Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems

CHAPTER ONE

Party Realignment and American Industrial Structure: The Investment Theory of Political Parties in Historical Perspective

1. INTRODUCTION

IN MID-SEPTEMBER 1912 a gentleman representing Woodrow Wilson, the Democratic nominee for president of the United States, came calling on Mr. Frank A. Vanderlip. At that time Vanderlip was one of the most prominent businessmen in America. Quoted frequently in the press and recognized as a leading Progressive, he served on the boards of 12 major corporations, including E. H. Harriman’s Union Pacific Railroad, the mammoth U.S. Realty and Improvement Co., and four sizable banks. He was also a trustee of New York University and the Stevens Institute, a member of the executive committee of the New York Chamber of Commerce, and active in the National Civic Federation. Most important, however, he was president of the National City Bank of New York, after J. P. Morgan & Co. probably the most important bank in America.

Nothing in the record suggests that the banker felt any embarrassment at receiving the envoy of a party associated in American folklore (and much subsequent academic writing) with straitened Southern and Western farmers. It is easy to understand why: the visitor was Henry Morgenthau Sr., himself a director a dozen corporations (including the big, multinationally oriented Underwood Typewriter Co.) and a major figure in Manhattan real estate.

As was his custom with anything important, Vanderlip later wrote a detailed account of the encounter to James Stillman. Along with William Rockefeller (younger brother of the even more famous and wealthier John D.), Stillman had been prominently associated with the bank for many years. He was probably its largest stockholder. Now retired in France, he superintended the bank by remote control. Almost every other day brought a long letter from Vanderlip, describing his activities and decisions. After reading the letters, Stillman would write back his comments and instructions, dispatching them once in a while by secret courier or sometimes sending them in code. Because the months prior to the 1912 election had been filled with acrimonious controversies that importantly affected National City, especially the discussions of what eventually became the Federal Reserve Act, Vanderlip could be sure of Stillman’s attention as he related how

I had a two-hour session with [Charles D.] Hilles, the chairman of the Republican Campaign Committee, and one of equal length with Morgenthau, who is Chairman of Wilson’s finance committee, and who is, with [William G.] McAdoo, practically directing the campaign. Hilles is not hopeful. I think the most [William Howard] Taft really hopes for is to get a larger vote than [Theodore] Roosevelt, although he believes that sentiment is swinging back to him some, and there is some evidence of that. . . . I had a very thorough going over of the administration with Hilles and I must say the result did not improve my views any of its efficiency. There never has been any clear understanding in the White House in regard to the National City Company [National City’s newly organized and controversial securities affiliate], and the whole disposition was to avoid trouble and to pass the question along. My conversation with Morgenthau left me more pessimistic about the political outlook than I have been at all. I am afraid not a great deal that is good is likely to come out of a Wilson administration. At least, I am afraid that a good deal that is foolish and ill considered may come out of it. I think Wilson is really pretty well imbued with the “Money Trust” idea, and I fear he lacks the sincerity that I believed at one time he had. Morgenthau told me positively that it would not be his plan to have any extra session of Congress and that he proposed to take up banking legislation before the tariff; that he favors a central bank and one of the arguments he proposed to use is that the people are now under all the evil conditions of an unrestrained central bank, through the operations of the “Money Trust”; that there is a “Money Trust” that is practically a central bank, without any legislative control, and that they might much better replace it with a real central bank that will do them some good and will be controlled. I can see how just such stuff as this would appeal to Wilson’s mind, but I am disgusted with his thinking and using such clap trap. He has told Morgenthau that the Aldrich Bill [which many major American banks sponsored] never can be passed, because it bears the Aldrich name. They have got to get up another bill which he supposes will have to be about 60% the Aldrich Bill to start with and probably will be 80% before they got it passed, but it must have another name.

This is about as scientific an attitude toward the banking question as you would expect from Tim Murphy. Morgenthau tells me that [New York attorney Samuel] Untermeyer is preparing for a thoroughgoing campaign to begin after election—I believe the date is November 20th—and has got a lot of men working on it now. His whole ambition is to, in some way, get a white-wash for his character. He has offered a hundred thousand dollars (all of this is quite confidential, of course) if he can be assured of a foreign mission. Indeed, he would give any amount for an important one, and has even the audacity to think that he might possibly be appointed to England. Wilson will make no promises whatever and they have accepted only $10,000 as yet and probably will accept no more. He would also like to be Attorney General. Morgenthau says that, of course, is quite impossible, although he could imagine that he might be sent to some post of about the grade of Italy.1

As a primary source for the study of modern American politics, this letter is uncommonly rich. Even on casual reading it brims with exciting implications for a wide range of issues now extensively debated by social scientists and historians—the impact of financial innovation on American political development, for example; or the relationship between congressional investigations (like that Untermeyer had just directed into banking practices on behalf of the so-called Pujo Committee) and the evolution of the national political agenda; or the role of professionalization in U.S. diplomacy of the period; or the significance of class and, perhaps, ethnic factors in elite politics. With more deliberate attention to the letter’s historical context and stylistic idiosyncrasies still more would be revealed. A reading that was sensitive to the political choices other leading businessmen made during the same election, for instance, could certainly throw rare light on several first-order mysteries of the great American organism of that epoch, notably the delicate balance of rivalry and cooperation that characterized the “Money Trust” before World War I, and the precise ways in which the preferences of its members, allies, and opponents translated into party politics and public policy.

But perhaps the most important reflections suggested by this correspondence concern this essay’s central theme: the primary and constitutive role large investors play in American politics. For much about this missive’s tone and contents—the famous banker’s condescension toward the White House (where “the whole disposition was to avoid trouble and to pass the question along,” while—as Stillman and Vanderlip were both well aware—securing National City’s vital interests); the Olympian assurance which acts as though nothing could be more natural than that top operatives of both major parties should drop by for intimate campaign discussions; or the matter-of-fact disdain with which Vanderlip relates to Stillman that the “Archangel Woodrow” (as H. L. Mencken called him) doesn’t really believe what he is saying about what was probably the campaign’s prime issue—bank reform—and that he has no plans to appoint Untermeyer, the archenemy of the big banks, to high diplomatic post—almost irresistibly raises a series of subversive doubts about the basic conceptual framework that most recent studies of American politics rely on to understand the workings of the political system over time and as a whole.

As summed up in the “critical realignment theory” elaborated by a succession of scholars since the late 1950s, this view understands political change primarily—though of course not exclusively—in terms of changing patterns of mass voting behavior.2 Most American elections, it considers, are contests within comparatively stable and coherent “party systems.” While any number of short-term forces may momentarily alter the balance of power within a particular party system, and cumulative, long-run secular changes may also be at work, the identity of individual party systems rests on durable voting coalitions within the electorate. So long as these voting blocs (which in different party systems may be defined variously along ethnic, class, religious, racial, sexual, or a plurality of other lines) persist, only marginal changes are likely when administrations turn over. Characteristic patterns of voter turnout, party competition, political symbols, public policies, and other institutional expressions of the distribution of power survive from election to election.

“Normal politics,” of course, is not the only kind of politics that occurs in the United States. The “critical realignments” of critical realignment theory refer to a handful of exceptional elections—those associated with the New Deal and the Great Depression of the 1930s, the Populist insurrection of the 1890s, the Civil War, and the Jacksonian era are most frequently mentioned, though other dates have also been proposed—in which extraordinary political pressures find expression. Associated with the rise of new political issues, intense social stress, sharp factional infighting within existing parties, and the rise of strong party movements, these “critical” or “realigning” elections sweep away the old party system. Triggering a burst of new legislation and setting off or facilitating other institutional changes that may take years to complete, such elections establish the framework of a new pattern of politics that characterizes the next party system.

With few exceptions, the higher stakes involved in realigning elections do not sway realignment theorists from their emphasis on popular control of public policy.³ The sweeping changes in the political system that occur are again ascribed to voter sentiment. By raising the salience of political issues, most analysts suggest, critical elections facilitate a large-scale conversion of new voters from one party to another, or a mass mobilization of new voters into the political system. Either way, the partisan division of the electorate alters decisively.

An illuminating and sophisticated variation on classic liberal electoral themes, critical realignment theory continues to be widely held by both social scientists and historians. It has also inspired increasing numbers of journalists, consultants, and political activists professionally concerned with interpreting political events. But in recent years skeptical appraisals of the theory have proliferated and many of its claims have come in for heavy criticism (Lichtman, 1976, 1980, 1982; Kousser, 1980; Benson, Silbey, and Field, 1978; Ferguson, 1986).

The pivotal arguments raised against conventional versions of critical realignment theory undermine precisely the aspect of the theory that the Vanderlip-Stillman exchange challenges so vividly: the inspired confidence in what might be termed “voter sovereignty.” As several studies have argued in detail, evidence is mounting that the durable voter coalitions which are supposed to underlie party systems never existed, and that so-called critical realignments are not only very difficult to define, but simply have not witnessed major, lasting shifts in voter sentiment.4 In the words of one sophisticated quantitative study of American voting patterns by three scholars very sympathetic to the realignment perspective (Clubb, Flanigan, and Zingale, 1980, p. 119),

[E]lectoral change during the historical periods usually identified as realignments was not in every case either as sharp or as pervasive, nor was lasting change as narrowly confined to a few periods, as the literature suggests. Although these periods were marked by both deviating and realigning electoral change, which shifted the balance of partisan strength within the electorate toward one or the other of the parties, these shifts did not involve the massive reshuffling of the electorate that some formulations of the realignment perspective describe. Moreover, indications of substantial continuity of the alignment of electoral forces across virtually the whole sweep of American electoral history can be observed. . . . [E]lectoral patterns do not, by themselves, clearly and unequivocally point to the occurrence of partisan realignment.

To this evidence of massive public policy change without correspondingly sweeping electoral realignment, and other difficulties, adherents of critical realignment theory respond variously. The common denominator in virtually all their replies, however, is a determination to shore up the theory by making it even more complicated, “more multidimensional.” The hope is to supplement the already complex electoral analysis with more and more variables—conducting more detailed studies, for example, of the president and the electorate, Congress and the electorate, the president, Congress, and the electorate, etc.5

But it is doubtful that such moves will do more than postpone the inevitable. As an earlier paper argued (Ferguson, 1986), adding baroque variations to already complex themes is likely only to generate rococo variations on the same themes—and provide very little additional illumination. Nor are these efforts likely to constitute an effective reply to the direct evidence emerging from both quantitative and case studies indicating that the relationship between public policy change and party platforms, electoral margins, and voting behavior is weak and unstable.⁶

It is time, therefore, to recognize that the chief reason why no social scientists have succeeded in specifying unambiguous electoral criteria to identify “partisan realignment” may well be that there are no such criteria to be found. And it is high time, accordingly, to begin developing a different approach—a fresh account of political systems in which business elites, not voters, play the leading part; an account that treats mass party structures and voting behavior as dependent variables, explicable in terms of rules for ballot access, issues, and institutional change, in a context of class conflict and change within the business community.

The present paper represents an attempt to revise conventional accounts of American party systems and critical realignments along precisely these lines. Parties, the paper argues, are not what critical realignment theory (and most American election analyses) treat them as, viz., as Anthony Downs defined them in his celebrated formalization of the liberal (electoral) model of parties and voters, the political analogues of “entrepreneurs in a profit-seeking economy” who “act to maximize votes” (Downs, 1957a, pp. 295 and 300). Instead, the fundamental market for political parties usually is not voters. As a number of recent analysts have documented (Burnham, 1974, 1981; Popkin et al., 1976; Ginsberg, 1982), most of these possess desperately limited resources and—especially in the United States—exiguous information and interest in politics. The real market for political parties is defined by major investors, who generally have good and clear reasons for investing to control the state. In a two-party system like that of the United States, accordingly, incidents like those recounted in Vanderlip’s letter to Stillman are far more typical of U.S. parties than the usual median voter fantasy. Blocs of major investors define the core of political parties and are responsible for most of the signals the party sends to the electorate.

During realignments, I shall argue, basic changes take place in the core investment blocs which constitute parties. More specifically, realignments occur when cumulative long-run changes in industrial structures (commonly interacting with a variety of short-run factors, notably steep economic downturns) polarize the business community, thus bringing together a new and powerful bloc of investors with durable interests. As this process begins, party competition heats up and at least some differences between the parties emerge more clearly.

Since the business community typically polarizes only during a general crisis, it is scarcely surprising that in such cases voters also begin to shake, rattle, and roll. Only if the electorate’s degree of effective organization significantly increases, however, does it receive more than crumbs. Otherwise all that occurs is a change of personnel and policy that, because it may reflect nothing more than a vote of no confidence in the current regime, bears no necessary relation to any set of voting patterns or consistent electoral interests. Assuming that the system crisis eventually eases (possibly, but not necessarily, because of any public policy innovation), the fresh “hegemonic bloc” that has come to power enjoys excellent prospects as long as it can hold itself together. Benefiting from incumbency advantage and the chance to implement its program, the new bloc’s major problem is to manage the tensions among its various parts, while of course making certain that large groups of voters do not become highly mobilized against it—either by making positive appeals to some (which need not be the same from election to election) or by minimizing voter turnout, or both.

The discussion comprises the following major sections.

Section 2 outlines the basic notions of the investment theory of parties and applies them to the problem of critical realignment. This effort involves two separate tasks: first, to explain clearly why voters can only rarely define public policy through elections; second, to indicate how businesses (and, in some party systems, labor or middle-class organizations) importantly influence or control political parties and elections. Now the first problem, the paper argues, has already been completely solved by recent contributions to the so-called economic theory of democracy developed by Downs and other theorists. Also, the paper proposes that by pursuing the logic of the arguments developed in one of these recent essays, “What Have You Done for Me Lately? Toward an Investment Theory of Voting” (Popkin et al., 1976), an easy solution materializes to the second—the question of how elections and policies are in fact controlled. Building on these arguments, the present paper contrasts the “investment theory of political parties” point by point with conventional voter-centered models of elections. As part of this exercise, the paper reconsiders aspects of Mancur Olson’s famous analysis of The Logic Of Collective Action to gain a clearer view of the unique advantages major investors enjoy in providing themselves with what look to all other actors in the system like “public goods” (Olson, 1971).

How to test the theory is considered next. Section 3 begins with a brief discussion of criteria for recognizing “large” investors and similar definitional issues. To demonstrate the existence and stability of the investor coalitions that the theory posits, the paper develops a method for the graphical analysis of industrial (and, where necessary, agricultural) structures. By analyzing how blocs of investors whose interests center in different parts of the economy map into multidimensional issue space, this technique produces spatial models of the distribution of major investors within the political system—models that can be estimated with actual data to reveal whether a coalition really exists. When analyzed developmentally, such models can also indicate whether these coalitions are becoming more or less coherent.

Section 4, the longest part of the paper, presents a series of sketches of the major investor blocs that have dominated the various party systems in American history. Necessarily stylized and subject to further revision, these accounts largely bring together research gathered for longer studies which have appeared or will appear separately.

Finally, section 5 ties up loose ends and considers the possibilities for enhancing the power of ordinary voters in advanced industrial societies in light of the investment theory of parties.

II. FROM ELECTORAL TO INVESTMENT THEORIES OF POLITICAL PARTIES

Ironically, it was Anthony Downs’s classic formalization of the liberal theory of elections and public policy which took the first and perhaps most important step down the path toward an alternative account. For by the middle of An Economic Theory of Democracy, Downs (1957a, p. 258) concluded:

The expense of political awareness is so great that no citizen can afford to bear it in every policy area, even if by doing so he could discover places where his intervention would reap large profits.

More recent analysis has demonstrated, however, that serious application of Downs’s ideas about information costs to actual political systems leads to many striking conclusions, which stand both traditional voting analyses and Downs’s preferred models of democratic control on their heads.

The most important of these contributions is that of Samuel Popkin and his associates. A pioneering attempt to incorporate the cost of obtaining and processing information into the analysis of voter behavior, their paper presents a detailed critique of the conventional “socialization” approach to partisan identification and mass political choices. In this view, which work done during the 1950s on The American Voter (Campbell, et al., 1960) appeared to support, an individual’s attachments to political parties are shaped by non- or a-rational group and family socialization experiences involving a minimum of cognitive orientation.⁹ By reanalyzing data presented in several earlier studies along Downsian lines, however, Popkin et al. demonstrate that the orientation of most voters toward politics is and has been primarily cognitive rather than affective.

Following a path Downs himself briefly explored,¹⁰ Popkin et al. suggest that voters are only acting rationally when they cut information costs by using shortcuts like partisan identification or demographic facts to evaluate complex vectors of political variables. But—and here lies one major part of their paper’s interest for this essay—Popkin et al. (1976, p. 787) also provide a clear argument and a series of vivid examples illustrating how, in a political system like that of the United States, where even highly motivated voters face comparatively enormous costs when they attempt to acquire, evaluate, and act upon political information, effective electoral control of the governmental process by voters becomes most unlikely:

[T]he understanding that information is costly leads to expectations about the voter which differ from those of the SRC or citizen-voter [i.e., “socialization”] model. Whereas citizen-voters are expected to have well developed opinions about a wide range of issues, a focus on information costs leads to the expectation that only some voters—those who must gather the information in the course of their daily lives or who have a particularly direct stake in the issue—will develop a detailed understanding of any issues. Most voters will only learn enough to form a very generalized notion of the position of a particular candidate or party on some issues, and many voters will be ignorant about most issues.

