By December 1930, Eisenhower had completed his Plan for Industrial Mobilization and forwarded it to Hoover (who promptly ignored it). He then wrote an accompanying article (published almost a year later in the Cavalry Journal), summarizing the contributions of the many people he interviewed.79 Several themes ran throughout. First, while the “Government has wisely refrained, as far as practicable, from interfering with the operation within our own country of fundamental economic laws.… In war all this changes.” For example, “demand becomes not only abnormal but is measured in terms of national self-preservation rather than in capacity to pay. Time is vital.” In short, war reversed the natural laws of capitalism.80
At the same time, the “problem facing the Federal Government in war is to be prepared to minimize damaging effects of sudden changes in industrial activity,” even while striving to “mobilize material, labor, and capital for the support of the fighting forces.”81 In other words, the less the state had to change, the better. Here, he adopted Baruch’s views, specifically on the question of outright nationalization of industry during war. “Who would run it?” Baruch asked. “After you … had taken it over and installed your Government employee as manager, what greater control would you have then than now! [Through taxation] you can choke it to death, deprive it of transportation, fuel, and power, divert its business, strengthen its rivals. Could any disciplinary means be more effective?” Besides, even “if [a federal] bureau could prove adequate to the task [of running industry] … the mere process of change would destroy efficiency at the outset.”82
Indeed, efficiency remained the watchword throughout the plan, and it imagined that competition between various sectors of the economy (and among departments within the government) might create frictions that would undermine industrial output. Such competition “must not exist.” To overcome this, “the government must know the national needs—and by wise and conservative measures direct the efforts of the population toward meeting those needs.”83 To do this, the plan envisioned centralized coordination, but also, and crucially, “the force of public opinion.” It encouraged the president to take advantage of the “unified and intensive public opinion” common at the outbreak of hostilities, because this unity, “[if] properly directed and employed under a popular leader, will make effective any reasonable, practical and efficient plan that may be adopted.”84
The third theme, and what proved the most controversial, centered on controlling price levels during war. Here, again, Eisenhower followed Baruch, who favored widespread price controls across the entire economy. On the one hand, this solved the problem of war profiteering; on the other, it addressed an issue in terms that would prove very important for Eisenhower in the future. “Inflation enormously increases the cost of war and multiplies burdens on the backs of generations yet to come,” Baruch argued. “In the inevitable post-war deflation the debt, of course, remains at the inflated figure. Thus the bonds that our Government sold in the World War for 50-cent dollars must be paid through the years by taxes levied in 100-cent dollars.”85 Altogether, Eisenhower’s report provided the basis for a planned economy along with the nuts-and-bolts of how to implement it—a valuable resource for American administrators when the next war came.
Thus, by 1930, one thing could be said about MacArthur, Eisenhower, and Clay as well as Henry Stimson. Each had, during the 1920s, gained invaluable experience in the tasks that awaited them. While the nation had made little effort to institutionalize military government as a core part of America’s external state, individual military leaders had gathered a great deal of experience and informal understanding of military government, political economy, and the art of governing. The initial lessons they learned came from the very practical problems of maintaining a civil society. They realized that it was already hard enough to subjugate a people and maintain some order. That task became impossible once military governments were seen as adding impoverishment to subjugation. Thus, in many cases they personally helped the local economy by cutting roads and building wharfs.
Put another way, military leaders absorbed Wilson’s contention that economic cooperation might foster peace, yet realized that Wilson had missed the local dimension of that promise. He had missed the fact that local economic stability became the prerequisite for global integration. The problem of the future—as military government played a much larger role in the lives of many more people around the world—would be learning how to achieve local economic stability. It was one thing to govern an agrarian archipelago or a narrow strip of Panamanian jungle. It would prove quite a different thing to govern densely populated and industrialized nations suffering after terrible defeats.
Chapter 3
The Army in a Time of Depression
Lucius Clay left the United States for Panama in July 1929. When he returned in July 1931, it seemed like a different country. In the intervening years America’s industrial production had dropped by more than 30 percent. “My work carried me all over,” Clay recalled, “… and particularly along the Monongahela River—which was the region that supplied Pittsburgh with its coal. And it was a scene of shocking desolation.”1
The Great Depression was the most important economic event of the twentieth century. It had enormous political and social consequences for nearly every nation. Although scholars debated its causes almost from the start, in the last two decades a “greater consensus” has emerged about the most likely sources of the economic collapse. Economists generally agree that the unstable arrangement coming out of Versailles finally caught up to the world and expressed itself in the form of the century’s greatest economic downturn.2
Of course, it has taken many decades to come to the current consensus, and the current consensus is neither the first nor the most strongly held agreement among economists. A framework offered by the British economist John Maynard Keynes (discussed below) generated widespread agreement within the United States for several decades as to the cause and cure for the Great Depression—although it has fallen out of favor over the last few decades. What matters for this study, though, is the way the current consensus fits particularly well within the insights that ultimately came out of military government. Of course, economists working during the depression were familiar with the events and data that make up the current consensus—as were non-economists such as MacArthur, Eisenhower, and Clay. Nothing about the current view was hidden from past generations. But the economists working during and just after the depression saw the same events as less decisive and the same data as less relevant than recent economists feel. By contrast, military government came to see the same events and data as particularly critical to the stability of the global economy and in a way that dovetails with the current consensus. The surprising agreement between the occupiers in the late 1940s and today’s economists therefore justifies a discussion of the current consensus.
While the current consensus has many subplots, one plot plays the central role: Germany could not recover from the war and pay reparations at the same time, and this fact destabilized global finance. To get around the challenge of paying reparations while trying to modernize industry and recover from the war, German officials more or less deliberately resorted to a kind of Ponzi scheme. Since the United States ended the war with surplus gold, it became Germany’s largest creditor. By 1927, Americans had sent more than $1.5 billion to Germany, covering the $500 million in reparations installments along with an extra billion to buy everything from new factories to new opera houses. A new market in the United States for German municipal bonds helped funnel American savings to German municipalities, which received the lion’s share of American investment. In simplified form, through the 1920s Germany borrowed heavily from the United States to pay its reparation debts to France and England (while keeping some to rebuild its infrastructure). France and England then used reparations to repay war debts to the United States (while keeping some to rebuild infrastructure). In other words, the U.S. lent the money ultimately used to repay itself, with overall global debt growing