Big Business and the Rise of American Statism: A Revisionist History

Part Two

"Monkey see, monkey do" or how other industries learned to wield the political axe

Now let's look at some other segments of American industry. From about 1875 on, many corporations, in quest of large size and dominance in their field, overexpanded and overcapitalized; mediocre entrepreneurship, administrative difficulties, and increasing competition cut deeply into the markets and profits of many giants. Mergers were often tried, but "the larger part of the mergers brought neither greater profits nor less competition. Quite the opposite occurred. There was more competition, and profits, if anything, declined."¹⁹ A survey of 10 mergers showed, for example, that they earned an average of 65% of their preconsolidation profits. Overcentralization inhibited their flexibility of action and hence their ability to respond to changing market conditions. In short, things were not as bad as the railroads in other industries; they were often worse.

In the steel industry, "the price of most steel goods declined more or less regularly until 1894-95, and although prices generally rose in subsequent years, there was continual insecurity within the industry as to what each competitor might do next. The apprehension was later justified."²⁰ Pools and mergers alike failed to cut down competition, and small firms branched out and took business away from the giants. A merger of many corporations in 1901, based on collaboration between J.P. Morgan and Andrew Carnegie, resulted in the formation of U.S. Steel, yet U.S. Steel's profit margin declined over 50% 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, it became increasingly expensive and inefficient.²¹ Voluntary efforts at control failed; U.S. Steel then turned to politics.

The same was true in oil where Standard Oil was dominant. In 1899 there were 67 petroleum refiners in the U.S.; within 10 years, the number had grown to 147 refiners. Competition!

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.²² In 1894, many of the patents which AT&T didn't deserve in the first place expired; "Bell immediately adopted a policy of harassing the host of aspiring competitors by suing them (27 suits were instituted in 1894-1895 alone) for allegedly infringing Bell patents."²³ But such efforts to stifle competition failed; by 1902, there were 9100 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 and challenged by midwestern competitors.

This was the basic context of big business; how did it react? Almost unanimously, it turned to the power of the state to get what it could not get by voluntary means. This was accomplished not only through concrete political advocacy and 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's look at some of the activities of the major organizational tool, that glorious trust for statism, the National Civics Federation. The NCF was an actual reincarnation of Hamiltonian views on the relationship 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 our modern business-government "partnership"—a partnership in regulation and control, in confiscation and intimidation, in foreign intervention and war—in short, a partnership in crime. It was not, as conservatives contend, a matter of ideological innocence on the part of big businessmen which 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 conscious result of the activities of organizations such as the NCF, created in 1900, coinciding with the birth of what is called the "progressive era," 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 it characterized the National Association of Manufacturers)." (My emphasis) The smaller businessmen, who constituted the NAM, formed an opposition from the "right" to "the new liberalism that developed in cooperation between political leaders such as Theodore Roosevelt, William H. Taft and Woodrow Wilson, and financial and corporation leaders in the NCF and other organizations."²⁴ The NCF before the first World War "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 businessmen to the changing needs in political economy which accompanied the changing nature of America's business system."²⁵

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 and Company. The important members of the Executive Committee of this Johnny Appleseed of power and pull were Morgan associate, George W. Perkins, E.H. Gary, a Morgan associate and one of the heads of U.S. Steel, Andrew Carnegie, Cyrus McCormick, Theodore N. Vail, president of AT&T, and George Cortelyou, head of Consolidated Gas. The largest contributor to this group was Andrew Carnegie.²⁶

The NCF created a "Commission on Public Ownership of Public Utilities" in 1905, which issued a three volume report on its findings that coincided exactly with the position of one of its founders, the utilities magnate Samuel B. Insull, and with the views of the National Electric Light Association, which established a general framework for regulatory laws stating that utilities should be conducted by legalized monopolies regulated by independent commissions. The work on a public utilities bill was done under the supervision of Emerson McMillin, a banker and president and director of several gas, light, and traction companies, including American Light and Traction, Southern Gas of New Jersey. Of such regulation, one businessman wrote another: "Twenty-five years ago, we would have regarded this as a species of socialism," but, seeing that the railroads were submitting wholeheartedly to government regulations, the NCF's self-appointed job of "educating municipal utilities corporations" became much easier.²⁷

