Now this settlement system was able to render an important service to American industry during the demobilization. Many of the contractors had gone to the limit of their resources in procuring buildings, machinery, materials, and work in the prosecution of their contracts. As long as production was continuing, the Government could finance the expansion by making advance payments to the cost-plus contractors and by advancing money to others through the War Credits Board. But when the contracts were terminated, the Government could no longer follow this financing system, and the contractors faced a period of months or even years before they could conclude their settlements with the Government. During all that time their invested money would be tied up. Some of the more deeply involved—and large concerns they were, too—were perilously near actual bankruptcy as a result.
For the relief of such producers the War Department continued in demobilization its plan of advance payments, with, of course, a difference. Before the armistice the Government, in making advance payments, paid a percentage of the cost of work actually done. After the armistice no work to speak of was being done; yet in practically all the settlements there were numerous items of cost admittedly legitimate and about which there was no dispute. These were such items as materials in sight, appraised, and invoiced to the War Department, and such items as the contractor’s obligations to his subcontractors. The War Department adopted the policy of making payments in advance of final settlement up to 75 per cent of its admitted obligations. These payments, amounting in all to more than $143,000,000, enabled the producers to tide over the period between the termination of work and the final settlement with the Government. The practice of maintaining officers of the Finance Service as members of the district claims boards facilitated the prompt payment of these advances. In the final settlements, of course, the Government subtracted from the amounts due from it to the producers all advances made to them.
From this outline it will be seen that the War Department, in striking a balance with war industry, set up within itself what was essentially a system of courts, with a regular procedure and process of appeal and—for such the decisions of the War Department Claims Board came to be—a body of laws and precedents. The court system, however, had the advantage of flexibility, simplicity, and rapidity of action, being hampered by none of the rules and customs that circumscribe the regular courts. The war department courts, if we may call the claims boards that, were courts of conciliation. The claimants partook of their benefits voluntarily. They might, under certain conditions, at any time appeal to the regular federal courts; but there they faced years of litigation before they could reach final settlement. This gave the war department system a great advantage, which the Department utilized to obtain advantageous terms for itself; yet it must be said that the entire liquidation was conducted in a spirit of desire to make the contractors whole for all their expenditures.
We are now in a position to understand the unavoidable injury done to the holders of the informal contracts during the first months after the armistice. When the Comptroller of the Treasury ruled that the informal contracts were invalid, he foreclosed the War Department from making any advance settlement payments to these victims of patriotism and haste. Many of them were as heavily obligated financially as the holders of the valid contracts, and their solvency was equally precarious. Yet not a dollar of government money could they receive until the wheels of legislation had ground out authority for the settlement of their claims. Some of their circumstances were particularly distressing.
Early in October, 1918, one of the war department bureaus ordered a certain manufacturer to produce 5,000 frames for army trucks on the security that “formal contract will follow.” He was awaiting the arrival of this document to justify him in making commitments for materials when he received an urgent message from Washington beseeching him to make early delivery of the frames. He yielded, and without waiting for the formal contract spent over $500,000 for machinery and materials. The armistice was signed before his formal contract was executed, and then, with his production stopped, he was unable to collect a penny of the money due him. Another man spent $400,000 in the prosecution of a contract, only to find after the armistice that his apparently valid contract had been improperly signed and therefore was classed among the invalid contracts.
The Dent Law gave all such claims a legal footing, but that act was not in force until March 2, 1919. Meanwhile, however, the War Department’s liquidation machinery had taken up the settlement of the informal contracts along with the others. The district boards had determined for many of them what part of the work had been completed, what amounts the Government should pay for materials delivered, what reimbursements the producers should receive for expenditures made in preparation for production, and in many instances had reached complete agreements as to final lump-sum settlements. When the Dent Law went on the statute books, these agreements needed only final approval to become operative; and therefore the settlement of the informal claims proceeded with great rapidity after the passage of the enabling act.
The Dent Law conferred upon the Secretary of War power to adjust the informal contracts on equitable terms, with the proviso (already adopted as policy in the settlement of the valid contracts) that no prospective profits should be paid. This power the Secretary delegated to the War Department Claims Board, with two exceptions. Invalid contracts made with Canadian producers were to be adjusted by the Imperial Munitions Board, a branch of the British Ministry of Munitions, which had acted as the agent of the War Department in procuring army supplies in Canada. All contracts with other foreign producers—they were principally French and British producers—were to be settled by various foreign agencies and representatives of the War Department.
The informal contracts with American producers were of two sorts—those of which there was written evidence and those of which there was no written evidence. The former were known as Class A contracts and the latter as Class B. The Class A contracts were contracts apparently formal but improperly executed, or procurement orders, or correspondence setting forth the contract terms. The Class B contracts were agreements wholly or in part oral. The Class A contracts presented no difficulty to the War Department Claims Board, and they were put through to settlement by the regular procedure. It required the taking of testimony to establish the terms of Class B contracts, and the War Department Claims Board, with its subsidiary boards, had its hands too full with the regular routine of liquidation to add to its business this new, voluminous work; and therefore it in turn delegated the duty of establishing the terms of the Class B contracts to the Board of Contract Adjustment, the creation of which was noted above.
The Board of Contract Adjustment heard witnesses and then rendered a decision as to the terms of a Class B contract. After that it did one of two things: it referred the now established contract to the proper district board for settlement, or else it determined itself the financial obligation of the Government and issued an award to the producer. In addition to this work the War Department Board of Contract Adjustment, as a convenient agency, also settled contracts of all sorts made by such presidential agencies as the War Industries Board and the United States Food Administration.
After the Dent Act was in operation, the War Department extended to the informal contractors also the privilege of receiving partial payments in advance of final settlement.