Big Business and the Rise of American Statism

Troika American Style

 

Retrieved from the website of the Molinari Institute.

Editors note: This piece has been edited for length. The preface has been removed. Read the full length version here.

Conflicting schools of thought

In historiography different schools of thought exist in much the same way and for the same reason as in many other fields. And in history, as in those other fields, different interpretations, no matter how far removed from reality, tend to go on forever, oblivious to new evidence and theories. In his book, The Structure of Scientific Revolutions, Thomas Kuhn shows in the physical sciences how an existing paradigm of scientific explanation tends to ignore new evidence and theories, being overthrown only when: (a) the puzzles and problems generated by a false paradigm pile up to an increasingly obvious extent, so that an ever-wider range of material cannot be integrated into the paradigm, and an ever-growing number of problems cannot be solved, and (b) there arises on the scene a new paradigm to replace the old.

In history, perhaps more than in most other fields, the criteria of truth have not been sufficiently developed, resulting in a great number of schools of thought that tend to rise and fall in influence more because of political and cultural factors than because of epistemological factors. The result also has been that in history there are a number of competing paradigms to explain different sets of events, all connected to specific political views. In this essay, I shall consider three of them: the Marxist view, the conservative view and the liberal view. I shall examine how these paradigms function with reference to one major area of American history – the Progressive Era – and with respect to one major issue: the roots of government regulation of the economy, particularly through the antitrust laws and the Federal Reserve System. Other incidents will also be mentioned, but this issue will be the focus.

Among these various schools, nearly everyone agrees on the putative facts of American history; disagreements arise over frameworks of interpretation and over evaluation.

The Marxists, liberals, and conservatives all agree that in the economic history of America in the nineteenth century, the facts were roughly as follows. After midcentury, industrialization proceeded apace in America, as a consequence of the laissez-faire policies pursued by the United States government, resulting in increasing centralization and concentration of economic power.

According to the liberal, in the nineteenth century there was an individualistic social system in the United States, which, when left unchecked, led inevitably to the “strong” using the forces of a free market to smash and subdue the “weak,” by building gigantic, monopolistic industrial enterprises which dominated and controlled the life of the nation. Then, as this centralization proceeded to snowball, the “public” awoke to its impeding subjugation at the hands of these monopolistic businessmen. The public was stirred by the injustice of it all and demanded reform, whereupon altruistic and far-seeing politicians moved quickly to mash the monopolists with antitrust laws and other regulation of the economy, on behalf of the ever-suffering “little man” who was saved thereby from certain doom. Thus did the American government squash the greedy monopolists and restore competition, equality of opportunity and the like, which was perishing in the unregulated laissez-faire free market economy. Thus did the American state act to save both freedom and capitalism.

The Marxists also hold that there was in fact a trend toward centralization of the economy at the end of the last century, and that this was inherent in the nature of capitalism as an economic system. (Some modern, more sophisticated Marxists maintain, on the contrary, that historically the state was always involved in the so-called capitalistic economy.) Different Marxists see the movement towards state regulation of the economy in different ways. One group basically sees state regulation as a means of prolonging the collapse of the capitalistic system, a means which they see as inherently unstable. They see regulation as an attempt by the ruling class to deal with the “inner contradictions” of capitalism. Another group, more sophisticated, sees the movement towards state regulation as a means of hastening the cartelization and monopolization of the economy under the hands of the ruling class.

The conservative holds, like the liberal, that there was indeed such a golden age of individualism, when the economy was almost completely free of government controls. But far from being evil, such a society was near-utopian in their eyes. But the government intervened and threw things out of kilter. The consequence was that the public began to clamor for regulation in order to rectify things that were either not injustices at all, or were injustices imposed by initial state actions. The antitrust laws and other acts of state interference, by this view, were the result. But far from seeing the key large industrialists and bankers as monopolistic monsters, the conservatives defend them as heroic innovators who were the victims of misguided or power-lusting progressives who used big businessmen as scapegoats and sacrifices on the altar of the “public good.”

All three of the major schools of interpretation of this crucial era in American history hold two premises in common: (a) that the trend in economic organization at the end of the nineteenth century was in fact towards growing centralization of economic power, and (b) that this trend was an outcome of the processes of the free market. Only the Marxists, and then only a portion of them, take issue with the additional premise that the actions of state regulation were anti-big business in motivation, purpose and results. And both the conservatives and the liberals see a sharp break between the ideas and men involved in the Progressive Movement and those of key big business and financial leaders. Marxists disagree with many of these views, but hold the premise that the regulatory movement itself was an outgrowth of the capitalistic economy.

