Cronyism

CHAPTER 4

THE FAILURE TO MONOPOLIZE

During the decades-long Great Barbecue, the market forces that broke up railroad pools also hit manufacturers’ cartels. Despite tariffs’ intense shield from foreign firms, new domestic competition weakened large companies’ attempts to raise prices and restrict production. Further paralleling the railroad industry, smaller businesses posed a threat by lobbying for antitrust legislation. This could mean only one thing: large manufacturers would further lobby the federal government to deny smaller interests’ preferred antitrust legislation, kill any emerging free-market proposals to lower tariffs, and secure increased tariff cronyism for themselves along with new regulatory barriers. By the end of the century they would shift their attention to forming new industrial corporations that could restrict production through patent holdings on new technologies.

Tariffs for the Manufacturers

As the 1860s arrived, the ascendant Republicans chose as their first special-interest policy a hallmark of the American System: protective tariffs. In the brief space between southern states seceding and the outbreak of the Civil War, they passed the Morrill Tariff of 1861. Following the Panic of 1857, politico Henry Carey sought to increase tariffs on various goods—including coal, which Carey wanted to personally invest in. The “Ajax of Protection” encouraged Republicans to campaign on this monopolistic restriction in Pennsylvania and other manufacturing states. Thanks to his strategy, they secured control of the House in the 1858 midterm elections. Protectionists then elevated Ohio’s John Sherman to the chair of the Ways and Means Committee, who in turn directed tariff legislation to Justin Morrill of Vermont.

Morrill always insisted his tariff bill did not depend on business pressure, but this was a blatant lie. As Phil Magness explains, the tariff was “undeniably the product of interest-group lobbying and manufacturer collusion” by small- and mediumsized northern businesses that produced chemicals, copper, glass, hemp, lead, oil, screws, sugar, wool, woolen goods, and iron wares.These firms wanted higher tariffs on their products at the expense of southern farmers who exported agricultural staples, businesses that imported inputs, and consumers in general. They cared more about producing for the domestic market than expanding overseas. This is unsurprising, since high tariffs tend to reduce the incomes of foreign consumers, which causes them to buy fewer American goods.

For example, Pittsburgh copper smelters, New Jersey and Massachusetts window glaziers, Maine carpet producers, and Wisconsin lead makers lobbied Morrill and other politicians to block out cheaper and more efficient foreign competition from the domestic market. In many instances what businesses asked they received: McCullogh & Co. secured sheet iron rates of 1 to 1.5 cents per pound, the Revere Copper Co. acquired copper sheathing taxes of 2 cents a pound, and the Boston Sugar Refinery received its preferred refined sugar duty of 2.5 cents per pound. In one notable case William Angell, president of the American Screw Company of Rhode Island, personally wrote to Morrill requesting that the tariff on wood screws be increased from 4 to 5 cents per pound.

Thanks to the assistance of Henry Carey, the Republican House passed the Morrill Tariff in May 1860. Truly, the bill would have made Henry Clay and his Whigs blush: rates on wood screws jumped from 24 to 55 percent, polished sheet iron levies surged from 24 to 65 percent, the refined sugar tariff soared from 24 to 59 percent, and bituminous coal tariffs increased from 24 to 32 percent. In toto, the tariff on dutiable imports increased from 19 to 27 percent. Unfortunately for its proponents, the bill went to Robert Hunter of Virginia, the free-trade Democratic chairman of the Senate Finance Committee. With southern Democrats on Hunter’s side, the Senate postponed its consideration of the bill until December.

Protectionists then decided to use the bill as a campaign plank in the upcoming presidential election. The Republicans “re-adopted Protection” through Abraham Lincoln’s nomination, according to Carey, who eagerly promoted him in the Philadelphia press.The issue played a pivotal role in securing victory in the manufacturing states of Pennsylvania and New Jersey, which were crucial for Lincoln’s campaign strategy: without receiving thirty-one Electoral College votes from them he would not have secured an electoral majority. Lincoln tellingly confided to a friend that “to the Tariff Whig element of Penn[sylvania] was he most indebted (and he will not betray it).”

Protectionists continued racking up victories at the end of 1860 and in early 1861. The secession of South Carolina and six other southern states made it much easier for Senate Republicans to pass the tariff in the lame-duck session. When the Democratic president James Buchanan signed the bill right before Lincoln’s inauguration, free traders lamented the outcome. The British economist William Stanley Jevons, realizing how the law sundered US trade relations with Great Britain, called it “the most retrograde piece of legislation that this country has witnessed.”The time of relatively free trade in America was over; a new era of ardent protectionist cronyism began.

Just when the protected industries thought they secured their grand prize, a new threat emerged. Unexpectedly, the Civil War exploded federal expenditures from $63 million in 1860 to $1.3 billion in 1865, which increased the relative size of the government from 1.4 percent to 13 percent of the nation’s gross domestic product. Higher tariffs could not come close to raising sufficient funds, so Congress financed spending by printing money and shifting the burden onto future generations through borrowing. The public debt soared over 4,000 percent, from $65 million to $2.68 billion.

Significantly, Congress also financed part of the war through higher taxes, and businessmen responded predictably. According to the Chicago Daily Tribune, “Everybody wants to see his neighbor taxed, but is anxious that his own burden shall be light.”Sixty-odd lobbyists circled the capital, including from the New York City Chamber of Commerce, the Boston and Philadelphia Boards of Trade, several railroads, and New England industrialists. In the face of proposals for income taxes and taxes on manufactured goods, these interests pushed for general sales taxes or property taxes to shift the burden to consumers and western farmers. Despite the businessmen’s ferocious lobbying, the reality of military expenditures and the need to pay interest on government debt outweighed their clamor. Defeated, they acrimoniously watched Lincoln sign new tax laws in 1861 and 1862.

The new laws contained two crucial components. First, they instituted a progressive income tax, an inheritance tax, license taxes on various professions, excise taxes on alcohol and tobacco, and taxes on manufactured goods. The income tax of 3 to 5 percent struck at the wealthy, as less than 2 percent of workers earned incomes that qualified. Second, the laws created the Bureau of Internal Revenue to enforce the collections. The Treasury Department became replete with fine sinecures for government officials, and its bureaucracy grew dramatically: at just 383 clerks in 1861, by 1864 it employed 2,000 clerks along with a bevy of new assistant treasurers, custom-house officials, and internal revenue agents. These officials collected bribes when issuing licenses and extracting taxes in the vast labyrinth of 185 collection districts. In the words of Richard Bensel, the bureau turned into “the most coercive civilian agency of the national government.”

