Once admitted that the machine must be efficient, society might dispute in what social interest it should be run, but in any case it must work concentration.
—Henry Adams, 19051
The day of combination is here to stay. Individualism has gone, never to return.
—John D. Rockefeller, 18802
Repeatedly in American history, waves of technological innovation have led to the reorganization of business and markets, before the political order could catch up. By the first years of the twentieth century, the second industrial revolution of the late nineteenth century, based on the new technologies of electricity and automobility, was already outgrowing the structures of American economic life that had been inherited from the last wave of reform in the United States during the Civil War and Reconstruction.
In 1901, the economist John Bates Clark wrote: “If the carboniferous age were to return and the earth were to repeople itself with dinosaurs, the change that would be made in animal life would scarcely seem greater than that which had been made in business life by these monster-like corporations.”3 By 1932, according to Adolf A. Berle and Gardiner C. Means in The Modern Corporation and Private Property, half of the assets of nonfinancial corporations in the United States were controlled by only two hundred firms.4 “The day of combination is here to stay,” John D. Rockefeller declared. “Individualism has gone, never to return.”5
The second industrial era that began in the 1870s and 1880s was an age of giantism in production as well as invention. By 1890 the assets of US manufacturing, at $6.5 billion, were approaching those of US railroads, at $10 billion, although while each of the ten largest railroads had assets of $100 million each, few manufacturing corporations were worth more than $10 million.6 The “great merger wave” of 1895–1904 created giant corporations in industries ranging from steel to tobacco.
The new industrial leviathans existed in a country whose political institutions, despite the reforms of the Civil War and Reconstruction, were still those of a decentralized, agrarian society. The misalignment between the emerging technological and economic order and the archaic political system was a challenge that different groups of reformers sought to meet in different ways.
ANTITRUST AND THE SUPREME COURT
One historian observes that around 1900 “a big majority of the economists conceded that the combination movement was to be expected, that high fixed costs made larger scale enterprise economical, that rivalry under these circumstances frequently resulted in cutthroat competition, that agreements among producers were a natural consequence, and the stability of prices usually brought more benefit than harm to the society.”7 A number of American economists argued that older notions of laissez-faire were irrelevant in an economy transformed by the use of steam power in transportation and manufacturing. For example, Richard T. Ely wrote that “owing to discoveries and inventions, especially the application of steam to industry and transportation, it became necessary to prosecute enterprises of great magnitude.”8 In 1889, another leading American economist, David Ames Wells, argued that the application of steam engines to manufacturing made possible “excessive competition” and losses that could only be avoided if firms combined to limit output.9 As a result, he declared: “Society has practically abandoned—and from the very necessity of the case has got to abandon, unless it proposes to war against progress and civilization—the prohibition of concentrations and combinations.”10 John Bates Clark wrote that large industrial combinations “are the result of an evolution, and the happy outcome of a competition so abnormal that the continuance of it would have meant widespread ruin. A successful attempt to suppress them by law would involve the reversion of industrial systems to a cast-off type, the renewal of abuses from which society has escaped by a step in development.”11
In addition to recognizing the legitimacy of large corporations in industries with increasing returns to scale, by the 1890s, many otherwise conservative economists argued for the reality of “ruinous competition” in railroads and other industries with high fixed costs and variable operating costs. According to this argument, too many firms competing in a capital-intensive industry could drive prices below the minimum prices needed to recoup long-term, fixed investments in railroads or factories. As a result, most or all of the competing firms could be plunged into bankruptcy. Traditional free-market competition could not work in such industries, it was argued. What was needed instead was either cartelization among firms that agreed upon minimum prices or consolidation of entire industries by monopoly or oligopoly.
Both methods were tried by entrepreneurs and financiers in the railroads and other industries. Informal price-fixing cartels, known as “pools,” tended to fail, because there was no penalty to prevent one or more firms from undercutting the agreed-upon minimum prices. In other countries, including Britain, Germany, and Japan, cartels were tolerated or legal and allowed to enforce price agreements upon all firms in an industry. But in its interpretations of the vague language of the Sherman Antitrust Act of 1890, which prohibited combinations to create monopolies, the Supreme Court, clinging to preindustrial economic theory, ruled repeatedly in the late nineteenth and early twentieth centuries that avoiding ruinous competition was not a defense of price-fixing or other forms of collaboration among firms in the same industry.
