Crisis and Liberty: Lecture 5

0:00Good morning, ladies and gentlemen. Welcome back. We're almost at the halfway mark for this series of talks. So if you've made it this far, the downhill slope is within sight. And I'm happy to say that I believe my voice has made a slight recovery, So that I'm optimistic about being able to continue to the end myself. 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 in the gutter of the whiteboard.

0:50These are genuine miniature replicas of World War I posters, which constituted a remarkable and 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 memorable in various ways, not only for the artistry, but for the kinds of sentiment expressed in them and the themes that the artists decided to use as their points of emphasis.

1:39Many 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 sending your sons off to die at the front, so there's a little bit of everything so far as the government's war program was concerned that the artists decided to join in promoting, and these posters are really quite astonishing, this little one in the middle was something 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 and the 4th 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.

2:58So, it was 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 was it about these people that made them capable of suddenly becoming that way? You might not have suspected before the war began that Americans were capable of behaving that way, and yet clearly they were. They must have had some kind of pent-up hostility, longing for an outlet, at least a great many of them.

3:52I 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 I as Fulfillment. The 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 is a wonderful essay to read just for enjoyment.

4:39I think everybody likes reading Murray Rothbard. It's so much fun because he's just so full of information and quite hot argument and writes so well. Murray was a tremendous stylist, a master of using simple, straightforward prose in an extremely effective way. And this essay, I think, is Murray at his best, but very pertinent to my topic this morning, World War I, because it fills in, in fact, it was explicitly designed to fill in what he described as an omission from my own discussion of World War I in my book, Crisis and Leviathan.

5:31And 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 an assigned part of my manuscript and so Murray was assigned to write in relation to World War I and this is the essay he presented. Murray's essay argues that, despite what historians have often claimed, usually claimed, which is that World War I killed progressives, that historians have often claimed, usually claimed, which is that World War I killed progressivism, and most of them weep for that.

6:46Murray argues that indeed World War I 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, and the liberal now in the modern sense, modern American sense, it actually opened up vast opportunities for these post-millennial pietists to impose on the public government policies such as prohibition of production, sale of alcoholic beverages World War I was not the end of progressivism, but the culmination of it, and if it ever did end, it was only after the war.

8:11Now, 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 I. So 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 U.S. Constitution followed immediately by passage of income tax legislation by Congress in late 1913.

9:14So I think for lovers of liberty, 1913 ranks as 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 income tax had a long history, of course. You'll recall that an income tax was imposed during the war between the states.

9:59It 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.

10:48But the Supreme Court, of course, declared that law unconstitutional in 1895. So that was a very transitory revival of the income tax. Tax, but once again its proponents didn't quit and they kept introducing income tax legislation every year. 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 you consumed directly or indirectly imported goods was paying that tax and in a sense even people who might not have consumed imported goods were paying it too because the tariff 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 in their own right.

11:58Now, that aspect 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 so the idea of the Democrats was always 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. A class tax being 19th century lingo for one that would bear 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.

12:51Well, finally, they brought this issue into sufficient political prominence during the first decade of the 20th century that even the old guard republicans concluded that they couldn't do anything about it. 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 a senator from Rhode Island, Aldrich, leader of the Republican Old Guard, came up with a scheme.

13:45One was to levy a corporation tax, and this was a flat rate 2% tax on corporate income over $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 publicly admitted, that what he hoped to do by proposing the corporation tax was 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.

14:39but to pretend to be fair at the same time he introduced a bill in Congress which gained passage 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 that didn't work because Aldous never thought that this proposed amendment would gain ratification.

15:28But within just four years it had passed around enough state legislatures 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 did, late in 1913, enact a law lowering tariff rates and imposing an income tax. Now, unlike 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, certainly no more than 1 or 2 percent. And so it looked as if indeed it touched only the very rich and even they, to start with, had to pay only

17:22An income of, I believe, a million dollars, if I recall correctly. There's a table in my book. One percent, you had to have an income of $500,000. I suppose that was pretty much Rockefeller and Morgan. I don't know if there were more than half a dozen Americans who had incomes of more than half a million dollars a year in 1913. So 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 bottom rate was raised from that 1% to 6% 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 $2,000 and 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 Indian

19:07Incomes of a Million Dollars or More. Now, you may recall that after the war, the tax rates were lowered under Secretary of the 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 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 a war of any substantial size, is that it suddenly needs to get command of more resources than it currently commands.

20:22It's got to divert goods and services from the uses they would otherwise serve, to civilian uses for consumption and investment purposes, 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 reallocate resources is getting money somehow from people, by taxing it away from them, and then using that money to purchase on markets what it wants to use. Normally, most of what the government uses, it pays for, at least formally.