As a consequence it is not necessary to assume or argue that the voting population is stupid or malevolent to explain why it often will not stir at even gross affronts to its own interests and values. Mere political awareness is costly; and, like most of what are now recognized as “collective goods,” absent individual possibilities of realization, it will not be supplied or often even demanded unless some sort of subsidy (at least in the form of advertising) is supplied by someone.11

To further clarify the issues involved in the decision to participate in collective action under uncertainty, Popkin et al. introduce their most striking idea—the notion that political action should be analyzed as investment, with “the simple act of voting” requiring at least an investment of time and attention as a limiting case.¹²

Now, this suggestion has many exciting implications—too many implications, indeed, for this paper to assess. Consider, for example, how non-Downsian it is at its core. Though Popkin et al. generally claim they are following Downs, conventional neoclassical exchange theories provide the basic framework for most of Down’s work. While, as mentioned earlier, Downs pioneered the analyses of investment, he did not pursue the sweeping implications of his results. As a consequence, in his presentation investment enters largely as a further complication in a more detailed model of voter control. Because investment does not really emerge as a prominent theme in its own right, neither Downs nor later analysts who share his methodological bent have fully recognized the implications of their own theory. As Joan Robinson and other critics of neoclassical microeconomics have observed, even the simplest acts of investment imply change over time and accordingly are almost impossible to incorporate into the general equilibrium framework that Downs himself champions as an ideal (Robinson, 1971, Chap. 1). Similar logic also inspires John Roemer’s insufficiently appreciated observation that much politically relevant behavior involves shattering the boundaries of what most microeconomic analysts too hastily identify as the “feasible set.”¹³

For this paper, however, the chief importance of the investment analysis of Popkin et al. lies in the possibility of its consistent extension to political parties. In several passages strongly reminiscent of parts of Burnham’s work, Popkin et al. (1976) sharply criticize the Michigan group for assuming that most individuals can normally afford to contest outcomes that are products of a whole system whose scale is many times that of the average voter.

The SRC also assumed that the major barriers to participation were internal to the individual. In 1960 they stated “[t]he greater impact of restrictive electoral laws on Negroes is, in part at least, a function of the relatively low motivational levels among Negroes.” The increase of participation among black voters in the 1960’s is, of course, a clear example of a situation where political participation as well as political interest and involvement, rather than being fixed expressions of individual motivation, responded instead to an increase in investment opportunities and a legal decision by Congress to reduce the cost (or more aptly, to provide subsidies to aid blacks in paying the costs) of voting, (p. 790)

In the investor voter model, interest, involvement, and participation depend on the voter’s calculation of the individual stakes and costs involved in the election; included in this calculation are the voter’s issue concerns and his estimates of his opportunities for participation. As a result, much of the stigma of “apathy” is transferred from the voter to the electoral system, (pp. 789–90)

Instead of arguing that irresponsible voters lead to irresponsible parties, we argue that a fragmented system with weak parties leads to information problems for the individual voter which make the best possible decisionmaking strategies less than ideal. (p. 795)

But despite their inspired and often very amusing beginning, Popkin et al. do not pursue their inquiry to its logical conclusion. Their analysis points out the vast disproportion between what the individual voter-investor can afford and the range of potential information and action in principle available to him or her, and exposes the flimsiness of much of the “spatial modeling” now popular in political science, but there it halts. Remaining content with an investment theory of voting, Popkin et al. refrain from taking the obvious next step. They do not broach the question that their study clearly implies: if ordinary voters can’t afford to invest much in American political parties, then who can? And by virtue of their unique status, do not these “big ticket” investors automatically become the real masters of the political system?

Raising these questions, I think, transports one to the heart of the disastrous misunderstanding of the nature of political parties inscribed at the center of the Downsian approach to political parties (and its less formal ancestors). For what can be taken as the core proposition of the “investment theory of political parties” denies the validity of the Downsian treatment of parties as simple vote maximizers. Instead, the investment theory of parties holds that parties are more accurately analyzed as blocs of major investors who coalesce to advance candidates representing their interests.

As should momentarily become apparent, this proposition does not imply that such investor blocs pay no attention to voters. It does, however, mean that in situations where information is costly, abstention is possible, and entry into politics through either new parties or existing organizations is expensive and often dangerous (that is, in the real world in which actual political systems operate) political parties dominated by large investors try to assemble the votes they need by making very limited appeals to particular segments of the potential electorate. If it pays some other bloc of major investors to advertise and mobilize, these appeals can be vigorously contested, but—and this is the critical deduction which only an investment theory of parties can draw—on all issues affecting the vital interests that major investors have in common, no party competition will take place.14 Instead, all that will occur will be a proliferation of marginal appeals to voters—and if all major investors happen to share an interest in ignoring issues vital to the electorate, such as social welfare, hours of work, or collective bargaining, so much the worse for the electorate. Unless significant portions of it are prepared to try to become major investors in their own right, through a substantial expenditure of time and (limited) income, there is nothing any group of voters can do to offset this collective investor dominance.

While the “principle of noncompetition” over the vital interests of all major investors constitutes the most important predictive difference between the investment and the Downsian theory of political parties, it is scarcely the only one. A whole series of contrasts can be drawn between them.

1. Downsian theory privileges voters, who are said to exercise control over at least the broad shape of public policy. The investment theory holds that voters hardly count unless they become substantial investors. When the ranks of significant investors are limited to relatively small numbers of elite actors commanding disproportionate shares of politically mobilized resources, mass voting loses most of its significance for controlling public policy. Elections become contests between several oligarchic parties, whose major public policy proposals reflect the interests of large investors, and which minor investor-voters are virtually incapable of affecting, save in a negative sense of voting (or nonvoting) “no confidence.”

Because the claims made by the investment theory of parties can easily be misunderstood, the logic of the underlying argument is worth pursuing a bit further. Two points in particular require clarification: one relates to the potential role of voters according to the theory; the other, involving a rather complicated set of considerations growing out of the “rational choice” literature that Popkin et al. rely on, concerns the precise nature of some of the advantages large investors enjoy when they act politically.

In regard to voters, what the investment theory of parties does not say is every bit as important as what it does say. The theory does not deny the possibility that masses of voters might indeed become the major investors in an electoral system, or that, if they did so, conditions approximating a Downsian ideal of voter sovereignty might exist. As a later section briefly illustrates in discussing the expansion of unions during the New Deal, such conditions are conceptually very clear and empirically identifiable. To effectively control governments, ordinary voters require strong channels that directly facilitate mass deliberation and expression. That is, they must have available to them a resilient network of “secondary” organizations capable of spreading costs and concentrating small contributions from several individuals to act politically, as well as an open system of formally organized political parties. Both the parties and the secondary organizations need to be “independent,” i.e., themselves dominated by investor-voters (instead of, for example, donors of revokable outside funds). Entry barriers for both secondary organizations and political parties must be low, and the technology of political campaigning (e.g., cost of newspaper space, pamphlets, etc.) must be inexpensive in terms of the annual income of the average voter. Such conditions result in high information flows to the grass roots, engender lively debates, and create conditions that make political deliberation and action part of everyday life. What the theory claims is merely that in the absence of these conditions a party system that is competitive in the relevant Downsian sense cannot prevent a tiny minority of the population—major investors—from dominating the political system. The costs that the voters must bear to control policy will be literally beyond their means.

A proper analysis of the reasons why large investors are likely to dominate political systems, however, need not rest with the observation—however weighty—that, to paraphrase Hemingway, the rich are different because they have more money. By pursuing several themes in the literature on economic theories of politics that Popkin et al. draw upon, we see that a more subtle picture emerges of the special position that large investors occupy in a political system.

There is first of all a point whose potential importance was clearly recognized by Downs, though I do not believe that he ultimately accorded it sufficient weight (Downs, 1957a, Chap. 13). This is the simple fact that much of the public policy–relevant information that voters must pay heavily in time or money to acquire comes naturally to businesses (i.e., major investors) in the daily course of operations.

In many cases vast economies of scale further enhance the position of large investors. What is for a voter an absolutely prohibitive expense a large firm can afford on a regular basis. As long ago as the eighteenth century, for example, large investors routinely consulted their lawyers before making major moves. Two hundred years later, these consultations are likely to be done in a committee which includes not only lawyers but also public relations advisers, lobbyists, and political consultants.15 In sharp contrast to voters, for whom even jury duty can become an onerous burden, large firms also can easily afford to divert personnel to special projects.

Still other advantages armor what is sometimes cited as the Achilles’ heel of large investors—their very size and frequent diversity of interests (Bauer, Poole, and Dexter, 1972). Modern management structure developed precisely to afford top executives the capacities for detailed command and control that they need to adjudicate conflicts within the firm and to optimize complex sets of interests.¹⁶ Such organizational forms, along with the informal retinue of advisers large investors have always maintained, constitute uniquely institutionalized “memories” that dwarf the resources available to most voters.

Olson’s well-known study The Logic of Collective Action demonstrates that, in addition to all these advantages, major investors also derive subtle but decisive benefits from certain general characteristics of the process of interest intermediation and articulation (Olson, 1971).* Both because several of the most significant consequences of Olson’s argument have not as yet been integrated into empirical research and because his own applications of it to the business community were cursory and, in part, misleading, his analysis is worth retracing in some detail.

Its initial stages have been well summarized by Barry (1970, p. 24):

Olson’s argument is intended to apply wherever what is at stake is a “public good,” that is, a benefit which cannot be deliberately restricted to certain people, such as those who helped bring it into existence. A potential beneficiary’s calculation, when deciding whether to contribute to the provision of such a benefit, must take the form of seeing what the benefit would be to him and discounting it by the probability that his contribution would make the difference between the provision and the non-provision of the benefit.

In a world in which most collective goods can be safely assumed to be beyond the means of isolated individuals, Olson’s formal theory of collective action follows directly from his judgment that the probability that one actor’s decision to contribute will influence another’s drops steeply with increases in the size of the group which will enjoy the collective good (see Olson, 1971, p. 44):

In a small group in which a member gets such a large fraction of the total benefit that he would be better off if he paid the entire cost himself, rather than go without the good, there is some presumption that the collective good will be provided. In a group in which no one member got such a large benefit from the collective good that he had an interest in providing it even if he had to pay all of the cost, but in which the individual was still so important in terms of the whole group that his contribution or lack of contribution to the group objective had a noticeable effect on the costs or benefits of others in the group, the result is indeterminate. . . . By contrast, in a large group in which no single individual’s contribution makes a perceptible difference to the group as a whole, or the burden or benefit of any single member of the group, it is certain that a collective good will not be provided unless there is coercion or some outside inducements that will lead the members of the large group to act in their common interest.

Now, this argument is of course subject to all the limitations of its premises, which include two that have frequently become targets for criticism: that human behavior is an exercise in rational calculation and that it is exclusively self-interested.17 But it is doubtful if the criticism in this vein that Olson’s argument has received makes much difference. It is possible to agree that strictly neoclassical approaches to political economy invidiously neglect ideology. One can therefore endorse the search for a more comprehensive theory of action. It is equally possible to reject Olson’s implicit assumption that action is always a cost rather than a good in itself, and allow that the process of collective action can become a uniquely rewarding experience in its own right. And anyone can recognize that the assumption that humans are exclusively self-seeking may sometimes be a potentially serious distortion of reality even in a capitalist society.

But unless one is prepared to make truly heroic counter-assumptions, Olson’s fundamental point is likely to stand. Expectations that large groups of people will voluntarily provide huge subsidies over long periods of time to projects that return no benefit to themselves (and may often be completely wasted) is unlikely to prove fruitful as an approach to most of human history—and particularly to the analysis of market societies. As rival accounts of collective action put forward by Olson’s critics inadvertently illustrate when they initially posit the origins of collective action in attempts to escape misery and deprivation, reason (or history) may be cunning, but it is rarely philanthropic: much, probably most, collective action undertaken is straightforwardly instrumental and animated by perfectly ordinary passions.18 Most of it, accordingly, should follow the basic logic of Olson’s model.

But while his general analysis identifies an important reason for expecting small groups of large investors to display capacities for self-organization far beyond the capability of ordinary citizens, Olson’s actual application of his model to the business community is perhaps the least satisfying section of his work.

In part this is almost certainly the consequence of an ambiguity in his original presentation that has a most important bearing on its implications for large investors. If Olson is correct, one would expect to find many instances in American history in which relatively small groups of major investors organized and bore most of the costs of political campaigns directed toward ends that greatly benefited themselves. Since in the United States most of what the state provides is formally provided for the benefit of the whole population, these investor groups would therefore supply collective “goods” to the rest of the country in the perhaps elongated technical sense that Olson employs the term.¹⁹ And, indeed, though many contemporary social scientists often are unable to distinguish accounts of small groups of major investors efficiently providing themselves with public goods from outlandish and improbable “conspiracy theories,”²⁰ American history is replete with vivid examples of the fundamental asymmetry Olson’s account suggests between the markets for collective action enjoyed by the rich and poor, respectively. Three of the greatest investors in the United States, for example, virtually financed the later stages of the War of 1812 all by themselves (Brown, 1942, p. 126; Hammond, 1957, pp. 231–32). Much of the money required for the force that quelled Shays’s Rebellion came from a handful of very affluent (and very nervous) investors.²¹ The original promoters of what eventually became the Brookings Institutions were a bloc of investors frankly hoping to reduce their taxes by curbing federal spending (by promoting the establishment of what became the Budget Bureau), while another group of millionaires bore the lion’s share of the costs for the effort to repeal Prohibition with the no less bluntly declared aim of reducing their taxes through the taxation of liquor (which the poor would pay).²²

Oddly, however, Olson discounts such cases as “empirically trivial” (1971, p. 48, no. 68). He does this because in addition to making his main argument (discussed earlier), which relates group size to the likelihood that individual action can decisively affect the provision of a collective good (for instance, by the influence of one’s example on others), he also develops another line of thought. In this second account he tries to derive his proposition that large groups will not provide themselves with collective goods (absent coercion or selective incentives) directly from an analysis of how an individual’s share of a collective good varies with group size.23

Now, this is an exceedingly dangerous way to make the case. For as Olson himself is well aware, the only calculation strictly relevant to deciding whether an individual will participate in collective action relates to the net advantage that accrues to that individual from that action. While there is no reason anyone who wishes to cannot relate this condition of the total gains to the group as a whole (by simply forming the appropriate ratios), additional formulations simply distract from this crucial point. And, as an examination of Olson’s mathematical presentation shows, his efforts on this score led him into an error that has no consequences for his basic argument but which obscures the vitally important case of major investors who provide themselves and the country as a whole with collective goods.²⁴

Olson’s own discussion of the business community is very brief, and largely confined to underscoring the conclusion that industries in which only a small number of firms compete will find it easier to organize. Cursory and highly stylized, it makes no sustained effort to engage empirical material (1971, pp. 141–48).

Many of the most interesting implications of his findings are not discussed at all. For example, if one accepts Olson’s arguments about the difficulties of achieving coordination in decentralized industries, then large merger waves, such as the United States experienced in the 1890s, 1920s, and more recent past, acquire potential political significance. Mergers, in effect, are a prime method by which actual businesses solve their collective action problems. Also, if Olson is correct, then the usual neoclassical dismissal of the importance of “aggregate” (in contrast to particular “industry”) concentration is probably mistaken, for it is clear that the scope of rivalry among a few giant firms which can coordinate and trade off operations in many industries at once will be vastly different from highly atomized and decentralized competition.²⁵

The most significant omissions in Olson’s discussion of collective action within the business community, however, concern his neglect of the financial system and the potential role of coercion (even) within market systems. The former is important because the strategic position that leading financiers enjoy in many economies may at least partially solve free-rider problems among businessmen. Of course, the leverage banks can exert over other enterprises varies with many factors, including the secular trend of economic growth, the business cycle, and, obviously, the development of credit markets.26 No less clearly, the interests being served in such cases may not be those of “business as a whole” or some similarly exalted abstraction, but primarily those of the banks themselves. But it is probably no accident that empirical studies of really powerful cross-sectoral business organizations like the Business Council or the Committee for Economic Development (CED)—neither of which Olson mentions—reveal the omnipresence of big banks.²⁷ And a long search I undertook of private records yielded direct evidence of pressure banks exerted on reluctant industrialists to enroll in the CED.²⁸

Olson’s analysis should also stimulate a re-evaluation of the role coercion plays among large investors. Both Olson and his critics dwell overmuch on the “voluntary” character of social interactions. When he discusses individual cases, Olson customarily breaks off the discussion after he reaches his conclusion that, while huge gains accrue to groups which succeed in organizing themselves, absent coercion or selective incentives this is quite unlikely.²⁹ By contrast, many of his critics, concerned either to reestablish the rationality of large group organizing efforts, or, more rarely, bothered that reality seems to provide more examples of successful collective action by large groups than theory predicts, often reply by tracing out arabesques of increasingly farfetched reasoning which might lead a large group to come together voluntarily in its own interest. But of course, the real alternatives facing a group with free-rider problems frequently include options more lively than dialogue among the members to build up a perhaps irrational mutual trust (Offe and Wiesenthal, 1980), encouraging the probably mistaken realization that none can hope to advance independently of the others (Roemer, 1978), or even locally based federation (which, since it associates small groups, fits Olson’s model as a part to collective action.) Specifically, it often is the case that the real “logic of collective action” for a large group with a vital interest at stake is the swift application (by some—perhaps self-appointed—subgroups) of coercion to erring members of the larger group.

Of course Olson, and his readers, are all perfectly well aware that coercion, force, violence, terror, and such practices are possibilities for social groups. The point, however, is that only in his discussion of labor unions does Olson energetically pursue the strategic trail in this direction (1971, pp. 66 ff.). Yet there is no reason to single out unions (or managements confronting unions). In general, any group of rational actors seeking to organize a large group will experience the same incentives—including major investors in the business community organizing various sorts of political coalitions.