THE GREAT MERGER MOVEMENT
Even as it forbade firms in the same industry to collaborate, the Supreme Court permitted mergers that created firms that could dominate particular industries. The court inadvertently reshaped the industrial landscape of the United States, as companies responded to its rulings by abandoning attempts at cartelization and taking part in what has been called “the great merger wave.” The merger wave of the 1890s and 1900s was followed by a second in the 1920s and a third in the period of conglomerate-building in the 1950s and 1960s.
Most companies in the early republic were created by “special incorporation,” specific charters issued by the legislature that detailed their powers and responsibilities. The Supreme Court struck a blow to the practice of chartering corporations as monopolies in 1837 in the Charles River Bridge case, in which it held that a corporate charter did not imply a monopoly in that industry. Hostility to special incorporation was part of the ideology of Jacksonian populists, for whom it was a source of political corruption and a violation of the principle, “Equal rights for all, special privileges for none.” The revulsion against special incorporation by state governments increased when state fiscal crises followed canal and railroad bubbles in the 1830s and 1840s. By the mid-nineteenth century, most states had enacted general incorporation laws that no longer required special action by the state legislature.
Even so, corporations usually were not allowed to own stock in other corporations. In 1889, in order to encourage companies to incorporate in the state, the New Jersey legislature passed a law that allowed any corporation chartered in New Jersey to own stock in the corporations of any other state. This permitted enormous corporations to be created as holding companies. In 1901, for example, J. P. Morgan incorporated US Steel as a New Jersey holding company. New Jersey was succeeded by Delaware, which still has the leading position among states as a home for American companies.
The combination of the outlawing of cartels and new corporate laws like that of New Jersey resulted in the great merger movement of 1895–1904. In that brief period, eighteen hundred firms were combined into 157 companies, most of them in manufacturing. New Jersey’s 1888 general incorporation law for holding companies of national businesses stimulated a wave of consolidations that grew from four in 1895 and six in 1897 to sixteen in 1898. The wave peaked in 1899, with sixty-three consolidations, followed by twenty-one in 1901, seventeen in 1902, and three in 1904.12
Of ninety-three consolidations studied by the historian Naomi Lamoreaux, seventy-two created companies that controlled at least 40 percent of their industries and forty-two controlled at least 70 percent.13 Among the corporations that dominated 40 percent or more of their industries were the familiar (Eastman Kodak; Otis Elevator; United Steel; National Biscuit, now known as Nabisco) and the forgotten (National Candy, United States Envelope, and American Stogie).14 The new giants included General Electric, which was formed from eight firms and controlled 90 percent of its market; International Harvester, formed from four companies and controlling 70 percent of its market; DuPont, formed from sixty-four firms and controlling 65 to 75 percent of its market; and American Tobacco, which controlled 90 percent of its market after forming from the merger of 162 firms.15
The Wall Street publisher John Moody, founder of Moody’s ratings service, a defender of industrial concentration, claimed that the US economy in the first years of the twentieth century was dominated by seven “Great Industrial Trusts”: United States Steel, Amalgamated Copper, American Smelting and Refining, American Sugar Refining, Consolidated Tobacco, International Mercantile Marine, and Standard Oil.16 In 1894, three-fourths of the output of the entire US steel industry came from Carnegie Steel and Illinois Steel.17 In the chronically troubled railroad industry, consolidation around 1900 resulted in the ownership of 62 percent of the US railway network by seven corporations.18 The period also witnessed the emergence of giant firms in extractive industries like lumber. Economies of scale that permitted upgrades in milling technology were costly and led to the replacement of small operators by large companies like those of Frederick Weyerhaeuser, Charles Stimson, and D. A. Blodgett.
MORGANIZATION
The great merger wave produced enormous firms that confronted a fragmented system of nearly thirty thousand unit banks in the early 1900s. In Germany, large universal banks were able to help a firm throughout its life cycle, by making loans in its early years, underwriting shares as it expanded, and policing and monitoring the firm in its maturity, as a proxy for the firm’s shareholders. The growing importance of the stock market in financing large corporations was the result in part of the inability of America’s mostly small unit banks to grow in scale along with businesses, because of state and federal anti–branch-banking laws. Until the 1890s, railroads dominated the stock and bond markets. Then companies representing the industries of the second industrial revolution, like General Electric and US Steel, became important.
