CHAPTER THIRTEEN
THE CURSE OF BIGNESS
Perhaps more than any other reformer of his time, Louis Brandeis stood as the opponent of big business and monopoly. His observations on how to control the depredations of industrialism affected the debate over government control of business in the 1912 election as well as legislation on banking and antitrust passed during the Wilson administration. Whether they agreed with him or not, reformers and business leaders took his views seriously, and his ideas, expressed in articles and testimony, have informed historians ever since about this particular and important aspect of progressive reform. To understand his analysis, however, one has to recognize that it relied far more on principles of morality and political theory than on economics. Brandeis opposed large businesses because he believed that great size, either in government or in the private sector, posed dangers to democratic society and to individual opportunity. Judge Learned Hand, who considered some of Brandeis’s ideas “impractical,” nonetheless believed that Brandeis’s “feeling, his sense, was right” about the impact of bigness upon the individual. At all times Brandeis maintained his faith in what he saw as the basic American principles of an open competitive society, in which private interests should always yield to the public good.
Americans added a moral ingredient to the mix. The free market served as a testing ground for a man’s character and ability. The Protestant ethic, tying labor in a person’s calling to individual salvation and a rawboned frontier spirit, produced a curious amalgam of free competition, moral striving, and the pitting of man against nature. Out of this grew a belief that all men deserved an equal opportunity to make the most of their abilities. Americans respected and admired those who succeeded, ignored those who failed, and condemned any efforts to restrict opportunity—either to curb the strong or to help the weak—as immoral and counterproductive. Faith in the open-ended nature of the economy became part of the American ethos in the nineteenth century.
Classical economics and the American creed of opportunity, however, rested on a small-unit economy. Individuals had to be able to start farms or open small businesses with modest amounts of capital. But by the end of the nineteenth century free land for homesteading had begun to dwindle. A flood of immigrants from southern and eastern Europe quickly eliminated what had been a chronic shortage of labor, and more and more men—and women—now worked for other people with little hope of ever owning their own businesses. The manufacturing process grew more complex and required larger and more expensive machinery, restricting access of newcomers. It was one thing to open a dry-goods store with a few hundred dollars of inventory, and quite another to build a steel mill costing hundreds of thousands or even millions. Most ominously, one could discern the consolidation of small and medium-size firms into larger enterprises, many with near-monopolistic control over their particular markets.
In four years alone, from the beginning of 1898 to the end of 1901, 2,274 companies disappeared as a result of mergers, and the capitalization of these new entities totaled $5.4 billion. In the steel industry, new mergers dominated the field: American Tin Plate held 75 percent of the country’s capacity in that product; American Steel & Wire, 80 percent; National Tube, 85 percent; and American Bridge, 50 percent. In 1901 all of these firms, plus several more, joined together in the Morgan-sponsored U.S. Steel Corporation. Capitalized at well over $1 billion, U.S. Steel brought under one control 213 different manufacturing plants and transportation companies, 41 mines, 1,000 miles of private railroad, 112 ore vessels, and 78 blast furnaces, as well as the world’s largest coke, coal, and ore holdings. It controlled 43.2 percent of the nation’s pig-iron capacity, and 60 percent of basic and finished steel products. In oil, John D. Rockefeller put together the Standard Oil Company that ruthlessly drove small, independent operators out of business. The conservative Wall Street publisher John Moody believed this development boded well for the future prosperity of the country and saw it as not only beneficial but inevitable.
Industrialization and the growing concentration of economic power in fewer hands affected how Americans thought about the market and what it meant in terms of both individual and social effects. Defenders of big business essentially married the old classical model to a conservative Darwinism, justifying the emergence of giant corporations as a form of survival of the fittest. To interfere in this process of “natural selection” would only hinder progress and undermine the strength of the American economy. As for the public interest, which Brandeis and others believed to have been at the heart of the older paradigm, industrial leaders offered a new model—let the people learn and profit from hardship. Henry O. Havemeyer, president of the American Sugar Refining Company, put it bluntly: “Let the buyer beware; that covers the whole business. You cannot wet nurse people from the time they are born until the time they die. They have got to wade in and get stuck, and that is the way men are educated and cultivated.”
If in the older model success equaled moral uprightness, then even more honor should be paid to Andrew Carnegie, E. H. Harriman, James J. Hill, and other self-made men who had built their empires on skill, good character, and shrewd business sense—indeed, every schoolboy should try to emulate them. The darker side of their business—the shady agreements, the squalid slums spawned by factories, horrendous working conditions—frightened many people, but this only increased the veneration and public homage to the older virtues, the “continuing veneration of individualism, self-reliance, and laissez-faire economics.”
At the turn of the century a debate arose within the business community over the benefits of competition. Bold entrepreneurs like Carnegie might welcome an unfettered free competition, confident in their own abilities to succeed. But the advent of gigantic corporations with millions tied up in factories and inventory led to a new emphasis on market stability and cooperation. A new generation of business leaders, including George W. Perkins of the house of Morgan, Elbert H. Gary of U.S. Steel, and John D. Rockefeller Jr., began preaching a system of business that Arthur Jerome Eddy, its chief theorist, called the “New Competition.”
Advocates of the new system for the most part opposed any form of government control and proposed that cooperation within an industry be coordinated by the heads of the largest firms. The goal of market stability would ensure that long-term prices would not fluctuate wildly. In prosperous times, prices would rise slightly, while in slack periods they would fall, but again, only slightly. In place of price-cutting and other “unethical” practices, businesses would emphasize the quality of their products and service to customers, and within an industry members would share information and regulate themselves, punishing those who violated the code. In theory, a stable market accompanied by steady prices and improved service would benefit producer, consumer, and investor alike, and harm no one. If nothing else, the “New Competition” faced up to the fact that in many industries, manufacturing and plant costs had risen beyond the point where newcomers could gain easy access to the markets, and those holding large investments in existing plants and equipment could not allow many business failures. It also recognized that in a complex industrial society, employers, employees, and consumers had grown so interdependent that no party could tolerate erratic market fluctuations.
