The role of the government in managing the war economy

For economic historians perhaps the most interesting aspects of the war economy were the attempts to control the economy through centralised price and production controls. There was a wide array of government agencies charged with influencing or controlling economic activities. The three most important were (1) the War Industries Board and its autonomous Price Fixing Committee, which dealt with industrial production and prices, (2) the Food Administration, which dealt with agricultural prices and production, and (3) the Fuel Administration, which dealt with fuel prices and production. The work of these agencies can be evaluated either at the microeconomic level or the macroeconomic level. In other words, we can ask how the individual policies of these agencies affected individual markets, given overall economic conditions, or we can ask a larger question about the overall impact of regulation on general movements of economic activity, industrial production, and munitions production.

When viewed in terms of macroeconomic impact, it is clear that the overall impact of the programmes on the fundamental economic problem

1914 1915 1916 1917 1918 1919 1920

Figure 10.4. USA: steel and total industrial production, 1914-1920.

1914 1915 1916 1917 1918 1919 1920

Figure 10.4. USA: steel and total industrial production, 1914-1920.

Source: Industrial production: Miron and Romer (1990: table 2, 336-7).

Steel: NBER website series m01135a,

of reallocating resources to the war effort, whether positive or negative, was rather small. Many of the regulatory agencies were not put in place until after the US entered the war, and, of course, they could not function effectively until some time after that. Inevitably, there was a period during which people were recruited for the war agencies, and learned by doing, before successful policies could be put in place. Bernard Baruch's tenure at the War Industries Board is often viewed, for example, as a great success. Baruch has been described by his admirers (not the least of whom was Baruch himself!) as a kind of tzar who replaced an inefficient system of laissez-faire with an efficient system of central planning. But Baruch was not appointed until February 1918, only nine months before the armistice. The heralded system in which the War Industries Board would take control of the allocation of all steel produced by the US steel industry went into effect in June 1918, only five months before the armistice.

Figure 10.4 plots monthly steel production (steel was probably the single most important industrial material for the war effort) and the Miron-Romer index of industrial production. Vertical lines indicate the relatively short period of US involvement, and the even shorter period of Baruch's legendary term as head of the War Industries Board. Evidently, steel production and industrial production had effectively reached their maximums by the time the US entered the war. Production could only be increased substantially by investing in new plant and equipment - older equipment, and manufacturing facilities had already been brought online. Given the enormous task of equipping the American Expeditionary Force, and the likelihood that the war was entering a decisive phase, it made sense to allocate resources to current production, rather than building plant and equipment that might come online too late to make a difference. In World War II, the United States followed a different policy - sometimes to the frustration of her Allies - of first building the factories to produce munitions.

There is a sharp dip in industrial production in January 1918. Steel production was especially hard hit. This was probably a result of the congestion on the railroads that brought the shipment of raw materials, particularly coal, almost to a halt. Schools and factories were closed for lack of fuel and, partly as a result of the fuel crisis, the nation's railroads were nationalised.14 The congestion was caused by a number of factors including an extremely cold winter and the unprecedented demands on the railroad network. The railroads had been built with the idea that goods would be flowing west as well as east, south as well as north, but now the bulk of shipments were heading to a few east-coast ports. Early attempts to create a priority system for war-related shipments had made things worse, as even McAdoo whom Wilson put in charge of the railroads, acknowledged. The natural tendency was to give preference to any railroad car claiming to carry war goods, and to hold up cars containing 'unimportant' civilian goods. The result was long lines of cars loaded with war goods, and no one to unload them. Once the traffic jam on the railroads was untangled, industrial production returned to what it had been before the winter crisis.

There is no evidence, then, that the policies introduced by Baruch as head of the War Industries Board (and the policies being introduced by the Food Administration, Fuel Administration, and other agencies) significantly increased the flow of materials into the war effort.

The focus of Baruch's efforts was in holding down the price of industrial materials and in creating a priorities system for determining the order in which producers would fill contracts for industrial materials. With prices for steel fixed and the order books filled, producers faced intense pressure because each agency booking an order - the most important were the army, the navy, the railroad administration (the railroads had been nationalised), and the War Shipping Board - wanted their order filled first. Funnelling all contracts through the War Industries Board and having the War Industries Board set the priority for each contract solved industry's problem. If someone from one of the major claimant agencies wanted to know why a particular order was not being filled, the answer would be 'go see the War Industries Board'.

Most historians have taken it as self-evident that a system in which authority was concentrated in a single all-powerful government bureau would work better - deliver more and better munitions - than one in which each agency separately could influence the order in which contracts were filled by bargaining separately with producers and using financial incentives. The navy, under its vigorous chairman Josephus Daniels, did continue to bargain with suppliers and never ceded complete authority to the War Industries Board. The assumption most historians make, despite their affection for Daniels, a vociferous progressive, is that things would have worked better had the navy been brought into the fold, and would have worked less well if the heads of other agencies had followed Daniels' example.

An economist might ask whether allowing some authority to individual agencies, to make their preferences felt by offering financial incentives, might have improved the allocation of resources. One problem with this approach, of course, is that while the budgets of claimant agencies were nominally fixed, the penalties for exceeding an agency's budget in wartime were weak. An agency that went over its budget could always defend itself by claiming that the excess spending was necessary to win the war. And in truth, whatever the nominal budget of an agency, the financial resources to pay for a deficit of any magnitude were always there: if all else failed, the money could be printed. On the other hand, there were problems in delegating all priority making to a central authority. The War Industries Board did not necessarily have the expertise to value the ultimate contribution of a particular project to the war effort. The priority system championed by Baruch, moreover, had its own problems.

In principle the system was simple and this was the source of much of its appeal. Each contract would be given a rating (for example, A, B, C, etc.) by the War Industries Board, and then producers would be required to fill contracts with A priorities before they filled contracts with B priorities, and so on. When this system was tried in World War II, however, it was plagued by 'priorities inflation'. Each decision maker would give each contract crossing his desk an A. When prime contractors were given the authority to pass along priorities to sub-contractors, they also tended to assign an A rating to every contract. When the system became clogged with A ratings, the War Production Board (the World War II counterpart of the War Industries Board) created a new, higher priority, A1. And when the problem recurred, still higher priorities were created, hence 'priorities inflation'. In World War II, when the system was given a longer trial, it was abandoned. Replacing price signals with priorities is not as simple as it sounds.

In any case, the period of time during which Baruch was in charge of the War Production Board and in which his ideas could be tried was too short, as shown in figure 10.4, to test the strengths and weaknesses of the system.

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