 Well, good morning ladies and gentlemen Welcome back We're almost at the halfway mark for this series of talks. So if you've if you've made it this far the the downhill slope is within sight and I'm happy to say that I believe my voice is made a a slight recovery so that I I'm optimistic about being able to Continue to the end myself and I want to Point out that I do have visual aids for this talk, but I'm afraid I had no good place to put them so I've displayed them here at the And the gutter of the whiteboard These are these are genuine miniature replicas of World War one posters which which constituted a remarkable an extraordinarily colorful art form and I believe that you can actually find collections of these online if you'd ever like to look at some of them they're They're memorable in various ways not only for the artistry but for the kinds of sentiment expressed in them and the the themes that the artists Decided to use as their Points of emphasis many of them had to do with exhorting people to lend money to the government by buying government bonds But they cover a vast range of other topics from canning fruits and vegetables for conservation purposes to To sending your sons off to to die at the front so So there's a little little bit of everything so far as the government's war program was concerned that that the artists decided to join in promoting and These these posters are really quite astonishing this this little one in the middle I Was something that that you could place in the window of your home or apartment To signify to your neighbors that you indeed had bought some bonds in the government's fourth Liberty loan Drive and it was important during the war that you let your neighbors know that you were not a slacker Because millions of them were looking for slackers and they were intent on exposing them and seeing that they were at least ridiculed and if need be lynched so It was a an amazing time in this country I'm not sure there was ever anything like it in terms of the degree to which War hysteria swept up so many people in such a violent way and One is left to ponder what what was it about these people that made them Capable of suddenly becoming that way You might not have suspected Before the war began that the Americans were capable of behaving that way and yet clearly they were They must have had some kind of the pent-up hostility longing for an outlet At least a great many of them I Want to call your attention to an essay by Murray Rothbard, which I'm sure some of you know about already It's called World War one as fulfillment Subtitle is power and the intellectuals and This is a long essay It was published in the Journal of Libertarian Studies in 1989 and Appears again in the volume John Denson edited called the costs of war and this this is a Wonderful essay to read just for enjoyment. I mean if I think everybody likes reading Murray Rothbard. It's so much fun because he's just so full of him information and and quite hot argument and And writes so well Murray was a tremendous stylist a master of using simple straightforward prose in a extremely effective way and This essay I think is Murray at his best But very pertinent to my topic this morning World War one because it It fills in in fact it was explicitly Designed to fill in what he described as a as an omission from my own discussion of World War one in my book crisis and Leviathan and I'm actually proud that I had something to do with this essay because it was written for A conference held in 1986 at which a draft of my book crisis and Leviathan was the topic and a number of outstanding scholars agreed to attend that conference and even to write papers having something to do with with within assigned part of my Manuscript and so Murray was assigned to to write in relation to World War one and this is the essay he presented and so I'm Honored that I had any connection whatsoever with it and I commend it to you Murray's essay argues that despite what historians have often claimed usually claimed Which is that? World War one Killed progressivism and most of them weep for that Murray argues that Indeed World War one was the culmination of progressivism and that it gave progressive intellectuals in particular opportunities to realize various objectives that they had been unable to realize Previously at wartime conditions Far from killing this kind of liberal program. They were espousing Liberal now in the modern sense modern American sense It actually opened up vast opportunities for these post millennial scientists to to impose on the public government policies such as prohibition of production sale of Alcoholic beverages that they'd been unable to impose on society before but not just that many other policies as well and and So in that in that sense, I think Murray argues correctly that World War one was not the end of progressivism, but the culmination of it and If it ever did end it was only after the war Now there's another set of events a couple of events. I want to mention before Getting into the war years themselves Because I think they too need to be seen as On the one hand culminations of the progressive program at the national level and Essential preconditions for the government's actions during World War one. So they're they're Critical parts of both progressivism and war socialism And those two events are the creation of the Fed the Federal Reserve system and The ratification of the 16th amendment to the US Constitution followed immediately by passage of income tax legislation by Congress in late 1913 so I think for lovers of liberty 1913 ranks is one of the all-time bad years because we got the Fed and the income tax put in place in the same year and Those two institutions have proven to be monumental contributors to the growth of government and the corresponding loss of liberty in this country over the past 90 years The the the income tax had a long history of course You'll recall that an income tax was imposed during the war between the states and Became an important source of revenue for the Union government And was carried on for a number of years after the war finally discontinued in 1872 But another income tax was passed in the 1890s Indeed the Democrats always proposed income tax bills in the late 19th century every session of Congress they introduced an income tax bill but when one was actually passed in 1894 it provided for a small flat rate tax on incomes above a fairly high limit so that it wouldn't have affected the great mass of people in any event But the Supreme Court of course declared that law unconstitutional in 1895 so that was a very transitory revival of the income tax But once again its proponents didn't quit and they kept introducing income tax legislation every year They were they were seeking they claimed To provide some offset or some justice as it were for the working classes Who were bearing the brunt of federal taxation? because the tariff was the major source of federal revenue and of course everybody who consumed directly or indirectly imported goods was paying that tax and And in a sense even people who might not have imported consumed imported goods were paying it to because the the tariff for provided protection from competition which allowed some domestic sellers to sell at higher prices than otherwise and so those higher prices can be Viewed as a kind of tax in their own right Now now that that aspect was was well understood and argued by the Democratic Party in the late 19th century or the entire 19th century indeed it was a major argument against high tariffs and And and and so the idea of the Democrats was always that that the rich are escaping because we have this consumption tax on imported goods Which is being borne by the masses and we need to add at least a Class tax to this mass tax The class tax being 19th century lingo for one that would bear on on high income people wealthy people and The idea had always been at least the claim had always been that income taxes would never be applied To the great mass of people. This was a form of tax aimed at the rich well finally The they they brought this issue to into sufficient political prominence during the first decade of the 20th century that even the Old guard Republicans concluded that they couldn't just ignore it and expect to defeat it forever They had to resort to strategy