American history is replete with examples of business groups and individual firms retaining vast arrays of military and paramilitary forces for long periods of time. In the nineteenth century many railroads kept private armies. The Pennsylvania Coal and Iron police ran their own Obrigkeitsstaat for decades. General Motors maintained the Black Legion; Ford sported a veritable Freikorps recruited by the notorious Harry Bennett; and any number of detective agencies, goon squads, “special consultants,” and wiretappers have also been active.30 That most of these—though clearly not all, for railroads often fought pitched battles with competitors—are usually said to have been directed at labor makes little difference. While this claim does underline the quasi-military character of many of the most important cases of collective action in American life, there is little reason to believe that it represents the whole truth. Force on such a scale potentially menaces competitors, buyers, and suppliers almost as much as it does workers.³¹

It is true that market forces place definite limits on the scope for coercion within the business community. But as the earlier reference to financial pressure on businesses should suggest, even an economy that might be reasonably competitive in the long run contains all sorts of imperfections and uncertainties that leave plenty of scope for direct pressure. Accordingly, it ought to surprise no one if, especially in times of extreme emergency, as, for example, during a war or strike wave, many businessmen turn rapidly to structures that contain strong elements of coercion—either by (some part of) themselves, emergency provisions in a liberal constitution, or, in truly dire emergencies, a Führer. And in less straitened circumstances political coalitions should be scrutinized carefully for elements of coercion as well as voluntary accord even within dominant groups.

2. Inside political parties, Downsian theory focuses all the attention on professional politicians. Investment theory takes care never to confuse investors/employers with politicians/employees.

The investment theory of politics does not deny that candidates and professional politicians have a great stake in their success, or indeed that they might have a greater interest than their major backers in winning at almost any price. But investment theories maintain that political organizations are (sometimes very complex) investments; that, while they need small amounts of aid and commitment from many people, most of their major endorsements, money, and media attention typically come as direct or indirect results of their ability to attract heavyweight investors. As a consequence not even former presidents with enormous personal popularity like Theodore Roosevelt could run insurgent campaigns without support from investors like U.S. Steel or investment banker George Perkins.32 In addition, for all the attention Downsian theorists focus on offices as the primary lure for candidates and parties, the investment theory of parties expects that a fairly clear distinction exists between routine lower-level appointments, with limited discretion and established formal and informal role expectations, and top policymaking slots. These latter, the investment theory of parties anticipates, are often reserved for representative major investors or their immediate designates (Ferguson, 1986).

3. Downsian theory expects parties to move near the voters on important policy dimensions and, indeed, often even “leapfrog” rivals in their haste to find the median voter. The investment theory expects very modest moves toward the public on all issues affecting major investors, rocklike stability toward the vital interests of these investors, and many efforts to adjust the public to the parties’ views rather than vice versa.³³

The Vanderlip-McAdoo-Hilles deliberations regarding the Federal Reserve System discussed earlier, or the many other examples American history offers of major party candidates who flatly refused to take immensely popular steps opposed by almost all major investors (such as abandoning a balanced budget to extend relief during major economic downturns)³⁴ should embarrass Downsian theory but scarcely the investment theory of parties. On the contrary, if, for example, George McClellan in 1864, Horatio Seymour in 1868, Rutherford Hayes in the late 1870s, Grover Cleveland in the 1880s and 1890s, Alton Parker in 1904, William Howard Taft in 1912, all major party candidates in 1924 and 1932, Alfred Landon in 1936, Barry Goldwater in 1964, Jimmy Carter in 1980, and any number of other presidential candidates all expressly repudiated major factions of their party immediately ahead of closely contested elections, the investment theory just looks for the investors who insisted on having their way.³⁵

4. Downsian theory anticipates competition between the parties on most issues; the investment theory of parties, on the contrary, expects that whole areas of public policy will not be contested at all, while on others the parties will differ like Ford and GM before the Japanese arrived.

Downs hedged his original analysis of political dynamics with all sorts of qualifications about single-peaked preferences, etc. Subsequent commentators added a variety of other caveats, of which those concerning the number and types of issues contested were probably the most important (Stokes, 1966). But neither Downs nor most of his critics ever indicated they believed that most major parties in advanced industrial societies would actually fail to compete on many important issues in which the interests of many citizens were fairly clearly defined, or could, through political campaigning, readily be defined. Nor, so far as I can discover, did anyone ever do more than glance at systematic pressures put on parties not to make issues out of certain questions of public policy or entertain the possibility that both major parties (in a two-party system) would regularly do precisely this. To the investment theory of political parties, of course, nothing is more natural. If all major investors oppose discussing a particular issue, then neither party is likely to pick the issue up—no matter how many little investors or noninvestors might benefit—not because of any active collusion between parties but because no effective constituency exists to force the issue onto the public agenda.

Also, the investment theory of parties would scarcely be surprised to discover that the major parties in party systems marked by great economic inequality or sharp swings in national income often confine almost all competition to noneconomic issues less threatening to elite investors. This does not, it should be observed, imply that political parties generate these noneconomic cleavages. It says merely that, if an emphasis on noneconomic issues protects major investors in all parties, then emphases on ethnic, racial, or cultural values will proliferate relative to economic appeals. And, the investment theory adds, studies of voting behavior that cite ethnocultural voting patterns congruent with such partisan appeals as evidence against older economic interpretations of U.S. political behavior are invalid in principle.36 Without an analysis of party leadership and public policy output, the voting patterns cannot be interpreted.

The contrast between the Downsian and the investment theory of political parties could go on indefinitely and with endless refinement. But the implications for this paper on critical realignments should now be clear: for all its merit and intellectual interest, Downs’s An Economic Theory of Democracy misspecifies the basic market in which political parties operate. Not voters but investors constitute their fundamental constituency.

Once this central point is clarified, a revised approach to the definition of party systems and critical realignments becomes immediately available. If, according to the investment theory of parties, political parties are constituted by “core” blocs of major investors interested in securing a small set of specific outcomes, then “party systems” are the systems of action organized by these major investment blocs. Depending on the relative strength of the contending blocs, several different types of “party systems” can be distinguished. In rare cases (such as the Era of Good Feeling after the War of 1812) virtually all major investors may be organized into one massive, utterly “hegemonic” bloc, so that national party competition literally ceases to exist. Similarly, even where competition between rival blocs has brought into being another party, one investment bloc may still strongly dominate the other. Where one bloc succeeds in controlling most outcomes and reducing its opponents to variations on its themes (as, for example, the Democrats did to the Republicans for years after the New Deal), it also makes sense to continue to refer to the dominant bloc as “hegemonic,” though this case is clearly very different from instances where no organized opposition exists at all. Where no one party exercises hegemony, rival blocs will simply be “competitive.” Since the identity of parties—and thus of a party system—depends on the blocs that make them up and not on whether some party happens to win or lose, it is perfectly reasonable to speak of a party system as decaying over time from hegemony to competitive status, or even as having a life cycle, provided that is understood as referring, say, to changes in the relative power of various elements composing a once-dominant bloc or to minor shifts between the parties. And, obviously, party systems also pass away. In theory this could happen by slow change of identity in an industrial equivalent of Key’s “secular realignment” (which could lead to tedious definitional arguments).37 In actual fact, however, for reasons adumbrated in the next section, all but the first American party system ended catastrophically in brief critical realignments that ushered in new and notably different party systems.

Also, in the spirit of the earlier analysis of the crucial role size differentials among coalition partners play in political coalitions, one would expect that a bloc that is hegemonic for any length of time might be—in Gramsci’s famous phrase—“crowned” by a particularly outsized and active unitary (or near unitary) actor. Because of its disproportionate size relative to the rest of the coalition, and its relatively enormous stake in the system as a whole, this “hegemon” often becomes the final source of the emergency subsidies any political coalition sometimes requires. Its prominence within the system may also afford it some scope for coercion, which also will help keep the bloc together.

III. TESTING THE INVESTMENT THEORY OF POLITICAL PARTIES: METHODOLOGICAL AND OPERATIONAL CONSIDERATIONS

Many discussions of the methodological issues involved in testing highly abstract social science theories strongly resemble Sunday morning radio broadcasts. Inspired more by a desire to protect a license than by any audience demand for the information, they fill the air with a hodgepodge of pious cant and sententious banality that only rarely connects to real problems. At the risk of further blackening the good name of empirical social science, however, some discussion of methodology is indispensable in this paper, for it is perfectly obvious that any number of questions are likely to arise naturally in the course of operationalizing the theory just sketched. If, for example, blocs of major investors constitute party systems, then how should one distinguish “major” from “minor” investors? For that matter, just exactly who or what constitutes an “investor” in the relevant sense?

Assuming that these notions can be satisfactorily elucidated, what counts as evidence for claims that major investors “support” particular candidates, issues, and parties? Still more importantly, let us agree for the sake of argument that the evidence shows that powerful blocs of investors have actually massed behind different parties at different times. How can the existence and stability of such coalitions over the course of a whole party system be demonstrated? Without evidence on these points the investment theory of parties is vulnerable to the same sort of embarrassments that electoral theories endured when tests failed to reveal the stable voting blocs persisting through the “party systems” that they were supposed to define. And finally, of course, how does one recognize and deal with situations which the investment theory itself acknowledges, when major investors do not dominate a party system and something like effective mass democracy actually occurs?

Not all of these questions are equally urgent. The first, for example, sounds far more profound than it really is, and can be dealt with summarily. Essentially the investment theory of political parties postulates that a strong relationship exists between the extremes (or “tails”) of two different distributions; the distribution of investors in political action and the distribution of investors in the circumambient economy. In testing the theory nothing important depends on the exact values of the cutoff points used to indicate “large” investors in each distribution—the top 5 percent, 10 percent, 12 percent, or whatever.38 So long as both distributions actually are skewed, large investors can be meaningfully distinguished, though, of course, in any case study specific characteristics of a particular skewed distribution are almost certain to become important facts.³⁹

While puzzles about the identity of investors are therefore problems less for the investment theory of political parties than for other branches of the social sciences such as business history, the same cannot be said about the methodological problems involved in inquiries into which parties or policies a firm or a group of investors supports at particular moments. In the absence of a clear justification for these sorts of claims the investment theory of parties cannot hope to flourish.

Records of campaign contributions by major investors, of course, can provide important clues about who supports what. But while such evidence often yields important insights, it is most commonly marked by distinct limitations. The biggest problem is with the fragmentary character of the data for nearly all periods of American history. Analysts of campaign contributions are nearly unanimous in pointing to its inadequacies (Overacker, 1932; Thayer, 1973). Large numbers of pecuniary contributions were understated or never recorded at all. Cash paid in the form of excessive consultant, lawyer, and other third-party fees is rarely noticed and in-kind contributions almost never listed. “Loans” which are never repaid or are granted on preferential terms rarely attract notice. Neither do “gifts” to “friends.”

Not surprisingly, almost every seriously pursued investigation of campaign contributions, from the Hearst-inspired attacks on Theodore Roosevelt and E. H. Harriman to the recent inquiries into corporate bribery conducted under the auspices of the Securities and Exchange Commission, has unearthed unreported contributions of astronomical magnitude. And there is reason to think the omissions have often followed systematic patterns. In an ingenious statistical comparison, Pittman has demonstrated that a series of striking and predictable differences exist between the original “public” campaign contribution lists of the 1972 Nixon campaign and the secretly maintained files that later court cases brought to light (Pittman, 1977). A good rule of thumb, accordingly, is to treat published campaign contributions (even after the recent changes in the law) as the tip of an iceberg, and be wary of any analysis that relies only on them.

This is less devastating to political analysis than it appears. Sometimes a fuller pattern of corporate contributions can be retrieved by careful archival work. Other cases can sometimes be clarified by thorough analysis of apparent patterns in corporate contributions: looking either at a sample of core actors that one has defined on other grounds as possessing a strong common interest, or checking carefully among the attorneys for major actors.

The beginning of real wisdom in these matters, however, occurs when one reflects that direct cash contributions are probably not the most important way in which truly top business figures (“major investors”) act politically. Both during elections and between election campaigns, their more broadly defined “organizational” intervention is probably more critical. As the earlier discussion of free-riders suggested, such elite figures function powerfully as sources of contacts, as fundraisers (rather than mere contributors) and, especially, as sources of legitimation for candidates and positions. In particular, as I have sought to document elsewhere, the interaction of high business figures and the press has frequently been pivotal for American politics (Ferguson, n.d.). Merely for J. P. Morgan or David Rockefeller to make known his choice for president or his policy views to newsmen is to instantly confer substantial newsworthy reality to them—and to contribute an in-kind service whose value dwarfs most cash contributions.

This “organizational” influence is less conveniently available than national campaign committee records, but it is not impossible to obtain, and it has the virtue of being far more reliable than published single-figure dollar totals. While of course anyone can reel off a long list of their potential limitations,40 private archival sources provide unparalleled access to this sort of evidence. If Thomas Lamont of J. P. Morgan & Co. in 1932 was writing intimate small-circulation letters to other New York bankers in support of incumbent President Herbert Hoover, and one can obtain these letters, that should settle the question of Lamont’s choice for president, no matter how often American historians have asserted he was Franklin D. Roosevelt’s friend (Ferguson, 1986, n.d.). Similarly, if the chairman of the General Electric Company was actively aiding New York Senator Robert Wagner in preparing the National Labor Relations Act, it is a fair conclusion that he favored it over alternatives (Ferguson, 1984, n.d.).

But published sources contain much more evidence than most scholars realize. Newspapers print ads with endorsements; obituaries often disclose a remarkable political history; and collating newspaper accounts of campaigns and campaign press releases often is enormously illuminating. Even biographies, institutional histories, and magazine profiles of businessmen sometimes contain important facts, while for figures active in the present and recent past, oral interviews can be hazarded.41 In most cases, if one cannot come up with the full roster of a candidate’s supporters, still one can generally identify a “core.” When this is examined for internal consistency and structure (perhaps in the light of preexisting theory), very striking patterns often emerge.

Political appointments can also furnish important evidence. As several recent studies have shown, a systematic examination of these can be remarkably revealing.⁴²

Complicating questions of evidence are instances in which industries or firms appear to be operating in both parties. These are often cited by analysts who wish to deny that businesses promote definite public policies or that they wield their influence to obtain these policies, so the logic of the situation is important to understand.

The first step in a realistic analysis is to focus sharply on the ways in which issues figure in political campaigns. Party politics in America most commonly displays only loose relations to issues. As a consequence, in practice, issue politics in America at a national level always implies a focus on a particular candidate. Right here, a fair number of cases of business bipartisanship become immediately intelligible.

In the nomination stage of election campaigns it is only common sense for many firms to float a candidate (or more) in each party. The chances of getting a winner are thus much enhanced. Similarly, different levels of government and different regions of the country may make useful mixed strategies of candidate support by one firm. Other forms of bipartisanship are no less intelligible but depend on different reasoning. The guiding principle is that selection of political parties is merely a special case of rational portfolio choice under uncertainty: one holds politicians more or less like stocks.

A firm cannot predict exactly who will win or know for certain exactly what policies will be implemented if a candidate or party is victorious. But, as the Vanderlip-Stillman exchange suggests, it has some useful knowledge of the candidates and parties. So it has to estimate its chances of advancing a particular policy and discount for the possibility it will lose. Some industries or firms find themselves wanting policies that the other party clearly could never accept. Having nothing to gain from bipartisan strategies, these industries (or firms) become the “core” of one party, as, for example, textiles, steel, and shoes were in the Republican Party after the New Deal because of labor policy, and chemicals because of trade (Ferguson, 1984, n.d.). Other industries or firms, differently situated, can try out both parties. But this is the crucial point: rarely equally. For everyone to find it in his or her interest to hold identical portfolios of parties is as outlandish as the case of everyone’s attempts to buy and hold one stock, and for exactly the same reasons.

The chance of one candidate’s simultaneously satisfying high- and low-tariff advocates, labor-intensive and high technology firms, or exporters and importers is zero. And, especially in large firms which have resources big enough to affect the outcome, some clarity about this can be shown to obtain.43

The underlying dependence of business bipartisanship on an incomplete articulation of issues is pointed up by critical elections like the one of 1936. That election had been preceded by several in which issues had not always been clearly defined. It was thus easy, and common, for many (not all) investors with a party identification (especially attorneys, whose position in the party depended on party regularity) to swallow their disappointment at one or another candidate they disapproved of and remain to support him in the general election. But the 1936 election showed that, as policy divergence between parties grew, the bipartisanship of firms disintegrated in a perfectly obvious and—it can be shown—predictable fashion (Ferguson, 1984, n.d.).

Once intensive research has produced data linking as many major investors as possible to particular candidates, issues, and parties, the focus of the inquiry turns naturally from the facts of “support” (or the “support network”) to attempts to explain it. Now, the general thrust of the investment theory of parties on this question is straightforward: The political investments of major investors are governed by the same criteria that all their other investments are.⁴⁴ For this essay, where there is not space to consider the many rather obvious ways one can modify or qualify this postulate, this should be taken to normally imply an attempt to maximize wealth (relative, perhaps, to some level of risk) in whatever form existing institutional arrangements permit this to be augmented: revenues in a business, salaries in a bureaucracy, or whatever.⁴⁵ Accordingly, the investment theory of political parties predicts that the political investments of major investors can usually be related directly (if commonly more subtly than most “economic” theories of politics suggest) to their particular positions in the political economy.

