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Publications of the Carnegie Endowment for International Peace Division of Economics and History

ECONOMIC AND SOCIAL HISTORY OF THE WORLD WAR

British Serzes

JAMES Ts; SHOTLWELL, Pub LED:

GENERAL EDITOR With the Collaboration of the

BRITISH EDITORIAL BOARD

Sir William H. Beveridge, K.C.B., M.A., B.C.L. (Chairman) Professor H. W. C. Davis, C.B.E., M.A.

Sir Edward C. K. Gonner, K.B.E., M.A., Litt.D.

F, W. Hirst, Esq.

Thomas Jones, M.A., LL.D.

J. M. Keynes, C.B., M.A.

Professor W. R. Scott, D.Phil., Litt.D., LL.D., F.B.A. Professor J. T. Shotwell (ex officio)

For List of other Editors and the plan of the Series see end of this volume

EXPERIMENTS IN __

STATE CONTROL At the War Office and the Ministry of Food

BY

Ee Vier Sa LLOYD

FORMERLY OF THE RAW MATERIALS SECTION, WAR OFFICE, ASSISTANT SECRETARY, MINISTRY OF FOOD

OXFORD: AT THE CLARENDON PRESS London, Edinburgh, New York, Toronto, Melbourne, Cape Town, Bombay HUMPHREY MILFORD 1924

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PRINTED IN ENGLAND AT THE OXFORD UNIVERSITY PRESS

ATLTRGHENY COLLEGE LIBRARY

EDITOR’S PREFACE

In the autumn of 1914 when the scientific study of the effects of war upon modern life passed suddenly from theory to history, the Division of Economics and History of the Carnegie Endow- ment for International Peace proposed to adjust the programme of its researches to the new and altered problems which the War presented. The existing programme, which had been prepared as the result of a conference of economists held at Berne in 1911, and which dealt with the facts then at hand, had just begun to show the quality of its contributions; but for many reasons it could no longer be followed out. A plan was therefore drawn up at the request of the Director of the Division, in which it was proposed by means of an historical survey, to attempt to measure the economic cost of the War and the displacement which it was causing in the processes of civilization. Such an ‘Economic and Social History of the World War’, it was felt, if undertaken by men of judicial temper and adequate training, might ultimately, by reason of its scientific obligations to truth, furnish data for the forming of sound public opinion, and thus contribute fundamentally toward the aims of an institution dedicated to the cause of international peace.

The need for such an analysis, conceived and executed in the spirit of historical research, was increasingly obvious as the War developed, releasing complex forces of national life not only for the vast process of destruction but also for the stimulation of new capacities for production. This new economic activity, which under normal conditions of peace might have been a gain to society, and the surprising capacity exhibited by the belligerent nations for enduring long and increasing !oss—often while pre- senting the outward semblance of new prosperity—made necessary a reconsideration of the whole field of war economics. A double obligation was therefore placed upon the Division of Economics and History. It was obliged to concentrate its work upon the

2S) Ovens

vi EDITOR’S PREFACE

problem thus presented, and to study it as a whole; in other words, to apply to it the tests and disciplines of history. Just as the War itself was a single event, though penetrating by seem- ingly unconnected ways to the remotest parts of the world, so the analysis of it must be developed according to a plan at once all embracing and yet adjustable to the practical limits of the available data.

During the actual progress of the War, however, the execution of this plan for a scientific and objective study of war economics proved impossible in any large and authoritative way. Incidental studies and surveys of portions of the field could be made and were made under the direction of the Division, but it was impossible to undertake a general history for obvious reasons. In the first place, an authoritative statement of the resources of belligerents bore directly on the conduct of armies in the field. The result was to remove as far as possible from scrutiny those data of the economic life of the countries at war which would ordinarily, in time of peace, be readily available for investigation. In addition to this difficulty of consulting documents, collaborators competent to deal with them were for the most part called into national service in the belligerent countries and so were unavailable for research. The plan for a war history was therefore postponed until condi- tions should arise which would make possible not only access to essential documents but also the co-operation of economists, historians, and men of affairs in the nations chiefly concerned, whose joint work would not be misunderstood either in purpose or in content.

Upon the termination of the War the Endowment once more took up the original plan, and it was found with but slight modification to be applicable to the situation. Work was begun in the summer and autumn of 1919. In the first place a final conference of the Advisory Board of Economists of the Division of Economics and History was held in Paris, which limited itself to planning a series of short preliminary surveys of special fields. Since, however, the purely. preliminary character of such studies was further emphasized by the fact that they were

EDITOR’S PREFACE Vii

directed more especially towards those problems which were then fronting Europe as questions of urgency, it was considered best not to treat them as part of the general survey but rather as of contemporary value in the period of war settlement. It was clear that not only could no general programme be laid down a priori by this conference as a whole, but that a new and more highly specialized research organization than that already existing would be needed to undertake the Economic and Social History of the War, one based more upon national grounds in the first instance and less upon purely international co-operation. Until the facts of national history could be ascertained, it would be impossible to proceed with comparative analysis ; and the different national histories were themselves of almost baffling intricacy and variety. Consequently the former European Committee of Research was dissolved, and in its place it was decided to erect an Editorial Board in each of the larger countries and to nominate special editors in the smaller ones, who should concentrate, for the present at least, upon their own economic and social war history. The nomination of these boards by the General Editor was the first step taken in every country where the work has begun. And if any justification was needed for the plan of the Endowment, it at once may be found in the lists of those, distinguished in scholarship or in public affairs, who have accepted the responsi- bility of editorship. This responsibility is by no means light, involving, as it does, the adaptation of the general editorial plan to the varying demands of national circumstances or methods of -work ; and the measure of success attained is due to the generous and earnest co-operation of those in charge in each country. Once the editorial organization was established there could be little doubt as to the first step which should be taken in each instance toward the actual preparation of the history. Without documents there can be no history. The essential records of the War, local as well as central, have therefore to be preserved and to be made available for research in so far as is compatible with public interest. But this archival task is a very great one, belonging of right to the governments and other owners of historical sources

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and not to the historian or economist who proposes to use them. It is an obligation of ownership; for all such documents are public trust. The collaborators on this section of the war history, there- fore, working within their own field as researchers, could only survey the situation as they found it and report their findings in the form of guides or manuals; and perhaps, by stimulating a comparison of methods, help to further the adoption of those found to be most practical. In every country, therefore, this was the point of departure for actual work ; although special mono- graphs have not been written in every instance.

This first stage of the work upon the war history, dealing with little more than the externals of archives, seemed for a while to exhaust the possibilities of research. And had the plan of the history been limited to research based upon official documents, little more could have been done, for once documents have been labelled ‘secret’ few government officials can be found with sufficient courage or initiative to break open the seal. Thus vast masses of source material essential for the historian were effec- tively placed beyond his reach, although much of it was quite harmless from any point of view. While war conditions thus continued to hamper research, and were likely to de so for many years to come, some alternative had to be found.

Fortunately such an alternative was at hand in the narrative, amply supported by documentary evidence, of those who had played some part in the conduct of affairs during the war, or who, as close observers in privileged positions, were able to record from first- or at least second-hand knowledge the economic history of different phases of the Great War, and of its effect upon society. Thus a series of monographs was planned consisting for the most part of unofficial yet authoritative statements, descriptive or historical, which may best be described as about half-way between memoirs and blue-books. These monographs make up the main body of the work assigned so far. They are not limited to con- temporary, war-time studies ; for the economic history of the war must deal with a longer period than that of the actual fighting. It must cover the years of ‘ deflation ’ as well, at least sufficiently

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EDITOR’S PREFACE 1x

to secure some fairer measure of the economic displacement than is possible in purely contemporary judgements.

With this phase of the work, the editorial problems assumed a new aspect. The series of monographs had to be planned primarily with regard to the availability of contributors, rather than of source material as in the case of most histories; for the contributors themselves controlled the sources. This in turn involved a new attitude towards those two ideals which historians have sought to emphasize, consistency and objectivity. In order to bring out the chief contribution of each writer it was impossible to keep within narrowly logical outlines ; facts would have to be repeated in different settings and seen from different angles, and sections included which do not lie within the strict limits of history ; and absolute objectivity could not be obtained inevery part. Under the stress of controversy or apology, partial views would here and there find their expression. But these views are in some instances an intrinsic part of the history itself, contemporary measurements of facts as significant as the facts with which they deal. Moreover, the work as a whole is planned to furnish its own corrective; and where it does not, others will.

In addition to this monographic treatment of source material, a number of studies by specialists,is already in preparation, dealing with technical or limited subjects, historical or statistical. These monographs also partake to some extent of the nature of first-hand material, registering as they do the data of history close enough to the source to permit verification in ways impossible later. But they also belong to that constructive process by which history passes from analysis to synthesis. The process is a long and difficult one, however, and work upon it has only just begun. To quote an apt characterization, in the first stages of a history like this one is only ‘ picking cotton’. The tangled threads of events have still to be woven into the pattern of history ; and for this creative and constructive work different plans and organiza- tions may be needed.

In a work which is the product of so complex and varied co-operation as this, it is impossible to indicate in any but

x EDITOR’S PREFACE

a most general way the apportionment of responsibility of editors and authors for the contents of the different monographs. For the plan of the History as a whole and its effective execution the General Editor is responsible; but the arrangement of the detailed programmes of study has been largely the work of the different Editorial Boards and divisional Editors, who have also read the manuscripts prepared under their direction. The acceptance of a monograph in this series, however, does not commit the editors to the opinions or conclusions of the authors. Like other editors, they are asked to vouch for the scientific merit, the appropriate- ness and usefulness of the volumes admitted to the series; but the authors are naturally free to make their individual contribu- tions in their own way. In like manner the publication of the monographs does not commit the Endowment to agreement with any specific conclusions which may be expressed therein. The responsibility of the Endowment is to History itselfi—an obligation not to avoid but to secure and preserve variant narra- tives and points of view, in so far as they are essential for the understanding of the War as a whole.

ned eS

PREFACE

Ir is difficult to write history, and perhaps more particularly economic history, without allowing a certain bias to creep in. With regard to events so recent and so controversial as the operation of State control during the war, most people would confess to some degree of prejudice. If this book is to be read with an open mind, therefore, it may be well for the author to confess his bias at the outset.

First, I write as a loyal British subject, who was engaged in war service. The amount of prejudice imported by this fact is incalculable, but inevitable.

Secondly, I believed and still believe that to wage war effectively involves replacing private enterprise by collective organization. In this respect I sympathize with those who hold that the necessity for war-time control of life, liberty, and property is an additional reason for abolishing war. Another great war will plunge the world into a sort of military communism, in comparison with which the control exercised during the recent war will seem an Arcadian revel. Personal freedom and private property are condemned by the exigencies of modern war; and I confess to a prejudice in favour of both.

Thirdly, I am disinclined to admit that all the measures of industrial and commercial organization adopted during the war, which are commonly lumped together under the term State control, were merely necessary evils to be got rid of as soon as possible and never to be thought about again. A considerable extension of co-operative and collective enterprise seems to me probable and desirable in times of peace ; and I believe that there is something to be learnt from the experiments in State control during the war which may be of positive value in the difficult times ahead.

In a word, this book is not designed to teach Governments how to wage war ; nor is it intended as a text-book on the abolition of private enterprise. It is meant as a contribution to the economic history of the war—as a record of facts and impressions drawn

xi PREFACE

from a small but important field of war-time administration. And so far as it is coloured by opinions, they arise out of a belief that even war has its lessons—lessons of social idealism and practical co-operation, which were never so badly needed as in the period of recovery from war.

While, therefore, the author’s limited outlook restricts him primarily to matters of administrative policy and technique, an endeavour has been made to contribute to the discussion of the wider problem with which this series is concerned: namely, the psychological and economic reactions of the war upon the normal processes of civilized life. When the time comes for computing the total net cost of the war and its after-effects, what little there is to be set down on the credit side will need to be sifted with microscopic care from the evil consequences that leap at once to the eye; and among those changes and develop- ments that may appear to some to contain the germs of a better order of society a place may perhaps be found for some features, at any rate, of the experiments described in this volume.

The aim of the book is to trace the evolution of war-time controls in certain sections of the War Office and the Ministry of Food. No attempt has been made to give a complete historical record of these controls (some of which, such as wool and food, are more fully dealt with in other monographs in the Series), but rather to present a comparative picture having a fairly wide range.

The first chapter contains a brief sketch of army supply in the past as a background to the work of the Army Contracts Depart- ment during the war. Two chapters are devoted to the early days at the War Office, before the Ministry of Munitions was established. The rest of the book is concerned with trades and industries falling outside the sphere of munitions, principally with textiles, leather, and certain foods.

The fourth chapter describes the early application of re- quisitioning and costing to the jute industry. The plan of fixing ‘ conversion costs’ throughout the various stages of manufacture was first conceived in March 1915, in connexion with the supply of jute goods. The circumstances which led up to and accompanied

PREFACE xii

this first experiment are therefore set out in some detail. Attention is then turned to the problem, that at one time seemed almost insoluble, of finding, or rather inventing, a satisfactory legal foundation for the measures of control on which the War Office had embarked. This chapter explains the genesis of certain Regulations and Amendments issued under the Defence of the Realm Act, giving power to requisition output, license or prohibit dealings, fix prices and examine costs.

The next stage is represented by State purchase of raw materials, first of flax, then of jute, hemp, wool, leather, and hides. Part II gives a brief account of the manner in which these com- modities were handled and the way in which the boot industry was organized for war purposes. A longer and more detailed account is inserted of the organization of British Wool Purchase, since this represented the first attempt to apply control on a large scale to agricultural produce.

Part III contains a description of Meat Control under the Ministry of Food. It illustrates, perhaps better than any other scheme, the difficulties of controlling supplies and prices of a perishable commodity needed for the daily consumption of the whole nation. Importers, farmers, dealers, wholesale traders, and retail butchers—all these had to be virtually combined in a single State Meat Trust, in order to ensure that the meat cards issued to every man, woman, and child in the country should be punctually honoured on presentation at the butcher’s shop.

The account of oils and fats control which follows explains the manner in which manufacture, import, and wholesale distribution were organized on State account by self-governing Trade Asso- ciations. The survey of the meat and fats trades ends with a short account of the control of milk, butter, and cheese.

Tn Part IV an attempt is made to examine the general principles of war organization. Price-fixing, the State as importer, the costings system, the control of agricultural produce, of manu- facture and of wholesale trade, are treated from a comparative point of view with illustrations drawn from the chapters that have gone before. The last chapter summarizes some of the lessons and consequences of war-time control with special reference

xiv PREFACE

to the problems of large-scale organization and public administra- tion.

The writer received permission in 1919 from the War Office and the Ministry of Food to make use of official sources of informa- tion; but neither Department is in any way responsible for the statements made, for the conclusions drawn, or for the manner in which the facts are presented.

I have endeavoured to keep the narrative as objective and im- personal as possible and have only occasionally mentioned by name the civil servants and business men whose struggles and achievements are here recorded. It would be ungracious, however, not to pay a sincere tribute of admiration to the work of my former chiefs, Mr. U. F. Wintour, C.B., C.M.G., and Mr. E. F. Wise, C.B., to whose vision, resourcefulness, and inspiring leadership the country owed so much during the war, and to the many distinguished business men who served under them at the War Office and the Ministry of Food—Sir Edward Penton, K.B.E., Director of Boots and Leather Supplies; Col. F. V. Willey, C.M.G., C.B.E., M.V.O., Controller of Wool Supplies ; Sir Charles Sykes, K.B.E., Director of Wool Textile Production ; Sir James Beattie, K.B.E., Controller of Flax and Jute Goods ; Mr. George Malcolm, C.B.E., Controller of Raw Jute and Hemp; Mr. W. H. Gardner, Controller of Flax Supplies; Sir Francis Boys, K.B.E., Director of Meat Supplies; Sir Philip Proctor, K.B.E., Deputy Director and later Director of Meat Supplies ; Sir William Wells, K.B.E., Chief Live Stock Commissioner; Sir Alfred Mansfield, K.B.E., Director of Oils and Fats ; Sir Campbell Kirkman Finlay, Director of Oilseeds Supply ; Mr. Wilfred Buckley, C.B.E., Director of Milk Supplies; Mr. William Lovell, C.B.E., Director of Butter and Cheese Supplies; and lastly, to Sir James Cooper, K.B.E., Director of Raw Materials Finance, and Sir Harry Peat, K.B.E., Financial Secretary of the Ministry of Food, upon whose skilled collaboration in costings and finance the schemes described were so largely dependent for their success. To these and other friends and colleagues whose names I have reluctantly had to omit, I dedicate this book. EK. M. H. LLOYD.

January 1924.

CONTENTS

INTRODUCTION. 4 : : c A “ 1

The paradox of war— Patriotism and social idealism — Disillusionment after the war— Was the ‘ larger air’ an illusion ?—The background of State control— Corporate feeling stronger than self-interest.

PART I ORIGINS OF{CONTROL AT THE WAR OFFICE CHAPTER I. ARMY SUPPLY IN PEACE AND WAR. Syme syeanG

Historical background — Army supply under Queen Elizabeth — Cromwell’s reforms — Corruption returns with the Restoration — Abuses in Marlborough’s time — Scandalous mismanagement during Napoleonic wars — Sufferings of the troops in Flanders and West Indies — Corruption at the War Office— Duke of Wellington’s reforms — The Crimean scandals — ‘ Old-fashioned departmental- ism’ — Growth of integrity and efficiency in the public services — Results of democracy.

Origin of Army Contracts Department — Purchasing machinery of British War Office in 1914 — Functions of Contracts Department and

Supply Departments — Army factories — Efficiency of pre-war system.

CHAPTER II. THE OUTBREAK OF WAR 4 : LS

Normal routine continued — Appeal for 500,000 volunteers — Centralized buying breaks down — Story of jerseys bought by local commands — Paralysis at head-quarters— Purchases by Allied Governments — Commission Internationale de Ravitaillement — Unemployed harness-makers and Army saddles — Lord Kitchener’s intervention — Proposals for reorganization of Army buying — Necessity for organizing industry first realized November 1914 — Reluctance to interfere with private enterprise — Nationalization of armament firms rejected — Ministry of Munitions established May 1915 — Provision of food, clothing, and miscellaneous equipment remains with Army Contracts Department — Origins of State control in the War Office.

CHAPTER III. FROM COMPETITIVE TENDERING TO COLLEC- TIVE BARGAINING : ; ; 5 ° c 3 - 26

Speculation in Army supplies — Delays inherent in tendering system — Public criticism of high prices paid — Comparison with business methods — Establishing personal contact — Widening area of sup- ply — Work of the Labour Exchanges — The laws of supply and demand and ‘business as usual’ — Effect on prices of raw and subsidiary materials — Weakness of competitive tendering — New policy of collective negotiations — Agreement with Wholesale Clothiers’ Association — Objections to the ‘flat rate’ principle — Advantages of new system — Difficulties still unsolved.

XVl CONTENTS

PAGE

CHAPTER IV. REQUISITIONING AND COSTING IN THE JUTE INDUSTRY . é A é ; 3 5 : - 385

Jute production and consumption — Importance for military pur- poses — Demand for sandbags — Course of prices up to March 1915 — Decision to requisition — Stocks at Liverpool — Negotiations at Dundee — Cost and market price — Profits of Spinners — The costings system first suggested — Objections to the plan — Appointment of agent firm — Increased output and deliveries — The plan in opera- tion — Comparison of Government price and market price — Negotia- tions with Calcutta — Prices and quantities — An avalanche of sand- bags — Economies affected.

CHAPTER V. THE LEGAL BASIS OF CONTROL . : : c 50

Defence of the Realm Act — Royal prerogative — Losses Commission — Compensation a matter of grace — Requisitioning under the Army Act — ‘ Fair market value ’ — Regulation 2 8 — Requisitioning from merchants and growers — Maximum prices and requisitioning — Amendment of Regulation 7 — Prices to be fixed with reference to cost of production and fair profit without regard to market price — Compulsory examination of books — February 1916 the turning-point in costings system — No Parliamentary sanction — Regulation 30 a — Prohibition and regulation of private dealings — Licensing and price-fixing — Government monopoly — Regulation 2 the most comprehensive basis for control — Were the Regulations ulira vires ?

PART II

TEXTILES AND LEATHER

CHAPTER VI. RUSSIAN FLAX AND CONTROL OF THE LINEN INDUSTRY . . 8 3 : ; : 5 . - 65

Extension of costings system to linen industry — Comparison with jute industry — Difficulties in supply of raw material — Closing of the Baltic — Decision of War Office to monopolize purchase of Russian flax — Appointment of buying agencies in Russia — Flax offices opened in London, Dundee, and Belfast — Co-operation of spinners and manufacturers — Improvements in supply of raw material — Results of trading operations — Profits and risks — Usual accounting methods not applicable — Government departments and business firms — Controller and Auditor-General and audit of flax accounts in Russia.

Work of Flax Control Board — Aeroplane linen — Increase of flax production in United Kingdom — Purchase of seed — Rationing and control of manufacture — Local Committees — Centralization and decentralization of control.