As the new corporate leviathans turned to other sources of financing, banks increasingly made loans to small local businesses. The share of corporate debt in the form of bank loans plunged from 32.1 percent in 1920 to 23.3 percent in 1929. America’s small unit banks also lost out in consumer lending to specialized consumer lenders and corporate vendor financing, like that of the General Motors Acceptance Corporation. Many banks were forbidden by law to branch even within their home states.19
Investment banks in the United States performed the functions of underwriting and monitoring large corporations by the same method of corporate board memberships that was used in Germany by large universal banks. Investment banking costs were high, however, in the United States, compared to Germany, with its universal banks. Restrictions on the size and resources of banks raised the costs of underwriting securities and bank lending to industrial corporations.20
The need for giant corporations to raise enormous sums increased the importance of investment bankers as intermediaries between the shareholding public and individual companies. In 1912, five American banks—J. P. Morgan and Company, First National Bank, National City Bank, Guaranty Trust Company, and Bankers’ Trust—had representatives on the boards of sixty-eight corporations whose combined assets added up to more than half of US gross national product.21
The dominant figure in American investment banking around 1900 was John Pierpont Morgan, a Europe-educated patrician from a wealthy American banking dynasty. A dedicated art collector, a pillar of the Episcopal Church, an adulterer who supported Anthony Comstock’s Society for the Suppression of Vice, with a nose discolored by the skin disease rosacea and an impressive stature and girth, Morgan was a larger-than-life figure. Morgan’s grandfather Joseph was a founding investor in the Hartford and Aetna insurance companies. His father, Junius, worked in business in Hartford and Boston for a few years before joining the merchant bank of George Peabody, a Baltimore expatriate living in London. On Peabody’s retirement, Junius changed the name of the firm to J. S. Morgan & Co.
Morgan was born to Junius and his wife in 1837 in Hartford, Connecticut. A sickly youth, Morgan grew into an unhealthy adult who never exercised, saying, when his son began to play squash every morning before work, “Rather he than I.”22 Educated in Boston, Switzerland, and Germany, and with a degree in art history from the University of Göttingen in Germany, Morgan turned down an offer to stay as an assistant to a mathematics professor at the University of Göttingen and moved to New York, where he worked for a Wall Street firm, Duncan, Sherman & Co., surprising them when, during a trip to New Orleans, he bought a shipload of coffee and sold it for a profit on the firm’s account, without asking permission. His first wife, Amelia “Memie” Sturges, was suffering from tuberculosis when he wed her; too weak to stand during their wedding, she died four months later in Nice, leaving Morgan a widower at twenty-four. Toward the end of the Civil War he married his second wife, Frances Tracy, with whom he had three daughters and a son, Jack Morgan Jr., who inherited the leadership of J. P. Morgan and Company.
In 1860, he became the American agent for his father’s firm and made his first fortune on commissions for selling US bonds in Europe during the Civil War. Like many upper-class Americans, Morgan avoided service in the Civil War by paying three hundred dollars for a substitute. Later he inherited his father’s firm and formed his own partnerships, first Dabney, Morgan & Co. and then Drexel, Morgan and Co. He formed a syndicate that successfully challenged Jay Cooke’s monopoly of government finance.
Morgan’s eminence grew in 1879, when he sold British investors 150,000 shares of the New York Central Railroad that William H. Vanderbilt, Cornelius’s son, wanted to divest himself of in order to diversify his holdings. By holding the proxies of the British investors, Morgan got a place on the New York Central’s board and a foothold in the railroad industry. With Vanderbilt’s approval, Morgan sought to end a war between the New York Central and the Pennsylvania Railroad by persuading their directors to work out a truce aboard his yacht on the Hudson River. Morgan frequently invited quarreling railroad chiefs to settle their differences at his dinner table, in his library, or on his yacht, named the Corsair, in keeping with his piratical reputation.
Morgan transferred the technique of consolidation from the railroad industry to other industries. Morgan created General Electric, American Telegraph and Telephone (AT&T), the Pullman Company, National Biscuit (Nabisco), and International Harvester. Morgan’s most famous consolidation was the 1901 merger that produced US Steel, the world’s first billion-dollar company. He paid $480 million for Carnegie Steel, making Carnegie the richest person in the world. The initial capitalization of US Steel—a billion dollars—was twice the US federal budget.
The process by which the House of Morgan acquired, consolidated, and reorganized railroads and other companies and controlled them by placing Morgan partners on their boards of directors came to be known as “Morganization.” Morganization was popular with shareholders and entrepreneurs who believed that Morgan’s reputation helped the companies attract investment. Charles S. Mellen, the president of the New York, New Haven and Hartford Railroad, declared, “I wear the Morgan collar, and I am proud of it.”23 When a railroad executive spoke about his railroad, Morgan exploded: “Your railroad? Your railroad belongs to my clients.”
