever-higher levels of debt while finding it difficult to pass even watered-down tax bills.

  The Republicans naturally wished Wilson no good but avoided making themselves seem blindly obstructionist by professing their unqualified support for the war while accusing the administration of mismanaging it. Democrats, for their part, were increasingly disaffected from the president. Those of a progressive bent were particularly uneasy. They were offended by the transformation of Washington into a fountain of cash for contractors of every description, appalled by the whitewashing of dishonesty with buckets of jingoistic rhetoric. Other Democrats resented the president’s remoteness and the air of flinty superiority with which he looked down upon Capitol Hill.

  It was not until October 3, half a year after a war revenue bill was first introduced, that a badly mauled version finally became law. Through all that time the bill had been kicked from committee to committee in both houses, with progressives demanding an almost confiscatory excess-profits tax while conservatives warned that if America’s business leaders were treated unkindly, they might find it difficult to sustain their enthusiasm for the war. Every industrial and agricultural organization in the country was doing its best to make Congress and the administration understand why, although of course it supported fair and responsible financing of the war, the well-being of the nation depended on sparing its members from an increased burden of taxation.

  The bill as passed was a setback for the administration. The president either lacked the political muscle to raise taxes on high incomes and high profits to a level commensurate with the need, or decided to follow the path of least resistance. When he proposed a consumption tax of $2.50 per bale on cotton and the Bourbon Democrats rose up in righteous wrath, threatening a comparable tax on wheat, he found it prudent to back down. That was the way the struggle proceeded, with the various interests holding each other hostage in a round robin of legislative blackmail. In the end, farm products escaped being taxed at all—even unregulated cotton producers paid nothing—and the levy on industrial profits was held to little more than a third of what the progressives had proposed.

  The wealthy and those becoming wealthy could have found few grounds for complaint. Many ordinary Americans, on the other hand, saw the cost of living rise faster than wages. They were left with an abiding sense that the entire government, the Wilson administration included, was in thrall to special interests. The Republicans, to deflect public attention from industrial profiteering, denounced the Bourbons. They accused the Democrats of being not a national party at all but a southern one.

  The consequences of all this should have alarmed more people than they did. By May 1918 federal spending was a billion dollars a month more than income, and the Treasury Department was forecasting total outlays of $24 billion in the 1919 fiscal year. Remember that until the war, the federal budget had been in the neighborhood of $1 billion annually.

  If the president was troubled, he kept his concerns to himself. His determination to spend whatever the war required reduced all financial questions to mere administrative details. This was bound to create problems, and it did so soon enough. Trouble emerged first, not surprisingly, in an area where planning and spending had been particularly reckless: the creation of the nation’s first combat-ready air force.

  Having entered the war with only a rudimentary aircraft industry and a tiny military air service possessing no airplanes comparable to what the Europeans were producing, the United States had a great deal of catching up to do but little understanding of the magnitude of the problem. Intervention brought wildly foolish talk, encouraged by the administration if it did not originate there, of building a hundred thousand planes to “darken the skies over Germany.” With lightning speed, Congress appropriated hundreds of millions of dollars to get the program started. The Council of National Defense created an Aircraft Production Board to put those millions to work.

  The board sent a delegation of engineers and manufacturing specialists to Europe to decide which of the Allies’ latest aircraft might most usefully be copied. At home, a search began to find companies to manufacture aircraft, engines, and parts. Airframes had to be made of spruce, the supply was limited, and so the government took over the spruce market. Production contracts were awarded wholesale, often with more haste than care. Congress was asked for still more money and granted it without argument. Spending soon passed the half-billion-dollar mark. The program then bumbled along quietly, burning money and managing to produce no aircraft, turning into a political time bomb.

  The administration’s easiest victories were being won in the courts at this stage. Appeals of Postmaster General Burleson’s refusal to allow the mailing of publications of which he did not approve were turned down with numbing consistency. Judges at all le
vels appear to have taken pleasure not just in finding against plaintiffs but in subjecting them to verbal whippings. The Georgia populist Tom Watson, once a member of Congress and a future U.S. senator, was told by the judge from whom he had requested a restraining order that “had the Postmaster General longer permitted the use of the great postal system which he controls for the dissemination of such poison, it would have been to forgo the opportunity to serve his country afforded by his lofty station.” The poison in question was Watson’s sour view of the war. It consisted of questions such as “Why is your boy condemned to die in Europe?” and such statements as “Men conscripted to go to Europe are virtually condemned to death and everybody knows it.”

  Higher courts were no less supportive of the government. The Post Office Department appealed when Judge Learned Hand ordered it to accept The Masses for mailing. In nullifying Hand’s decision, a circuit court of appeals ruled that “liberty of circulation may be essential to freedom of the press, but liberty of circulation through the mails is not.”

  To be charged under the Espionage Act was to face near-certain conviction. Of the 180 persons tried for violations of the act in 1917, six were found not guilty. It was even worse for those accused of violating the Selective Service Act: 981would be charged by war’s end, seventeen acquitted. Prosecutors and the advocates of prosecution were not satisfied, however. They demanded more power to deal with the allegedly seditious, the administration agreed, and the Justice Department readied a new and still more draconian measure for presentation to Congress in 1918. Capitol Hill stood ready to approve it sight unseen.