The Free Market 12, no. 12 (December 1994)
“Peace on Earth” should be more than a holiday cliché. The costs of war and its perpetual threat are immense, and threaten freedom and civilization itself. Even with the end of the Cold War, the U.S. finds itself in an endless series of military squabbles, including Panama, Iraq, Somalia, and Haiti, with prospects for future involvement in Korea, Bosnia, Cambodia, and Rwanda.
This policy must be re-evaluated, especially by those concerned about the fate of American liberty. In his 1994 book War and the Rise of the State, historian Bruce D. Porter extensively surveys the fatal linkage between war and collectivism. He maintains that the history of the West during the past six centuries can be reduced to a simple formula: war made the state, and the state made war. In the process, countless individuals suffered the destruction of their liberties, property, and lives. “A government at war is a juggernaut of centralization,” he says, and that has been “a disaster for human liberty and rights.”
Still, war seldom receives its due as a cause of big government in the U.S. Scholars and laymen alike usually trace the origins of our own Leviathan to the New Deal. But FDR never could have done what he did in the 1930s without the state-building precedents of World War I.
The federal government on the eve of that war was quite limited. In 1914, outlays totaled less than 2 percent of GNP. The top rate of the income tax was 7 percent on incomes over $500,000 (about $5 million today). Only 1 percent of the population had to pay the tax. Federal civilian employees made up about 1 % of the labor force, and most worked for the Post Office.
Fewer than 166,000 people were on active duty in the military. The federal government did not regulate securities markets, labor-management relations, agricultural production, or energy markets. It provided no make-work jobs and offered no make-believe training for the unemployed. There was no unemployment compensation, social security, or national medical insurance like Medicare and Medicaid.
The feds meddled in a few areas of economic life, prescribing railroad rates and prosecuting a handful of unlucky firms under the antitrust laws. But for the most part, the central government was only a nuisance. It maintained a gold standard, was not very expensive, and did not exert an important direct effect on the daily lives of most citizens.
But U.S. entry in the Great War changed all that. The government virtually nationalized the ocean shipping industry. It did nationalize the railroad, telephone, domestic telegraph, and international telegraphic cable industries. It became deeply engaged in manipulating labor-management relations, securities sales, agricultural production and marketing, the distribution of coal and oil, international commerce, and much else.
It turned the new Federal Reserve System into a powerful engine of monetary inflation to satisfy the government’s appetite for money and credit. With more than 5,000 mobilization agencies of various sorts, America was ruled under “war socialism.” Federal revenues increased by nearly 400 percent between fiscal 1917 and 1919—and even greater amounts had to be borrowed. The national debt swelled from $1.2 billion in 1916 to $25.5 billion in 1919.
The Espionage Act of 1917 penalized those convicted of willfully obstructing military enlistment with fines as high as $10,000 and imprisonment as long as 20 years. The Sedition Act of 1918 imposed the same harsh criminal penalties on all forms of expression in any way critical of the government, its symbols, or its mobilization of resources.
The suppressions of free speech, upheld by the Supreme Court, established dangerous precedents. The police arrested Upton Sinclair for reading the Bill of Rights at a rally, for example. The final result was countless incidents of intimidation, physical abuse, and even lynching of persons suspected of disloyalty or insufficient enthusiasm for the war. People of German ancestry suffered disproportionately.
When the war ended, the government abandoned most—but not all—of its wartime control measures. By the end of 1920, the bulk of the economic regulatory apparatus had been scrapped. But the American public’s resistance to governmental direction had weakened. Many farmers and big businessmen, especially, were impressed by how the government could be used to maintain high prices and make them personally prosperous, even if at public expense.
Some of these wartime measures were given new life during the Great Depression. The War Finance Corporation, for example, came back as the Reconstruction Finance Corporation. The War Industries Board became the National Recovery Administration.
The Food Administration became the Agricultural Adjustment Administration. The Muscle Shoals hydroelectric munitions facility became the basis of the Tennessee Valley Authority. The wartime servicemen’s insurance became Social Security.
When World War II began in Europe in 1939, the size and scope of the central government were much greater than they had been 25 years earlier, owing mainly to World War I and the New Deal.
Federal outlays were 10 percent of GNP. The federal government employed 1.3 million in civilian and military jobs, and another 3.3 million in emergency work relief programs. The national debt had grown to $40 billion. The scope of federal regulation had increased to embrace whole industries and sectors.
If World War I gets insufficient notice, World War II gets even less. It was ten times more expensive than World War I. Government raised many new taxes, with individual income tax rates extended to a range of 23 percent to 94 percent. Previously a class tax, it became a mass tax, and the number of returns grew from 15 million in 1940 to 50 million in 1945. Federal revenues soared from $7 billion to $50 billion in five years, and most expenses were financed by borrowing. The national debt went up by $200 billion, or more than five fold. The Fed bought some $20 billion in government debt, thereby acting as a printing press for the Treasury.
Government authorities used a vast system of controls and market interventions to gain possession of resources without having to bid them away from others in a free market. Through price-fixing, direct allocations, and draconian production orders, war planners steered private resources into uses they deemed important. Markets no longer functioned freely. In many areas they did not function at all. Markets operated only on the fringes of a command-style economy.
Without due process of law, 112,000 people of Japanese ancestry, most of them U.S. citizens, were uprooted from their homes and put in concentration camps. The government imprisoned 6,000 conscientious objectors. Scores of newspapers were denied the use of the mails. Some were banned altogether.
The government seized more than 60 industrial facilities and sometimes entire industries (railroads, bituminous coal mines, and meatpacking), and imposed labor conditions favorable to unions. FBI special agents increased from 785 in 1939 to 4,370 in 1945.
At the end of the war, most of the economic control agencies shut down, but not all. The military-industrial complex, which had grown to gargantuan size during the war, shrank but survived, as top military officers and contractors lobbied for new procurements to shore up their clout.
Federal tax revenues remained very high by prewar standards. In the late 1940s the IRS’s annual take averaged four times greater in constant dollars than in the late 1930s. In 1949, federal outlays were 15 percent of GNP, up from 10 percent in 1939. The national debt was a hundred times its 1916 size.
Soon after, the Cold War began. Conscription was repeatedly extended until the Nixon administration, in the face of massive protests, allowed it to expire in 1973. Draftees supplied the principal cannon fodder for Korea and Vietnam, as well as a large part of the standing forces positioned throughout the world. After 1950, the military-industrial-congressional complex achieved renewed vigor, sapping 7.7 percent of GNP on average during the next four decades, or more than $10 trillion (1994 dollars).
Such confiscation of private wealth no longer startles the citizenry. Indeed, many Americans, including highly regarded intellectuals and top policy makers, have come to regard it as desirable. Even businessmen, many of whom resisted the encroachments of the New Deal, now look upon the American Leviathan with an approving eye. Wartime has conditioned them to accept coercive control.
“It is not possible,” said William Graham Sumner, “to experiment with a society and just drop the experiment whenever we choose. The experiment enters into the life of the society and never can be got out again.”
The American wartime experiment entered into the life of society, and the central government has good reason to keep it there. To slacken the expectation of perpetual war is to risk its historical justification for coercion, control, and property confiscation.
Opponents of global interventionism are often smeared as “isolationists” and “appeasers.” Better to call them wise students of history. If we place a premium on human liberty and an unhampered market economy, there is no greater policy priority than staying out of war.