By 1900, Morgan and his partners had a place on the boards of directors of companies that accounted for over a quarter of the wealth of the United States. Did Morganization produce criminal monopolies or efficient firms that benefited from technological and commercial economies of scale? The historian of business Alfred D. Chandler Jr. noted that many of the largest US firms in industries such as petroleum, transportation equipment, rubber, chemicals, and food products were the same in 1973 as in 1917. These market-dominating “center firms” tended to be more capital-intensive and technologically advanced than small, labor-intensive “peripheral firms” in the same industry. Chandler found a similar pattern among the center firms of Britain, Germany, France, and Japan, which suggests that the formation of large manufacturing corporations in the second industrial era could only be explained in terms of efficiency, not local conspiracies against the public good. Building on Chandler’s work, Thomas K. McCraw concluded that these international comparisons discredit polemical accounts of the rise of nefarious “trusts.”24 The economist Bradford DeLong has concluded that Morganization did produce value for its beneficiaries.25
HOW J. P. MORGAN BAILED OUT THE UNITED STATES
Morgan was so powerful that it was necessary for him to intervene to help rescue the federal government from financial crises in 1895 and 1907. In 1895, after the Panic of 1893 had caused a depletion of the US Treasury’s gold reserves, Morgan visited Democratic president Grover Cleveland in the White House and promised help. On returning to New York, he locked a number of leading financiers in the ornately decorated library of his lavish mansion and refused to allow them to leave until they had agreed to contribute money to a syndicate that would bail out the federal government by supplying the Treasury with gold in return for federal bonds. The plan worked, but outrage among populist Democrats contributed to the party’s nomination of William Jennings Bryan in 1896 and 1900, when Morgan and other American financiers and industrialists, mobilized by Mark Hanna, contributed record-breaking sums of money to defeat Bryan and elect McKinley twice.
Again in 1907, Morgan was reluctantly called upon by President Theodore Roosevelt to help avert a financial crisis. On the evening of Thursday, October 24, 1907, most of the leading bankers in New York were summoned to Morgan’s library. Morgan ordered them to figure out a way to restore public confidence in the banks, then retired to his office to play solitaire. The plan the bankers worked out was to allow banks to settle their accounts among themselves in New York Clearing House notes, freeing them to lend out their clearing-house balances in the form of cash to depositors. The system had been used successfully in earlier panics. In addition, Morgan raised $13 million in call money for the stock exchange, while John D. Rockefeller contributed $10 million to the national banks in addition to $10 million from the US Treasury.
Shocked by the dependence of the federal government on the private power of the House of Morgan in 1895 and 1907, Congress decided to create an American central bank. On December 1913, eight months after J. P. Morgan died in Rome, President Woodrow Wilson signed the Federal Reserve Act into law. The legislation was based on a 1912 report by the National Monetary Commission, headed by the powerful chair of the Senate Finance Committee, Rhode Island senator Nelson W. Aldrich. Several members of the commission—Aldrich, Paul M. Warburg, Henry P. Davison, Frank A. Vanderlip, A. Piatt Andrew, and Benjamin Strong, a vice president at Bankers Trust, who later became the highly capable first governor of the New York Federal Reserve—had secretly traveled to the Millionaire’s Club at Jekyll Island, Georgia. They told journalists they were going duck hunting, and Davison and Vanderlip in the earshot of train personnel and other passengers called each other Orville and Wilbur.
The Aldrich plan that emerged from these discussions combined a central board of private bankers with regional reserve banks. The Democratic majority in Congress reduced the influence of private bankers by adding a presidentially appointed governing board in Washington. At the insistence of southerners and westerners who feared the domination of central banking by the New York financial community, a decentralized system of regional Federal Reserve banks was created, in what ultimately proved to be the vain hope that this would limit the influence on the Federal Reserve of the New York financial community.
