Cronyism

CHAPTER 7

A TRADE COMMISSION FOR INDUSTRY

“Government and business are and should be mutually helpful,” declared businessman turned regulator Edward Hurley in late 1915. “The bankers,” for instance, receive assistance from “the Federal Reserve.” “To do for general business,” Hurley concluded, what the Federal Reserve does for bankers “was the thought behind the creation of the Trade Commission.”Hurley hit the nail on the head: around the same time as the drive for a central bank, businesses, led by the largest corporations, lobbied for a trade commission to cartelize domestic and international markets. Making it more difficult for firms to cut prices, particularly through compulsory public disclosures of business practices, formed a key pillar of the burgeoning corporatist state. It was an uphill battle, though, as big business had to grapple with smaller businesses and unions’ antitrust, tax, and labor proposals that hurt their profits. In the end, as with the Federal Reserve, industrialists, partnering with economists and lawyers, achieved their desired regulatory commission by securing favorable commissioner appointments.

The Corporatist Groundwork

McKinley’s 1896 presidential win augured well for business and marked a return to prosperity. The decreased likelihood of silver inflation encouraged investor confidence, increased immigration led to lower labor costs, and new sources of iron ore and other resources supercharged industry. Confident that the president would not invoke the Sherman Antitrust Act, investment banks on Wall Street and elsewhere returned to financing corporations. In 1898 and 1899 over 1,500 manufacturing and mining companies merged, aggregating to $2.9 billion in market capitalization.

Notably, J. P. Morgan created the $200 million Federal Steel Company and the $80 million National Tube Company to try to monopolize the steel industry. In the process Morgan enlisted top corporate lawyers Francis Lynde Stetson and Elbert Gary. Both shared Morgan’s belief in achieving business stability through cartels and monopolies—arrangements that required their legal services. After creating Federal Steel, Morgan made Gary its president. Other examples abound: businessman John “Bet-a-Million” Gates organized the $90 million American Steel & Wire Company, the $294 million Standard Oil empire finished reorganizing as a corporation in New Jersey, and James Stillman and William Rockefeller formed the $75 million Amalgamated Copper by buying out the Anaconda Copper Mining Company. The ostensible goal of these megamergers was to reduce market instability; the real goal was to monopolize markets so big businesses could restrict supply and raise prices.

As large corporations developed economies of scale and lowered production costs below those of foreign concerns, their goods became more competitive abroad. The value of finished manufactured exports surged 56 percent, from $213 million in 1897 to $332 million in 1900. Corporations’ increased focus on international markets made them less supportive of protective tariffs because the taxing out of foreign goods made it harder for foreigners to buy American products. On the other hand, smaller firms, like those in the National Association of Manufacturers (NAM), lacked the necessary cost efficiencies and therefore embraced the protection of tariffs. The relative inefficiency of smaller businesses in the NAM caused them to step up their advocacy of a new department of commerce that would provide export assistance.

Some corporations looked for further means of protection, including acquiring additional patents to prevent competitors from using the patented technology. One patent lawyer for American Telephone & Telegraph, a company that J. P. Morgan & Co. increasingly financed and controlled, declared that “the policy of bringing suit for infringement on apparatus patents is an excellent one because it keeps the concerns which attempt opposition in a nervous and excited condition . . . and . . . keeps them all the time changing their machines and . . . adopt[ing] inefficient forms of apparatus.”In similar fashion, General Electric continued to restrict competition through its Board of Patent Control and initiated a policy of purchasing foreign patents and stock in foreign companies. The first decade of the twentieth century witnessed noticeable growth in patents held by corporations, with the proportion of new patents for inventions issued to domestic corporations rising from 17 percent in 1901 to 23 percent in 1911.

To Wall Street’s disappointment, the mergers failed to increase prices and market shares. As the New York Financier stated in 1900, “The most serious problem that confronts trust combinations today is competition from independent sources.” Inveterate competition and price undercutting especially plagued the steel industry, and Iron Age lamented the problems facing cartels “where the combination is naming confessedly high prices for its goods.”New firms and cheating broke up Federal Steel and Carnegie Steel’s attempt to cartelize the rail market. Nor could American Steel & Wire permanently drive out new wire firms. The large conglomerates engaged in turf warfare and reneged on agreements: Carnegie Steel started to diversify against Morgan’s National Tube Company, and American Steel & Wire stopped buying billets from Federal Steel and Carnegie Steel. In the oil industry, Standard Oil failed to adjust to discoveries in Texas, California, Kansas, Illinois, and the Indian Territory (Oklahoma). It also experienced difficulties abroad because of the Royal Dutch Company and the Shell Transport & Trading Company. Promoters had widely overestimated the consolidated corporations’ abilities to control competition, and investors overpaid for their stocks.