21:15So the question is, to get money, 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 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 make newly created deposits available to itself either at the first or second round.

22:05The 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 becomes as it passes through the economy with a succession of purchases and repurchases. So taxation can be direct or it can be by means of inflation and during wartime nearly every government war program has relied quite heavily on inflation at least to some extent and during World War I the government relied quite heavily. Between 1914 and 1920, the money stock of the United States approximately doubled, and as a strict quantity theorist would have forecasted, voila, the average price level of the country approximately doubled too.

23:07So it was a very straightforward 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 expands the incidence of taxation during warfare, 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 they care to tolerate.

24:02Governments all understand that and so they like to, if they can, somehow carry out their Care Wars without making people aware of just how burdensome they really are. Now the inflation tax is one good way to do that, partly because most people can be fooled into thinking that inflation is something like an act of God. It either just happens, you know, where'd that come from? Or it's something caused by evil capitalists. After all, it's the storekeeper that keeps raising his prices, isn't it? He must be causing the inflation. So this way of diverting the public's attention from the true workings of inflation can be counted on to keep people somewhat placated. But nonetheless, all governments governments try to borrow money to pay for their big wars, and about two-thirds of the government's expenses of World War I were covered with revenues obtained by borrowing.

25:13And 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 about killing people in foreign lands and so forth, but these bond drives allowed the government to get its hands on eventually some $25 billion in new revenue to go toward Paying for the War. And that was no small sum. In those days, the gross national product was in the neighborhood of, oh, about $70 billion a year. So this was a very large amount of borrowing the government was undertaking at the time.

26:37I want to remember that this whole episode we're talking about, American involvement in World War I, 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 the only way it can borrow large sums is by offering those people who lend to it higher rates of interest. Otherwise, what is the inducement for them to change their current behavior?

27:23If they're already allocating their savings in optimal ways, then why should they change? Change. The government comes into the market and it's got to bid loanable funds away from others 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 not to offer a higher interest rate because that again has to be covered somewhere by tax revenues, later if not sooner. So to prevent its cost from mounting because the costs of servicing that debt become enormous as they would have if the government had openly bid against others 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 pump bank reserves into the commercial Banking System, then all these banks find themselves flush with reserves and they look

28:46around for ways to lend 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 are flush with reserves, they're looking Banking to invest in a secure way and the government is wanting to borrow money. What a nice match. So during World War I, 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 individuals and firms who themselves then have the means to invest in government bonds.

29:46So in various ways, inflating the money stock 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 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 take it directly as it were at gunpoint, it can force people by just passing laws authorizing it to confiscate your goods or services.

30:46The most important resource we're talking about here is human labor and life, because most people don't want to sell those resources except at a very high rate. And of course if the government had to pay market rates to get young men 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. Indeed, a private only earned about $30 a month during World War I.

31:31That 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 the 4 million people who were ultimately a part of the U.S. Army by the end of the war, 2.8 million of them were conscripts. So, some 70% of all the people who served in the Army in World War I 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.

32:21because on some occasions one can get a better deal by joining than by waiting and being drafted a better assignment of duty. In addition, almost 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 I, 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.

33:13If you've read about conditions in the trenches in World War I, 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 skids. They hoped that if you provided enough patriotic hoopla surrounding the induction of men into the armed forces, that that would begin 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.

34:12And so the Wilson administration, when it began the draft, carefully prepared hoopla all over the country so that newspaper editors and local committees all joined forces in trying to glorify what was being done by conscripting these men. And some people had expected a great deal of resistance. Indeed, when the draft law was being debated in Congress, some members of Congress forecasted 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 think 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

35:28Draft 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 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 may be itself out of visibility for running the draft.

36:19Civilian draft boards were created in districts, small districts that covered the whole country. 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.

37:04That meant several things. It meant, first of all, that whatever kinds of local prejudices happened 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 districts in the South, blacks 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.

37:51At 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 army leadership in Washington, D.C. It wasn't even armed men at all. It was just 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.

38:41And I quoted in my book, and I'm going to read it again, it's so astonishing.

38:56It starts at the bottom of page 133, and it's a statement by Provost Marshal General Enoch 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. Its 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 have been caused by the concentrated total of dissatisfaction.

40:07That is such a perfect expression of Machiavellianism. When I read that, I thought, I can't quote this. People will 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. It's just So, you can take by force, by trickery, and intimidation is good.

40:57And 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 I, 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.