The Marxists, of course, smuggle in specifically nonhistorical conclusions and premises, based on their wider ideological frame of reference, the most prominent being the idea of necessity applied to historical events.

Although there are many arguments and disputes between adherents of the various schools, none of the schools has disputed the fundamental historical premise that the dominant trend at the end of the last century was toward increasing centralization of the economy, or the fundamental economic premise that this alleged increase was the result of the operations of a laissez-faire free market system.

Yet there are certain flaws in all three interpretations, flaws that are both historical and theoretical, flaws that make any of the interpretations inadequate, necessitating a new explanation. Although it is not possible here to argue in depth against the three interpretations, brief reasons for their inadequacy can be given.

Aside from the enormous disputes in economics over questions such as whether or not the “capitalistic system” inherently leads toward concentration and centralization of economic power in the hands of a few, we can respond to the Marxists, as well as to others, by directing our attention to the premise that there was in fact economic centralization at the turn of the century. In confronting the liberals, once more we can begin by pointing to the fact that there has been much more centralization since the Progressive Era than before, and that the function, if not the alleged purpose, of the antitrust and other regulatory laws has been to increase, rather than decrease, such centralization. Since the conservatives already question, on grounds of economic theory, the premise that the concentration of economic power results inevitably from a free market system, we must question them as to why they believe that (a) a free market actually existed during the period in question, and (b) how, then, such centralization of economic power resulted from this supposed free market.

Aside from all the economic arguments, let us look at the period in question to see if any of the schools presented hold up, in any measure or degree.

The roots of regulation

In fact and in history, the entire thesis of all three schools is botched, from beginning to end. The interpretations of the Marxists, the liberals and the conservatives are a tissue of lies.

As Gabriel Kolko demonstrates in his masterly The Triumph of Conservatism and in Railroads and Regulation, the dominant trend in the last three decades of the nineteenth century and the first two of the twentieth was not towards increasing centralization, but rather, despite the growing number of mergers and the growth in the overall size of many corporations,

toward growing competition. Competition was unacceptable to many key business and financial leaders, and the merger movement was to a large extent a reflection of voluntary, unsuccessful business efforts to bring irresistible trends under control. … As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could [control and stabilize] the economy. … Ironically, contrary to the consensus of historians, it was not the existence of monopoly which caused the federal government to intervene in the economy, but the lack of it.[1]

While Kolko does not consider the causes and context of the economic crises which faced businessmen from the 1870s on, we can at least summarize some of the more relevant aspects here. The enormous role played by the state in American history has not yet been fully investigated by anyone. Those focusing on the role of the federal government in regulating the economy often neglect to mention the fact that America’s ostensive federalist system means that the historian concerned with the issue of regulation must look to the various state governments as well. What he will find already has been suggested by a growing number of historians: that nearly every federal program was pioneered by a number of state governments, including subsidies, land grants and regulations of the antitrust variety. Furthermore, often neglected in these accounts is the fact that the real process of centralization of the economy came not during the Progressive Era, but rather (initially) during the Civil War, with its immense alliance between the state and business (at least in the more industrialized North). Indeed, such key figures in the progressive Era as J. P. Morgan got their starts in alliances with the government of the North in the Civil War. The Civil War also saw the greatest inflationary expansion of the monetary supply and greatest land grants to the railroads in American history. These and other related facts mean that an enormous amount of economic malinvestment occurred during and immediately after the Civil War, and the result was that a process of liquidation of malinvestment took place: a depression in the 1870s.

It was this process of inflationary book caused by the banking and credit system spurred by the government and followed by depressions, that led the businessmen and financial leaders to seek stabilizing elements from the 1870s on. One of the basic results of this process of liquidation, of course, was a growth in competition. The thesis of the Kolko books is that the trend was towards growing competition in the United States before the federal government intervened, and that various big businessmen in different fields found themselves unable to cope with this trend by private, economic means. Facing falling profits and diffusion of economic power, these businessmen then turned to the state to regulate the economy on their behalf. What Kolko and his fellow revisionist James Weinstein (The Corporate Ideal in the Liberal State, 1900-1918) maintain is that business and financial leaders did not merely react to these situations with concrete proposals for regulations, but with the ever more sophisticated development of a comprehensive ideology which embraced both foreign and domestic policy. Weinstein in particular links up the process of businessmen turning to the state for favors in response to problems which they faced and the modern “corporate liberal” system. he maintains that the ideology now dominant in the U.S. had been worked out for the most part by the end of the First World War, not during the New Deal, as is commonly held, and that the “ideal of a liberal corporate social order” was developed consciously and purposefully by those who then, as now, enjoyed supremacy in the United States: “the more sophisticated leaders of America’s largest corporations and financial institutions.”[2] In examining this thesis, I shall focus predominantly on the activities of the national Civics Federation (NCF), a group of big businessmen that was the primary ideological force behind many “reforms.”