As Upton Sinclair 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.…"²⁸

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 publically announced: 'We are now and have always been in favor of the extension of the inspection.'"²⁹

In both word and deed American big businessmen sought to replace the last remnants of laissez-faire in the United States with government regulation—for their "benefit." In February 1908, speaking at Columbia University, George W. Perkins, Morgan associate, said that the corporation "must welcome federal-supervision, administered by practical businessmen."³⁰

"As early as 1908, Andrew Carnegie and M.E. Ingalls had suggested to the NCF…the idea of an interstate trade commission, modeled on the ICC and British Board of Trade. As Carnegie put it, an 'Interstate Commission' with 'the power to judge combinations and contracts proposed' was needed. 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.'"³¹ This dream was to be translated into political reality in the form of the nightmare Clayton Anti-Trust Act and the Federal Trade Commission (FTC).

Concerning price competition, Andrew Carnegie stated that "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."³²

AT&T, under the driving force of J.P. Morgan, who had managed to gain effective control of the Board of Directors by 1907, chose to solve the problem of small competitors by seeking federal regulation. They got what they wanted in 1910, when telephones were placed under the jurisdiction of the ICC, and rate wars became a thing of the past. Theodore N. Vail, president of AT&T, said in 1914, "We believe in and were the first to advocate…governmental control and regulation of public utilities."³³

In 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."³⁴

On the same day that Gary testified, Cyrus McCormick "dropped into the Civic Federation office in New York and urged its committee to draw up legislation. McCormick…(said) that he would be glad to have the government fix the price of the products of the International Harvester Company."³⁵

In 1911, Gary appeared before the Newlands Committee and proposed that every interstate corporation should be required to have a federal license—if it met strict capitalization and price requirements. "A corporation commission similar to the ICC would be created to grant, suspend, and revoke licenses, subject to court appeal," he said, and, "in line with Carnegie's proposal, it could regulate prices."³⁶

In the fall of 1911, the National Civics Federation moved on two fronts: it sent a questionnaire to 30,000 businessmen to seek out their positions on a number of political issues, preliminary returns in November indicated that businessmen favored federal regulation of trade by a commission of the ICC type by three to one.³⁷

In November of 1911, Theodore Roosevelt called for the formation of a national commission with "complete power over the organization and capitalization of all business concerns engaged in interstate commerce," and possibly prices as well. "The proposal immediately won an enthusiastic response from Wall Street."³⁸

In 1912, Arthur J. 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 the big businessmen all along; Eddy trumpeted that "competition was inhuman and war, and that war was hell."³⁹

Thus did big businessmen believe and act.

Business leaders flocked to support Theodore Roosevelt for president in 1912 on the Progressive Party ticket. Frank Munsey, a director of U.S. Steel, wrote to Roosevelt that the U.S. must move from "excessive democracy" to a more "parental guardianship of the people," who needed "the sustaining and guiding hand of the State." As Munsey saw it, it was "the work of the State to think for the people and plan for the people—to teach them how to do, what to do, and to sustain them in the doing." He supported Roosevelt, as so many businessmen did, as the candidate best suited to advance these concepts.⁴⁰

Meanwhile, back at the bank, J.P. Morgan was not to be left out. Morgan's financial power and reputation were largely the result of his operations with United States and European governments; his many dealings in currency manipulations and loans to oppressive European states earned him the reputation as a "rescuer of governments." One crucial aspect of the banking system at the beginning of the 1900's was the relative decrease in New York's financial dominance, and the rise of alternative sources of substantial financial power. "J.P. Morgan and Co. were fully aware of the diffusion of banking power that was taking place, and it disturbed them."⁴¹

Hence, Morgan and the New York Bankers turned to the only engine that could control the economy where they had failed: the federal government. By 1907, NCF business members had become convinced of the alleged "need" for an elastic currency and for greater centralization of banking. Victory Morawetz, chairman of the Executive Board of the Atchison, Topeka and Santa Fe Railroad, supported the establishment of a central banking clearing house association to provide "intelligent control over the credit situation, through a board of leading bankers under government supervision and control.⁴²