Charles Van Hise, an advocate of industrial concentration, called for “freedom for fair competition, elimination of unfair practices, conservation of natural resources, fair wages, good social conditions, and reasonable prices,” and Louis Brandeis, the opponent of concentration, agreed with nearly all of it. Brandeis’s view of business as a profession easily accommodated cooperation among producers, the elimination of cutthroat competition, stable pricing, and emphasis on quality and service. In fact, at one time or another he advocated all of these things, albeit in somewhat different form from Arthur Eddy or George Perkins. On the Supreme Court he surprised some of his former reform allies when he dissented in 1921, opposing the application of the antitrust laws to the American Hardwood Manufacturers’ Association, a group representing about one-third of the nation’s annual hardwood production whose members shared information about costs, sales, and stock.
But while the goals may have been similar, Brandeis and other opponents of bigness questioned whether the alleged benefits of the new industrial age outweighed what they saw as increasingly obvious disadvantages. They believed that big business was inimical to a democratic society and worried over the effect that monopolistic practices would have on government, labor, and the public. Few of them, however, knew exactly what to do about it. While some reformers flirted with socialism, Brandeis opposed government ownership except in the limited case of public utilities. Do not believe, he told Robert Bruère in 1922, “that you can find a universal remedy for evil conditions or immoral practice in effecting a fundamental change in society (as by State Socialism).”
How much grounding Brandeis had in economic theory is hard to say, but given his voracious reading habits, it is safe to say that he was not economically ignorant. The lectures he gave on business law in 1893 show a familiarity with classical theory, especially his arguments on the evils of monopoly. His father ran a successful grain and produce company, and while Frederika may have banned commercial talk from the dinner table, there is no doubt that the family discussed business matters. Moreover, Brandeis’s law practice relied on commercial clients, whose affairs and problems he knew intimately.
Brandeis never really questioned the basic rightness of the free enterprise system. He acknowledged that it had defects, and he spent many years trying to correct them. But the achievements of his immigrant father, and his own and his brother’s successful careers, imbued him with a sense of the opportunities awaiting the diligent worker. He differed from many of his fellow reformers in Boston when he insisted that risk capital deserved greater returns than money invested in safe measures, although he condemned outright speculation. Despite his involvement in labor matters, Brandeis did not overly concern himself with the weak. It is not that he did not care for people victimized by industrialization, or that he opposed measures to prevent the strong from taking advantage of others. Rather, he approached reform neither as a social worker nor as a leveler to give a leg up to those on the bottom. Life involved risks, and those who competed had to bear the losses as well as enjoy the gains. He always accepted and indeed rejoiced in the competition of life and of the economy, with both the harshness and the rewards. He once told his daughter Susan, when she complained of some difficulty, “My dear, if you will just start with the idea that this is a hard world, it will all be much simpler.”
One form of challenge he did not care for involved the stock market, which he viewed as little more than legalized gambling. He made his money from his law practice and then invested it in safe railroad or municipal bonds. “I believe in investing money where it will be so safe,” he said, “that I will not have to take time off thinking about it.” The idea of making money for its own sake, especially through speculation, repulsed him. In a letter to Alfred in 1904, Louis spelled out his philosophy on the subject:
I feel very sure that unser eins [people like us] ought not to buy and sell stocks. We don’t know much about the business, and beware people who think they do. Prices of stocks are made. They don’t grow; and their fluctuations are not due to natural causes…. My idea is … to treat investments as a necessary evil, indulging in the operation as rarely as possible. Buy only the thing you consider very good, and stick to it unless you have cause to doubt the wisdom of your purchase. And when you buy, buy the thing which you think is safe, and will give you a fair return; but don’t try to make your money out of investments. Make it out of your business.
Years later he cautioned his daughter: “Do not invest in any stock, common or preferred…. Such investment is mere speculation.” The few times he bought stock resulted from the requirements of his law practice; he occasionally had to own a few shares to attend a stockholders’ meeting on behalf of a client. Long before he began writing about the curse of bigness and the use by bankers of other people’s money, Brandeis distrusted the elaborate and what he considered fraudulent financial edifices created by J. P. Morgan, Jacob Schiff, Henry Lee Higginson, and others.
Advocates of bigness and monopoly—and the two often went together—decried competition among smaller firms as wasteful; economies of scale made the big company the most efficient producer of goods, and this meant that the consumer would benefit from lower prices. “This argument is essentially unsound,” Brandeis declared. “The wastes of competition are negligible. The economies of monopoly are superficial and delusive. The efficiency of monopoly is at best temporary. Undoubtedly competition involves waste. What human activity does not?”
Brandeis believed that the ability and judgment of the person in charge constituted the single most important element of business success. As firms grew too large, they became unmanageable, because no one person, no matter how talented, could direct them well. Henry Bruère recalled that when the bank he directed celebrated its one hundredth anniversary in 1934, Justice Brandeis sent him a telegram reading, “BEST WISHES, I HOPE YOU MAY NEVER GROW LARGER.”
Delegation of authority and responsibility—the keystones of modern management theory—struck Brandeis as exceedingly poor business procedures. He did not insist that all companies be one-man operations. Some people did certain jobs very well, and some could supervise better than others; individual talents differed. He had organized his own law firm on these principles. But, he believed, once a company grew so large that the person in charge operated three or four removes from production, that person did not really know what was happening. “Man’s work,” he maintained, “often outruns the capacity of the individual man.” Each man, he said, “is a wee thing,” and he liked to quote Goethe that “care is taken that the trees do not scrape the skies.” Brandeis’s faith in business as in democracy began and ended with what he saw as the natural limits of the individual.