The second scourge for the large corporations was new antitrust suits from southern and western Populists. This was particularly true in the oil industry. In late 1897, Ohio refiners lobbied the state’s attorney general, whose father was the president of Standard Oil competitor Bucyrus Gas Company, to file an antitrust suit. In 1900, Texas forced a Standard Oil subsidiary out on antitrust grounds. That same year, John Archbold, John D. Rockefeller’s lieutenant at Standard Oil, lobbied Ohio senator Joseph Foraker and paid him $44,500, mainly to defeat “a very objectionable bill” on antitrust that he should “have no difficulty in killing.”These legal headaches weakened Standard Oil’s ability to respond to new oil competition, though the failure to respond to new oil sources was more damning.

Their failure to monopolize led industrialists to advocate for corporatist legislation that cartelized markets through government coercion. In 1898, Congress created the Industrial Commission to investigate trusts and gather information from businessmen, lawyers, and economists. Corporate leaders testified and called for a national incorporation law that enabled the federal government to charter companies to engage in interstate commerce. Gates at American Steel & Wire declared that “if necessary, I would have a manufacturing commission, the same as the Interstate Commerce Commission.” He wanted to stop attacks on New Jersey corporations from “Illinois, Iowa, [and] Nebraska.” He was “very much in favor of having national charters granted” to corporations worth $5 million or more, with the owners “hav[ing] to go to Washington and pay a substantial sum for that charter, and a substantial sum per annum thereafter.” Gates obviously left out that such a license would increase barriers to entry and make it harder for up-and-coming corporations to compete against established giants like his. A costly federal charter would privilege the biggest trusts and restrict production and raise prices in interstate markets.

Some industrialists approved of the government requiring firms to publicize prices and financial records. Coerced publicity, if it was neither probing nor motivated on antitrust grounds, made cartels easier to enforce by revealing competitors’ price cuts and other business decisions. Gary of Federal Steel declared to the commission that publicity was “one of the very best remedies” and that “he did not quite agree with some of the gentlemen that the affairs of a large corporation should be kept secret.” While Gary claimed that his motivation was to protect the public, it is undeniable that Federal Steel, which pioneered in issuing quarterly reports, wanted to know what its competitors charged. An additional effect was that disclosure regulations imposed new costs, such as hiring more accountants, that smaller companies had a harder time affording relative to Federal Steel and other large concerns. Standard Oil, on the other hand, feared publicity because it dominated through clandestine railroad rebates; Archbold testified that he was hesitant about government “inspection of the books and affairs of each concern.”Privately, he confided that publicizing “receipts and expenditures, profits, and losses can only benefit the competitors.”

Big businessmen found common ground with corporatist economists. Cornell University’s Jeremiah Jenks advised the Industrial Commission. He was eager to devise and advocate the policies businessmen desired in return for research sinecures and employment. His preliminary report for the commission in 1900 favored requiring large corporations “to publish annually a properly audited report, showing in reasonable detail their assets and liabilities, with profit or loss.”In Jenks’s view, monopolization, combined with government-required public disclosure, improved the competitive marketplace because it stabilized prices and profits and eliminated depressions.

In early 1901 J. P. Morgan and Stetson organized a massive corporation, US Steel. J. P. Morgan and three of his partners sat on the board, with Elbert Gary serving as chairman. The company absorbed Carnegie Steel, Federal Steel, American Steel & Wire, National Tube Company, American Tin Plate Company, and many others. It controlled nearly two-thirds of the nation’s production of steel ingots and castings and planned to dominate international markets. Anticipating high earnings from US Steel’s market share, J. P. Morgan & Co. capitalized it at a gargantuan $1.4 billion, which made it the world’s largest private business. Gary confidently believed that US Steel could publicly announce its prices and get smaller competitors to abide by them. Along these lines, Gary issued quarterly reports that revealed cost data. Jenks would later work as a consultant and lend intellectual support to the firm’s pricing policies.

In 1900, shortly before US Steel’s formation, corporatists founded the National Civic Federation (NCF). The Republican senator and Ohio political heavyweight Mark Hanna served as president, and prominent members included Gary, Morgan partner George Perkins, and academic advisor Jenks. This Republican think tank preached a middle-of-the-road attitude, as its founder, the probusiness journalist Ralph Easley, believed that the “enemies are the Socialists among the labor people and the anarchists among the capitalists.”