While many manufacturers received lucrative contracts to produce or procure weapons, uniforms, provisions, and other goods related to the war, they complained loudly about the manufacturing and income taxes that offset these subsidies, and for good reason: the coerced payments disincentivized their production. On top of increasing the prices that consumers paid, the higher taxes contributed to the wartime stunting of the nation’s private capital stock and economic growth. After rising 7.8 percent per year from 1840 to 1859, output growth in the manufacturing sector grew only 2.3 percent per year from 1860 to 1869, and manufacturing’s share of overall commodity output crawled from 32 percent in 1859 to just 33 percent in 1869. The taxes were an albatross businesses wanted off their already burdened necks.

Fortunately for the manufacturers, the indefatigable protectionist Justin Morrill pushed for raising tariffs to counterbalance the tax burden. “If we bleed manufacturers we must see to it that the proper tonic is administered at the same time,” he cautioned, “or we shall have destroyed the goose that lays the golden eggs.”What Morrill really meant was that Congress needed to burden other businesses and consumers by forcing them to pay even higher prices for foreign wares. The higher tariffs acted as a surrogate sales tax, granting those businesses that had previously lobbied for a sales tax some of what they desired. Congress dutifully passed the second Morrill Tariff in July 1862. The legislature raised tariff rates further in 1864 to compensate for additional tax increases. For example, Congress raised the tariff on pig iron from $6 per ton to $9 per ton to compensate for a new production tax of $2 per ton. As with the 1861 tariff, politicians distracted by the war simply raised rates on whatever products businesses lobbied for.

The real bounty for the protectionist interest groups in the Great Barbecue came with the war’s end. Thanks to their lobbying efforts, by 1872 Congress eliminated all nontariff taxes save those on alcohol, tobacco, and some luxury items. The tax cuts incentivized the private sector to increase output. At the same time, though, manufacturers pushed to increase tariffs, with the average rate rising from 36 percent in 1864 to 47 percent by 1870. Protectionists strategically made most tariffs specific dollar amounts, so the percentage rates rose sharply when import prices fell 16 percent in the postwar years. The tariff increases blatantly privileged American firms in specific sectors and disadvantaged foreign producers, other businesses, and consumers. Due to this artificial raising of the prices of foreign goods, other businesses that used foreign inputs and consumers seeking lower-cost products from abroad were pushed to buy domestically, increasing domestic prices and overstimulating domestic production. The ultimate outcome was a misallocation of scarce factors of production away from goods that the United States had a relative advantage compared to other countries in producing and into the uneconomical growth of the protected industries.

Tariff cronyism lasted because influential Republican politicians had joined in on the spoils by investing in northeastern and midwestern businesses that benefited from protection. For example, William Sprague of Rhode Island, one of New England’s largest cotton textile manufacturers, had the good fortune in 1863 to become a senator and marry the daughter of Salmon P. Chase, Lincoln’s secretary of the Treasury. During his service Senator Sprague assiduously defended the cotton textile duties that protected his company A&W Sprague Manufacturing Co. Zachariah Chandler, a senator from Michigan, invested in copper mines and successfully procured a tariff on Chilean copper in the Copper Act of 1869. Pennsylvania congressman Daniel Morrell praised higher iron rates, as he owned the largest iron producer in the country, the Cambria Iron Works. Chief tariff architect Justin Morrill himself, who produced wool and invested in marble production, ardently defended tariffs on those goods. Supposed stewards of the public welfare had a compelling financial interest in bilking the American public.

The protectionist ranks further strengthened when privilege-seeking businesses organized into trade associations to coordinate lobbying efforts. The most prominent were the woolens and iron and steel industries. It is no coincidence that these two sectors secured some of the largest rate increases in the postwar tariff structures.

The New England woolen interests struck first and achieved success by joining with midwestern sheep farmers. These groups normally fought each other because textile manufacturers wanted cheap rates on imported raw wool and domestic raw wool producers wanted higher rates. While the tariff on woolen goods had increased from 21 percent in 1860 to 39 percent in 1864, protecting the domestic woolen industry, the rate on raw wool also increased to roughly 37 percent, hurting the industry’s bottom line. This greatly worried Erastus Bigelow of the Bigelow Carpet Company, one of the nation’s leading carpet manufacturers. Familiar with how to pay off politicians, Bigelow gave a rug to Congressman Justin Morrill’s wife—a material reminder to the politician that if rates on raw wool increased then woolen manufacturers needed compensation in turn. In late 1864, Bigelow worked with lobbyist John Hayes to create the National Association of Wool Manufacturers (NAWM). The NAWM then allied with the National Wool Growers Association and intensely lobbied Congress for higher rates in the 1867 Wool and Woolens Act. Various woolen manufacturers, including carpet makers, now received net protection of 25 percent. The voiceless loser in this affair was the consumer required to pay relatively higher prices.

The burgeoning iron and steel interests hit Congress next. The American Iron and Steel Association (AISA) and the Pennsylvania Industrial League spearheaded the drive. These organizations were dominated by Congressman Daniel Morrell and wealthy ironmasters and steel manufacturers such as Stephen Colwell, Joseph Scranton, Eber Ward, and Joseph Wharton. Thanks to the AISA’s flurry of periodicals, Congress revised the tariff schedule in 1870. Notably, it changed the tariff on imported Bessemer steel rails from 45 percent to a specific duty of $28 per ton. The specific dollar amount meant that as British rail prices decreased, the tariff burden swelled to between 70 and 100 percent. This cunning change from percent to dollar amount heavily privileged American steel producers and encouraged the formation of Andrew Carnegie’s Edgar Thomson Steel Works in 1872. In 1873, the AISA appointed as its secretary James Swank, who became the industry’s foremost lobbyist defending protection of the American iron and steel industries. The politically savvy economist Henry Carey lined his pockets by investing in coal and iron and remained the sector’s leading intellectual apologist. The AISA’s tariff led to relatively higher prices of steel rails, which hurt the railroad industry by making it more expensive to import British rails. The importance of the tariff in developing the American steel industry remains questionable, as new iron ore discoveries, technological improvements, and knowledge transfer from British producers would have spurred growth in the absence of protectionism.

