Economy, World War I

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ECONOMY, WORLD WAR I

In April 1917, almost fifty-two years to the day after Lee's surrender at Appomattox, the United States entered the First World War. The federal government moved forward tentatively as it sought to mobilize the nation for its first great conflict since the Civil War. By November 1918, however, the federal government overcame its early handicaps and successfully marshaled the nation's human and economic assets to fight. In the process, Washington accumulated vast new powers, vindicated the ideas of a generation of reformers, and set the stage for New Deal and World War II reforms.

The first issue the Wilson administration faced as it prepared America for war in April 1917 concerned financing the mammoth cost of war. On this issue Progressives and their traditionalist opponents waged the first great battle. World War I cost an estimated $33.5 billion, and of this amount the government borrowed some $23 billion and raised some $10.5 billion through taxes. Progressive reformers had hoped to finance the bulk of the war through taxation but, faced with spiraling costs and congressional opposition to draconian taxes, Secretary of the Treasury William McAdoo sought greater reliance on generating revenue through the sale of government bonds. In the end, McAdoo's Liberty Bond Campaign contributed some $22 billion to the nation's war coffers. McAdoo's use of the Federal Reserve System to enlarge the nation's money supply eased the fiscal strain on the credit supply and facilitated the rise of the national debt from $1 billion to $20 billion. But it also brought about a doubling of the consumer price index between 1916 and 1920. Despite the Treasury Department's emphasis on borrowing and currency manipulation, Progressive reformers led by Wisconsin's Robert La Follette were not without success. Presaging Franklin Roosevelt's progressive tax policy of World War II, the 1917 and 1918 Revenue Acts proved significant in shifting the tax burden from the shoulders of the working class to the affluent. During the war federal receipts from consumption and excise taxes (taxes on certain goods and licenses) declined from 75 percent of total tax revenue to 25 percent, while revenue from income, corporate, luxury, and estate taxes grew from 25 percent to 75 percent of total tax revenue. Despite inflation, many working-class and farm incomes increased during the war. For the wealthy, after-tax income reached a plateau.

agriculture

The Wilson administration faced the enormous task of marshalling the nation's human and material resources. By Armistice Day the United States had raised a military of nearly 4.8 million soldiers and shipped over 20 million tons of food to Europe. None of this would have been possible without a mammoth increase in the power and authority of the federal government to organize the economy so as to support the war effort. In 1916, as part of its overall preparedness campaign, Congress created the Council of National Defense, made up of cabinet officers and leaders from business and labor. The council's major achievement involved the creation of various specialty coordinating agencies, including the Food Administration and the War Industries Board. In May 1917 President Wilson appointed Herbert Hoover as Food Administrator and charged him with raising U.S. agricultural production in order to furnish both domestic and European needs. Congress provided Hoover considerable power under the Lever Act, which gave him authority to control the production and distribution of key commodities such as meat and grain. The future president augmented his official powers with new voluntary measures, including conservation of key commodities through the observance of "meatless days" and "wheatless days." Hoover's policies paid off handsomely for all concerned. Food exports increased from some 7 million tons in 1916 to 18 million tons in 1918, and farm income soared as the Lever Act pegged commodity prices at often twice their prewar level.

industry

In July 1917 the council created its second great coordinating agency, the War Industries Board (WIB), and charged it with coordinating war production and supervising labor-management relations. After ten inauspicious months, WIB leadership passed to Bernard Baruch. With sweeping authority, which included allocation of resources, production and price controls, the suspension of antitrust laws, and the use of the cost-plus contract, Baruch and the WIB brought coordination to the wartime economy.

Complementing the WIB's control over wartime industry, several federal agencies brought similar order to America's far-flung and diverse labor force. The United States Employment Service, for example, placed some 3.7 million workers in wartime industry. The War Labor Board (WLB), led by Frank Walsh and former president William Howard Taft, worked to ensure labor harmony and avert strikes. The WLB heard over twelve hundred labor management disputes and settled the vast majority in labor's favor. Under WLB auspices, workers won the right to collective bargaining and the eight-hour day while the nation's largest union, the American Federation of Labor, saw its membership rise from approximately two million in 1916 to just over four million in 1920. Private employers also sought to create harmony at the workplace through the use of welfare capitalism, a system in which employers sought to gain worker loyalty through benefits such as profit sharing and pensions.

Much less successful experiments in coordination, including the Emergency Fleet Corporation and the Aircraft Production Board, utterly failed to meet their respective obligations. The Shipping Board, for example, created by Wilson in April 1917, provided less than 500,000 tons of new merchant shipping—less than 3 percent of its goal of 15 million tons—by late summer 1918. Wartime agencies were far more successful when they simply took needed resources. The United States Shipping Board, for example, helped alleviate the merchant marine shortage by seizing a merchant fleet of some 3.5 million tons. When volunteer efforts failed to coordinate the nation's mammoth rail system by Christmas 1917, President Wilson placed the railroads under the control of the newly created United States Railroad Commission.

World War I ended on November 11, 1918, but its effect on the United States would continue for a generation. The war helped invalidate earlier ideas about the superiority of limited government in an industrial age and in the process vindicated the ideas of a generation of reformers about using government to regulate the economy and promote social justice. World War I set the stage for the reforms of the 1930s and contributed to the rise of the modern, powerful government, which would lead the nation through the challenges of World War II.