Since the basic pattern of regulation was first established in the case of the railroads, a glance at this industry will set the basis for an examination of the others.

American industry as a whole was intensely competitive in the period from 1875 on. Many industries, including the railroads, had overexpanded and were facing a squeeze on profits. American history contains the myth that the railroads faced practically no competition at all during this period, that freight rates constantly rose, pinching every last penny out of the shippers, especially the farmers, and bleeding them to death. Historian Kolko shows that:

Contrary to the common view, railroad freight rates, taken as a whole, declined almost contiuously over the period [from 1877 to 1916] and although consolidation of railroads proceeded apace, this phenomenon never affected the long-term decline of rates or the ultimately competitive nature of much of the industry. In their desire to establish stability and control over rates and competition, the railroads often resorted to voluntary, cooperative efforts.

When these efforts failed, as they inevitably did, the railroad men turned to political solutions to [stabilize] their increasingly chaotic industry. They advocated measures designed to bring under control those railroads within their own ranks that refused to conform to voluntary compacts. … [F]rom the beginning of the 20th century until at least the initiation of World War I, the railroad industry resorted primarily to political alternatives and gave up the abortive efforts to put its own house in order by relying on voluntary cooperation. … Insofar as the railroad men did think about the larger theoretical implications of centralized federal regulation, they rejected … the entire notion of laissez-faire [and] most railroad leaders increasingly relied on a Hamiltonian conception of the national government.[3]

The two major means used by competitors to cut into each other’s markets were rate wars (price cutting) and rebates; the aim of business leaders was to stop these. Their major, unsuccessful, tool was the “pool” which was continuously broken up by competitive factors.[4] The first serious pooling effort in the East, sponsored by the New York Central, had been tried as early as 1874 by Vanderbilt; the pool lasted for six months. In September 1876,a Southwestern Railroad Association was formed by seven major companies in an attempt to voluntarily enforce a pool; it didn’t work and collapsed in early 1878. Soon it became obvious to most industrial leaders that the pooling system was ineffective.

In 1876 the first significant federal regulatory bill was introduced into the House by J. R. Hopkins of Pittsburgh. Drawn up by the attorney for the Philadelphia and Reading Railroad, it died in committee.

By 1879, there was “a general unanimity among pool executives … that without government sanctions, the railroads would never maintain or stabilize rates.”[5] By 1880, the railroads were in serious trouble; the main threat was identified as “cutthroat competition.”

Far from pushing the economy toward greater centralization, economic forces indicated that centralization was inefficient and unstable. The push was towards decentralization, and smaller railroads often found themselves much less threatened by economic turns of events than the older, more established and larger business concerns.

Thus the Marxist model finds itself seriously in jeopardy in this instance, for the smaller forms and railroads, throughout the crises of the 1870s and 1880s often were found to be making larger profits on capital invested than the giant businesses. Furthermore, much of the concentration of economic power which was apparent during the 1870s and on, was the result of massive state aid immediately before, during, and after the Civil War, not the result of free market forces. Much of the capital accumulation – particularly in the cases of the railroads and banks – was accomplished by means of government regulation and aid, not by free trade on a free market.

Also, the liberal and conservative models which stress the supposed fact that there was growing centralization in the economy and that competition either lessened or became less intense, are both shaken by historical facts. And we already have seen that it was the railroad leaders, faced with seemingly insurmountable problems, who initiated the drive for federal government regulation of their industry.

Rate wars during 1881 pushed freight rates down 50 percent between July and October alone; between 1882 and 1886, freight rates declined for the nation as a whole by 20 percent. Railroads were increasingly talking about regulation with a certain spark of interest. Chauncey Depew, attorney for the New York Central, had become convinced “of the [regulatory commission’s] necessity … for the protection of both the public and the railroads.[6] He soon converted William H. Vanderbilt to his position.[7]

Agitation for regulation to ease competitive pains increased, and in 1887, the Interstate Commerce Act was passed. According to the Railway Review, an organ of the railroad, it was only a first step.

