WWII Corporate Profit Explosion Through Cost-Plus Contracts

Corporate profits surge during World War II as government cost-plus contracts and massive military spending transform the Depression-era economy into a profit bonanza for large corporations. While workers face wage controls and rationing, corporate executives and shareholders reap unprecedented gains.

Profit Statistics

The 200 largest corporations more than double their annual profits during the war:

• 1936-1939 average: $576 million in reported after-tax profits
• 1940-1944 average: $1.225 billion in reported after-tax profits
• Increase: 113%

After-tax profits exceed 100% in the steel, meat, and chemicals sectors. The CIO United Steelworkers of America’s analysis “Five Years of War Profits” reveals that open and concealed steel profits from 1940 to 1945 exceeded $2 billion - an average of $245 million yearly.

Before income and excess-profits taxes (maximum rate of 85.5%), total corporate profits in 1944 were more than twice as large as reported figures - about $25 billion.

Cost-Plus Contracting Enables Profiteering

Following WWI precedents, the War Industries Board relies on cost-plus contracting allowing companies to earn guaranteed profits as a percentage of costs. This creates perverse incentives to inflate costs.

Many companies increase profits by artificially elevating costs through:

• Lavish executive salaries and bonuses
• Unnecessary expenditures charged to government contracts
• Inflated overhead allocations

Controlling costs requires constant vigilance from government auditors, but corporate accounting complexity and political influence limit oversight effectiveness.

Executive Compensation Excess

General Motors pays CEO Charles E. Wilson more in 1943 (besides dividends) than the combined salaries of the United States President, Vice President, entire Cabinet, entire Supreme Court, Speaker of the House, and General Eisenhower.

There is no salary freeze for top executives while workers face wage controls justified by wartime sacrifice.

Navy Contract Analysis

The 1,228 most important Navy contractors (over $10,000 contract value) made 19,086 contracts:

• Total contract value: $3.889 billion
• Total reported profits: $287.859 million
• Average profit margin: 7.99%

However, these figures represent only reported profits and don’t capture the full extent of profiteering through cost inflation and hidden gains.

Economic Context

War mobilization ends the Great Depression as gross national product rises:

• 1939: $91 billion
• 1941: $126 billion
• 1945: Over $166 billion

Unemployment falls from 8% (1940) to 1% (1944). However, the benefits flow disproportionately to large corporations. By 1944, 30% of Americans work for large employers who receive the lion’s share of defense orders and wartime profits.

Limited Government Response

Senator Harry Truman’s committee holds hundreds of hearings on profiteering, saving taxpayers an estimated $15 billion in 1940s dollars. The Revenue Act of 1942 raises corporate, estate, excess profits, and gift taxes, reflecting progressive tax laws from WWI.

However, these measures only modestly constrain the profit explosion. The excess profits tax, designed to recapture wartime windfalls, proves difficult to enforce given corporate accounting sophistication.

Legacy

The WWII profit boom demonstrates how “national emergency” can be leveraged for massive private gain while the public bears sacrifice. The cost-plus contracting model and corporate-government fusion established during the war become templates for ongoing defense industry profiteering in the Cold War era.

The concentration of defense contracts among large corporations accelerates industry consolidation and establishes the permanent military-industrial complex that President Eisenhower will warn against in 1961.