The curse of bigness applied to government as it did to business. Big government could be as bad as big business, because both violated the same rules of efficiency. In limited units, men could function and be on top of their jobs, and the public would be served; if a government agency grew too large, the officers in charge would not be able to control the organization, and everyone would suffer. Big government posed as great a social and political threat as did economic monopoly. “We risk our whole system,” Brandeis told the Senate Committee on Interstate Commerce in 1911, “by creating a power which we cannot control.”
The obvious answer, at least to Brandeis, was restricting the size of both government and private businesses. He believed that since big firms had grown out of unrestrained, cutthroat competition in which the strongest—albeit not the most moral—had survived, restraints upon unethical business practices had to be enacted. If a company failed as a result of the poor quality of its product or bad management, then the economy and the consumer gained, even if the investors lost. If, on the other hand, a firm used its power illicitly to force out its rivals, then the community suffered.
“There is in every line of business a unit of greatest efficiency,” he wrote. “The unit of greatest efficiency is reached when the disadvantages of size counterbalance the advantages. The unit of greatest efficiency is exceeded when the disadvantages of size outweigh the advantages.” He understood that this point would vary from industry to industry, company to company, and even from time to time, and hoped that someday it would be possible, through scientific management, to determine with some exactitude the precise point of maximum size.
There are inherent contradictions between wanting to maintain a small-unit or, as some economists describe it, an “atomistic” market structure and the real economies that large-scale firms enjoy. If the government, for whatever political, economic, or social reasons, chose to preserve the small-unit market, then the government itself would have to impose and enforce limitations on competitive behavior, because in an atomistic market competition will almost always lead to the most successful firms crowding out the least efficient.
One of the most incisive critics of Brandeis’s views has been Thomas K. McCraw, who has drawn on recent developments in economic theory such as distinguishing “center” from “peripheral” firms and vertical from horizontal integration. McCraw argues that Brandeis’s failure to grasp these distinctions “fed his confusion concerning how and why big businesses evolved, which business practices would or would not help consumers, and which types of organizations were or were not efficient.” At the heart of this confusion lay Brandeis’s stubborn commitment to smallness, an “anti-modern ideology” that would sacrifice the interests of a majority of consumers for the preservation, on political grounds, of inefficient small units threatened by the inexorable march of progress toward concentration. In the end, Brandeis’s refusal to separate market facts from morality, his readiness to tailor his economics to his “aesthetic preference for small size,” overwhelmed his formidable analytical powers and “doomed to superficiality both his diagnosis and his prescription.”
To fault Brandeis on his economic theory, as McCraw does, is to miss the point, because he made these arguments not as an economist but as a moralist and a democrat. “I am no theorist,” he candidly admitted, but he knew trusts. “I have had a large experience and know what I am talking about.” Big business threatened the economic opportunity of the individual and also posed a danger to a free society. Brandeis did not try to hide these fears behind the facade of the efficiency argument; to him they all went together. The curse of bigness adversely affected everyone and in every way, and therefore had to be fought. “I used to think there were ‘good trusts,’” he said in 1912, “that there were big men at the head of some of them and that they worked things out for the benefit of the community. I know better now. There are no good trusts.”
“Half a century ago,” Brandeis told a congressional hearing in 1912, “nearly every American boy could look forward to becoming independent as a farmer or mechanic, in business or in professional life; and nearly every American girl could expect to become the wife of such a man. Today most American boys have reason to believe, that throughout life they will work in some capacity as employees of others, either in private or public business; and a large percentage of women occupy like positions.” The rise of gigantic industries caused this shift, and the consequences would be devastating to the nation. The boy would work, he would produce, he might even do better as an employee than as an independent farmer or mechanic. But where would he be able to test himself? Where would he have an opportunity to wager his future on his own ability? How would he develop the strong and independent character that came from daring and succeeding, or even from daring and failing? Democracy reflected the character of its citizens, and a nation could never have a vibrant democracy without free people, individuals with pride and the strength to take chances.
Time and again Brandeis emphasized that individual opportunity stood at the heart of political freedom. “You cannot have true American citizenship, you cannot preserve political liberty, you cannot secure American standards of living,” he informed the Senate, “unless some degree of industrial liberty accompanies it.” He understood that not all men would be independent; many would work in factories and for others even on small farms or in small businesses. But if people no longer felt they controlled, at least in some measure, their own economic destiny, then the traditional basis of the political structure would itself be threatened. Jefferson had believed that democracy rested on the shoulders of the yeoman farmer; Brandeis expanded that notion to include small-business men and professionals. Employees dependent upon large corporations could be coerced, and as more and more people worked for these companies with no hope of economic independence, the danger of business influence and control over politics increased. “There cannot be liberty without industrial independence,” Brandeis said, “and the greatest danger to the people of the United States today is in becoming, as they are gradually more and more, a class of employees.”
He rejected the argument that the growth of large corporations represented an irrevocable law of economic development, nor did he accept the monopolists’ claims that by operating more efficiently, they provided the public with better goods at lower prices, so that all Americans could enjoy a higher standard of living. To Brandeis this missed the whole point of what America meant. Yes, he agreed, people should be well housed and well fed and have opportunities for education and recreation. A free nation demanded no less, but “we may have all these things and have a nation of slaves.” Material comfort, or at least the basic needs of life, mattered, but freedom, tied to opportunity, mattered more.