The Act was not enough, and it did not stop either the rate wars or rebates. So, early in 1889 during a prolonged rate war, J. P. Morgan summoned presidents of major railroads to New York to find ways to maintain rates and enforce the act, but this, too, was a failure. The larger railroads were harmed most by this competition; the smaller railroads were in many cases more prosperous than in the early 1880s. “Morgan weakened rather than strengthened many of his roads … [and on them] services and safety often declined. Many of Morgan’s lines were overexpanded into areas where competition was already too great.”[8] Competition again increased. The larger roads then led the fight for further regulation, seeking more power for the Interstate Commerce Commission (ICC).

In 1891, the president of a midwestern railroad advocated that the entire matter of setting rates be turned over to the ICC. An ICC poll taken in 1892 of fifteen railroads showed that fourteen of them favored legalized pooling under Commission control.

Another important businessman, A. A. Walker, who zipped back and forth betwene business and govenrment agencies, said that “railroad men had had enough of competition. The phrase ‘free competition’ sounds well enough as a universal regulator,” he said, “but it regulates by the knife.”[9]

In 1906, the Hepburn Act was passed, also with business backing. The railroad magnate Cassatt spoke out as a major proponent of the act and said that he had long endorsed federal rate regulation. Andrew Carnegie, too, popped up to endorse the act. George W. Perkins, an important Morgan associate, wrote his boss that the act “is going to work out for the ultimate and great good of the railroad.” But such controls were not enough for some big businessmen. Thus E. P. Ripley, the president of the Santa Fe, suggested what amounted to a Federal Reserve System for the railroads, cheerfully declaring that such a system “would do away with the enormous wastes of the competitive system, and permit business to follow the line of least resistance” – a chant later taken up by Mussolini.

In any case, we have seen that (a) the trend was not towards centralization at the close of the nineteenth century – rather, the liquidation of previous malinvestment fostered by state action and bank-led inflation worked against the bigger businesses in favor of the smaller, less overextended businesses; (b) there was, in the case of the railroads anyway, no sharp dichotomy or antagonism between big businessmen and the progressive Movement’s thrust for regulation; and (c) the purpose of the regulations, as seen by key business leaders, was not to fight the growth of “monopoly” and centralization, but to foster it.

The culmination of this big-business-sponsored “reform” of the economic system is actually today’s system. The new system took effect immediately during world War I when railroads gleefully handed over control to the government in exchange for guaranteed rate increases and guaranteed profits, something continued under the Transportation Act of 1920. The consequences, of course, are still making themselves felt, as in 1971, when the Pennsylvania Railroad, having cut itself off from the market and from market calculation nearly entirely, was found to be in a state of economic chaos. It declared bankruptcy and later was rescued, in part, by the state.

Regulation comes to the rest of the economy

Having illustrated my basic thesis through a case study of the origins of regulation in the railroad industry, I shall now look at the rest of the American economy in this period and examine, however briefly, the role that big business had in pushing through acts of state regulation.

I should also mention, at least in passing, big businessmen not only had a particularly important effect in pushing through domestic regulation, but they fostered interventionism in foreign policy as well. What was common to both spheres was the fact that the acts of state intervention and monetary expansion by the state-manipulated banking system had precipitated depressions and recessions from the 1870s though the 1890s. The common response of businessmen, particularly big businessmen – the leaders in various fields – was to promote further state regulation and aid as a solution to the problems caused by the depressions. In particular vogue at the time – in vogue today, as a matter of fact – was the notion that continued American prosperity required (as a necessary condition) expanded markets for American goods and manufactured items. This led businessmen to seek markets in foreign lands though various routes, having fulfilled their “manifest destiny” at home.

Domestically, however, the immediate result was much more obvious. From about 1875 on, many corporations, wishing to be large and dominant in their field, overexpanded and overcapitalized. Mediocre entrepreneurship, administrative difficulties and increasing competition cut deeply into the markets and profits of many giants. Mergers often were tried, as in the railroad industry, but the larger mergers brought neither greater profits nor less competition. As Kolko states: “Quite the opposite occurred. There was more competition, and profits, if anything, declined.” A survey of ten mergers showed, for instance, that the companies earned an average of 65 percent of their preconsolidation profits after consolidation. Overcentralization inhibited their flexibility of action, and hence their ability to respond to changing market conditions. In short, things were not as bad for other industries as for the railroads – they were often worse.