Nelson Aldrich proposed a reform-bank act and called a conference of 22 bankers from 12 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 bet these small banks out of the way."⁴³

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

These were not the only areas in which businessmen and their political henchmen were active. Roosevelt had 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." He announced in 1908 that the problem of this inequality "could be solved by the rich regarding their money 'to be administered as a sacred trust for the good of others.…'"⁴⁴ Many businessmen opposed it, but the Wall Street Journal said that it was certainly in favor of it, although it opposed a section of the first Act which exempted persons with incomes under $4000 a year; equality of sacrifice was its line.

1914 saw the passage of the Clayton Anti-Trust Act and the creation of the Federal Trade Commission. 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 the large corporations and their understanding that the FTC was helpful to the corporations in every way."⁴⁵

For those with any doubts about my thesis, which I have been illustrating above, let me be explicit: Big business is the major root of American statism; it is the dominant and conscious architect of 20th century American statist-liberalism.

Thus, consider that Carnegie, who in traditional right-wing mythology was a pure free-enterpriser, not only supported all of the programs mentioned but also supported such things as the big navy movement at the turn of the century. He sold steel to the government which went into the building of the ships and saw in the Venezuela boundary dispute the possibility of a large order for armor from the U.S. Navy.⁴⁶ Also, like James J. Hill, he worked with the Russian czar to build the Russian statist-economic system. In 1917, Carnegie was "clamoring for war as a means of establishing permanent peace."⁴⁷

J.P. Morgan was a prime mover of American and European statism. His foreign financial dealings led him to become so deeply involved in the British-German conflict in World War I through loans and huge investments to Britain that when the defeat of Britain was imminent, it was Morgan and his fellow financiers who persuaded Wilson to enter the war. Thus Morgan pushed for sacrificing human lives so that he could reap profits from his loans to the British government.

Consider statements made in 1914 by S. Thruston Ballard, owner of the largest wheat refinery in the world. Ballard not only supported restrictions on immigration, vocational schools as a part of the public school system (which would transfer training costs from industry to taxpayers), and a national minimum wage, he saw and proposed a unique way to "cure" unemployment. He advocated a federal employment service, public works, and if these were insufficient "Government concentration camps where work with a small wage would be provided, supplemented by agricultural and industrial training."⁴⁸

The partial fulfillment of these ideological tendencies was World War I, with the controlled, quasi-fascist economic system which resulted from the actions of such agencies of control as the War Industries Board (WIB), headed by well-known Wall Street financier Bernard Baruch. The result was "a system under which production was maximized by 'businessmen wholly consecrated to Government service.'"⁴⁹

Consider, finally, the role of big businessmen in "innocently" pushing public education during and after World War I. Consider that Senator Wadsworth spoke before a gleeful group of NCF members 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 the 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 need be, was to brainwash them into accepting the status quo, almost explicitly to ruin and trample on their capacity for dissent (i.e., their capacity for independent thinking). Thus did Wadsworth bleat his praise and unblushing advocacy of 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 National Civics Federation 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 " (my emphasis). 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."⁵⁰

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 has been simply to present as accurate a picture of what happened as is possible in order to help people form an accurate conception of "how we got here," which is necessary if we are to understand and deal with the present as it is. This requires an honest-to-life picture of many fabled big businessmen as they were in a very important part of their activities. Did they support governmental policies? Why? And how? And what have been the effects? This is what I am asking.

I am suggesting that these industrialists might have thought and planned both with regard to their own industries and with regard to the political system as a whole. I am challenging the view which holds that they were giants of the intellect in one field (business) but incompetent, bungling oafs in another (politics).

What is the conservative's flaw in analyzing this? He does not integrate into his historical outlook the fact that there has never been laissez-faire in America, that the practice of one group attempting to "benefit" itself at the expense of another by coercion is an age-old tradition, although it was not made into a system (with the exception of slavery, taxation, and the tariff) in American history until the progressive era. At that point, it was largely "big businessmen" who whooped it up for the regulatory commissions which seem to have everlasting life. They as a class have never really been "America's persecuted minority." They may very well be one of the most productive groups in history, but we can legitimately ask what might have been had they not worked to eliminate our semi-market economy, had they not used the government to smash more efficient competitors and innovators.