Brandeis did not foresee, nor did anyone else, that even in an economy dominated by multibillion-dollar global corporations, there would still be opportunity for those seeking it. Technology in our own time has opened up unlimited possibilities for small and medium-size businesses. While it is true that Microsoft and Apple are gigantic firms, Bill Gates and Steve Jobs started those firms in their garages with limited capital. The service industry as well as computers and other technologies seems to be an infinite source of economic opportunity. An economic scenario that included both gigantic firms and small and successful companies is one that most progressives—including Brandeis—did not envision.
• • •
BRANDEIS HAD HIS FIRST CHANCE to put his ideas into practice when he worked with Robert La Follette in 1911 to draft a measure expanding the 1890 Sherman Antitrust Act. “I want you to give me as many cases as you can of business assassination, attempted and accomplished by the System, cases within your personal knowledge,” La Follette wrote, “and with the names of the corporations involved.” Because of attorney-client confidentiality, Brandeis could not tell all of his stories, but he did share one that had involved him a great deal, and one that did not show Brandeis at his best.
The story of the United Shoe Machinery Company is tangled and would become part of the attack on Brandeis during the nomination hearings in 1916. His critics charged that Brandeis had helped create United Shoe, defended it and its monopolistic practices, and then turned against the company. While the bare outline is true, the story is complex and revolves around the fact that Brandeis violated his own cardinal rule about investing in a client’s company, and lost, at least to some extent, the objectivity he valued so highly in his professional work. While he claimed that he had done no wrong and certainly nothing illegal, the episode shows, at the least, a lapse of judgment on his part.
In 1899, Brandeis represented the Henderson family, which had large holdings in the McKay Shoe Machinery Company. Several of the large firms in the field, including Goodyear and Winslow, had agreed to merge, and invited McKay to join as well. Brandeis later claimed that he had opposed the merger “on ground of general business policy,” but this led to a higher offer, and the company decided to join. The Henderson family wanted Brandeis on the board of directors to safeguard their interests, and he agreed, buying five shares of common stock to qualify. But he also invested $10,000 of his own money in preferred stock and later accumulated additional common stock as the company distributed rights to new issues to existing shareholders. He did what many corporation lawyers at the time did, and United Shoe seemed to him and to many others a good investment. It clearly, however, ran in the face of what he had told Alfred about purchasing stock.
Part of the new company’s success resulted from so-called tying clauses, which required that a company leasing one machine from United had to rent all of its equipment from United. Since the company held most of the key patents on shoe-manufacturing equipment, and made some machines that no one else did, anyone wanting to make shoes had to take United’s entire line. None of the rival companies offered a full line of equipment, so in effect a shoemaker could not lease one or two machines from them and the rest from United. In 1906 these competitors went to the Massachusetts legislature and sought a bill outlawing tying clauses. Sidney Winslow, the president of United, asked Brandeis and James J. Storrow to oppose the measure before the assembly committees.
Several years later Brandeis recalled the circumstances of that request. Due to illness, United’s regular counsel, Louis A. Coolidge, could not attend to legislative matters. “I had a great deal of hesitation, and finally decided to go. I say a great deal of hesitation, as I did not like particularly to put myself in the position of testifying on the subject. But I felt the company was being attacked by this bill in the interests of certain shoe machinery manufacturers and not of the public.” Although he identified himself at the hearings as a director and stockholder, he nonetheless submitted a brief and received payment as if he had been counsel. Moreover, his argument on behalf of the company seems strange indeed in light of his opposition to monopoly, for that is the only word to describe the United Shoe Machinery Company.
Because United leased equipment to small manufacturers on the same basis as it did to large companies, men with a minimum of capital could enter the shoe-manufacturing business with access to the latest machinery. Brandeis then went on in words that even in 1906 seem strange coming from him:
What is this so-called monopoly? It is nothing more than that control which to a greater or less extent any successful business acquires by virtue of being successful, and therefore of expanding. If this company has machines which are deemed to be desirable by shoe manufacturers, why should not this company be allowed to increase its own business by refusing to let manufacturers have these machines unless they will purchase also from the same concern other machines which they require? … Great corporations have resorted to [the tying clause] from time to time as a means of increasing their already large business.
Not all shoe manufacturers accepted Brandeis’s claim that the leases worked to their benefit, and he got some of them, including William H. McElwain, to withdraw their support for the anti-tying-clause measure in return for a promise that United would look into their grievances. In September 1906, however, Brandeis learned of a federal court decision in Wisconsin that held a monopoly resulted, not from the holding of patents, but from the way the holder enforced the patent to eliminate competition. He alerted Sidney Winslow as well as United’s general counsel, Elmer Howe, that the ruling, if widely accepted, could adversely affect the company. Winslow insisted that Brandeis again represent the company at the next legislative session, when new attacks upon the tying clause would be introduced. This put Brandeis in a quandary. Despite his earlier defense of monopoly and the tying clause, he considered Judge Seaman, who wrote the Wisconsin opinion, “uncommonly able,” and now had doubts as to his earlier position. In December 1906, he resigned as a director of the company, explaining that with United now so well established, the Henderson family no longer needed him as a director to protect their interests, and so he “ought not to continue an exception to my general rule of not holding the office of director in any corporation for which I act as counsel.”
Two years later, in 1908, Brandeis told the editor Henry Beach Needham that he had resigned “because I was unable to induce the management to adopt the views which I held from a public standpoint in respect to the operations of the company.” He still believed that the past and present operations of United Shoe had been “on the whole beneficial to the trade. The grave objection which I had to it was the principles on which it was operated, and their effect in the future, and to a certain extent incidental methods employed.”
