Big Business and the Rise of American Statism: Regulation Comes to the Rest of the Economy
In this final section, Childs generalizes his analysis of big business’s effect on public policy.
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 through 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 were 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.
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. ↩
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. ↩
Reprinted, with permission, from the February 1971 (pp. 12–18) and March 1971 (pp. 9–12) issues of Reason magazine. Copyright 2004 by Reason Foundation, 3415 S. Sepulveda Blvd., Suite 400, Los Angeles, CA 90034: www.reason.com.
Originally delivered as a speech before the first convention of the Society for Individual Liberty, University of Pennsylvania, 15–16 November 1969.