and so senator From Rhode Island Aldrich The leader of the Republican Old Guard Came up with a scheme One was to levy a corporation tax And this was a flat rate 2% tax on corporate income over five $5,000 So once again, this wouldn't have affected very many people directly and It wasn't very big anyhow, certainly by our standards 2% seems almost negligible and Aldrich imagined in fact he He publicly admitted that what he hoped to do by Proposing the corporation tax was to To Placate the public that indeed the rich were being punished in this fashion and that would divert their attention and Passion away from a general income tax but To pretend to be fair at the same time he introduced a bill in Congress which gained passage a In 1909 Providing for an amendment to the Constitution which would permit Taxation of incomes and therefore get around the Supreme Court's Pollock decision in 1895 declaring income taxes Unconstitutional because they weren't apportioned according to population as the Constitution requires all direct taxes to be so this was a scheme and One it didn't work Because Aldrich never thought that the this proposed amendment would gain ratification But within just four years it had passed around enough state legislatures to To get the required number of approvals and indeed it was ratified in 1913 and as soon as it got the ratification President Wilson convened a special session of Congress for the purpose of Passing new tax legislation and they they did late in 1913 Enact a law lowering tariff rates and imposing an income tax Now unlike the the income tax of 1895 at the flat 2% rate this one was a graduated rate Tax started at 1% But it was a class tax the lowest Income affected by this 1% rate was $20,000 and In 1913 that was a very large income so a mere handful of Americans earned more than $20,000 a year in 1913 certain certainly no more than one or two percent and So it looked as if indeed it it touched only the very rich and Even they to start with had to pay only 1% Marginal rates so again negligible. It's almost a token right beware of tokens tokens often amount to feet in the door and this was the Best case of foot in the door I could ever imagine in American history The rates ran up from the 1% up to a rate of maximum 7% and that that was on an income of I Believe a million dollars if I recall correctly There's a table in my book 1% you had to have an Income of $500,000 I Suppose that was pretty much a Rockefeller and Morgan I don't know if there were more than a half a dozen Americans who had incomes of more than half a million dollars a year in 1913 so so this looked this looked like a definite token tax on the rich but All we have to do is move forward to 1917 and 18 and we see that during the war the government's quest for revenue led Congress to alter the tax so that on the one hand the the bottom rate was raised from that 1% to 6% and And the bracket to which it applied was shoved way down so that instead of having to start paying tax on Income over 20,000 it now became in 1917 income over 2000 And that that swept the entire middle class into tax liability And the top rate was pushed from the 7% it started at to 77% a near confiscatory rate Applicable to incomes of a million dollars or more Now you may recall that after the war The tax rates were lowered under Secretary of Treasury Mellon's leadership But never lowered anywhere near the pre-war Rates so that despite a series of tax rate reductions in the 1920s the war brought about a an enduring increase in the magnitude and incidence of income taxation by the federal government and Of course, it was a major source of revenue to the government to pay for its war program Now I've put a little diagram scheme up here To organize our thinking about what the government was doing during the war The basic economic problem of a government that goes to war if it's an a war of any substantial size is that it suddenly needs to get command of more resources than Then it then it currently commands And it's got to divert goods and services from the uses. They would otherwise serve civilian uses For consumption and investment purposes and to to production of military goods and services So how can it make that? Reallocation of resources Well ordinarily what we see the government doing to to reallocate resources is Is getting money somehow from people usually by taxing it away from them and then using that money to purchase? on markets what it what it wants to use and Normally Most of what the government Uses it pays for At least formally so the question is to get money you can you can tax as I mentioned yesterday one way you can tax without appearing to tax is by inflating the money stock and if the inflation is Is designed so that it gives First or early use of the newly created money to the government itself and invariably it is so designed Sometimes because the government just prints the money as the union did when it printed the greenbacks during the Civil war or sometimes because the government works through the banking system to to make newly created deposits available to itself either at the first or second round and The government gets early use of the new money and therefore is able to spend it for goods and services Before it is fully depreciated Which it it becomes as it passes through the economy with a succession of purchases and repurchases so taxation can be direct or it can be by by means of inflation and during wartime nearly every government war program has Relyed quite heavily on inflation at least to some extent and during World War one the government relied quite heavily between 1914 and 1920 the the the money stock of the United States approximately doubled and As a as a strict quantity theorist would have forecasted Voila the average price level of the country approximately double too So it was a very straightforward to inflationary episode But if we look at how it operated and where the money went we see that a great deal of it went To help the government finance directly or indirectly purchases of war materials So that's taxation now People don't like to be taxed and when government makes taxes Higher and and expands the incidence of taxation during war for it fair you make even more people unhappy and so that Presents a constraint to what the government is trying to do if you tax people too heavily They'll decide that this is just more burdensome Adventure than then they care to to to tolerate governments all understand that and So they like to if they can Somehow carry out their wars without making people aware of just how burdensome they really are Now the inflation tax is is one good way to do that Partly because most people can be fooled into thinking that the inflation is something like an act of God It either just happens, you know, where'd that come from or or or it's something caused by evil capitalists After all it's the it's the storekeeper that keeps raising his prices, isn't it? He must be causing the inflation so this this way of of Diverting the public's attention from from the true workings of inflation Can be counted on to to keep people somewhat placated But nonetheless all governments try to borrow money to pay for their big wars and About two-thirds of the government's expenses of World War one were covered with revenues obtained by borrowing And that's where these Liberty loan Drives came into play the government had a series of big bond sales And they called their bonds Liberty bonds of course because during the war they called everything Liberty this was a beautiful Example of Orwellianism in action as governments at war always are They always call things the exact opposite of what they are As in the term Peacekeepers, you know those being armed men who go about killing people in foreign lands and so forth, but the these bond drives Allowed the government to get its hands on eventually some 25 billion dollars in new new revenue to to go toward paying for the war and That was no small sum in those days the the gross national product was in the neighborhood of all about 70 Billion dollars a year so this is a very large amount of borrowing the government was undertaking at the time I want to remember that this whole episode we're talking about American involvement in World War one extended over only about 19 months The war in Europe had gone on