Then, in 1912, he told Senator Moses Clapp that he had learned additional information that proved inconsistent with earlier statements made by the company’s management. He did not yet know if United’s policy was unsound or its methods improper, “but so serious a doubt had been raised in my mind as to the soundness of their general policy, and particularly as to the propriety of some of their methods, that I was unwilling to assume responsibility for the company’s actions.”
Brandeis was certainly being honest in admitting that during this time he did not complain about the company’s monopolistic control over the manufacturing and leasing of shoe-making machinery, but what then did he object to regarding the company’s actions? The decision in the Wisconsin case, while surely raising questions about United’s policies, did not constitute any sort of definite legal rule on the subject outside Wisconsin. The case never went on appeal to the Supreme Court, and in 1906, and even later, no ruling by the high court would have held the tying clause illegal. Brandeis might have believed that Judge Seaman had gotten it right, but that hardly explains his actions. Moreover, while he had warned Sidney Winslow about the possibilities of legal problems, it is unclear how much he had pushed the company to change those policies he later described as monopolistic. At the 1907 legislative session Brandeis sat in on a few conferences between the company and shoe manufacturers, but he then resigned as counsel to the company, and after that the Brandeis firm apparently had little to do with United Shoe except to finish up a few minor cases. The Massachusetts legislature did, however, enact a measure regulating the sale and lease of shoe-making machinery similar to the measure defeated the year earlier.
Had the story stopped here, Brandeis would have been guilty of little more than bad judgment in violating one of his own rules regarding the separation of his business from investment, and in going onto the board, even for the ostensible purpose of looking after a client’s interests (a practice, it should be noted, common to many lawyers of his standing). He had warned the company that there were potential legal problems and, at least according to his later recollections, tried to get Winslow to change those policies, without success. On one occasion, he said, he had spoken to Winslow for five hours “without my making the slightest impression.” Brandeis had, as he put it, done all he could and then walked away.
In response to the 1907 law, United Shoe inserted two new clauses into its leases. One said that any section of the lease held to be unlawful would not be deemed part of the lease, and the other gave the company a unilateral right to cancel a lease on thirty days’ notice. The first clause meant nothing unless someone tried to take the company to court, which he would not do because of the second proviso. In 1907, United Shoe had no real competition in the making of a full line of shoe machinery, and if it canceled a lease, the shoe manufacturer had no one else to whom he could turn. Cancellation in essence meant ruin.
Then, in 1910, Thomas Plant began to develop an alternative line of shoe machinery independent of United’s patents, and he sought to hire Brandeis as counsel. Brandeis refused, carefully abstaining from anything that might bring him into conflict with a former client. Plant did not want to lease his machines, which many considered superior to United’s, but to sell them at a small margin of profit. If even one big shoe manufacturer agreed to take Plant’s equipment, others would quickly follow. But the shoemakers feared retribution from United, and one of them, Charles Jones of the Commonwealth Shoe & Leather Company, sought advice from his counsel on the legality of United’s leases. Brandeis could not deny this request from an existing client, and at his direction William Dunbar drew up an opinion that while the leases may have been legal under Massachusetts law, under the newly reinvigorated Sherman Act the leases probably violated federal law. The memorandum pointed to a recent Supreme Court case that held similar leases invalid. Moreover, Brandeis and Dunbar believed that any effort by United to buy out Plant would also violate the Sherman Antitrust Act.
United, however, figured out a different way to put Plant out of business. In October 1910, Plant had obligations due of $1.5 million. As a matter of course the banks would normally have given him an extension, but United got the First National Bank of Boston to refuse to renew the loan and then used First National’s contact with other banks in Boston and New York to refuse Plant credit. Plant had no choice but to sell, and United stepped in to purchase his equipment and patents. Brandeis, who had advised one member of United’s executive committee that any man who tried to put Plant out of business “would look jail in the face,” learned of the sale in the morning newspapers at the end of September. “I then concluded that the time had come when I could no longer properly remain passive,” he told Senator Clapp, and if the opportunity arose, he would “lend aid in any effort that might be made to restore competitive conditions in the industry.”
This was the story that Brandeis told to Robert La Follette in 1911. But it was not the end of his involvement with the United Shoe Machinery Company.
About the same time that Brandeis wrote to La Follette about the sins of the “Shoe Machinery Trust,” as he now called it, the federal government brought both antitrust and criminal proceedings against United Shoe for its actions regarding Plant. In mid-July, United’s board of directors, belatedly waking up from the failure to heed earlier warnings not only from Brandeis but from other lawyers as well, asked Brandeis to meet with them. Although he could not get them to change their policy, he did manage to make clear to them why he had left the board earlier, and that record stood him in good stead during the confirmation hearings.
Then Governor Eugene Foss of Massachusetts unexpectedly attacked United, and a number of Boston financial men believed Brandeis to be responsible. In fact, Brandeis had met with Foss, who showed him his message just one hour before delivering it to the legislature, but he had, as he told Alfred, done nothing to instigate it. Nonetheless, “my old friends will think I am at the bottom of it—as they do that I am responsible for the government investigation—a belief which is groundless.”
When congressional committees began holding hearings on new antitrust proposals as well as on various economic policy matters, Brandeis testified—and at length—before all of them. He now told the story of United in a far different way than he had earlier. He no longer defended the company as a good monopoly, but because of the way in which it had forced Plant out of business, he contended, United stood for the worst aspects of monopolistic industry.
