Our World Boundaries

March 1935

The Paradox of War for Profits

by William T. Stone

[Foreign Policy Association Bureau, Washington, DC]

SIXTEEN years after the "war to end war," newspaper headlines trumpet the weird story of a world at peace: "War Budgets of Great Powers Top 1914 Level" . . . "Naval Limitation Doomed in 1936" . . . "Japan Warned US Ready for Naval Race" . . . "Germany Building Air Fleet" . . . "British Frontier Is on the Rhine" . . . "France Speeds Defense Plans"..."Italy To Build Dreadnaught"...

Since that solemn occasion six years ago when Briand and Kellogg scratched their signatures to the Pact renouncing war "as an instrument of national policy," the nations of this topsy-turvy world have spent some $30 billion for armies and navies maintained in the sacred name of "national defense." Americaămeaning of course the United Statesăsheltered by its two great oceans, has poured out nearly $5 billion and is stepping-up its war and navy budgets close to a billion a yearălikewise in the name of "national defense." Japan is trebling her pre-war military outlays; Britain is casting aside "disarmament by example"; Hitler is driving his Third Reich toward arms "equality" by striving to build up to the level of his neighbors, while France and Italy and the Little Entente counter with bigger and better armamentsăall in the name of "national defense."

SEATED around a horseshoe dais in a high-ceilinged room of the Senate Office Building in Washington seven senators are searching for an answer to this tragic riddle of a world "at peace" yet arming to the teeth. They are members of the special Committee of the United States Senate, under the chairmanship of Senator Gerald P. Nye of North Dakota, investigating the munitions industry. For weeks on end they have been breaking through on the front pages with "sensations" ranging from the super-salesmanship of Sir Basil Zaharoff, Europe's erstwhile man of mystery, to 800 percent wartime profits of our own munitlons makers. Surrounded by avid newspaper correspondents, their disclosures have been flashed to Europe, the Far
East and South America. During these weeks they have discovered, as a League of Nations Commission discovered years ago, that private manufacture of arms and ammunition is subject to "grave abuses." But they have also discovered that when nations are preparing for war there are grave objections to abolishing private manufacture and serious obstacles in the path of effective control.

THE first disclosures of this unique investigation may have seemed to point an accusing finger at the arms merchant as the chief culprit responsible for spreading discord in a peaceful world. But as the probers dig beneath the surface the accusing finger begins to point to a host of others outside the inner circle of the trade. It points to responsible governments which lend their aid to the munitions maker. It points to army and navy bureaus preparing their vast plans for mobilizing industry and labor and manpower to meet the enormous procurement needs of the next war. Army and navy bureaus always think in terms of future war ăthat is what they are for! The finger points to boards of trade and departments of commerce which are promoting foreign trade in bombing planes as well as sewing-machines and noiseless typewriters. It points to big and little industrialists who are marshalled in patriotic array to play their partăfor profitsăin that same next war. And it points to premiers and presidents and dictators who set the course, and to Parliaments and Congresses which vote the funds for battleships and guns and powder to support national policies which inevitably come into conflict with the national policies of other powers. All these, with the arms merchant, have their stake in the munitions business and their measure of responsibility for the conditions that have been revealed. The arms merchant in the flesh bears slight resemblance to the villain who is pictured in the cartoons in the act of plotting wholesale slaughter that he may fatten on the profits. As he testifies in the crowded committee room in Washington he assumes a dual role. First, he is a business man. And, like any other business man, he is concerned with making a profit. His first responsibility is to his shareholders who have shown their confidence in his business acumen by investing in his firm. He regards this obligation as a sacred trust. His shareholders expect dividends which he can pay only by selling his goods and services in the market-place. His goods happen to be instruments of death but he conceives of his operations as dictated by commercial considerations and the ethics of big business. Incidentally, he may be able to point out, and truthfully, that in ordinary times most of his business is concerned with the arts and processes of peaceful industry.

IN his second role, the munitions maker assumes the mantle of the patriot. He proclaims his unswerving loyalty to the nation, and his desire to serve its interests in peace or war. He welcomes the lavish attentions bestowed upon him by his government, which regards him as an adjunct of the Army and Navy, an indispensable part of the national defense system. He receives government aid and encouragement that he may keep his plants and workshops in efficient condition and operation, against the emergency of that "next war."