«

CONTENTS XVii

PAGE CHAPTER VII. PURCHASE OF RAW JUTE AND MANILA HEMP. 79 Decision to buy raw jute for military purposes — First agency agree- ment — Objections in Caleutta — Appointment of Jute Commissioner and allocation of orders in India — Third and final system adopted — Purchase in the market in competition with manufacturers — Prohibi- tion of import of jute, February 1917 — Steps to control prices and ration supplies — Resumption of private imports and methods adopted — Licensing private purchases — Effect on prices in India and United Kingdom — Purchases for Allied Governments — Results of Government trading in jute. Position with regard to Manila Hemp, April 1917 — Freights, prices, and profits — Government purchase — Appointment of buying and distributing agents — Selling prices — Course of market prices in the Philippines — Results of trading operations.

CHAPTER VillG ARMY BOOTS bet «25 ee) See ho bel ot

The Duke of Wellington on army boots — Achievements of boot industry during the war — Quantity, quality, and price — Organiza- tion and co-operation between Government and industry — Early developments — Appointment of business organizer — Stimulation of production — From trade patterns to regulation patterns — Examination of costs and profits — Fixing different prices for individual firms — Objections to strict application of costings — New system of group prices — District Committees — Levelling up the inefficient.

Boot repairs — A large-scale industry run by the War Office — New methods and new machinery.

War-time boots — Extension of costing and control to supplies for civilian population.

CHAPTER IX. HIDES AND LEATHER . - 5 : - 101

Shortage of leather for military purposes in first six Senge of war — Prices rise — First intervention of War Office in January 1915 — Conference of Tanners in Leathersellers’ Hall — Information of probable requirements supplied in confidence — Agreement concluded with regard to production and prices — Heavy hides in the home market — Prices controlled by Tanners’ Federation — Extension of control early in 1916 — Requisition of tanners’ output — Deter- mining costs of production of leather — Reduction of tanners’ profits — Standard prices for Army leather — Stocks in merchants’ hands requisitioned at different prices based on cost price to holder — Advantages of uniform maximum price — Allocation of leather to manufacturers — Exchange of light leather for heavy hides from France and Italy — Prices of hides in South America.

Government purchase of tanned kips from India for upper leather, May 1916 — Supplies for civilian consumption — Curriers employed on commission — Trading accounts analysed.

Government leather purchases in the United States — The Leather Council — Review of Government’s policy and results of control.

1569.53 b

XVill CONTENTS

PAGE CHAPTER X. THE POLICY OF WOOL PURCHASE : : 5 a lhe

Consumption of wool for military purposes — Figures for blankets, flannel and khaki cloth purchased by the War Office — Restrictions on export — First attempt to introduce costings — Review of wool trade at beginning of 1916 — World scarcity foreseen — Necessity of safeguarding supplies and controlling prices — State purchase of British wool decided June 1916 — Negotiations with Dominion Governments — Purchase of entire clips of Australia and New Zealand, November 1916 — Advantages of centralized purchase — Standardiza- tion of prices and qualities — Methods of distribution and sale — Hardships inflicted — Elimination of middlemen.

CHAPTER XI. BRITISH WOOL PURCHASE . : 5 - 125 Preliminary difficulties — Variety of trade customs — Scottish wool trade — Organization of trade in England — Special conditions in Ireland and Wales — Plan adopted in Great Britain — Price and valuation — Wool areas and local staff — Local and Central Advisory Committees — Authorized merchants — Allocation of clips — Methods of purchase — Complaints — Skin wool — Manx wool — Free car- riage — Distribution and sale — Trading accounts.

CHAPTER XII. THE WOOLLEN AND WORSTED INDUSTRIES . 148

Topmaking — Woolcombing on commission — Topmakers as Govern- ment agents — Conversion costing — Economies effected — New specifications and use of rags and waste — Allocation of contracts — Decentralization — Restrictions on civil trade in 1917 — Central Wool Advisory Committee — Priority scheme — Reduction of hours — Discontent in the industry — Appointment of Board of Control] — Partnership between Government, employers, and labour — Standard clothing scheme — Application of costings to civilian products — Working of the scheme — Abandonment after the war.

PART II

MEAT AND FATS

CHAPTER XIII. THE MEAT TRADE AND WAR PROBLEMS Pelion

Meat shortage during the war — Popular demand for Government control, May 1917— Meat (Sales) Order, 1917 — Description of Meat Trade — How the retail butcher obtains his supplies — Farmer’s methods of sale — Distinction between live weight and dead weight — Preference of farmer for live weight— Links in the chain between the farmer and the butcher — Regulation of supply and demand under normal conditions — The American Meat Combine and the price of cattle — Automatic regulation of distribution — The meat problem during the war — Original scheme of control — Objects aimed at — Municipal control of retail distribution — Pro- posals for price reduction — Reserve of meat more economical than reserve of cattle

CONTENTS xix

PAGE CHAPTER XIV. THE PERIOD OF TRANSITION . é c - 166

Preliminary steps — Progressive reduction of prices — Live weight difficulties — Criticisms of price policy — Reduction of herds — The glut and the subsequent shortage — Appointment of Central Live Stock and Meat Trade Advisory Committee — Standardization of cuts — Wholesale Meat Supply Associations and their functions — Census of meat sold retail — Licensing and registration of traders — Inadequacy of fixing retail maximum prices — Threats of butchers’ strike — Limitation of consumption — Crisis in the last week of December 1917 — Complete control established — State purchase of all live stock for slaughter — Pooling expenses of distribution — The Central Live Stock Fund — The meat trade as a national service.

CHAPTER XV. MEAT CONTROL IN OPERATION : . 179

The crisis surmounted — Organization of live stock contro! — Duties of auctioneers — Grading Committees and schedule of prices — Allocation to butchers — Farmers Selection Committees — Assess- ment of supply quotas — Regulation of demand — Meat rationing introduced February 1918 — Registration of customers — Meat permits — Machinery of distribution, in Food Committee areas, in Live Stock areas, and at head-quarters— Functions of meat agents, Wholesale Meat Supply Associations, Importers Committees, National Meat Distribution Committee — Government slaughter- houses and the dead-weight system — Smithfield Control Board — Central Live Stock Fund — Meat finance — Irish imports — Frozen meat imports.

CHAPTER XVI. OILS AND FATS . : : ‘ : : - 201

Meaning of term ‘oils and fats’ — Processes of manufacture — Sources of raw materials — Normal channels of trade — Margarine industry — Glycerine requirements — Intervention of Ministry of Munitions — Appointment of Controller — The ‘ Grand Committee’ — Original scheme of control — Opposition of the trade — Licensing and Maximum Prices Orders, May 1917 — Statistics and research — Danger of fat shortage — Preparations for State purchase of oilseeds — Problem of prices and distribution— Appointment of Advisory Committees — Growth of combination and corporate feeling.

CHAPTER XVII. NEGOTIATIONS WITH CRUSHERS AND BROKERS . : - J : : 8 : c . 210

Investigations into costs of crushing and refining — New system of book-keeping introduced — Provisional ‘ margins’ fixed — Problem of adjusting maximum prices for seed, oil, and cake — Variations in cost between different firms — The ‘ marginal ’ and the average cost — The principle of a common pool — Discussion of plans for pooling — Scheme for a Crushers’ Combine rejected — Profit Equalization Scheme — Transit Pool — New margins agreed, November 1917 — Adjustment of maximum prices — Requisition of seeds, nuts, and

b2

xx CONTENTS

PAGE kernels, and of oils, oileake, and meals — Difference between old and new prices debited to holders of stock. Arrangements for distribution — Employment of brokers — Forma- tion of United Kingdom Oilseeds Brokers Association as sole Govern- ment agents — Allocation of work and remuneration among members — Smooth working of commercial side of distribution.

CHAPTER XVIII. OILSEEDS SUPPLY AND THE INTER-ALLIED OILSEEDS EXECUTIVE . . . ° . - 220

Inter-Departmental Conferences on oilseeds supply, August 1917 — Proposal to centralize purchases and shipping arrangements — Negotiations with French Minister of Commerce — French demand for pooling resources — Finance and shipping dealt with separately — Terms of agreement constituting Inter-Allied Oilseeds Executive — Not a joint trading corporation.

Machinery of purchase — Purchases made f.0.b. not c.i.f. — Reasons for this — Methods of purchase varied — Co-operation of Governments in British Dominions and Possessions — Egyptian cotton seed — Terms of purchase — Appointment of Cotton Seed Control Board at Alexandria — Coco-nut oil from Ceylon — Linseed, rape seed, and eastor seed from India — Argentine linseed — Animal fats from South America, Australia, and New Zealand — Purchases in U.S.A. — Whale oil — Olive oil — West African oleaginous products obtained by purchase c.i.f. — Ministry of Food’s monopoly of import — Ton- nage programme 1917-18 and 1918-19.

CHAPTER XIX. MARGARINE AND EDIBLE FATS = 2 . 230

Prejudice against margarine — Its composition — Figures of con- sumption 1913-16 — Weekly supplies of butter and margarine com- bined during 1917 — Reduction of imports from Holland — Increase of home production — Maximum Prices Order, November 1917 — Un- even distribution — Alarming increase of queues in December — Local rationing and requisitioning — Preparations for complete control — Fewer trade connexions to be broken— The Margarine Clearing House — Functions of local officials — New machinery of distribution working smoothly, June 1918.

Control of quality — Expert inspection and guidance — Weekly samples submitted — Results of examination published — Comparison of marks gained — Improvement in refined oils — Other edible fats and oils — Advantages of standard specifications.

Control of dripping and tallow — The problem of relative prices — Tallow Melters Association formed — Standardization — Sampling and testing — Results of organized competition in quality.

CHAPTER XX. MILK, BUTTER, AND CHEESE . 6 A 245

Shortage of milk during winters of 1917 and 1918 — Statistics of production and consumption — Condensed milk — Organization of the trade — Importance of wholesale firms and milk factories — Report of Sub-Committee on wholesale trade in milk — Waste, over- lapping and unequal distribution due to lack of co-ordination —

CONTENTS Xx]

PAGE Scheme of control proposed — State purchase recommended — Tem- porary measures of control adopted — Wholesale rationing and priority — Work of Divisional Commissioners — Introduction of certified grades of milk.

Purchase of Australian and New Zealand cheese for the Army by Board of Trade — Ministry of Food negotiates voluntary price agreements, April 1917 — Legal maximum prices, August 1917 — Extension of cheese control — Control of butter prices — Centralization of import, December 1917 — Functions of Butter and Cheese Imports Committee — Long term contracts and purchases in open market — Argentine, South Africa, Canada, United States, Denmark, France, Holland — Pooling of purchases and averaging of prices — Results of policy adopted.

PART IV

COMPARATIVE STUDIES CHAPTER XXI. THE PROBLEM OF WAR ORGANIZATION . - 209

Two axioms: subordination of private interests and as little inter- ference as possible — Distrust of State management — ‘ Business as usual ’ — Nationalization of armament industry rejected in 1914 — Contrast with Government action in regard to finance, railways, and sugar — War profits a legitimate expectation for armament share- holders — First year of war — Obtaining supplies — Speculation replaced by collective agreement — The price problem — Growth of control in the second year — State purchase of raw materials — Fur- ther developments in third and fourth years.

Principles of war organization — Economy of man-power, finance, transport, production, and consumption — Impossible to realize fully in practice — Psychological factors.

CHAPTER XXII. ORGANIZATION OF INDUSTRY : : . 270

Crisis in 1917 — Review of situation by Army Contracts Department — Man-power, production, export trade, consumption — Measures already taken inadequate — Need for treating each industry as a unit — Illustration from woollen and worsted industries — Man- power and Production Committees — Constitution and functions — Advantages of joint control — Promotion of export — Exporters Committees — Restriction of imports — Centralized purchase of raw material — Importers Committee — Division of functions between

Departments. CHAPTER XXIII. THE MECHANISM AND THEORY OF PRICE FIXING ; : : c : : 3 : - . 282

The novelty of price control_-— Growth of an idea — Price control for military purposes — Methods of the ring adapted for public ends — Price fixing for civilian consumption more difficult — War. time boots and standard clothing — Standardization and identifica-

Xxil CONTENTS

PAGE tion by marks — Resemblance to sale of proprietary articles — Control of supply, licensing, and rationing of demand — How far were maximum prices observed ?

Theoretical objections to price fixing — Effects on production and consumption — Price fixing used either to discourage or to encourage production — Guaranteed prices for farmers — Reduction of con- sumption by rationing rather than by destitution — Effect on prices and consumption of non-rationed articles — Continual extension of control — The right balance of prices — Diversion and transference of purchasing power — Price control and inflation — Was inflation inevitable ? — The alternative.

CHAPTER XXIV. THE STATE AS IMPORTER : ; . 299

Reasons for State purchase — Sugar — Meat — Flax — Kips Jute — Wool — Hemp — Butter and cheese — Oilseeds — Summary of reasons — Methods of purchase — Dominions — India — Crown Colonies — Egypt — Russia — United States — Neutral countries.

Purchasing organization — Union of official and business methods — Variety of forms — Centralization in wool — Decentralization in oilseeds — Buying agents in flax and hemp — Contrast with jute — Official buying mission for food purchases in U.S.A. — Semi-official trade organization in butter and cheese.

Must State import be a monopoly ? — Conditions of success in Government trading operations — Business men as officials — Charges of incompetence — Competition versus centralization the issue — Recent tendencies in producing countries.

CHAPTER XXV. THE COSTINGS SYSTEM . : < : . 316

Profiteering and the costings system — Costing in private business — Machinery of cost investigations — Pre-war indifference to costing — Employment of chartered accountants — Work of Costings Depart- ment at Ministry of Food — Confidential nature of work — Regulation 2 G — Distinction between items chargeable to cost and to allocation of profits — Adjustment to varying circumstances.

Cost of production in economic theory — Prices normally determined by marginal cost of production — No longer applicable in war-time — Limitations of monopoly profits by costings system — Complexities of applying the costings principle — Distinction of Government requirements and civilian needs — Treatment of importers, whole- salers, retailers, manufacturers, farmers — Objection that costings system gives large profits to best firms — Differential rent under normal conditions — Without costings system war profits would have been larger — Not always necessary to base prices on highest cost — Striking divergence in costs between efficient and inefficient firms — Bearing of this on economic laws — Survival of the unfit increases differential rent — Average costs as basis of fixed prices — Pooling

and unification — Application to distribution, manufacture, agriculture.

CONTENTS XXlil

PAGE CHAPTER XXVI. CONTROL OF AGRICULTURAL PRODUCE . 331 Contrast between Germany and Britain — Difficulty of controlling domestic produce — The balance of prices — Contrast with control of manufacture — Application of costings to agriculture — A new science — Differential or uniform prices — Maximum and minimum prices — Methods of subsidizing — Effects of price control — Advantages of guaranteed price. Methods of marketing — Little combination or co-operation before the war — Centralization necessary for control — Comparison of methods — Relations between Government and farmers — Advisory Committees — Agricultural Council — Parliament. Valuation and grading — Fixed prices and different qualities — Gresham’s law applied to commodities — Improved methods of standardization — Grading of milk.

CHAPTER XXVIII. CONTROL OF MANUFACTURE 5 - . 3847 Control of industry as part of wider problem — Gradual growth of unification — Collective agreements, control of raw materials, costings system, rationing of raw materials and standardization of product — Application to civilian trade.

No interference with ownership or management of factories — Re- strictions on buying and selling — Similarity to Kartel system — Costing and transfer of products at fixed prices — Similarity to vertical trust — Vertical combination of horizontal associations in oils and fats — International combination — Association not amalga- mation of separate firms — Representative governing bodies and advisory committees.

Limitation of profits and price-fixing simpler in manufacture than agriculture — ‘ Taking possession’ of factories and costings system compared — Problem of securing efficiency and economy — Com- parison with methods of trust — Inducements to economy retained — Competition in quality — Organized competition and encouragement of initiative in large-scale organizations.

CHAPTER XXVIII. TRADERS AS GOVERNMENT AGENTS . . 363 Functions of merchants and middlemen — Different relationships between Government and traders — Individual agency agreements — Coliective agreements — Controlled monopolies — Semi-official trade organizations — Direct distribution by Government — Employment of all or selection — Customary trade channels maintained or abolished — Trade practices modified — Remuneration by flat-rate, sliding scale, percentage, fixed maximum, lump sum — Financing by traders or by Government — Guarantees any loss — Control simplified by delegation of responsibility — Summary and classification of agency arrangements.

CHAPTER XXIX. ORGANIZED DISTRIBUTION . : : - 372 Adjustment of supply and demand at fixed prices — Rationing and organized distribution — Contrast with free market — Cotton and grain markets — Futures, crop statistics, standardization, speculation — Other produce markets— No futures, imperfect

XX1V CONTENTS

standardization — Unorganized markets — Influence of rumours and commercial instinct — A story of cement — Monopoly distribution — Centralized planning and adjustment — Changes of price less frequent — Uniform prices in different places — Standardization of quantities and qualities — The importance of reserves.

The clearing-house system under control — Jute, flax, hemp, wool, meat, vegetable oils and margarine — The zoning system — Economy of transport — Financial pooling — Free carriage — Averaging costs — Selling price determined by average rather than marginal cost — Pooling costs of related products — Soap, paint, and margarine.

Post-war developments — Gold, petroleum, rubber, and grain — Possibilities and limitations of organized distribution.

CHAPTER XXX. REACTION AND RECONSTRUCTION

The transition from war to peace — Conflict of opinion on the future of State control — An overwhelming demand for freedom — Perma- nent influences of war-time control — The study of administration — Decentralization and initiative— Delegation of responsibility — Dis- tinction between business administration and administration of law — Publicity — The importance of criticism — Advisory Committees — Statistics and quantitative measurement — Civil servants and business men — The results of co-operation — The qualities necessary for successful administration — Administration as a profession — Effect of control on industry — Development of combination — Reaction after the war— The need for stability — Merchants as agents — Marketing as a profession — Progress and stagnation — Conclusion.

APPENDICES

. Agreement constituting the Commission Internationale de Ravitaille-

ment

. Royal Commission of foe ane March 31, 1915, as “e cmon

tion in respect of loss or damage to property or business in the United Kingdom occasioned by. exercise of rights and duties in the defence of the Realm

3. Flax and Flax Seed Account 4. Raw Jute Account 5. Manila Hemp Account . : 6. Boot and Leather Committees 7. British Wool Areas E , 8. Memorandum on Control of Meat Supelics (Tux une 6, 1917) : : 9. The Cattle (Sales) Order, 1917." Dated December 24, 1917 10. The Sheep (Sales) Order, 1918. Dated January 15, 1918 . 11. Circular Letter to Oil Seed Crushers (November 29, 1917) . 12. Joint Executive for Vegetable Oils and Oil Seeds : Memorandum of Agreement : c : - 9 13. Ministry of Food — Costings Department : Oils and Fats. Memo- randum of Instructions to the District Supervising Accountants 14, Letter from Lord Rhondda to the Secretary of the Ministry of Food on State purchase of the Wholesale Milk Trade . é INDEX . : ; : 5 : : : é 4

PAGE

387

3899

451

INTRODUCTION

The paradox of war — Patriotism and social idealism — Disillusionment after the war— Was the ‘larger air’ an illusion? — The background of State control — Corporate feeling stronger than self-interest.

* War is the ruin of nations,’ said Louis XIV on his death- bed, after a reign devoted to the military aggrandizement of France. ‘ The sword settles nothing,’ said Napoleon at St. Helena. To-day the whole world has learnt the same lesson. The tragedy of the great war has branded into the world’s consciousness a horror and loathing of war itself as of something utterly hideous, ruinous, and vile. *

And yet there remains the paradox, which military apologists have so often urged, that war evokes some of the finest qualities in human nature. The last war is no exception. Just as its appalling evils exceeded in magnitude and horror those of all previous wars, so the self-sacrifice, courage, disinterested service —and even, one might add, the achievement of willing and effective co-operation, nationally and internationally, between vast masses of men, surpassed anything that would have been thought possible in time of peace. In almost every belligerent country the same phenomena were found—an intense patriot- ism that rose at first to the height of a religion and found its expression in the sacrifice not only of life itself, but of wealth, comfort, and the habits of a lifetime; a readiness to make experiments and adjustments in social and economic organiza- tion with astonishing rapidity and in defiance of precedent and tradition; and a concentration of massed endeavour and willing service that made light of almost insuperable obstacles and compressed the evolution of years into as many months. For the first time in history the world began to have a vision of what human association, raised to its highest degree, might accomplish. No wonder that the statesmen who were able to evoke such extraordinary manifestations of social harmony and social energy, believed or professed to believe that after

1569.53 B

2 INTRODUCTION

the war things would never be as they had been before, that in a few years the ills and injustices of centuries would be re- dressed and that the social system would be rebuilt on just and enduring foundations.

The memory of those few years of collective endeavour is something that many who now find themselves discarded or outcast recall almost with feelings of regret. During the war the humblest, the most aimless, and the most despised were filled with a new vision of usefulness and purpose in their lives. Their country wanted them. ‘ All the qualities of a man acquire dignity when he knows that the service of the collectivity that owns him needs them.’! Patriotism evoked unsuspected capacities and transformed the despondent, the cynical, and even the vicious from parasites or sufferers into heroes and idealists. In many indolent and selfish lives the war, for a time at any rate, worked a moral revolution. Social relations were transformed, not by legislation or by organization from without, but by individual regeneration from within.