United fought back in an effort to discredit Brandeis, and Sidney Winslow told Senator Clapp that the People’s Attorney’s allegations regarding United putting Plant out of business had absolutely no foundation in fact. “In his present role of an expounder of public morals, he seeks to hold this company up to public contumely because it opposed a law which he himself denounced publicly as unconstitutional.” The company also issued a pamphlet titled Brandeis and 
—the Reversible Mind of Louis D. Brandeis, “the People’s Lawyer”—As It Stands Revealed in His Public Utterances, Briefs, and Correspondence. While no one ever claimed responsibility for authorship, it clearly came from either someone within the higher management of United or someone who had access to the company’s confidential files. It very cleverly used Brandeis’s own words against him, taking passages from letters, testimony, conference memoranda, and briefs, all edited to show that Brandeis spoke out of both sides of his mouth. The company then arranged for all or part of the pamphlet to appear in newspapers and magazines friendly to business. Brandeis, by now accustomed to such attacks, shrugged it off. But in 1916 he would have to expend a great deal of energy during the confirmation fight explaining away United’s charges.
Although Brandeis later compared the fight against United with that against the New Haven, even so friendly a biographer as Alpheus Mason found the episode puzzling. For all his antimonopoly talk—and by 1906 he had expressed these sentiments a number of times—he nonetheless agreed to represent United, a company formed through mergers of previously competing companies. He had gone onto the United board to protect the interests of one of his clients, a practice widespread in the legal profession, although one that Brandeis himself had studiously avoided for the simple reason that it might create a conflict between his role as an attorney, representing the Hendersons, and his role as a director, responsible for the company’s policies. His clients in the shoemaking business had no problem with the tying clause by itself, but objected to the higher prices that United, as a monopoly, could charge. Had the company lowered its prices, it apparently would have satisfied the shoemakers, who, because of patents, had to use United’s equipment. Brandeis had accepted the role of counsel in opposing the 1906 legislation on the understanding that if the bill were defeated, United would renegotiate its leases with more favorable terms to the shoemakers. After the defeat of the measure the company did not renegotiate, and not until Brandeis learned of a case in far-off Wisconsin did he begin to have doubts about the tying clauses. One suspects that he resigned less because of Judge Seaman’s opinion than because of his embarrassment that United had not kept its word to McElwain and other shoe manufacturers, a promise that he had helped to elicit.
Yet between 1907 and late 1910, Brandeis said little about either United or the tying clauses. Only after United put Thomas Plant out of business did Brandeis finally begin to talk about the “Shoe Machinery Trust.” The company, despite its denials, did change its policies between 1906 and 1910, and it did exploit its monopolistic powers. Long before Brandeis denounced the company to Senator La Follette, it had engaged in the same types of activities that Brandeis had earlier discovered during the New Haven fight. Moreover, United did not try to cloak its actions—with the exception of forcing Plant out of business—and with all of his shoe-making clients, Brandeis certainly would have been kept aware of United’s policies and actions. The investigator who had ferreted out William Howard Taft’s deceptions in Pinchot-Ballinger ought to have been able to discern United’s depredations.
Brandeis’s instincts proved wise, and had he followed them, he could have avoided many of the charges made against his alleged ethical flip-flopping. Moreover, he did not have to reenter the fray in 1911. Recognizing his error in going on the United board in the first place, he had maintained a studied neutrality concerning the company after 1906. Perhaps he should have continued to do so.
In the meantime, the federal investigation begun in 1911 led to charges against United, and eventually the U.S. Supreme Court held that tying clauses violated the antitrust laws. Brandeis, by then a member of the high court, recused himself in the case, but the near-unanimous decision against the company must have given him a quiet satisfaction.
In response to an emergency telegram from La Follette, Brandeis took the night train from Boston and arrived in the capital on the afternoon of 18 May 1911. He immediately closeted himself with La Follette, Francis J. Heney of California, and Irvine Lenroot of Wisconsin, and the four men worked out the basic provisions of the La Follette–Stanley Antitrust bill introduced into the Senate on 19 August. The bill had a number of sections fine-tuning the Sherman Act and three major substantive provisions. First, it tried to define what constituted a reasonable as opposed to an unreasonable restraint of trade. Second, the bill proposed that when a company is indicted under the antitrust law, the burden of proof would be on the defendant to show the reasonableness of its actions, just as railroads had to prove reasonableness in asking for a rate increase. Finally, to give teeth to the law, the authors wrote that once a company had been found guilty, competitors who had been adversely affected by the illegal practices would only need to prove their harm and receive triple damages in awards.
Brandeis did not expect the La Follette bill to pass, certainly not easily. “The antitrust fight will be a hard one,” he predicted to Alice after the meeting, “and our own friends much divided—more or less imbued with the idea of monopoly inevitableness. I think it probable that we shall get some valuable thinking on the subject at any rate. That the country will repeal the Sherman law seems to me almost impossible, but it is highly possible that some changes will be made.”
Even before La Follette submitted the bill, the Senate Committee on Interstate Commerce had begun hearings on the growth of big business and what federal policy toward it should be. George W. Perkins and other representatives of big business testified that industries had grown as a result of greater efficiency. Big companies like U.S. Steel, International Harvester, and Standard Oil had given the American public the highest standard of living in the world. The country did not have to fear its great industries, but instead should see them as the inevitable result of market forces.
Brandeis took the stand for three days starting on 14 December 1911 and with one example after another spelled out his message: trusts did not enjoy greater efficiency than smaller firms; they had gained control of the market either by merger or by forcing smaller and weaker competitors out of business; a natural limit existed beyond which no one man or even a small group of men could effectively control a company and exercise good judgment. Big companies that had failed to win control of the market, either through merger or cutthroat competition, had for the most part failed. Moreover, Brandeis began to expand on the theme that behind the drive of companies like U.S. Steel to gain control of the market lay bankers and investment houses, eager to underwrite new stock offerings and gain commissions. In addition to closing off competition in the market, big companies adversely affected the social, political, and economic life of the country. Socialism by itself could make few converts in a country of opportunity, but the actions of the giant trusts did more than anything else to gain converts to that cause. The answer to the problems generated by these monstrous companies could not be simpler. “If we make competition possible, if we create conditions where there would be reasonable competition, these monsters would fall to the ground.” He spent five hours on the stand the first day, and as he modestly wrote to Alice, “I am told it was a great speech.”