Patriotism or profits? The characterization, as I draw it, is of course a composite one. There are variants, up and down the scale, but this is the type as unfolded by one witness after another. During the critical days of the World War when the Allied armies were hard pressed on the western front, the United States War Department sought the aid of the great E. I. du Pont de Nemours Company to build a powder factory for the government. The need was urgent. Du Pont was ready to build, but it could not, in the words of one of its directors allow "our own patriotism to interfere with our duties as trustees" to the stockholders. The Old Hickory controversy was long and involved, but the fact remains that for three months, in the very midst of the war, work on the powder plant was held up while du Pont and the government bickered over the terms.

Pursuit of profits leads to curious results. When hostilities break out between Bolivia and Paraguay in the jungles of the Gran Chaco the arms merchant sends his agents to both sides as a matter of course. When civil conflict flares in China, Brazil or Cuba he is on the spot with a full line of his best merchandise. When peace prevails and trade is dull he drums up business by every device calculated to create a demand for his wares. In the interest of better business he signs agreements with foreign arms firms for exchange of patents and secret processes, division of sales territory, and splitting of profits. He seeks to prevent the enactment of legislation detrimental to his commercial interests and when faced by cut-throat competition the usual practise seems to be to fall in with the customs of the trade, even when they take the form of bribery, "commissions," or whatnot else may constitute the "usual thing in these parts." He apparently does these things without question for the simple reason that under our capitalist economy without profits the wheels of industry stop. And as he recounts his intricate business deals he seems more or less blissfully unaware of the political and social consequences which flow from his operations.

What happens when the arms merchant, in the role of business man, sets out to sell his product in the marketplace may be seen in the case history, for example, of the submarine. Some thirty-five years ago, a small but enterprising American firm developed certain basic designs and patents which enabled it to manufacture a superior type of submarine. Presumably, had these designs been the property of the United States government they would have been reserved exclusively for the United States Navy. But these designs belonged in fact to a private corporation whose officials felt their first responsibility was to their own shareholders and that they would have been dull business men had they ignored the promise for sales held forth by the impending competition in naval armaments. It is hardly surprising, therefore, to find this American firm, the Electric Boat Company, about 1902 negotiating the sale of its patents and processes to the great British armament firm of Vickers, Ltd., under an agreement which promised handsome royalties on all submarines built by Vickers or Vickers subsidiaries in Holland, Japan and Australia. Nor is it strange to find license agreements with shipyards in Spain, Belgium, Italy and other countries scattered around the world.

The consequences are sometimes fantastic. In the course of the last thirty-five years the promoters of Electric Boat products, operating on sound business principles, have succeeded in arming the leading navies of the world with this American submarine. True, more than 115 Electric Boat submarines have flown the American flag. But 275 Electric Boat submarines fly the British Union Jack or the flags of Japan, Spain, Russia, Italy, Norway, Peru and other maritime powers whose fleets sail the high seas and may someday encounter ours. Out of the total of 391 boats built by this one American company (which enjoys the support of the United States Navy as a national defense asset,) 167 were built in American shipyards, and 224 were built under license in foreign shipyards. In 1913 one of these foreign yards licensed to build American designed submarines was located in Fiume, then a part of Austria-Hungary. After the World War the Electric Boat Company sought to recover damages placed at $17 billion from the German government on the ground that American designs and patents had been used in the German U-boats which took their toll of American life and property on the high seas.

THERE is nothing new or surprising, or in the trade view illegitimate, in the disclosure that American armament firms, like American moving-picture concerns and motorcar companies, have their international connections. American aviation companies have their foreign subsidiaries and their license agreements with producing countries and distributing companies in Europe and South America. The E. I. du Pont de Nemours Company with its vast dye industry, its chemical plants, its rayon factories, and its Duco products has a long list of foreign subsidiaries engaged in manufacturing innocuous commercial products as well as its commercial trade agreements with British, Canadian and German corporations. Likewise, it has its military sales agreement with Imperial Chemical Industries of England providing for joint sale of military explosives of both companies in Europe, Asia and South America.

Business considerations dictated the signing of the du Pont military sales agreement. But business arrangements sometimes turn out to conflict with national interests or national policies. Thus, when President Roosevelt proclaims an arms embargo on sale of arms and ammunition to Bolivia and Paraguay the du Pont Company may express its entire willingness to support loyally the policies of the United States government, but how does the intention pan out among its agents in the field? Early in June 1934, a few days after the President's embargo proclamation, Nick Bates, the principal du Pont agent for South America, received an inquiry calling for quotations on 2000 tons of TNT, presumably for the government of Paraguay. Unable because of the embargo to answer the inquiry on behalf of du Pont, Bates promptly cabled Imperial Chemical Industries suggesting that the British firm quote its price to the agent in Buenos Aires. Under the sales agreement between the two companies du Pont receives a commission on all sales made by ICI in South America. Though this particular inquiry apparently did not result in a sale by the British company, du Pont agents are under obligation to promote the sales of a foreign corporation as well as their American employer.

