In the preceding chapter we have been discussing chiefly the written, formal contract, the tangible, visible document, duly signed and witnessed, which could be submitted to any court as prima-facie evidence of the obligations of both the producer and the Government. If, however, the impression has been given that all the war business was conducted under the authority of such instruments, let it now be dispelled; because thousands of manufacturers did war work for the Government, and the Government itself became involved for hundreds of millions of dollars, under another set of arrangements, which became known, after the armistice, as the informal, or “Bevo,” contracts. These agreements, while embodying the same terms as those of the formal contracts, were drawn with no such attention to the niceties of federal procedure, without which the law says that a government contract is not enforcible. The informal contracts were a product of the hurry and rush to get things done. There were several sorts of them, some being formal in type but defective in detail, others existing in written records, such as correspondence, but not in formal contracts, and still others being merely oral agreements between the producers and the agents of the Government as to what work had to be done.
The law, in theory, assumes that the Secretary of War himself makes and signs contracts for the production of army supplies. He is permitted by law, however, to delegate his contracting function to accredited deputies, who are called contracting officers. In normal times these contracting officers are able to make all the necessary contracts; but during the war, with all industry aligning itself in the munitions organization, it became physically impossible for the regular contracting officers to handle all the business, and they in turn appointed deputies or proxies, and conferred on them (quite illegally, as it afterwards appeared) the right to sign contracts. Then, in the urgency of the occasion, the procurement officers, who were frequently business men commissioned in the military service, adopted the common business expedient of allowing correspondence to stand as evidence of contractual engagements, expecting to follow up this correspondence with formal contracts when the ponderous executive machinery of the Department could get around to it. Sometimes the producer did not even have the protection of correspondence, but, after coming to an oral understanding with the contracting officer as to what was to be done and on what terms, hurried back to his factory to spend, it might be, hundreds of thousands of dollars in preparation for some large manufacturing effort, without a scrap of writing to secure him in these investments. Finally, there was an extensive class of contracts which lacked correct form. New officers, unfamiliar with the restrictions which hedge about the governmental administrative acts, restrictions which the public calls red tape, took the short cut of making out direct purchase orders, which stipulated quality, quantity, price, method of payment, time of delivery, and so on; and the producers accepted such orders in good faith as binding agreements.
All went well with this informal procedure until the armistice brought the necessity of terminating the war business. The question was, How might the oral and other informal contracts be settled? And then the Comptroller of the Treasury rendered the absolutely stunning decision that all these informal arrangements, including the formal contracts which had been signed by proxies of the constituted contracting officers, were illegal and without standing before the Treasury, and that not a penny of government money could be paid out in settlement of the obligations of the Government under the terms of these agreements, except that the Government could pay for goods actually delivered. At that time the outstanding contracts and agreements of all sorts involved the Government in the sum of approximately $7,500,000,000. The informal contracts, thus declared void, accounted for $1,500,000,000 of this sum. The Government, if it chose, could refuse to reimburse a dollar of hundreds of millions expended freely by patriotic manufacturers, careless of their own interests in their eagerness to give their utmost service to the prosecution of the war.
Of course, repudiation of these agreements was unthinkable, if only for the reason that such action would have brought on an unprecedented business panic and sent many concerns crashing down into bankruptcy. Yet the only remedy was legislation to permit the Government to settle up its obligations under these contracts just as if they had been properly drawn in the first place. Such legislation, known as the Dent Act, was eventually passed by Congress, the law being approved by the President on March 2, 1919. In the interim between the armistice and that date, the holders of informal and irregular contracts were subjected to an unavoidable injustice, the nature of which will be plain when we have somewhat examined the War Department’s method of terminating its war industry.
The modern contract is the foundation stone of industry and commerce. If the integrity of that foundation be impaired, we come into a condition of anarchy of which Anglo-Saxon civilization knows nothing. The man who breaches a contract can be held in court to indemnify the other party to it, and the Government itself cannot escape such liability. On the first day of the armistice there were 30,000 outstanding war department contracts. Three thousand of these, involving a government expenditure of over $1,500,000,000, either were so near completion or called for the production of materials so necessary to the maintenance of the demobilizing Army or for the future preparedness of the United States that they were allowed to go through undisturbed. The other 27,000 contracts bore a face value of $6,000,000,000. Under many of them there had been extensive deliveries of finished supplies to the Government, these deliveries (including the deliveries made while the industries were tapering off their production and adjusting themselves to peace conditions) amounting to approximately $2,000,000,000 in value. Thus there was left to the War Department a contractual obligation amounting to $4,000,000,000, which huge sum would go to pay for a great mass of materials for which the Government could have no possible use. It was highly desirable to terminate the unfulfilled portions of these contracts; yet few of the contracts contained termination clauses. It will be remembered that the standard termination clause did not appear as a common feature of the war contracts until the final six weeks of hostilities. Thus the majority of the 27,000 contractors possessed the plain legal right to go through with the performance of their contracts, even though the war had ended, and thereafter to hold the Government to the full payment of the face value of the contracts. The sum of such determination, had it been unanimous, would have cost the United States $4,000,000,000 with nothing to show for it except a great collection of useless munitions which could be sold to the junk dealers.