This is not the whole of the truth, but it is the side that is most easily forgotten in the mood of disillusionment that has followed the war. Dishonesty, cruelty, and treachery are no less the fruits of war than heroism and self-sacrifice. The profiteer, the food-hoarder, the dishonest contractor, and the tyrannical or incompetent official were more in evidence in war than in peace, partly because war provided greater opportunities, but partly also because the atmosphere of war was demoralizing as well as stimulating.

And its evil effects are not confined to the war period. The after-effects of war upon conquerors and conquered alike are almost as devastating as the war itself. The state of European society since the Armistice has been marked by the worst features of war psychology with none of its redeeming qualities. Dreams of social reconstruction have been shattered. In every country the union sacrée has. been dissolved. There is no common purpose to keep men together. Suspicion, revenge, class-feeling, and outraged nationalism have reopened great rifts in human society, and economic and social life is suffering a violent reaction from

1 William James, Memories and Studies, p. 285.

INTRODUCTION 3

the hothouse growths of war. Loyalty to their leaders and willing response to the call for public service have given place in men’s minds to a mood of profound distrust in the capacity of govern- ments to govern and of statesmen to lead. The privations of peace have in many countries been as severe as the privations of war, and the men who successfully strove to organize the world’s resources for the prosecution of the war declare themselves helpless to repair the deficiencies and harsh injustices of peace.

So prompt have we been to forget the new spirit which grew up during the war that when we read again the contemporary literature of the war period—not the literature of war aims but sober plans of reconstruction—the change that has taken place in so few years seems like the difference between youth and age. There is a poignant irony in reading again such sentences as these :- “ Life seems wider and more impersonal. Our fellow- countrymen seem nearer to us. Rank and class seem to count for less. All have suffered alike and all have served alike, and all have the same world to live in and repair—a world that seems lonely at times beyond all bearing, yet is lit up with the flame of sacrifice and the undying memory of those who are gone. . . People have come to realize that what is needed is not a mere transitory programme to enable life to resume its normal pre-war channel, but some larger and more permanent policy, conceived in the spirit which the war has revealed. . . . Men who have breathed the larger air of common sacrifice are reluctant to return to the stuffy air of self-seeking.’ +

‘The stuffy air of self-seeking ’ is so suffocating to-day that many have forgotten what it felt like to breathe the larger air. They remember only the pains and discomforts, the lying and corruption, the suppression of liberty, the profiteering, the waste, and the mismanagement. In every new account of what happened during the war we expect to learn only fresh scandals, fresh evi- dence that the * larger air’ was an illusion, and that the men who stayed at home were guided not by any ideals of public service but by the narrowest self-interest and class antagonism.

The historian of events so recent must beware of this mood of disillusionment. He must admit the idealism of war as a fact. 1 A, E. Zimmer, Nationality and Government, 1918, pp. 244, 245.

B 2

4 INTRODUCTION

however illusory its fruits. Evanescent and conditional though it was, it supplies an essential background to the subject-matter of this book.

In his well-known essay on The Moral Equivalent of War William James suggests one of the lessons to be learned from the psychology of war. ‘The War Party’, he says, ‘is assuredly right in affirming and reaffirming that the martial virtues, although originally gained by the race through war, are absolute and permanent human goods. . . . Men now are proud of belonging to a conquering nation, and without a murmur they lay down their persons and their wealth, if by so doing they may fend off sub- jection.’ He then raises the pregnant question, how far it may be possible to retain the martial virtues by substituting as the occasion for their exercise the constructive interests of society in place of its defence against external aggression. ‘ Intrepidity, contempt of softness, surrender of private interests, obedience to command, must still remain the rock upon which States are built. . . . It would be simply preposterous ’, he concludes, ‘if the only force that could work ideals of honour and standards of efficiency into English or American natures should be the fear of being killed by the Germans or the Japanese.’ !

The ‘ fear of being killed by the Germans ’, whether or not it is the only force that can evoke such a response, did in fact work a surprising transformation in current standards of honour and efficiency. Traders and manufacturers learnt to subordinate their interests to social ends; workers were induced to work longer hours, to surrender time-honoured customs, and to speed up production ; and wealthy consumers learnt to bear their share in the deficiencies of food and fuel. The higher standards of honour and efficiency, which were commented upon during the war and aroused large hopes of social reconstruction, were not altogether illusory. Even in the sphere of civilian administration, with which this book is concerned, the organization of State control was an expression of corporate feeling and collective responsibility of a far more intense kind than that which binds society together in times of peace.

But if social idealism supplies the background, the fore-

+ William James, op. cit., pp. 288-95.

INTRODUCTION 5

ground of the picture is a jungle of conflicting private interests. Every restriction on civilian freedom, every limitation of the right to strike and the right to profiteer aroused vigorous opposition. The civilian’s duty in time of war was a fluctuating code of negative rather than positive injunctions. It was immoral to oppose conscription for the Army, but it was not immoral to obstruct conscription of labour or conscription of wealth. It was only gradually that patriotic emotion became effective in matters of no direct military concern. Men reacted vehemently and naturally against trading with the enemy ; but it was difficult to regard a breach of food and fuel restrictions with the same moral fervour. In spite of the new spirit which rendered closer cohesion and organization possible there were strong centrifugal tendencies which had to be overcome. Lack of imagination, habit, and self- interest were the rocks over which each scheme described in this book had to be steered with anxious circumspection. Not the least of Lord Rhondda’s achievements as pilot of the nation’s food- ship was that he understood the psychology of obstruction and knew how to meet it with firmness and yet with sympathy.

But when all is said, the wonder is not that individualism was so strong, but that corporate feeling was stronger. Hateful as was the need and hideous the result, yet the temper and method of war organization still leave a hope that human association may accomplish miracles. The machinery, the technical capacity, the uncanny secrets of science are there to be used; it is only men’s minds which refuse to devote them to the service of peace and life.

PART I ORIGINS OF CONTROL AT THE WAR OFFICE

CHAPTER I ARMY SUPPLY IN PEACE AND WAR

Historical background — Army supply under Queen Elizabeth — Cromwell’s reforms — Corruption returns with the Restoration — Abuses in Marlborough’s time — Scandalous mismanagement during Napoleonic wars — Sufferings of the troops in Flanders and West Indies — Corruption at the War Office — Duke of Wellington’s reforms— The Crimean scandals — ‘ Old-fashioned depart- mentalism ’ —.Growth of integrity and efficiency in the public services — Results of democracy.

Origin of Army Contracts Department — Purchasing machinery of British War Office in 1914 — Functions of Contracts Department and Supply Depart- ments — Army factories — Efficiency of pre-war system.

Tur administrative experiments described in this book, which arose out of the need for equipping an army and organizing a nation for war, were of a kind and magnitude unprecedented in history. Never before, except possibly under the Incas of Peru, had civil administration been called upon to play such a part in the life of a nation. Towards the end of the war the Army had become practically coterminous with the community, and the scope of Government activities extended over nearly the whole field of civilian life. Public administration was utterly unprepared for such a task; nor was its record in the past such as to inspire confidence. Even the simpler business of equipping the small armies of previous wars had rarely been conducted with con- spicuous success. Army contracts was a phrase that connoted corruption and mismanagement. It may be useful, therefore, to glance briefly at the history of this branch of public adminis- tration, before describing the efforts made by the War Office in 1914 to escape the reproaches of incompetence so freely flung at it, and to dissipate some of the suspicion and mistrust bred of centuries of army scandals.

‘It is an unpleasant thought’, says Mr. Fortescue, reviewing

ARMY SUPPLY IN PEACE AND WAR a

the seamy side of army administration in the past, ‘ that dishonesty and peculation should be inseparably associated with so much that is noble and heroic in human history, but the fact is indis- putable and must not be lightly passed over.’ ! Nor is it a pleasant thought that the higher moral standard that has become general in public administration during the last fifty years should have rendered it possible to carry on the most tragic war in history. But the fact remains. War on the modern scale can only be waged by nations that can rely on a reasonably high standard of honour and efficiency in the public services.

For the greater part of English history neither Parliament nor the Crown took adequate steps to ensure that the Army was properly fed and clothed. Each regiment was regarded as the colonel’s property, and the profit he made on clothing his men was in time of peace his chief source of income. In Queen Elizabeth’s time the soldier’s pay was 8d. a day or £12 13s. 4d. a year. The commanding officer drew the pay and was entitled to deduct £4 2s. 6d. for clothing and £7 8s. 4d. for victualling, leaving only £1 2s. 6d. for the soldier. In consequence of this system commissions were bought and sold, and it became a regular practice to falsify the muster roll in order to draw pay for a fictitious number of men.”

This system was for a time swept away by Cromwell. The purchase of commissions was abolished, and with it went a mass of corruption and fraud. The New Model Army was not only better disciplined but had a higher morale than the old army. With the Restoration, however, the old abuses returned, and under Charles II corruption was rampant from the highest to the lowest. The Paymaster-General was responsible to the King alone, and took a commission of 5 per cent. on all pay issued to the Army. Civilian officials, such as auditors, commissaries, and their subordinates, obtained their livelihood by a system of fees and perquisites. Officers were forced into dishonesty by the withholding of their pay by civilian officials in London. Captains of companies stationed in Ireland appropriated the entire pay of their men and turned them loose to live by plundering the

1 Hon. J. W. Fortescue, History of the British Army, vol. 1, p. 31. 2 Thid., p. 156.

8 ORIGINS OF CONTROL AT THE WAR OFFICE

inhabitants. The evils of corruption which had been checked by the Puritans were now firmly established, and were not eradicated for nearly a hundred and fifty years. “The sin and shame of England is that though she had once put away the accursed thing from her, she returned to it again as the sow to her wallowing in the mire.’ }

In 1702 the Paymaster-General, Lord Ranelagh, was convicted of fraud, and the Paymaster-General’s office was reformed. In 1706 the Duke of Marlborough caused an inquiry to be made into the abuses which prevailed in the clothing of the Army. In spite of the mismanagement and corruption of the commanding officers Marlborough was opposed to centralization of supply, and the colonels were still left to provide for their men ; but a Board of General Officers was appointed to sanction contracts and to see that the colonels did their duty. During the war of the Spanish Succession severe losses were suffered in the Peninsula and in the West Indies owing to the breakdown of the supply services. Marlborough himself was impeached for defrauding the Exchequer by taking 24 per cent. commission on all bread supplied to the Army in the Low Countries. The Duke was able to prove that this was the usual practice, and that the funds so obtained were used for paying the cost of the secret service, for which Parliament made no provision. Marlborough was dismissed from his post, but his successor, the Duke of Ormonde, was allowed by Parlia- ment to continue the same practice. In 1712 a mutiny broke out because the troops could get no bread at all.?

In the ill-fated expedition to Carthagena in 1740, which is described by Smollett in Roderick Random, nine out of every ten men. who sailed in the original expedition perished through sick- ness or privation. The stores supplied were ‘ unspeakably bad ’, the food was indifferent, and there were no nurses, doctors, surgeons, or hospital supplies. The responsibility for this disaster appears to rest chiefly with the incompetence and corruption which prevailed at the War Office, but the system under which colonels profiteered at the expense of their men contributed to the breakdown.? According to the Report of the Commissioners

1 Op: cit., pp. 285-321.

eis ae . ® Ibid., pp. 409-560. 3 Thid., vol. ii, pp. 63-78.

ARMY SUPPLY IN PEACE AND WAR 9

on Army Expenditure in 1746, deductions for clothing were often much in excess of the cost. In 1745 it was found that in the Ist Horse Guards the deductions amounted to £2,823, and the clothier’s account was £1,946, leaving a profit of £877 for the colonel. This system was not abolished till 1854.1

The mismanagement of the Commissariat during the wars with F rance, until the Duke of Wellington took it in hand during the Peninsular War, are not facts on PNA historians usually dwell. The Army suffered greatly from Pitt’s ideas of economy. The Treasury paid large sums for raising recruits, and then allowed thousands of them to be killed or disabled by small economies in the supply of food, clothing, and medical attendance. At this time a colonel’s nominal allowance for clothing each soldier amounted to no more than £2 8s. a year, which involved him in a heavy loss. The civilians in the military departments tried to make money at the expense of the officers, and the officers were compelled to recoup themselves at the cost of the men. The con- sequence was that colonels took bribes from contractors, soldiers were constantly in debt, food and clothing was bad, and desertion was frequent. Pitt’s record as an economist is summed up in the History of the British Army, as follows: ‘ Pitt allowed the soldier to starve from 1784 to 1791, gave a grudging pittance in 1792, and increased his pay threefold under threat of mutiny in 17977.’ ?

In these circumstances it is not surprising that the Duke of York’s Army which fought in Flanders in 1794 is said to have been worse clothed than British troops had ever been on any previous recorded occasion. Raw recruits were sent across the Channel without arms, ammunition, clothing, or medical stores. The doctors and surgeons were convicted of inefficiency, dis- honesty, and cruelty, the reason being that the Treasury refused to pay the fees demanded by properly qualified medical men.*

During the long campaigns in the West Indies from 1794 to 1798 the troops were decimated by bad food and inadequate and unsuitable clothing. This was due not merely to inefficiency but to fraud and corruption. Many of the officers in charge of army

1 de Fonblanque, T'reatise on the Administration and Organization of the British Army, 00.

p. 40) 2 History of the British Army, vol. iii, p. 580; vol. iv, pp. 316-20. 00.

3 Thid., vol. iv, p. 3

10 ORIGINS OF CONTROL AT THE WAR OFFICE

supply made large fortunes. One Commissary is said to have amassed £87,000 by shameless fraud. The whole service was infected by the prevailing system of bribery and dishonesty.?

During this period the Secretary at War was Sir George Yonge, who after leaving the War Office was appointed Governor of the Cape in 1799, and was recalled in 1801 for having granted a monopoly of the meat supply of the garrison to a firm of dishonest contractors who allowed him a share in the profits.2, The War Office under Sir George Yonge was ‘a sink of robbery and ex- tortion’. The clerks and officials made their livelihood by a recognized system of fees and customary perquisites. One official, as part of the emoluments of his office, enjoyed the right to supply coal to the garrison of Gibraltar as a profit.*

It is a relief to turn from this record of systematic corruption to the achievements of the Duke of Wellington during the Penin- sular War. Writing to Lord Castlereagh from Portugal in August 1808, he says: ‘I have had the greatest difficulty in organizing my Commissariat for the march, and that department is very incompetent ; the department deserves your serious attention ; the existence of the Army depends upon it, yet the people who manage it are incapable of managing anything out of a counting- house.’ Later he writes: ‘Our Commissariat is very bad, but it is new, and will improve I hope.’ It was largely owing to the Duke’s own efforts and to the experience he had gained in his campaigns in India, that in a few years the supply and transport departments of his Army reached a comparatively high standard of efficiency, and appear to have been distinctly superior to those of Napoleon. The French armies were accustomed to live mainly by pillage and requisitioning. But even so Napoleon was not satisfied with his Commissariat. ‘ Envoyez-moi donc,’ he wrote to the Directory from Italy in 1795, ‘un ordonnateur habile, distingué, homme de génie ; je n’ai que des pygmées qui me font mourir de faim dans le plus beau pays du monde.’ Sir Charles Trevelyan states in a Memorandum written for the War Office in 1855 that the Duke of Wellington raised the organization of the Commissariat so high that on the restoration of peace the French

1 Op, cit., vol. x, p. 192. ~ #® Thid., vol. iv, p. 872. ERLOIGs nV Ole Xen ponL Oa

ARMY SUPPLY IN PEACE AND WAR 1]

Government sent Baron Dupin to inquire into the arrangements which had proved so conducive to military efficiency. ‘It has now become our turn ’, he adds, referring to the Crimean scandals, *to learn from the French.’ ! i

During the nineteenth century a gradual improvement took place. Many of the traditional abuses were done away with, and the House of Commons, through its Public Accounts Committee, paid increasing attention to irregularities in the administration of public funds. But the system of obtaining supplies for the Army was still unsatisfactory when the Crimean War broke out. It was not till 1854 that the business of feeding and clothing the troops was taken out of the hands of commanding officers and centralized in a single supply department.

The loss of life and the sufferings caused by the breakdown in the supply of food, clothing, and hospital stores in the Crimea were proportionately not greater than in. many of the disastrous expeditions during the war with France fifty years before. But public opinion was now more easily aroused by the horrors to which the private soldier was exposed. In the official report on the Crimean scandals, published in 1855, the picture of muddle and misery, which had been painted so‘ vividly by the famous war correspondent Russell, was shown to be by no means exaggerated. Apart from the breakdown of transport and the lack of proper medical equipment, much of the food issued was uneatable, and the boots and clothing were deficient in amount and inferior in quality. The Report says that the clothing was ‘ extremely spongy in its texture, badly put together, and quite unfit to stand the tear and wear of the rough work of the trenches’. Of the boots it says, ‘like all articles obtained by contract from the lowest bidder, the workmanship was bad, and totally unfit for endurance in the tenacious soil of the trenches, or for travelling along the muddy roads, in which the men were often half-leg deep.’ A report of a Board of Officers which met at Sebastopol on January 8, 1855, states that ‘two or three days’ wear on duty and fatigues have rendered the boots useless, the heels and soles becoming detached from the uppers ’.?

1 Treatise on the Administration and Organization of the British Army, pp. 55-60. 2 Report of the Commission of Inquiry into the Supplies of the Britssh Army in the Crimea, 1855, p. 3.

12 ORIGINS OF CONTROL AT THE WAR OFFICE

Not only was there an absence of sanitary precautions, which caused a severe outbreak of dysentery and cholera, but no atten- tion was given to the need for a scientific dietary. During the first year the troops were fed for the most part on biscuits and salt meat, and there was a total lack of fresh vegetables. The attitude of the Commissariat on this matter is illustrated by a story told by Prince Albert to Lord Panmure, the Secretary of State for War, in a letter dated February 10, 1855 :

It is admitted by allsmedical men that the greatest danger to our army arises from scorbutic diseases and a corrupt state of blood, caused chiefly by the use of salt provisions. Vegetables are of the utmost importance to the poor men. It so happens that one of the Crimean Relief Societies sent out a whole shipful of vegetables. On its arrival at Constantinople, the man in charge of it reported himself to the Commissary (I believe Smith, reported to be our best), who was delighted to hear of the arrival of provisions; when he saw the list, however, and found they were vegetables, he declined purchasing ‘as the Commissariat had no power to purchase vegetables’!! You will know that such is the ordinary rule,

but surely in these moments they ought to have full powers to exercise their own discretion.

Lord Panmure replied as follows :

The narrative with which Your Royal Highness has favoured me is of a piece with the old-fashioned departmentalism throughout the whole administration of military affairs, which must be entirely overset.!

The reforms that took place during and after the Crimean War laid the foundation of the modern system of army administration. At the present time when the standards of efficiency expected in the public service are still apt to be higher than average human nature can reach, it is worth emphasizing the rapid and unmis- takable improvement which has taken place even in the last fifty years. One has but to dip into the history of army adminis- tration to realize that there has been a marked advance in the integrity and efficiency of public servants and the honesty of army contractors. What are the main reasons for this change ?

It has often been observed that honesty and fair dealing in business have been encouraged by the development of banking and the growth of the credit system. The causes that have con- tributed to raise the standards of honour and efficiency in public

1 The Panmure Papers, vol. i, pp. 54-5.

ARMY SUPPLY IN PEACE AND WAR 13

administration are many and various. For one thing ideas of economy have changed. It is now realized that it is more economical to pay decent salaries to Government officials than to leave them to obtain their livelihood by recognized or illicit fees and perquisites. The principle of paying a living wage to all public servants out of public funds has only been admitted in compara- | tively recent times. Without this it was impossible to expect efficient and honourable service or a high sense of public duty.

But another important factor contributing to the same end has been the growth of democratic institutions and a democratic public opinion. The abolition of sinecures and perquisites has been accompanied by an increasingly critical and exacting attitude on the part of the public and the Press towards the conduct of public officials. This attitude, it is true, is sometimes more concerned with the cutting down of expenditure as an end itself, without regard to the value and efficiency of the service performed ; but on the whole, especially in time of war, and on matters in which public opinion is particularly interested, criticism has acted as a spur to efficiency. The results of democracy are particularly noticeable in the change which has taken place in the treatment of the private soldier. He is no longer a common vagabond, forced by destitution or the attentions of the press- gang to exchange the frying-pan of peace for the fire of war. He is a voter, with a share in the government of his country. Whether he enlists as a volunteer or is conscripted by the will of the majority, he must be treated as a citizen with full rights. The heartless indifference of the Government and the ruling classes to the sufferings of the common soldier during the Napoleonic wars reflects a social system which first created rogues and vagabonds, and then offered them service in the Army as the only possible avenue of escape from a life of misery and persecution. The elaborate care taken to safeguard the health and well-being of the soldier during the Great War was due not merely to the advance of medical science and improvements in the technique of public administration, but to the extension of democracy and public education and the higher standard of living which they have rendered possible.