for years before the United States declaration of war. So this country was a very late entrant and a lot of things happened in 19 months. This was a Feverish time for government action Now if the government is going to borrow money It may find very easily that that the only way it can borrow large sums is by offering Those people who lend to it higher rates of interest Otherwise, what I mean, what is the inducement for them to change their current behavior if they're already Allocating their savings in optimal ways and why should they change? The government comes into the market and it's got to bid Loanable funds away From other who seek to borrow those funds So it does that in an open market by offering a higher interest rate Well, the government doesn't want to do that. It doesn't want to offer a higher interest rate because that again Has to has to be covered somewhere by tax revenues Later if not sooner So to prevent its cost from from mounting Because the cost of servicing that debt Becoming enormous as they would have if the government had openly openly bid against others In the in the loan market It can make life a lot easier if it can somehow find a way to increase the demand for its securities artificially and It does that again through inflation If the Federal Reserve system Takes measures to to pump bank reserves into the commercial banking system Then all these banks find themselves flush with reserves and they look around for ways to land or invest the money and One of the options that banks invariably consider in this country is a purchase of government securities So now we've got a perfect Meeting of the methods here banks get our flesh with Reserves there they're looking to invest in a secure way and And the government is is wanting to borrow money. Yeah, what a what a nice match So during World War one the banks either themselves Purchased government securities and indeed the Fed changed the regulations with regard to bank purchase of Government bonds to encourage them to purchase them directly or Again, they can lend the money to to individuals and firms Who themselves then have the means to invest in government bonds? and so in Various ways inflating the money stock through through the operation of the Fed Acts to make borrowing easier by increasing the demand and holding down the increase in interest rates that otherwise would occur So inflation is operating through that avenue as well and finally if if just Paying for goods and services is not getting the job done and For some purposes it never does Then the government has a third option, which is just go take what it wants and It can it can take it directly as it were at gunpoint it can force people By just passing laws authorizing it to confiscate your goods or services The most important resource we're talking about here is human labor and life Because most people don't want to sell those resources Accepted a very high rate and of course if the government had to pay market rates To get young men to to serve as cannon fodder in the trenches of France the cost would have been enormous But if it can just compel them by threatening to put them in prison If they don't join the army Then it can acquire a soldier's services cheap Data private only only earned about thirty dollars a month during World War one that that that wasn't even what a common laborer in agriculture made in those days, so Virtually token payment was being made to ordinary soldiers and Of of the four million people who were ultimately Part of the US Army by the end of the war 2.8 million of them were conscripts So some 70 percent of all the people who served in the army in World War one were drafted and Of course some of those who voluntarily Enlisted have to be understood as having done so in order to avoid being drafted because on some occasions one can get a better deal by joining then by waiting and being drafted a better assignment of duty in addition almost to 700,000 Men served in the Navy and some of those also need to be understood as having joined the Navy in order to avoid Being drafted into the army The worst fate of a draftee of course is that he'll end up in the infantry and Nobody wants to be there because even if you don't get blown to smithereens And the chances of that were quite considerable in World War one It's extraordinarily unpleasant to live outdoors in the rain and the cold and the heat and the mud and the excrement and the rats and all the rest of it if you've read it read about Conditions in the trenches in World War one. It's just horrifying just to be there Not to speak of the fact that people are under bombardment much of the time living in terror that they're going to be killed or gassed so $30 a month wouldn't do the job and So they just took these men and forced them to perform the service Now while doing it they glorified it Because they hoped that would ease the skis They hope that if you provided enough patriotic hoopla surrounding the induction of men into the armed forces that that would begin to To make them feel a little better about it and Diminish the degree of resistance that they or their friends and relatives and neighbors might otherwise put up And so the Wilson administration when it began the draft carefully prepared hoopla all over the country so that the newspaper editors and local committees all joined forces in Trying to glorify what was being done by conscripting these men and And some people had expected a great deal of resistance indeed when the draft law was being debated in Congress some members of the Congress Forecasts that there would be blood in the streets that there would be draft rights again as there had been during the war between the states But there were none And I and I think there there were at least two important reasons why they didn't happen Maybe three actually the third one being that a considerable number of people just Evaded the draft in World War one. They never registered or if they did register They didn't show up when called So the evasion rate was as I remember about 10 or 11 percent But aside from that and the hoopla The army had learned something from the experience of draft resistance in the 1860s In those days the draft was enforced by the army itself So if you were called to report and you didn't show up Some soldiers appeared at your door armed and dragged you off Well, that's Crude That's too blatant that makes it too obvious what's being done. So in 1917 the army had developed a system for operating the draft Which took the army itself out of visibility for? running the draft Civilian draft boards were created in districts small districts that covered the whole country and Civilian volunteers from those neighborhoods were recruited to serve as members of the draft boards They had to comply with general regulations concerning Qualifications for the draft and what have you but nonetheless They had considerable discretion within the bounds of the general guidelines in deciding which specific individuals they would draft From the number they were given as their quota That that meant to several things it meant first of all that whatever kinds of local Prejudices happen to exist in that draft district were likely to be reflected in the operation of the draft so that if you had a Draft in places where people hated the Irish then they'd probably draft a lot of Irish guys before they drafted others There were many claims made that in Many draft to districts in the south blacks were were treated shabbily and that's easy to believe in the time and place But all sorts of prejudices might be indulged when you put this sort of power in the hands of People with discretion At the same time this system Made it look as if Well, this was just all community defense effort You know it was mrs. Jones and mr. Smith who were selecting you to defend the neighborhood it wasn't the president or the or the The army leadership in Washington DC and you know, it wasn't even armed men at all It was just your your neighbors and civic leaders So it made it look all very democratic as opposed to military and regimented There's a remarkable statement made by the military commander in charge of designing this system and I quoted in my book and I'm going to read it again. It's so astonishing It's It starts at the bottom of page 133 and it's a statement by provost