War, Government Contracting

In the Western tradition war is a political instrument. Over time in Europe, war and peace became the preserve of states, and governments ultimately strove for a monopoly of violence. But public institutions have never solely controlled war, because governments often needed to rely on private entrepreneurs to supply, maintain, finance, and even administer their war machine. War contracts governed, regulated, and defined this relationship between the political necessity and the private business of war making.

THE EARLY MODERN PERIOD

Until the nineteenth century states were relatively weak and needed to outsource numerous aspects of security policy. In most cases, outsourced work also included the actual financing of the contract itself, so the merchant/banker providing the service or goods also needed to provide the money to execute the contract. The most evident example of such a contract was the Spanish asiento, which entailed both a royal contract and a farm of taxes. The king of Spain contracted a merchant/banker to render services or deliver goods, but the entrepreneur had also to advance the money up front. In return, the merchant/banker received a right to claim Castilian revenues or the right to farm a tax.

After 1450 two major military innovations transformed the nature of European warfare: the rising importance of firearms, and the professionalization of the military. To meet the demands, early modern states engaged in three distinct areas of outsourcing: manning the army and navy, supplying and outfitting the military, and manufacturing arms.

In time, an international "military-industrial complex" emerged, with common standards and procedures. Ordinance, for instance, was usually priced by weight. Arms could be tested at delivery, before the contract was fulfilled. By the beginning of the Thirty Years' War (1618–1648) armies needed large quantities of arms. Contracts could be relatively small, and purchased by the regiment, or they could involve the negotiations of governments, international manufacturers, and brokers, and include tens of thousands of firearms, pikes, blades, and other implements of war making.

In the course of the sixteenth century, as a consequence of the proliferation of firearms, changing tactics, and more extensive drills, a highly trained professional soldiery became crucial to success on the battlefield. During the Thirty Years' War the demand for such troops helped create an international system of troop contracting, with many armies being composed of men from disparate nations including Ireland, Switzerland, Scotland, and numerous German states. By the end of the seventeenth century many armies consisted almost entirely of such "foreign" troops who served for a fixed price—an entrepreneurial soldiery. The proverbial military phrase "no money, no Swiss" captures the manpower dilemma of early modern war.

Armies marched on a full stomach. During the fifteenth and sixteenth centuries captains took personal responsibility for feeding their men, purchasing provisions locally—a custom practiced by the Dutch navy until 1800. By the middle of the sixteenth century troops on campaign began to receive their bread directly from governmental administrators, and by the end of the century this task often fell to independent contractors. Such contracts stipulated a specific quantity of rations at a set price per ration and stipulated a transportation agreement to assure that the food reached the front. Over time, Jewish merchants became the main suppliers of the continental armies. They not only could supply the large initial sums to purchase foodstuffs but also commanded an extensive international network which reached into the Baltic, the granary of Europe. During the seventeenth century governments tended to contract with the same firms annually, with efficiency and reliability often trumping price. French contractors, however, lacked the connections of the Jewish merchants, and needed to be paid in advance monthly by the French Crown, a serious disadvantage. The British army during the Seven Years' War (1756–1763) regularly put out bids to British, mostly Protestant, contractors, who then supplied British troops on the Continent from England.

THE MODERN PERIOD

The modern era was characterized by nationalism and industrialization. After 1800 the dynastic countries of Europe emerged as strong national states, and governments began to conduct many aspects of military supply themselves. Conscription, for instance, served an important role in maintaining national armies, and the professional entrepreneurial regiments gradually became obsolete—one famous exception being the Swiss Guard at the Vatican.

During the machine age war fighting took place on an industrial scale. More and more supplies, troops, food, clothes, and so on were required to conduct modern war. As late as the Franco-Prussian War (1870–1871), for instance, the House of Morgan was still the monopoly purchaser of all the goods and supplies for the British and French in the United States, and it steered profitable war contracts to the firms to which it was connected. But by the early twentieth century it was impossible for a single firm to maintain such a dominant position—the amounts required were simply too immense. During World War I (1914–1919), for instance, the United States government needed tens of millions of shoes. Wars were no longer won on the battlefield, but in the factories.

In a war economy, price tends to be of secondary importance. Governments naturally prefer to keep war costs to a minimum, but the primary consideration is the immediate production of sufficient qualities of arms and other war commodities. Nevertheless, states have never simply been willing to pay anything to win. War profiteering has been considered immoral and often unpatriotic, and governments have tried to limit profit taking. As early as the American Revolution (1775–1783) Congress replaced the contracting system, where purchasing agents were compensated by a percentage of the contract, with a system of fixed pay and rations for the Commissary Department. During the U.S. Civil War (1861–1865) unprecedented quantities of weapons were needed, and a new contracting form was launched: incentive pricing. Under this system a contractor's ability to deliver quickly took precedence over price. After a baseline estimate of the cost of manufacturing standard military weapons was made, the manufacturer was allowed a "liberal profit" on the cost.

During the two world wars, most countries limited a contractor's profits through excess-profit taxation, at a rate as high as 100 percent, and provided contract safeguards. A typical contract used in Great Britain during World War II (1939–1945) was of the fixed-price type, although a company might have been allowed in the beginning of production to operate under a cost-plus-a-percentage contract, a cost-plus-a-fixed-profit contract, or a "target price" contract. After the United States entered the war, all services were obliged to reduce prices by eliminating excess profits by a process of renegotiation, but profiteering—especially in the aircraft indus-try—still could not be entirely avoided.

THE POSTMODERN WORLD

With the end of the Cold War, government power began to retract. In several European countries, for instance, conscription was postponed and smaller armies were recruited. Governments returned to outsourcing much of their war machine. In 2003, of the $200 billion spent by the United States government in the private sector nearly 75 percent of that money was spent by the Department of Defense. During the Third Gulf War (2003–2004) between 10 and 20 percent of the total U.S.-led coalition troop strength was proved by private military companies. In Iraq, troop supply, transport, maintenance, and security were almost entirely outsourced to private firms whose contracts generally fell into one of three categories: fixed-price, where the government and contractors decide on a binding price; time-and-materials, where the government and contractors agree on an hourly rate that includes labor, materials, and overhead; and cost-reimbursement, where the government reimburses the contractor for costs incurred in providing a service.

SEE ALSO Wars;Wheat and Other Cereal Grains.

BIBLIOGRAPHY

Boyaijan, James C. Portuguese Bankers at the Court of Spain, 1626–1650. New Brunswick, NJ: Rutgers University Press, 1983.

Brandes, Stuart D. War Hogs: A History of War Profits in America. Lexington: University Press of Kentucky, 1997.

Crowell, J. Franklin. Government War Contracts. New York: Oxford University Press 1920.

Edwards, Peter. Dealing in Death: The Arms Trade and the British Civil Wars, 1638–52. Stroud, U.K.: Sutton 2000.

Lynn, John A. Giant of the Grand Siècle: The French Army, 1610–1715. Cambridge U.K.: Cambridge University Press, 1997.

Parkin, Norman C. "Renegotiating of War Contracts Prices." The Journal of Business of the University of Chicago 17 no. 17 (April 1944): 91–110.

INTERNET RESOURCES

Peterson, Laura. "Outsourcing Government. Service Contracting Has Risen Dramatically in the Last Decade." Center for Public Integrity. Washington, DC, 2003. Available from http://www.publicintegrity.org/wow/report.aspx?aid=68.

Victor Enthoven