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Rizwan Meah

December 6th, 2024

When did the Military- Industrial Complex emerge?

0 comments | 3 shares

Estimated reading time: 10 minutes

Rizwan Meah

December 6th, 2024

When did the Military- Industrial Complex emerge?

0 comments | 3 shares

Estimated reading time: 10 minutes

What happens to arms manufacturers when war ends?  Rizwan Meah examines the growth and contraction of the American small arms industry during and after World War I, highlighting the ineffective strategies manufacturers took to sustain their businesses after the wartime boom ended.

In his farewell address as US President, Dwight D. Eisenhower warned of the potential dangers of the military-industrial complex (MIC). He described the risk of a growing alliance between the defence industry and the military which could drive aggressive policy decisions. Since Eisenhower’s 1961 speech the MIC has only strengthened, with US defense spending now surpassing that of the next ten countries combined. But how far back can we trace this relationship? Paul A. C. Koistinen, a historian of the political economy of American warfare, argues that World War I was a key moment in the development of the MIC. My own research examines business outcomes of two large arms manufacturers during and after World War I. I find that the MIC did not fully materialize as a result of World War I. However, arms manufacturers who survived the interwar period learned critical business lessons that shaped today’s MIC.

The wartime boom of two American arms manufacturers

The American arms industry saw unprecedented growth during WWI. Before the war, U.S. arms firms primarily relied on international contracts and consumer goods to successfully operate. That changed in March 1916 when the federal government launched the National Defence Preparedness Program, which awarded arms manufacturers cost-plus contracts. These contracts guaranteed payment of all production costs plus a fixed profit margin.

Two major beneficiaries were the Winchester Repeating Arms Company, a leading rifle producer, and Colt’s Patent Fire Arms Manufacturing Company, which supplied US soldiers with the iconic M1911 handgun.

Soon after signing the contracts, Winchester acquired land, buildings, tools, and machinery. The firm financed these purchases through substantial debt. This strategy enabled the company to fulfil a contract for over 300,000 rifles. Figure 1 shows a dramatic rise in Winchester’s return on assets (ROA) during the “US Contracts” period, peaking just before the contract’s end in 1919.

Figure 1. Winchester Repeating Arms Company (WRAC) Return on Assets 1915-1925 

Similarly, Colt experienced great wartime success. Figure 2 compares Colt’s stock price to the Dow Jones Index (DJIA). In 1916, the year the cost-plus contracts commenced, Colt’s stock soared well above the DJIA. War business was so profitable for Colt that when the USA entered the war in 1917, Colt halted its commercial business to focus entirely on government contracts. In the same year Colt doubled its capital stock, reducing the par value from $100 to $25, to increase stock accessibility to speculators. Although Colt’s stock did trend downward following these changes, it remained significantly above pre-war levels. The downward trend maybe partly attributed to the fact that investors had already priced in the anticipated profitability of the government contracts.

Figure 2. Colt’s Arms Stock Price Indexed to Dow Jones Industrial Average
 

It’s not you, it’s the cost-plus contract

The MIC dynamic Eisenhower would later warn against appeared to be taking hold – until the war ended. While private firms had reaped significant profits, the government faced an unsustainable fiscal situation. The cost-plus contractual terms allowed arms firms to accrue excessive profits. In addition to charging the government ten per cent on top of the cost of output, arms firms received an additional  six per cent  for capital depreciation. Moreover, the post-war Congress expressed outrage at the contractual obligation to purchase unused arms, which was costing the government billions of dollars. The aftermath soured military and industry relationships.

Arms firms now confronted a new challenge. Their over-expanded factories, built for wartime production, could not be easily repurposed for consumer markets. Compounding this, the Fordney-McCumber Tariff of 1922 weakened protections for American firearms, allowing cheap European imports to erode their domestic market share. Many manufacturers went bankrupt, while others stagnated.

Winchester’s response was to insist that a return to pre-war methods of production was impossible, given its war debts. Instead, the company diversified, acquiring businesses and entering new markets such as tools, cutlery, skates and sporting goods. For every firearm it produced, Winchester added ten non-firearm products. Despite this effort the firm’s profitability plummeted. ROA dropped sharply, and by 1931 Winchester was forced into receivership, eventually being acquired by the Western Cartridge Company.

Colt faced similar challenges after 1919 but avoided bankruptcy by steering clear of debt. Like Winchester, Colt attempted diversification, producing everything from firearms to dishwashers. However, its diversification strategy proved chaotic, and Colt’s stock price languished. A modest government contract for Browning Automatic Rifles in 1923 provided some relief, though it wasn’t until World War II that Colt saw a resurgence in profitability when these rifles became standard issue for the US Army.

Lessons Learned

During the interwar period, many small arms firms pursued mergers and acquisitions as a survival strategy. However, they struggled to integrate new product lines, deviating from their core competencies and facing significant challenges in merging corporate cultures. Their obsession with short-term sales targets left them unable to pursue more sustainable business strategies. Rather than using their wartime gains to invest in improving productivity or cost-cutting, they squandered their financial buffers chasing illusory revenue opportunities.

What we now recognize as the MIC did not fully materialize after World War I, largely due to the federal government’s cuts in defence spending and the corporate mismanagement of arms manufacturers. Both Colt and Winchester failed to maintain strong relationships with military entities in the post-war years, a key factor in their struggles. Although Colt’s development of the Browning rifle showed some foresight, the MIC as we know it today had not yet appeared.

About the author

Rizwan Meah, LSE master's graduate

Rizwan Meah

Rizwan Meah graduated from LSE in 2023 with an MSc in Economic History, after receiving a Bachelor of Laws from the University of Essex. He is currently part of Babcock International Group’s commercial graduate programme, focusing on driving strategic growth and managing commercial operations within the defence industry.

Posted In: Post-War Economies | War