marshal general in a Crowder who was the top leader of the army's draft apparatus and He's describing This is actually published In an army report The operation of draft boards. He said they acted as buffers between the individual citizen and the federal government and Thus they attracted and diverted like local grounding wires in an electric coil such resentment or Discontent as might have proved a serious obstacle to war measures Had it been focused on the central authorities It's diversion and grounding at 5,000 local points dissipated its force and Enabled the central war machine to function smoothly Without the disturbance that might have been caused by the concentrated total of dissatisfaction That is such a a perfect expression of Machiavellianism When I read that I thought I can't quote this people think I made it up This man wrote this for the whole world to see Basically saying we've found a way to organize our coercion So that we can get away with it, although we know what we're doing We're grinding you raw materials into our war machine You don't want to be ground, but we're getting away with it because we've cleverly organized the grinding Just amazing so you can take by force by trickery and Intimidation is good, and that's where all the Supercharged patriotism came into play the Wilson administration organized as many public opinion leaders as it could think of to try to Stir everybody's emotions up now When it comes to propaganda, I think even to this very day the British are the masters and In World War one they had not only got their way ahead of us But they had got to the United States way ahead of us And they had actually told our authorities how to do things They had shown the way in propaganda You know it was the Brits who invented all these lies about German atrocities in Belgium and babies on bayonets and and all the rest of this hogwash For their own purposes But one of their purposes of course was to induce the United States of America to come into the war on their side And that had been the case from the very beginning now the United States had been important to Britain even early on in 1915 and 16 as a provider of raw materials very important so We were in the war just not a belligerent in the war and But once we did become a belligerent We had not mobilized the armed forces armed forces the United States all together army in the Navy 1916 I had fewer than 200,000 personnel That's that's nothing I Mean there must have been tiny countries in Europe with bigger armies than that. I mean I'm sure places like Bulgaria and Romania had huge armies compared to that and and they were nothing compared to Armies of millions like the ones in Austria and Germany and France and Russia and and even Great Britain So so the United States was not really in a position to be a very decisive Direct military force, but it was in a position all along to be a terribly Decisive force in terms of munitions supply and it had already been doing that and it and it did that in an even bigger way in 1917 and 18 and once it did begin to build up its armed forces as I said it built the army up from from From about a hundred and fifty thousand men to four million men in less than two years time And it managed to get two million of those men to Europe by the time the war ended and When the German general staff looked out across the water it could see Enormous potential out there for the Americans to just keep pouring fresh well supplied troops onto the Western Front and that was what led the Germans to say We must seek a settlement So America was decisive in this war as it turned out it because it It had the potential to be militarily decisive Besides being very important in terms of supplies to the French and the British When the government set out to build up this big armed force it had to take whole variety of actions to Supply the training facilities the the bases the housing the subsistence the equipment The arms the ammunition This was a very big undertaking For which as I say there had been very little prior preparation There had been a certain amount of fumbling study About what they ought to do to organize industry for war purposes in 1915 and 16 but not a great deal had come of it other than Formation of a few boards and accumulation of some information about industrial capabilities But in 1917 they had to get serious because they started appropriating billions of dollars for the army and Navy to go out and buy goods and services and So the purchasing agents went forth and they started bidding things away from other potential purchasers in the markets now that began to force up prices of course we've got this infusion of new demand Coming coming into the market and as that happened then the government realized well This is not good This is going to cost a fortune And that means we've got to raise taxes or we got a we got to somehow find a way to sell more bonds So we just see problems growing out of this. So what can we do to diminish the magnitude of these problems? How can we we keep a grip on this vast mobilization effort? and The government's work planners realized that that that they could use controls of various sorts To to interfere in the operation of the price system in a way that would hold down the government's Visible costs of making war. Now. Remember the true costs of making war are whatever they are You keep you can't do anything about that There's certain sacrifices are being made in order to use resources for war purposes They're being made those costs are being born whether people know they're being born whether they understand them whether they see them Nonetheless Those those costs are inevitable when you divert resources to war purposes But for political purposes It makes all the difference in the world how people appreciate the costs Do they see it? Do they understand how big it is? those kinds of things influence political action and even the viability of the government itself because it even though there was a lot of Approval for America's initial entry into the war There was at the same time quite a lot of serious opposition The and not just from radicals and socialists They opposed and they they were not inconsequential in 1917 in this country But but others also were were Opposed some even aghast Remember we've got all these millions and millions of immigrants and children of immigrants And who are the two biggest immigrant groups? Germans Well, most of them think this is a horrible idea to go war against Germany and irish And they would rather die than help england So you've got the large groups of people already predisposed not to speak of Masses of people in the midwest part of the united states who had thought going to war was stupid And they couldn't see any reason to do it to begin with most of the war support before 1917 had been Concentrated in the northeast and much of that manufactured by rich people Then what Murray Rothbard would call the Morgan Ambit People of that sort But The point is that the government had to take into account opposition And it under understood that opposition would grow If it made the costs of the war too visible and made people Fully aware of how great they were and and were were going to be so controls offered a way to to conceal costs And to allow the government to carry out objectives that otherwise would have been at least financially much more visibly costly As the the government began to purchase a lot of munitions a certain raw material prices rose a great deal and in some cases became almost impossible for manufacturers to get hold of various raw materials at least to get hold of them at prices that made them Worth using anymore And so that that created a lot of squawk and it also began to distort the structure of industry A whole industry's found that you know, they were going to bind How can we keep operating? If we have to pay five times more for copper than we did before Even before the war started People engaged in international commerce Had discovered that shipping rates had gone up so much that It was uneconomic for them to even bring goods from Places such as australia or south africa or south america because it It it cost too much to transport them And they had set up so much howl That the government had passed the shipping act in 1917 Creating a federal board the shipping