By now the debate over monopoly and bigness had heated up, and Brandeis had become one of its central figures. “The Trust discussion won’t let me in peace,” he told Alice, as he listed one person after another who had disturbed his quiet in Washington. He thought there would be a “battle royal,” and he clearly welcomed it. “I am dead against the middle of the road. No regulated private monopoly of the capitalists. Either competition or State Socialism. Regulate competition, not monopoly, is my slogan. We have trouble enough with vested rights, let us not begin with vested wrongs.”
Over the next few months Brandeis would deliver this same message with slight variations to the House Committee on the Judiciary in its hearings on antitrust legislation, the House Committee investigating U.S. Steel, and the House Committee on Patents. He also met with various government officials to discuss antitrust matters, including Commissioner of Corporations Herbert Knox Smith. Although the La Follette–Stanley bill died, Brandeis and other progressives laid the ground for the great debate on monopolies that would be at the center of the 1912 presidential campaign and that would result in the last major revision to the nation’s antitrust laws in 1914.
In early 1911, Brandeis started talking about how banks used “other people’s money” both for good and for ill. Responsible bankers saw the power they had over people’s deposits as a trust (and here he surely had in mind Massachusetts savings bank directors), to be used impartially depending on the degree of an applicant’s creditworthiness. But if “they exercise their power regardless of that trust, ignoring the square deal, it amounts practically to their playing the industrial game with loaded dice.” This illegitimate use of other people’s money, he warned, might ultimately “force the thought of Government control of money in order to insure the square deal.”
Later in the year he told a reporter that “the control of capital is, as to business, what the control of water supply is to life. The economic menace of past ages was the dead hand which gradually acquired a large part of all available lands. The greatest economic menace of today is a very live hand—these few able financiers who are gradually acquiring control over our quick capital.” It would be one thing if the bankers used their own money; after all, people had a right to refuse to lend their own capital. But bankers held other people’s money and therefore had an obligation to manage it in a fair and equitable manner. This they were not doing, he charged, and as a result “the fetters which bind the people are forged from the people’s own gold.”
A person reading this might have assumed that Brandeis had moved over toward the radical wing of progressivism, those who flirted with socialist ideas and the redistribution of wealth. But Brandeis, like Theodore Roosevelt and Woodrow Wilson, never abandoned his conservatism, his belief that one had to adapt to new conditions in order to preserve the best of the old. There was, however, a growing sense of outrage not so much against the new economic modes (although he did not care for them) as against those who controlled the new industrialism and who he believed had compromised their integrity by catering to the worst aspects of the new order. As early as 1891 he had told his fiancáe of his outrage at “the wickedness of people, shielding wrong doers, and passing themselves off (or at least allowing them to pass themselves off) as honest men.” The corporation itself had no life, no power to make decisions, no intrinsic good or evil. Rather, in the hands of farsighted leaders like William McElwain and the Filenes, the corporation became a tool to be used to develop a business that benefited not only its owners but its workers and the community. But in the hands of a J. P. Morgan or a John D. Rockefeller, the corporation became an instrument of oppression, stifling individualism and opportunity, and the bankers were the worst of the villains. Brandeis may have sounded like a radical in attacking the so-called captains of industry and the bankers who controlled the economy, but his solution—the restoration of competition and with it individual opportunity—could not have been more conservative.
Beginning in May 1912, a special subcommittee of the House Banking and Currency Committee, chaired by Arsène Pujo of Louisiana, began public hearings on the banking community, during which Samuel Untermyer, the committee counsel, grilled witnesses from the banks and investment houses on the practices of high finance. Although J. P. Morgan and other bankers denied that such a thing as a “money trust” existed, the committee found clear evidence of a concentration of financial power in a handful of men. No sooner had the committee issued its report than the financial community began worrying about what would happen next. A “cold perspiration” gripped bankers, according to one newspaper, “at the thought of an intelligent committee with Louis D. Brandeis as counsel.”
Brandeis followed the Pujo hearings closely and had received a copy of the committee report from Untermyer in mid-March 1913. He read it immediately and wrote to Untermyer calling the work “admirable.” He agreed with most of the recommendations, but “in some respects it seems to me that the recommendations do not go far enough,” and he suspected that in those instances the committee had failed to heed Untermyer’s advice. On his next trip to New York he met with Untermyer, and the two men went carefully over the committee’s findings. Brandeis then sat down and wrote his most famous nonjudicial work, a series of articles called “Breaking the Money Trust” for Harper’s Weekly, now edited by his good friend Norman Hapgood, later collected and published as Other People’s Money, and How the Bankers Use It.
The first installment in the series, titled “Our Financial Oligarchy,” appeared in the 22 November 1913 issue of Harper’s, and the remaining eight articles followed on a weekly basis. The series appeared just as Congress debated reform of the banking system, and Woodrow Wilson received advance copies that he read closely. Wilson had been convinced earlier that a money trust existed and just prior to his inauguration had declared, “The banking system of this country does not need to be indicted. It is convicted.” If any one other than bankers doubted that, Brandeis’s articles pounded home the message with force and clarity.
In the series, Brandeis repeated many of the arguments he had made before about the inefficiency of big corporations and their threat to democratic institutions. But he went further than in his previous attacks and, according to one scholar, “contributed the first serious challenge to the principal rationale of the consolidation movement.” Whatever progressives thought about the social consequences of industrialization, most of them conceded the economic superiority of the large unit. Brandeis laid out what he considered the weaknesses in the arguments of efficiency and inevitability:
Consolidations created companies too big for their managers to manage responsibly, because they could not know what was happening in all of the divisions.