The Army Contracts Department of the War Office was

14 ORIGINS OF CONTROL AT THE WAR OFFICE

created during the Crimean War in consequence of the breakdown of the previous system of obtaining supplies for the Army. It was laid down that all stores required for the Army should be purchased by the Contracts Department, and that the normal method of making contracts should be by public competition. After the South African War, the experience of which had shown that the problem of an efficient and reliable supply system had not yet been entirely solved, much attention was given to the reorganization of the Purchasing Departments of the War Office. The principle of centralizing purchases was confirmed by Sir Clinton Dawkins’ Committee, which reported in 1901, but was discarded in 1904 on the recommendation of Lord Esher’s War Office (Recon- stitution) Committee. In that year the Contracts Department was abolished, and the military supply departments were autho- rized to do their own buying direct. The new system did not, however, last long. It resulted in competition in the same markets between the different supply departments, and the absence of a single purchasing authority led to other difficulties. The Army Council therefore decided in 1907 to re-establish the post of Director of Army Contracts. The main lines of organization then laid down continued with slight alterations till the outbreak of war.

The underlying principles of this organization were that the buying for the whole Army should be centralized in the War Office; that the military supply departments should determine requirements, draw up specifications, and receive, store, and inspect the goods ; and that the actual placing of contracts, the selection of firms invited to tender, and negotiations as to price should rest with the Army Contracts Department, which was a civilian branch, responsible to the Financial Secretary. The advantages of centralization of buying were obvious. But the grounds for divorcing the functions of purchase and inspection were less obvious. The main object was to provide a system of checks and counter-checks, which would prevent any possibility of financial laxity or costly errors of judgement. That the system involved inevitable delays owing to the necessity of referring to and fro between different offices, which were situated miles apart in different parts of London, was not a serious defect in normal

ARMY SUPPLY IN PEACE AND WAR 15

times. Mistakes were less likely to occur if nothing could be done in a hurry; and experience confirmed that several brains were better than one in dealing with the wiles of Army contractors. The system was thus a rather complicated division of labour under which the Financial Member of the Army Council, who was responsible to Parliament for the expenditure of public money, looked after the question of price; and the Quartermaster- General or the Master-General of the Ordnance, his colleagues on the Army Council, decided what to buy and saw that the quality was satisfactory.

In July 1914 the Army Contracts Department consisted of fifty-six officials and clerks. It was_their business to keep lists of reliable contractors ; to receive demands from the supply depart- ments, and send out inquiries and forms of tender to selected firms ; then to open the tenders received at the time appointed, tabulate full particulars, and pass them on to the supply depart- ments with their recommendations ; and finally to issue forms of contract to be signed and returned by the successful firms. A staff of not more than twenty was sufficient to handle in this manner the business of purchasing munitions and explosives. The average annual purchases of the Army in times of peace were between five and six million pounds, the actual total for the two years before the war being £11,370,000. About half this ‘amount represented contracts placed by the Contracts Department of the War Office, the balance being local purchases reviewed, but not placed, by the Contracts Department. The resources of the whole world were available to draw upon. Hundreds of firms catered specially for Army requirements, and many thousands could be counted on to compete eagerly for the privilege of selling to the War Office and calling themselves Government Contractors. Except for an occasional attempt at a ‘ring’, that is to say, an understanding between tendering firms, competition could be trusted to keep prices down to a reasonable level. The constant pre-occupation of the Contracts Department was to watch for evidence of rings and to take steps to break them up when discovered by refusing to deal with the offenders. It was a severe punishment for most firms to be struck off the War

Office list.

16 ORIGINS OF CONTROL AT THE WAR OFFICE

Equal care had been given to perfect the organization of the military supply departments. Technical experts were employed for drawing up specifications and inspecting deliveries. Scientific methods of testing were in use. Estimates of requirements could be gauged with great accuracy. With a strictly limited amount of funds to draw upon, the military departments had to cut down their expenditure to the minimum, purchase goods which would last for a long time, and never keep more than a minimum of reserve stocks on grounds of economy and for fear of loss by deterioration. At Woolwich, Pimlico, and elsewhere the military departments had their own Army factories, where uniforms, guns, and ammunition were manufactured, special processes tested, and comparisons made with the quality and cost of privately manufactured goods. An extension of direct manu- facture by the State might perhaps have been justified both on grounds of efficiency and economy, but this development had been abandoned on grounds of policy. A Committee on the Organization and Administration of the Manufacturing Depart- ments of the Army appointed in 1887, under the chairmanship of the Earl of Morley, reported that they looked upon the success of the Army factories with some apprehension. They found that the State factories were well-equipped and economically managed, but they noticed a tendency for their activities to be expanded unduly at the expense of private manufacturers. ‘The natural tendency for able administrators is to develop the works of which they have charge to the fullest possible extent.’! This tendency they seem to have regarded as a menace to the private armament industry, the prosperity of which was vital to the defence of the country. As a result of this point of view the Army factories only produced about a third of the guns and ammunition and half the uniforms required, but their existence provided a useful check on private manufacturers. The fraudulent contractor was easily caught ; his only chance to avoid detection was by bribery, but under the elaborate system of checks which prevailed suc- cessful bribery was rare and attempts were soon detected and punished.

* Report of the Committee on the Organization and Administration of the Manufacturing Departments of the Army, 1887, C. 5116.

ARMY SUPPLY IN PEACE AND WAR 17

Under the conditions obtaining in times of peace, the system so organized worked smoothly and efficiently. Within the limits imposed by the strictest economy, it gave the Army all that it required. It delivered the goods at the right time and in the right place, sound and durable in quality, and at the cheapest possible price. Unquestionably the War Office machinery was adequate for the needs of peace. What would happen if a European war should break out, no one could prophesy.

1569.53 c

CHAPTER II THE OUTBREAK OF WAR

Normal routine continued — Appeal for 500,000 volunteers — Centralized buying breaks down — Story of jerseys bought by local commands — Paralysis at head-quarters — Purchases by Allied Governments — Commission Inter- nationale de Ravitaillement — Unemployed harness-makers and Army saddles — Lord Kitchener’s intervention — Proposals for reorganization of Army buying — Necessity for organizing industry first realized November 1914 — Reluctance to interfere with private enterprise — Nationalization of armament firms rejected — Ministry of Munitions established May 1915 — Provision of food, clothing, and miscellaneous equipment remains with Army Contracts Depart- ment — Origins of State control in the War Office.

Wuen war broke out there were no sudden changes. The normal routine continued as if war were to make little difference. When the Expeditionary Force had crossed to France, additional orders were placed, and appeals for special urgency began to interfere with the smooth flow of business. Then the decision to raise an army of a hundred thousand men brought orders on an unprecedented scale. The work of the Contracts Department began to grow congested and the staff became overburdened. A few weeks later it was announced that Lord Kitchener had decided to appeal for a further five hundred thousand men. To equip such a force seemed beyond the range of possibility ; but the same system continued, the same number of officials and clerks endeavoured to cope with the ever-growing mass of arrears, and larger and larger demands were made upon the firms on the War Office list. Long before even the most necessary supplies were ready, recruits began to pour in to the improvised camps in their tens of thousands. The system of centralized buying broke down ; local commands bought where they could at any price ; recruits were told to bring their own blankets and toilet neces- saries to make good the deficiencies of the official supply. Pneumonia broke out in many camps and was attributed to the lack of proper equipment. The competition of local commands, of privately raised battalions, of Territorial Force Associations,

THE OUTBREAK OF WAR 19

of the Allied Armies, and of the supply departments and Contracts Department of the War Office produced a wild scramble, which sent prices up by leaps and bounds.

The following story is well authenticated: A consignment of jerseys was bought by a firm of merchants at 3s. 11d. each and offered to the War Office at 4s. 5d. The offer was refused because the price was too high, whereupon the goods were sold to a pro- vincial draper at 4s. 1ld. The draper then sold a considerable quantity to various local commands at 5s. 10d. ; and the balance went to a firm of Army contractors at 5s. 9d., who resold them to a Territorial Force Association for 6s. 6d.

The buying machinery at head-quarters, which was functioning smoothly when war broke out, was now becoming paralysed. No preparations had been made for such a strain as this. The very merits of the system—the elaborate checks, the careful division of labour, the strict adherence to rules and precedents, and the . constant reference from one officer to another for concurrence, observations, or covering authority—all these tended to stifle initiative and clog the wheels of the machine. There were plans in the War Office for dealing with an outbreak of war; but no plans for war on such a scale as this. For weeks and months few even in the War Office realized the extent of the struggle on which the country had embarked. Even to the General Staff it would have seemed incredible at that time that Great Britain would have to raise more than five million men before the War ended. Certainly no one in the Contracts Department could have been expected to plan on such an assumption.

In October 1914 a crisis was reached. The situation had for some time been complicated by the competition of Allied Govern- ments, whose needs were no less urgent than those of the British Forces ; indeed, the importance of equipping the Allied Armies which were already fighting at the front was even greater than that of supplying the recruits of Kitchener’s Army. Early in August a body called the Commission Internationale de Ravitaillement had been set up as the result of an agreement between the French and British Governments.1_ Its purpose was to enable the pur- chasing officers of the French Government to have access to the

1 Appendix 1. C2

20 ORIGINS OF CONTROL AT THE WAR OFFICE

information as to firms and markets in the possession of the Contracts Departments of the War Office and Admiralty, and to secure that, where the requirements of the two Governments were likely to clash, competition should so far as possible be avoided. At later dates representatives of other Allies joined the Com- mission. The administrative and secretarial work of the Com- mission was entrusted to the Exhibitions Branch of the Board of Trade, whose officials assisted the Allied buyers in finding sources of supply and negotiating with British firms. Before orders could be placed by the Allies, the Board of Trade officials had to obtain the consent of the War Office and Admiralty. But in spite of this check the Allies had been remarkably successful in obtaining supplies. Effective methods had been rapidly im- provised to meet the emergency ; there were no precedents and no established routines to stand in the way. Indeed, many manufacturers found it simpler to do business with the Allies through the Board of Trade than with the War Office; there were fewer formalities and there was more reasonable latitude as to quality and specification.

A concrete example will illustrate the difference. One of the most urgent needs of: the Allies was for saddlery and harness. The War Office refused to give its consent to any purchases of saddlery on the ground that the whole output of the country was being taken for the British Army. The Board of Trade then asked for a list of all the manufacturers of saddlery on the War Office list, and inquired if orders might be placed with any firms which did not appear on the list. To this the War Office raised no objection. Within a short time the Allies were obtaining their saddles, while deliveries for the British Army remained unsatis- factory. The reasons were twofold. The Board of Trade had managed to tap new sources of supply; and the Allied repre- sentatives were not bound by the rigid specifications laid down by the War Office. Unemployed harness-makers were found in Birmingham and Walsall who had probably never seen an Army saddle, and would never have dreamt of tendering to the War Office. When it was explained to them what was wanted, they set to work on a simplified pattern and produced large quantities which satisfied the urgent needs of the Allies.

THE OUTBREAK OF WAR | 21

When Lord Kitchener discovered that the Allies were getting what they wanted, while the Army was still wofully short, he took the characteristic step of commandeering the services of Mr. U. F. Wintour, C.B., C.M.G., the Board of Trade official who was buying for them, and appointing him to the post of Director of Army Contracts.

In November 1914 the new Director of Army Contracts pre- sented a report to the Army Council containing proposals for the re-organization of the purchasing system. The difficulties were of two classes, internal and external, and each reacted on the other. The internal difficulties, caused by the necessity of adjust- ing the existing administrative machinery to new conditions, were gradually remedied during the war; they are only mentioned here because of their bearing on the external problem and the particular forms of State control adopted by the War Office.

The weaknesses of the existing system were attributed to the division of responsibility for purchase between two different departments, one being responsible for considering the price and the other for deciding the quality. Inevitably under war conditions this line of demarcation was constantly being overstepped. When- ever demands were exceptionally urgent, the military departments were tempted to usurp the functions of the Contracts Department and place orders direct. The necessity of accepting substitutes for the standard official patterns also caused great confusion. The Contracts Department was supposed to find out what sources of supply were available, and to know the productive capacity of the country. The military departments, on the other hand, were the sole judge of quality, and were reluctant to modify the rigid specifications to which they were accustomed. The result was that there was no single authority to balance the comparative importance of speed and quantity on the one hand and excellence of quality on the other. With two departments dealing with separate halves of the problem, it was nobody’s business to survey the problem as a whole.

The solution proposed was to combine the two halves and set up a single authority responsible for the whole business of pro- viding stores for the Army. This department would determine questions of quality and price, inspect samples and place con-

22 ORIGINS OF CONTROL AT THE WAR OFFICE

tracts, watch the execution of orders, hasten deliveries in arrears, and assist manufacturers in every possible way. In many branches of industry the ordinary resources of the country were insufficient to produce all that was required ; and if the new armies were to be equipped in time, the co-operation of every available manu- facturer would be required. In such circumstances it was useless to attempt to adhere rigidly to standard patterns drawn up to suit peace-time conditions. Attention would have to be given to such considerations as the comparative speed at which articles of slightly different type could be produced, the available supplies of raw material, and the most fruitful use of labour and machinery. The buying department would have to be in the closest possible touch with industry, studying the possibilities of home and foreign sources of supply, and intervening where necessary to secure the maximum production for military purposes.

The argument was summed up in the following words, the truth of which was not fully realized for many months: ‘ The important part played by industry in fitting out an army has not been sufficiently recognized. The war is a war of organization, in which the raisig of men is one very important item. It is equally important that they should be equipped, clothed, fed, and provided with guns, arms, and ammunition. For the pro- vision of these necessaries, industry, and industry alone, has to be relied upon, and the rapidity and effectiveness with which industry can be organized to meet the emergency cannot but have an enormous influence upon the issue of the struggle.’

Even in the sphere of guns and ammunition, where the need was greatest, six months elapsed before effective steps were taken to give effect to this policy by the establishment in May 1915 of the Ministry of Munitions. The idea that industry would have to be deliberately organized for war production encountered subconscious resistance in a Government committed to the doc- trines of free trade and individualism. It is not surprising that the necessity for State intervention was only gradually admitted by Ministers who had spent the greater part of their political careers in exploding the fallacies of Protectionism on the one hand and Socialism on the other.

But more important even than the traditional bias of a

THE OUTBREAK OF WAR 23

liberal Ministry was the conservative professional outlook of the soldiers. The military departments of the War Office relied on private enterprise to perform its job of finding supplies in war, as implicitly as they did in times of peace. It was naturally felt that it was not the business of soldiers to meddle with industry. Though many of them were technical experts in engineering, they had little theoretical or practical knowledge of the organization of industry, of labour conditions, or of economic statistics. It was not surprising, therefore, that they under-estimated the diffi- culties with which the regular War Office contractor would be faced in meeting the demands made upon them, and the slowness with which the economic system would adjust itself unaided to the colossal task of transformation from peace to war conditions.

In October 1914 a proposal was made in the War Office that the Government should take over the large armament firms and transform them from private commercial ventures into a branch of the public service; but this suggestion received no serious consideration. It was thought preferable to rely on private enterprise and the laws of supply and demand. The result was that for the first year of the war firms able to supply munitions had to struggle against herculean difficulties, and the fact that they were able to obtain any price they chose to ask was an extravagant and probably unnecessary stimulus. The doctrine implicitly acted upon was that the higher the price and the greater the freedom allowed to the private contractor, the greater would be the increase in the supply ; it followed that if only the Govern- ment paid high enough prices and left private firms to their own devices, munitions would be forthcoming in abundance.

After nearly a year’s trial, this theory was abandoned. The problem of munitions supply was tackled in a different way. National organization and centralized control were found to be more effective than high prices and laisser-faire in stimulating supply. National factories were built; raw materials were monopolized and distributed by the Government at fixed prices ; and manufacturers, instead of being left to produce shells or not as they pleased and to ask any price they liked, were, if necessary, required to produce them at prices based on cost, and instructed how to do it.

24 ORIGINS OF CONTROL AT THE WAR OFFICE

The methods of State control adopted by the Ministry of Munitions fall outside the scope of this volume. The Ministry covered an immense range of trades and industries; its total expenditure from June 1915 to March 1919 was close on £2,000,000,000 ; and in place of the twenty clerks in the Army Contracts Department who sufficed to purchase munitions in August 1914, it employed in November 1918 a staff of 65,142 persons. But in spite of its vast responsibilities, it covered only a part of the Army’s requirements. The principal items covered by the Ministry were arms, ammunition, mechanical transport, optical instruments, and aeronautical supplies. The Army Contracts Department remained responsible for the pro- vision of most other supplies and equipments. These included food of every kind for the soldier’s daily ration; a complete outfit of clothing, including underwear, hosiery, shirts, uniforms, boots, great-coats, accoutrements, pack, blankets, ground-sheets ; huts, tents, engineers’ stores, and miscellaneous camp equipment ; timber, barbed wire, picks and shovels, sandbags, rubber boots, and smoke helmets for use in the trenches; stretchers, drugs, medicines, and hospital stores for the Army Medical Corps ; forage, horse-shoes, harness and saddlery for the mounted troops ; petrol, fuel, and light; and innumerable other items of less importance. The exact line of demarcation was not always easy to define. But, broadly speaking, the division followed that between the two great military supply departments of the Army. The Master-General of the Ordnance obtained most of his supplies through the Ministry of Munitions; the Quartermaster-General through the Army Contracts Department. Another broad dis- tinction was that the Ministry dealt with the engineering and metal industries ; the War Office, though it bought a large amount of hardware and tools, dealt primarily with the food trades and the textile and leather industries. With the exception of a com- paratively few items, the supplies purchased by the War Office were within the productive capacity of the country, but were drawn from the same sources of supply as the necessaries of life for the civilian population. The Ministry’s demands on the other hand far exceeded the original capacity of production, but were not for the most part of a kind for which there was a large and

THE OUTBREAK OF WAR 25

indispensable civilian demand. This difference had an important bearing on the development of State control in the two depart- ments.

The evolution of control, like the evolution of natural species, had many starting-points and many parallel lines of descent. The chief significance of the early experiments at the War Office is that they led ultimately to control of the necessaries of life for the civilian population. By requisitioning practically the whole output of the engineering industry and making use of nearly all the iron and steel obtainable, the Ministry of Munitions virtually suppressed private trade and ignored civilian needs. In the textile industries and food trades the War Office could not do this ; civilian requirements had to be-met. This led to the Standard Clothing and War-time Boots schemes on the one hand, and to the establishment of the Ministry of Food on the other. The machinery of control necessarily became more elaborate when it was concerned with the needs of private consumers. But the experience of the War Office in feeding and clothing five million men in the Army provided a useful preparation for the task of feeding and clothin, the thirty-five million who remained at home. The starting-point of the evolution traced in this book is the struggle of the Army Contracts Department to secure supplies for the Army and to protect the Government from extortionate charges ; the final stage is reached in a national and international organization to secure supplies at reasonable prices for the whole nation.

CHAPTER III

FROM COMPETITIVE TENDERING TO COLLECTIVE BARGAINING

Speculation in Army supplies — Delays inherent in tendering system — Public criticism of high prices paid — Comparison with business methods — Establishing personal contact — Widening area of supply — Work of the Labour Exchanges — The laws of supply and demand and ‘ business as usual ? — Effect on prices of raw and subsidiary materials — Weakness of competitive tendering — New policy of collective negotiations — Agreement with Whole- sale Clothiers’ Association — Objections to the ‘ flat rate’ principle — Advan- tages of new system — Difficulties still unsolved.

Tue story of the jerseys which cost 3s. 1ld., were offered to and refused by the War Office at 4s. 5d., and were ultimately sold to local Army buyers at 5s. 10d. and 6s. 6d., has been given as a typical illustration of what happened towards the end of 1914. This was by no means an isolated or exceptional case ; it happens to be well authenticated, because a friendly critic of the War Office took the trouble to trace the facts from beginning to end. In every item of Army clothing the same feverish buying and selling went on. Army socks became a favourite gambling counter in the city; speculators turned with relief from the slump in rubber shares to the boom in Army contracts. ‘Some- body brought off something like a corner in blankets ; for a few days the market was bare. No risk attached to such transactions ; they were perfectly sound business propositions. Any one who could offer supplies could name his own price; and in order to get a contract, it was not always necessary even to possess the goods. An option was sufficient. The banks were quite willing to advance money on a War Office contract and thus enable the contractor to buy what he had already sold.