Free traders, including those still in the Republican Party, watched feebly as special interests carved tariff favoritism into the nation’s laws. Senator James Grimes of Iowa witnessed that “the manufacturers of iron and a few wool agriculturists and speculators . . . have organized associations, contributed large sums of money to mold public sentiment through the press, and have formed combinations with other interests to control the legislation of the country.”Another western Republican, Congressman John Kasson of Iowa, lamented how the manufacturers could boast of their associations while “the great interest of the consumers of the country is not organized into a system of mutual protective associations.”Without a political association looking out for the consumer—such as a revitalized Democratic Party harkening back to Jacksonian free trade—the protectionists ran unimpeded.

By the end of the 1860s Republicans had showered on northern industry the generous gift of restricted foreign competition. Starting with the 1861 Morrill Tariff, Congress repeatedly increased rates until it erected a formidable wall around the domestic market, which doubled after businesses successfully lobbied to remove taxes on domestic production and incomes. Soon enough, many politicians and intellectuals invested in the industries for which they championed protection, diminishing the likelihood that Congress would lower tariffs. The solidifying bonds between special interests and politicians made it much harder to pass meaningful free-trade reform.

Protecting the Trusts

Tariffs were here to stay. Yet manufacturers were not given complete protection. Emerging sources of competition increased production and lowered prices, which decreased profit margins. Again and again, large businesses bought out their competitors and tried to monopolize markets, but each time market forces thwarted them. Instead of trying to innovate and outcompete their rivals, established players resorted to the political arena: lobbying for ever-higher tariffs that privileged them without regard to the public’s welfare.

After the stagnation of the Civil War, America entered another Industrial Revolution. Between 1870 and 1890 real gross domestic product and its per capita equivalent soared 184 percent and 80 percent, respectively. The manufacturing sector grew 7 percent per year from 1869 to 1889, and manufacturing’s share of overall commodity output leapt from 33 percent to 48 percent. Increased mechanization caused manufacturing workers’ productivity to rise 39 percent. The resultant increase in the quantity of consumer goods pushed retail prices down 30 percent. Middle and lower classes reaped the benefits—real wages rose between 28 and 40 percent, and the average workday fell from eleven to ten hours.

The neo–American System of railroad subsidies and protective tariffs did not occasion this burst of economic growth. Subsidies caused railroads to uneconomically build far ahead of demand. American manufacturing had flourished during the relatively free-trade 1850s. The genesis for growth came, instead, from a powerful combination: Americans began saving more for retirement and their heirs, which decreased long-term interest rates. Increasing numbers of unskilled immigrant workers, along with an abundance of iron ore, coal, and other natural resources, lowered businesses’ costs of production. Skilled immigrants also expanded on foreign technologies. These factors, not the new government interventions, steered the United States to resume its growth potential.

The economic growth led to an increase in competition as new firms entered markets to earn profits. Businessmen did not exactly have the best of intentions: the goal was always to be one of a few sellers or the only seller. Every business prefers to be a monopolist. The plan was that once their business’s greater efficiencies drove competitors out of operation, they would attempt to decrease production and increase prices to fatten profits. Most businesses tried to skip ahead and become one of a few sellers that worked in concert by entering into a variety of cartel agreements through various trade associations, like the National Association of Wool Manufacturers and the American Iron and Steel Association. Still others tried to achieve outright monopoly through informal mergers, known as “trusts.”

Under the trust form, businesses combined their assets into a centralized management structure in return for shares of ownership that were informally traded. The most famous example occurred in 1882, when John D. Rockefeller combined forty companies to form the Standard Oil Trust. This industrial giant controlled almost 90 percent of oil refining and had a total capital value of $70 million, an enormous amount for manufacturing yet still small relative to railroads. Though “trusts” technically referred to the specific business form used by Rockefeller, to the public a trust was simply any big business or group of large companies.

An illuminating statement about trusts came from Henry Havemeyer, who in 1887 created the New York–based American Sugar Refining Company—the so-called Sugar Trust. Later he admitted that “the mother of all trusts is the customs tariff bill. . . . Without the tariff I doubt if we should have dared to take the risk of forming the trust.”It is true that Standard Oil and other big businesses, like Armour & Co. and Swift & Co. of the so-called Beef Trust of Chicago, achieved their large market size without tariffs and instead by lowering costs through mass production and other economies of scale. But Havemeyer perceived that in many industries, attempts to monopolize could only succeed if the government provided special privileges. In the Sugar Trust’s case, the privileges were tariffs, because higher duties made it harder for foreign competitors to enter markets and lower prices.

Protectionist industries worked hard to defend their tariff privileges. First, they continued to recruit intellectuals. Joseph Wharton, a disciple of Henry Carey, the major stockholder in the Bethlehem Iron Company and former AISA vice president, donated $100,000 to the University of Pennsylvania in 1881 to create the explicitly protectionist, and eponymous, Wharton School of Finance and Economy. The Wharton School hired Simon Patten and other economists trained by the interventionist German Historical School. These German-trained intellectuals played a chief role in shifting the profession from its laissezfaire origins to statism. Patten was one of the founders of the American Economic Association (AEA) in 1885, an organization that recognized supporting free markets prevented economists from obtaining prestigious positions of authority. According to Thomas Leonard, the AEA considered “laissez-faire . . . a nonstarter as a professionalizing strategy.”Though some members of the new generation of economists trained in Germany would never admit it, they could thank protectionist businessmen for providing the seed money needed to advance their ideas and profession.

Second, trusts compromised with one of their leading adversaries: the unions, or the politically influential labor cartels that constituted 2.5 to 5 percent of the labor force. Even though the current Industrial Revolution was progressively reducing working hours and raising real wages, the American Federation of Labor, established in 1886, and other unions attempted to restrict the labor supply in order to raise their wages further. Higher wages for union workers could only come at the expense of competing groups of labor: immigrants, blacks, and other nonunionized workers would have to increase the labor supply in other sectors and thereby drive down wages in those jobs. Although trusts strongly disapproved of unionization, protectionists such as James Swank of the AISA shrewdly tried to enlist unions to the protariff side by arguing that tariffs actually protected their incomes. A dubious argument, since tariffs raise the cost of consumer goods and tariff-induced monopolies reduce business competition and hence demand for labor. But the tactic succeeded in convincing unions to be suspicious of free trade.