board empowered to set shipping rates for international shippers And other terms of service for people in that industry It also Empowered that board then and even more later in amendments to the legislation to to basically take over the whole ocean shipping industry Which eventually it did Uh Including just just confiscating Property rights over all ocean ships of more than 2,500 tons. So all But the smallest vessels were basically placed at the disposal of the government Which told the owners and the ostensible owners A What they could get for their services assigned routes assigned cargos So in all that Formal status the ocean shipping industry was nationalized during world war one So that that was one way of dealing with rising costs. It just Just have the government set the set the prices and and they can hold them down then It didn't mean by the way that the real scarcity of shipping was in any way alleviated There was still a fact that there were only so many ships there and that some were getting torpedoed regularly And that the french and the british ocean shipping services were Down to almost nothing because they had withdrawn their ships for their own war purposes and the german shipping and the austrian shipping and had Retreated into safe ports or been interned in foreign countries. So that wasn't available So the fact of scarce shipping was just a fact of life and all the all the price manipulation in the world couldn't change that now In a way the government understood that too It understood for example that in order to make a military impact in europe It had to get its army over there and that required in itself a huge amount of shipping So it it decided it would just have to Produce the ships and the shipping board was authorized in 1916 to create a subsidiary for the purpose of constructing and operating ships and that was called the emergency fleet corporation During the war and then the merchant fleet corporation afterwards when it persisted and operated Government shipping line losing money every year so They started building ships, but again The government had only a few naval shipyards. It didn't have the capability to build hundreds of merchant ships So before it could build the ships it had to build the shipyards So it set about doing that and in some places such as hog island near philadelphia it built these massive shipyards And and and that took time See I keep emphasizing the the united states entered this war very late and it's not ready So it's got to take all these frantic efforts To do what needs to be done to be an effective belligerent. So it has to build these shipyards Then they start building ships. Well almost none of these ships was actually completed By the end of the war a lot of them were Well along A few of them were completed not many But the great bulk of them Didn't get finished until 1919-1920 And so there's the government stuck with a lot of shoddy merchant ships for which there's really no demand at that time It it sold two-thirds of them in the 1920s at very Attractive rates basically said here take this ship It's yours Still had about a third of what it had built in its hands And as I say operated those ships commercially but at a loss which had to be made up by congress so the The shipping was never really provided by the united states and almost all the shipping services that took american troops and supplies To europe was actually provided by british ships british of course had the big merchant navy as well as the Navy proper of the world at that time So I suppose there was a kind of justice there It was really on their behalf that america was in the war to begin with so and at least they provided the ships to carry the us army to france the war industries board was Created by executive order by by wilson first and then it was authorized by congress later on And it was the major government agency for controlling industry In order to do that it divided itself into several dozens of so-called commodity sections and these were according to product areas such as leather lumber steel a non-ferrous metals and so forth so They they created these Subcommittees as it were And they brought in businessmen Because remember this is this is a very small government still the federal government in 1917 they'd They don't have a bunch of experts on industry as part of the bureaucracy What do they know about how the copper industry operates? Well, approximately nothing So how can they control the copper industry and try to divert copper away from civilian uses into military uses? How how can they figure out how to conserve materials? They don't have a clue the only people who know how to do this are people who run these industries So they go where they have to go They go to big businessmen And these guys Are pretty much happy to serve And in fact the historical literature on the war industries board The best Work the leading work is by historian named robert cuff cu f f I believe the title is the war industries board But cuff and the other historians have Almost all concluded that the war industries board was a kind of business man's conspiracy And these guys were just serving to To cartelize and otherwise to promote the interests of their own industries and firms I've actually looked into this enough to conclude that that's not quite right There's certainly more than a grain of truth to it But if one looks at what was actually done by the members of these government boards during the war One sees that they they in a sense took their Responsibility to the government quite seriously at the expense of firms in the industry on many occasions and one of the Factors that has misled the the historians who've written about these episodes is that they they think Business was much more profitable during the war than it really was And they make that mistake because they don't appreciate the extent to which the purchasing power of money Failed during those years So very often they look at What these companies were earning before the war and they say ah look at how much they earned in 1918 They were making so much more once they had their pals controlling Resource allocation in the industry or setting prices But if you adjust for the inflation And you adjust for the extraordinary corporation taxes Being levy that was a major source of government revenue in world war one corporation taxes And not only did they have a high corporation income tax, but they had a surtax on top of it So when you make adjustments for all of those things You find that even in extraordinary cases. I looked at the copper industry for example, which is often used as an example of profiteering They weren't making more money during the war. They were making a lot less During the war and if if it seems that the nonferrous metal guys that the war industry's board were We're working on their behalf. Well, maybe they were but they weren't doing a very good job of it because the industry was still Taking a big hit from the way they were compelled to do their business during the war so So you had this kind of Operation going on the war industry's board used priorities. It assigned categories like a b c and even subcategories like 1a 2a and 1b 2b and so forth And it devised a system whereby when people ordered industrial materials, they had to use the priority Given to them by the war industry's board and attach it to their order So that if I wanted to buy some steel plates, for example, and I was making Oh, what what do we say? I was I was making Some kind of farm equipment Well, I would have an assigned priority. Maybe it was 1b And I would send my order to us steel I want to buy this much of a certain kind of steel and it would say 1b on my order form And us steel was obliged by the war industry's board to not fill my order Until it had filled all the orders it had with higher priority ratings So it was a ranking system now Of course everybody wanted a high priority And so there's a lot of jockeying and lobbying and businessmen were constantly going to washington or calling up their pals in the commodity section to try to get their rating improved or changed and everybody claimed to be critical for the war effort And and as a result There emerged what came to be called a priority inflation which is to say Almost all the orders were showing up with one a or two a Ratings