The Army Contracts Department tried to put a stop to this speculation. One of its rules in normal times was to deal direct with manufacturers and never to buy from merchants and middle- men. Endeavours were made to maintain this principle. But

COMPETITIVE TENDERING 27

when the middlemen could offer delivery from stock, and the goods were required immediately, the Department had no alter- native; it could not afford to wait for the goods to be manu- factured. The result was that merchants were encouraged to anticipate Army requirements, and place orders with manufacturers before they had sold their output to the War Office. The merchant could buy quickly ; as soon as he knew what the War Office wanted, he could fix up a contract in a few hours. The War Office, on the other hand, took days and sometimes weeks to make up its mind. The regular routine was too slow and deliberate to keep pace with the feverish activities of the speculators. Attempts were made to speed up the work of dealing with tenders; long hours of overtime were worked, fresh staff was engaged, and when the strain and congestion grew too great, additional accommodation was obtained outside the War Office. But a limit was soon reached beyond which it was found im- possible to reduce the interval between the receipt and the acceptance of offers. Under the tendering system as many as two or three hundred different offers would be received at the same hour, and all had to be considered together. Before the final allocation could be made, papers would be referred back- wards and forwards between four different offices, in separate buildings. The Chief Inspector and the Chief Ordnance Officer in different offices at Woolwich and Pimlico, the Quartermaster- General’s representative in Whitehall, and the Contracts Officer in Tothill Street—all had to be consulted and make their reports, recommendations, and observations. On completion of their outward journey, the papers retraced their steps by the way they had come. Frequently the only action required was a formal concurrence, but this could not be dispensed with except in rare cases. The moving of the papers backwards and forwards usually took a fortnight or three weeks ; sometimes the journey had to be repeated for consideration of further points that had arisen or for reports on additional samples received too late for the first journey. In a complicated tendering, where samples had to be seen by two different inspecting officers, or where a number of trade patterns differing from the official pattern had to be considered, the time taken before all the orders were placed might run into five or six

28 ORIGINS OF CONTROL AT THE WAR OFFICE

weeks, even if every effort was made to expedite the case, and no delays occurred through mislaying of documents or a breakdown of the messenger service.

The result of this delay was that higher prices had to be paid. Manufacturers would make it a practice of quoting ‘ subject to immediate acceptance’; in a few days they would withdraw their previous offer, having perhaps in the meantime sold their goods to a merchant, or they would quote a higher price on the ground that their option on the raw material had expired. It often happened, too, that firms would be asked to tender a second time before they had heard whether their original offer had been accepted. This placed them in a position of uncertainty, against which they would naturally protect themselves by advancing the price. Another grievance of contractors was the long time they had to wait for payment. This again was due to the impossibility of speeding up the existing machinery beyond a certain point. Delays were inevitable and inherent in the system. The regula- tions were designed to prevent possible accidents, not to encourage the maximum speed—like the old law which required motor vehicles to be preceded by a man on foot carrying a red flag.

During this period there was much criticism in the Press and in Parliament of the exorbitant prices paid by the War Office and of the speculation and profiteering associated with Army contracts. The Financial Secretary of the War Office, replying to these criticisms in the House of Commons on November 23, 1914, expressed the general view when he said: ‘ Everybody, I think, will agree that a Government Department, not merely the War Office, but any Government Department, has often to pay more than a private individual.’1 But few of the criticisms pointed to any solution of the real difficulties. Most of the critics were content with the suggestion that the Government should buy like a private business firm. But how would a private business firm do it? That was the problem Many business men were at the time advising the Director of Army Contracts, but they did not profess that the solution was easy. The annual purchases of the largest London stores did not amount to a hundredth part of the annual requirements of the War Office. During the first two and

1 Parl. Debates, H. of C., vol. Ixviii, col. 851.

COMPETITIVE TENDERING 29

a half years of war the aggregate value of purchases made by the Army Contracts Department amounted to more than £700,000,000. The largest London stores bought a small fraction of the national output ; the War Office wanted many articles in greater quantities and at a quicker rate than industry could produce them. A private firm would choose its own market and its own time for buying ; the War Office had to buy wherever it could and buy at once. Though a private firm had to buy to suit its customers, it could exercise a wide latitude in selecting the relatively cheapest goods ; the Army demanded the best obtainable, insisted on a rigid specification, and had no use for substitutes.

In spite of these difficulties many attempts were made, and much was actually done, to introduce more business-like methods, to break away from the established routine, and generally to speed up the machine. Innovations were made here and there. Expert buyers were appointed ; personal negotiations began to take the place of formal tenderings; prices would be knocked down by bargaining and informal pressure. Manufacturers began to respond to the human appeal, and would quote lower prices as a personal favour or from a sense of patriotism. The Department began to drop the traditional attitude of aloofness and distrust, and to discard the secrecy with which the needs of the Army were usually guarded. Contractors who could be trusted were taken into confidence and told the full gravity of the position ; this generally proved to be a sure method of obtaining their co-operation.

Towards the end of 1914 energetic steps were also taken to widen the area of supply and induce as many firms as possible to tender for Army contracts. In peace-time the War Office list contained a limited number of specially selected firms; most firms regarded it as a privilege to be on the list, but many im- portant firms did not bother to get recognized as regular tenderers, because they found War Office business either too troublesome or perhaps not remunerative enough ; to do well as Army con- tractors, a firm had to specialize to some extent, or at least to be familiar with War Office specifications. This policy of exclusive- ness had inconvenient results when demands became so large that the ordinary sources of supply dried up. The War Office had no

30 ORIGINS OF CONTROL AT THE WAR OFFICE

means of knowing the full extent of the manufacturing resources of the country in many of the items of Army equipment, and with the insistence still laid on peace-time specifications, it was some- times doubted whether the experiment of trying new firms would be justified. This attitude had to be abandoned. In one item after another, every possible producer had to be enlisted and induced to tender. But here a difficulty arose. To find out all the possible firms capable of making each of the hundreds of different items which were in short supply, from horseshoes to razor blades, and from tents to brass buttons, would have required a large staff of travellers and inspectors. For a mere name was not sufficient. It was necessary to know, first, whether the firm really existed and had any plant, or was a mere blind for a firm of speculators ; and secondly, whether it could really produce the article, and if so in what quantities. If it had had no experience, it had to be shown how to set about it. And lastly, many firms who had never thought of tendering had to be induced to try their hand; and it took some time to find such firms.

In all this work, the Contracts Department relied to a large extent on the assistance of the Employment Department of the Ministry of Labour and its exchanges. About 11,000 firms were inspected and reported upon by Labour Exchange officers during the first eighteen months of the war. Of this total several hundreds proved to be merely middlemen or agents. Early in the war a survey of the woollen and worsted industries was carried out at short notice by the Labour Exchanges in Yorkshire with a view to showing the possible expansion of khaki cloth manufacture. Similar inquiries were made later in the tailoring and shirt trades. Small saddlery firms were induced to group themselves together for War Office contracts. Efforts were successfully made to merease the output of biscuits, cork helmets, rum jars, climbing irons, field telephones, hosiery, buttons, glass bottles, scissors, mess tins, nail boxes, stove pumps, grindstones, and many other of the thousand and one miscellaneous items of Army equip- ment. This work not only helped the War Office by increasing production, but at the same time relieved unemployment and helped the Labour Exchanges to find work for applicants on their lists.

COMPETITIVE TENDERING 31

All this was useful as a beginning, but in the main the essential problem remained unsolved. Lord Rhondda, shortly before his death, stated that his object at the Ministry of Food had been to endeavour to ‘suspend the laws of supply and demand’. It is doubtful whether the problem would have been formulated in this way in 1914; but substantially that was the miracle which both the War Office and its critics hoped might somehow be accom- plished. If supply was limited and demand practically unlimited, market prices were bound to rise indefinitely. And if prices of materials required for the Army were certain to rise, everybody who wanted to make money would start dealing in them; profiteering in Army supplies would become the chief national industry. Nor was it merely the-finished article which attracted the speculator; the profits to-be made in raw materials and semi-manufactured articles such as wool and yarn were quite as sensational; and since these were required for many other purposes besides Army requirements, there could be no objection on patriotic grounds to a course which was merely regarded as * business as usual ’.

When purchases from stock had ceased to be necessary, and the War Office was able to deal direct with manufacturers, the question of raw and subsidiary materials began to attract special attention. What happened under the tendering system was that fifty or more manufacturers would enter the market at the same time, and each would endeavour to cover himself for the quantity of material he required in order to tender. If, for example, the inquiry was for 200,000 blankets, and fifty firms were invited to tender, each firm might buy, or obtain an option to buy, enough yarn to manufacture the whole quantity. In this way the effect of the original demand would be multiplied fiftyfold in the yarn market, and so on, in something like geometrical progression, in the markets for tops and raw wool. A constant succession of these vast orders, coming upon a trade which had at the same time a large demand for export and for home consumption, demoralized the market. Dealing ceased to be a matter of careful estimates of chances, and began to resemble an infallible system for breaking the bank. The only effective limit to the profits obtainable was the amount of money a man could borrow to finance his trans-

32 ORIGINS OF CONTROL AT THE WAR OFFICE

actions. It was authoritatively stated at the time that a complete stranger to the wool trade, with next to no capital, made £150,000 in six months by speculation in yarn.

Until the end of 1914 little attention could be given to the solution of these remoter problems. The whole energies of the Department were devoted to the task of obtaining sufficient sup- plies, and as soon as deliveries began to keep pace with current requirements, to the re-establishment of centralized buying for the whole Army. Until local buying had been stopped, it was no use trying to deal systematically with prices; and until head- quarters was in a position to supply what was needed, it was impossible to stop local buying. But in the last two months of the year important steps were taken towards the replacement of competitive tendering and individual offers by a simpler and more rational procedure. |

Hitherto associations of traders had been looked upon with great suspicion. Co-operation for any purpose was apt to en- courage understandings as to price, if not actual collusion in tendering. But in the present emergency it was recognized that co-operation might be a good thing if it led to better organization, and understandings as to price might be useful if the object was to keep them steady. Conferences were therefore arranged with the executive officials of the Wholesale Clothiers’ Association. The difficulties of the War Office and the full extent of its re- quirements were frankly placed before them, and a strong appeal was made to their patriotism to co-operate with the Department in obtaining these supplies at reasonable prices. The response was satisfactory. The manufacturers themselves were dissatisfied with the confusion and uncertainty entailed in the tendering system, and promised that if the War Office mended its ways and abandoned competitive tendering, they would secure by collective agreement and by concerted organization of production, that the supplies should be forthcoming at prices considerably lower than open competition would determine.

An agreement was thereupon made with the Wholesale Clothiers’ Association for the supply of uniforms at an all-round flat rate for making up—so much for jackets, so much for trousers, and so much for great-coats. The War Office was to continue as

COMPETITIVE TENDERING 33

hitherto to supply the cloth at fixed ‘ issue ’ prices. It was realized in the course of negotiations that to arrange a flat rate for every class of manufacturer, large and small, efficient and inefficient, would mean that the large firm would get a bigger profit than the small one. But if the maximum output was to be obtained, any flat rate must enable the small marginal producer to pay his way. It was urged that the efficient firm was entitled to reap the benefit of its superior organization, and that it would be unfair to penalize him by paying him a lower price than the less efficient. To do so would, in fact, place a premium on inefficiency. Moreover, even the most efficient manufacturer would receive a lower price under this arrangement than he would be able to obtain under conditions of open competition. There was no question, therefore, that in the particular circumstances of an overwhelming demand and a limited supply, the arrangement was to the advantage of the War Office, and involved a considerable concession on the part of manufacturers. At a later date, when the machinery of the wholesale clothing industry had been greatly expanded and the War Office requirements had become more moderate, competitive tendering was restored, and the keen competition that resulted brought profits down to a much lower level.

Towards the end of 1914 the Association circularized its members and induced them by voluntary arrangement to put aside private orders and to concentrate all their energies upon increasing the production of Army supplies. In place of a con- tinuous succession of piece-meal demands and individual tenders, the Association arranged the splitting up of the total requirements of the War Office for several months ahead among all their members. The chaos and confusion inseparable from the previous system came to an end; speculators and middlemen were elimi- nated; and the wholesale clothing industry settled down in a systematic way to the business of producing the vast quantities of uniforms required for equipping the New Army.

From this new departure four principles emerged which mark the first stage towards national organization and control under the War Office :

(1) Abandonment of the system of competitive tendering.

(2) Recognition and co-operation of Trade Associations.

1569.53 D

34 ORIGINS OF CONTROL AT THE WAR OFFICE

(3) Introduction of collective agreements covering the whole of a trade.

(4) Substitution of a general uniform price over a period of time for a multiplicity of individual contracts at different prices.

The adoption of the new system represented a considerable advance, but it only touched the fringe of the problem. In many trades there were no manufacturers’ associations with whom it was possible to conclude voluntary collective agreements. Secondly, the prices fixed by collective agreement still depended upon bargaining, in which the dice were necessarily loaded against the purchasing department ; for the department could only guess at the cost of production while the manufacturers more or less knew them. Thirdly, agreements with manufacturers of the finished article had very little influence on the market for subsidiary materials, such as yarn and leather, and the raw materials wool and hides. And lastly, the principle of arranging uniform prices for the whole of an industry had no legal sanction behind it, and was liable to be upset by recalcitrant firms standing out for higher prices. The next developments, which consisted in the use of the power of requisitioning and the earliest attempt to introduce the costings system, will be described in the following chapter.

CHAPTER IV

REQUISITIONING AND COSTING IN THE JUTE INDUSTRY

Jute production and consumption — Importance for military purposes — Demand for sandbags — Course of prices up to March 1915 — Decision to requisition — Stocks «at Liverpool — Negotiations at Dundee — Cost and market price — Profits of spinners — The Costings system first suggested — Objections to the plan — Appointment of agent firm — Increased output and deliveries — The plan in operation — Comparison of Government price and market price — Negotiations with Calcutta — Prices and quantities — An avalanche of sandbags — Economies affected.

JUTE is a vegetable fibre used for the manufacture of sacks, twine, packing-cloth, and coarse canvas. Jute fabrics are as essential to wholesale commerce as paper is to a shopkeeper ; they are in universal and daily use throughout the world for wrapping and containing all kinds of produce.

The fibre is a monopoly of British India, its cultivation being confined to the provinces of Bengal and Eastern Bengal, and the Native States of Assam, Cooch Behar, and Nepaul. The area under jute is normally rather more than three million acres, yielding an average crop of ten million bales of 400 lb. each. Before the war one bale cost about £5. Of the total production British India consumed more than half and the British Empire about two-thirds.1

1 The maximum consuming capacity of the jute spinning and weaving industry of the world in 1913 was approximately as follows :

bales

British India : : 6 - 5,250,000 Great Britain : . F . 1,470,000 Germany . ; ‘ a : 886,000 United States : : F , 650,000 France. é : i . ‘. 593,000 Austria-Hungary . : : 4 366,000 Russia : : 5 : ; 274,000 Italy . : A ‘ 5 - 255,000 Spain . ; é i ‘ : 208,000 Belgium 2 : ; : : 152,000 South America ; ; ; ; 92,000 Holland ; : 5 ‘ : 40,000 Sweden ; ; : : : 36,000 Norway : : : c : 10,000 Greece A : é 3 : 5,000

Total . : : : - 10,287,000

36 ORIGINS OF CONTROL AT THE WAR OFFICE

The jute mills of Great Britain and India are concentrated in two cities, Dundee and Calcutta, the former specializing in the finer class of goods, and the latter producing the cheaper and coarser qualities. This concentration of production and manu- facture, and the comparative simplicity of the processes involved, made the jute industry specially suitable for the first experiment in control. Its great importance for military purposes for the Allies as well as for the British Army soon made the experiment inevitable. Since the jute industry was the first instance in which the War Office succeeded in ‘ suspending the laws of supply and demand ’ and obtaining its requirements at less than market prices, the early developments will be traced in some detail.

Jute products were required for the Army for a number of miscellaneous uses, but the most important item was sandbags for use in building trenches, earthworks, and dug-outs. Until early in 1915 the supply of sandbags was at the rate of about 60,000 per week. But when the campaign developed into stationary trench warfare, the demand for sandbags enormously increased. In March 1915 an urgent demand was received from the front for an immediate supply of five million bags. In May the demand was for six million per month, in July for twelve million, and in August for eighteen million. Even this proved insufficient. Every time new trenches were made hundreds of. thousands of sacks were wanted ; empty sandbags were made to serve every kind of purpose from pillows to nose-bags. In August the Army announced that it would require thirty-five million for September, thirty-eight million each in October and November, and forty million in December. At the same time the demands of all the Allies had increased proportionately. At the end of the war the total number of sandbags supplied to the British and Allied Armies had reached the gigantic total of 1,186,000,000.

The course of prices in the jute industry during 1914, 1915, and 1916 is given in the diagram on page 451. The average price of raw jute from July 1913 to June 1914 was about £32 per ton. The high prices ruling in the early part of 1914 stimulated the sowing of a larger acreage than usual, with the result that the crop yielded was about five per cent. greater than the normal yield. This fact caused a gradual fall in prices in June and July

COSTING IN THE JUTE INDUSTRY PSE

1914 from £33 to £30 per ton. On the outbreak of war a slump occurred owing to the collapse of the exchanges and the cessation of demand from Germany and Austria. The lowest point was reached at the end of November 1914, when jute could be bought at £12 to £14 a ton, and 103 0z. hessian cloth at 21d. a yard compared with 33d. in November 1913. Trade then began to revive. A vigorous demand from abroad sprang up, especially from European neutrals. The War Office began to invite com- petitive tenders for large supplies of jute products for the Army. The outlook for the future looked promising. By the beginning of March raw jute had recovered by 50 per cent. to £21 per ton, and yarn and cloth had returned to their pre-war level. That was the position when the demand for five million sandbags was received.

In view of the urgency of the demand telegraphic inquiries were sent to every firm on the War Office list, and Chambers of Commerce in all important centres were asked to make the requirements known as widely as possible. Offers began to pour in subject to immediate acceptance ; but the number offered was in most cases insignificant, the specification unsatisfactory, and the prices too high. Then an incident occurred which roused the War Office to drastic action. The largest firm of second-hand bag merchants telegraphed an offer to supply the whole quantity and more at a price about three times the highest hitherto paid. No conditions as to delivery were stated. Obviously the firm could not hold such a large amount at the time, but counted on being able to buy what was wanted at prices which would yield a satisfactory profit. If only they could keep the War Office off the market by contracting to supply its full requirements, there was no reason why the price should rise above their quotation. At the prices then ruling their quotation would allow a profit of more than 100 per cent., which seemed a safe enough bargain. But the offer was rejected. The War Office refused to swallow the bait, and decided that something drastic must be done.

In March 1915 there were no powers under the Defence of the Realm Act which enabled the Government to take possession of anything it might require. But there was an old clause in the annual Army Act which conferred the power of requisitioning

388 ORIGINS OF CONTROL AT THE WAR OFFICE

horses and vehicles, and this had recently been amended so as to cover warlike stores in general. The procedure was compli- cated. A statement had to be signed by a General Officer Com- manding certifying that one of His Majesty’s Principal Secretaries of State had declared that a ‘state of emergency’ existed. This had to be presented to a Justice of the Peace, who signed a second form instructing the Chief Constable and his subordinates to render all assistance to the military authorities and to serve requisitions on the owners of the goods required. When a third form had been signed by the police constable and handed to the owner, the process of requisitioning had been accomplished in due legal form.

This procedure was followed early in March 1915. Two officers were sent to Liverpool and made a tour of the warehouses where the bag merchants kept their stocks. In a single afternoon they succeeded in obtaining one and a half million second-hand grain sacks. As it was Saturday many of the owners were away from their offices. When they returned on Monday and learnt that their whole stock of second-hand bags had been impounded by the War Office, they wanted to know what price they were going to receive. The provisions of the Army Act laid down that the price to be paid for goods requisitioned should be the ‘ fair market price in the opinion of the purchasing officer’; and that an appeal might be lodged against his decision with a judge of the County Court. The price would then be assessed on the basis of the market price as between a ‘ willing buyer and a willing seller’. Fortunately for the purchasing officer the question of what was a fair market price was a matter about which it was possible to hold a variety of opinions. It might be held on the one hand that the market price was the highest price obtained by any dealer on the day before the requisitioning took place. But a few isolated transactions, influenced largely by the huge demand which had come from the War Office and from the Allies, could hardly be admitted as a fair basis for determining the market price. * Market price ’ was a vague term, but might fairly be claimed to involve a number of transactions extending over a reasonable period. It might also be argued that the fact that the War Office was compelled to get the goods irrespective of price, rendered it. an ‘ unwilling ’ rather than a ‘ willing’ buyer, and that therefore,

COSTING IN THE JUTE INDUSTRY 39

m arriving at the price, the hypothetical effect of the War Office demand should be ruled out of account. Whatever the correct interpretation of the Act might be, the purchasing officer was clearly entitled to hold any opinion he chose. He accordingly fixed the price at 2d. per bag on the basis of values ruling before the abnormal War Office demand had come on the market. Having arrived at this opinion, he maintained it in spite of the protests of the bag merchants, and in spite of the fact that some of them, in anticipation of selling to the War Office, had actually bought at a higher price than the figure he fixed. Bags had changed hands at as much as 23d.; and the quotation received by the War Office which prompted the requisitioning was 6d. per bag. Invoking the Army Act had thus saved £25,000 on a million and a half bags. Within three weeks the bags had been converted to the standard size required and dispatched overseas.