Upon the administration of the War Department rested the responsibility to save for the people as much of this sum as could be saved. Not all of it could be saved. Millions had been spent by the contractors for machinery and other equipment, for materials, and to pay manufacturing costs during the early stages of production. These millions the Government was bound to reimburse in any event, together with a reasonable profit upon work already done. The closer the administration could come to paying these legitimate costs and nothing else, the more successful would be its conduct of the industrial demobilization. The question was, what procedure to adopt.
To be sure, the departmental heads might have adopted the policy of canceling the contracts outright; but such a course would have meant ruin for many manufacturers, it would have thrown into the courts a mass of litigation that would have congested them for the next two generations, and it would have shattered the faith of business in the Government and rendered difficult all governmental contracting in the future. Instead of that, the war department heads adopted the shrewd measure of requesting the producers to suspend work on their contracts. They made termination a voluntary act on the part of the contractor. It is obvious that it was fully as much to the interest of the producers as to that of the Government to liquidate the war business amicably and, it may be said, inexpensively, since these very men would be the ones called upon to contribute most heavily in taxes to the payment of the war debt. Nevertheless, it was greatly to the credit of American business men that their response to the general request to terminate war contracts was nearly unanimous. There was scarcely one who stood on his full legal rights. The business of industrial demobilization was largely that of negotiating with the individual producers as to the terms under which they would consent to terminate their contracts. When the terms were adopted, they were written into the original contracts as supplemental agreements and thus given legal force. The decision which resulted in this procedure was one of the great administrative acts of the War Government. It saved billions of dollars to the Government and it sent the war producers away fairly well content with the treatment they had received.
The preliminary steps in industrial demobilization were taken before the armistice. For one thing, in those final days when it was apparent that the end was close at hand, the War Department adopted the policy of terminating the war contracts by agreement. For that purpose, the war department administration added to the standard contract provisions already adopted standard forms of supplemental agreements, to the end that the liquidation of war industry might be carried out uniformly. On November 9 all production bureaus of the Department were notified to be ready to enforce the termination clauses of contracts when the fighting ended. This order, of course, applied only to those contracts containing termination clauses; but at the same time provision was made for the suspension of war work when the public interest required it. This suspension was to be preliminary to the adoption of arrangements whereby war industry could be gradually stopped down and readjusted by easy stages. On this date, too, the Department adopted a policy from which it never afterwards deviated: not to pay to a producer any profits on prospective production under his contract, but to allow a profit as high as 10 per cent of the cost on work that had actually been done but from which no actual production might have resulted. Thus from the very first the Government showed a spirit of conciliation that promised well for the producers of war supplies.
On the morning of November 11, after the receipt of the official news of the armistice, the Secretary of War, the Secretary of the Navy, and the Director of the United States Shipping Board announced after a conference that all Sunday work and overtime work on government contracts would cease at once, and that war industry would be tapered off by the various procurement agencies in consultation with the Department of Labor and the War Industries Board. These two organizations, the one in contact with employers and the other with labor, were in a position to guard the interests both of labor and of industry. Meanwhile the procurement bureaus of the War Department, following the recent instructions, had sent out generally requests to suspend the manufacture of munitions. These orders were soon modified to allow production to continue at most of the war plants, but the brief interim of idleness gave the procurement officers time to survey the situation and also served as a notice to the manufacturers that the war was over and that they were to incur no further obligations in pursuance of their contracts.
Simultaneously with issuing the suspension requests, the procurement bureaus in Washington began making out what were known as termination schedules. These were detailed statements of proposed reductions in war work compiled by individual contracts, by manufacturing projects, by entire commodities that were being consumed by the Army, and by entire production programs. These schedules were first sent for approval to the Director of Purchase, Storage, and Traffic, who also secured the approval of the War Industries Board and the Department of Labor. The approved schedules were then sent back to the bureaus for action, except that the bureaus were instructed to terminate the production gradually so as not to disturb industry in any particular localities. The terminations, of course, were made by agreement with the producers, the agreements embodying the terms under which the manufacturing ceased.