and and and there were more of them than the suppliers could feel So they never got to anybody with a lower priority rating. They weren't being served at all But even all the people with the high priority ratings weren't getting served quickly and And so in effect the priority system tended to break down because of its mismanagement by the war industry's board itself And that created more problems indeed The interesting thing about The economic controllers during world war one is that when the war was over They claimed to have been enormously successful Now the the head of the war industry's board was bernard baruch Baruch had been a very successful Independent capitalist although he was he was closely associated with the guggenheims and and other very important capitalist interests before the war but but baruch After heading the war industries board Set about after the war Immediately actually before the war ended I would say he said about Mythologizing his great contribution And he got to people like grovner-clarkson and others to write books about the the great success of economic control during world war one of course under the glorious leadership of bernard baruch and all his wisdom and and He managed to propagate not only by getting these books subsidized But by then sending out copies to libraries all over the country and by by feeding material to Reporters he had close links with at major newspapers He managed to make the public believe And historians to believe for a long time that this economic management had been hugely successful But in fact if you go back and follow it what you find is that It was it was a mess It was a mess from the beginning and even though they were able to make certain adjustments and put out certain fires New ones would break up because consider what they're trying to do They're trying to allocate resources in a huge Industrial economy without use of the price system They're trying to set aside the normal operation of the price system where Millions of people with their own demands and supplies Determine the conditions of all the the prices and other other conditions of exchanges and they're trying to order what those Prices and what those terms of contracts will be From on top with a relative handful of experts that can't be done Even guys who understood the workings of the copper industry didn't know what the price of copper ought to be Nobody knows that that's that's something emerges from market exchange And when it emerges it expresses some information That cannot be summarized in any other way It automatically expresses The terms of trade of all the people who participate directly or indirectly in the entire market system and there's no way to get at and agglomerate and bring together and and compress into a piece of information a price That all of that information in any other way no expert can know it but they were trying to Substitute their judgments and their guesses and their wishful thinking for the operation of a price system And and as a result they were creating what amesis always said would come out of such planning chaos And In more than one instance they they owned up to how they were committing chaos in my book I reproduced some of the contemporary reports about how they were short on critical materials for certain Munitions and they couldn't get them because if they use them there Then they wouldn't be available for some other critical munitions. Well that sort of situation Is pervasive in any normal economy Those kinds of fallops would be happening everywhere all the time but for the price system We we don't know how lucky we are Those of us who have studied austrian economics may know how lucky we are to have the price system But all the these planners and people who think they can do a better job Or somehow substitute expert control for the operation of the price system don't understand Exactly what it is a price system is doing The upshot was that if this war had lasted much longer It would have become clear to everybody what a mess was being made So bernard baruch and company got out of this mess just in time Uh the end of the war saved them from the revelation Of what a mess they were making of war planning And the historian who who approaches this whole experience with the knowledge of austrian economics To guide his observations can see what they were doing and where it was leading But people who lack that kind of preparation for the study have missed it So That was the the upshot of the industrial planning Now when I say this I say they make a mess it doesn't mean nothing was accomplished Okay, even the ussr did something They made some tanks they produced some rockets Central planners can do something So these guys did enough that they could walk away from it saying look at all that we accomplished But what no one sees is the value they sacrificed because that's not a visible thing You can't you can't point to it and say look at how much it cost For them to produce the visible result they produced And and that allows these these planners to get away with murder as it were in terms of waste Now industry is not the only place they needed to to deal with similar situations In food and in agricultural raw materials in fuels Uh across the board in the in the economy the same kinds of of problems arose Problems of of trying to beat the price system To rig it so that the government could steer resources into war purposes and away from civilian use And the the problems were met in different ways in in the case of Food the the food administration was was created first by executive order and then in 1917 by congress Under the lever act Of that year the lever act was really one of the more draconian pieces of legislation We've ever had in this country Because it authorized the president and his delegate the administrator of the food administration who who was herbert hoover to Require a license of every everybody who Processed or bought and sold agricultural and raw commodities So that if you were in the wholesale food business you had to have a federal license If you sold any agricultural inputs seed fertilizer equipment You had to have a federal license and of course all these licensees had had to adhere to the conditions of the license And and the food administration was authorized to dictate not only prices and other terms of contracts But even profits To set limits on how much profit could be realized They were authorized to Support the price of wheat at no less than two dollars per bushel and they they in fact Supported it at a price of two dollars and twenty cents A bushel throughout the war operating the wheat market through a subsidiary the u.s. grain corporation which Manipulated the market by buying and selling grain With capital provided by the taxpayers They also Operated the sugar industry the same way by taking control of that and creating something called a sugar equalization board which With taxpayer money manipulated purchases and sales of sugar and took complete control of imported sugar So that among other things they they bought sugar cheap from the cubans and resold it at a higher price domestically so they were they were rigging the The sugar market And and again as the government had done in conscripting labor It discovered that in order to to pursue its food conservation programs. It could be most effective by creating a A whole bunch of local boards And so the food administration created thousands of boards for counties every county had one for cities states all volunteer man And woman because some of these food board volunteers were women and These local tyrants and that's what you have to I think recognize they were you know like thousands of little hitlers Were empowered under the lever act in effect to tell people what to eat When to eat it how to eat it? and and so the degree of detail of their regulations was pushed down to the level Of declaring things like porkless Mondays and wheatless Tuesdays and and and meatless Fridays And and besides you know the absurd detail They they would switch around for month to month if they decided that well You know the county's kind of short on bacon this month. So we're going to baconless Wednesdays next month And having set these regulations then they would encourage everybody to spy on one another And to report violations and to