Now, it should be clear that a general methodological analysis cannot hope to specify precisely how one defines the politically relevant aspects of these “particular positions in the political economy.” Such analyses emerge only from a detailed analysis of specific historical periods.

Nevertheless, it is quite possible to identify a general method for handling most of the data that one usually encounters. Essentially a graphical analysis of political coalitions in terms of industrial (and, where necessary, agricultural) structures, this procedure has the happy property of providing a means for displaying the coherence of coalitions during a single election. In addition, a simple extension of the technique to several elections provides the answer to another of the questions raised earlier, viz., how it is possible to demonstrate the coherence and stability of entire party systems (as well as, of course, their eventual breakdown).

An application to industrial structures of spatial analysis techniques used for many years in many parts of the social sciences, this technique is perhaps most conveniently explained by outlining the steps one might take once one had finished acquiring information on the empirical pattern of “support,” as discussed previously.

The procedure is straightforward. First one identifies what appears to be the major outcomes or issues involved in an election. As I have elsewhere observed (Ferguson, 1986)—and it should be obvious anyway—the identification of the relevant outcomes requires great care. The judgments involved (which may, and indeed commonly should, be justified as far as possible by reference to quantitative evidence) frequently rely on intelligent aggregation of cases, measures, and other particulars. They are therefore normally complex and sometimes delicate, making it very easy to overlook major policies that the analyst happens not to care about, that involve recondite or obscure facts (such as monetary policy), or which require reference to so-called nondecisions or subtle policy moves disguised as administrative measures.46

Once a plausible list of outcomes that brought the coalition together has been identified, the second and most important step becomes obvious. When compared with the objective facts of the actual economic structure, the issues define a multidimensional space. By simply plotting each major investor’s position in this space, a “spatial” profile emerges that displays relationships between investors’ policy positions and their economic situation. One can then see—sometimes at a glance—whether a logic exists within the business structure to a candidate’s support “network” during an election or to a whole party system.

A concrete example (adapted and greatly simplified from an actual model conceptualized in an earlier essay) that illustrates the use of these techniques to analyze a party system as a whole may be helpful. An inquiry into the sources of the monolithic policy cohesion exhibited by the Republican Party during most of the “System of 1896” suggested that a two-dimensional scattergraph of the contemporaneous American business structure might be quite revealing.47 For present purposes let us regard the first dimension as referring to the “labor intensity” of an individual firm’s production process. The second can then be described as a nationalist-internationalist dimension in which free-trading businesses opposed tariff-seeking protectionists.⁴⁸ When the nonfinancial sectors of the business community are scattergraphed along those dimensions and the financial community is then added in,⁴⁹ it is impossible to miss seeing the gigantic—indeed hegemonic—antilabor, intensely nationalist bloc of the system of ’96 centered in quadrant 1 of figure 1.1

Unfortunately the varying quality and frequent gaps in available data require that an extensive commentary accompany all attempts to present scattergraphs of actual party systems in American history. So neither this nor the next section of the paper can undertake to estimate actual models.⁵⁰ These will have to be separately published. But even from the example under discussion, the general procedures for analyzing stability over time should be clear. While short-run issues and emergencies may briefly disrupt long-run politics, as long as the economy remains relatively the same, so will the basic coalitions.

FIGURE 1.1. The Industrial Structure of a Party System: An Idealization of the “1896” Case

But it should also be clear how the very act of plotting a coherent party system can uncover the model of its decay (a decline, incidentally, in which the generational decline of partisanship among the electorate need play no role whatsoever). Over time, and especially over a series of booms, cumulative changes in industrial structure occur. New fortunes, firms, and industries rise, older ones may decline, and any number of related changes begin to occur. As a consequence the distribution of major investors within the space begins to alter (i.e., the points representing major investors on the graph shift position). Without analysis of actual cases, one can only speak in the most general terms about the changes that ensue. As the sketches in the following sections suggest, what usually occurs first are some reshufflings within existing coalitions. Older alliances begin to break down, and signs of strain emerge. What happens next depends importantly on the overall level of economic activity as well as the specific sectoral, firm, and institutional patterns that real economies display. In theory waves of rapid growth could simply lead to the gradual disintegration of a political coalition. Depending on the facts of the case, a new one might arise (as when some new bloc gradually forms), or, of course, chaos might follow the disintegration of a previously hegemonic bloc. It is also possible that two previously warring blocs might merge and competition cease.

Commonly, however, the transition to a new party system is more complicated. As described in another essay (Ferguson, 1984), the economic growth that comes with long booms often leads to basic changes in an economy’s overall pattern of development. Entire new sectors dominated by new elites, for example, may rise up in the course of a boom, or secular change may take place in the financial system. Such cases often force new issues to the fore and complicate the transition to a new party system.

The passage from one party system to another, in addition, is very often catastrophic. As pressures for change build up over a boom, a sharp downturn finally arrives. This can, of course, excite the (at that moment usually miserable) general population. But if, as occurred in every case save that of the New Deal, substantial numbers of people are unable to become significant political investors, then the character of the transition depends almost entirely on the changing alignments of major investors.

Typically major depressions rapidly reshuffle investors in several ways. First, they bring about waves of bankruptcies and (often defensive) mergers. If these are sufficiently extensive—as they were, for example, in the giant merger wave of the 1890s that literally created the System of ’96 Republican bloc,51 then the old party system may cease to exist. Economic downturns also have other effects that may lead to swift reorganization of investor blocs, however. Even if there is no general merger wave, depressions strengthen the position of the strongest investor groups relative to their rivals. As the dominant groups move to capitalize on their advantageous positions, very dramatic clashes often occur that may involve far-reaching changes in public policy—of the order of the New Deal’s Glass-Steagall Act (Ferguson, 1984, n.d.).

Rapid changes in the world economy may provide impetus for other rapid reshufflings. Since many major American downturns are merely local manifestations of world economic crises,⁵² the situation of American industrialists has sometimes been drastically affected by the strategies foreign competitors adopt to cope with their own problems. Some industries in the United States, for example, may not be able to face heightened international economic competition that accompanies a shrinking volume of world trade, or the export drives foreign manufacturers mount to make up for declining demand in their home markets. So their stances toward tariffs and related issues may change abruptly from what they have been all through the previous party system. And, as I have described in other works (Ferguson, 1980, 1984, n.d.), various pathological (in the sense of abnormal and transitory) phenomena that accompany steep downturns may also reshuffle older coalitions. Industrialists, for example, have on occasion dramatically split with financiers over the question of measures to stimulate the economy or whether to remain on the gold standard.

The transition from the Republican-dominated System of 1896 to the New Deal was of course affected decisively by the dramatic shift in the balance of power between management and labor that occurred during the New Deal. But the very clarity and vividness of this example—which involved the rapid spread of unionization and the mass mobilization of millions of ordinary Americans—draw attention to the close links between the analysis of party system stability over the long run and the final question posed at the opening of this section concerning the significance for an investment theory of parties of situations where millions of ordinary investors have in fact joined to contest control of the polity by major investors.

Now, the fundamental factors militating against control of public policy by ordinary citizens have already been discussed.⁵³ More light, in addition, will be shed on these issues in the next section, which briefly examines American trends in mass political mobilization. Nevertheless, because the question is so fundamental, and because even analysts who should know better often write as though they believe the only way they can defend the dignity of the victims of American history is to make them responsible for its outcomes,54 a closer look is warranted at the conditions under which one might decide that ordinary voters are controlling public policy, and at how often they have done so in American history.

Perhaps the most obvious sign that major investor dominance is under challenge is public, visible indications of panic among major investors. Perhaps the best-kept secret of the endless discussions of community power that have marked recent American political science is that it is probably impossible to disguise a condition in which the community actually acquires power. At such times—as in the New Deal, or the (failed) Populist insurrection—the political atmosphere heats up enormously. As whole sections of the population begin investing massively in political action, elites become terrified and counterorganize on a stupendous scale. The volume—and acrimony—of political debate and discussion increase—so much so that the echoes reverberate for years afterward. And, invariably, elites openly begin discussing antidemocratic policy measures and more than usually exalt order and discipline as social goods.⁵⁵

Some indicators that major investors in fact dominate policymaking are fairly obvious. Officially organized or sanctioned violence against large groups of the citizenry probably constitutes one telltale sign. While one can imagine situations in which a government represses a particular strike or protest demonstration to the cheers of the bulk of the electorate, the longer this persists and the broader the attacks, the less plausible this possibility becomes. Similarly, widespread cases of surveillance by police (abetted perhaps by private groups in a patron-client relationship to the gendarmes), the disruption of meetings, and formal and informal harassment of dissenters (such as their inability to find jobs) are scarcely compatible with citizen sovereignty.⁵⁶

A close scrutiny of the substance of public policy, of course, should in principle disclose the interests it serves. In industrial societies, perhaps the single most important and obvious dimension to examine in this respect is state policy toward the “secondary” organization of the citizenry. By far the most important of such organizations, of course, are labor unions. Though most discussions of American “democracy” elide the often ugly facts, the truth is that if employers are allowed untrammelled rights to destroy organizations created by their laborers, then claims about “citizen sovereignty” are merely cynical rationalizations for elite investor dominance, whether in Poland in the 1980s, Massachusetts in the 1850s, Pennsylvania before the New Deal, or much of the South and West today. Mutatis mutandis, the same is true of agricultural societies in which the state subsidizes organizations designed for large farmers while placing hurdles in the way of organizations (including cooperatives and credit unions) servicing small farmers, sharecroppers, tenants (urban or rural), and the permanently underemployed or poor.

Other dimensions of public policy are also important, of course. Perhaps the most urgently needed piece of research in American history is a set of reliable, quantitative estimates of the tax burdens borne by segments of the population at different points in time. Short of that ideal study, it is vital to attend as best one can to the shifting incidence of taxation, for until social services began to grow it may well have been the most important single issue in assessing the overall balance of power between large and small investors.57

Social services themselves are, obviously, another excellent indicator of how much control ordinary investors are able to exercise over public policy. It is, of course, true that demand for these varies over time and especially with the level of urbanization and spread of wage labor through society. Nevertheless, it is highly doubtful that a modest social security program, a minimum wage, savings guarantees, small agricultural credit programs, and well-funded relief programs during depressions would have been any less popular among the citizenry as a whole in 1840 than they were in 1940. (Certainly there was plenty of agitation for them in the 1840s.)

By making rough and, in this paper, necessarily informal estimates of the content of state policy on these and perhaps a few other issues (such as immigration), real empirical content can be infused into the often vacuous debate over who or whose interests historically have governed. It is perfectly easy, for example, to imagine a pattern of policy results, leadership, and mobilization that would support an “electoral sovereignty” model of nineteenth-century American politics. For instance, state policy could have promoted organizing and political activity among small farmers and labor, shortened the length of the working day, taxed the wealthy, and generalized social insurance at an early date. Leadership of political parties and voluntary organizations could have been virtually monopolized by ordinary citizens; and the most affluent Americans could have been least involved, active, and interested in the party system—but they were not.

Instead, as the following sketches suggest, not until the New Deal did any important segment of the mass population acquire much importance as political investors. Before that date, the major investors who defined the various American party systems consisted almost entirely of businessmen. As a consequence, critical realignments that resulted in hegemonic blocs before the New Deal marked elections in which a powerful new element within the business community ascended to power—in 1860, the railroads; in 1896, manufacturers; while in the New Deal, the biggest winners were not unions but the combination of international oil, investment, and commercial banking firms that I have elsewhere termed the “multinational bloc” (Ferguson, 1984). By contrast, party systems like those of the Federalist era, or the Jacksonian period, during which no clear hegemonic element emerged, marked periods of bitter competition within rival groups in the business community—in the former, between pro-British merchants, planters, and financiers on one hand, and pro-French merchants and planters on the other; in the latter, between regionally dispersed arrays of merchants, (some) planters, and state banks on one side, and most other sectors on the other.

IV. PARTY SYSTEMS IN AMERICAN HISTORY 1789–1984

Bearing in mind all these methodological considerations, it is possible to try briefly to summarize the major investment blocs that have constituted successive American party systems. It should of course be obvious that a single paper can at best present nothing more than a series of highly stylized and tentative sketches. As much a report on research in progress as anything else, such sketches necessarily neglect all sorts of significant details, and they cannot afford to do more than glance at alternative interpretations of the same events.58 They serve mostly to identify problems and to suggest connections between outcomes which initially might appear unrelated. They also provide an indication of what traditional electoral-centered accounts of power in America have missed.

A. The First Party System: Federalists vs. Jeffersonian Republicans

Whether the Federalist-Republican clashes that began shortly after the ratification of the Constitution can be described as constituting a true “party system” in the conventional sense has sometimes been questioned.⁵⁹ But since politics in this period looked extensively like a party system—featuring more or less formally organized parties, recognized leaders, and substantial issue differences—and sounded like one, marked as it often was by bitter clashes and, as figure 1.2 shows, a steadily rising level of voter participation which peaked during the crisis of 1812—the first party system might as well be recognized as one.

But affirming reality is only the first step toward explaining it. Once one acknowledges that the first party system was no counterfeit, the successive stages of its often puzzling career still await explanation. Why did a political coalition fresh from its dazzling success in maneuvering the Constitution’s acceptance break up so rapidly in the early 1790s? What was the connection between the gradual U.S. slide into war with Britain and the soaring rise in voter turnout? Perhaps most mysteriously of all, how could the intense partisanship of 1812 evaporate within a mere four years? And what miracle of political alchemy transformed the Jeffersonian Republicans from bitter opponents of Alexander Hamilton’s schemes in support of the “Money Power” to ardent champions of tariffs and a Bank of the United States after 1816, when the Era of Good Feeling and a period of one-party government can be said to have begun?

The search for a solution to all these puzzles, I think, properly begins with an appreciation of the complex and rapidly changing nature of the American upper class of this period. As figure 1.2 suggests, all through the 1790s wealth in the United States remained far more equally distributed than it was a generation later. But while the social pyramid remained comparatively broad and low all through the first American party system, still its upper levels attained considerable height—and it was primarily this upper 10 percent to 15 percent of the population that first created that system and then, after the War of 1812, abruptly ended it.

FIGURE 1.2. Voting Turnout and the Concentration of Wealth in the Nineteenth Century

Sources: Presidential turnout (Burnham): colonial turnouts (Dinkin 1977); wealth data (Williamson and Lindert, 1980).

Note: All data are discrete; lines represent conventional interpolations.

The endless wrangling over the details of Charles Beard’s famous analysis of the Constitutional Convention, for example, should not be allowed to obscure the critical point: that once the bulk of the upper class decided they wanted the Constitution, effective resistance was literally beyond the means of the mostly, though not entirely,60 poor and provincial anti-Federalist opposition. Although, as Main and other recent analysts have observed, a majority of the population in many states probably opposed the new regime, the resources available to the affluent, well-educated, and cosmopolitan merchants, planters, large landowners, financiers, and lawyers who led the campaign for ratification dwarfed those of their opponents.⁶¹ Especially after they made concessions on the Bill of Rights (which the reactionaries at Philadelphia had declined to include), their campaign ran roughshod—the words are carefully chosen—over all opposition and secured the adoption of the Constitution (Main, 1961).

But almost immediately this first hegemonic bloc of virtually all the big investors disintegrated. Backed by a huge interlocking and interrelated directorate of merchants, lawyers, financiers, and certain landowners who dominated a handful of key financial institutions (including Robert Morris and Thomas Willing’s Philadelphia-based Bank of North America, the Bank of New York, and the Massachusetts Bank), Secretary of the Treasury Alexander Hamilton (co-founder of the Bank of New York, who married into one of the families that controlled it) put forward his famous fiscal program.⁶²

Calling for federal government assumption of the foreign debts of the Revolution and Confederation, tariffs, federal assumption of state debts, the issuance of money, public securities, and a Bank of the United States, Hamilton’s program struck directly at the vital interests of many planters. Many of the Southern states had already paid their debts; now they would be taxed to pay others. The Bank was not intended to aid agriculture, only commerce.⁶³ In addition, it soon became apparent that many prominent Federalists had been speculating on a rise in the value of existing securities, betting that Hamilton’s program would pass and provide them with massive capital gains that the rest of the population would be taxed to pay for.

Not surprisingly, therefore, Thomas Jefferson, James Madison, and their planter associates almost immediately began mobilizing. Joining them in due course were a variety of business groups that resented Federalist attempts to limit banking competition by restricting the number of bank charters, which at that time had to be individually approved by the legislature (Hammond, 1957, pp. 146–47). Prominent among these were a bloc of businessmen, financiers, and landowners in New York City that included the Clinton family and Aaron Burr (who eventually organized the Bank of Manhattan to rival the Federalist Bank of New York).

Polarization increased as Hamilton expanded the scope of his tax program. His proposals laid only modest duties on goods imported by his merchant constituency. Instead, Hamilton wanted to raise much of the money necessary to pay off the government debt by taxes on slaves (owned by the planters) and whiskey produced by subsistence farmers in the West.

A widespread “tax revolt” began. Jefferson and other members of George Washington’s cabinet without strong ties to the “Money Power” (as opponents dubbed the Federalist complex) resigned one by one. Aided by Washington’s forcible suppression of the pathetic Whiskey Rebellion and later Federalist attacks on important emigrant leaders of the opposition, Jefferson’s Republican Party gathered strength.

Had conflict between the Federalists and Republicans been limited to Hamilton’s fiscal program, it is possible that the Federalists might have survived in power. Very shortly, however, the Federalist investors began to divide sharply over foreign policy.