PROGRESSIVISM IN AMERICA
In response to the challenges posed by giant industrial corporations, some Americans advocated doing nothing at all. Herbert Spencer’s laissez-faire doctrine was championed in the United States by William Graham Sumner of Yale and Edward Livingston Youmans, the editor of Popular Science Monthly, founded in 1872. Asked by the champion of land reform, Henry George, what he would do about social problems, Youmans replied: “Nothing! You and I can do nothing at all. It’s all a matter of evolution. We can only wait for evolution. Perhaps in four or five thousand years evolution may have carried men beyond this state of things. But we can do nothing.”26
Other Americans were not willing to wait four or five thousand years for social progress. Many American academics had studied in Imperial Germany and had been impressed by the social reforms and economic regulation that Chancellor Otto von Bismarck’s regime had undertaken since the founding of the united Reich in 1871. In the late nineteenth century, even as the authoritarian government of Imperial Germany outlawed unions and the Social Democratic Party, it passed reforms: health insurance (1883), accident insurance (1884), and old age and disability pensions (1889). By World War I Britain under David Lloyd George had adopted many similar reforms. Admirers of these reforms in America adopted the name “progressive” for themselves by translating the German word Fortschrittliche. Their counterparts in Britain called themselves the New Liberals, and by the 1930s “liberal” came to be preferred to “progressive” by Americans like Franklin Roosevelt, who described himself as “slightly left of center.”
The American progressives were influenced by the German historical school of economics, which dismissed classical liberal economics in the tradition of Adam Smith and David Ricardo as superficial “Manchester liberalism.” According to the historical school, political economy was a form of statecraft, not a science modeled on physics that could identify “laws” of economics that would be valid in all societies and all times. The historical school was influenced by Friedrich List, who had argued that Germany should model itself on the United States by creating a large internal market and using a protective tariff to promote its infant industries; in addition, List dreamed of American-style democracy for Germany, not Bismarckian authoritarianism. List had been an evangelist for the American school of developmental capitalism associated in the first half of the nineteenth century with Hamilton, Clay, Raymond, Carey, and others. The American progressives of the 1900s who imported German historical school ideas were thus, in a sense, reimporting the modified themes of the earlier American school of political economy. They went on to found the institutional school of American economics, which had a profound influence on American reform in the first half of the twentieth century, even though it was marginalized in the American academy after World War II by excessively abstract, unrealistic approaches to economics. Similar themes are found in the “evolutionary economics” of the late twentieth and early twenty-first centuries that drew inspiration from the economist Joseph Schumpeter’s vision of technology-driven “creative destruction.”27
In the early twentieth century, the radical left was marginal, especially after World War I brought about the collapse of the Socialist Party, followed by the postwar Red Scare. The major debate was between champions of neo-Hamiltonian developmental capitalism and neo-Jeffersonian producerists, who idealized small producers. The former school can be called by Theodore Roosevelt’s term, the New Nationalism; the latter, by Woodrow Wilson’s phrase, the New Freedom. New Nationalists favored economies of scale, but within the context of stakeholder capitalism. Their idea of reform was increasing partnership among large, efficient corporations, a strengthened federal government, and (for some) national labor unions. The neo-Jeffersonian producerists of the New Freedom school sought to use federal and state laws to tilt the playing field toward small businesses, small distributors, and small banks. Both schools opportunistically denounced their adversaries for interfering with the market, but each school favored government intervention in the economy in order to promote its vision of the future of American society.
THE NEW NATIONALISM
In his influential book Relation of the State to Industrial Action (1887), the economist Henry Carter Adams distinguished industries with increasing returns from those with constant or diminishing returns. In industries with increasing returns to scale, the greater efficiency of large units meant that the largest firm would be likely to drive its rivals out of existence and become a monopoly. Adams argued that an industry with increasing returns to scale would tend to be either an “irresponsible, extralegal monopoly, or a monopoly established by law and managed in the interest of the public.”28
In his 1909 manifesto The Promise of American Life, the progressive journalist Herbert Croly, the founding editor of the New Republic, wrote: “The constructive idea behind a policy of the recognition of the semi-monopolistic corporations is, of course, the idea that they can be converted into economic agents . . . unequivocally for the national economic interest.”29 The trade-union leader Samuel Gompers favored the formations of industrial trusts capable of negotiating with labor unions. At J. P. Morgan’s death, a socialist is supposed to have said: “We grieve that he could not live longer, to further organize the productive forces of the world, because he proved in practice what we hold in theory, that competition is not essential to trade and development.”30
This progressive version of America’s tradition of Hamiltonian developmental capitalism found a champion in Theodore Roosevelt. Roosevelt condemned “malefactors of great wealth.” He wrote: “Of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of a plutocracy.”31