BUSINESS considerations as well as diplomatic stupidity have played their part in the rearmament of Nazi Germany. While Downing Street and the Quai d'Orsay protest Hitler's open military preparations British, French and American commercial interests help to nullify Part V of the Versailles Treaty. British and American aviation companies have filled lucrative orders for airplanes and engines which may or may not be intended for Goering's air armada. Three weeks after Hitler rode into power, in March 1933, the Pratt & Whitney Aircraft Company, manufacturers of airplane engines for the US Army and Navy signed an agreement with the Bavarian Motor Works of Munich, granting this firm the right to build Pratt & Whitney engines in Germany. The German company agreed to pay the American firm $200 for each engine built in Germany, and to make a quarterly report on the number produced. Perhaps the engines were for purely commercial use. But if they were, later developments were strangely suspicious. For before the first quarterly report the German firm demanded that the contract be modified to provide for a lump-sum payment which would not reveal the number of engines produced.

The activities of the arms merchant in pursuit of profits is the first chapter in the long story of munitions. The second chapter deals with governments preparing for war; governments lending aid and encouragement to the private munitions industry to play its part in the national defense scheme, and perfecting their elaborate mobilization plans for the next world conflagration.

Although armament firms are generally free to ply their trade without restriction, they are regarded by governments as integral parts of the military machine. That machine is the mass army backed by a regimented industry. War long since ceased to be an engagement between armed forces on the field of battle. In the somber words of our own War Department, it is:

a struggle in which each side tries to bring to bear against the enemy the coordinated power of every individual and every material resource at its command. The conflict extends from the soldier in the most front lines to the humblest citizen in the remotest hamlet in the rear.

In probing relations between governments and private munitions interests the Senate Committee has exposed, per haps unwittingly, the central paradox of war for profits For it has discovered, much to its own surprise, that the Army and Navy not only promote the trafllc in arms, but serve in the role of "sales agents" to release their own military designs and processes and, in short, to arm the worldăin order to encourage the development of a strong domestic industry in the interest of national defense. There is, for example, the now famous Raleigh case in which the US War Department promised to release its latest designs of anti-aircraft material to assist the Driggs Automatic Ordnance Company, a private concern, to secure a large order from the Turkish government. Not to be outdone, the Navy Department offered the facilities of the cruiser Raleigh for an official inspection of the Driggs anti-aircraft guns, in the harbor at Constantinople, by a delegation of Turkish officials. The only disappointing incident of this transaction was the failure of the American company, despite this handsome cooperation, to secure the contract.

A few years ago the Polish government decided that it wanted an up-to-date powder factory. It approached agents of the du Pont Company with a proposal to build the plant and furnish the latest processes to enable it to produce the most efficient military propellants. When the proposition was put up to the War Department in Washington, the du Pont Company was advised that in the opinion of the Ordnance Bureau "it is vastly more important to encourage the du Pont Company to continue in the manufacture of propellants for military use than to protect secrets relating to manufacture."

Bewildered and perplexed by the long list of exhibits showing the sale of military equipment to foreign countries with the consent and approval of the War Department, one member of the Senate Committee was led to observe:

It seems to me that we now have the amazing proposition that when the United States perfects a new advantage in the art of self defense, we must sooner or later impart that knowledge to all the nations of the earth.... We must impart this advantageous information to our potential enemies, or our pri- vate munitions manufacturers in the United States will be un- able to continue to arm us with this advantageous thing.

To which Senator Nye added:

It comes down to thisăthat we must arm the world under this practice so that we can have the capacity to defend ourselves in an emergency when and if the world decides to use our own devices against us.

MILITARY and naval missions with gold braid and cocked hats are another useful institution frequently employed by the greatpowers to promote their arms industries. For many years they have been visiting those smaller countries which lack the military trappings of modern civilization. Along about 1920, at the request of the Peruvian government, an American naval mission was sent to Peru to advise on a new naval program. Its distinguished personnel included an admiral and several ranking officers.

During the World War, it appeared that Peru's neighbor Chile had "upset the balance of power" in South America by purchasing six submarines manufactured by the Electric Boat Company, an American concern. Before leaving for Peru "to practically take charge of the Peruvian Navy" two members of the mission visited the plant of this firm at Groton, Conn. The mission, which remained in Lima for nearly ten years, drew up a naval program calling for the purchase of warships from American concerns, including of course, the submarines built by the Electric Boat Company, the superiority of whose products was widely known. The Peruvian loans floated in the United States to finance this national defense program have long since gone into default.