Though the NCF emerged from a conference on trusts, it originally focused on labor issues. Over the next decade, technological change and economic progress continued to raise real wages, shorten working hours, and reduce child labor. That did not stop organized workers from trying to secure greater gains at the expense of nonunionized rivals and the public, who had to pay relatively higher prices. Notably, as Japanese and southern and eastern European immigration surged after 1897, the American Federation of Labor (AFL) proposed a literacy test for workers. Big businesses in the NCF adamantly opposed unions and the literacy test because they would raise the cost of employing low-skilled labor and thereby reduce their profits. They decided to bring the AFL into the fold as a (very) junior partner, appointing its president and founder Samuel Gompers as the NCF’s vice president. The big business–labor partnership was as follows: cooperative unions would receive higher wages without receiving recognition from individual businesses. The NCF’s détente with unions infuriated the National Association of Manufacturers. The NAM understood how negotiating with labor groups imposed management costs that disproportionately raised the costs of smaller firms. It feared that acceptance of unions would make it so that only the big corporations could survive.

As examples of the new labor-management arrangement, in 1900 the United Mine Workers, an immigrant-heavy union that faced continued competition from newer immigrants, initiated a strike. Hanna instructed the NCF to work with the AFL to defuse the issue, and mining companies agreed to increase wages 10 percent without recognizing the union. The next year, the Amalgamated Association of Iron, Steel, and Tin Workers went on strike against US Steel. Gary and Perkins refused to tolerate it, and Gompers and the NCF ended the strike, permanently crippling the union.

By the beginning of the second McKinley administration, Wall Street had created new mergers that favored patents, federal incorporation, and compulsory public disclosure. Big business enlisted economists to articulate their policymaking goals. In establishing the NCF, large corporations brought labor unions under their thumb as junior partners to stymie labor radicalism. The new century looked fertile and promising for big business.

Roosevelt’s Preferential Treatment

In September 1901, Wall Street watched in horror as President William McKinley was assassinated and his vice president became the chief executive. Theodore Roosevelt was a loose cannon whom political power brokers never intended to become president. He threatened to use the Sherman Antitrust Act against big business to benefit smaller firms and to shift compulsory publicity measures away from reducing competitive pressures and toward catalyzing antitrust lawsuits. To neutralize the threat, the Morgan concerns worked strategically with the new administration and secured preferential treatment with protection from such antitrust cases.

Roosevelt was a politician J. P. Morgan had routinely tried to buy off. In 1898 Morgan donated $10,000 to his campaign for New York governor. It didn’t do much good. When Morgan tried to get Roosevelt to exempt his New York Central Railroad from a proposed mortgage tax, he failed. Ironically, Roosevelt only became McKinley’s running mate in the 1900 election because New York Republican Party boss Thomas Platt “want[ed] to get rid of the bastard . . . [and] bury him” in the dead-end position of vice president.After the election, Roosevelt, trying to improve his rapport with business, hosted a dinner in Morgan’s honor. The banker later confessed to a journalist that he was “afraid of Mr. Roosevelt because I don’t know what he’ll do.”

Morgan partners George Perkins and Robert Bacon anxiously sounded President Roosevelt out. They felt reassured after the president’s first congressional address praised big business and only recommended a new department of commerce to regulate “labor and all matters affecting the great business corporations and our merchant marine.”Uncertainty returned in February 1902 after the president launched an antitrust lawsuit against the Northern Securities Company, a holding company Morgan had organized for the Northern Pacific and Great Northern Railways. This anti-big-business interpretation of the Sherman law pleased small-business Populists and self-styled Progressives and shocked Morgan and other corporate leaders. An angry Morgan visited Roosevelt at the White House and asked if Roosevelt planned to attack “the Steel Trust and the others.”“Certainly not,” the president reassured Morgan, unless “they have done something that we regard as wrong.”This informal corporatist arrangement insulated J. P. Morgan & Co.’s investments from future federal antitrust lawsuits and allowed these corporations to make business decisions forbidden to other big businesses. This arrangement contrasted sharply with the strategy pursued by Standard Oil and other corporations, which coldly distanced themselves from the administration.