While the available stocks of second-hand bags were being seized in Liverpool, steps were also being taken to mobilize the manufacturing resources of Dundee. A meeting of jute manufac- turers was held at Dundee, at which the War Office representative explained the extent and urgency of the Army’s requirements. Dundee, at the time, happened to be exceptionally full up with private orders. The export trade was booming; it was even alleged that large quantities of jute yarn were finding their way into enemy countries. Clearly there was no chance of buying the vast quantities of bags required in the ordinary course of business. But the needs of the Army could not wait for the completion of private contracts. If private contracts stood in the way they would have to be broken. Under one of the earliest regulations made under the Defence of the Realm Act, power was taken to require manufacturers to place their output at the disposal of the Admiralty or Army Council, and compliance with any such requirement was stated in the Act to be a good defence in pro- ceedings for breach of contract. This point having been cleared up, the manufacturers readily agreed to do all in their power to meet the Army’s demand, and undertook to put aside their private work and devote their whole output for three weeks to the manufacture of sandbags.

Meanwhile, as business men, they wanted to settle the question of price there and then. This the War Office representative

40 ORIGINS OF CONTROL AT THE WAR OFFICE

refused to do. He explained that a formal letter would be addressed to each manufacturer applying Regulation 7 of the Defence of the Realm Regulations. This Regulation provided that payment should be made at an agreed price or in default of agreement at such prices as might be determined by the arbitration of a Judge, in Scotland a Judge of the Scottish Court of Session selected by the Lord President of the Court of Session. A discussion then took place as to the basis on which it would be possible to reach an agreement satisfactory to both parties. The Dundee manufacturers naturally claimed that they should receive the market price. A reference to the diagram on page 451 will show that the price of jute cloth had now risen to 4d. per yard compared with the 24d. at the beginning of December 1914, an increase of 78 per cent. in less than four months. Cloth was 20 per cent. above the average level of prices for the twelve months prior to the war, while the raw material was 30 per cent. below it. Whether they were fair or not, market prices were clearly giving very large profits to the manufacturers.

The War Office representative argued that in time of war it was not always reasonable to demand the market price; that the market price for jute goods had been unduly inflated by the demands of the Army; that the conditions of a free market no longer existed owing to the act of requisitioning ; and that it was no use speculating what the market price might have been if the War Office had not intervened and forcibly postponed private contracts. Some other basis must be taken for settling the price. He suggested that the fairest course would be to fix the price not on market values but on the actual cost of production with the addition of a reasonable profit. This suggestion met with little support. The general view was that, though this might be ideally the fairest system to adopt, it was quite impracticable. ‘ You can- not get away ’, it was said, * from the laws of supply and demand.’ Certainly there were difficulties, and some of them were pointed out. The largest manufacturers were both spinners and weavers, but the majority were either one or the other. The cost of pro- duction of the combined firm, which only had to buy raw jute, would be much lower than that of the weaving firm, which had to pay the market price for its yarn. How was this difficulty to

COSTING IN THE JUTE INDUSTRY 4]

be met ? The reply was that the value of the yarn required should also be assessed on the basis of cost. But how was a private firm to buy its yarn at less than the market price? The War Office would presumably have to requisition the yarn also. Finally, what about the raw material? Was it proposed to requisition raw jute from the natives of India at its cost of pro- duction? After this reductio ad absurdum, as it then appeared, the discussion was adjourned. It was clear that the opinion of Dundee was fairly unanimous in regarding an attempt to obtain goods for less than they would fetch in the open market as mere confiscation. They argued that if the Government wanted to deprive them of part of their profits, the fairer and more straight- forward course would be to increase taxation all round and put up the Excess Profits Duty. It was in any case unfair to single out Dundee for special treatment.

The question of price was not settled at the conference, but by common consent was postponed for further consideration and discussion. Meanwhile, the manufacturers were legally bound by the requisition order, and at once started operations. Contracts were broken on a wholesale scale; yarn and cloth already sold and awaiting delivery were diverted to the War Office; the purchasers had no recourse and had to wait. The export trade in certain lines came to a standstill. Important trades were suddenly deprived of packing material; the meat importers complained that if they could not get their beef wrappers, the import of frozen meat would come to an end. The position was explained to the factory girls, and the rate of production at once increased. Dundee for a time thought of nothing but the needs of the Army in the trenches. By almost superhuman efforts, which surprised even the trade itself, four and a half million sandbags were completed and dispatched to the front within three weeks.

The question of price was soon settled by bargaining and compromise. The War Office obtained the assistance of experts in the trade, who knew the technicalities and could advise when the price asked was unreasonable. Prices were eventually fixed at rather less than private purchasers had hitherto been compelled to pay; but no attempt was made during this preliminary period to unravel all the problems of ‘ cost of production ’. When stocks

42 ORIGINS OF CONTROL AT THE WAR OFFICE

of cloth were requisitioned from merchants, they received what they had paid for it, with the addition of a small profit ; not the price at which they had sold it, or might have sold it but for the War Office intervention. Similarly, manufacturers’ quotations were beaten down below the market prices previously ruling. Voluntary contracts for delivery during May and June were entered into, without interference with private orders, at prices more favourable to the War Office than those quoted to private purchasers. A spirit of moderation and accommodation pre- vailed, and speculation received a check. This was reflected in the course of prices in the open market. For the first time since the end of November 1914 a general fall in prices took place, as will be seen from the slight depression which appears on the diagram during the months of April and May.

It was now possible to review the price problem at more leisure. Was it inevitable that the War Office should always be in competition with private trade? It was no longer true that the Government necessarily had to pay more than private in- dividuals. The weapon of requisitioning put it in a stronger position for bargaining, and manufacturers had certainly shown themselves ready to make concessions. But this did not make any substantial difference. The manufacturer of cloth still had to buy his yarn in the open market. Even if the weavers were content with a reasonable profit, the spinners would still be reaping the full benefit of the laws of supply and demand. An investigation of the costs of production, with the assistance of expert advisers, showed that the position at the end of June was roughly as follows :

5 Market price of one ton of jute : ; ; se Ay Cost of spinning into yarns. : A ‘ 5 9 Ee, Total cost of production of yarn ; : . 32 Spinner’s profit ‘ ; é ee per tony el8 Market price of one ton of yarn ; : : . 50 Cost of weaving into cloth c : : : , 6 Total cost of production of cloth ; : Nadie Weaver’s profit : : j : per ton 6

Market price of one ton of cloth ar as - 62

COSTING IN THE JUTE INDUSTRY 43

The spinner was thus obtaining a profit of 56 per cent., while the weaver was getting only a normal 10 per cent.

One step had already been taken which pointed in the right direction. Hitherto when the War Office had wanted bags, they had had to pay the market price of the complete bag. The sewing of bags was carried on by separate firms called public calenders, which worked on a commission basis with charges based on a common tariff. Bags would be sold to the War Office by merchants who bought the cloth and had it sewn up on commission. This had now stopped. The War Office itself requisitioned the cloth and had it sewn up by the public calenders.

Apparently this principle might be extended. It should be possible to requisition yarn and get it woven on a commission basis. The process might even be carried a step farther back. The Government might buy its own raw material in Calcutta, ship it to this country, and get it spun into yarn by the spinner. Provided spinners and weavers could be induced to fall in with these arrangements and work for an agreed commission or ‘ mar- gin’ sufficient to cover their expenses and a reasonable profit, immense economies would be possible, and the whole process of obtaining supplies would be independent of market prices in this country from start to finish. The laws of supply and demand, if not defeated, would at least be temporarily suspended, so far as supply and demand for the Army was concerned.

The objection to such elaborate measures of State intervention was that they involved the War Office in intricate commercial operations for which it was totally unprepared. It was as much as the War Office could do to keep pace with the demands from the front by the ordinary process of buying; it had neither the machinery, nor the staff, nor the experience to carry out a more ambitious programme. There were no precedents to go upon. Perhaps Parliamentary sanction would be necessary ; doubts were even expressed whether the War Office had any statutory powers to engage in trading operations. But the most convincing argu- ment against it was that it would mean the Government under- taking to do work which was essentially the business of the manufacturer, namely, the buying of his raw material. Each manufacturer knew his own business best; it was absurd to

44. ORIGINS OF CONTROL AT THE WAR OFFICE

suggest that officials in London could successfully spoon-feed a whole trade. Firms would be supplied with materials which were unsuitable for them, and the resulting confusion and discontent might seriously jeopardize supplies. Finally, the sceptics argued, it was the business of the War Office to get supplies; it was the business of the Chancellor of the Exchequer to deal with excessive profits. Prices were bound to rise in war-time, and high profits did not so much matter, so long as the greater part was returned to the Exchequer through the Excess Profits duty.

It was true that the higher prices the War Office paid, the greater would be the yield of the Excess Profits duty ; but it was also true that the more economically it could purchase the less would be the burden on the ordinary tax-payer. It was this point of view that appealed to the House of Commons and the Press, when they complained of Government extravagance. So strongly was this view expressed, that the Army Contracts De- partment decided that no expedient by which prices could be reduced must be left untried. From this time onwards the policy of buying raw materials, and fixing the margin to be paid for each stage of manufacture on the basis of actual cost and a fair profit, became the goal consciously aimed at in every trade where the total demand so far exceeded the productive capacity as to yield exorbitant profits to manufacturers.

The objection that the War Office was unfitted to look after the technical details of commercial operations of this kind was met in the jute industry by appointing Messrs. A. & S. Henry, Ltd., a large firm of merchants in Dundee, to act as Government agents, and entrusting to them the duty of purchasing jute goods and superintending the various stages of manufacture. The agreement provided that the terms of remuneration payable to the firm in consideration of their undertaking all duties in con- nexion with the purchase, inspection, storage, and dispatch of jute goods, on behalf of the British and Allied Governments, should be on a sliding scale, with a fixed maximum which left little if any profit after paying expenses.

The agreement came into force on June 1, 1915.. A War Department Jute Goods Depot was opened in Dundee under the management of the agent firm, and henceforth the whole business

COSTING IN THE JUTE INDUSTRY 45

of purchase, inspection, storage, and dispatch of jute goods was conducted on the spot by an efficient and specialized organization, thus relieving Whitehall, Woolwich, and Pimlico of a small fraction of their current work.

The way was now open for putting the first part of the pro- gramme into effect. Negotiations were opened with the spinners, and arrangements were made whereby they undertook to supply yarn to the order of the War Office at special prices based on the cost of raw material, the cost of spinning, and a reasonable margin of profit. The yarn was not bought outright. It was requisitioned and ear-marked for Army requirements, but was not as a rule paid for by the War Office. Payment was made by the weaving firm to whom the spinner was instructed to deliver it. Similar arrangements were made with the weavers, and with the firms which both spun and wove. So far as possible, the burden was spread evenly over the whole trade. For some months it was necessary to take nearly half the manufacturing output of Dundee for military purposes. The agent firm had to keep exact records of orders placed, of future requirements, and of current deliveries from firm to firm; constant adjustments had to be made, mostly by telephone or by word of mouth, in order to ensure an even flow of material and to keep the machinery constantly at work. The Jute Goods Depot took the place of the yarn and cloth market, and became a clearing house for the transfer of products at fixed prices.

That the new system worked satisfactorily is proved by the following figures showing the monthly demands from the Army overseas and the number of sandbags dispatched each month :

Demanded Dispatched

April : “ : 5,000,000 5,414,000 May F : : 6,000,000 6,619,350 June : , ; . 6,009,000 6,607,000 July : : : : 12,000,000 8,192,000 August . : : é 18,000,000 17,650,000

In the last week in July the Dundee holidays took place. But for the holidays the July figure would have reached about 11,000,000. The deficiency was made good by drawing on a reserve of 6,750,000 accumulated overseas.

46 ORIGINS OF CONTROL AT THE WAR OFFICE

An idea of the effort required to produce these quantities may be gathered from the fact that during July and August practically every sewing machine in the Dundee factories was employed in sewing sandbags. The normal rate of production was about 1,200 a day per machine. But an exceptionally skilled girl could sew as many as 2,000 bags a day, which works out at about four a minute.

In negotiating an agreed basis of prices, detailed examinations of costs of production were made with the assistance of a local firm of chartered accountants. Though under the Defence of the Realm Regulations, as they then stood, there was no obligation on the part of the spinners to accept the ° costings system ’ or even to allow the Government to examine their costs, they voluntarily agreed to the fixing of prices on this basis, partly from a genuine desire to meet the wishes of the War Office, and partly because they were reluctant to resort to arbitration and have the matter fought out in open court. The level of prices so fixed was about 25 to 30 per cent. below market prices. Jute yarn selling for 3s. 9d. per cop in the open market was requisitioned at 2s. 8d., and jute cloth worth 44d. per yard was obtained for 3d. per yard. Compared with the previous statement of costs and profits, the position was now approximately as follows :

In the open For the market War Office Sad. £ syd: Price of one ton of jute (common quality) . ‘ : 20 0 0 20 0 0 Cost of spinning into yarn ‘ ; : é F ZOO 12 0 0 Total cost of production . : : ‘ : 32 0 0 32 0 0 Spinner’s profit é : : : : ; tSeOMO 5 0 0 Price of one ton of yarn . 5 : : 4 : 50 0 O 37 0 0 Cost of weaving into cloth 6 0 0 6 0 0 Total cost of production . ; : : 4 56 0 0 43 0 0 Weaver's profit c F : : : ‘ COMO 310 0 Priceofonetonofcloth. . . . . . 62 0 0 4610 0

It will be seen from the diagram of prices that the ‘ requisition ’ prices of yarn and cloth happen to correspond fairly closely with the average prices of the previous two years; but this result is

COSTING IN THE JUTE INDUSTRY 4G

largely accidental. The fall in the price of raw jute would have justified a lower level, had it not been that the increased cost of production offset the reduction in the price of raw material.

Early in August it became evident that the demand for sand- bags was rapidly becoming too great for Dundee to cope with unaided. Attention was therefore turned to Calcutta, where the jute manufacturing resources were the largest in the world, and the annual output of cloth was nearly four times as great as Dundee’s. Market prices in India, as shown on a separate diagram on page 453 had followed a parallel course. After the outbreak of war, raw jute had fallen rapidly to 30 rupees per bale in December 1914 compared with 80 rupees per bale in the beginning of the year. The market for jute cloth was completely disorganized, and no quotations are available between the end of July 1914 and the beginning of January in the following year, when trading was resumed at 11 rupees per 100 yards compared with 16 rupees per 100 yards a year before. From January onwards the same causes which affected the Dundee market caused a recovery in Calcutta. By March the price of cloth had risen to 16.8 rupees. The first War Office intervention at Dundee at the end of March was re- flected in a slight depression during the next two months, but by the end of June the level of cloth prices had reached 21.8 rupees, a rise of nearly 100 per cent. in six months. During the same period raw jute rose about 50 per cent. The effect of the intro- duction of the ‘ costings system ’ at Dundee on July Ist is shown by a sympathetic drop of 10 per cent. in Calcutta during that month. In September appears a new line for cloth called ‘ re- quisition price ’, starting at 13.75 rupees per 100 yards, and falling to 12 rupees in January 1916. This was the effect of applying the ‘ costings ’ principle to Calcutta.

The War Office had no legal power to requisition the output of mills in India, still less to fix prices on the basis of cost and fair profit. It was possible, however, to bring indirect pressure to bear, first by inducing the Allied Governments to make their purchases jointly rather than in competition with one another, and secondly, by persuading the Government of India to prohibit export except under licence. With the co-operation of the India

48 ORIGINS OF CONTROL AT THE WAR OFFICE

Office both these steps were taken. Though the Allied Govern- ments agreed in principle through their representatives in London to make their purchases of jute goods only through the agency of the British War Office, competitive purchases by Allied traders did not in fact stop until the second course was adopted. Export of jute goods was prohibited even to Allied countries, and no licences were granted if the goods were considered to be for military purposes. Co-operation with the Allies was thus ren- dered effective by preventing them obtaining their requirements in any other way.

Negotiations to purchase were successfully carried through in August and September. The Jute Mills Association of Calcutta undertook to provide fifty million sandbags monthly at a price of 17s. per 100 for the British Government, and at corresponding prices, according to quality, for the Allied Governments. This was a reduction of about 30 per cent. compared with market prices. The British requirements alone were thirty-five million in September, thirty-eight million each in October and November, and forty million in December. Russia demanded thirty million, France twenty million, and Belgium six million for delivery up to the end of the year.

From this time onwards Calcutta provided the bulk of the supplies, and Dundee was used as a reserve, to make good de- ficiencies. Large reserve stocks were accumulated, and supplies could be diverted at short notice to any theatre of war. Early in 1916 an urgent request was received from Egypt for an imme- diate supply of thirty million sandbags for use in defending the Suez Canal against the Turks. Within eight days ships coming from India were diverted to Alexandria, and had started discharging sixteen million bags. More ships were on the point of arriving with further millions, when a telegram was received asking that further deliveries should be suspended until the masses of bags congesting the quays, railways, and depots had been cleared away. |

This experience showed that the largest demands could be met promptly and without difficulty, and that the situation was now well in hand. The system adopted had produced the supplies required, and the prices paid were reasonable and satisfactory.

COSTING IN THE JUTE INDUSTRY 49

In their report of August 8, 1916, the Public Accounts Com- mittee of the House of Commons drew attention to the control exercised by the Government over the jute trade, and noted with approval that the methods adopted had resulted in an eG saving of £3,000,000 a year on sandbags alone.

The success of this early experiment had Cereachine conse- quences in the development of State control.

1569.53 E

CHAPTER V THE LEGAL BASIS OF CONTROL

Defence of the Realm Act — Royal Prerogative — Losses Commission — Compensation a matter of grace — Requisitioning under the Army Act — ‘ Fair market value ’ — Regulation 2 8 — Requisitioning from merchants and growers — Maximum prices and requisitioning — Amendment of Regulation 7 — Prices to be fixed with reference to cost of production and fair profit without regard to market price — Compulsory examination of books— February 1916, the turning-point in costings system — No Parliamentary sanction — Regulation 30 a — Prohibition and regulation of private dealings — Licensing and price- fixing — Government monopoly — Regulation 2 the most comprehensive basis for control — Were the regulations wlira vires ?

In the previous chapter an account has been given of the earliest application of requisitioning and costing on a large scale, and reference has been made to the insecure legal foundations on which they rested. For an understanding of subsequent develop- ments, it is necessary to give a brief description of the gradual evolution of a legal basis for control.

The Defence of the Realm Act was passed by Parliament in August 1914, and conferred wide and undefined powers upon the Government to make regulations for ensuring ‘ the public safety and the defence of the Realm’. The earliest regulations made under the Act conferred certain powers on the Admiralty and the Army Council, such as the right to take possession of land and factories, and to require manufacturers to produce goods for naval and military purposes. But there were no powers wide enough to enable the War Office or any other Department to exercise complete control of a trade, to determine the basis on which payment for goods requisitioned should be made, to regulate dealings, or to prescribe maximum prices. Not only were such measures ultra vires the Regulations as they then stood, but it was generally considered that it would be ultra vires the original Act to amend the Regulations so as to cover them.

Under the Defence of the Realm Act, no provision was made for settling the question of compensation. The theory was that in the absence of any express provision by Act of Parliament, there was no legal right to compensation whatever; that the

THE LEGAL BASIS OF CONTROL 51

Crown had the right to take possession of any private property by virtue of the Royal Prerogative, and that any compensation paid was purely a matter of grace. On March 31, 1915, a Royal Commission was set up to assess claims for compensation in such cases and to award ew gratia payments for losses incurred owing to the exercise of the Royal Prerogative. The wording of the preamble to the Commission’s letter of appointment is as follows :

Whereas We have deemed it expedient that a Commission should forthwith issue to enquire and determine, and to report what sums (in cases not otherwise provided for) ought in reason and fairness to be paid out of public funds to applicants who (not being subjects of an enemy State) are resident or carrying on business in the United Kingdom, in respect of direct and substantial loss incurred and damage sustained by them by reason of interference with their property or business in the United Kingdom through the exercise by the Crown of its rights and duties in the Defence of the Realm : Now know ye that We, &c.!

A full discussion of the legal theory underlying the problem of compensation falls outside the scope of the present inquiry. But it is important to note that this theory of the Royal Pre- rogative, whether valid or not, was acted upon throughout the war; that until an adverse decision was given by the House of Lords after the war was over, it was accepted without question by the Courts, including the Court of Appeal; and that it was thus as much a part of the law of the land as any Act of Parlia- ment.? It is also important to note that the Defence of the Realm Losses Commission laid it down as a general principle that claims for compensation could only be admitted in the case of individuals who could prove that they had suffered exceptional interference specially directed against themselves. If damage was suffered owing to an Order which was of general application and not restricted to particular individuals, no compensation was payable. The Crown. could not undertake to compensate all persons whose business suffered from the effect of war measures universally and impartially applied.

1 The full text is given in Appendix 2.

2 In 1915 the Shoreham Aerodrome case was decided in favour of the Crown by the Court of Appeal. C. A. (1915) 3 K.B. 649. It never went to the House of Lords, since the Government compromised for fear of an adverse decision. In 1920 the De ee Hotel case was decided against the Crown on appeal to ne House of Lords.