Third, trusts supported Republican attempts to drain the Treasury’s burgeoning surplus by spending it on larger pensions for Civil War veterans. The existing program under the 1879 Arrears of Pension Act was incredibly corrupt, doling out annual payments two and a half times the average income. Contemporaries estimated that a quarter of approved applications were fraudulent, and Democrats deemed the entire program an effort “to save the tariff in order to enrich a few men that are making princely fortunes out of it at the expense of the great mass of the people.”The Democrats realized all too well that protectionist businessmen supported the nascent welfare state because higher expenditures necessitated the need for tariff revenue.

Lastly, the trusts and cartels employed time-honored congressional lobbying tactics to increase tariffs. John Hayes of the NAWM, Swank and Wharton of the AISA, Havemeyer of the Sugar Trust, and others frequently testified before Congress, financed protariff writings, and donated heavily to protectionist politicians. For example, the AISA bought the support of Senator John Sherman by purchasing ten thousand copies of a protectionist speech he delivered. The Sugar Trust found a major ally in Republican senator Nelson Aldrich of Rhode Island, whom it invited to New York “before the sugar schedule should be reached . . . [to] go through one or more of our refineries in order to inform yoursel[f] thoroughly on the subject.”The Sugar Trust was so pleased with Aldrich’s vigorous defenses of the tariff that it rewarded him with the presidency of the United Traction and Electric Company in Rhode Island, a firm one of the Sugar Trust’s lobbyists had formed. Its monopoly franchise made Aldrich a millionaire.

For these reasons, Republicans successfully beat back Democratic attempts to reform rates for protected industries. The Tariff of 1883 was a travesty of reform and continued to protect influential sectors. In 1888 the Democratic administration of Grover Cleveland failed to muster enough strength to defeat tariff lobbyists and pass its quasi-free-trade Mills bill. Throughout the decade tariffs remained around 45 percent of dutiable imports.

Despite all this effort, protected industries watched their monopolies melt away because of internal cheating and new competition as businesses took advantage of falling interest rates, cheaper resources, and new technologies. Recently opened refineries in Philadelphia and Baltimore caused the American Sugar Refining Company’s market share to drop from 80 to 66 percent between 1887 and 1889, and retail sugar prices fell 23 percent during the 1880s. In 1887 Andrew Carnegie and other steel producers formed the Rail Association and hiked the price of American steel rails 7.5 percent, but by 1889 the price declined back to its previous level. By the end of the decade there existed 719 steelworks, blast furnaces, and rolling mill companies in the United States, an environment hardly conducive to cartelization and trust monopolization.

The trusts without tariff protection fared no better against the gales of competition. From 1882 to 1890 Standard Oil’s market share slipped from nearly 90 percent to roughly 85 percent, and prices of refined oil fell 21 percent. On the international front, Standard Oil began to experience fierce competition from Russian oil. Neither could Armour & Co. and the rest of the Beef Trust control their market: from 1883 to 1889 retail prices for beef tenderloins plummeted 39 percent, and the number of meatpacking establishments increased from 872 in 1879 to 1,367 in 1889.

To compound the trusts’ frustrations, rival businesses proposed their own special-interest legislation. The Interstate Commerce Act of 1887 benefited railroads at the expense of large manufacturers by making it harder for companies that shipped in bulk to obtain rebates. European meatpackers lobbied their own governments to ban American meat products based on the allegations of diseased meat, despite American meat being just as safe as European meat.

The most prominent threats against big business were state-level attacks on sheer bigness, usually through “anti-trust” legislation. Various legislatures heeded the call of smaller and less efficient competitors by initiating investigatory proceedings against large companies—for example, New York against the Sugar Trust and Ohio against Standard Oil. Large companies had to devote resources to fending off legal attacks and avoiding negative publicity. In 1889 interest groups in the emerging Populist movement lobbied twelve midwestern and western states to pass harsh antitrust laws that expressly prohibited various business practices and included severe penalties. In Missouri, for example, cattle ranchers and retail butchers lobbied for a state antitrust law that prohibited actions intended “to limit or fix the price” of outputs (i.e., prohibited large businesses from using their efficiencies to reduce prices or to prevent them from rising).Missouri’s antitrust law made it harder for the Beef Trust to lower meat prices based on the claim that such behavior was anticompetitive because it could drive other firms out of business (the truth is precisely the opposite, for cutting prices is a rivalrous practice that encourages other businesses to be more efficient so they can stay in operation).

If big businesses’ attempts to monopolize markets were to succeed in the 1890s, they needed to replicate what the railroads had done in the run up to the Interstate Commerce Act: lobby to secure higher tariffs and new anticompetitive barriers while finding a way to weaken state antitrust laws so they could retain their bigness advantage in the marketplace. But obtaining new federal legislation required replacing the current president, Grover Cleveland, a Bourbon Democrat who supported lower tariffs and frugal veterans’ pensions.

The Billion Dollar Congress

Thanks to strong financial and political support from the trusts, the Republicans ousted the Democrats from the White House and Congress. With a control of government not seen since the Civil War years, Republicans enacted new special privileges that big business believed would reduce competition—namely, higher tariffs and federal meat inspection. In addition, the party defused small businesses’ proposals to hamper larger businesses by passing a weak and vague antitrust law.

The presidential election of 1888 was one of the first elections in which big businesses’ campaign contributions played a substantial role. Previously, political parties raised campaign funds from government employees who received patronage appointments in return. This ended with the Pendleton Civil Service Act of 1883, which Congress passed at the urging of the National Civil Service Reform League and other organizations eager to create an entrenched bureaucracy insulated from popular control. The Pendleton Act instituted a series of exams and grades of tenure for the classified civil service. In 1884 the civil service constituted 12 percent of the federal bureaucracy, but the law empowered the president to add more bureaucrats and by 1896 the number of protected employees rose to 45 percent.