Perkins, Morgan’s “first real power broker and high-level lobbyist,” performed the necessary intermediation.During the rest of the year Perkins secured Roosevelt’s approval of two new Morgan creations, the $120 million International Harvester, which produced farm machinery, and the $170 million International Mercantile Marine shipping trust. Perkins made further inroads by introducing Roosevelt to Elbert Gary to ensure that the president viewed US Steel in a positive light. Finally, Perkins worked with Roosevelt in 1902 to mediate another strike between the United Mine Workers and coal operators. He successfully fought for a less labor-friendly arbitration board. Typical of NCF agreements, the president’s arbitration board secured the miners the same compromise as before—a 10 percent wage increase without union recognition.

A crucial part of Perkins’s establishing comfortable relations with the president was lobbying for Roosevelt’s new pet project, the Department of Commerce and Labor, and its subsidiary, the Bureau of Corporations. Perkins professed to Roosevelt that he was “personally very anxious to see the Department of Commerce bill become a law.”He wanted the agency to act as a liaison between business and the federal government to minimize antitrust lawsuits against the Morgan companies. This was still a concern because the president was simultaneously pushing to expedite antitrust cases in the federal courts and increasing appropriations for the Justice Department.

Perkins quickly instructed his lobbyist William Beer to convince congressmen of the need for such a department. When Roosevelt had the bill amended to enable him to release or withhold the Bureau of Corporations’ findings, Perkins maintained his support. The president had declared that he could “separat[e] the good from the bad” trusts, and Perkins believed he could help him determine what constituted the “good” trusts that played nice in markets and the “bad” trusts that violated antitrust laws.The Morgan bank’s strategy clashed with Standard Oil’s, which lobbied against the Roosevelt amendment. Infuriated by Standard Oil’s actions, the president’s vindictiveness toward it swelled—he already held Standard Oil partially responsible for his ousting from New York politics.

Early in 1903 Congress created the Department of Commerce and Labor along with passing laws that fast tracked antitrust cases and furnished the Justice Department with a $500,000 appropriation for antitrust proceedings. Perkins was so indispensable in getting Congress to create the department that Roosevelt gave him one of the pens he used to sign the law. Furthermore, Roosevelt, who knew of Perkins’s “interest . . . in reference to filling the position[s]” in the new agency, appointed James R. Garfield to be the first head of the Bureau of Corporations.The son of the former president was a Roosevelt loyalist, but he had also known Morgan’s attorney Stetson since his years at Williams College, and Stetson was consulted on the appointment.

The corporatist apparatus of the new Department of Commerce and Labor became a ready forum for businesses to obtain crony privileges from the Roosevelt administration. Some of the government assistance involved the Bureau of Manufacturers, an agency created to aid the National Association of Manufacturers and other small- and medium-sized exporters. For example, at the taxpayers’ expense, the bureau subsidized exporters by compiling lists of foreign importers and publishing trade information about them and the goods they desired. This was a significant stepping stone to explicit export assistance, including export-driven trade agreements, cartels, and direct subsidies.

Big business primarily focused on the Bureau of Corporations because the president used its information-gathering functions to decide which large companies should receive government support and which should suffer scrutiny. To gather the necessary data, the bureau brought into the civil service various interventionist economists. Like Jenks, Edwin Seligman, and many other prominent academic economists, they were trained in the empirical methods of the German Historical School. The new breed of economists was keen on proving its worth to the bureau, and the government at large, by providing measurements and quantifications of business conditions to make policy proposals appear rigorous and sophisticated. Economists now ensconced in the government bureaucracy included E. Dana Durand, an instructor at Harvard and former student of Jenks, and Francis Walker, a recent doctoral graduate from Columbia University.

Roosevelt wanted the bureau to help the “good” trusts and prosecute the “bad” ones. It became apparent that the president was playing favorites with his definitions. The “good” trusts turned out to be the Morgan corporations that maintained friendly relations with the administration. Protected from antitrust attacks by the president and his bureau, Morgan concerns were able to engage in activities forbidden to others—namely, the acceptance of secret rebates, the creation of new cartels, and the acquisition of competitors. This gave them an advantage against competitors not favored by the Roosevelt administration and furthered their restrictionist goals. The “bad” trusts, on the other hand, were those the president personally opposed. He directed the bureau to initiate inquisitorial probes to fuel antitrust litigation. With their operations hampered and their attention focused on fighting antitrust battles, large businesses in Roosevelt’s crosshairs became less responsive to consumer desires.