Liberals, of course, err because they fail to understand that it was the power of government that enabled these businessmen to gain their ends. They have long called American business evil, but they have yet to see the evil of a coercive state. They also have yet to realize that laissez-faire never existed in America or anywhere else.

Though there have been exceptions, it has been and to a large degree remains big businessmen who are the fountainheads of American statism. If libertarians are seeking allies in their struggle for liberty, I suggest they look elsewhere.

The lesson of all this is perhaps obscure. What can validly be said is this: libertarians must stop looking to the past for allies in their struggle for a rational culture and look toward the future. Our hope lies, as difficult as it may be for some to accept, not with remnants from an illusory "golden age" of individualism, but with tomorrow, with youth, with anyone who will listen. Our day has not come and gone. But it could be coming.

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FOOTNOTES

19. Kolko, The Triumph, etc., p. 25.
20. Ibid., p. 31.
21. Ibid., pp. 30-39.
22. It is instructive to note that most, if not all, of these patents were illegitimate according to libertararian 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 present and past patent laws and their coercive-monopolistic nature see Rothbard, Man, Economy, and State, Vol. II, pp. 652-660.
23. Ibid.
24. Weinstein, op. cit., pp. 5-7.
25. Ibid., pp. 5-7.
26. Ibid., pp. 30n & 34.
27. Ibid., pp. 25 & 34.
28. Kolko, The Triumph, p. 103.
29. Ibid., p. 105.
30. Ibid., p. 129.
31. Weinstein, op. cit., p. 82.
32. Kolko, The Triumph, p. 180.
33. Ibid.
34. Ibid., pp. 173-74.
35. Weinstein, op. cit., p. 85.
36. Kolko, The Triumph, p. 176.
37. Weinstein, op. cit., pp. 87-88.
38. Kolko, The Triumph, p. 175.
39. Ibid., p. 181.
40. Weinstein, op. cit., p. 155.
41. Kolko, The Triumph, pp. 140-142.
42. Weinstein, op. cit., p. 29.
43. Kolko, The Triumph, p. 186.
44. Ibid., p. 173.
45. Weinstein, op. cit., p. 91.
46. 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 correspondence. This book is, in addition, an excellent treatment of a subject which I unfortunately cannot get into here, the role of certain businessmen not only in producing an interventionist domestic policy but an expansionistic-imperialistic foreign policy. Also, see William A. Williams, The Tragedy of American Diplomacy (New York: Delta, 1962).
47. Charles C. Tansill, America Goes To War (Boston: Little, Brown and Company, 1938), p. 651.
48. Weinstein, op. cit., pp. 209-210.
49. Ibid., p. 223.
50. Ibid., pp. 133-35.
51. For an excellent, more general, overview of history, including the role played by classical liberalism in Western Civilization, see Murray N. Rothbard's "Left and Right: The Prospects for Liberty," in Left and Right, Vol. I, No. 1. While the present essay concentrates on a small period involving big business, other periods show similar results in every era. The role of businessmen in passing "protectionist" tariffs and the like is well known; not so well known is the continuity throughout the supposedly "radical" New Deal. For a peek at how some businessmen developed the basic ideas which were later adopted by Roosevelt, see Murray N. Rothbard, America's Great Depression (Princeton: D. Von Nostrand, 1963), esp. pp. 245-251. Finally, two notes: (a) This essay in no way is based on the doctrine of "collective guilt," i.e., I have nowhere maintained that a businessman is "guilty" of supporting statism merely because he is "big"; some businessmen indeed opposed regulations, but they were few and far between. My method has been to examine the opinions and proposals of dominant members of key industries; (b) I am totally aware that such regulations would not have been possible if it were not for the government. But the point is simply that the state is not some mystical entity existing in a societal vacuum—it is a certain kind of institution which has certain relations with other institutions. The question is simply: who has been responsible for the laws which have succeeded in cartelizing American industry within a coercive, statute-riddled framework? Politicians passed them; businessmen, however, were the fountainhead.