Ever since the Revolution, relations between Britain and the United States had been poor. British regulations restricted U.S. trade with Britain and its dependencies; ships of the British navy frequently seized U.S. vessels, and British forts remained in the American Northwest, where they were frequently accused of stirring up the Indians to attack.64

Planter spokesmen such as Edmund Randolph, who succeeded Jefferson as secretary of state, favored harsh measures to deal with the British. Federalist financiers and merchants, dependent on Britain for trade and, more importantly, credit, strongly opposed this. After a series of intrigues involving both Britain and France, New York merchant John Jay negotiated a treaty with the British. Because it sacrificed almost all other American interests, including that of the planters (whose old debts to the British the treaty reconfirmed) to the merchants’ desire for good relations with Britain, the treaty became very controversial.

Though the Federalists weathered the storm over the Jay Treaty, pro-French elements in the mercantile community, such as Philadelphia merchant banker Stephen Girard (whose attorney, Alexander J. Dallas, was closely associated with Albert Gallatin, Jefferson’s chief financial spokesman),65 began coming over to the party of “agrarian democracy.”

Though this paper cannot afford to trace each quarrel in detail, subsequent battles between the Republicans and the Federalists virtually all reflect disputes along these same two dimensions of financial/fiscal policy and foreign relations.

The difference between earlier and later outcomes, which the Jeffersonians largely controlled, however, reflects the increasing strength of the anti-British party. Since the Revolution, American trade had been shifting away from Britain to other parts of Europe, the West Indies, Russia, and the Orient.⁶⁶ Over time, this significantly reduced the number of merchants dependent on the British. Jefferson’s election as president in 1800, for example, hinged importantly on prodigious organizing efforts by the Bank of Manhattan (Hammond, 1957, p. 160). During the Napoleonic Wars pro-French merchants such as Robert Smith of Baltimore (Jefferson’s secretary of the navy) and the Crowninshield and Story families of Salem, Massachusetts, supported Jefferson (Burch, 1981a, pp. 86, 90, and 110). No less importantly, expansion into the West created a new class of merchants, such as legendary fur trader John Jacob Astor (a close friend and supporter of Gallatin, after Gallatin became Jefferson’s secretary of the treasury) with a strong interest in ejecting British rivals from the West. Many planters and large landowners who were openly planning to seize Florida from Spain, and drive the British from both the Midwest and Canada, also supported this goal.⁶⁷

The mushrooming sentiment for war in the West alarmed the still largely proBritish elites of New England. With the pro-war party growing vigorously, increasingly frantic Federalists coalesced behind a peace-oriented ex-Republican from New York City. The vigorous campaign and high stakes brought out the enormous turnout that figure 1.2 shows.⁶⁸

With the end of the war, and the temporary removal of the “British question” from the public agenda, the mounting elite strength within the party of “agrarian equality” made it perfectly natural that the Republicans should adopt “Federalist” policy measures.

Back in his first term, Jefferson had deliberately encouraged pro-French merchants like Salem’s Joseph Story (whom Jefferson appointed to the Supreme Court) to found Republican banks.⁶⁹ These disproportionately Republican state banks had flourished in the decade before the charter of the First (Federalist) Bank of the United States came up for revision in 1811. Joined by Girard (who wanted to set up his own national bank), Astor, and others, these state banks blocked renewal of the first Bank’s charter.70 But subsequently Astor, Girard, and other businessmen purchased large amounts of government bonds to help finance the War of 1812. (It was, after all, their war.) When the bonds began dropping in value after the war, these major investors moved at once to secure their investments by establishing a bank that would support a market for the bonds.⁷¹

Having taken over the centerpiece of the old Federalist program, the Republicans also realized another Hamiltonian goal: a protective tariff. As soon as the war ended, British industrialists moved to recapture their former position in the American market. Hoping to destroy the manufacturing capacity that the war and British blockade had stimulated in the United States, the British began dumping goods in American ports. Virtually all sectors of the business community rose in angry protest. Even Southerners, who may have harbored hopes for industrialization themselves (at this moment when cotton’s commercial success was still not assured), backed tariffs.⁷² With almost no major issues now dividing American elites, party competition (and voting turnout) virtually disappeared. President James Monroe traveled to Boston and made gestures of reconciliation toward Federalist elites, who had only recently discussed secession at the Hartford Convention in 1814. An Era of Good Feeling commenced. Quite like Mexican elites a hundred years later, American investors for a time enjoyed the luxury of ruling an essentially one-party state under the banner of revolutionary democracy.

B. The Jacksonian Party System

As though to underscore the point that elite competition, rather then swelling mass political sentiments, would provide the driving force in nineteenth-century American politics, the Era of Good Feeling had just barely taken hold when the devastating depression of 1819 burst upon the scene. Though reliable statistics are lacking, there is little doubt that what could be identified as America’s first modern business depression wreaked widespread havoc. Though the predominantly agricultural character of the economy perhaps mitigated the worst consequences, unemployment soared, perhaps topping 20 percent in some cities. Both business and farm bankruptcies soared, and demand for relief triggered riots and demonstrations all over the country.⁷³

All the tumult, however, created barely a ripple in the placid waters of American national politics. While few members of the American upper class probably relished the Era of Good Feeling quite as much as President Monroe (who, as long as he sat in the White House, enjoyed loans from Astor at concessionary rates),74 none even bothered to contest the president’s reelection in 1820. Instead they organized at the local level to oppose public relief and attempted to hold down private relief disbursements—when they were made at all—to well under 1 percent of the gross national product (GNP).

Cumulative economic changes during the 1820s, however, eventually accomplished what all the human misery of the panic of 1819 could not. The headlong expansion of the American national economy began redividing and reordering the business community. Whole new blocs of investors came into being. In this early stage of industrialization, major infrastructural projects could still be mounted by states and localities. Accordingly many big investors concentrated their efforts there. Turnout in local races often rose, party machinery developed, and any number of campaign techniques entered increasingly into general use.⁷⁵

Over time, however, the process of capitalist development posed issues that could only be settled at the national level. For example, industrialization stimulated tariff agitation all through the 1820s. Organizing nationwide, industrialists perfected the technique (which the parties later took over) of turning out their work force for mass meetings around demands that preeminently benefited someone else.⁷⁶ They also subsidized scholars to promote protectionism (including Friedrich List, whose Nationalökonomie was perhaps the one foreign import appreciated by the Pennsylvania iron manufacturers who arranged his long visit here).

As revenues from tariffs piled up, what should be done with the money naturally became an issue. Several different proposals found support. Some suggested that all the money be applied to the national debt, others proposed that it be returned to the states, while Henry Clay put forward his famous program of internal improvements. A generally rising level of agricultural prices also stimulated demand for Western lands. Since the federal government controlled these, how they should be developed automatically became a national issue.

Perhaps the most important issues which came inevitably onto the political agenda during this period concerned the Bank of the United States and the question of territorial expansion. Both issues could be resolved only at the national level, and both attracted major blocs of investors. The basic dimensions of the Bank question were brilliantly spelled out a generation ago by Bray Hammond, and there is little to add to his treatment.⁷⁷ Throughout the 1820s, the Bank of the United States restrained (rival) state and private banks from circulating un or thinly backed bank notes by its ability to collect and then present large amounts of notes for redemption into hard money. With state banks proliferating at a prodigious rate, a head-on collision between the regulator and the involuntarily regulated became inevitable. Because Philadelphia capitalists dominated the Bank, New York and other city bankers and capitalists took the lead in the campaign to destroy it. Though Hammond did not mention it, it is possible that railroad rivalries between Philadelphia, Baltimore, New York, and other cities also played a role.78

Since several well-known Jacksonian scholars have flatly asserted the contrary, it is probably worth observing that the anti-Bank forces went about their business about as straightforwardly as any group ever has in American politics. Andrew Jackson’s cabinet and advisers included many state bankers, who did not conceal their desire to smash the Bank (notably Attorney General Roger Taney, who not only served as a director of a state bank whose president hated the Bank, but was also a part-time legal counsel to the Baltimore and Ohio Railroad, which stood to gain from the injury the Bank’s destruction would inflict on Philadelphia’s capacity to raise railroad finances). The ranks of the Albany Regency, the political machine perfected by Martin Van Buren, a close associate of Jackson, included many important bankers, from both New York City and upstate.⁷⁹

Subsequent battles over banking and finance legislation followed a similar pattern. The Loco Focos, whom two generations of historians have treated as virtual Jacobins because of their agitation against financiers, have recently been demonstrated to have won support from literally hundreds of New York City bankers and merchants, whose plans for “free banking” and other reforms could plausibly be passed off as “antimonopoly” measures.⁸⁰ Van Buren’s controversial plan for an Independent Treasury arose in response to demands from these quarters. No less than Churchill Cambreleng, a longtime associate of John Jacob Astor, sometime railroad official and founding director of the Farmers Loan and Trust Co. (of New York City), pushed the plan on Van Buren, whose former law partner happened also to be a major (New York City) bank director.⁸¹

The other outstanding national issue during this period concerned the rate and timing of territorial expansion into what almost everyone referred to as the “inland empire.” For decades many important American investors had dreamed of incorporating all or parts of Mexico and the Far West (including Oregon) and Canada into the United States. In the 1820s, Monroe, John Quincy Adams, Clay, and other business leaders encouraged Latin American countries to rebel, believing that this would remove European influence from the hemisphere and open these countries to U.S. trade.

As transportation improved, and profits from Southern cotton production soared, the question of territorial aggrandizement came increasingly to the fore. By 1828 proposals for the annexation of Texas (where many American businessmen from Boston, New York, Philadelphia, and the South were heavily invested, and where Sam Houston migrated after helping to run Jackson’s campaign) had triggered a growing national debate. Involved were many issues—the balance between free and slave states within the Union, the risks of war with Mexico and Britain, a preference by some blocs in the United States for Oregon or California or Canada instead, etc.

Space limitations make it impossible to do more than trace the barest outlines of the ensuing controversies. But the broad outlines of the process which revived national party competition are clear enough.

Throughout the 1830s, issues involving the Bank, tariffs, and expansion became increasingly urgent. In rough proportion to the rising stakes followed major investor interest. Copying the political methods for recruiting turnout pioneered by the Albany Regency, more and more blocs of investors joined battle. A process of polarization ensued. With controversy increasing over the tariff and nullifications, Jackson destroyed the Bank. Almost immediately party alignments began to crystallize. Party cohesion in Congress leaped up and rival party identities became increasingly firm.82

The continuation of Jackson’s bank policies under Van Buren sealed this process. The Democrats tended to oppose a strong federal role on everything except expansion: they opposed the tariff (after Jackson), the Bank, and extensive federal expenditures for anything except harbors. They favored vigorous expansion, especially toward Texas and Mexico (where conflict with Britain was less likely) and, of course, opposed efforts to regulate slavery. This program directly advanced the interests of their core constituencies: port city (especially New York City) bankers who financed trade and depended on British financing; many merchants (who controlled many of the largest fortunes in the country in this period); many railroads (which favored free trade and wished to import iron rails from Britain, and whose most successful units, such as Democrat Erastus Corning’s New York Central Railroad, opposed federal aid to other transportation companies); expansion-minded planters (such as Robert Walker, treasury secretary under James Polk, whose heavy investments in Texas land and cotton made him the natural leader of the pro-Mexican War faction in the Democratic Party) [Burch, 1981a, p. 190]; plus farmers who favored trade agreements with European countries to permit their grain to enter those markets.

By contrast the Whigs emerged quickly as the party championing a strong federal role. While the rapid expansion of railroads gradually limited enthusiasm for tariffs even among the Whigs (since in the short run it reduced the capital going into manufacturing and created positive incentives to expand trade), the party did always stand for some protection; it also favored the Bank (until the spread of state banks rendered the issue moot) and more internal improvements and steamship subsidies. Many Whigs also tended to be less liberal in the terms they favored for the sale of public land. Though Whigs also favored expansion, they went about it more cautiously. Unlike the Democrats, they did not vigorously advance the Monroe Doctrine in this period, and when offered the chance most of the party tried to compromise over both Texas and Oregon. Their elite constituencies, of course, differed from the Democrats’: the relatively small (except for textiles and iron) manufacturers; a substantial number of merchants and bankers oriented toward the home market or invested in manufacturing; many railroads, including the Pennsylvania Railroad (Sobel, 1977, p. 39) (which often did not support a tariff); many (but far from all) land speculators; some planters whose interests and identities have been extensively debated (Frescia, 1982, pp. 109 ff.), but who certainly included champions of the Bank; and overseas traders and fishermen, whose desire for California harbors led them to downgrade Texas, the top imperial priority of many planters, and who vigorously promoted Whig overtures to Japan and China.

But while merchants, planters, railroad men, and other major investors often found their investments in politics paid off handsomely, mass voters rarely did.

Bankruptcy legislation that reduced the chances that heavily indebted merchants and industrialists would languish in prison for nonpayment of debts undoubtedly aided ordinary Americans. And a more substantial part of the population doubtless derived some profit from all the canals, turnpikes, public schools, and other infrastructures built at least partly at their expense during this period. But the increasingly meaningless ritual “Repulicanism” that marked festivals and public occasions in this period marked the limits of official concern for the vital material interests of the bulk of society.

For example, though precise figures do not exist, the party system that witnessed the sharpest overall increase in both wealth and income inequality in American history (figure 1.2) probably also saw the largest proportion of ordinary people left to starve, beg, or steal during severe economic downturns. Virtually without exception, proposals for laws to shorten the length of the working day (to a mere ten hours) fell on deaf ears. Neither agricultural wage earners nor owner-occupied small farms received any significant assistance from public policy. Disability compensation (which would have benefited farmers no less than workers) or unemployment insurance was always rebuffed. Minimum-wage legislation was debated but never passed. Jackson himself became the first U.S. president to send troops to break a strike, while all levels of government largely declined to interfere with employers’ “rights” to dismiss, spy upon, or blacklist any worker they chose. Rights for women (who had been disenfranchised in all states since the turn of the century)83 were a cause of an unpopular minority, while the fortunes of blacks in this period need no comment.⁸⁴

The rising voter turnout that marked the period is perhaps better analyzed as an effect of the high elite investment in new, cheaper technology of voter mobilization and as a sign of elite confidence that additional unorganized voters were incapable of posing severe threats than in terms of increases in the abilities of ordinary people to control the state. Though the unit costs of the means of popular mobilization were probably lower in this period than in any since, entry barriers remained prohibitively high, especially at the national level. Then, as today, most voters could not afford to take extensive time off from work to campaign and agitate. In addition, most lacked more than a rudimentary education; somewhere between 10 percent and 20 percent were illiterate, while many more were not fluent in English. While formal barriers to suffrage mostly fell away during this period, financial barriers did not—indeed, overall they doubtless increased. In a subtle touch insufficiently appreciated by later analysts, members of Congress received no regular salaries until 1856. While printing costs fell and newspapers were probably easier to start than ever since, the incomes of ordinary people were not sufficient to sustain papers reflecting their interests: out of more than 1,000 papers the Census estimated existed in America in the 1830s, not more than perhaps 50 were prolabor—and most of these folded in the panic of 1837.⁸⁵

Even more important than these “passive” entry barriers were the active ones. While political machines of course had to deliver some benefits to voters, all the relief, Christmas turkeys, citizenship papers, and whatever else later analysts have celebrated them for probably amounted to less than 1 percent of GNP. In addition, the growth of the political machine destroyed all chances ordinary citizens had for exercising power. As social organizations, political machines were critically dependent on money—enormous streams of it. Without the cash, reason, discussion, or persuasion availed one nothing. Machines also made it easy to isolate segments of the electorate and to play endless games to divide and rule.⁸⁶

The wealthy dominated most other voluntary organizations as well. Conspicuous in this regard were the churches. Gramsci once observed that in America there were many sects but only two parties (Gramsci, 1971, pp. 20–21). But, while entry barriers for churches were lower than for the major parties, the major denominations offered little beyond alms to the lower classes—indeed, they became the chief source of movements to remake the American working class from above, in the guise of “benevolence.” In a seminal study, Paul Johnson has documented the overwhelming importance of manufacturers in launching the great revivals and temperance crusades of the 1830s—the prototype for the reform movements that convulsed middle-class life in this period (Johnson, 1979). Similarly, other studies have shown the impact of changing social class in nurturing the schisms and breakaway groups that have proliferated ever since (Singleton, 1975).

The only forms of social organization that might have afforded the work force an independent capacity to act in politics were denied them almost completely. While business elites almost always protected (and often encouraged) immigrant churches, they spared no expense to destroy unions—to such an extent that a smaller percentage of workers belonged to unions at the end of the period than at its beginning (Lebergott, 1972, p. 220). Though I have not been able to find any systematic studies of entry barriers within farm organizations in this period, there is little doubt that the network of “scientific” farm groups that sprang up after 1820 was controlled by the larger farmers, whose businesses were the only ones large enough to justify the expense of dues, travel, and meetings, and occasional subsidies for organizational experiments.87 One might therefore suspect that in the case of single-family farmers, unlike that of labor, the adverse microeconomics of voter control, rather than more overt repression, defeated agrarian democracy.