In the steel industry, the price of most steel goods declined more or less regularly until 1895, and even though prices rose somewhat thereafter, there was considerable insecurity about what other competitors might choose to do next. A merger of many corporations in 1901, based on collaboration between Morgan and Carnegie, resulted in the formation of U. S. Steel. Yet U. S. Steel’s profit margin declined over 50 percent between 1902 and 1904. In its first two decades of existence, U. S. Steel held a continually shrinking share of the market. Due to technological conservatism and inflexible leadership, the company became increasingly costly and inefficient. Voluntary efforts at control failed. U. S. Steel turned to politics.

In the oil industry, where Standard Oil was dominant, the same situation existed. In 1899 there were 67 petroleum refiners in the U.S.; within ten years, the number had grown to 147 refiners.

In the telephone industry, things were in a similar shape. From its foundation in 1877 until 1894, Bell Telephone (AT&T) had a virtual monopoly in the industry based on its control of almost all patents.[10] In 1894 many of the patents expired. “Bell immediately adopted a policy of harassing the host of aspiring competitors by suing them (27 suits were instituted in 1894-95 alone) for allegedly infringing Bell patents.”[11] But such efforts to stifle competition failed; by 1902, there were 9,100 independent telephone systems; by 1907, there were 22,000. Most had rates lower than AT&T.

In the meat packing industry too, the large packers felt threatened by increasing competition. Their efforts at control failed. Similar diffusion of economic power was the case in other fields, such as banking, where the power of the eastern financiers was being seriously eroded by midwestern competitors.

This, then, was the basic context of big business; these were the problems that it faced. How did it react? Almost unanimously, it turned to the power of the state to get what it could not get by voluntary means. Big business acted not only through concrete political pressure, but by engaging in large-scale, long-run ideological propaganda or “education” aimed at getting different sections of the American society united behind statism, in principle and practice.

Let us look at some of the activities of the major organizational tool of big business, the National Civics Federation. The NCF was actually a reincarnation of Hamiltonian views on the relation of the state to business. Primarily an organization of big businessmen, it pushed for the tactical and theoretical alliance of business and government, a primitive version of the modern business-government partnership. Contrary to the consensus of many conservatives, it was not ideological innocence that led them to create a statist economic order – they knew what they were doing and constantly said so.

The working partnership of business and government was the result of the conscious activities of organizations such as the NCF created in 1900 (coincided with the birth of what is called the “Progressive Movement”) to fight with increasing and sustained vigor against what it considered to be its twin enemies: “the socialists and radicals among workers and middle class reformers, and the ‘anarchists’ among the businessmen” (as the NCF characterized the National Association of Manufacturers). The smaller businessmen, who constituted the NAM, formed an opposition to the new liberalism that developed through cooperation between political leaders such as Theodore Roosevelt, William H. Taft and Woodrow Wilson, and the financial and corporate leaders in the NCF and other similar organizations. The NCF before World War I was “the most important single organization of the socially conscious big businessmen and their academic and political theorists.” The NCF “took the lead in educating the businessmen to the changing needs in political economy which accompanied the changing nature of America’s business system.” [12]

The early leaders of the NCF were such big business leaders as Marcus A. Hanna, utilities magnate Samuel B. Insull, Chicago banker Franklin MacVeagh (later Secretary of the treasury), Charles Francis Adams and several partners in J. P. Morgan & Co. The largest contributor to the group was Andrew Carnegie; other important members of the executive committee included George W. Perkins, Elbert H. Gary (a Morgan associate and a head of U. S. Steel after Carnegie), Cyrus McCormick, Theodore N. Vail (president of AT&T) and George Cortelyou (head of Consolidated Gas).

The NCF sponsored legislation to promote the formation of “public utilities,” a special privilege monopoly granted by the state, reserving an area of production to one company. Issuing a report on “Public Ownership of Public Utilities,” the NCF established a general framework for regulatory laws, stating that utilities should be conducted by legalized independent commissions. Of such regulation one businessman wrote another: “Twenty-five years ago we would have regarded it as a species of socialism”; but seeing that the railroads were both submitting to and apparently profiting from regulation, the NCF’s self-appointed job of “educating” municipal utilities corporations became much easier.