But TR did not believe that breaking up large corporations could restore a golden age of equality among small farmers and small shopkeepers. He complained: “Much of the legislation not only proposed but enacted against trusts is not one whit more intelligent than the medieval bull against the comet, and has not been one particle more effective.” In his annual address to Congress in 1902, he wrote: “These big aggregations are an inevitable development of modern industrialism, and the effort to destroy them would be futile. The line of demarcation we draw must always be on conduct, not on wealth; our objection to any given corporation must be, not that it is big, but that it behaves badly.”32 In his “New Nationalism” speech at Osawatomie, Kansas, in 1910, Roosevelt observed: “The effort at prohibiting all combination has substantially failed. The way out lies, not in attempting to prevent such combinations, but in completely controlling them in the interest of the public welfare.”33
Critics noted that when Roosevelt distinguished “good trusts” from “bad trusts,” the good trusts were often organized by J. P. Morgan, who funded his campaigns. For example, although his Justice Department successfully brought an antitrust suit against the Morgan-backed Northern Securities railroad trust, TR saw US Steel as a good trust, and when a lawsuit against it was brought under the Sherman Act, a federal district court agreed, throwing out the suit in a 1915 decision upheld by the Supreme Court in 1920. The satirist Finley Peter Dunne, in Irish dialect, restated Roosevelt’s distinction between good and bad trusts: “ ‘The trusts,’ says [Roosevelt], ‘are heejous monsthers built up be th’inlightened intherprise iv th’ men that have done so much to advance progress in our beloved country,’ he says. ‘On wan hand I wud stamp thim undher fut; on th’other hand not so fast.’ ”34
When in 1902, Roosevelt ordered Attorney General Philander Knox to prosecute Morgan’s Northern Securities Corporation for violating the Sherman Antitrust Act, Morgan visited the White House and told the president, “If we have done anything wrong, send your man to my man and they can fix it up.” After Morgan departed, TR told Knox: “Mr. Morgan could not help regarding me as a big rival operator, who either intended to ruin all his interests or else could be induced to come to an agreement to ruin none.” Their clashes did not prevent Morgan along with other major financiers and industrialists from contributing money to Roosevelt’s 1904 election campaign, on the grounds that the agrarian populist Democrats were a greater threat than the patrician progressive. But Morgan never forgave Roosevelt. When he learned that the recently retired president had gone to Africa on a hunting expedition, Morgan told friends: “I hope the first lion he meets does his duty.”35
As an alternative to the blunt instrument of antitrust, TR supported a federal incorporation law. Representative William P. Hepburn of Iowa in 1908 introduced a bill inspired by a 1907 report of the National Civic Federation. Founded in 1900 by a Chicago Republican editor named Ralph Montgomery Easley, the National Civic Federation brought together leaders from the realms of business, labor, politics, the academy, the clergy, and journalism who shared a common interest in moderate reform that avoided the extremes of radicalism and reaction. Mark Hanna was the first president and Samuel Gompers the first vice president. Andrew Carnegie and August Belmont belonged to the NCF, as did John R. Commons of the University of Wisconsin, one of the most important of the progressive economic reformers.
The Hepburn bill proposed federal incorporation of firms engaged in interstate commerce and exempted not only unions but also farms and business combinations “in the public interest.” A commissioner of corporations in the Commerce Department, rather than lawyers in the Justice Department, would have supervised corporate behavior. Jeffersonian paranoia doomed this sensible Hamiltonian reform. The Senate Judiciary Committee denounced the proposed registration of companies engaged in interstate commerce with the commissioner of corporations: “Shall we confer power upon the mere head of a bureau that the Parliament of England were unwilling to accord the King, and which they regarded as a menace to their liberties?”36
WILSON, BRANDEIS, AND THE NEW FREEDOM
Like Theodore Roosevelt, Woodrow Wilson recognized that there could be no return to an American economy dominated entirely by small enterprises. In 1900, he complained about populists like William Jennings Bryan: “Most of our reformers are retro-reformers. They want to hale us back to an old chrysalis which we have broken; they want us to resume a shape which we have outgrown.”37 In 1908, Wilson told the National Democratic Club: “No one now advocates the old laissez faire.”38 In 1912, at the Democratic Party’s annual Jefferson Day banquet, Wilson dismissed the relevance of Jeffersonian political economy, arguing that the United States “is not the simple, homogeneous, rural nation that she was in Jefferson’s time.” He concluded: “We live in a new and strange age and reckon with new affairs alike in economics and politics of which Jefferson knew nothing.”39 In 1912, Wilson declared: “Nobody can fail to see, no matter how clearly you perceive the evils that have come upon the country by the use of them—nobody can fail to see that modern business is going to be done by corporations. The old time of individual competitiveness is probably gone by. . . . We will do business henceforth when we do it on a great and successful scale, by means of corporations” (emphasis in original).40 On accepting the presidential nomination of the Democratic Party in the same year, Wilson emphasized, “I daresay we shall never return to the old order of individual competition, and that the organization of business upon a great scale of co-operation is, up to a certain point, itself normal and inevitable.”41
Nevertheless, Wilson had misgivings about centralized power, which he shared with another southern-born Progressive, Louis Brandeis. The first Jewish justice of the Supreme Court, appointed by Wilson in 1916, the Kentucky-born Brandeis campaigned all his life against what he called “the curse of bigness,” inspiring a school of influential Brandeisian liberals including Felix Frankfurter and Benjamin Cardozo.