41:44They had shown the way in propaganda. It was the Brits who invented all these lies about German atrocities in Belgium and babies on bayonets 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 belligerent in the war. But once we did become a belligerent, We had not mobilized the armed forces, the armed forces of the United States all together.

42:41Army and the Navy, 1916, had fewer than 200,000 personnel. That's nothing. I mean, there must have been tiny countries in Europe with bigger armies than that. I'm sure places This is like Bulgaria and Romania had huge armies compared to that and they were nothing compared to armies of millions like the ones in Austria and Germany and France and Russia and even Great Britain. So the United States was not really in a position to be a very decisive direct military force The Army was a very decisive 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 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 about 150,000 men to 4 million men in less than two years' time, and it managed to get 2 million men out of the Army.

43:55of 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 because it had the potential to be militarily decisive besides being very important in terms of supplies to the French and the British.

44:52When the government set out to build up this big armed force, it had to take a whole variety of actions to supply the training facilities, 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 other than formation of a few boards and accumulation of some information about industrial capabilities.

45:49But 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

46:36What can we do to diminish the magnitude of these problems? How can we keep a grip on this vast mobilization effort? The government's war planners realized that they could use controls of various sorts 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 can't do anything about that. If certain sacrifices are being made in order to use resources for war purposes, they're being made. Those costs are being borne whether people know they're being borne, whether they understand them, whether they see them.

47:26Nonetheless, 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 cost. 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 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, and not just from radicals and socialists.

48:17They opposed, and they were not inconsequential in 1917 in this country, but others also 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 to war against Germany and Irish, and they would rather die than help England, so you've got 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.

49:09Most of the war support before 1917 had been concentrated in the northeast and much of that manufactured by rich people, 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 understood that opposition would grow. Controls offered a way to conceal costs and to allow the government to carry out objectives that otherwise would have been, at least financially, much more visibly costly.

50:03As the government began to purchase a lot of munitions, 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 created a lot of squawk, and it also began to distort the structure of industry. The whole industries found that 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 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 Our board, the shipping board, empowered to set shipping rates for international shippers

51:30and 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 basically take over the whole ocean shipping industry, which eventually it did, including just confiscating property rights over all ocean ships of more than 2500 tons, so all, but the smallest vessels were basically placed at the disposal of the government, which told the owners, the ostensible owners, what they could get for their services, assigned routes, Assigned Cargoes. So in all that formal status, the ocean shipping industry was nationalized during World War I. So that was one way of dealing with rising costs. Just have the government set the prices and they can hold them down then. It didn't mean, by the way, that the The real scarcity of shipping was in any way alleviated.

52:44There 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 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 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.

53:37So 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 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.

54:47So 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 sold two 2 3rds of them in the 1920s at very attractive rates basically said here take this ship it's yours still had about 1 3rd 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 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.

56:10So I suppose there was a kind of justice there. It was really on their behalf that America The War Industries Board was created by executive order 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, non-ferrous metals and so forth.

57:02So they created these subcommittees, as it were, and they brought in businessmen, because remember, this is a very small government still, the federal government in 1917, 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 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.

57:50They 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 a historian named Robert Cuff, C-U-F-F and 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 businessman'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 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, in a sense, took their responsibility to the government quite seriously at the expense of firms in the industry on many occasions.

59:03And one of the factors that has misled the historians who have written about these episodes is that 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 fell 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 and 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 levied, that was a major source of government revenue in World War I. Corporation taxes. And not only did they have a high corporation income tax, but If the non-ferrous metal guys at the War Industries Board were working on their behalf, well maybe they were but they weren't doing a very good job.

1:00:12So most of the time, they had to make adjustments. For example, I looked at the copper industry, which is often used as an example of profiteering. They weren't making more money during the war. They were making a lot less money during the war. were 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 industries board used priorities It assigned categories like A, B, C, and even subcategories like 1A, 2A, 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 Industries Board and attach it to their order.

1:01:16So that if I wanted to buy some steel plates, for example, and I was making, oh, what will we say, 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 It was obliged by the War Industries 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 was a lot of jockeying and lobbying and businessmen were constantly going to Washington or calling up their pals in the commodities section to try to get their rating improved or changed and everybody claimed to be critical for the war effort 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 1A or 2A ratings and there were more of them than the suppliers could fill so they never got to anybody with a lower priority rating they weren't being served at all

1:02:45all, but even all the people with a high priority ratings weren't getting served quickly. And so, in effect, the priority system tended to break down because of its mismanagement by the War Industries Board itself. And that created more problems. Indeed, the interesting thing about the economic controllers during World War I is that when When the war was over, they claimed to have been enormously successful. The head of the War Industries Board was Bernard Baruch. Baruch had been a very successful independent capitalist, although he was closely associated with the Guggenheims and other very important capitalist interests before the war, but Baruch, after heading the War Industries Board, set about, after the war, immediately, actually before the war ended, I would say he set about, mythologizing his great contribution, and He got people like Grosvenor Clarkson and others to write books about the great success of economic control during World War I. Of course, under the glorious leadership of Bernard Baruch and all his wisdom. He managed to propagate not only by getting these books subsidized

1:04:17but by then sending out copies to libraries all over the country and 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 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.