intimidate each other A lot of this this action in world war one is reminiscent of of what we read about At china under under mouthsy tongue Where people were all spying on each other reporting little deviations You know carrying checking the little red book to see if people were adhering to malice philosophy Americans in 1918 were spying on one another's meals You know Are the smiths having pork on Tuesday? Well, I'll report them to the authorities Not only the food administration But the treasury department created a cadre Called the american protective league of some 250 000 junior gmen who actually had little make-believe badges And they they felt that they were empowered to go around and find slackers That was a term that somebody cooked up for people who were Most of all evading the draft But if not that then just not complying with some government edict whether it was a food regulation or anything else And so the american protective league would would would conduct what amounted to vigilante raids of all sorts And they'd burst in on a bunch of poor damn irish guys to find which of them hadn't shown up when called for the draft And and and they would drag people off to the police station And make these semi citizens arrests of them And so we we had this kind of out of control quasi patriotic semi organized hysteria Loosed up on the united states of america the so-called land of the free And and to go back and read about the the united states in 1918. It is a shocking thing How could this happen here? How could people act like this? and I'm not sure I have the answer the answer seems to be that you can stir people up if you work Hard and the wilson administration indeed worked very hard They created a war information committee came to be known as the creel committee after its head george creel and they organized these artists and preachers and actors and and school teachers and anybody else they could get to To become instant patriots and to exhort congregations or classrooms or people on the street corner To obey tax laws pay your taxes buy bonds conserve food Plant a victory garden blah blah blah blah blah. You know, there's a whole list of things the government says you should be doing So get in gear and do it Uh the railroad industry I talked about before Because it had been the object of government's loving attention for decades and as a result of the interstate commerce commission's actions In the early 20th century the industry had been damn near ruined by the time the war started Now when the when the government mounted this huge mobilization effort it made matters even worse By concentrating its orders for industrial materials in the northeastern part of the country to some extent that was inevitable because that's where most of the industry was But it's still concentrated orders there that might have been placed elsewhere And that put more pressure on the railroad network in the northeast Which is a relatively small area in any event And so they were trying to work all of these shipments of munitions onto a A limited number of rail routes to bring them to just a handful of ports to be sent to europe So they were creating congestion that could have been avoided Now once again, if you didn't have government planners Hey, the price system takes care of this Normally if you're just shipping things Products to europe from somewhere in the interior and you find there's big delays in in shipping them via new york port Well, maybe you ship them to philadelphia or baldemore or some other place You take care of that everybody makes adjustments that suit the particular conditions of time and place But government planners make these one size fits all decisions and they say You know munitions type x are all going out of new york So everybody's got to End up sending shipments over a handful of rail lines that go to new york city So the rail lines were getting congested They were they were having a lot of breakdowns because they hadn't been able to maintain the capital stock of the industry Given the economic squeeze they'd been under for 15 years So there were problems and followed by problems getting shipments physically carried from their origins in the united states to europe and To top it all off At the end of 1917 the weather got horrible and it snowed like crazy in the northeast And that stopped the operation of the railroads from time to time in various places So everything was grinding to a halt And the government realized this was going to wreck the whole program if they couldn't supply their army and provide their allies with supplies and They didn't see any way around it because they had tied themselves in knots The unions were pressing for higher wages again You know they had pressed in 1916 the government intervened and and given them a 25 pay increase by legislation cutting the working day without cutting pay But they came back the following year and threatened the nationwide strike again during the war and there's patriotism for you Railroad unions saying we can shut down the whole machine we want more pay and having a Good stranglehold to make that threat And once again, what's the government going to do send in the army to operate the railroads? They don't know how to run a railroad They can't do it So what it finally did is throw up its hands and nationalize the industry in the last week of 1917 That meant of course that the railroad company still operated the whole apparatus But they had to take their orders from the railroad administration headed by william gibbs macadoo president wilson's son-in-law at that time sometimes known as the crown prince and so macadoo among other things Took care of the labor problem by just raising wages by dictate And he took care of his social conscience as he understood it by raising the wages of Low wage workers more than the wages of higher wage workers. He was very proud of that And and he proceeded to tell the railroads what they had to do in terms of What railroad shipped what car goes where and what the rates would be for that shipment? He raised the rates also But not enough to make up for the increase in cost that he had engineered So the government ran the railroads for the duration of the war and indeed until 1920 when it Uh finally returned them to private ownership although under very onerous new conditions Transforming them into something approximating a public utility from that time forward They had very little discretion over how to run their businesses after 1920 Well in many other ways the government undertook to set aside the price system and to steer resources to war purposes My chapter in crisis and leviathan spells out some of them, but there are many others. I didn't cover in that chapter it's Someone estimated at one time that there there were there were more than 5,000 government boards corporations administrations and what have you Operating at some time some place during the war years and So even entire books can't hope to embrace everything that was done as I've said much of it was delegated down to local levels and so It would be a job just to track how each county food administration Administrator made his decisions from month to month, but but we know enough about the the main leadership and the main control agencies to To understand how they operated and the results they got And again, I think what hasn't been well understood is what a mess they made of it What a mess they had to make of it And the fact that they managed to steer some resources to war purposes Is an insufficient basis for concluding that they Succeeded we always have to say in what sense did they succeed? When mesas said Said that a planned economy cannot work He didn't mean you couldn't have a planned economy that it was you know couldn't physically exist He just meant that you couldn't have one that satisfied the condition of economic rationality So that the resources were allocated in a way that took into account costs A planned economy has no way to know what anything costs because only Market generated prices give us the information by which we can evaluate the cost of anything We'll never know if we made a profit on any deal Unless we have market prices to use as the basis of that calculation So we'll never know whether we've wasted resources or not except in a market system And looking at what was done