International Forecaster Weekly

War Profiteering in WWI

... it was not merely to line the pockets of the well-connected that the war was fought... it was a chance to change the very consciousness of an entire generation of young men and women

War Economy

James Corbett | November 28, 2018

As the most decorated Marine in the history of the United States at the time of his death, Smedley Butler knew of what he spoke. Having seen the minting of those tens of thousands of "new millionaires and billionaires" out of the blood of his fellow soldiers, his famous rallying cry, War Is A Racket, has resonated with the public since he first began—in his own memorable words—"trying to educate the soldiers out of the sucker class."

Indeed, the war profiteering on Wall Street started even before America joined the war. Although, as J.P. Morgan partner Thomas Lamont noted, at the outbreak of the war in Europe "American citizens were urged to remain neutral in action, in word, and even in thought, our firm had never for one moment been neutral; we didn't know how to be. From the very start we did everything we could to contribute to the cause of the Allies." Whatever the personal allegiances that may have motivated the bank's directors, this was a policy that was to yield dividends for the Morgan bank that even the greediest of bankers could scarcely have dreamed of before the war began.

John Pierpont Morgan himself died in 1913—before the passage of the Federal Reserve Act he had stewarded into existence and before the outbreak of war in Europe—but the House of Morgan stood strong, with the Morgan bank under the helm of his son, John Pierpont Morgan, Jr., maintaining its position as preeminent financier in America. The young Morgan moved quickly to leverage his family's connections with the London banking community and the Morgan bank signed its first commercial agreement with the British Army Council in January 1915, just four months into the war.

That initial contract—a $12 million purchase of horses for the British war effort to be brokered in the US by the House of Morgan—was only the beginning. By the end of the war, the Morgan bank had brokered $3 billion in transactions for the British military—equal to almost half of all American supplies sold to the Allies in the entire war. Similar arrangements with the French, Russian, Italian and Canadian governments saw the bank broker billions more in supplies for the Allied war effort.

But this game of war financing was not without its risks. If the Allied powers were to lose the war, the Morgan bank and the other major Wall Street banks would lose the interest on all of the credit they had extended to them. By 1917, the situation was dire. The British government's overdraft with Morgan stood at over $400 million dollars, and it was not clear that they would even win the war, let alone be in a position to repay all their debts when the fighting was over.

In April 1917, just eight days after the US declared war on Germany, Congress passed the War Loan Act extending $1 billion in credit to the Allies. The first payment of $200 million went to the British and the entire amount was immediately handed over to Morgan as partial payment on their debt to the bank. When, a few days later, $100 million was parceled out to the French government, it, too, was promptly returned to the Morgan coffers. But the debts continued to mount and throughout 1917 and 1918, the US Treasury—aided by the Pilgrims Society member and avowed Anglophile Benjamin Strong, president of the newly-created Federal Reserve—quietly paid off the Allied powers' war debts to J.P. Morgan.

“In the World War [I] a mere handful garnered the profits of the conflict. At least 21,000 new millionaires and billionaires were made in the United States during the World War. That many admitted their huge blood gains in their income tax returns. How many other war millionaires falsified their tax returns no one knows.”

-Major General Smedley Butler, War Is A Racket

After America officially entered the war, the good times for the Wall Street bankers got even better. Bernard Baruch—the powerful financier who personally led Woodrow Wilson into Democratic Party headquarters in New York "like a poodle on a string" to receive his marching orders during the 1912 election—was appointed to head the newly-created "War Industries Board."

With war hysteria at its height, Baruch and the fellow Wall Street financiers and industrialists who populated the board were given unprecedented powers over manufacture and production throughout the American economy, including the ability to set quotas, fix prices, standardize products, and, as a subsequent congressional investigation showed, pad costs so that the true size of the fortunes that the war profiteers extracted from the blood of the dead soldiers were hidden from the public.

Spending government funds at an annual rate of $10 billion, the board minted many new millionaires in the American economy—millionaires who, like Samuel Prescott Bush of the infamous Bush family, happened to sit on the War Industries Board. Bernard Baruch himself was said to have personally profited from his position as head of the War Industries Board to the tune of $200 million.

The extent of government intervention in the economy would have been unthinkable just a few years before. The National War Labor Board was set up to mediate labor disputes. The Food and Fuel Control Act was passed to give the government control over the distribution and sale of food and fuel. The Army Appropriations Act of 1916 set up the COUNCIL OF NATIONAL DEFENSE, populated by Baruch and other prominent financiers and industrialists, who oversaw private sector coordination with the government in transportation, industrial and farm production, financial support for the war, and public morale. In his memoirs at the end of his life, Bernard Baruch openly gloated:

"The [War Industries Board] experience had a great influence upon the thinking of business and government. [The] WIB had demonstrated the effectiveness of industrial cooperation and the advantage of government planning and direction. We helped inter the extreme dogmas of laissez faire, which had for so long molded American economic and political thought. Our experience taught that government direction of the economy need not be inefficient or undemocratic, and suggested that in time of danger it was imperative."

But it was not merely to line the pockets of the well-connected that the war was fought. More fundamentally, it was a chance to change the very consciousness of an entire generation of young men and women. . . .