1:05:05They'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 in the copper industry, didn't know what the price of copper ought to be, nobody knows that, that's something that 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 compress into a piece of information a price that all of that information in any other way.

1:06:21No 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 a Mises always said would come out of such planning chaos and in 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.

1:07:12Those kinds of foul-ups would be happening everywhere all the time, but for the price system. 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. All 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.

1:08:02The end of the war saved them from the revelation of what a mess they were making of war planning. And the historian 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. People who lack that kind of preparation for the study have missed it. So, that was the upshot of the industrial planning. Now, when I say this, I say they make a mess, it doesn't mean nothing was accomplished. Even the USSR did something. They made some tanks. They produced some rockets.

1:08:48central 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 costs for them to produce to reduce the visible result they produced, and that allows these planners to get away with murder, as it were, in terms of waste. Now, industry is not the only place they needed to deal with similar situations in food, in agricultural raw materials, in fuels, across the board in the economy.

1:09:39The same kinds of problems arose, problems 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 problems were met in different ways, in the case of food, the food administration 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 was Herbert Hoover, to require a license of 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.

1:10:45If you sold any agricultural inputs, seed, fertilizer, equipment, you had to have a federal license. And of course all these licensees had to adhere to the conditions of the license. 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 $2 per bushel and they in fact supported it at a price of $2.20 a bushel throughout the war, operating the wheat market through a subsidiary, the US Grain Corporation, which manipulated the market by Buying and Selling Grain with capital provided by the taxpayers.

1:11:44They also operated the sugar industry the same way by taking control of that and creating something called the 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 bought sugar cheap from the Cubans and resold it at a higher price domestically. So they were rigging the sugar market. And again, as the government had done in conscripting labor, it discovered that in order to pursue its food conservation programs, it could be most effective by creating a whole bunch of local boards.

1:12:34And so the Food Administration created thousands of boards for counties. Every county had one for cities, states. All volunteer manned and womaned 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, 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 so the degree of detail of their regulations was pushed down to the level of declaring things like Porkless Mondays and Wheatless Tuesdays and Meatless Fridays.

1:13:26and besides, you know, the absurd detail, they would switch around from 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 action in World War I is reminiscent of what we read about China under Mao Tse-tung, where people were all spying on each other, reporting little deviations, checking the little red book to see if people were adhering to Maoist philosophy.

1:14:14Americans in 1918 were spying on one another's meals. 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 G-men who actually had little make-believe badges And 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.

1:15:01But 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 conduct what amounted to vigilante raids of all sorts. Research, you know, they 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 they would drag people off to the police station and make these semi-citizens arrests of them. And so we had this kind of out of of Control, quasi-patriotic, semi-organized hysteria loosed upon the United States of America, the so-called land of the free.

1:15:51And to go back and read about the United States in 1918 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 school teachers and Anybody else they could get 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.

1:16:53There's a whole list of things the government says you should be doing, so get in gear and 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 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.

1:17:38But it 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 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 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 shipping them via New York port, well maybe you ship them to Philadelphia or Baltimore or some other place. You take care of that.

1:18:34Everybody 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 having a lot of breakdowns because they hadn't been able to maintain the capital stock of the Industry, given the economic squeeze they had 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.

1:19:25And 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 The unions were pressing for higher wages again. They had pressed in 1916 and the government had intervened and given them a 25% pay increase by legislation, cutting the working day without cutting pay.

1:20:14But they came back the following year and threatened a nationwide strike again during the war. 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. 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 was throw up its hands and nationalize the industry in the last week of 1917. That meant, of course, that the railroad companies still operated the whole apparatus, but they had to take their orders from the Railroad Administration, headed by William Gibbs McAdoo, President Wilson's son-in-law at that time, sometimes known as the Crown Prince.

1:21:08And so, McAdoo, 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 he proceeded to tell the railroads what they had to do in terms of what railroads shipped, what cargos 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 costs that he had engineered. So the government ran the railroads for the duration of the war and indeed until 1920 when it finally returned them to private ownership, In many other ways, the government undertook to set aside the price system and to steer resources to war purposes.