A further sequel to this story is no less pertinent. A few years after Peru had received her four new submarines from the Electric Boat Company, that country became embroiled in a controversy with its northern neighbor, Colombia, over the Leticia affair. And Colombia, like Peru, turned to the United States Navy for aid in preparing its defense program. At the request of the Colombia government the Navy Department in 1932 loaned the services of Lieutenant Commander Strong to prepare plans for the defense of Colombia against Peru. In this case, the American adviser drew up elaborate plans (drafted, by the way, with the help of an American arms firm) which took into account the possibility of a Peruvian submarine attack on the Pacific ports of Colombia with the very vessels recommended by the earlier American mission to Peru.

At the same moment the US State Department, in cooperation with the League of Nations, was using its good offices to bring the Leticia controversy to a peaceful solution!

Nor are the Army and Navy the only agencies of government which have done their bit to promote this traffic. Until quite recently the enterprising commercial attaches of our Commerce Department regarded promotion of arms sales as one of their routine jobs. Beginning about 1931 the Department's Bureau of Aeronautics helped the big American airplane companies to recruit former US Army and Navy pilots to organize a military training school for the Nanking goyernment in China. This school has been turning out scores of Chinese aviators who have formed the flying squadrons of Chiang Kai-shek's armed forces in the anti-Communist campaigns in central China.

The business of war departments is war, and preparations for war. From the day when the guns ceased fire in France, every general staff of every military power has been preparing for the next warăor perhaps for the last warăon a vaster scale. They assume that in the world today the only assurance of security is that "adequate national defense" which they are asked to provide. And once that principle is accepted every thing else follows logically and inevitably. To the general state national defense means the mobilization of the manpower and industrial resources of the nation. It means "the Nation in Arms." To talk of abolishing the private manufacture of arms and ammunition is hailed as fantastic in a world which is arming for war, which is still using force as an instrument of national policy. And to talk of taking the profits out of war is just as fantastic to a war department which must depend upon private industry to meet the enormous procurement needs of mass armies geared to wage modern war.

For fifteen years, as the Nye Committee is now beginning to discover, our own War Department has been perfecting the intricate details of a mobilization plan based on the needs of a wartime army of some four million men. The military organization laid down in the National Defense Act of 1920 is not primarily concerned with the defense of the continental United States or even defense of American territories and possessions. It envisages the defense needs of the nation in terms of the manpower which would be required in a war waged on the same scale and fought with the same tactics as the last World War. And as applied by the War Department, it means that the general staff is preparing, not for defense of American soil, but for participation in the next World War, whether in Europe or Asia.

As long as we continue to prepare for this next war, there is not much that can be done about the munitions makers. And if the war comes and these plans hold, the munitions maker will embrace all industry; there will be confiscation of men's lives and there will be war profits and profiteering. For as the Nye Committee has been told, the only way to stimulate production to meet the needs of modern war on such a scale is to guarantee a profit. The unsigned contracts worked out by the war department and waiting for the declaration of war to become effective, guarantee industry a profit of 6 percent on the valuation of plant and capital. Bills which have already been drafted for Congress seek to "equalize the burdens of war" by price-control measures which proved ineffective in the last war. There will be "bonus" provisions to stimulate production. There will be control of the press and public opinion. There will be labor boards without representation for organized or unorganized labor. In short, as Irenee du Pont truthfully observed, "If we are going to have war, we are going to have a hell of a time, no matter what route we take." To which he added as his own opinion that there is "only one way really to wage war, and that is to have an absolute monarch at the head."

The seven senators are still searching for an answer. They have certainly discovered that there is no easy solution, and no simple remedy. International regulation by a system of licenses and controls may end the more flagrant abusesăbut it will not alter the war policies of great powers or materially lessen the danger of another world conflagration. Nationalization of the munitions industry is possible, but only when nations are willing to scrap their National Defense Acts and their mobilization plans. And, so far as I can see, taking the profit out of war can be accomplished only by scrapping the profit systemăor by scrapping war.

The munitions problem extends far beyond the munitions makers, and its solution can be found only in the solution of the problem of peace. When we decide to overhaul those outworn institutions and policies which lead inevitably to war, then we can begin to deal effectively with the arms merchant. Perhaps we shall not have to; he may vanish with the need for him.

To Corresponding Photo Essay



Portrait of America: Survey Graphic in the Thirties