The Warfare State

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A further indication of the weakness of central authority in the long decades of peace from the Civil War to 1914 was the exceptionally stormy course of American industrialization. American leaders, both national and local, proved unable to cope with the stresses of industrialization through effective reform measures. As a result, the period from 1870 to 1900 witnessed the most violent clashes between labor and capital in any industrializing country ever. The National Guard was mobilized some 150 times to cope with industrial disputes, and federal troops intervened in eight states during the Great Strike of 1877, in eleven states in 1894, and in the Coeur d’Alene mining region of Idaho three times in the 1890s. Hampered by its own impotence as the industrial age unfolded, the American state resorted to suppression as a substitute for reform. This pattern was hardly altered by the fleeting drama of the Spanish-American War; though it exposed critical problems in the Army and state, that conflict was too brief to generate significant reform pressures.

America’s participation in the First World War, on the other hand, lasted no longer than in the War of 1812 yet was far more intense. In only nineteen months—from the declaration of war to the armistice of November 1918—the United States drafted nearly three million men, transported two million of them to Europe, and lost more than a hundred thousand soldiers in combat. Federal spending multiplied almost tenfold, and the federal bureaucracy more than doubled. With war now fully industrialized—with armor-plated fleets, submarines, airplanes, machine guns, mechanized artillery, and tanks—the cost per soldier was immense, rising by 1918 to nearly seven times that of the Civil War in constant dollars. The cost and complexity of mechanized warfare compelled the Wilson administration to take radical steps to enhance the federal government’s capacity to extract revenue, regulate the economy, and harness the nation’s industrial output.

Adjusted for inflation, annual per capita spending during World War I was nearly double that of either the Civil War or World War II. Federal outlays soared by 2,500 percent in less than three years and never again dropped below four times the 1916 level. The income-tax amendment ratified in 1913 was a minor source of federal revenue until Congress passed the Wartime Revenue Act of October 1917. The act lowered exemptions for all taxpayers and drastically elevated taxes in the highest brackets—from a top of 13 percent in 1916 to 77 percent during the war. Perhaps most important, the lowest, or “normal,” tax bracket doubled, from 2 percent to 4 percent. The number of tax returns filed jumped from 437,036 in 1916 to 3,472,890 in 1917 and then doubled again by 1920. Never before had federal taxation affected so many Americans so directly.

The revenue legislation of World War I permanently changed the nature of American taxation, much as had that in the Civil War. Not only did it greatly elevate the importance of the income tax, but it made the principle of progression a permanent fixture of the nation’s tax system. On the eve of entry into the war, personal and corporate income taxes accounted for only 24 percent of internal revenue; the figure averaged 75 percent throughout the 1920s. World War I thus made the income tax—the most direct and intrusive of all forms of revenue extraction—the mainstay of federal financing.

Revenue from war bonds and the income tax not only fed and supplied the American Expeditionary Force but also funded a burgeoning army of civilians at home. In 1916 civilian employment in the Executive Branch numbered just under 400,000. During the war the federal government hired an additional 450,000 civil servants; by 1923 postwar layoffs had eliminated some two-thirds of these jobs, but that still left a permanent net gain of 141,000. This growth did not take place only in warrelated government agencies; by mid-1920 the only federal agencies that had not experienced net growth as a result of the war were the Interstate Commerce Commission, the Smithsonian Institution, and the Panama Canal Company, which had finished building the canal in 1914. Treasury had gained nearly 40,000 employees, Commerce 7,000; and State, Justice, Agriculture, Labor, and the Post Office all had marked up permanent increases too.

Legislation passed in 1916 and 1917 gave the Wilson administration unprecedented authority to intervene in the national economy, effectively putting the entire industrial, agricultural, and transportation base of the United States under federal control. The Overman Act, of May 1918, was a further milestone, granting Wilson vast authority to restructure the Executive Branch. He used his new power to create numerous federal agencies, the most important of which was the War Industries Board (WIB), under Bernard Baruch. As the main instrument for mobilizing U.S. industrial capacity, the WIB imposed on American industry a system of production and price schedules tied to Army requirements.