C. The Civil War Party System

For years the epic highlight of many survey sources in American history and politics has been a detailed analysis of the ever-widening gulf that grew between the North and South in the years before the Civil War. By now the stars of this drama are so well known they scarcely need any introduction: tariff-seeking manufacturers in the North; Northern farmers and laborers who feared competition from slavery and wanted access to free land either for themselves or their children or because they hoped Western settlement would pull up wages in the East; and Southern planters who sharply opposed tariffs and were increasingly convinced that slavery had to expand or die.⁸⁸

In recent years, however, this classic formulation of the Progressive interpretation of history has come under sharp attack. The importance attached to the tariff, for example, has been sharply questioned. In the early 1960s, several New Economic Historians argued that the South could actually have benefited from rises in tariffs. While this result now looks even more flimsy than some of the early quantitative work on railroads and the economics of slavery, the best recent assessments of how much the South lost from tariffs make it difficult to believe that the sums were worth secession in 1861.89

In addition, several studies have shown that the cotton textile industry, one of the largest and best-organized manufacturing interest groups, and one which presumably would have benefited from the Civil War tariffs, staunchly opposed Abraham Lincoln in 1860 out of anxiety for its supply of cotton (Foner, 1941; O’Connor, 1968).

Depending on their exact form, parts of the land argument also are shaky. Cotton planters worried about running out of land could always have developed some of the fields they later planted within the South after the Civil War—an area twice as great as in 1860. Older arguments that cotton destroyed the soil and thereby forced expansion are simply wrong: planters headed West to take advantage of much higher yields, not because their own lands were wrecked. Nor is it obvious that increasing cotton (or wheat) acreage would have helped farmers as a group in either the North or the South. As Lee and Passell have observed, assuming that demand did not change, prices of crops would drop, lowering an individual farmer’s revenues from the same output (Lee and Passell, 1979, pp. 212–13).

Not surprisingly, therefore, recent treatments of the political economy of the Civil War increasingly resemble movies about the Titanic in which the iceberg melts away before it can come on camera. Several highly sophisticated analysts have simply thrown up their hands, while others have resorted to increasingly improbable devices, including suggestions that thousands of Southern planters were literally paranoid.⁹⁰

From the perspective of the investment theory of parties, however, the giant forces that first polarized the nation and then broke it apart are easily identified.

Consider first the situation of major Southern investors. While Lee, Passell, and other New Economic Historians have greatly advanced the argument by bringing out more clearly the main economic issues in the dispute over expansion of slavery into the territories, they slip past the historically decisive point. Within any likely range of price declines, it simply does not matter if opening up new cotton lands might have slightly reduced the world price for cotton, or lowered the productivity of cotton acreage in general. These are aggregate effects spread out among all cotton growers. As the investment theory of parties suggests, what usually matters most in historical change is the position of the major investors. And here the situation is clear.

As the earlier planter invasions of Alabama, Louisiana, Texas, and Missouri illustrated, major cotton growers were highly mobile. They (or their agents and sons) moved rapidly to take advantages of any rich growing areas that opened up. Walling off these slaveholders from the territories by prohibiting slavery there would have reduced the rate of return on their investments, almost certainly to a significant degree. That less mobile or smaller groups would benefit if the major investors sacrificed profits and stayed home is irrelevant. One might as well expect major oil companies not to pump oil for the sake of the independents, or affluent farmers not to apply machinery and fertilizer, to increase everyone else’s returns.

It could be replied that the territories opening up in the 1850s scarcely compared to Texas and Louisiana, and so could hardly have seemed widely attractive. But many reasons exist for thinking this was not the case. On and off the Senate floor in the period just before the Civil War, planters repeatedly demanded the right normally accorded capital in America to seek the highest possible rate of return by going anywhere it pleased.91 In addition, both their words and some actions suggest that leading Southerners were making or projecting investments in southern California (then a very shaky free state), New Mexico, and perhaps Nevada—all areas whose status as slave or free remained unsettled in the 1850s.⁹²

It is also doubtful if the more recent literature has been sufficiently sensitive to the impact the admission of increasing numbers of free states to the Union was making on the Southern position within the federal government. Many newer accounts pause only to nod at the traditional arguments about Southern fears of permanent minority status, especially in the Senate.

But this skepticism is unwarranted. One of the few real battles in the Era of Good Feeling came over the admission of Missouri into the Union—and the solution to the problem, involving the carefully paired admission of Missouri as a slave state and Maine as a free state, underscored the importance accorded regional balance.

Similarly, the annexation of Texas was delayed for years while debates raged over its impact on sectional power. Considering the heat these early fights generated, it is difficult to see why anyone would now doubt that the new conquests of the 1840s would inevitably raise the issue to a new level of interest, or that as Southerners watched California, Oregon, and other states enter the Union as free states, they would become increasingly fearful. Especially after the Kansas-Nebraska controversy undermined the painfully hammered-out Compromise of 1850, it is easy to see why Southerners believed that the loss of Kansas not only meant abandoning all hope for additional slave states in the Southwest but also threatened the status of vulnerable slave states like Missouri.93

A succession of Caribbean adventures in the 1850s showed just how alarmed Southern elites were becoming, as well as how the issue of control of the government was now transforming expansion from a unifying theme in the 1840s to a cause of breakdown in the 1850s. Planters and businessmen from New Orleans, a major center of agitation during the Texas controversy, launched an abortive attack on Cuba in 1851. Several groups of investors, led by one William Walker, organized ventures aimed at other parts of Central America in the mid-1850s.⁹⁴

To dismiss these cases as essentially actions of private businessmen misses all the vital points. Walker’s actions were widely hailed in the South. Because they promised control of territory that could later be brought into the United States, these ventures found wide support not only there, but in parts of the Southern-dominated Buchanan administration. Finally, as it became obvious that Northern Whigs and perhaps the Democrats were not about to support an attack on Cuba that the British (major investors in many Northern enterprises and the dominant power in the world economy) opposed, the Southern champions of expansion who had once opposed John C. Calhoun’s increasingly strident attacks on the North now had no reason not to join him.⁹⁵

Any remaining doubts about why Southerners became increasingly, and rationally, anxious should be stilled when the situation of major Northern investors in the later stages of the Jacksonian Party System is clarified.

As the New Economic History analysis misspecified the problems affecting the South, so it has failed to focus sharply enough on the critical power blocs in the North. That opening more lands along the Northern frontier (which at that time included parts of Indiana, Ohio, Michigan, and Illinois, as well as Wisconsin, Iowa, and Minnesota)⁹⁶ might lead to lower world prices for wheat or, perhaps, corn scarcely mattered to the investors chiefly responsible for promoting growth in these regions. While such considerations might eventually trouble farmers (though not if they believed that demand for their product was elastic or they sought a place for their children), and workers (who probably would still have preferred farms to factories), as well as later historians and social scientists convinced that it was these groups that provided the backbone of the Free Soil parties, major investors were certainly not trying to get rich by buying 160-acre farms.

Their efforts, by contrast, were directed at securing capital gains, for which “development” was essential. Most important, and fatefully, however, they were investing in railroads. Now, had they been differently circumstanced, it is exceedingly doubtful that the Eastern merchants, financiers, industrialists, and lawyers (such as the Forbes family of Boston, or the legendary “Associates” of the same city) who dominated major American railroads would have scrupled at carrying slave-produced cotton any more than their grandfathers had worried as their ships carried slaves between Africa and the United States.

In the world of the 1850s, however, cotton expansion could at best have helped a tiny minority of these major investors. Railroad growth and profits in states like Indiana, Ohio, Illinois, and Wisconsin depended on the expansion of family farms in corn, wheat, and related products (plus, of course, such infant or locally based industries as could survive). Even if the railroads hoped to postpone conflict, there was no chance the settlers they were feverishly recruiting (who certainly feared slave labor) would sit still.

The rapidly developing discussions about a transcontinental railroad lent additional urgency to the debate over national development. A sugarplum that danced in the visions of many major investment groups in both the North and the South in the 1850s, this venture absolutely required government assistance if it were to be feasible. And here was an unpleasant dilemma. Given the enormous expense, it was initially possible to build only one. No one had to be a New Economic Historian to see that the location of that one line would thereby become a major determinant of the whole course of national development, and thereby the balance of power between North and South. Not surprisingly, therefore, investors proposing to begin construction from various cites—Chicago, St. Louis, New Orleans—maneuvered all through the decade, and, no less unsurprisingly, essentially checkmated each other in the 1850s.97

The stupendous scale of railroads compared to all other enterprises of the period is difficult to imagine today. America’s first true “big business” dwarfed every other institution in society in the 1850s. (One recent analysis has observed, for example, that as late as the early 1880s Carnegie Steel, a leading manufacturing corporation, was still capitalized at only $5 million, while at least 41 railroads had capital values of $15 million or more [Burch, 1981b, p. 16].)

As a consequence, the Western-oriented railroads would by themselves probably have sufficed to force the issue of North against South. Once the issue began to be joined, however, other investor interests could hardly afford to sit back passively.

Even textile manufacturers for example, whose attachment to “cotton” as opposed to “conscience” Whiggery is correctly observed by the studies cited earlier, probably could not afford to let the South expand at the pace Southerners wanted. If textile magnates like the Lawrences of Boston tried to prevent war at the last moment by organizing the Constitutional Union Party in the 1860 election, they still had to make certain that Southern expansion into Cuba or the West did not eventually render their tariff-protected manufacturing investments as worthless as their heavy contributions to William Henry Harrison (who died in office holding an interest-free loan from Abbot Lawrence before he could act on either the tariff or the Bank) (Burch, 1981a, p. 218, n. 26).

With partial exceptions among textile manufacturers, merchants, and financiers in New York, Cincinnati, and other commercial centers who were interested in trade with the South, leading figures in every sector of the Northern business community played some role in the abolitionist campaign of the 1850s, and indeed statistical studies have demonstrated that they were far overrepresented among that campaign’s leaders.98

Illinois Central Railroad attorney (and U.S. Senator) Stephen Douglas, for example, destroyed the Compromise of 1850 by advancing a plan for the settlement of Kansas and Nebraska that was a cover for a transcontinental railroad (Potter, 1976, pp. 145–76). When “bleeding Kansas” began hemorrhaging, textile king Amos Lawrence (who clearly tried to restrain the group to nonviolent efforts) joined many merchants, lawyers, and industrialists to back the network of Kansas Aid Societies that sprang up to funnel men and supplies to Free Soilers. Contributing money, time, and his almost mythic name, Lawrence helped hammer out the plans for a land company that offered shares to literally thousands of clergy in the New England and the mid-Atlantic states and that eventually had large impact on public opinion (Harlow, 1935).

Finally, transcontinental railroad promoter Samuel Ruggles (a New York merchant and leader of the short-lived American Party), William B. Ogden (a major developer of Chicago and agent for many Eastern capitalists), and superlawyer William Seward (a leading abolitionist, and member of a law firm that is today Cravath, Swaine and Moore, which at that time represented Wells Fargo and many other leading Western interests) all helped build the demand for a Northern-based line that eventually achieved expression in the newly formed Republican Party (Russel, 1948, passim; Burch, 1981b, pp. 19–21; Boorstin, 1969).

The Whig Party had largely been built around the twin issues of the Bank and the tariff. A series of booms in the late 1840s and early 1850s, however, undermined the constituency for both these issues and led to the disintegration of the party. Headlong internal commercial expansion and the spread of railroads both reduced pressures for tariffs—in part because they created interests oriented toward the moving (rather than the production) of goods, but also because many railroads wanted to import superior British rails for their own tracks. In addition, the rapid expansion of state and private banks further multiplied the natural enemies of a national bank, while privately developed schemes for guaranteeing bank soundness, such as Boston’s Suffolk system for state-run bank examinations, partially satisfied backers of a “sound” money (Hammond, 1957, Chap. 17).

As the Whigs fragmented, the pieces of the old party looked around for new coalitions. For a few years in the early 1850s, when very high immigration rates created fertile ground for nationalist themes, various factions experimented with all sorts of appeals.

When the panic of 1857 arrived, bringing with it a wave of religious revivals, smashed unions, and, as always, thousands of starving unemployed left without relief by “their” political parties (Rezeck, 1942), the Jacksonian System was close to collapse. Prompted by Southerners within the party and by some New York businessmen fearful for their city’s trade with the South, President James Buchanan vetoed homestead laws and steamship subsidies. He also lowered tariffs and halted all aid to railroads (Polakoff, 1981, p. 23).

Under this dramatic stimulus a new historical bloc now began coming together. While almost none sought war, legions of Northern businessmen grew increasingly impatient with the developing national stalemate. In the early 1850s, railroad titan John Murray Forbes, the leader of the so-called Forbes group of (mostly Western-oriented) railroads, and his lieutenant James Joy, president of the Michigan Central Railroad (in which the Forbes group held a dominant position) had strongly promoted the short-lived Free Soil Party.99 Subsequently, Joy, while working briefly for the Illinois Central (which was then controlled from New York) engaged Abraham Lincoln as an attorney. Lincoln continued to work intermittently for the Illinois line after Joy departed. He did not, however, become the favorite candidate of the railroad, which backed Stephen Douglas in the famous Senate race of 1858.¹⁰⁰

What happened thereafter is complex and, despite all the attention the period has received from historians, not entirely clear in all particulars.

Still hoping to avoid war, many Northern businessmen dramatically increased pressure on the South by fanning abolitionist flames. Emulating earlier business support for the Kansas aid movement, Forbes and other top business figures contributed money to John Brown, the noted abolitionist.101 The Forbes group, which operated a string of Western railroads that eventually grew into the famous Santa Fe line, seems also to have supported Charles Sumner.¹⁰²

As businessmen all over the country began uncoordinated, decentralized searches for a presidential candidate for the 1860 election, the panic of 1857 hit. Some railroads folded. Others, including several controlled by Forbes, and the Illinois Central itself, were hurt badly and barely escaped bankruptcy.

While many details remain obscure, it is clear that these developments enormously strengthened radical sentiments within the business community. Among the directors of the Illinois Central, for example, anti-Lincoln sentiment seems to have abated,¹⁰³ while elsewhere demand for more vigorous action mounted. By the time former Massachusetts Republican Governor Nathaniel Banks had become head of the Illinois Central, Forbes, Joy, and company were all backing Lincoln as the Republican nominee.¹⁰⁴ So were too many other railroad men to mention, including many with ties to the earliest stages of Lincoln’s candidacy (Burch, 1981b, pp. 18–19). Joining them were a host of other major business figures, including Ogden, the leader of the Chicago business community (which stood to profit enormously from Northern transcontinental lines and the newly laid railroad connections to the East rather than South) and an associate of many powerful Eastern railroad interests;¹⁰⁵ Ohio Publisher Henry Cooke (who came bearing campaign contributions from his soon-to-become famous brother in the banking business, Jay); Cooke’s friend, Cincinnati merchant and abolitionist leader Salmon Chase; and Western Union’s Ezra Cornell.¹⁰⁶ Businessmen demanding both banking reform (which was widely blamed for the panic) and tariffs, notably Pennsylvania iron manufacturers led by Simon Cameron, all climbed aboard.¹⁰⁷

As the Southern states seceded and the Civil War began, the legislative logjam gradually broke up. Tariffs soared, railroad grants proliferated, the Homestead Act sailed through, national banking legislation that chartered a whole new crop of pro-union financiers passed, and Jay Cooke and other financiers did a splendid business in government bonds.¹⁰⁸

If the investment theory of political parties accounts well for the timing and policies of the hegemonic bloc that dominated the Civil War System, it also makes it very clear why that system’s unity could not last and why a return to two-party competition was inevitable. Though space limitations make it impossible to offer more than the briefest outline, this process is so much less well understood than the dramatic events of the late 1850s that it merits brief notice.

A close look at how commerce and finance functioned within the hegemonic bloc of the system provides the key to virtually all later developments. Though the Union League clubs that quickly formed in most major cities in the North certainly enrolled a majority of major investors during the war, a substantial number of bankers and merchants remained opposed to the new Republican bloc. The core of this Democratic opposition consisted mostly of merchants and financiers with strong commercial ties to the South or overriding commitments to free trade (such as New York banker August Belmont). Also in this group were a handful of manufacturers who, because they dominated world markets for their products, favored free trade (such as Cyrus McCormick) and a few railroads (including the New York Central) with obvious interests in the return of Southern commerce.109

While Union defeats in the early part of the war created trying times for the Republicans, as long as the war lasted this rival bloc could offer only limited opposition. As soon as hostilities ended, however, it posed a more formidable threat.

For the end of the war immediately posed the question of what policy to pursue toward the South. This automatically raised the possibility of an alliance between the “War Democrats” and the elements of the Republican bloc that had a long-term interest in the revival of the cotton trade and New York City’s traditional commercial ties, a lower tariff rate, and a speedy return to the gold standard abandoned at the start of the war.

Though this essay cannot trace the process in detail, precisely this alliance emerged in time to revive the Democratic Party. Backed by a massive coalition of bankers, merchants, and some (not all) important railroad men, President Andrew Johnson treated the South rather like another group of similarly connected business leaders treated Germany 80 years later, and began reinstalling the old leadership of the defeated country into power. He also pursued a highly conservative monetary policy designed to get the United States quickly back on gold, and laid plans to cut tariffs (Nugent, 1967; Coben, 1959).

All of these proposals generated powerful opposition. The Reconstruction, tariff, and monetary policies were sharply opposed by many industrialists, especially those in Pennsylvania and the Midwest, who complained bitterly about tariff cuts and deflation; some railroads, which did not want to have to pay off newly issued bonds in sound money; and many Republicans of all stripes whose overriding priority was the creation of a viable Republican Party in the South to secure the fruits of the Civil War. Johnson had to be rescued by superlawyer William Everts, attorney for the Astors and the New York Central, and barely escaped impeachment (Nugent, 1967; Coben, 1959; Burch, 1981a, pp. 26–32).

