A Brief History of Nationalization

In a new report for the Next System Project, I document the long and rich tradition of nationalization in the United States — from railroads, telephones, and arms manufacturers (such as Smith & Wesson) during World War I; to the Tennessee Electric Power Company (TEPCO) and gold and silver during the New Deal; to literally hundreds of companies in a wide swath of sectors during and after World War II; to steel mills during the Korean War; to passenger and freight railroads in the 1970s; to Continental Illinois Bank and the savings and loan industry in the 1980s; to banks and car manufacturers in the 2000s. While it would be impractical to reproduce this lengthy history here, a few illustrative examples may be useful.

In December 1917, President Woodrow Wilson nationalized the nation’s railroads — at the time one of the country’s largest industries, employing around two million people and accounting for approximately one-twelfth of the entire economy. Under private ownership, the rail system was falling into disarray. The vast array of competing companies were in financial distress but continued to prioritize returns for their shareholders over investment in tracks, trains, and stations. Coordination problems flourished alongside crumbling infrastructure and poor service.

Following the government takeover, the rail network was integrated, badly needed repairs were made to tracks and stations, and thousands of new cars and engines were ordered. Wages were also increased, ensuring that organized labor fully backed the effort. After the war, railroad unions endorsed an ultimately unsuccessful effort (the Plumb Plan) that would have instituted permanent public ownership and operation of the railroads through a multi-stakeholder board with equal representation from workers, officials, and the public.

During World War II, the government nationalized hundreds of companies. John Ohly, author of the definitive account of wartime nationalization, writes that “seizing plants developed into a major government business … In the three months before V-J Day the government was taking over approximately one plant a week, and in a score of other situations seizures were averted only at the last minute or because the war ended.”

Two of the more interesting examples concerned the Montgomery Ward department store chain and the Philadelphia transit system.

Montgomery Ward’s anti-labor, free-marketeer chairman, Sewell L. Avery, refused to abide by contracts negotiated with unions and orders to do so from the National War Labor Board. So in early 1944, President Roosevelt ordered the Commerce Department to seize the company’s main factory in Chicago. Federal troops forcibly removed Avery from his office. Later that year, the government went further, nationalizing Montgomery Ward facilities in several states. Sewell sued the government but lost at the appellate court level, and by the time the case reached the Supreme Court, the war had ended and the company had been reprivatized.

Another wartime example of nationalization dealt with the privately owned Philadelphia Transportation Company, which operated train, subway, tram, and bus networks in the city. The company was racially segregated, with black employees consigned to shop work. In 1944, the company finally agreed to accept federal orders to stop discriminating against black workers and applicants. However, the independent Philadelphia Rapid Transit Employees Union, which was jostling with the radical, CIO-affiliated Transport Workers Union for control of the company’s bargaining unit, began agitating white workers against desegregation. On August 1, 1944, when the first black operators were scheduled to begin work, many of the white workers went out on strike. With the walkout spreading to war plants and downtown office buildings, transportation at a standstill, war production halted, and growing fears of a white supremacist race riot, President Roosevelt ordered the company to be nationalized.

The company, now under government authority, resumed desegregation through the training of black operators. Meanwhile, the CIO-affiliated union was strengthened through a quick, worker-supported contract negotiation (under the supervision of an NWLB mediator), and the company was forced to undertake a number of reforms. The system was then returned to private ownership, where it remained until 1968, when the state of Pennsylvania took it back into public ownership.

By the late 1960s, the private railroads were again in disarray, with many facing bankruptcy. The number of passenger trains had plummeted to from around 20,000 in 1929 to only about 500. Following the collapse of one giant railroad corporation, Penn Central, Congress passed the National Railroad Passenger Service Act, which formed the National Railroad Passenger Corporation (now known as Amtrak). Privately owned railroads were given the option to transfer their passenger service to Amtrak, and ultimately twenty of twenty-six did.

But nationalizing passenger rail service only solved one part of the problem. Some of the railroads, especially in the northeast, were still unviable financially. In 1973, Congress passed the Regional Rail Reorganization Act that, among other things, created the Consolidated Rail Corporation (Conrail) as a government-owned corporation. Conrail then acquired the lines and assets of dozens of bankrupt railroads and their subsidiaries. By the mid-1980s, Conrail had repaired the terrible state of the infrastructure and rolling stock it inherited from the private corporations, freed itself from price controls and other regulations, and streamlined its operations and management. In 1986–87, the profitable and efficient company was privatized by the Reagan administration in what was then one of the largest IPOs (initial public offering) in US history.

Around the same time it was reprivatizing Conrail, the Reagan administration was nationalizing Continental Illinois National Bank and Trust Company, which had become the nation’s seventh-largest bank through aggressive (and at times risky) commercial and industrial lending. In 1984, the bank was in serious financial difficulty, and after a bailout failed a more radical solution was introduced. “The Bank would,” former FDIC Chairman Irvine Sprague recalled in 1986, “have to be, in effect, nationalized.” Ultimately, the government took an 80 percent ownership stake in the bank before slowly selling it off to the private sector (taking a $1.8 billion loss in the privatization process).

Back to the Future

In late 2008, the CEOs of two iconic US manufacturing companies, General Motors (GM) and Chrysler, were frantically begging Congress for a bailout. While GM’s CEO blamed the financial crisis for the company’s woes, many observers identified significant longer-term structural problems (including an “antique, closed corporate culture”). Ultimately, the Obama administration nationalized GM and Chrysler through bankruptcy court. New GM (NGMCO) emerged with 60.8 percent of its shares owned by the government (the remaining portions were held by the Canadian and Ontario governments and the United Auto Workers through their retiree health care fund). And while the US government was only a minority shareholder in the new Chrysler, by almost every measure it was the entity in control of the transition process.

Fast forward ten years. In September, workers at the now-fully-reprivatized General Motors walked off the job in what turned into one of the largest and longest strikes in recent years. The walkout illustrated an important truth about nationalization: while it is a powerful policy tool, it cannot and will not improve things by itself. As Chris Kutalik puts it, “the US Treasury owned GM for three years — and managed to do virtually nothing to benefit the working class with it.” As with many institutions that have been nationalized over the years, the federal government was much more concerned with reprivatizing GM as quickly as possible (no matter how public money it lost in the process) than making any significant changes to the company’s management or business structure.

Both purpose and execution are critical if nationalization is to be a viable strategy for achieving a more equitable and sustainable society. As Kutalik suggests, a renationalized GM could be restructured to radically democratize its internal governance and push it toward producing electric public transport vehicles as part of the Green New Deal. Similarly, nationalizing fossil-fuel corporations must be done with an eye toward decommissioning or converting those companies to renewable energy producers and supporting a just transition for workers and communities. And when the next financial crisis occurs, rather than simply bailing out or temporarily nationalizing the failing banks, we should demand long-term public ownership as a way to democratize our economy, break up large concentrations of capital, and provide essential funding for priorities like the Green New Deal.

Nationalization has been used for decades in the United States for a variety of purposes, from dealing with financial collapse to intervening in labor-management disputes to saving jobs. With climate change bearing down on us and inequality at Gilded Age levels, we should turn again to nationalization to address the many interconnected crises we face.