Roosevelt’s first attack via the bureau against the “bad” trusts was on the much-maligned Beef Trust, at the urging of livestock interests eager to raise the prices of their cattle. However, he saved most of his ire for Standard Oil. That company was already increasingly on the defensive as smaller oil refiners in Texas and other states lobbied for state- and federal-level antitrust suits. Now, Kansas oilmen wanted the Bureau of Corporations to investigate. Smaller oil companies relished the propaganda from muckraker Ida Tarbell, who in Ron Chernow’s words wrote “screed[s] masquerading as sober history.”This lauded progressive reformer was in league with small-oil interests: her father was an oilman whom Rockefeller had outcompeted, and her brother William worked as the treasurer of the Pure Oil Company, one of Standard Oil’s biggest domestic competitors. William read and vetted his sister’s manuscripts before she published them. Far from the publicly minded journalism they professed to be, Tarbell’s attacks were not intended to protect the consumer but rather to keep in operation smaller companies unable to improve product quality and lower prices as much as Standard. Standard Oil chose to ignore Tarbell’s work, in what proved to be a catastrophic public relations strategy.

In a late bid to placate the president, Standard Oil donated $100,000 to his reelection campaign in 1904. It didn’t work: after his campaign had already spent the money, Roosevelt wrote a letter ordering a refund because “the letter will look well on the record” (Standard never received a refund).Years later Roosevelt admitted his vindictiveness: Standard Oil “antagonized me before my election, when I was getting through the Bureau of Corporations bill,” and after the election “I then promptly threw down the gauntlet.”Beginning in 1905 the bureau investigated Standard Oil, and the next year Roosevelt publicized the report showing that the company had received secret discounts from railroads in violation of the Elkins Anti-Rebating Act of 1903. The bureau charged it a record $29 million fine, but Standard Oil resisted, and the courts overturned the penalty. Spurred by the court loss, Roosevelt went for the jugular in 1907 and filed an antitrust suit to break up the company.

In 1911, the Supreme Court upheld a lower court’s judgment and required Standard Oil to split into Standard Oil of New Jersey (SONJ), Standard Oil of Indiana, and others with separate management and operating structures. Never mind that competition had eroded Standard’s share of the petroleum products market from 90 percent in 1899 to 84 percent in 1907 and then to 80 percent in 1911. Instead of capitalizing on the new oil discoveries that had chipped away at Standard’s market share, smaller oil interests teamed up with Roosevelt to smash the corporation. Through the strong arm of government, they succeeded in lowering Standard Oil’s market share, but without the concomitant increase in production and improvements in quality that genuine market competition would have engendered. Small oil got what it wanted without the hard work.

Roosevelt and his bureau’s treatment of Standard Oil contrasted sharply with their treatment of the “good” trusts: J. P. Morgan & Co.’s International Harvester and US Steel. Initially, Morgan had privately tried to induce both Grover Cleveland and Mark Hanna to run against Roosevelt in 1904, but when they declined, he and his partners decided to continue supporting the president. Morgan donated $150,000 to Roosevelt’s reelection and Perkins raised an additional $450,000.

International Harvester received protection from both the Elkins Anti-Rebating and Sherman Antitrust Acts. After it was discovered that International Harvester secretly received rebates in May 1904, company president Cyrus McCormick Jr. met privately with Garfield and convinced him that the company should receive only a warning and not be penalized. Standard Oil received no such friendly slap on the wrist. Then, in December 1906, the bureau began an investigation into International Harvester. It coincided with Populist farmers who, wanting lower prices for farming implements, lobbied their states for restrictive laws against the company. Looking to defuse the situation, Perkins and Gary, himself a large stockholder, made sure that the investigation proceeded quietly and that the bureau delayed the report. Roosevelt even personally ordered the attorney general to drop the Justice Department’s suit.

US Steel received the greatest blessing. Perkins boasted to his superior that “Gary and I feel quite confident as to the Steel Corporation. . . . [It] is looked upon in Washington with more favor than perhaps any other one concern.”From 1901 to 1906, its cartelizing policy of publicly announcing prices backfired and led to undercutting by independent firms and a decline in its share of ingot production from 66 percent of the market to 58 percent. Recognizing the situation, Gary wanted to organize a new cartel, but this required the president’s approval in order to avoid antitrust prosecution. Confident in his relationship with the president, Gary told Roosevelt that if investigated, US Steel would allow the bureau “to examine the books and records of all our companies.”When the bureau did investigate in 1905, Gary met with Garfield and Roosevelt at the White House. The bureau did not complete its report during the Roosevelt administration.