Brandeis denied the very existence of increasing returns to scale in technology-based industries: “I am so firmly convinced that the large unit is not as efficient—I mean the very large unit—is not as efficient as the smaller unit, that I believe that if it were possible today to make corporations act in accordance with what doubtless all of us agree should be the rules of trade no huge corporations would be created, or if created, would be successful.”42 He attributed the large size of modern industrial and infrastructure corporations not to economies of scale but to a conspiracy of New York bankers: “There is the consolidation of railroads into huge systems, the large combinations of public service corporations and the formation of industrial trusts, which, by making businesses so ‘big’ that locally independent banking concerns cannot alone supply the necessary funds, has created dependence upon the associated New York bankers.”43 He did not explain why large enterprises in manufacturing were common in other industrial countries beyond the reach of New York bankers. Brandeis would have resolved the emergent contradiction between large corporations and small unit banks—“locally independent banking concerns”—by cutting companies down to the scale of unit banks. Brandeis’s neo-Jeffersonian alternative to industrial corporate capitalism was a vague vision of a social order based upon small enterprises and cooperatives, of a kind that has not existed in any modern industrial country since the nineteenth century.
The Brandeisian wing of progressivism stoked Jeffersonian and Jacksonian dread of “the trusts,” a pejorative term for large enterprise that continued to be used long after New Jersey’s incorporation law permitted companies to abandon the unwieldy form of trusts in order to expand. Charles Francis Adams complained that every plan to coordinate railroads was immediately “characterized in the papers as a vast ‘trust’—in these days, everything is a ‘trust’—and denounced as a conspiracy.”44 The journalist Ida Tarbell, who had written a bestselling attack on John D. Rockefeller and Standard Oil, wrote in her autobiography that the public was wrong to believe “that the inevitable result of corporate industrial management was exploitation, neglect, bullying, crushing of labor, that the only hope was in destroying the system.”45
Many Brandeisians believed mistakenly that large corporations survived only because of high tariffs. They hoped that the Underwood Tariff Act of 1913, by slashing tariff rates, might cause industrial trusts to crumble under new competition. In fact, the most successful industrial corporations no longer needed the tariff and favored a policy of reciprocal trade liberalization so that they could export more to foreign markets, especially Europe. When the United States adopted low tariffs after World War II, most of the Morgan-created behemoths, instead of crumbling, as Brandeisian theory predicted they would, dominated the global market as well as the American market.
For critics of the trusts like Brandeis, the real purpose of antitrust was not to protect consumers, who often benefited when economies of scale permitted lower prices, but rather to protect small, inefficient producers who sought to use the state to compensate for their own lack of competitiveness. Anti–chain-store legislation similarly sought to protect small stores from competition by national retailers.
While the New Nationalists in the Hamiltonian tradition sought to remove economic governance from the adversarial environment of judges and juries to the realm of federal public administration, the neo-Jeffersonian advocates of the New Freedom sought to strengthen the prosecutorial antitrust system. In 1914, the Clayton Act backed by the Wilson administration sought to make the Sherman Antitrust Act even harsher by specifying monopoly practices. The Federal Trade Commission, created in 1914, was empowered to police restraints of trade, in addition to the courts.