Regulation in general, far from coming against the wishes of the regulated interests, was openly welcomed by them in nearly every case. As Upton Siclair said of the meat industry, which he is given credit for having tamed, “the federal inspection of meat was historically established at the packers’ request. … It is maintained and paid for by the people of the United States for the benefit of the packers.”[13]

However, one interesting fact comes in here to refute the Marxist theory further. For the Marxists hold that there are fundamentally two opposing “interests” which clash in history: the capitalists and the workers. But what we have seen, essentially, is that the interests (using the word in a journalistic sense) of neither the capitalists nor the workers, so-called, were uniform or clear-cut. The interests of the larger capitalists seemed to coincide, as they saw it, and were clearly opposed to the interests of the smaller capitalists. (However, there were conflicts among the big capitalists, such as between the Morgan and Rockefeller interests during the 1900s, as illustrated in the regimes of Roosevelt and Taft.) The larger capitalists saw regulation as being in their interest, and competition as opposed to it; with the smaller businessmen, the situation was reversed. The workers for the larger businesses also may have temporarily gained at the expense of others through slight wage increases caused by restrictions on production. (The situation is made even more complicated when we remember that the Marxist belief is that one’s relationship to the means of production determines one’s interests and hence, apparently, one’s ideas. Yet people with basically the same relationship often had different “interests” and ideas. If this in turn is explained by a Marxist in terms of “mystification,” an illuminating explanation in a libertarian context, then mystification itself is left to be explained. For if one’s ideas and interests are an automatic function of the economic system and one’s relationship to the means of production, how can “mystification” arise at all?)

In any case, congressional hearings during the administration of Theodore Roosevelt revealed that “the big Chicago packers wanted more meat inspection both to bring the small packers under control and to aid them in their position in the export trade.” Formally representing the large Chicago packers, Thomas E. Wilson publicly announced: “We are now and have always been in favor of the extension of the inspection.”[14]

In both word and deed American businessmen sought to replace the last remnants of laissez-faire in the United States with government regulation – for their own benefit. Speaking at Columbia University in February 1908, George W. Perkins, a Morgan associate, said that the corporation “must welcome federal supervision administered by practical businessmen.”[15]

As early as 1908, Andrew Carnegie and Ingalls had suggested to the NCF that it push for an American version of the British Board of Trade, which would have the power to judge mergers and other industrial actions. As Carnegie put it, this had “been found sufficient in other countries and will be so with us. We must have our industrial as we have a Judicial Supreme Court.”[16] Carnegie also endorsed govenrment actions to end ruinous competition.

It always comes back to me that government control, and that alone, will properly solve the problem. … There is nothing alarming in this; capital is perfectly safe in the gas company, although it is under court control. So will all capital be, although under government control.[17]

AT&T, controlled by J. P. Morgan as of 1907, also sought regulation. The company got what it wanted in 1910, when telephones were placed under the jurisdiction of the ICC, and rate wars became a thing of the past. President T. N. Vail of AT&T said, “we believe in and were the first to advocate … governmental control and regulation of public utilities.”

By June of 1911, Elbert H. Gary of U. S. Steel appeared before a congressional committee and announced to astonished members, “I believe we must come to enforced publicity and governmental control even as to prices.” He virtually offered to turn price control over to the government. Kolko states that

the reason Gary and Carnegie were offering the powers of price control to the federal government was not known to the congressmen, who were quite unaware of the existing price anarchy in steel. The proposals of Gary and Carnegie, the Democratic majority on the committee reported, were really ‘semisocialistic’ and hardly worth endorsing.[18]

Gary also proposed that a commission similar to the ICC be set up to grant, suspend and revoke licenses for trade and to regulate prices. In the fall of 1911, the NCF moved in two fronts: it sent a questionnaire to 30,000 businessmen to seek out their positions on a number of issues. Businessmen favored regulation of trade by three to one. In November of 1911, Theodore Roosevelt proposed a national commission to control organization and capitalization of all inter-state businesses. The proposal won an immediate and enthusiastic response from Wall Street.

In 1912, Arthur Eddy, an eminent corporation lawyer, working much of the time with Standard Oil, and one of the architects of the FTC, stated boldly in his magnum opus, The New Competition, what had been implicit in the doctrines of businessmen all along: Eddy trumpeted that “competition was inhuman and war, and that war was hell.”

Thus did big businessmen believe and act.

Meanwhile, back at the bank, J. P. Morgan was not to be left out. For Morgan, because of his ownership or control of many major corporations, was in the fight for regulation from the earliest days onward. Morgan’s financial power and reputation were largely the result of his operations with the American and European governments; his many dealings in currency manipulations and loans to oppressive European states earned him the reputation of a “rescuer of governments.” One crucial aspect of the banking system at the beginning of the 1900s was the relative decrease in New York’s financial dominance and the rise of competitors. Morgan was fully aware of the diffusion of banking power that was taking place, and it disturbed him.