Roosevelt’s favoritism extended to allowing US Steel to engage in activities forbidden to “bad” trusts. During the Panic of 1907, he allowed the corporation to purchase the Tennessee Coal, Iron, and Railroad Company at the distress price of $45 million, increasing US Steel’s control over iron and steel in the South. Roosevelt justified permitting the takeover, to himself and later to Congress, on the grounds that it was during a financial crisis and he trusted Gary. Later in the year, Gary formed a new cartel with 90 percent of the country’s iron and steel producers. At so-called Gary dinners steel industrialists publicly announced their agreed-upon prices. They openly talked of price rigidity—a US Steel official instructed his salesmen to “indulge in no cutting of any kind; maintain schedule prices absolutely.”This extended to propping up wage rates to make sure no company in the group could undercut its competitors by slashing labor costs. Roosevelt’s Justice Department knew of Gary’s cartelist activities yet did not prosecute. Although collusion failed due to the perennial problem of secret price-cutting, the Roosevelt administration’s sanction of them and the purchase of Tennessee Coal reveals US Steel received special privileges that were forbidden to other corporations.

The NCF looked to codify the Morgans’ preferential treatment. In fall 1907 Jeremiah Jenks, who had become the president of the American Economic Association, and Seth Low, a former president of Columbia University and former mayor of New York City and the NCF’s next president, sponsored a conference for corporatist businessmen and intellectuals to draft policy proposals. The delegates called for amending the Sherman Act to allow “combinations whose objects are in the public interest.” This vague statement could be interpreted to exempt larger businesses like Standard Oil, which benefited the public with reduced prices and improved quality, from the antitrust attacks. However, the vagueness of “public interest” could easily be interpreted as any companies the president favored—regardless of whether said companies embraced market innovations or cartelized through special privileges like US Steel. The latter appears to have been the intention because the conference proposal combined the antitrust provision with public disclosure requirements favorable to the maintenance of cartels—“complete publicity in the capitalization, accounts, operations, transportation charges paid, and selling prices.”

In early 1908 Jenks consulted with fellow academic Low, businessmen George Perkins and Elbert Gary, and lawyers Francis Lynde Stetson and Edgar Addison Bancroft (the latter International Harvester’s general counsel) to devise a bill. Businessmen, intellectuals, and lawyers worked in concert to further the corporatist state. In a step toward federal incorporation, Jenks’s proposal allowed corporations to voluntarily register with the Bureau of Corporations. Once they provided annual reports with detailed information about finances and operations, which the bureau would publish, they could submit trade arrangements to the bureau for potential exemption from the Sherman Act. Significantly, as an enticement to organized labor, unions could also apply to exempt their cartelization of workers.

The proposal’s regulations reflected the corporatist thinking of big businessmen. First, the bureau’s ability to exempt various activities from the Sherman Act reduced intrusive government intervention. Second, the publicity features reduced hidden price competition. Third, corporations were encouraged to register to avoid antitrust lawsuits, saddling compliance costs disproportionately on smaller corporations and larger corporations not in the president’s favor.

Roosevelt did not find the bill acceptable. He amended it to increase the discretionary power of the president—himself—and included a more compulsory form of registration. This weakened the NCF’s support and drew a firestorm of criticism from the NAM, the Illinois Manufacturers’ Association, and other organizations representing small- and mediumsized businesses. They understood that the enhanced executive authority and the increased power of unions would impose costs that hurt the smaller companies relative to the industrial giants close to the president. For these reasons, the proposal died in Congress.

The defeat led the NCF to change its strategy later in the year. Instead of working through the president and the Department of Commerce and Labor’s Bureau of Corporations, the new plan was to create a trade commission like the Interstate Commerce Commission, a modified version of John Gates’s proposed manufacturing commission. To quote one NCF businessman, Congress needed to “establish a large Bureau of Commerce and give them the power to turn the limelight on those concerns. . . . Let us wipe out the Sherman Law and put in its place something that will strengthen . . . the examination and control of our corporations.”The next step in big businesses’ partnership with government was about to commence.

In Restraint of Trade

The corporate power elite and their economists and lawyers spent the next several years lobbying for a trade commission to reduce antitrust lawsuits and enforce crony restrictions on price-cutting. In order for cartelization and monopolization efforts to succeed, it became increasingly necessary to reduce market pressures. Under the guise of promoting competition, businessmen would lobby to restrain it. With the right personnel leading a trade commission, big business would be in a commanding position.