According to Matthew Josephson, the Pendleton Act caused political machines to become “devoted to the service of the large corporations in their regions that required political privileges.” Sometimes large companies maintained the upper hand over politicians, while other times politicians simply extorted businesses by threatening to remove their privileges. Thus, James Foster, president of the protectionist Republican League of the United States, stated before the upcoming election, “I would put the manufacturers of Pennsylvania under the fire and fry all the fat out of them.”

The Republicans wholeheartedly embraced industrialists in the election. At the national convention they set aside frontrunner John Sherman for dark-horse candidate Benjamin Harrison, a former protectionist senator from Indiana. The convention chose Senator Matthew Quay, the political boss of Pennsylvania, to manage Harrison’s campaign. Quay put Philadelphia department store magnate John Wanamaker in charge of a special advisory committee to raise money from the trusts. Thomas Dolan of the NAWM, a prominent investor in one of the country’s largest woolen mills, and Herman Armour, cofounder of Armour & Co., worked with Wanamaker on the committee. According to Wanamaker, “We raised the money so quickly that the Democrats never knew anything about it.”He wasn’t exaggerating: the special committee raised $700,000 of the Republicans’ total $1.2 million war chest, which dwarfed the Democrats’ $250,000 in campaign funds. Over $300,000 of the Republicans’ funds came from iron, steel, and other Pennsylvania manufacturers, and Quay personally donated $50,000.

In American politics, money buys everything. The Democrats fought hard for free trade, but the Republicans outspent them to narrowly oust Cleveland from office. Whereas Harrison exulted that “Providence has given us the victory,” Quay was far more accurate: “Providence hadn’t a damned thing to do with it.”The real reason, of course, was the big-business slush fund.

The Republicans also regained control of the House, giving them unified control of the federal government. The party quickly repaid the special interests that bought them the victory. Contemporaries called the 1889 to 1891 congressional sessions the Billion Dollar Congress for its profligate spending and what Matthew Josephson deemed its “auctioning of immense sums and of public privileges greater still.”Indeed, the large trusts found their contributions to Harrison a worthwhile investment that yielded the McKinley Tariff, the Sherman Antitrust Act, and a meat inspection act.

The New York Times minced no words, describing the McKinley Tariff of 1890 as the “‘Campaign Contributors’ Tariff Bill.” Republican congressman William McKinley of Ohio, chair of the House Ways and Means Committee, so vigorously defended midwestern manufacturers that he was known as the “Napoleon of Protection.”He certainly had benefactors who wanted protection. His mentor and fundraiser, Ohio politico Mark Hanna, owned one of the largest coal and iron firms near the Great Lakes.

The McKinley Tariff raised the average tariff rate from 47 percent to 51 percent and protected woolen goods, iron and steel, refined sugar, and other manufacturing industries. A canonical example of Republican cronyism during the Great Barbecue, the McKinley Tariff was “widely seen as an unnecessary new tax on the public for the benefit of the rich.”Scores of industry representatives lobbied congressmen for their preferred rates. This included steel magnate Andrew Carnegie, who was on good terms with McKinley and had given him $5,000 in 1889.

Two examples in the McKinley Tariff stand out. First, the Sugar Trust instructed Senator Aldrich to maintain protection on refined sugar while eliminating the tariff on raw sugar to reduce its input costs. Hardly a move to the free market, the law compensated Louisiana sugar growers with a $7 million subsidy, which made those firms less responsive to market conditions and more dependent on taxpayer assistance. Second, the Tin Plate Association lobbied to obtain a specific duty on tin plates that raised import prices 70 percent, even though virtually no domestic tin plate production existed at the time—it was more efficient to import tin plates from Great Britain since the relevant inputs were expensive and US producers lacked experience. McKinley, however, represented a district where aspiring tin plate firms were located. He, not the American people, stood to gain by protecting tin plate manufacturing.

Ironically named, even the Sherman Antitrust Act of 1890 benefited the trusts. Big-business Republicans understood that they risked incurring the public’s wrath by raising monopolistic tariffs as it vindicated Democrats’ charges that tariffs fostered the trusts. As a counterweight, they advocated federal antitrust legislation to tame any monopolies. It was a ruse. Republican beneficiaries of big business devised a vague and nonthreatening law. Such legislation would provide cover for higher tariffs while not actually interfering with large companies; blunt cattle ranchers, small oil refiners, and other inefficient interest groups’ drive for a strong federal antitrust law that would harm big business; and supersede anti-big-business state antitrust laws. Businesses were fine with abandoning the legal form of the trust if they could reorganize as a different type of entity, such as a corporation that investors publicly traded on stock exchanges.

Politicians had self-interested motivations as well. Senator Sherman, whom the law was named after, only took up the antitrust cause in earnest when he realized he could use it to weaken Russell Alger, a former governor of Michigan turned political rival. Sherman believed that he lost the presidential nomination at the Republican national convention because Alger had bribed away some of his delegates. Fortunately for Sherman, Alger was tangentially involved with the Diamond Match Company of Michigan, a firm recently embroiled in a legal case concerning its attempt to buy out competitors. Sherman used his energies in the Senate debates to continually connect Alger with the Diamond Match Company to diminish Alger’s prospects on a future Republican presidential ticket. Sherman’s fixation, write historians Peter Dickson and Philippa Wells, “was not the response of a legislator who was sincerely concerned about passing effective antitrust legislation.”Once Sherman criticized his enemy he bowed out of the legislative process.

The trusts then received what they wanted. Unlike state antitrust laws, the Sherman Antitrust Act vaguely declared any contracts and combinations “in restraint of trade or commerce” illegal.It did not define what constituted a trust, a monopoly, or competitive conditions. Enormous interpretative leeway was left to the Justice Department and the courts. An attorney general favorable to big business could interpret the act in such a way that very few actions of large companies violated it. For this reason, the Commercial & Financial Chronicle, worried about various state laws, concluded that investors attached “little importance” to the Sherman Act.Probusiness attorneys general from 1893 to 1897, such as Richard Olney in the second Cleveland administration, made the law irrelevant. To the extent that Olney did use the law, he deployed it to strike down union activities—which big business heartily supported.