Hence, bankers too turned to regulation. From very early days, Morgan had championed the cause of a central bank, of gaining control over the nation’s credit through a board of leading bankers under government supervision. By 1907, the NCF had taken up the call for a more elastic currency and for greater centralization of banking.

Nelson Aldrich proposed a reform bank act and called a conference of twenty-two bankers from twelve cities to discuss it. The purpose of the conference was to “discuss winning the banking community over to government control directed by the bankers for their own ends.” A leading banker, Paul Warburg, stated that “it would be a blessing to get these small banks out of the way.”[19]

Most of his associates agreed. In 1913, two years after the conference, and after any squabbles over specifics, the Federal Reserve Act was passed. The big bankers were pleased.

These were not the only areas in which businessmen and their political henchmen were active. Indeed, ideologically speaking, they were behind innumerable “progressive” actions, and even financed such magazines as The New Republic. Teddy Roosevelt made a passing reference to the desirability of an income tax in his 1906 message to Congress, and the principle received support from such businessmen as George W. Perkins and Carnegie, who often referred to the unequal distribution of wealth as “one of the crying evils of our day.” Many businessmen opposed it, but the Wall Street Journal said that it was certainly in favor of it.

The passage of the Clayton Antitrust Act and the creation of the Federal Trade Commission occurred in 1914. Once established, the FTC began its attempt to secure the “confidence” of “well-intentioned” businessmen. In a speech before the NCF, one of the pro-regulation powerhouses, J. W. Jenks, “affirmed the general feeling of relief among the leaders of large corporations and their understanding that the FTC was helpful to the corporations in every way.”[20]

In this crucially important era, I have focused on one point: big business was a major source of American statism. Further researches would show, I am convinced, that big business and financial leaders were also the dominant force behind America’s increasingly interventionist foreign policy, and behind the ideology of modern liberalism. In fact, by this analysis sustained research might show American liberal intellectuals to be the “running dogs” of big businessmen, to twist a Marxist phrase a bit.

Consider the fact that the New Republic has virtually always taken the role of defender of the corporate state which big businessmen carefully constructed over decades. Consider the fact that such businessmen as Carnegie not only supported all the groups mentioned and the programs referred to, but also supported such things as the Big Navy movement at the turn of the century. He sold steel to the United States government that went into the building of the ships and he saw in the Venezuela boundary dispute the possibility of a large order for armor from the United States Navy.[21]Carnegie, along with Rockefeller and, later, Ford, was responsible for sustained support of American liberalism through the foundations set up in his name.

J. P. Morgan, the key financial leader, was also a prime mover of American statism. His foreign financial dealings led him to become deeply involved with Britain during World War I, and this involvement in turn led him to help persuade Wilson to enter the war on Britain’s behalf, to help save billions of dollars of loans which would be lost in the event of a German victory.

In a more interesting light, consider the statements made in 1914 by S. Thruston Ballard, owner of the largest wheat refinery in the world. Ballard not only supported vocational schools as a part of the public schools (which would transfer training costs to taxpayers), restrictions on immigration, and a national minimum wage, he saw and proposed a way to “cure” unemployment. He advocated a federal employment service, public works, and if these wee insufficient, “government concentration camps where work with a small wage would be provided, supplemented by agricultural and industrial training.”[22]

Consider the role of big businessmen in pushing through public education in many states after World War I. Senator Wadsworth spoke before a NCF group in 1916, pointing out that compulsory government education was needed “to protect the nation against destruction from within. It is to train the boy and girl to be good citizens, to protect against ignorance and dissipation.” This meant that the reason to force children to go to school, at gunpoint if necessary, was so that they could be brainwashed into accepting the status quo, almost explicitly so that their capacity for dissent (i.e., their capacity for independent thinking) could be destroyed. Thus did Wadsworth also advocate compulsory and universal military training: “Our people shall be prepared mentally as well as in a purely military sense. We must let our young men know that they owe some responsibility to this country.”

