meant that for 1918, companies paid two major new taxes on “excessive” profits: one calculated on the basis of the ratio of earnings to invested capital; and the other by looking at the difference between actual dollar profits in the prewar and wartime periods. This was a complex system but amounted to a robust, progressive corporate income tax, which succeeded in trimming business profits sharply during the last year of the war.45
Certainly, it is possible to overstate the strength of the regulation of American business during the Great War. As the record of World War II would show, taxes could have been higher. The Wilson administration might have been more hostile to business. Even Daniels, who was driven by an intense antipathy toward big business, was far from being an enemy of all forms of private enterprise. This distinguished him from the era’s true radicals, including the Bolsheviks who seized power in Russia in late 1917 and, closer to home, American communists, socialists, and members of groups such as the Industrial Workers of the World. Franklin Roosevelt—who, as assistant secretary of the Navy, was second-in-command to Daniels—was more circumspect than his boss about public capacities. In 1919, Roosevelt called for the quick liquidation of the government’s merchant marine; he opposed government ownership of the infant aircraft industry. Such views about the need to limit regulation and government enterprise were shared by Baruch, the WIB chief, among other leading Democrats.46
Beyond this, many of the large new government-owned plants built during the Great War, including merchant shipyards and explosives factories, were constructed and operated not by the government but by private firms. Inside many of the wartime agencies, business conservatives took key leadership positions. Charles Schwab, the Bethlehem Steel executive who had previously fought bitterly with Daniels over armor plate, became head of the Emergency Fleet Corporation in 1918. Meanwhile, much of the day-to-day work of the Railroad Administration, nominally headed by McAdoo, was handled by his assistant, Walter D. Hines, chairman of the Santa Fe line.47
But even if some of the wartime expansions of regulation and public enterprise looked more radical on paper than in practice, pro-business conservatives had good reason to take them seriously. Not long after the war ended (with an armistice that took effect on 11 November 1918), McAdoo suggested that the government control the railroads for at least another five years. Meanwhile, Burleson asked Congress to allow the post office to control telecommunications indefinitely. For a short while, at least, President Wilson seemed open to these schemes.48 For many business leaders, these facts—along with the behavior of Daniels at the Navy Department, the seizures and compulsory orders, the high corporate taxes, and other troubling wartime developments—showed that modern war was a threat to their power and to the country’s prosperity. Although this danger diminished when the war ended, some legacies of war proved hard to erase.
From Reconversion to the TVA
By the time Warren G. Harding entered the White House, in early 1921, many of the Great War expansions of government regulation and control had been eliminated or greatly scaled back. President Wilson, who was focused on international issues in 1919, favored a quick dismantling of the WIB, among other wartime agencies.49 Most of the wartime experiments in government enterprise now came to an end. The management of telecommunications by the post office, which brought rate increases but never diminished labor unrest, was widely seen as an abject failure; it ended in mid-1919. This reversal helped to erode congressional and popular support for continued government management of the railroads, which ended in 1920, over the objections of labor unions and other groups on the political left. McAdoo was dismayed by what he regarded as unfair partisan criticisms of government operation and inflated claims by the private roads for damages. Nonetheless, McAdoo—who had his eye on the White House—dropped his call for an extended period of control. He was well aware of the mood in Congress, where the midterm elections of 1918 (held just a few days before the end of the war) had created Republican majorities in both houses. In the railroad industry, Congress used the Transportation Act of 1920 to revive the prewar order: private railroads, subject to ICC regulation. The ICC’s new regulatory powers were robust enough to make the railroad industry remain one of the most tightly controlled of all sectors in the American economy. For instance, the new law required the agency to confiscate half of any profits that any company managed to earn in excess of 6 percent of its invested capital, so that the money could be loaned out to struggling lines. But in practice, very little money was ever turned over to the government.50 More important, champions of private enterprise could at least take heart that the nationalization had been temporary.
Meanwhile, to the dismay of Daniels, the radio industry was privatized, with some of the Navy’s former assets taken over by a big new for-profit enterprise: the Radio Corporation of America (RCA).51 Daniels’s beloved GOGO armor-plate plant, whose completion had been delayed by the war effort, was abandoned not long after it started casting steel in 1921. To Daniels, the reason for all this reform was obvious. “Monopoly won,” he explained, “when it put Harding in the White House.”52 The new president put it differently: “We want a period in America with less government in business,” Harding reportedly said, “and more business in government.”53
Most American business leaders welcomed the shift away from progressive governance, for many reasons. One key field was industrial relations. During the war, the Wilson administration’s policies had favored the AFL. But this changed in 1919, when the president spent many weeks abroad and was focused squarely on international concerns. During the major wave of labor strikes across North America in 1919, the Wilson administration did little to assist unions. As the Bolsheviks attempted to consolidate power in Russia, observers of international affairs wondered whether communism might become an important force in the postwar world. In the United States, a series of domestic bombings contributed to an antilabor, anti-immigrant “Red Scare,” which culminated, by the end of the year, in mass arrests and wholesale violations of civil liberties by the federal government and by many states. These developments worked in favor of business leaders, some of whom combined antiunion efforts within their own firms with broader, more coordinated public campaigns against domestic “Bolshevism.” By early 1921, as Harding entered the White House, organized labor was very much on the defensive. Calvin Coolidge, the new vice president, had risen to prominence thanks in part to his role in crushing a strike by Boston policemen in 1919. With men such as Coolidge in Washington, business leaders were reassured that federal labor policy would improve.54
For most business leaders, organized labor was not the only political concern: they also hoped to rein in the recent excesses of government. In 1917–18, business groups and Republican politicians had complained about what they saw as incompetence and excessive bureaucracy in the Wilson administration’s management of the war economy.55 During the last year of the war, the Chamber of Commerce had criticized the “growing tendency for government control of industries.” Immediately after the armistice, the Chamber called for an end of government operation of transport and telecommunications. In 1919 and throughout the interwar period, Chamber members passed resolutions calling for an end to government competition with private enterprise. The same was true of the National Association of Manufacturers (NAM), another leading business association. One NAM leader, Francis H. Sisson, echoed the Republican Party’s calls for “a business government for business people.” In 1920, NAM president James A. Emery warned against “the undue and improper influence of government” in the economy, which stifled innovation.56
From the point of view of the NAM and the Chamber, the departure of the Wilson administration was a blessing. As Daniels recognized, it was Republican control in Washington, and not just the coming of peace, that guaranteed the death—or at least the downsizing—of many wartime experiments in state enterprise and heightened regulation. Working with a Republican-majority Congress, the Treasury secretary, Andrew W. Mellon, lowered taxes. Income taxes did continue to generate a large fraction of federal revenue. However, top rates dropped dramatically (eventually all the way down to 20 percent), and the excess profits tax was killed off.57 Meanwhile, Congress and the Harding and Coolidge administrations liquidated the government’s considerable fleet of