1:22:22My chapter in Crisis and Leviathan spells out some of them, Some of them but there are many others I didn't cover in that chapter. Someone estimated at one time that 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 administrator made his decisions from month to month. But we know enough about the main leadership and the main control agencies to understand how they operated and the results they got.

1:23:18And 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 purposesivid is an insufficient basis for concluding that they succeeded. We always have to say, in what sense did they succeed? When Mises 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.

1:24:06A 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 I, I think it's quite fair to conclude that a huge waste was born by the American public. So we have a few minutes for questions or comments. Yes, sir. How surprising the American people acted there in 1978.

1:24:54We just could write new books on it. Just recently, the same spy network because the post office put a spy on people, the truck drivers 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 I think they have a capability that's, in a way, much more powerful than they had when And they had to have an actual person steam open a letter or cut it open and read what was inside.

1:25:59That did put a limit on how much they could do and to whom and where. Of course, they did grievous things to some people. Joe mentioned the other day in his talk that they sentenced people to prison for 10 years just for giving speeches, Office, which weren't even all that violently in opposition to what the government was doing. They arrested Upton Sinclair and Roger Baldwin for reading the Constitution in public. So, 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 a 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 If you ate bacon on Tuesday, did they just stick your neighbors on you, or did they put you in jail?

1:27:40I think in cases like a violation of food regulations, they probably just tried to shame you publicly. Or like the Dixie Chicks. One of those people is actually threatening the Dixie Chicks.

1:28:00Death threats for the Dixie Chicks, yeah. Well, there is what I think of as the dark side of modern technology, 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, so naturally people demand more of that. I think I got it out of your book, actually. You mentioned in the book, I think of 1916, some law that was passed on transportation that gave government control of all transportation in the United States.

1:28:50Well, 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 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 old friend John Hughes, who wrote about that provision, that it was put in there by people who were thinking about the armies dealing with Mexican incursions in the Texas border. Pancho Villa had come across the border once or twice in the southwest, and U.S. Army troops that had gone to chase him away and they'd actually chased him into Mexico. And while they were down there on that expedition, apparently they had some trouble getting railroad service 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 The Army would be able to get the railroad service it needed on the spot, but not by

1:30:17asking, but just by demanding. 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 much more consequential purpose later on. Well that comes, they could have gotten that passed, that is a loss up, and clearly they weren't after that because they stuck it in, I think you said they stuck it in between appropriation for building a bridge and something else. Yeah, something about buying murals maybe. Yeah. Well, if you look at 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, things that you think, what is this doing in here?

1:31:11And they're just stuck in there by members of Congress because they know that the big bill is one that's certain 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 it for a long time it's become more and more common as the past century has gone by. I think the most recent example might be the Rave Act, which that was the law that authorized the Amber Alert, which is a real good idea, but tucked in there someplace is the law that the government can shut down any event where someone can even potentially use any kind of a drug.

1:32:09That isn't what I wanted to ask. What I wanted to ask was, what is the name of the Rothbard essay again? It's called World War I as Fulfillment, yes, yes, yeah, it's in the first edition too, I believe.

1:32:44I have the citation somewhere. It was about the people in some place, I think it was Northwest Arkansas, just sort of ignoring the draft, and they came around the draft, and they just go hide with Uncle So-and-So, and just kind of move around. So the article actually had a feel for sort of written more in the spirit of ridicule. Imagine these stupid hillbillies that didn't find the description of the Kaiser important to them personally. There was a really interesting little piece on Lew Rockwell's site yesterday about the British portrayals of the Kaiser. Maybe some of you read it. They recruited a Dutch artist who came up with this grotesque cartoon imagery of Kaiser Wilhelm, who was, as you may know, the grandson of Queen Victoria. He was a not-so-distant relative of the House of Windsor at the time of World War I. So, as usual, the European aristocrats are having wars with one another

1:34:29Sure, does the United States sort of pay off its debts to World War I debt?

1:34:59and 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 1914. So even after the Second World War, in the early 50s, the government, The debt incurred in World War II was huge, so the debt at the end of World War II was about $250 billion, as I recall, and there were almost never any significant surpluses thereafter, so there was no paying down of debt.

1:35:51We had a few years just recently, 1999, 2000, 2001, where a little bit of debt was paid down, but it's trivial compared to the size of the debt. So no, basically it's only kind of gone up in stages ever since 1914. How much percentage of federal spending is paid on interest?

1:36:39Thank you for this session. Thank you very much.