When The Army Needs Advice, It Turns To These Guys
A Wide Moat Fortified By Government Bureaucracy
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John Pierpont Morgan didn’t care that 5,000 men might be about to lose their thumbs.
All that mattered to him was that he was about to sell 5,000 defective rifles for $22.50 apiece… after paying only $3.50.
Morgan knew the guns were no good – out-of-date Hall carbines, manufactured back in 1819 and auctioned as condemned property after exploding in soldiers’ faces. But it was 1861, the start of the American Civil War, and he’d hooked a government buyer who was desperate for supplies.
After the first shots on Fort Sumter, a wild crew of pirate-like merchants had descended on the U.S. government, promising to sell them everything they needed for the war effort – and quite often, selling bad stuff for too much money. The defective goods (delivered, of course, after payment had been rendered) included lame horses, leaking boats, rotting uniforms, and exploding, overpriced muskets.
The spook on the other end of the musket deal was U.S. Senator John C. Fremont… a wild card who issued his own Emancipation Proclamation four years before President Abraham Lincoln issued his, and as a result, was relieved of his military command. He likely knew the guns were faulty, too. And he wasn’t authorized to make weapons purchases to begin with.
But the newly-formed Union army needed firearms, and Fremont wasn’t picky… or much of a rule follower.
So an anonymous arms merchant sourced the rifles, and 24-year-old Morgan – operating out of a modest one-room banking office – brokered the deal and pocketed the markup.
And until The New York Times broke a story about the scandalous “Hall Carbine Affair” a few months later, no one was the wiser.
The Times exposé triggered major outrage and a Congressional investigation into procurement fraud. Weevilly flour and sinking boats, it turned out, were everywhere. So in marched a little-known American hero to save the day: Quartermaster Montgomery Meigs.
Meigs – who’d likely be diagnosed somewhere on the spectrum today – was a stickler for correct procedure. An architect who designed bridges and public buildings in his spare time, he had a sharp eye for detail, a solid reputation – and god-awful handwriting. At one point he sent a scribbled report to General William Tecumseh Sherman, who replied: “The handwriting of this report is that of General Meigs, and I therefore approve of it, but I cannot read it.”
It didn’t take Meigs long to whip the government contracting apparatus into shape. He ran off fraudsters, implemented rigorous quality-control systems, and – most famously – waited at the end of General Sherman’s grueling “March to the Sea” with a stockpile of fresh clothes, hot food, and bedding for 62,000 weary Union soldiers.
Meigs’ efforts also laid the groundwork for the U.S. government’s seminal legislation on keeping contractors honest: the False Claims Act (“FCA”), passed in 1863…
The FCA sharply regulated merchants who wanted to sell goods to the government. It fined and jailed them for trying to foist off poor products, and it offered a hefty reward (up to 50% of the recovered funds) for whistleblowers who tipped off Congress to unethical business practices.
Young J.P. Morgan, however, managed to sidestep consequences from his shady arms deal. He skedaddled with his 550% markup and used it to expand his one-room office into a respectable financial firm on Wall Street (one you may have heard of today).
But in general, the FCA established a much-needed set of checks and balances on the procurement industry. And for the next 80 years, it remained the gold standard regulating the government’s dealings with outside contractors… until President Franklin Delano Roosevelt waltzed in.
Beg, Borrow, Steel
FDR – the proto-socialist architect of the New Deal – believed that Big Government was like monosodium glutamate: it just went well with everything and made everything a little better. He had a fetish for expanding the government’s traditionally limited powers into all corners of private industry, and (to hear him tell it) he’d single-handedly lifted the U.S. out of the Great Depression by giving struggling businesses a well-placed boost:
We used the facilities and resources available only to government to permit individual enterprise to resume its normal functions in a socially sound competitive order. We provided credit at one end of the business mechanism and purchasing power at the other. The broken pipes of the circulatory system of business have been welded together again.”
World War II – and its sudden, urgent need for boats and planes and bullets – offered an enticing playground for FDR to subsidize the defense industry on a grand scale…
By 1942, he’d already commandeered the production lines of automakers Ford and Chrysler and ordered them to stamp out planes, trains, and automobiles for the war effort. But he had bigger plans: he wanted the government to fund whole companies… aircraft makers like Boeing and Lockheed Martin, shipbuilders like Bethlehem Steel… creating the streamlined government and private industry partnership of his wet dreams. Under the auspices of two bodies called the Office of Production Management and the War Production Board, he’d make massive advance payments (up to 30% of the total contract), construct $11 billion (about $200 billion today) worth of additional facilities for the contractors to use, and do away with profit limits.
He wanted all this to happen quickly: without red tape, without hold-ups, and without inconvenient whistleblowers.
The only thing standing in his way was good old Montgomery Meigs’ False Claims Act.
FDR set out to weaken the Act with a series of 1943 Congressional amendments that slashed the original safeguards Meigs had put in place. Whistleblowers now had to jump through prohibitive hoops for lower rewards – and contractors could take big handouts from the government with much less oversight.
The FCA wilted… and the government contracting industry bloomed into something far larger than FDR could have imagined…
The Shadow Government
By the end of the war, FDR had poured over $175 billion (in 1940s dollars) into the eager maws of defense contractors, with two-thirds of those contracts going to just 100 companies. Along the way, the contractors figured out they could pretty much do whatever they wanted… and the government would pay for their steak and chocolate-covered strawberries.
Between 1948 and 1989, the government spent over $10 trillion (in today’s dollars) on national defense, most of which disappeared into an incestuous, revolving-door network of civilian and military buddies. Waste, fraud, and abuse abounded. By the 1980s… in an eerie echo of the Civil War procurement scandals of over a century earlier… major contractors openly padded their invoices to the tune of $400 a hammer and $7,000 a coffee pot.
In a panic, Congress attempted to bring back a revised version of the FCA – but by then, the (lame) horse was out of the stable. Trillions of dollars were already pledged to “maintain American interests” overseas in the 1980s, 1990s, and 2000s, especially in the aftermath of 9/11. In 2019 alone, the Pentagon spent more than half of its annual $676 billion defense budget on contracting. Like it or not, the military-industrial complex… with all its cronyism and bloat… was here to stay.
Here, too, to rule…
We now have, in effect, a fourth branch of government: a “shadow branch” composed of incredibly powerful defense contractors who are unelected and unaccountable, control hundreds of billions of dollars, and (by way of lobbying, “think tanks” and civil advisory positions) directly shape much of our domestic and foreign policy.
In the words of investigative reporter Dan Guttman, who wrote a foundational 1970s exposé on these contractors called The Shadow Government:
The public is not aware who is making decisions in this country. We find agencies delegating large chunks of [themselves] to one or more firms over a number of years and, in effect, saying, ‘Run this portion of the agency.’’’
Flush with government cash, private defense contractors exercise outsize influence over our politics – spending about $100 a million a year to lobby lawmakers, and nearly $200 million over the past decade to fund super PACs and political campaigns – and ultimately to get their projects and products into the government ecosystem. (If you guessed that they funded a larger percentage of Republican campaigns, you were right.)
Of course they are all a key reason the U.S. government hires businesses like the one we are placing in this month’s Best Buys. Managing weapon systems, software platforms, high-tech communications, and the people who run them require a skill set Uncle Sam does not have.
Is this a good thing that the government needs to outsource so much of what it does? Certainly not.
Is it a good investment opportunity? Most certainly yes.
Quartermaster Meigs would be horrified.
This month’s Best Buys is one of the best, and safest, of these “Shadow Government” companies.
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