Another progressive reform directed at the new elite of industrial and financial millionaires was the federal income tax. The Constitution provided that any federal direct tax be apportioned on the basis of the population of a state rather than its wealth. This meant that if New York had 30 percent of income but only 10 percent of the population, only 10 percent of an income tax’s revenue could come from New York. This provision did not prevent Congress from passing a federal income tax during the Civil War. It expired in 1872, but in 1895, Congress passed a law taxing all personal and corporate income. In a narrow five-to-four decision, the Supreme Court ruled that the income tax was unconstitutional because it was not apportioned among the states by population. Congress responded by approving the Sixteenth Amendment in 1909, and the amendment became part of the Constitution in 1913 after three-fourths of the states ratified it. In the same year, the Revenue Act imposed rates from 1 to 6 percent on incomes and a 1 percent rate on corporate incomes. Rates were raised in World War I but cut again in the 1920s, when Treasury Secretary Andrew Mellon argued that reducing taxes on the rich would stimulate economic growth, an argument revived in the form of “supply-side economics” during the Reagan era that began in 1981.
THE MONEY TRUST
As governor of New Jersey, Wilson argued in 1911: “The great monopoly in this country is the money monopoly.” This was an absurd statement, given the existence of thousands of legally privileged and protected unit banks, but one that appealed to the Jeffersonian and Jacksonian prejudices of the largely southern and western Democratic Party of his time.
A southern Democrat, Louisiana congressman Arsène Pujo, used his subcommittee of the House Banking and Currency Committee to investigate Wall Street’s role in American finance. In December 1912, Morgan was forced to testify before the Pujo Committee. With the aid of committee counsel Samuel Untermyer, a progressive lawyer, the Pujo Committee issued its report on February 28, 1913. According to the report, American industry and finance were dominated by associates of J. P. Morgan, including the investment banking firms Kidder, Peabody; Lee, Higginson; National City Bank; and First National Bank.
Brandeis drew on the Pujo Committee hearings in a series of essays in Harper’s Weekly and a book, Other People’s Money: And How the Bankers Use It (1914). Brandeis argued that the leaders of three banks—J. P. Morgan, George F. Baker at First National, and James Stillman at National City Bank—were at the center of a “money trust” that had captured the American economy. Brandeis complained that members of J. P. Morgan and Co. had seventy-two directorships in forty-seven of America’s largest corporations, while Baker and his First National colleagues served on forty-nine boards, and Stillman and his colleagues at National City served on forty-eight. George F. Baker, a Morgan partner who was also head of First National Bank, sat on the boards of six railroads that owned 90 percent of Pennsylvania anthracite coal. Membership by bankers on corporate boards has been commonplace and uncontroversial in other countries, including the democratic Federal Republic of Germany after 1945. But Brandeis insisted: “The practice of interlocking directorates is the root of many evils. It offends laws human and divine. It is the most potent instrument of the Money Trust.”46
BETWEEN THE NEW NATIONALISM AND THE NEW FREEDOM
Veering between the poles of the New Nationalism and the New Freedom, federal antitrust policy set by courts and executive branch officials produced an incoherent pattern, producing uncertainty for American businesses and investors. Supreme Court rulings in E. C. Knight (1895) and Addyston Pipe and Steel (1898) suggested that the Sherman Act would not be used by the federal judiciary to block mergers. However, the Supreme Court created confusion in 1904 by ordering the dissolution of Northern Securities—a holding company created with the help of J. P. Morgan to merge the Great Northern and Northern Pacific railroads. The court found an intent to restrain trade and forced a breakup.
The Supreme Court ordered that American Tobacco and Standard Oil be broken up as well. The penalty against Standard Oil was the equivalent of half the money coined by the US government in a year. Mark Twain responded to news of the fine by quoting the bride on the morning after her wedding night: “I expected it but didn’t suppose it would be so big.”47 Then in 1920, the court decided in favor of US Steel, even though its president, Elbert Gary, had made no secret of his company’s cooperation with other firms in stabilizing prices in the industry, at meetings known as “Gary dinners.”
The Supreme Court announced a “rule of reason,” but from the beginning US antitrust policy has lacked rhyme and reason. The fact that the United States was the only leading industrial nation that repeatedly harassed and sought to destroy many of its successful industrial enterprises merely on account of their scale can be explained only by the lingering residues of preindustrial Jeffersonian ideology in the radically different circumstances of industrial America.
As the second decade of the twentieth century began, both the New Nationalism and the New Freedom could claim victories in the struggle to shape the emerging American economy based on the technologies of the second industrial revolution. US entry into World War I would shift the balance of power in favor of the New Nationalism, leaving a legacy that would shape American institutions for generations.