The Billion Dollar Congress finished with the Meat Inspection Act of 1891, reflecting the growing desire for cronyism within the food and drug industry. Various special interests wanted the US Department of Agriculture (USDA), which had been raised to cabinet status in 1889, to institute burdensome compliance costs and taxes on rivals. Even though competitors produced goods that were the same or better quality, specialinterest groups always camouflaged their favoritism in the guise of protecting the nation’s health. For example, in 1886 dairy farmers successfully lobbied Congress for a discriminatory production tax on oleomargarine because it competed with butter. Sugar producers sought to cripple the less expensive glucose. The American Medical Association assailed competing patent medicines and medical practitioners because they posed formidable threats to its licensed doctors. The pietist Women’s Christian Temperance Union longed for influence in dictating consumption habits. Chemist Harvey Washington Wiley was determined to concentrate the enforcement powers of a food and drug law in the USDA’s chemistry division. To Wiley and other interests’ dismay, Congress failed to pass a food and drug law in the early 1890s because the public was “either apathetic or positively opposed to a pure food and drug act as an illegitimate and paternalistic intervention of government into their lives.”

On the other hand, the meatpacking industry seized an opportunity. In general, the Beef Trust’s refrigerated meat, canned products, and use of preservatives drastically improved meat quality by reducing spoilage, bacterial contamination, and the monotony of diets. However, that did not stop the Butchers’ National Protective Association from blasting the Beef Trust for selling diseased meat while downplaying infections in their own meats. Responding to the situation, in 1884 Armour & Co. and other Chicago meatpackers lobbied for federal inspection of exported meat to stymie the small packers’ criticisms as well as induce European governments to lift their discriminatory bans. Their efforts failed: Congress only created the Bureau of Animal Industry (BAI) in the USDA to supervise animal quarantines.

Five years later, sagging meat exports caused Secretary of Agriculture Jeremiah Rusk to reinvigorate the drive for meat inspection. Armour & Co. instructed William Campbell, a former Republican Illinois state senator turned lobbyist, to make sure Congress produced the appropriate bill. The Meat Inspection Act of 1891 required BAI inspection of meat exports and provided for nonmandatory inspection of meat intended for interstate commerce. Philip Armour, the head of Armour & Co., lauded Rusk’s accomplishment and told the Chicago Tribune that “there is no objection to it on our part.”For good reason: the taxpayers, not the packers, paid for the inspection, and the USDA devoted most appropriations to inspecting the Beef Trust’s products. This taxpayer-subsidized quality seal, according to a meatpacking periodical, allowed the Chicago packers to get one-eighth to one-quarter cent more for their products.

Overall, the trusts certainly earned a return on their investment in the election of 1888. Much to their delight the Republicans and the Billion Dollar Congress increased tariff protection, enacted a favorable antitrust law, and subsidized the Chicago meatpackers’ exports. Conditions appeared ripe for consolidation, and the next phase of industrialists’ attempts to monopolize markets could now commence.

Corporate Cartelization

The early 1890s inaugurated the corporate merger movement as big businessmen formed corporations to cartelize and monopolize markets. Throughout the decade these corporations attempted to corner markets under the McKinley Tariff, patent protection, or other forms of government-granted privilege. Though they were mostly successful in stopping inimical tax and labor legislation proposed by Populist special-interest groups, the unrelenting emergence of new competition continued to cut into their market shares and profits.

Between 1890 and 1893 investors formed fifty-one corporations in the US, often in New Jersey because that state’s new and relatively free-market incorporation law made it easy to establish manufacturing corporations and purchase stock in other companies. J. P. Morgan, who had previously invested largely in railroads, bank stocks, and foreign and domestic government securities, led Wall Street into an alliance with the nation’s manufacturing interests. A major J. P. Morgan concern was General Electric, which he helped form in April 1892. General Electric was a $50 million combination of two of the largest electrical equipment manufacturers, Edison General Electric and Thomson-Houston Electric. Morgan sat on the board of directors and made Thomson-Houston executive Charles Coffin president of the concern.

The so-called Electric Trust’s business strategy relied on patent restrictions. Patents were a special privilege administered by the US Patent Office that granted to the inventor of a technology a monopoly for a certain period (at the time seventeen years). Patents stimulate overinvestment in the early stages of technologies by giving monopoly rights to the first developer while hampering investment in later stages of technologies by disincentivizing the patent holder from innovating (because the patent holder already has a legal monopoly) and forcibly barring competitors from making advancements. The patent system outlined in the late eighteenth century emphasized the inventor, but the corporate movement spurred the transfer of patent rights from individuals to large-scale businesses. Corporations began to buy patents away from the discoverers of the technology so that they, not the inventor, could legally prevent other companies from entering the sector. In General Electric’s case, it tried to amass all the patents related to electrical equipment.

A similar Wall Street–manufacturing alliance was forged between Standard Oil—then in the process of reorganizing under New Jersey’s incorporation laws—and the nation’s largest commercial bank, National City Bank. William Rockefeller, John D.’s brother and a Standard Oil cofounder, did the heavy lifting. He befriended National City’s president, James Stillman; arranged for his two sons to marry Stillman’s daughters; funneled Standard Oil’s money into the bank; and became a large stockholder and prominent director in the bank. Contemporaries labeled National City Bank “the oil bank” and watched its influence grow steadily in the following years.

Catastrophe struck when the newly formed corporations began to experience serious difficulties in the Panic of 1893 and the ensuing depression. General Electric lost 75 percent of its value and avoided bankruptcy only through Morgan’s infusion of funds. Other firms, such as the National Cordage Company, the rope trust that had reorganized into a corporation and then embarked upon a borrowing spree to expand operations, were not so lucky. When it failed in 1893, National Cordage owed $1 million to J. S. Morgan & Co., the London-based arm of the Morgan empire. Despite additional financing from J. P. Morgan that allowed it to reopen, National Cordage failed again in 1895. New attempts to restrict prices and production floundered. The iron and steel industry especially stood out. Morgan watched the situation with considerable dismay, recognizing that current cartelization efforts could not survive in the cutthroat depression and that he would have to postpone plans to devise new corporations in the industry.

