Destructive Creation. Mark R. Wilson
build and run an enormous new GOCO smokeless powder plant. According to the original contract, Du Pont would be paid a fee amounting to at least 7 percent of the expected $90 million in construction costs (over $6 million), plus fees for powder production that were likely to amount to at least 15 percent of the cost of the powder. The terms of this deal raised eyebrows at the WIB. One of its top price controllers, Robert Brookings, believed that the fees were at least twice as high as they should be. These criticisms convinced Baker, who ordered the Ordnance Department to cancel the deal.
Having alienated Du Pont, Baker engaged private engineering and construction firms to design and build a large government-owned powder works in Nitro, West Virginia. In May 1918, the War Department hired Hercules Powder to operate the Nitro plant. By the time of the armistice, six months later, this big GOCO powder facility had barely started production.38
In the meantime, Baker and Du Pont had a rapprochement. Because the Nitro plant would be large enough to supply only about half of the nation’s projected additional demand, the War Department went back to Du Pont. In March, they agreed on a contract that would have Du Pont build and operate a new GOCO plant on a 4,700-acre site outside Nashville, Tennessee. Known as “Old Hickory,” this huge complex included housing for thirty thousand people, along with its own fire department, hospital, and segregated schools. Designed to produce 900,000 pounds of smokeless powder a day, Old Hickory cost about $84 million to build. On this deal, the government managed far better terms than those contained in the canceled October 1917 contract.39
Despite the Old Hickory deal, the earlier clash with the government had alienated Pierre du Pont, president of the nation’s leading explosives supplier. Proud of their expertise and their contributions to the war effort, Pierre du Pont and his peers regarded their critics as ignorant ingrates. And, as they watched the government build giant public-owned facilities in their own industries, they could not help but worry about the consequences of this potentially serious encroachment into the private sector. As we shall see, similar concerns would lead Pierre du Pont and other top American business leaders to inveigh against the New Deal in the mid-1930s. But as the case of Pierre du Pont suggests, many of those executives came into the 1930s with a political sensibility that had been shaped by their experiences during the Great War, under an administration led by President Wilson and his progressive lieutenants.
Pierre du Pont and his allies may have had some cause to complain of the public’s under-appreciation of their expertise, but few ordinary Americans would shed them many tears, given the evidence of what came to be called wartime “profiteering.” In April 1917, as he led the nation into war, President Wilson had warned American companies to avoid “unusual profits.”40 But it was already too late. Thanks to big orders from the Allies, many American companies, including Du Pont and Bethlehem Steel, were making record returns. Until the summer of 1916, Du Pont had been selling smokeless powder to the Allies for a dollar a pound, twice as much as it charged the U.S. military. The big-margin powder sales helped Du Pont earn $82 million in profits in 1916 alone—more than ten times its average annual earnings before the war.41
As long as the United States remained neutral, objections to these windfall profits were limited, at least domestically. But in April 1917, this changed. As hundreds of thousands of young men prepared to risk their lives in the trenches, some Americans—including those who held the fastappreciating stock of the munitions makers—were amassing wealth. “War brings prosperity to the stock gamblers on Wall Street,” said Senator George W. Norris (R-NE), an outspoken progressive. But their gains would always be “soiled with the sweat of mothers’ tears,” as they cashed in “coupons dyed in the lifeblood of their fellow man.”42
Whether or not one agreed with Norris that war profits amounted to blood money, it was impossible to deny that the Great War earnings of many American companies were huge. Bethlehem Steel, the nation’s leading shipbuilder, as well as a steelmaker, recorded $43.6 million in net earnings in 1916, about seven times its 1914 profits. Bethlehem’s president, Eugene G. Grace, was paid about $3 million in wartime bonuses. At U.S. Steel, the biggest of the steelmakers, profits for 1916 were $272 million—nearly twelve times what they had been in 1914. Meanwhile, J. P. Morgan, the leading Wall Street bank, had collected at least $30 million in fees for serving as the Allies’ main purchasing agent in North America. At Du Pont, where executives and stockholders shared millions of dollars in dividends and bonuses, there was enough left over for the company to buy a 25 percent share in the General Motors Corporation.43
To many business leaders, the growing chorus of criticism of Great War “profiteering” failed to do enough to recognize the decline in corporate earnings in 1917–18, the period when the United States was actually at war. The biggest reason for this fall was taxes. The Sixteenth Amendment, which authorized federal income taxes, had been ratified in 1913. At first, federal tax rates were very low. But during the Great War, the Wilson administration and Congress relied on high income taxes, on corporations and individuals, to cover a large fraction of the cost of the war. (Initially, Treasury Secretary McAdoo hoped that taxes would pay half the expense. In the end, taxes covered only a quarter of war costs; most of the remainder was paid for with bonds.)44
From 1916 to 1919, Congress passed a series of new tax measures, which reined in corporate profits. High taxes on manufacturers were favored by many Southern and Western members of Congress, most of whom represented rural districts. One of these men was House Ways and Means Committee chairman Claude Kitchin (D-NC), who joined forces with McAdoo to devise the new laws. The first step came in September 1916, before the United States entered the war, when Congress passed a new revenue law containing a special 12.5 percent “munitions tax.” This would be paid mainly by Du Pont.
A much larger group of companies was affected by the revenue law enacted in October 1917, which—besides hiking the income tax for individuals—created a new “excess profits tax” (EPT). The EPT applied a progressive ladder of rates, ranging from 20 percent to 60 percent, on any earnings in excess of what had been a company’s average rate of return on capital investment during the designated prewar base period of 1911–13. The individual income tax and EPT rates were raised slightly in the last wartime revenue bill, which was not enacted until February 1919, after the armistice. But that law also created an additional “war profits” tax, which allowed the government to take 80 percent of any profits above the baseperiod average, in dollar terms. This meant that for 1918, companies paid two major new taxes on “excessive” profits: one calculated on the basis of the ratio of earnings to invested capital; and the other by looking at the difference between actual dollar profits in the prewar and wartime periods. This was a complex system but amounted to a robust, progressive corporate income tax, which succeeded in trimming business profits sharply during the last year of the war.45
Certainly, it is possible to overstate the strength of the regulation of American business during the Great War. As the record of World War II would show, taxes could have been higher. The Wilson administration might have been more hostile to business. Even Daniels, who was driven by an intense antipathy toward big business, was far from being an enemy of all forms of private enterprise. This distinguished him from the era’s true radicals, including the Bolsheviks who seized power in Russia in late 1917 and, closer to home, American communists, socialists, and members of groups such as the Industrial Workers of the World. Franklin Roosevelt—who, as assistant secretary of the Navy, was second-in-command to Daniels—was more circumspect than his boss about public capacities. In 1919, Roosevelt called for the quick liquidation of the government’s merchant marine; he opposed government ownership of the infant aircraft industry. Such views about the need to limit regulation and government enterprise were shared by Baruch, the WIB chief, among other leading Democrats.46
Beyond this, many of the large new government-owned plants built during the Great War, including merchant shipyards and explosives factories, were constructed and operated not by the government but by private firms. Inside many of the wartime agencies, business conservatives took key leadership positions. Charles Schwab, the Bethlehem Steel executive who had previously fought bitterly with Daniels over armor plate, became head of the Emergency Fleet Corporation in 1918. Meanwhile, much of the day-to-day work of the Railroad Administration, nominally headed by McAdoo, was handled by his assistant, Walter