Until the NCF devised a trade commission proposal for Congress to enact, the Morgan firms planned to continue their informal arrangements with the new president, William Howard Taft. The House of Morgan had assiduously supported Taft against the pro-antitrust Bryan, and after Taft’s victory Perkins predicted to Jack Morgan that “we are going to have a more comfortable time.”Perkins’s optimism was misplaced, for the new executive surrounded himself with lawyers who interpreted the Sherman Act broadly. An activist reading of the statute pushed businessmen to hire legal counsel to defend them in court—creating demand for lawyers who understood the law and how it was enforced. For example, Taft chose as his attorney general George Wickersham, a law partner of his brother Henry. After Wickersham’s service in government, Cadwalader, Wickersham & Taft became “one of Manhattan’s earliest law factories” and earned lucrative fees defending corporations from antitrust prosecution.Over his four years in office the legal-minded Taft initiated nearly twice as many antitrust lawsuits as Roosevelt did in his seven and a half years.

To J. P. Morgan & Co.’s dismay, the Bureau of Corporations completed their long-delayed investigatory reports, and Taft filed antitrust lawsuits against US Steel and International Harvester in October 1911 and April 1912. Though these suits were ultimately unsuccessful, they hit J. P. Morgan & Co. at a sore time—they had lost Perkins, their Washington go-between, on bad terms in late 1910 after he began to undermine J. P. Morgan’s leadership. The antitrust headache only added to US Steel’s latest troubles from competition—the Gary dinners floundered after reductions in steel tariffs in 1909 incentivized small firms to furtively cut prices. Furthermore, General Electric, previously under the radar, had to dissolve its Board of Patent Control because of an antitrust lawsuit in March 1911. International Mercantile Marine escaped antitrust prosecution, but the tragic sinking of its Titanic in April 1912, and the difficulty of dampening competition on the ocean, caused irreparable damage.

Amid the antitrust onslaught, the NCF renewed its legislative push. Throughout the second half of 1911, Gary, Perkins, and NCF president Seth Low testified before Congress. They argued that a trade commission was necessary to decrease antitrust lawsuits and control harmful price competition. Regarding the latter—similarly to how railroads sought cronyism through the elimination of secretive rebating and discriminatory pricecutting on long hauls compared to shorter routes—industrialists wanted to publicize hidden forms of price discounting, such as through discriminatory price cuts for certain individuals, firms, and locations. NCF officials did not admit that relative price discounts were harmful only to businesses; for the consumer they meant lower prices. This, of course, was all according to plan.

Gary fixated on secretive prices, a sign that this competitive behavior clearly frustrated his attempts to control markets. As Emiliano Corral Jr. puts it, he had recently created the American Iron and Steel Institute to “striv[e] for ‘fair’ prices and the avoidance of ‘destructive competition.’”Despite his persistent efforts, Gary admitted to Congress that US Steel experienced difficulties because “it is not the big company that makes the market. It is the small company, disposed to cut prices, which makes the market.”He advocated “a corporation commission . . . similar to the Interstate Commerce Commission.” This agency would enforce the “utmost publicity” for corporations engaged in interstate trade and make sure “prices should be the same to all customers without discrimination between persons or localities.”In other words, the commission would make it harder for firms that had developed the relevant cost efficiencies to undercut the larger firms that had become less efficient and responsive to change.

Low continued, explaining that a commission’s publicity powers would make it “impossible to maintain secretly a trade agreement affecting prices and output.”In reality, public disclosure of pricing practices makes cartelizing easier and hurts competition. Perkins also disingenuously insisted that publicity would improve competition. Perkins, conscious of the need for the right personnel, favored “a business court or controlling commission, composed largely of experienced business men.” Enforcing publicity would be “the essential feature,” and each corporation would require commission approval for “all its affairs, from its capitalization to its business practices.”

Around the time Congress was holding hearings, Low and Jenks drafted corporatist policy recommendations for the NCF. They enlisted the help of another leading intellectual, Columbia University’s eminent economics professor John Bates Clark. They proposed that Congress create a new regulatory agency that would reduce anticompetitive pressures through public disclosures. Just as the Interstate Commerce Commission had been enabled “to put an end to rebating and every other unfair practice in railroading,” the new trade commission would “smoke out and put an end to any unfair practice in connection with ordinary commercial business” (i.e., any welfare-enhancing price reduction that cut into cartels and monopolies). In addition, the commission would alleviate antitrust uncertainty by helping businesses “determine whether what they are doing or proposing to do, is probably lawful or unlawful.”The proposal was big businessmen’s preferred trade commission.