Indeed, we find V. E. Macy, president of the NCF at the close of the war, stating that it was not “beside the mark to call attention to the nearly thirty million minors marching steadily toward full citizenship,” and ask “at what stage of their journey we should lend assistance to the work of quickening … the sense of responsibility and partnership in the business of maintaining and perfecting the splendid social, industrial, and commercial structure which has been reared under the American flag.” The need, Macy noted, was most urgent. Among American youths there was a widespread “indifference toward, and aloofness from, individual responsibility for the successful maintenance and upbuilding of the industrial and commercial structure which is the indispensable shelter of us all.”[23]

Big business, then, was behind the existence and curriculum of the public educational system, explicitly to teach young minds to submit and obey, to pay homage to the “corporate liberal” system which the politicians, a multitude of intellectuals and many big businessmen created.

My intention here simply has been to present an alternative model of historical interpretation of key events in this one crucial era of American history, an interpretation which is neither Marxist, liberal nor conservative, but which may have some elements in common with each.

From a more ideological perspective, my purpose has been to present an accurate portrait of on aspect of “how we got here,” and indicate a new way of looking at the present system in America.

To a large degree it has been and remains big businessmen who are the fountainheads of American statism. If libertarians are seeking allies in their struggle for liberty, then I suggest that they look elsewhere. Conservatives, too, should benefit from this presentation, and begin to see big business as a destroyer, not as a unit, of the free market. Liberals should also benefit, and reexamine their own premises about the market and regulation. Specifically, they might reconsider the nature of a free market, and ponder on the question of why big business has been opposed to precisely that. Isn’t it odd that the interests of liberals and key big businessmen have always coincided? The Marxists, too, might rethink their economics, and reconsider whether or not capitalism leads to monopoly. Since it can be shown scientifically that economic calculation is impossible in a purely socialistic economy, and that pure statism is not good for man, perhaps the Marxists might also look at the real nature of a complete free market, undiluted by state control.

Libertarians themselves should take heart. Our hope lies, as strange as it may seem, not with any remnants from an illusory “golden age׏ of individualism, which never existed, but with tomorrow. Our day has not come and gone. It has never existed at all. It is our task to see that it will exist in the future. The choice and the battle are ours.

Notes

1 Gabriel Kolko, The Triumph of Conservatism (Chicago: Quadrangle Publishing Co., 1967), pp. 4-5.

2 James Weinstein, The Corporate Ideal in the Liberal State (Boston: Beacon Press, 1968), p. ix.

3 Gabriel Kolko, Railroads and Regulation (Princeton: Princeton University Press, 1965), pp. 3-5.

4 See both Kolko books for factual proof of this. Weinstein does not take this fact into account in his book, and thus underestimates this as a motivating force in the actions and beliefs of businessmen. For a theoretical explanation, see Murray N. Rothbard, Man, Economy and State (Los Angeles: Nash Publishing Co, 1971), II pp. 566-585. [Online editor’s note: Chapter 10, Section 2: Cartels and Their Consequences. – RTL]

5 Kolko, Railroads, p. 26.

6 Kolko, Railroads, p. 17.

7 The twin facts here that Vanderbilt needed “converting” and that he had other options open to him should by themselves put to rest the more simplistic Marxist theories of “class consciousness,” awareness of interests and relationships to the means of production.

8 Kolko, Railroads, pp. 65-66.

9 Kolko, Railroads, p. 74.

10 It is instructive to note that most of these patents were illegitimate according to libertarian ownership theories, since many other men had independently discovered the telephone and subsequent items besides Bell and the AT&T group, yet they were coercively restrained from enjoying the product of such creativity. On the illegitimacy of such patent restriction, see Rothbard, Man, Economy and State, pp. 652-660. [Online editor’s note: Chapter 10, Section 7: Patents and Copyrights. – RTL]

11 Kolko, Triumph, pp. 30-39.

12 Weinstein, The Corporate Ideal, p. 82.

13 Kolko, Triumph, p. 103.

14 Kolko, Triumph, p. 103.

15 Kolko, Triumph, p. 129.

16 Weinstein, The Corporate Ideal, p. 180.

17 Kolko, Triumph, p. 180.

18 Kolko, Triumph, pp. 173-174.

19 Kolko, Triumph, p. 183.

20 Weinstein, The Corporate Ideal, p. 91.

21 Walter LeFeber, The New Empire: An Interpretation of American Expansion,1860-1890 (Ithaca: Cornell University press, 1963), pp. 239, 273n. The note on Carnegie’s linking of the Venezuela boundary dispute with obtaining large orders of steel from the Navy was taken from Carnegie’s correspondence.

22 Weinstein, The Corporate Ideal, p. 91.

 

 

 

 

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One Response to “Big Business and the Rise of American Statism”

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