Over time the Republican bloc tended to melt away in a complicated and confusing pattern. “Liberal Republicans” pressed demands for tariff and civil service reform (which almost always began with the Customs House, the center of both party organizations and tariff abuses). Led by Samuel Tilden, a New York bank attorney with the closest possible ties to the big banks and many railroads, the Democrats reorganized.110 Though a complex bargain between the Pennsylvania and several other big railroads, along with the more familiar agreement to end the occupation of the South, deprived Tilden of the Presidency in 1876, polarization between industry and finance continued.¹¹¹ In Boston, bankers like Henry Lee Higginson joined John Murray Forbes, and many merchants and attorneys such as Moorfield Storey, and split loudly from the GOP. Similar events occurred in New York. Sometimes referred to as Mugwumps, these groups pushed hard for lower tariffs, maintenance of the gold standard, civil service reform, and a foreign policy that limited American aggressiveness in the interest of close relations with Great Britain (the final source of credit for many in these groups).¹¹²

A substantial number of railroads fell in line, either because the financiers were coming to control them or because the program attracted them. Throughout most of this period the New York Central and the Democratic machine that was closely associated with it continued to pour stupendous resources into efforts to mobilize high turnouts.¹¹³

In 1884 the banks and their allies won with their favorite candidate, Grover Cleveland. By then the seesaw pattern of major party competition that characterized the rest of the system was essentially set. Industrialists (who often favored soft or “softer” money than financiers, though never free coinage of silver or unlimited issues of greenbacks); some railroad magnates (who sometimes backed tariffs for special reasons); many merchants; and (mostly inland and small) bankers opposed the Democrats on the traditional GOP platform of high tariffs, although a few major exporters sometimes were willing to waive (someone else’s) specific duties for very carefully circumscribed “reciprocity” treaties that would get their own goods into another country. They also expressed a willingness to subsidize the merchant marine (which the Democrats opposed as contrary to free trade). In a portent of things to come, the Republicans became increasingly strident in their calls for a naval build-up and foreign expansion in the Caribbean. They also harshly criticized the Democrats for their friendship with the British (Schirmer, 1972, Chaps. 1–3; Eiteman, 1930).

Neither party made any serious appeal to workers. Both watched impassively while the panic of 1873 destroyed the unionization drives of the late 1860s, which had enrolled 2.4 percent of the total work force by 1869 (Lebergott, 1972, p. 220). As related in more detail below, both parties also favored all necessary force to put down the strikes and riots that soared after the onset of early 1870s depression. Both opposed virtually all relief during the Great Depression. They both also exalted the role of the judiciary in checking relief measures passed by occasionally errant legislatures.114

The parties also ignored all but affluent farmers. Bankers and rail-roadmen typically dominated the newly created Department of Agriculture regardless of which party held power. Both parties also greeted farmers, clamoring for regulation of railroads, or much larger increases in the money supply than the industrialists would stand for, with proposals for increasing exports (Crapol and Schonberger, 1972) and, as the ethnocultural analysts remind us, with conservative religious appeals.¹¹⁵

D. The System of 1896

From the standpoint of the investment theory of political parties, the System of ’96 is perhaps more satisfactorily treated in recent literature than any other U.S. party system. Lawrence Goodwyn and Michael Schwartz, for example, have written excellent studies of the emergence of organized protest among Southern and Western farmers in the 1880s.¹¹⁶ While some mystery still surrounds the extent and precise nature of farm grievances in this period, these works demolish any lingering impression that farm protest was somehow “irrational.” They also vividly convey the agonizing difficulties that confront any mass movement that seeks to transform ordinary voters into major political investors. A number of authors, of whom David Montgomery (1979) and Jeremy Brecher (1972) are perhaps the most notable, have also extensively analyzed the savage repression accorded organized labor after 1877, when the great railway strike and related upheavals heralded the arrival of a new and extraordinarily fierce stage of class conflict in American life. And Walter Dean Burnham’s careful analysis of the striking drop in voter turnout that began around 1896 and his discussion of the System of ’96 have explored the most important political efforts by industrializing business elites to insulate themselves from popular reaction at this time.¹¹⁷

Because this literature states the general problems so well, and because I hope shortly to publish a much longer analysis of the System of ’96, this sketch will develop only a few major themes.¹¹⁸

It is convenient to begin by taking a closer look at the controversies engendered by Burnham’s discussion of turnout decline during this period. At first glance, it is surprising that anyone would doubt that the sharp decline in turnout was related to industrialization. For as Montgomery and others have stressed, throughout the period industrial conflicts rose sharply. They burst forth in peaks of mass violence several times in the 1880s, in the Great Depression of the 1890s, and then again during World War I, when a stratospheric strike rate and widespread union agitation brought on the temporary destruction of most of organized labor through the combined effects of the great Red Scare, the Palmer raids, extensive deployment of federal troops, and something like civil war in parts of Pennsylvania affected by the great steel strike.119 That these processes, not to mention the spread of Taylorism and “scientific” management in factories or the widespread destruction of craft unions that marked the period, could proceed in anything remotely resembling a democracy strains credulity.

Still, the Burnham-Converse controversy is well known. For more than a decade now, alternative theories that explain the turnout decline as an artifact of rural vote frauds or institutional changes unrelated to industrialism have been discussed and suggestions seriously voiced that Burnham was somehow a “conspiracy theorist” (Burnham, 1974; Converse, 1972 and 1974; Rusk, 1970 and 1974).

Rather than review the debates in detail in this paper, it makes sense to test the global hypotheses. If Burnham rather than Converse or Rusk is correct, turnout decline after 1896 should be proportional to the spread of industrialism within various states (outside the South).¹²⁰

Now, this is a straightforward proposition to test. Measuring turnout decline by the drop in turnout between the 1890s and mid-1920s, and industrializaton by the growth of manufacturing value added per capita between 1880 and 1929, let us test for a relationship between vote loss and industrial growth. Figure 1.3 shows the remarkable result: save for three states with perhaps 3 percent of the population, industrialization and turnout decline stand in an almost linear relationship.¹²¹

A recent analysis of the spread of the Australian ballot after the late 1880s concluded that the “reform” was deliberately designed to weaken third parties like the Populists (Argersinger, 1980). Further evidence that the turnout decline of this period was no accident is visible in table 1.1, which summarizes the development of restrictive suffrage among the states from 1789 to 1940. It shows several interesting trends. After 1890 the nineteenth-century trend toward the elimination of the poll tax abruptly reversed. There is also a sharp rise in the number of states imposing other taxes on voters. Residence requirements stiffened, especially at the ward level, though at the state level these had been tightening since the Jacksonian period. Registration requirements proliferated between 1890 and 1912, while educational requirements, almost unknown before the 1890s, became far more common, even in the North.¹²² Most striking of all, however, a complete reversal of attitude took place toward the common mid-nineteenth century practice of allowing aliens who had declared their intent to obtain U.S. citizenship to vote.

FIGURE 1.3. Outside the Southern States (and the Exceptions Noted in the Text), Voting Turnout Decreased in Proportion to the Growth of Manufacturing Within States

Note: Standard errors in parentheses; for sources and other comments, see text.

Once industrial power is accepted as the final cause of the legal changes, extralegal pressures, party efforts to recruit voters, and the simple removal of many issues from politics that all combined to reduce voter turnout during the System of ’96, plenty of other questions remain.123

One of the most urgent is very simple, but seldom asked: how could the rise of manufacturing, a long-term process, possibly account for the sudden emergence of the System of ’96, which required at most a few years?

TABLE 1.1 Number of States with Selected Suffrage Limitations

Sources: This table has been prepared from information supplied by many sources, including various state constitutions and statutes. But most of it comes from four large-scale surveys of state voting provisions: O. H. Fisk’s Stimmrecht und Einzelstaat in den Vereinigten Staaten von Nordamerika (Leipzig: Verlag von Duncker & Humbolt, 1896); The Legislative Reference Bureau of the Rhode Island State Library’s General Constitutional and Statutory Provisions Relative to Suffrage (Providence: Freemen, 1912); Richard Boeckel, Voting and Non-Voting in Elections (Editorial Research Reports, 1928); Council of State Governments, Voting in the United States (Chicago: Council of State Governments, 1940).

All summary efforts like these have problems stemming from minor variants among similar state laws and the occasional loopholes or special qualifications created by states. For example, in 1830 New York had a three-year residence requirement for the “man of color.” Should New York figure in the table as a state with a residence requirement or not? My answer was no, on the grounds that this would be too specific a usage for a category that usually represents a far more universal disability. Similar problems attend some of the other categories, especially “serious crime” and “paupers.” “Serious crime” is a catchall category that varies from state to state. Much state legislation barring the lowest classes from voting (“paupers”) lumps them together with maniacs alcoholics, or other types of “dependents.”

I have attempted to standardize among the sources by checking likely exceptions and cases that stand out as anomalous between them, so the figures here sometimes differ from any particular sources. Where exact details about individual states became important, however, recourse should be had to each source’s notes and the state’s consitution and statutes, for more exceptions exist than are noted here.

It should also be noted that several states’ literacy requirements were waived for the occasional affluent illiterate: i.e., one could buy into the franchise if one could not pass the literacy test. Note: Blank space = no information; — = zero as far as ascertainable.

1. Includes two states in which property owners alone could vote on special tax and debt issues and one state in which they alone could vote on expenditures.

2. The second figure (6) applies only to elections for bond issues.

3. Includes one state in which tax requirement applies for votes on taxation and one in which it is required at state and county levels for votes on council and expenditures.

4. One state required 40 days.

5. Three states required 90 days: two required 6 months; and two required 4 months.

6. Four states required 90 days; six required 6 months; one required a full year.

7. One state required 40 days.

8. Two states required 20 days.

9. Includes 12 states which specifically exclude paupers and 18 which declare their desire to exclude illiterates (not all these had literacy tests).

To contemporaries the decisive factor in the alteration of the party system was obvious. It was the defeat of the Gold Democrats by the Free Silver and Populist forces and the subsequent move by most of the former into the Republican Party.

But while this accounts superbly for the timing of the realignment and certainly explains the intense unity the Republicans displayed in the 1896 campaign, it fails to provide any clues why many of the Gold Democrats became Republicans. We have no hints why some, but not all, of the Gold Democrats returned to the Democratic Party or why financiers who had regularly crossed party lines earlier became permanently enamored of the GOP.

The answer to this question comes only from a close scrutiny of the major investors in both parties. As previously suggested, after the 1870s, controversies over the tariff, gold, and foreign policy found many, almost certainly most, major bankers in the Democratic Party.

Grover Cleveland’s efforts in his first term to lower tariffs, reform the Customs Service, extend civil service, and defuse tensions with Great Britain during the 1888 Venezuelan crisis provided the Gold Democrats’ finest moments. In the 1890s, however, this internationalist drive began to slow down. Cleveland in his second term was only slightly less bellicose toward the British than the Republicans. William C. Whitney and other New York Democrats temporized on the tarif, and industrially oriented figures like Attorney General Richard Olney (a Pullman Co. stockholder who was responsible for Cleveland’s dispatch of troops to break the strike at Pullman) received major appointments (Schirmer, 1972, Chap. 3; Burch, 1981b, pp. 96–103).

What was happening is perfectly obvious but rarely noted. The financiers were investing more and more in American industry. They were beginning to acquire some of the same interests in tariffs, aggressive foreign policies, and export drives against British competitors that the industrialists shared. In addition, their own rising sense of importance tempted them to claim a bigger role in world finance.

The climax of this process was the breathtaking merger movement of 1897–1901. Led by a handful of investment bankers, notably J. P. Morgan (whose law firm retained Cleveland between terms), this wave of mergers placed bankers on the boards of hundreds of corporations. Centralizing the economy as never before, the great merger wave created a series of gigantic new corporations in which the bankers had major influence. The perfect symbol of the new unity between banking and industry that the movement created was the biggest merger of all, United States Steel: Andrew Carnegie, the industrialist, sold out to Morgan, the investment banker.124

Parallel to the industrial merger movement was a massive consolidation of many increasingly shaky (often actually bankrupt) railroads (Kolko, 1965, Chap. 4). Superintended by Morgan and a handful of other bankers, this step essentially ratified the disintegration of the Civil War System’s hegemonic bloc and further consolidated the new unity within the business community.

With manufacturing now playing a new pivotal role in the plans of the major investors in both banks and railroads, a switch of sentiment on the tariff was inevitable.

Though most leaders of these consolidations (like many big manufacturers) continued to press for highly selective “reciprocity” agreements with a few countries that would open particular export markets to goods their more successful corporations produced, their interest in “free trade” abruptly disappeared. They accepted protection in principle, and helped build the GOP around it. The ne plus ultra of this accommodation was probably reached in 1909, when Morgan fine-tuned a tariff bill by telegraph from his yacht (Wiebe, 1962, p. 107).

Other issues of foreign economic policy helped cement the developing unity between industry and finance. The gold standard, formally adopted in 1900 after discussions too complex to trace here, was obviously a foreign economic theme that united this Republican “national capitalist” bloc. So, too, was imperialism, though aggressive imperialists were concentrated in a few sectors: steel and munitions, obviously, some foodstuffs, and textiles, which collided head on with British and German competition in Latin America, the Far East, and elsewhere.125

But while an analysis of the GOP elites accounts perfectly for their behavior during the System of 1896, what explains their ability to carry if off so well, so long? For, after all, a substantial if only occasionally successful second party existed throughout the period. An explanation is required of why this party only rarely challenged the repressive character of the party system that is also consistent with the obvious fact that it remained another party.

The beginning of the answer has already been supplied in the earlier discussion of labor policy and class conflict. Outside of a few crafts, labor unions, socialist or nonsocialist, were victims of unremitting attack all during that period. In most industries they could not even get a toehold. The notion that workers who could not even organize their own industry could control a party structure that was now extended over the entire United States is utterly fantastic. It could be seriously entertained only by analysts who have not systematically examined differences in public policy between government structures with and without labor union participation.

The point can be reinforced by a glance at the state of mass politics in the Democratic Party. Lawrence Goodwyn has brilliantly depicted the organizing efforts of the People’s Party which led up to the 1896 debacle. By comparison with any mass movement before or since, the Populists were incomparably better prepared to contest control of the state apparatus. They were solidly rooted in local organizations. They had their own press, speakers’ bureaus, and festivals. That most of their forces were concentrated in one party provided them with yet another advantage over most groups seeking to influence the government (Goodwyn, 1976, Chap. 12).

But they were easily knocked over in the Democratic Party, not by the business community as a whole but by a single sector. In the mid-1890s silver companies poured resources into the party, hoping to secure government aid. As Goodwyn’s work shows in detail, the farmers and their allies were no match for Anaconda, the Hearst interests (which owned not only newspapers but silver mines), and their allies.¹²⁶ In state after state, the silver companies picked off the Populist Party leaders one by one. The mining companies sealed their triumph by installing an editor of one of their newspapers, William Jennings Bryan, as the party’s nominee (Goodwyn, 1976, Chap. 13). The largest, best-organized, and most cohesive mass political movement in American history could not compete with even a part of the business community.

Since control of the national party was literally beyond the means of the Populists, and labor unions remained weak throughout the period, power within the Democratic Party passed virtually automatically to the only groups that could afford to exercise it: businessmen and affluent farmers.

These were rather more numerous than most references to “Republican business dominance” within the System of 1896 suggest. For most of the party system, they included a still-substantial bloc of investors who remained committed to free trade: Southern planters, of course, but also importers (who were concentrated in port cities); a handful of multinationals without major overseas competitors who wanted lower tariffs, like International Harvester; copper companies, whose American refineries could process foreign ores only if tariff rates were secure; many, though far from all, retailers; mercantile and financial elites who missed the 1890s’ move into industry; some railroads (including the head of the Pennsylvania) and utilities (including the head of New York’s Consolidated Edison); and last, if scarcely least, foreign multinationals, who promoted the party to get their wares through Republican tariff walls.127

Virtually all of these interests shared Republican views on the desirability of bureaucratic reform—reform of civil service, reform of the diplomatic service, reform of municipal government.¹²⁸ They were also as frightened of the mass populace as any Republican. Grasping intuitively the investment theory of political parties’ principle of noncompetition across basic investor interests, they accordingly made few moves to stir the “Great Beast” (as Plato sometimes referred to the citizens of another democracy). Instead, they promoted their own version of Democratic Progressivism, which (along with many Republicans) gradually accepted women’s suffrage and on occasion made a few gestures toward labor (chiefly in regard to disability compensation). When the Republicans split, or when crosscutting issues like the Federal Reserve temporarily disrupted normal politics, this was sometimes enough to win—in an electorate that grew smaller and smaller as a percentage of the potential electorate.

For about a decade after the turn of the century the issue of antitrust did create turbulence in both parties, and especially within the Democratic Party. Here again, however, the main forces at work exhibited only an indirect relationship to mass electoral pressures. As Alfred Chandler has observed, among the most powerful forces operating in favor of antitrust were the thousands of small-town wholesalers and distributors threatened by the growth of forward integration among manufacturers and the spread of major retailing concerns (Chandler, 1980). Other important support for antitrust measures came from the shoe industry, whose numerous firms directly confronted a giant trust, United Shoe Machinery, and from some importing merchants who feared the power of concentrated buyers. Independent oilmen, who proliferated after the new oil discoveries in Texas and elsewhere, also strongly favored vigorous antitrust enforcement.129

While partisan differences were slight, the Democrats tended to come down somewhat more strongly on this issue. Not only were the trusts to be busted headed by predominantly Republican businessmen, but several peculiar features of geography strengthened the party’s commitment as well. In Boston the dense concentration of shoe companies, small savings banks, and merchants created a real basis for a thin “reform” stratum within the business community that helped sustain the heterodox opinions of Oliver Wendell Holmes, Jr. and Louis Brandeis. In the largely Democratic South and West, independent oilmen often constituted the wealthiest segments of the local business community. There the antitrust sentiment merged easily with sentiment for free trade and an income tax (paid largely by the affluent East) to form an aggressive small-scale capitalist ideology that has often been confused with mass-based populism.¹³⁰

E. The New Deal System

Because I have recently published a formal analysis of the growth of the New Deal coalition out of the slowly disintegrating System of ’96, and coauthored a lengthy analysis of the gradual dealignment of the New Deal System,¹³¹ this paper’s analysis of what might be termed the System of ’36 will be even more summary than the preceding sketch of the System of ’96.