Despite attempts to control the wire nail market before the panic, prices fell 22 percent from 1890 to 1892 and dropped an additional 23 percent between 1892 and 1894. In the spring of 1895 manufacturers formed a new cartel, the Wire-Nail Association, which promptly jacked up prices 81 percent. But new firms kept entering the fray, and the Association spent considerable sums of money paying them not to produce wire nails. In 1896 competition routed the cartel and prices crashed 50 percent. The total plunge in prices from 1890 to 1897 amounted to 46 percent. A similar phenomenon occurred with the Rail Association and the newly formed Carnegie Steel: a short-lived price spike for steel rails and hefty payments to would-be competitors in 1895 followed by a return to reality, with a 41 percent price decline between 1890 and 1897. The infant tin plate industry fared no better at controlling competition: by 1897 the American Tin Plate Manufacturers’ Association watched helplessly as independent firms relentlessly pushed down prices.

The Beef Trust experienced similar problems. After the Meat Inspection Act passed in March 1891, Chicago packers formed a cartel in May to control meat shipments in the nation. But a new firm, the Cudahy Packing Company, undercut the agreement and drove the industry into fierce competition throughout 1892. When the panic struck, the Beef Trust formed a new cartel, making sure to include Cudahy. But this agreement suffered from familiar problems: there was internal cheating by the cartelists, and the new firm Schwarzschild & Sulzberger refused to join. By May 1896 the cartel had collapsed. Compounding these difficulties, the Beef Trust incurred unanticipated costs from inspection when veterinarians in the BAI enforced a stringent condemnation of carcasses. This was uneconomical, as the Beef Trust and many physicians argued that the meat was safe to eat if properly cooked.

The Panic of 1893 convinced many financiers and big businessmen that excessive competition and overproduction caused the business cycle—businesses overproduced, which led to surpluses that caused prices to fall and business activity to become depressed. Their solution was to form larger corporations that could better restrict domestic sales. Then the corporations would sell any remaining surplus in export markets. Increased attention to the export market was a significant development; outside of Standard Oil and the Beef Trust the international scene was all but neglected.

Of course, big business concurrently devised new ways of using special privileges to strengthen their corporations. In early 1896, for example, General Electric negotiated an agreement with its remaining major rival, Westinghouse, to create a Board of Patent Control, a cartel that enabled the firms to exchange their monopoly grants and cooperate in blocking out competitors. General Electric also envisioned a vigorous program of exports and planned on acquiring foreign patents to cripple the competitiveness of international rivals.

Smaller and medium-sized manufacturers wanted to get in on the overseas action and drafted their own plans for government assistance. In 1895 they formed the National Association of Manufacturers (NAM) to push for subsidies so they could compete with American big businesses in overseas markets. For instance, the NAM called upon the government to subsidize the merchant marine, advertise American products, and help negotiate with foreign businesses and governments. As early as 1896 the NAM called for a new federal Department of Commerce and Manufacturers to execute these policies.

Leading members of the new breed of interventionist economists articulated businessmen’s desires. Jeremiah Jenks, an economics professor at Cornell University in New York and a founding member of the AEA, sharply criticized excessive competition for leading to “remarkable reductions in prices” and “small profits.”Charles Conant, an economist for the New York Journal of Commerce, stressed the need for US businessmen to find “an outlet for their surplus savings.”Conant argued that the government could stop capitalist overproduction by encouraging the formation of corporations and forcing South American and Asian countries to accept manufacturers’ exports. Naturally, Jenks, Conant, and other intellectuals envisioned themselves as influential advisors to both manufacturers and the government.

The new dispensation in businessmen and economists’ thinking pleased many Republican imperialists, among them President Harrison’s secretary of state James Blaine, Massachusetts senator Henry Cabot Lodge, Civil Service Commissioner Theodore Roosevelt, naval strategist Alfred Mahan, and the historian Brooks Adams. Harkening back to another tenet of Henry Clay’s American System, the imperialists desired to make America a world power by creating a Western Hemispheric bloc that forced South American and Asian countries to purchase American exports. But their efforts failed because the newly reelected President Cleveland thwarted Republicans’ attempts to annex Hawaii in 1893 and practiced a generally restrained foreign policy, save for intervening in a boundary dispute between Great Britain and Venezuela. With manufacturers growing more eager for export markets, however, the potential for the Republican dream of a worldwide American empire appeared within reach.

Until the depression ended in 1897, though, the new conglomerations and globalist vision had to wait. Big businessmen completed only twenty-seven mergers from 1894 to 1896 and fixated on electing Ohio governor McKinley to the Oval Office. Andrew Carnegie, for one, noted that because of the political uncertainty “capital at home equally with capital abroad has become alarmed. It has run into its hole.”William Jennings Bryan, the Populist Democrat who favored free silver coinage to reduce the value of the gold dollar, would not just make it harder for corporations to receive investment funds. A Bryan presidency would deliver cronyism very different from what big business wanted: income taxation on the wealthy, prounion privileges, and strict antitrust enforcement to break big businesses up. These policies would redistribute income away from wealthy industrialists and deliver it to farmers, smaller competitors, and unions.

Big businessmen received a taste of this in the depression. The Populist Democrats’ Wilson-Gorman Tariff of 1894 included a 2 percent income tax on all corporations’ profits and on personal incomes above $4,000. The wealthy derided it as class legislation, and Joseph Choate, one of the lawyers who successfully argued its unconstitutionality before the Supreme Court, worried it was “the beginning of socialism and communism.”Choate was a prominent Wall Street lawyer whose clients included Standard Oil.

Unions continued to worry about competition undercutting their wage rates, and the resultant violence in the 1892 Homestead and 1894 Pullman strikes greatly disturbed businessmen. In both cases industrialists hired immigrants and other cheaper labor to break the strikes and lobbied for government-funded troops to restore order. In the face of such setbacks, unions advocated making their competition less affordable. For example, Samuel Gompers, the head of the American Federation of Labor, declared that “unrestricted immigration is working a great injury to the people of our country” and called for a literacy test to block lower-skilled labor.The anxiety of manufacturers increased when Gompers urged the union’s members to vote for Bryan.

By the mid-1890s leading manufacturers found their cartel and monopoly attempts once again unsuccessful. Despite new tariff privileges provided by the Billion Dollar Congress, big business could not control competition and achieve monopolies. Budding corporations then had to make sure other interests did not receive any government favoritism—a Bryan presidency must be prevented. Once they secured the election of 1896, big businesses could again devise government policies to crack down on competition and promote export markets. In other words, “it was time, then, for those industrial and financial groups who had sought monopoly to emulate the example of the railroads: to turn to government to impose the cartels on their behalf.”