H. L. (E.) [1920] A. C. 508. B 2

52 ORIGINS OF CONTROL AT THE WAR OFFICE

The Royal Prerogative thus came to play an essential part in the development of control. It was by virtue of the absolutist theory that the subject had no legal right to compensation against the Crown, that the tyranny of market prices was overthrown. It was because compensation for property requisitioned need only be made ea gratia that the costings system could be, and was, legally enforced; and it was the principle laid down by the Defence of the Realm Losses Commission that no compensation was payable for losses inflicted by measures of general application, which made the régime of maximum prices and the prohibition of private dealings administratively possible without causing State bankruptcy. It was explained in the House of Commons on the first reading of the Indemnity Bill on May 3, 1920, that if the decision of the House of Lords which repudiated this theory was not superseded by legislation, innumerable claims would be opened up and the State would be faced with liabilities for com- pensation running into hundreds of millions of pounds.*

The attempts made by the War Office early in 1915 to check the constant rise in market prices of jute goods were of two kinds : first, the seizure of stocks in merchants’ hands, and secondly, the requisitioning of the future output of manufacturers. The two cases present quite different problems and must be kept distinct.

The first case was originally covered by Section 115 of the Army Act, which provided that the price to be paid for goods seized from the owner should be based on the ‘ fair market value ’. But since the market value was all the time being inflated by the huge demand for military purposes, this provision rendered requisitioning useless as a means of reducing prices. It would be no deterrent to the speculator; unless he was hoarding for a further rise, it would be a matter of indifference to him whether he sold his stocks by voluntary agreement or had them requisi- tioned at their market value. Indeed, it might be argued that the market value was precisely the price which the War Office would have had to pay, if it had not requisitioned. When second- hand sacks were requisitioned at Liverpool, the circumstances were in many ways exceptional. Since the huge demand for » sandbags had only recently come on the market, and since action

1 Parl. Debates, Commons, vol. cxxviii, col. 1765.

THE LEGAL BASIS OF CONTROL 53

had been taken fairly promptly, it was possible for the purchasing officer to discount the greater part of the effect of this demand and still maintain that the price paid was a fair market price. Even so, the result was that certain dealers had to part with their goods at a-price actually lower than that which they had paid for them a day or two before. Though the principle adopted may have been justifiable in the particular circumstances (some of the dealers who escaped without loss were inclined to welcome the action of the War Office as a well-deserved punishment inflicted on their rivals for speculating in Army supplies), it obviously could not be universally applied without inflicting the greatest hardship on bona-fide traders and paralysing legitimate commerce. If the market price was unfair to the Government, anything less than the market price would often be grossly unfair to the individual trader.

No advance in the solution of the price problem could therefore be looked for by occasional requisitioning of merchants’ stocks under the procedure laid down by the Army Act. Recourse was therefore had to an amendment of the Defence of the Realm Regulations.

In February 1916 an amendment of the Defence of the Realm Regulations was made which superseded Section 115 of the Army Act.* It gave the Army Council power, under Regulation 2 B, ‘to take possession of any war material, food, forage, and stores of any description and of any articles required for or in connexion with the production thereof’. In the absence of any provision as to price, holders would have no legal recourse, and in the absence of agreement would have to appeal, not to the Courts, but to the Defence of the Realm Losses Commission. This was an improvement on the Army Act, but it still left doubt as to the principle on which ‘in reason and fairness’ payment should be made in such cases. Accordingly a year later Regulation 2B was amended, and express provisions were laid down as to the basis on which compensation should be paid. A distinction was made between stocks seized in merchants’ hands, and food, forage, or war material requisitioned from the producer. In the latter case the chief consideration was to be not the market price, but the cost of production ; in the former case the provisions were

54 ORIGINS OF CONTROL AT THE WAR OFFICE

more complicated, being designed on the one hand to discourage mischievous speculation and hoarding, and on the other hand to safeguard the bona-fide trader against loss. Regard was to be had to the price paid for the goods, provided that that in itself was not unreasonable or excessive, and to the rate of profit normally earned in selling such goods; but a person who had acquired them ‘ otherwise than in the usual course of his business ’ was to receive only a reduced rate of profit or even no profit at all. The full wording of the Regulation is as follows:

28. It shall be lawful for the Admiralty or the Army Council or the Minister of Munitions to take possession of any war material, food, forage, and stores of any description and of any articles required for or in connexion with the production thereof.

Where any goods, possession of which has been so taken, are acquired by the Admiralty, Army Council, or the Minister of Munitions, the price to be paid in respect thereof shall in default of agreement be determined by the tribunal by which claims for compensation under these regulations are, in the absence of any express provision to the contrary, determined.

In determining such price, regard need not be had to the market price, but shall be had :

(a) if the goods are acquired from the grower or producer thereof, to the cost of production and to the rate of profit usually earned by him in respect of similar goods before the war and to whether such rate of profit was unreasonable or excessive, and to any other circumstances of the case ;

(b) if the goods are acquired from any other person than the grower or producer thereof, to the price paid by such person for the goods and to whether such price were unreasonable or excessive and to the rate of profit usually earned in respect of similar goods before the war, and to whether such rate of profit were unreasonable or excessive and to any other circumstances of the case ; so, however, that if the person from whom the goods are acquired himself acquired the goods otherwise than in the usual course of his business, no allowance, or an allowance at a reduced rate, on account of profits shall be made.

Provided that where by virtue of these regulations or any order made thereunder the sale of goods at a price above any price fixed thereunder is prohibited, the price assessed under this regulation shall not exceed the price so fixed.

If, after the Admiralty or the Army Council or the Minister of Munitions have issued a notice that they have taken or intend to take possession of any war material, food, forage, stores or article in pursuance of this regulation, any person having control of any such material, food, forage,

THE LEGAL BASIS OF CONTROL 50

stores or article (without the consent of the Admiralty or Army Council or the Minister of Munitions) sells, removes, or secretes it, or deals with it in any way contrary to any conditions imposed in any licence, permit, or order that may have been granted in respect thereof, he shall be guilty of an offence under these regulations.

It will be noticed that the Regulation contains a further provision that where a maximum price had been fixed for any commodity requisitioned, the compensation payable should not exceed the maximum price. This clause meant that the Govern- ment could seize private property and virtually fix its own price, a power implicit in the doctrine of the Royal Prerogative, but never yet so openly avowed. But a due regard for legal form was shown. On one occasion when the War Office desired to requisition certain classes of woollen material in merchants’ hands, an order was drafted requisitioning the goods and fixing prices at the same time. The Department’s legal advisers, how- ever, objected to this; they explained that though it was lawful to fix a maximum price and then to requisition, it was not law- ful to requisition and fix maximum prices in the same order. The War Office accordingly adopted the expedient of issuing two orders following closely one after the other, the first, a Maximum Prices Order, and the second, a Requisitioning Order. The result was the same, but the scruples of the legal experts had been respected.*

The later history of Regulation 2B has been inserted out of its chronological order, so as to complete the account of the way prices were fixed when goods were requisitioned from stock—the problem that faced the purchasing officer at Liverpool.

Attention must now be given to Regulation 7, which already existed in its original form in March 1915, and was brought into use in requisitioning the output of Dundee manufacturers. In the case of manufacturers’ output the goods requisitioned are not yet in existence ; they have not been bought and sold and passed through a number of hands in the open market ; at the time when

1 In February, 1920, in the Newcastle Breweries case, Regulation 2 B was declared

to be invalid and the petitioners were said to be entitled to the market price for rum requisitioned by the Admiralty. (1920) 36 Times L. R. 276 and (1920) 1 K. B. 854.

- Before however the case was heard on appeal, it was cleared up by the Indemnity Act, 1920, 10 & 11 Geo. V, c. 48, which by implication validated this and other Regula-

tions.

56 ORIGINS OF CONTROL AT THE WAR OFFICE

they are ordered even their future market value is to a certain extent problematical, and depends on the future course of market prices. Further, the manufacturer cannot be said to own goods not yet in existence, though he may own the raw materials. What he is required to do under a Requisitioning Order is to perform certain operations which will transform these materials into the goods required. In a sense, then, it is the raw materials and not the future goods which are requisitioned ; and the manufacturer is merely instructed to work them up. So long as he receives the full value for his raw materials and the actual expenses of working them up, and in addition is granted a reasonable rate of profit comparable to what he would have received in normal times, he has suffered no damage. Requisitioning at less than market prices may therefore be fair and reasonable to the manufacturer when it is unfair to the merchant. For the manufacturer, though he is deprived of future profits, does not incur a loss; whereas the merchant, though he may have bought the goods a long time ago when prices were lower, may equally well have bought them only the day before, and consequently will lose money if he receives less than the market price.

In 1915 Regulation 7 ran as follows :

The Admiralty or Army Council or the Minister of Munitions may by order require the occupier of any factory or workshop in which arms, ammunition, or any warlike stores or equipment, or any articles required for the production thereof are manufactured, to place at their disposal the whole or any part of the output of the factory or workshop as may be specified in the order; and the occupier of the factory or workshop shall be entitled to receive in respect thereof such price as, in default of agreement, may be decided to be reasonable having regard to the circumstances of the case by the arbitration of a Judge of the High Court selected by the Lord Chief Justice of England in England, by a Judge of the Court of Session selected by the Lord President of the Court of Session in Scotland, or by a Judge of the High Court of Ireland selected by the Lord Chief Justice of Ireland in Ireland.

If the occupier of the factory or workshop fails to comply with the order or without the leave of the Admiralty or Army Council or the Minister of Munitions delivers to any other person any part of the output of the factory or workshop to which the order relates he shall be guilty of an offence against these regulations.

For the purpose of ascertaining the amount of the output of any such factory or workshop or any plant therein the Admiralty or Army Council

THE LEGAL BASIS OF CONTROL 57

or the Minister of Munitions may require the occupier of any such factory or workshop, or any officer or servant of the occupier, or where the occupier is a company any director of the company, to furnish to the Admiralty or Army Council or the Minister of Munitions such particulars as to such output as they may direct, and if any such person fails to comply with any such requirement he shall be guilty of an offence against these regulations.

The important phrase in this Regulation is the following : ‘the occupier of the factory shall be entitled to receive such price as, in default of agreement, may be decided to be reasonable having regard to the circumstances of the case by the arbitra- tion of a judge.’ This express provision as to price differentiated Regulation 7 from other Regulations under the Act, and removed compensation for requisitioning the output of a factory from the jurisdiction of the Defence of the Realm Losses Commission. No case had yet gone to arbitration ; it was therefore uncertain how a judge would interpret the words ‘ reasonable having regard to the circumstances of the case’. At that time he could hardly fail to be influenced by the parallel case of goods requisitioned under Section 115 of the Army Act, where it was expressly provided that payment should be made on the basis of the ‘ fair market value’. In any case the very indefiniteness of the clause as it stood largely deprived the power of requisitioning of its value as a means of inducing manufacturers to accept what the War Office would regard as reasonable prices. In Dundee manufacturers had hitherto accepted the War Office interpretation of the word ‘reasonable’. They had entered into voluntary agreements to supply goods at prices about 25 per cent. below those ruling in the open market, and these agreements had the force of legal contracts. But after the system had been running for some months, one of the largest firms began to question the justice of the new principle, and threatened, when the time came for renew- ing the agreement, to refer the matter to arbitration. The War Office at once realized that an unfavourable decision would knock the bottom out of the whole system of control of prices, and that some means must be found for strengthening the legal foundations of its policy.

This proved a task of considerable difficulty and complexity. The legal advisers of the Department were of the opinion that

58 ORIGINS OF CONTROL AT THE WAR OFFICE

since the Defence of the Realm Act contained no provisions as to prices, any regulation which purported to fix prices or to determine the basis on which they should be fixed, might be construed as ultra vires. This may appear surprising in the light of subsequent developments ; but the theory and practice of later years must not be imported into a period when the rights of property, freedom of contract, and liberty of commerce were still invested with much the same sanctity as they enjoy in times of peace. The practice of fixing maximum prices by Departmental Order which later became, under pressure of popular opinion, a universal and un- questioned procedure enforced in every local court, would in 1915 have been regarded as unconstitutional and legally impossible. The War Office wished to delete all reference to arbitration before a judge, to lay down that compensation should be based on ascertained cost of production and a reasonable profit defined by reference to a pre-war standard of profit (as under the Munitions of War Act and the Excess Profits Duty), and to leave a right of appeal to the Defence of the Realm Losses Commission as under other Regulations. But in deference to the views of the legal advisers this programme was abandoned. A compromise was reached whereby arbitration before a judge was retained, but instructions were given to the arbitrator as to the principles which he should follow in determining the price. The only amendment necessary therefore was to substitute a rather more precise definition of the words ‘ reasonable in all the circumstances of the case’. The new clause which was embodied in Regulation 7 on February 15, 1916, ran as follows :

In determining such price regard need not be had to the market price, but shall be had to the cost of production of the output so requisitioned and to the rate of profit usually earned in respect to the output of such

factory or workshop before the war, and to whether such rate of profit was unreasonable or excessive, and to any other circumstances of the case.

The words which required the arbitrator to consider whether the pre-war rate of profit was unreasonable or excessive were a refinement subsequently inserted at the instance of the Ministry of Munitions. Whether a judge of the High Court appointed by the Lord Chief Justice of England would have regarded himself as bound by this amendment of the Regulation, or would have

THE LEGAL BASIS OF CONTROL 59

dismissed it as ultra vires, need not here be considered, nor was it at any time of very great importance. So far as the writer is aware, no case ever went to arbitration before a Judge of the High Court under this Regulation. The main object was to be able to make use of this provision (which until it was overthrown was as much the law of the land as any other part of the Regulations) in future negotiations with Army contractors. The patriotism and sense of justice of the majority might be relied upon to accept the principle laid down, so long as it was applied impartially all round, and could be legally enforced, if necessary, against a recalcitrant minority.

This amendment, however, was not in itself sufficient. It was no use having the power to-base prices on cost and normal profit, unless reliable information on these points could be ob- tained when the necessity arose from the books of manufacturers. This involved a new principle, the compulsory examination of books. Again the legal advisers considered it doubtful whether the Defence of the Realm Act was intended by Parliament to confer such powers on the Executive. No Regulation of the kind could therefore be validly made under the existing Act. It was argued that it would be necessary to pass a short Act through Parliament covering the point. This course, however, would involve delay and considerable risk of failure. The House of Commons had in fact refused to give this very power to the Revenue authorities, when they had asked for it in connexion with the administration of the Excess Profits Duty. The com- mercial advisers of the War Office regarded the proposal with equal or greater misgiving. Members of the Contracts Advisory Committee feared that the business community would never submit to an inquisition of this sort, and that such an unprece- dented extension of the powers of the State would cause an outburst of indignant protest. The Director of Army Contracts insisted, however, that without this power administration of the new system would be impossible; that he would otherwise be dependent on manufacturers’ own assertions of their costs and profits with no means of checking them; and that even if in practice the power was seldom used, it was essential to hold it in reserve in order to deal with less scrupulous firms. After two

60 ORIGINS OF CONTROL AT THE WAR OFFICE

hours’ debate the Contracts Advisory Committee reluctantly gave their assent, and the amendment was made by Order in Council on the same day as the former amendment. Traces of the mis- givings with which it was made are indicated by the phraseology adopted. No explicit reference was made to the compulsory production of books or the right to send officials into a factory to inspect them. The power was conferred in an almost casual manner by the insertion of the few unemphatic words ‘ and may require such particulars to be verified in such manner as they may direct’. The whole paragraph was then as follows (the words inserted are in italics) :

For the purpose of ascertaining the amount of the output of any such factory or workshop or any plant therein and the cost of production of such output, and the rate of profit usual in such factory or workshop before the outbreak of war the Admiralty or Army Council or the Minister of Munitions may require the occupier of any such factory or workshop or any officer or servant of the occupier, or where the occupier is a company any director of the company, to furnish to the Admiralty or the Army Council or the Minister of Munitions such particulars as to the output, cost and rate of profit as they may direct, and may require any such particulars to be verified in such manner as they may direct, and if any such person fails to comply with any such requirements he shall be guilty of an offence against these regulations.

It was by virtue of this clause, first promulgated in February 1916, that it became possible for the War Office and other Depart- ments to appoint skilled accountants to make minute investiga- tions of costs of production, and to bring to light information which was often a revelation and source of surprise to the manu- facturer himself. It was the turning-point in the development of the ‘ costings system ’. From this time onwards the new principle was firmly installed and remained unchallenged throughout the war. So far from protesting manufacturers submitted almost as a matter of course to the examination of their books. Parlia- mentary sanction proved unnecessary and was never obtained ; but the results achieved were so satisfactory to the tax-payer that the Public Accounts Committee of the House of Commons came to regard this new power as a valuable and necessary safe- guard of the purchasing Departments. In a recent report the

* Committee on Public Accounts, 4 Dec. 1919, pp. xvi, xvii.

THE LEGAL BASIS OF CONTROL 61

Public Accounts Committee criticized a particular transaction of the Ministry of Munitions on the ground that the manufacturer’s books had not been examined to ascertain the cost of production. In the light of such criticism it is difficult to realize that the power to examine books was at one time thought to be ultra vires, that it was obtained almost surreptitiously and without explicit avowal, and that the War Office was unwilling to ask the House of Commons to sanction it, for fear that sanction would be refused.

The origin of two of the main pillars of control has been given ; Regulation 2B governing the requisitioning of stocks and raw produce, and Regulation 7 laying down the principle of paying manufacturers on the basis of cost and fair profit. Reference must now be made to two other Regulations, 30 a and 2 £, which completed the legal frame-work and in time came to overshadow the other two in importance. These Regulations rendered possible State control of trade, the licensing of dealers and the enforce- ment of maximum prices. There were no provisions either in the original Act or in the early Regulations enabling the Government to prohibit or control commercial operations. The first venture in State trading—the prohibition of private imports of sugar and the subsequent monopoly exercised by the Sugar Commission— was based not on the Defence of the Realm Act but on a special Royal Proclamation. But among the special powers conferred on the ‘competent naval or military authority ’ (which meant not the Admiralty or War Office but individual naval or military officers above a certain rank, conducting operations or command- ing a district) was the right to prohibit the carrying and the buying and selling of rifles, ammunition, and other arms ; such a power was essential in case of a local emergency, such as the landing of a hostile army, but was clearly not intended to apply to the whole trade of the country.

This Regulation 30 formed a useful peg on which to hang the first attempts to supply a legal basis for controlling trade. A new Regulation was drawn up, called Regulation 30 a, which conferred similar but more general powers on the Admiralty, Army Council, and the Minister of Munitions. The authors of the Regulation were a small Committee consisting of members of the General Staff, the Ministry of Munitions, and the Contracts Department.

62 ORIGINS OF CONTROL AT THE WAR OFFICE

Their object was to put a stop to the mischievous speculation that was taking place in war material, such as rifles, which the Allies were requiring in very large quantities. The official explana- tion at the time was that enemy aliens and cosmopolitan specu- lators were buying up supplies of arms and ammunition and explosives, in order to embarrass the Allied Governments and place obstacles in the way of supplying the armed forces. It was announced that only bona-fide British merchants would be licensed to deal in certain classes of war material, and at the time there was no intention of interfering with legitimate private trade, still less of constituting any Government monopoly.

The new Regulation enabled the Admiralty, Army Council, or Minister of Munitions to schedule a list of articles and classes of war material, dealings in which were prohibited except under licence. The original list contained articles purchased for the most part by the Ministry of Munitions. The effect was in- stantaneous. A study of intercepted cables (copies of which were daily supplied by the Chief Censor, and formed a valuable weapon in the armoury of control throughout the war) showed that the speculators were badly hit. Offers of millions of rifles were no longer received from impecunious toy dealers. The Regulation was later amended in such a way that prohibition of dealings was extended to transactions outside the United Kingdom by firms domiciled here. This power of prohibiting British firms buying and selling in other parts of the world eventually proved of great importance in facilitating the establishment of State purchase in foreign markets on behalf of the Allies as a whole. At first the use made of the Regulation was confined to war material in the narrow sense, viz. arms, ammunition, and explosives. The Ministry of Munitions then extended it to certain rare metals, such as tungsten and molybdenum, which, though they might not be regarded as specifically war material in normal times, could be treated as such during the war owing to their being required almost exclusively as a raw material for high-speed steel.

In September 1915 the Ministry began to impose conditions on the recipients of licences, among which was the stipulation that certain fixed prices should not be exceeded. The next develop- ment came in March 1916, when the War Office made an Order

THE LEGAL BASIS OF CONTROL 63

under Regulation 30 4 prohibiting all private dealings in Russian flax, a raw material required largely but not exclusively for military purposes. In this case no licences were granted; the War Office itself assumed the entire monopoly of the purchase and import of flax from Russia, transforming four of the principal flax importers into Government agents.

Regulation 30 a was by this time becoming unsuitable for the purpose in view. To use it as a means for establishing a Govern- ment monopoly or the enforcement of maximum prices was only possible by straining the original intention. The legal advisers were particularly doubtful whether the power of prohibition and licensing conferred the right to prescribe regulations such as maximum prices as a condition of the licence. A local authority has power to prohibit cinema entertainments except under licence; but it would be quite illegal for it to lay down as a condition of the licence that only certain films may be shown ; that half the proceeds should be paid to the local authority ; and that the proprietor should not exceed a prescribed scale of maximum charges. As a result of this opinion the War Office took the initiative in getting a new Regulation issued by Order in Council which would give wider and more explicit powers than Regulation 30 a.