Bankers who promoted the combinations and dominated their management afterward only aggravated the supervisory problem by taking on tasks for which they had no qualifications and that conflicted with their responsibilities as bankers.
Consolidations reduced competition, and in doing so contributed to economic inefficiency by adversely tampering with the market.
Interlocking directorates, in which the same people sat on the boards of companies that should be independent, led to preferential treatment at the expense of the company and of the consumer.
Consolidations that now enjoyed monopolistic status used that power to thwart the entry of new producers and to suppress innovations that jeopardized existing investment.
The concentration of the control of money led to discriminatory credit practices and inflated the cost of money for new capital investments, especially for those attempting to start new businesses. The constricting of competition in banking inevitably led to constriction of competition in all sectors of the economy.
The series presents the quintessential Brandeisian argument against bigness: it is inefficient, it chokes off competition, it stifles opportunity, and it is not inevitable, but only appears so because of the machinations of the bankers.
The core of the argument is moral rather than economic, and almost from the time of its publication economists have noted its weaknesses. They are no doubt right. There is a certain nineteenth-century New England provincialism present, a disregard of market forces and the social as well as economic gains that consolidation often brings. But there is also much to say for morality in the marketplace, as anyone who reads the daily papers in the early twenty-first century can attest. News stories are full of the illegal and arrogant practices of giant corporations, which often see themselves as above the law that applies to everyone else. In this they are no different from J. P. Morgan, who in a meeting with Theodore Roosevelt objected to the application of a federal law to his enterprises. “Just send your man to see my man,” Morgan told the president, “and they can work things out.”
Hapgood arranged for the articles to be edited for book publication. Both he and the publisher, Frederick Stokes, wanted to call the book Every Man’s Money, and What the Bankers Do with It, but Brandeis insisted on Other People’s Money, having used the phrase from Adam Smith’s Wealth of Nations in previous speeches and articles. The book appeared in 1914, after the passage of the Federal Reserve Act, and has been considered one of the major muckraking works of the progressive era.
In the midst of the Great Depression, following the election of Franklin Roosevelt, Brandeis arranged for a cheap edition of Other People’s Money to be printed, hoping that as people realized the folly of bankers in the 1920s, they would finish the reforms begun in the Wilson era. But the inner circle surrounding Roosevelt had little use for Brandeis’s ideas, finding “his faith in smallness too stark and rigorous.” The Glass-Steagall Act and other New Deal measures, however, did much to implement one of Brandeis’s main proposals, the separation of investment and banking functions. Although that measure operated well for more than a half century, recent business-oriented administrations gave in to banking demands that they be allowed to reestablish their investment operations. Brandeis would not have approved, and the economic problems generated by poor banking practices would have justified his criticism.
J. P. Morgan partner
Thomas W. Lamont in the
1920s
Perhaps the most interesting part of the exchange was as follows:
Lamont: What I cannot understand, Mr. Brandeis, is this fixed impression that you have as to this dangerous power that we have been wielding.
Lamont: And you are really convinced, Mr. Brandeis, that our house [Morgan] has this great power that you describe?
The two men found little that they saw eye to eye on, although Lamont apparently agreed that interlocking directorates did cause conflicts of interests for some board members. Reading the transcript gives the impression of two people talking the same language but meaning far different things. Lamont could not accept Brandeis’s basic assumption that a money power existed or that those who controlled it could inflict great harm on the country. Brandeis would not buy Lamont’s assertion that the Morgan company did not exercise close control over firms it had helped create or that bankers played no role in the management of those firms. Neither man left the meeting, conducted on the most polite and cordial of terms, convinced one bit by the arguments of the other.
To subject Brandeis’s views on the inefficiency of big corporations and his theory of how the market should operate to analysis by economic theory leads, of course, to the conclusion that he had it all wrong. Companies could be efficient; even in a competitive national market, small firms often enjoy monopolistic power in a particular market; only big companies have been able to put aside significant sums of money for research and development; ease of entry is largely a myth, and exists only for a brief period when the market for a new product just opens.
That critique, however, misses the key element of what Brandeis tried to teach; namely, that in a democratic society the existence of large centers of private power is dangerous to the continuing vitality of a free people. This was not simply a question of power corrupting those who wielded it, but rather an assertion that the very existence of such power exerted a chilling effect. Workmen dependent for employment in a large factory could be intimidated regarding their support for “dangerous” political programs or candidates. The fact that a large bank in New York or Boston could exercise influence over its corresponding banks in smaller cities meant that businesses in these cities could be affected by the decisions of New York and Boston bankers. For Brandeis, social institutions, and these included economic organizations, had to be constructed to help individuals develop as responsible citizens, and the existence of large and threatening centers of economic power thwarted this goal.
Brandeis may have been wrong in his economic theory, but not in his cautions about the excesses of big business. The history of firms like Microsoft that built upon original and innovative ideas shows that as they grew bigger, they also began utilizing their power in ways that, if not outright illegal, certainly flouted the spirit of the laws. The failure of savings banks in the 1980s, after decades-old restraints had been removed, emphasizes the wisdom of those policies in the first place. Hardly a week goes by without news of some official of a large corporation going to jail or paying a large fine as a result of arrogance in meeting his or her duties. Brandeis’s demand that business be carried on in a moral manner and his insistence that a free and open market benefited democracy—old-fashioned virtues indeed—still ring true.
As Alexander Bickel wrote on the centenary of Brandeis’s birth, “Brandeis’s achievement is that he gave new content to old ideals, a content immediately and creatively relevant in a society in which, as he himself said, ‘the only abiding thing is change.’”