As with the railroads and manufacturers, Wall Street bankers found the Republican Party a sympathetic ally during and after the Civil War. Republicans, eager to enlist New York City bankers to their side, proceeded to enact banking laws and paper money schemes that this special interest favored. Another happy customer during the Great Barbecue!

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Henry C. Baird, “The Carey-Baird Centenary,” American Bookseller, February 16, 1885, 104, quoted in Reinhard Luthin, “Abraham Lincoln and the Tariff,” American Historical Review 49, no. 4 (July 1944): 614.

Phillip W. Magness, “Morrill and the Missing Industries: Strategic Lobbying Behavior and the Tariff, 1858–1861,” Journal of the Early Republic 29, no. 2 (Summer 2009): 328.

Magness, “Morrill,” 296–97, 299, 308–9; and Daniel Peart, Lobbyists and the Making of US Tariff Policy, 1816–1861 (Baltimore: Johns Hopkins University Press, 2018), 183–86.

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Henry C. Carey to C. N. David, June 2, 1860, quoted in Peart, Lobbyists, 189.

Hawkins Taylor to John Allison, December 21, 1860, quoted in Magness, “Morrill,” 320–21; emphasis in Magness.

William Stanley Jevons, The Coal Question: An Inquiry Concerning the Progress of the Nation, and Probable Exhaustion of Our Coal-mines (London, 1866), 236,

Bolt, Tariff, 203–8; Irwin, Clashing, 208–9; Magness, “Morrill,” 320; and Peart, Lobbyists, 188–93.

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Senator James Beck, Congressional Record, 50th Congress, 1st session, March 1, 1888, 1637.

Richard Franklin Bensel, Sectionalism and American Political Development, 1880–1980 (Madison: University of Wisconsin Press, 1984), 70; Irwin, Clashing, 243–44; and Murray N. Rothbard, “Beginning the Welfare State: Civil War Veterans’ Pensions,” Quarterly Journal of Austrian Economics 22, no. 1 (Spring 2019): 71–73.

John Searles to Nelson Aldrich, December 6, 1888, quoted in David J. Rothman, Politics and Power: The United States Senate, 1869–1901 (Cambridge, MA: Harvard University Press, 1966), 203–4.

César J. Ayala, American Sugar Kingdom: The Plantation Economy of the Spanish Caribbean, 1898–1934 (Chapel Hill: University of North Carolina Press, 1999), 31–32; Jay Cost, A Republic No More: Big Government and the Rise of American Political Corruption (New York: Encounter Books, 2015), 127–28; Josephson, Politicos, 330, 333, 338–39, 364; Joanne Reitano, The Tariff Question in the Gilded Age: The Great Debate of 1888 (University Park: Pennsylvania State University Press, 1994), 116; and Rothman, Politics, 203–6.

Irwin, Clashing, 6, 231–39, 257–61.

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“Railroad and Miscellaneous Stocks,” Commercial & Financial Chronicle, May 10, 1890, 653.

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Quoted in James Freeman and Vern McKinley, Borrowed Time: Two Centuries of Booms, Busts, and Bailouts at Citi (New York: Harper Collins, 2018), 58. William H. Becker, The Dynamics of Business-Government Relations: Industry and Exports, 1893–1921 (Chicago: University of Chicago Press, 1982), 32; Harold van B. Cleveland and Thomas F. Huertas, Citibank, 1812–1970 (Cambridge, MA: Harvard University Press, 1985), 314; Freeman and McKinley, Borrowed, 58–68; and Ralph W. Hidy and Muriel E. Hidy, Pioneering in Big Business: History of Standard Oil Company (New Jersey), 1882–1911 (New York: Harper and Brothers, 1955), 219–332.

Jeremiah D. Lambert and Geoffrey S. Stewart, The Anointed: New York’s White-Shoe Law Firms (Guilford, CT: Lyons Press, 2021), 10; Reich, “Lighting,” 307–11; and Strouse, Morgan, 114, 244–45, 319–20.

Lamoreaux, Merger, 14, 66–69, 72–73, 80; and Larry Schweikart, “Carnegie Steel,” in Paskoff, Encyclopedia, 77–78.

Newman, “Defense,” 36–37, 40–41.

Becker, Dynamics, 29–32, 44–46, 114, 211; David Healy, US Expansionism: The Imperialist Urge in the 1890s (Madison: University of Wisconsin Press, 1970), 159–77; Lambert and Stewart, Anointed, 10; James Livingston, The Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890–1913 (Ithaca, NY: Cornell University Press, 1986), 53, 59–61; Reich, “Lighting,” 308; and Joseph R. Stromberg, “William McKinley: Architect of the American Empire,” in Reassessing the Presidency: The Rise of the Executive State and the Decline of Freedom, ed. John V. Denson (Auburn, AL: Mises Institute, 2001), 322–26.

Jeremiah Jenks, “The Economic Outlook,” Dial 10 (1890): 253.

Charles Conant, The United States in the Orient (New York: Houghton, Mifflin, 1900), 3.

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Palen, “Conspiracy,” 174–79, 183, 191–98, 253–61; and Rothbard, Progressive, 203–6.

“The Financial Situation,” Commercial & Financial Chronicle, May 23, 1896, 924.

David Graham Phillips, The World, March 30, 1895, quoted in E. S. Martin, The Life of Joseph Hodges Choate (New York: Charles Scribner’s Sons, 1920), 2:8.

Samuel Gompers, Report of the Proceedings of the Twelfth Annual Convention (AFL), 1892, 14, quoted in Philip Taft, Organized Labor in American History (New York: Harper and Row, 1964), 306.

Briggs, Immigration, 45, 63–64, 73; Brownlee, Taxation, 79–82; Calton, “Monstrous,” 283; Chandler, Visible, 332; Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (Oakland, CA: Independent Institute, 2012), 91–103; Johnston and Williamson, “GDP”; Josephson, Politicos, 610–11; Lambert and Stewart, Anointed, 19; Gwendolyn Mink, Old Labor and New Immigrants in American Political Development: Union, Party, and State, 1875–1920 (Ithaca, NY: Cornell University Press, 1986), 42, 144–48; Morris, Tycoons, 196–206; Rothbard, Progressive, 180; and Sanders, Roots, 268–74.

Rothbard, Progressive, 107.