Perhaps the most important point to stress concerns the precise nature of the New Deal coalition. To attain a clear view of the New Deal’s uniqueness and significance it is necessary to break with most of the commentaries of the past 30 years, go back to primary sources, and attempt to analyze the New Deal as a whole.

As outlined in detail in the next essay, what stands out is the novel type of political coalition that Franklin D. Roosevelt built. At the center of this coalition, however, are not the workers, blacks, and poor that have preoccupied liberal commentators, but something else: a new “historical bloc” (in Gramsci’s phrase) of high-technology industries, investment banks, and internationally oriented commercial banks.¹³²

The origins of this bloc are most conveniently traced by beginning with World War I, which abruptly disrupted the tight relationship between industry and finance that defined the System of ’96.

Overnight the United States went from being a net debtor to being a net creditor in the world economy, while the tremendous economic expansion the war induced destabilized both the United States and the world economy. Briefly advantaged by the burgeoning demand for labor, American workers also struck in record numbers and for a short interval appeared likely to unionize extensively.

Not surprisingly, as soon as the war ended, a deep crisis gripped American society. In the face of mounting strikes, the question of U.S. adherence to the League of Nations, and a wave of racial, religious, and ethnic conflicts, the American business community sharply divided.

On the central questions of labor and foreign economic policy, most firms in the Republican bloc were drawn by the logic of the postwar economy to intensify their commitment to the formula of 1896. The worldwide expansion of industrial capacity the war had induced left them face to face with vigorous foreign competition. Consequently they became even more ardent economic nationalists. Meeting British, French, and later German and other foreign competitors everywhere, even in the United States home market, they wanted even higher tariffs and further indirect government assistance for their export drives. Their relatively labor-intensive production processes also required the violent suppression of the great strike wave that capped the boom of 1919–1920, and encouraged them to press the notorious “open shop” drive that left organized labor reeling for more than a decade.

By contrast, the new political economy of the postwar world pressured a relative handful of the largest and most powerful firms in the System of ’96’s hegemonic bloc in the opposite direction. The capital-intensive firms that had attracted increasing attention since the beginning of the System of ’96 and which had grown disproportionately during the war were under far less pressure from their labor force. The biggest of them also had developed by the end of the war into not only American but world leaders in their product lines. Accordingly, while none of them were pro-union (legislation along the lines of the Wagner Act would have struck them as incredible), they preferred to conciliate rather than to repress the work force. Those that were world leaders also favored lower tariffs, both to stimulate world commerce and to open up other countries to them. They also supported American assistance to rebuild Europe, which for many of them, such as Standard Oil of New Jersey and General Electric, represented an important market.

Joining the industrial interests of this second bloc were the international banks. Probably nothing that occurred in the United States between 1896 and the Depression was so fundamentally destructive to the System of ’96 as the World War I–induced transformation of the United States from a net debtor to a net creditor in the world economy (Kindleberger, 1977; Ferguson, 1984, n.d.).

The overhang of both public and private debts that the war left in its wake struck directly at the accommodation of industry and finance that defined the Republican Party. To revive economically, and to pay off the debts, European countries had to run export surpluses. They needed to sell around the world, and they, or at least someone they traded with in a multilateral trading system, urgently needed to earn dollars by selling into the United States. Along with private or governmental assistance from the United States to start up when the war ended, accordingly, the Europeans required a portal through the Republican tariff walls that shielded U.S. manufacturers from the outside world.

For reasons of space this paper cannot trace in any detail how spiraling conflicts over labor and foreign policy between the older System of ’96 group and the newer multinational bloc led increasingly to the disintegration of the Republican Party, so that by 1928 the partisan alignments of 1896 had disappeared altogether.

All that can be observed here is that the long-run trends in the world economy greatly favored the multinational bloc. With the notable exceptions of the big chemical and national oil companies, this bloc included the largest, most rapidly growing corporations in the economy. They were the recognized industry leaders with the best and most sophisticated managements. Perhaps even more importantly, they embodied the norms of professionalism and scientific advance which fired the imagination of large parts of American society in this period. The largest of them also completely dominated all major American foundations, which, during the System of ’96, had come to exercise major influence on not only the climate of opinion but also the specific content of American public policy. And, while I cannot stop in this chapter to justify the claims, what might be termed the “multinational liberalism” of the internationalists was also aided importantly by the spread of liberal Protestantism; by a newspaper stratification process which brought the free trade organ of international finance, the New York Times, to the top; by the growth of capital-intensive network radio in the dominant Eastern, internationally oriented environment; and by the rise of major newsmagazines, which, as Raymond Moley himself observed while taking over at what became Newsweek, provided “Averell” [Harriman] and “Vincent” [Astor] “with a means for influencing public opinion generally outside of both parties.”133

Not surprisingly, it was during the great boom of the 1920s that the representative capital-intensive, multinationally oriented American business firm ascended to the pinnacle of the economy: the giant integrated oil company (see table 1.2, which gives rankings of the thirty largest industrials from 1909 to 1948).

Space limitations also preclude this paper from doing more than asserting what I have sought to document in detail elsewhere: that between 1935 and 1938 this emergent bloc came together around Roosevelt’s Second New Deal (Ferguson, 1984, n.d.).

Because these firms were mostly capital-intensive, the rise in the power of organized labor that the Wagner Act permitted and the very limited intervention in market-determined patterns of (lifetime) wage setting that Social Security represented posed less of a threat to them. And their dominant position in the world economy made them the leading beneficiaries and most ardent champions of the other part of the New Deal’s reform package—Secretary of State Cordell Hull’s famous reciprocal trade program, which broke decisively with the System of ’96’s protectionism. (Oil companies, in addition, profited handsomely from the Interstate Oil and Gas Compact legislation which established the framework that fixed the price of oil for a generation.)

But while the biggest investors in the New Deal—including the dramatic election of 1936—were the multinationals and their internationalist allies among domestic exporters, there is no point in denying the obvious. To many within this group, even the almost dormant American Federation of Labor (several of whose top officials had become enmeshed in a close patron/client relationship with the larger firms within this bloc)¹³⁴ represented a graver threat than they felt comfortable with. While, left to themselves, the firms in the multinational bloc might have sponsored company unionism and made less extensive use of the private armies and detective agencies than more labor-intensive firms, they surely would not have created the Congress of Industrial Organizations (CIO).

That independent industrial unionism emerged during the New Deal is primarily a result of one factor: that, for the first time in American history, masses of ordinary voters organized themselves and succeeded in pooling resources to become major independent investors in a party system. Their success in this decade contrasts vividly with their failures during previous party systems, and vividly underscores the investment theory of political parties’ strictures on the importance of distinguishing between simple rises in voter turnout, such as characterized the Jacksonian Party System, and the real growth in the political power of mass voters that came with their effective organization.

In a longer analysis of the New Deal System, several stages could helpfully be distinguished within it. The rise in the power of labor, for example, came to an abrupt halt during or soon after World War II. A massive campaign led by the National Association of Manufacturers pushed through the Taft-Hartley Act, and the Truman administration initiated the first of several security investigations of the left wing of the Democratic Party.

TABLE 1.2 Largest American Industrials at Various Points in Time (Ranked According to Assets)

TABLE 1.2 Largest American Industrials at Various Points in Time (Ranked According to Assets) (continued)

Source: A.D.H. Kaplan, Big Enterprise in a Competitive Setting (Washington, D.C.; Brookings, 1962), pp. 140 ff.

But while these and related measures halted labor’s advance, they did not turn the clock back to the early 1920s. The rise in unionism merely halted and began a slow decline that has now lasted for almost a generation. Other legislative enactments, such as the 1959 Landum-Griffith Act, also incrementally trimmed labor’s power, but did not fundamentally alter the status quo.135

More recently the flight of business to the Sunbelt, where labor is weak, and abroad, where it cannot go, and the failure of President Jimmy Carter’s labor law reform initiative in the late 1970s have in combination with new organizing initiatives by the business community, such as the creation of the Business Roundtable, eroded organized labor’s position.¹³⁶

Rather more serious has been the deterioration of the network of community groups generated in the course of struggles over the rights of blacks, women, and the poor. Such groups flourished in the turbulent 1960s, when the economy was expanding and substantial financial assistance was available from the government and large foundations.¹³⁷ Since the recession of 1973–1974, however, their position has become increasingly precarious. Only the more conservative parts of the feminist and black movements continue to attract substantial funds from more liberal investors.

By contrast with the almost glacial pace of change with regard to labor policy, the other crucial policy outcome involved in the New Deal alignment—its commitment to internationalism—has come under increasingly severe challenge.

Though this essay cannot elaborate on the point here, the shape of things to come on this issue was clearly visible as far back as the 1936 election. After a bitter internal struggle, Republican nominee Alf Landon repudiated Hull’s reciprocal trade policies. Enraged, many high-level businessmen in the party abandoned Landon’s campaign and endorsed Roosevelt (Ferguson, 1984). All through the 1940s similar controversies flared; they were especially bitter when issues like the ratification of the International Trade Organization Treaty were pending.

While proliferating opportunities for investment abroad strengthened many large firms’ commitment to internationalism after World War II, the revival of world economic competition in the 1950s sharpened protectionist tendencies in industries like steel, textiles, and shoes. The predictable result was a growth of right-wing nationalist sentiment within the Republican Party. Often strongly critical of the United Nations, foreign aid, and the Rockefeller family, such groups joined with many independent oilmen to provide most of the force behind the Barry Goldwater candidacy in 1964. (Ferguson and Rogers, 1981, p. 12; Burch, 1973, pp. 120–21, n. 51). They have also weighed heavily in Republican primaries ever since (Ferguson and Rogers, 1981, pp. 12 ff.).

By 1971, as imports from Japan surged into the United States and the first absolute trade deficit in modern U.S. history appeared, nationalist sentiment within the business community was mushrooming. The Nixon administration responded with its famous New Economic Policy, with consequences too vast to be considered here.138

Thereafter, the international economic system, and thus American party politics, lurched from one crisis to another. The Organization of Petroleum Exporting Countries (OPEC) raised prices, raw-material prices briefly surged, food prices soared, and bank loans to Third World countries expanded immensely. By the mid-1970s it was clear that economic growth in the advanced countries was slowing down while in parts of the Third World it was booming.

In time it is possible that these and other forces too complex to consider here might produce a realignment in American politics. By itself slow growth is likely to generate rising dissatisfaction among an increasingly squeezed population. In addition a major crisis is brewing inside the Democratic Party. While the New Deal transformed the party into a historically unique coalition of capital-intensive, multinationally oriented businesses and organized labor, almost every major trend in the world economy now militates against that order. In the wake of OPEC’s price increases, the United States held down the domestic price of oil through a complex system of special price controls. The price of natural gas was also strictly regulated. The astronomical sums involved made these programs some of the largest income transfer programs in world history.139 Not surprisingly, most oil and gas companies ardently supported lifting the controls. Because it struck so massively at labor, blacks, and the poor, however, such a move was almost impossible for most Democrats to sponsor. As a consequence, the oil industry, which had played a pivotal role in the emergence of the Roosevelt coalition and had longstanding ties to high levels of the Democratic Party, became almost monolithically Republican in the mid-1970s.¹⁴⁰

Rising business interest in an increasingly unstable Third World has also operated to weaken the Democratic Party. While serious differences over the size of the total defense budget and specific weapons programs persist within the business community, interest in higher military spending still has tended to unite both nationalists and internationalists (Ferguson and Rogers, 1981, pp. 18–19). But economic stagnation now makes it impossible to fund both social welfare and higher defense budgets without higher taxes. Accordingly, the Democratic Party is coming apart, riven by struggles between the party’s mass base, which needs more, not less, social welfare spending, and its elite constituency, which would prefer to reform the budget process, cut social spending, and raise defense expenditures. In addition, Japanese imports are surging, raising demands from labor for protection that collide head on with the internationalists’ desire for an open world economy. How this struggle will be resolved is anyone’s guess, but it is instructive to see what an investment theory of parties predicts. It will be recalled that turnover among the top thirty firms during World War I and the boom of the 1920s heralded the ascent of the multinational bloc within a new party system. Until recently, a list of these major investors would have reflected little change since the New Deal—the rise, mainly, of electronics firms, and a further decline of steel. The last few years, however, suggest that major turnover within these ranks may be imminent. A new merger movement among the giants, spectacular failures of once multinationally oriented firms like Chrysler, the wreck of the auto industry, and, most recently, a major decline in oil prices suggest that new realignments with new blocs of investors could be in the offing.

V. CONCLUSION

The early sections of this paper raised fundamental questions about conventional electoral theories of American politics. Virtually all subsequent discussion has concentrated on elaborating and testing alternative accounts of party systems and electoral competition. While all results remain preliminary and tentative, it is now appropriate to look briefly at what this effort to interpret American political history in industrial terms says that is new or, at least, distinctive.

Here, it seems to me, one conclusion stands out ahead of all others: that the “welfare effects”—the tendency to satisfy popular demands—that most liberal political analysis attributes to two-party competition have been greatly overstated. This does not mean that voters never influence public policy or even that they do not constantly do so. It does imply, however, that their influence on state policy is highly variable and uncertain. In a political system like that of the United States, the costs associated with control of the state effectively screen out the bulk of the electorate from sustained political intervention. Accordingly, as the last section’s review of American party systems suggested, power passes ineluctably to relatively small groups of major investors. And political changes are usually—but not always—intimately involved with shifts in the balance of power among these large investors.

These fundamental points have vast implications. The potential significance of voter turnout, for example, changes abruptly. Many discussions of declining voter turnout implicitly link high voter turnout with effective democratic control of the polity. Now it is easy to understand why, for whatever can be imagined as a logically possible outcome, in the real world a political system that consistently serves the interests of a mass of nonvoting citizens is most improbable. But as the discussion of the Jacksonian period suggested, high voter turnout may indicate strong popular demands on the political system—or it may simply indicate that elites are willing to subsidize the cost of participation. To assess the meaning of voting in such situations, a hard look is vital at the resources available to individual voters to form and express an opinion—and above all to participate in secondary organizations. In this respect, I think, the American experience has been less than edifying.

Another common practice in American political science that this inquiry raises questions about concerns the conventional distinction between “foreign” and “public” policy. Few contemporary studies of American politics afford foreign policy questions the weight they deserve as factors in domestic party politics. From the Federalist acts of binary fission to the New Deal’s controversial free trade policy, however, American parties have fought bitterly over foreign policy issues. Considering the peculiar monopoly that the national state enjoys in foreign policy, it is time to abandon the notion that “politics stops at the water’s edge.” Analysts of public policy should normally expect to find questions of the world economy, foreign policy, and transnational relations acting to divide political investors. And election analyses, if they purport to deal with reality, should normally explain how industrial blocs, campaign issues, and international relations affect electoral outcomes.

Finally, if one considers the basic meaning of what might be termed the “microeconomics of voter control” implied by the investment theory of parties, then certain forms of interventions to create really effective democratic structures can readily be envisaged. Once it is clear that most ordinary people cannot afford to control the governments that rule in their name, then the normative remedy is obvious: public participation must be subsidized 141 and the costs of its major forms made as low as possible.

This recommendation, however, must be understood in the context of this essay’s earlier discussion of the social nature of information and action. The prerequisites for effective democracy are not really automatic voter registration or even Sunday voting, though these would help. Rather, deeper institutional forces—flourishing unions, readily accessible third parties, inexpensive media, and a thriving network of cooperatives and community organizations—are the real basis of effective democracy.

ACKNOWLEDGMENTS

This paper was originally part of a larger study which was divided and revised for publication. The first part of the longer paper, analyzing existing electoral theories of American politics and critical realignments, appeared as “Elites and Elections; Or What Have They Done to You Lately? Toward an Investment Theory of Political Parties and Critical Realignment,” in Benjamin Ginsberg and Alan Stone, eds., Do Elections Matter? 1st ed. (Armonk, N.Y.: Sharpe, 1986). An appendix to the original paper which attempts to integrate the present essay’s historical analysis of the relationship between business structures and American party systems with available statistical data on the law partners, business connections, and corporate affiliations of high federal officials has had to be dropped here, for reasons of space.

I should particularly like to thank Walter Dean Burnham, Gerald Epstein, Arthur Goldhammer, Robert Johnson, and Paul Zarembka for their comments on drafts of this essay. For important assistance with other parts of the study I am also grateful to Richard DuBoff, Benjamin Ginsberg, Lawrence Goodwyn, Duane Lockard, Samuel Popkin, Gail Russell, and Martin Shefter. Early discussions of Anthony Downs’s work with Stanley Kelley, and of Mancur Olson’s with Tim Scanlon and William Baumol, were also very helpful. Thanks also to Gavan Duffy, Cynthia Horan, and Lola Klein for additional assistance. It should not be necessary to add that readers and critics of a paper cannot be held responsible for its contents—only its author can.

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