in world war one. I think it's quite fair to conclude that a huge waste Was uh was borne by the american public So we have a few minutes for questions or comments. Yes, sir How surprising the american people acted there in 1917 We just could write new books on it. Just recently The same spy that worked because the coast office put a spy on people the truck drivers were going for you authorized to spy on people I agree. I'll talk on friday more about that We haven't yet reached the magnitude of the situation in 1917 Although in some ways the government by virtue of using modern technology can do even more draconian things today than it could in 1917 In those days the post office when it undertook censorship, which it did Had to actually open your mail Now of course they can have an electronic apparatus that filters through everybody's electronic mail and we're all vulnerable and And I think they have a capability that's in a way much more powerful than they had when They had to have an actual person Steam open a letter or cut it open and read what was inside that that did put a limit on how much they could do And to whom and where of course they they did grievous things to some people Joe mentioned the other day in his talk that they they sent people prison for 10 years just for Forgiving speeches, which weren't even all that violently in opposition to what the government was doing They they arrested Upton Sinclair and Roger Baldwin for reading the constitution in public So If you if you want to really get a sense sometimes of Just how paranoid the government became Read the sedition act of 1918 In fact, if you like I have a copy In my notes here of part of it and it is amazing that law basically said that the government could arrest and imprison you For anything that they took to be a criticism of the government Or its war efforts or its army or its symbols or a whole list Of trivial things such as the uniform of the military forces So so if a soldier walked by and I said you look like a damn marching band leader I could be in prison for that statement But look at that guy that I had that movie the revolution that Shown the British yes, that's right That's right. He wasn't even commenting on the u.s. Government at all I mean, did they just stick your neighbors on you or did they put you in jail? Yeah, uh, I I think uh In cases like the violation of of food regulations. They probably just tried to shame you publicly Or like the Dixie Chicks One she those people is actually getting threatening the Dixie Chicks Death threats for the Dixie Chicks. Yeah, well Well, there there is a what I think of as the dark side of modern technology, which Which I experience when I write opinion columns and receive death threats by email myself. So It's very cheap to send somebody a death threat nowadays and So naturally people demand more of that. Yes, sir Past on transportation that gave government control all trips Well the army appropriations act of 1916 has a paragraph wedged in there among a lot of other trivia That authorizes the president to take control of any means of transportation for purposes of defense And Or related purposes. So this was actually the authority under which the government did take over the railroads in 1917 Some people have argued including my my old friend John Hughes who who wrote about that provision That it was put in there by people who were Who were thinking about the armies dealing with the mexican incursions And texas border and poncho v had come across the border once or twice in the southwest and And us army troops had had gone to to chase him away and and they'd actually chased him into mexico And while they were down there on that expedition, apparently they They had some trouble getting railroad service for for their supplies and so some members of congress had thrown that provision in to make sure that if that situation occurred again Then the army would be able to get the railroad service that needed on the spot But not by asking but just by demanding That that may be true if it is true though. It just shows how often something Enacted into law for one purpose turns out to serve a very different and and much more consequential purpose later on That is a law itself and clearly they weren't after that because we stuck it in I think you said they stuck it in between Appropriation for building a bridge and and something else. Yeah, something about buying meals, maybe Yeah well If you look at any any big appropriations act congress passes I've looked at a lot of the defense appropriations acts of modern times You'll find them Full of provisions like that the things that you think what is this doing in here? and and they're just stuck in there by members of congress because They know that the big bill is one that's certain to to be passed because the major purpose is one that has Great majority support And so they know if they can stick any unrelated or distantly related provision in there It'll be kept carried through into law Along with the whole body of legislation. So they've been doing that for a long time. It's become more and more common as The past century has gone by I think one recent example might be the ray back Ray that That was the law that authorized the amber alert Which is a real good idea, but touch in there someplace. It's a law that The government can shut down any event right where someone can Even potentially use any kind of a drug that isn't what I wanted to ask what I wanted to ask was What is the name of the rock fire? I say again it's called World war one as fulfillment Yes, yes Yeah It's in the first edition too. I believe Joe Yes, I want to mention But there was an article about 1922 and Something like some popular magazine like the very digest or liberty or something to get you back. I have the citation somewhere it was about the People in some places like the Northwest Arkansas just sort of ignoring the draft and they came around the draft and they just Go ahead with Michael song. So I just kind of move around So the article There was a there was a really interesting little piece On lou rockwell's site yesterday about the british portrayals of the kaiser Maybe some of you read it They recruited a belgian art dutch artists who Who came up with this? grotesque cartoon imagery of kaiser vilhelm Who who was You may know the grandson of queen victoria and he was a not so distant relative of the house of winsor At the time of world war one. So as usual, you know, the european aristocrats are having wars with one another again But they they managed to get this this this image that made him look like a cross between a crocodile and some kind of a devil figure and And this was then carried to the united states and and used here and they they managed to make out the kaiser Is this there's this diabolical evil figure when They hit relatively little to do with anything it seems Certainly didn't bear responsibility for atrocities of world war one Well in a sense no because the the debt At the end of world war one had been run up from about a billion dollars which you know It'd been almost not existent before the war and it was about 25 billion at the end of the war And if you follow it afterwards, even though it came down some in the 20s Then it started back up again. And of course ever since then it's been going back up So if you think in terms of the debt being like water in a bathtub It's never been emptied Since since 1914 So even after the second world war In the early in the fifties the government we've never been free of debt at all. Oh, no, no, no, no not even close They the the debt incurred in world war two was huge. So the the debt at the end of world war two was uh Was about 250 billion as I recall and There there were almost never any significant surpluses thereafter. So there were there was no paying down of debt You know, we had a few years just recently the 99 2000 2001 where a little bit of debt was was paid down, but it's trivial Compared to the size of the debt. So no, I mean basically it's only kind of gone up in stages ever since 1914 Paid on interest Right now, I think it's a No, I think it's about 13 percent of of the federal budget right now is for interest costs on the debt I I actually have those data with me so I can look it up Well, we'd better call a halt to this session. Thank you very much