This new Regulation, which was called Regulation 2 £, enabled the Admiralty, Army Council, and the Minister of Munitions ‘to regulate, restrict, or prohibit the manufacture, use, purchase, sale, repair, delivery of or payment for, or any other dealing in any war material, food, forage, or stores of any description, or of any article required for or in connexion with the production thereof ’, and laid it down that any person breaking any condition that might be imposed in any licence or order made under the Regulation would be guilty of an offence.

This Regulation was the most comprehensive and drastic of all the Regulations concerned with State control. Though it did not expressly refer to the fixing of maximum prices, it was in- tended to be used for that purpose, and legal opinion was satisfied that it might be so used. It gave a legal basis for rationing manufacturers and dealers, for enforcing the * priority’ system of distribution, for cancelling or varying private contracts, and for

64 ORIGINS OF CONTROL AT THE WAR OFFICE

regulating the uses to which a man might put materials already in his possession. Provided the whole Regulation was not wlira vires, there was virtually no measure of State interference with private property and freedom of trade, which could not be legally justified under its provisions. The much more numerous and detailed powers subsequently conferred on the Food Controller might all be regarded as implicit in Regulation 2 £.

The British Common Law is often praised for its elasticity and adaptability to altered circumstances. The same qualities are to be found in a marked degree in many of the Regulations made under D.O.R.A. But the fact is, that in the great majority of cases, what was lawful and what was not lawful did not so much matter; what mattered was the extent to which any measure commanded general support and was applied impartially all round. Measures of State interference, which went beyond what the best opinion in any particular trade regarded as necessary and possible, were practically certain to fail, however valid their legal sanction. Similarly, many devices which were legally unsound or doubtful, were enforced without difficulty and accepted without demur, provided that they had behind them the weight of popular opinion and the patriotic support of the most influential men in the trade. The truth of these principles became specially evident in connexion with the flood of minute regulations issued by the Food Controller, all of which, according to one school of legal opinion, were technically ultra vires, since they had only the remotest connexion, if any, with the defence of the United Kingdom against an armed invader, which was alleged to be the sole contingency contemplated by the legislature in passing the original Act.

PART II TEXTILES AND LEATHER

CHAPTER VI

RUSSIAN FLAX AND CONTROL OF THE LINEN INDUSTRY

Extension of costings system to linen industry — Comparison with jute industry — Difficulties in supply of raw material — Closing of the Baltic — Decision of War Office to monopolize purchase of Russian flax — Appointment of buying agencies in Russia — Flax offices opened in London, Dundee, and Belfast — Co-operation of spinners and manufacturers — Improvements in supply of raw material — Results of trading operations — Profits and risks — Usual accounting methods not applicable — Government Departments and business firms — Controller and Auditor-General and audit of flax accounts in Russia.

Work of Flax Control Board — Aeroplane linen — Increase of flax production in United Kingdom — Purchase of seed — Rationing and control of manufacture — Local Committees — Centralization and decentralization of control.

Soon after the system of requisitioning and costing had been introduced in the jute industry, attention was directed to similar problems that had arisen in the heavy linen industry. Both industries were mainly concentrated in Dundee and district, and both were essential for military purposes. Indeed a far greater proportion of the heavy linen output was taken by the War Office than of jute products. For a few months the two industries were treated very differently. While jute goods were being supplied at much under market values, flax products commanded practically any price manufacturers chose to ask. Jute goods were obtained by requisitioning ; linen goods by the old method of competitive tendering, the greater part being supplied not to the War Office direct, but to War Office contractors and sub-contractors. So glaring a contrast could not long continue. Jute spinners and weavers began to complain that they had been singled out for special treatment, and asked why flax spinners and weavers were allowed to get any price they could in an unrestricted market. The general view in Dundee was that the costings principle should be

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applied all round or not at all. To this the War Office readily assented, and explained that it was only a question of time before the system would be applied not only to flax but to other textile industries.

There was undoubtedly every reason for dealing on the same lines with the linen manufacturer. The War Office was not obtaining all the heavy linen goods it required, and was being compelled to take cotton substitutes in many cases where cotton was inferior. In the absence of any organized control of the trade large orders were still being booked for private customers, and although export was restricted, licences could still be obtained by manufacturers or merchants who could show that the goods were already made, and that they were unsuitable for military purposes. This interfered with War Office supplies, and made it difficult for army contractors to obtain the canvas they required for making the finished articles for which they had tendered and received orders. Meanwhile, the Allied Governments were being refused permission to buy linen goods and were being compelled to buy instead in the United States. From the point of view of economy the need for organized control was no less apparent. Prices were exorbitantly high. As in the jute trade, it was the spinner who was making the largest profits, partly owing to the cutting off of yarn imports from Belgium.

Inquiries soon showed, however, that the new system would be much more difficult to introduce in the flax trade. The number of articles into which linen goods and canvas entered was much greater and more varied than the number of articles made of jute. Although it had been the practice for some time to buy tent canvas and issue it to contractors to be made up into tents, this was not the general practice in purchasing goods made of flax. There were over thirty items of army equipment, for which the contractor had to obtain his own supplies of canvas. It was realised that there would be great economy if the materials for all these made-up goods could be bought direct and issued to contractors ; but the change would involve much extra work in book-keeping, storage, and inspection, which under the existing pressure at Woolwich would scarcely be possible without opening a new local depot similar to the Jute Goods Depot at Dundee.

CONTROL OF THE LINEN INDUSTRY 67

Moreover, thejheavy canvases required for all these|various pur- poses differed widely in quality ; there would therefore be greater difficulty in fixing standard prices which would be fair to the different manufacturers and place a relatively equal burden on all.

But the most serious obstacles encountered in the course of inquiry were the uncertainties with regard to supplies of raw flax, the big risks which spinners had to run in order to obtain any, and the impossibility of fixing any basis of prices for the raw material from which to calculate the cost of yarn. Not only were the supplies of flax insecure but the quality of what arrived was not so good as in normal times. Whereas before the war about 30 per cent. was lost in the hackling process, in 1915 the loss was said to be nearer 60 per cent. ; om the other hand the by-product, which is sold as tow, commanded a better price than usual. Variations in the yield, fluctuations in the price, and uncertainties in delivery made it almost impossible to say what the raw material was worth; and the necessity of blending a great variety of qualities to produce the desired strength rendered it still more difficult to give even an approximate estimate of the cost of production of the many kinds of yarn which the spinner produced. It became evident that though it might just be possible with the aid of experts to apply the costings system if the price of the raw material were standardized on a stable basis, it would be quite impossible if the raw material was left uncontrolled.

A leading spinner with whom the position was discussed stated that the existing high prices were largely due to the necessity of covering against the abnormal risks of buying flax in Russia, and that if the Government would undertake to pur- chase on behalf of the whole industry and guarantee them their supplies, it would relieve manufacturers of their chief anxiety and enable them to quote more reasonable prices. Naturally the War Office was reluctant to assume such responsibility, if it could possibly be avoided. But events soon made Government intervention inevitable.

The flax required for making heavy linen canvas (as distinct from the finer flax grown in Ireland which is consumed by the fine linen industry of Belfast) was normally imported from Russia via the Baltic. The Baltic ports being now closed by enemy action, the

F 2

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only means of exporting flax from Russia, apart from a slow and difficult route through Sweden which was rarely possible or convenient, was to transport it several hundred miles by a single line of railway to Archangel and to ship it thence during the five or six months of the year when the port was not closed by ice. These natural difficulties were aggravated by the activities of speculators in Russia. Since there was a great shortage of trucks on the Archangel railway, a favourite move of the speculators was to obtain an option on a number of wagons, thus preventing the holders of flax from obtaining them, and then offer to release them for a consideration. The confusion thus caused made the business of buying flax so risky that the merchants began to ask the manufacturers to assume the risk themselves and pay them a fixed commission as agents. The manufacturers had then to employ other agents to try and obtain transport facilities to Archangel and shipping space to Dundee.

Under such conditions it is not surprising that the amount of flax imported during 1915 was about 30 per cent. less than the average pre-war import. Towards the end of 1915 the effect on prices in the United Kingdom became pronounced. Flax which sold for about £60 a ton before the war was now quoted at £115, a rise of nearly 100 per cent. in twelve months. By Feb- ruary 1916 the existing stocks in merchants’ hands were being held for a further rise, manufacturers’ supplies were running dangerously low, and the transport situation in Russia was getting worse. Meanwhile increased supplies of flax were necessary, if the needs of the Allied armies were to be adequately met. The situation had become so serious that in February 1916 the War Office decided to intervene.

The plan was as follows: first, by centralization of buying in the interior of Russia, to check speculation and buy as cheaply as possible ; secondly, to make an arrangement with the Russian Government for a definite allocation of wagons and thus obtain priority for flax required for military purposes; and thirdly, to arrange a shipping programme with the Admiralty for the shipment of flax from Archangel to Dundee in requisitioned tonnage.

On March 28, 1916, an Order was issued by the Army Council

CONTROL OF THE LINEN INDUSTRY 69

requisitioning unsold stocks of Russian flax in dealers’ hands and prohibiting all private dealings in Russian flax both in the United Kingdom and by British firms in Russia. Four large importing houses, which had been established in Russia for many years and had agencies and branches in the interior for buying direct from the peasants, were appointed sole Government agents; and the War Office announced that all Russian flax would henceforth be purchased through these agents on Government account. A special officer was sent to Archangel to look after flax shipments and to facilitate its transport from the interior. He was also instructed to give special attention to the movement of stocks of flax already bought on private account. As regards finance, which had been an increasing difficulty to private traders owing to the collapse of the foreign exchange market, it was arranged that the Russian Government should place roubles at the disposal of the British Ambassador for the use of the War Office agent in Russia and in exchange should receive an equivalent amount of sterling in London for the purchase of commodities which they were not permitted to buy out of the sums advanced to them on loan by the British Government. This proved an attractive proposal to the Russian Government, which was now finding it almost impossible to import anything except war material sup- plied on credit by the British Government, and helped to remove the objections, which might have become serious, to the new departure whereby the British War Office monopolized the export, and practically controlled the price, of one of Russia’s most important raw materials.

The administrative machinery necessary to carry out the new policy presented fewer difficulties than were at first anticipated. In February 1916 a new section of the Army Contracts Depart- ment had been created called the Raw Materials Section, whose functions were to act as a bureau of economic intelligence and research on all matters relating to the supply of raw materials and to prepare schemes for controlling and safeguarding supplies in. cases of necessity. This section now became responsible for the administration of flax purchase. The supervision of the four agent firms and the technical direction of all the commercial operations involved was undertaken in an honorary capacity by

10 TEXTILES AND LEATHER

Mr. W. H. Gardner, manager of the flax department of Messrs. W. F. Malcolm & Co. For three years he carried on the intricate processes of buying and selling raw flax for the linen manufacturers of the country with the assistance of a small staff installed in a few rooms in the Tothill Street Branch of the War Office. The ordinary routine of a City office was incorporated practically unchanged into a sub-department of the War Office, and its current business was conducted on commercial lines quite inde- pendently of the ordinary machinery of official routine.

In addition to the office in London, a War Department Flax Office was opened in Dundee, with a branch in Belfast, for the purpose of supervising the distribution of raw material, the allo- cation of orders, the investigation of costs, and the application of the requisitioning and costings system to the linen industry on the same lines as in the jute industry. These offices were manned by experts in the trade and were run on business lines with the minimum of interference from head-quarters.

It was now possible to fix the selling prices of the raw materials supplied ; manufacturers were able to select the particular grades or * marks ’ which they required; and linen yarn and cloth were obtained for War Office requirements at prices calculated to cover the cost of conversion and a reasonable margin of profit. An Advisory Committee of flax spmners and manufacturers was appointed, and every step taken or proposed by the War Office was fully explained and discussed at the meetings of the Committee. Once the general policy of State intervention had been accepted, the detailed applications of the policy and the many practical difficulties which the War Office had foreseen proved less formidable than was feared. With goodwill on both sides technical problems were solved with comparative ease. Without goodwill the same problems might well have proved insoluble. The drawing up of standard specifications for yarn, the determination of costs, the fair allocation of the burden of supplying War Office requirements, the distribution of the different grades of raw material to different firms in such a way as to avoid favouritism or discontent—all these difficulties were smoothed away by the fact that the manu- facturers themselves were co-operating to make the scheme a success. It is noteworthy that one of the first fruits of State

CONTROL OF THE LINEN INDUSTRY 71

control was the formation of a Flax Spinners and Manufacturers Association—a step which had never hitherto been successfully accomplished, owing to the strong individualism of the flax trade.

In Russia the new system worked a surprising transformation in the conditions of flax export. It now became possible to organize transport by rail and waterway from the interior to Archangel, to draw up a shipping programme which would lift all the flax purchased, and by bringing pressure to bear on the Russian Government and cutting out the speculators to ensure that the programme was fulfilled. The total quantity of Russian flax imported via Archangel during 1916 exceeded by about 60 per cent. the amount imported during the previous year and reached the same figure as imports in a normal year via the Baltic. At the same time the buying agencies found their task simplified. Overlapping and competition were avoided by dividing up the flax-growing districts among the four firms and allotting to each its sphere of operations. Concentration and co-ordination of buying checked further inflation during the 1915-16 season. In later years the occupation of flax-growing districts by the Germans and the disturbance caused by the Revolution caused prices to advance, but the increase would certainly have been greater but for the action of the British Government. In 1914 the price of a standard grade of Russian flax was £65 per ton. When the War Office intervened in 1916, the price had risen to £92. In 1917 purchases were made between £133 and £152, and in 1918 the highest price paid by the War Office was £177. In November 1919 after de-control the price ruling in the open market had reached £250 and during 1920 prices as high as £360 per ton were freely paid, this being more than twice the highest price paid by the War Office during the war.

Trading accounts and balance sheets for raw flax for the years 1916 and 1919 are given in Appendix 3. Relatively small purchases of Dutch, Egyptian, and Australian flax were made from time to time, and the account also includes purchases and sales of flax seed, which was obtained in many parts of the world, principally Russia, Holland, Canada, and Japan, for increasing

1 Report on Raw Materials, Cmd. 788, p. 18.

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the acreage under flax in Ireland and reviving flax production in England. The total purchases of flax and flax seed from March 1915 up to the date of the Armistice, when purchases on Govern- ment account came to an end, amounted to 163,000 tons of an approximate value of £20,000,000. A margin of about 15 per cent. was included in the selling price to provide a reserve fund against possible losses. By a combination of good fortune and good management losses owing to the German invasion of north-west Russia and the disturbances caused by the Revolution were almost negligible. The most serious losses were caused by enemy action at sea. A special marine and war-risks account was opened, into which was credited £15 per ton on flax and 6 per cent. on the cost of flax seed. At March 31, 1919, this account showed a credit balance of £70,000, after losses amounting in all to £1,142,230 had been written off. Over a million pounds worth of flax and flax seed were lost on steamers sunk by enemy action in the twelve months from March 1917 to March 1918, the period of the intensive submarine campaign. These vessels were nearly all sunk in the North Sea and off the coast of Norway.

The balance sheet drawn up on March 31, 1919, showed accumulated profits of £2,460,000, stocks in hand valued at £3,283,000, and a net liability of £923,200 to be set against the value of stocks. Total sales and stocks on March 31, 1919, amounted to £18,640,500, and accumulated and prospective profits, after repaying with interest the whole of the capital advanced from Army funds, amounted to £4,820,000. This was equivalent to a dividend of over 60 per cent. per annum for three years on the capital employed. That such a result was possible, and indeed almost unavoidable, without any attempt being made to realize big profits, supplies an interesting side-light on war-time inflation and the problem of profiteering. The result was due to ordinary prudent business management. The risks were great and adequate provision had to be made against losses. As the official com- mentary points out it was only by good fortune and good manage- ment that an eventual loss was successfully avoided.1 Moreover, in spite of the high rate of profit earned, the Government selling prices for flax were at all times considerably lower in proportion

1 Op. cit., p. 19,

CONTROL OF THE LINEN INDUSTRY 73

than those of any possible competing product, such as cotton or Italian hemp.

One further point may be mentioned, which has an important bearing upon the problem of Treasury control of Government trading transactions. The normal business of purchasing depart- ments is to estimate what amount of money will be required during the coming year, to obtain a vote of credit from the House of Commons for this amount, and to secure that in its expenditure every penny is accounted for and used to the best advantage. The Controller and Auditor-General is charged by Parliament with the duty of investigating the manner in which the money is spent. No detail is too insignificant for him to pass over and the least case of waste or loss is liable to be reported upon. All this is no doubt an essential safeguard for the public exchequer in normal times, and does undoubtedly secure a high standard of economy and efficiency in store accounting, which probably surpasses that of many business firms. The business firm has to satisfy its auditor that its balance sheet and profit and loss account are correctly drawn up. It is not the business of the auditor of a company to draw attention to losses or bad debts, to clerical mistakes, still less to errors of judgement in buying or selling. It is probable, therefore, that on the whole there is greater attention to detail and proportionately fewer losses in Government administration than in a large private business. Human nature being what it is, how- ever, the Controller and Auditor-General is always able to point to mistakes in one direction or another, which are then reported upon unfavourably by the Public Accounts Committee and placarded in the newspapers with headlines implying gross extravagance and colossal incompetence. ‘The impression created on the public mind is unfortunate, and to a large extent unfair. It is not the business of the Controller and Auditor-General, nor of the Public Accounts Committee, to draw attention to any striking successes or economies. It is not even their function to apportion praise and blame impartially where they are earned. It is their principal, if not only, function to draw attention to cases where they have discovered a misuse or waste of public funds. The result is that regularly, year after year, when the Controller and Auditor-General and the Public Accounts Committee make

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their reports, the public are treated to an exposure of dirty linen, which, being unaccompanied by any fair picture of the whole of the activities of the purchasing department, engenders a feeling that Government administration is practically synonymous with waste and incompetence. Those who have been intimately associated with the business side of Government administration recognize that this is not a fair conclusion. Private businesses are judged by the results they show in their trading accounts as a whole. A large business is often so little concerned with minor losses that it will write them off without a qualm as not worth further consideration. If the same sort of microscopic searchlight was applied to railway companies, coal-mining or textile manufacturing as is applied by the Controller and Auditor- General to Government departments, it is by no means a foregone conclusion that they would show fewer losses and blunders.

There is, however, another side to the system as it works out in the War Office and other purchasing departments. ‘The result of having to answer for everything that happens, no matter how unimportant it may appear at the time, leads to excessive attention to details and a too elaborate organization of records and filing. If there are a few pennies wrong in the account or a few stores cannot be traced, an immense amount of time and trouble is taken to investigaté the matter, and if possible to set it right, which in some cases may cost more than the original trouble. This is where private business scores. It writes off a loss or a bad debt without hesitation, if it would cost an undue sum of money to pursue the matter further.

This difference between Government accounting and the methods in use in a private business was strikingly illustrated when the War Office assumed the responsibility for the purchase of Russian flax in the interior of Russia. Many were the qualms of the financial and accounting authorities at the War Office when the conditions of the flax trade in Russia were explained to them. It was realized that none of the ordinary checks in use in Govern- ment departments were applicable. It was not merely that you had to trust to the integrity of the four principal firms selected as agents, but you had to rely on the integrity and personal state- ments of all the agents and native buyers whom these firms found

CONTROL OF THE LINEN INDUSTRY 15

it necessary to employ in dealing direct with the Russian peasant. The practice in the trade was to hand over a certain sum in roubles to the buyer, who then went to a market and haggled with the peasants for the best price he could obtain. Whether the amount of flax which he brought back, or the amount of money which he had spent, always corresponded with the facts, you had no means of checking. The illiterate peasant could not even give a receipt for the money received. The probability is that your buyer robbed you of a few kopecks per ton. That was of no great concern. Ifhe tried to rob you of roubles, you would probably find him out sooner or later by comparing his price with others and then you would cease to employ him. Then there were other contingencies. Goods might get lost, stolen, or burnt, and there was no possibility of insuring them or of checking the exact amount of your loss. The trade was a rough-and-ready one, and a good deal of latitude would have to be allowed in the rules and regulations applicable to Government finance and store accounting, if the War Office was going into the business. There was, of course, no risk to the Public Exchequer. The full cost of obtaining the flax would be passed on to the manufacturers, including an estimated amount to cover insurance against every kind of loss, and in practice the saving secured by eliminating competition and controlling prices in the Russian market was far greater than any possible loss that might be incurred in the ordinary course of business. One conclusion, therefore, may be drawn from this first experiment in Government purchase of raw material, and that is that the system of Treasury control and investigation by the Controller and Auditor-General and the Public Accounts Committee is not always compatible with ordinary trading transactions. Buying and selling, specially where you are buying agricultural produce from an illiterate producer, cannot be conducted on the principles of accountancy designed for the control of normal public expenditure. It is perhaps fortunate for the reputation of the Raw Materials Sec- tion that the Controller and Auditor-General never pursued his inquiries into the heart of Russia and was satisfied with the certificate of a British firm of chartered accountants, established in Petrograd, that the accounts of the four agent firms were properly kept.