The Armor-plate Scandal

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It was, of course, a classic starchamber proceeding, and both Frick and Carnegie were outraged. They appealed to President Cleveland. Cleveland, a Democrat, did not want to seem to be supporting the company responsible for the Homestead strike against his own Secretary of the Navy. But as a lawyer himself he realized that the company had gotten nothing resembling justice. He reduced the fine to 10 percent, but that still amounted to $140,484.94.

The nub of the Navy’s case was that although only three of the plates thus far delivered had been below specifications and therefore rejected, most of the rest had been 5 percent better than specified and a few were 20 percent above grade. In the Navy’s logic, if that is the word, since some of the plates were 20 percent above what the contract called for, all of the plates should have been that good.

Only a bureaucrat profoundly ignorant of the difficulties of making uniform armor plate could have decided this was fraud. And much that might appear to have been genuine fraud was, in fact, only an attempt—an extremely ill-advised one, to be sure—to protect the Navy from itself.

Only a bureaucrat ignorant of the difficulties of making iron plates could have decided this was fraud.

For instance, the contract called for armor plate with no blowholes, holes caused by uneven cooling. In congressional hearings Charles Schwab, then the superintendent of the Homestead Works, testified that blowholes were inevitable in first-class armor plate and that while they could be easily prevented by adding silicon to the metal, that would have weakened the whole plate. What did the Navy want, he asked in effect, strong armor with blowholes or weak armor with none? He pointed out that the German firm Krupp, one of the leading armor manufacturers in the world, had exhibited its very best armor plates in Chicago at the World’s Columbian Exposition of 1893 and they had been full of blowholes.

Charles Schwab was a man much given to getting the job done now and worrying about nitpicking rules later. To give the Navy the best armor plate, but without blowholes, he had simply patched them when the government inspectors had not been around to object.

The Carnegie company could have gone to court, and might have won. But Carnegie and Frick, all too aware of the government’s monopsony power, knew that any delay in paying the fine might be grounds for the Navy’s canceling the contract, leaving them with masses of armor plate and no one to sell it to. They swallowed their pride and paid the fine.

Matters returned to normal, and the Carnegie Steel Company, becoming in 1901 part of U.S. Steel, got its share of armor contracts from the government as the country built itself into a worldclass naval power.

But when the Wilson administration came to office in 1913, it was perturbed by the fact that the bids for contracts by the handful of companies that could produce armor plate were often nearly identical. The reason was simple enough. The Navy was afraid that if it awarded an entire contract to the lowest bidder, less efficient companies might drop out of the armor-plate business and the country would not have an adequate supply in wartime. So it made a practice of giving all the companies an equal share of any large contract, provided they met the lowest price. With no incentive to bid low, no company did so.

Josephus Daniels, Wilson’s Secretary of the Navy, thought the solution was a government armor plant. Congress appropriated the money after a Navy report estimated that a plant with a yearly ten-thousand-ton capacity could be built for $8,446,000 and could produce armor for only $314 a ton, while the steel manufacturers were then being paid $454 a ton.

The steel companies, hardly happy about the idea of the government, already a monopsony for armor plate, becoming a competitor as well, fought the project. But they needn’t have worried. When the plant was finally finished, three years after World War I ended, it was millions over budget and could not produce armor for less than nearly double what the steel companies charged. The plant was shut down after producing one batch of armor plates and never reopened.

For almost a century leftist historians have been regularly dredging up the “armor-plate scandal” as an example of capitalist greed at its worst. What it really is, of course, is one more example of government incompetence both as a customer and as a manufacturer.