More and more business groups joined the clarion call. The number of trade associations established in a five-year period—business affinity organizations that facilitated cartelization among firms—had nearly doubled from thirty-four between 1905 and 1909 to sixty-three between 1910 and 1914. Businessmen and government officials founded the United States Chamber of Commerce in 1912. Associationalists were eager for a trade commission. Most notably, trade association lawyer Arthur Eddy wrote an entire book supporting the replacement of antitrust with “a Federal Commission.” Eddy’s commission would enforce “the frank and free disclosure of all competitive practices,” require a “uniform system . . . of cost accounting” to prevent “intentional failure[s]” to accurately record prices, prohibit “secret rebates” and charging different prices to multiple buyers, and “revise and fix prices” of trade associations.Much like the big businesses in the NCF, businesses of all sizes in trade associations demanded their own corporatism to decrease competitive pressures.

The election of 1912 spurred a major change in strategy, as big business now faced a very Populist Democratic Party. Democratic candidate Woodrow Wilson perennially straddled the fence in election seasons. But his party championed cronyism for small businesses and unions that opposed big business and wanted government interventions that raised wages, redistributed the profits of the wealthy, and made it harder for large corporations to operate. They enlisted progressive intellectuals such as John Commons and the German-trained Richard T. Ely, two University of Wisconsin economists who helped found the American Association for Labor Legislation (AALL), a new group that advocated elevating scientific experts to oversee labor policy. Many AALL economists were close to Robert La Follette, who, as governor of Wisconsin in the early 1900s, had installed one-sixth of the university’s faculty on state-level commissions that regulated working conditions and other matters. Wilson himself, a former professor and a student of Ely’s, was an AALL member. His presidency augured the possibility of federal employment for AALL economists.

The Democratic-AALL labor program heavily privileged the American Federation of Labor and other Anglo-Saxon male– dominated unions that voted for the party: accident insurance for workers, minimum wages for women, labor restrictions on children, and a literacy test for immigrants. These types of policies raised the cost of employing low-skilled labor, causing firms to employ them less and instead demand higher-skilled unionized workers who were now relatively cheaper. Fittingly, after Congress had split up the Department of Commerce and Labor at the end of Taft’s presidency, the new president appointed as the first ever secretary of labor William Wilson (no relation), a close AFL ally and former secretary-treasurer of the United Mine Workers. Some firms did support prounion policies because they were already employing higher-skilled labor, unlike their competitors. The New England Cotton Manufacturers’ Association aimed to hurt smaller competitors in the South that still employed children. US Steel and International Harvester had instituted their own workmen’s compensation and wanted to saddle smaller competitors with similar compliance costs. Unions, however, remained the primary beneficiaries.

Wilson’s one olive branch to business came by happenstance. He had originally envisioned as secretary of commerce Louis D. Brandeis, his anti-big-business advisor and the AALL’s legal counsel. But his other advisor, Colonel Edward House, persuaded him to pass over Brandeis. Instead, Wilson picked William Redfield, a former machine manufacturer and president of the American Manufacturers’ Export Association. Secretary Redfield quickly proceeded to help create the National Foreign Trade Council (NFTC) in early 1914. The organization was controlled by US Steel, International Harvester, General Electric, Standard Oil of New Jersey, and other large corporations that dominated the 118 percent explosion in manufacturing exports (from $332 million to $725 million) that had taken place since 1900. The NFTC and Redfield favored government-privileged export cartels to combat similar European cartels. Recently, US Steel had contemplated forming an export cartel, as had Amalgamated Copper, but worries over antitrust violations postponed implementation. With Redfield, the corporations now had an ally in the administration.

Redfield’s appointment notwithstanding, Wilson’s first legislation angered big business. Labor and farmers had increasingly lobbied for an income tax to redistribute income and strike at corporate power. They secured the Sixteenth Amendment in February 1913 to prevent the wealthy from legally challenging peacetime income taxes again. The Underwood-Simmons Tariff Act of October 1913 slashed the tariff and instituted both a 1 percent corporate income tax and a progressive personal income tax that hit only the wealthiest (the top marginal rate was 7 percent). Robert Montgomery, the president of the American Association of Public Accountants, rejoiced at the news, having previously told Congress that his profession stood “ready and glad to render every assistance in our power to further the preparation of efficient legislation.”As the demand for tax accountants increased in subsequent years, Montgomery published highly influential books on how to prepare income tax returns.

Large corporations and the wealthy, on the other hand, were not pleased at having to pay the government more money. Gary and other corporate leaders did not lobby against the tariff reduction because they no longer needed that form of protection. But they sharply criticized the income tax because, in the words of one businessman, “it immediately arrays ninety-seven per cent. of the people against [the] three per cent. of the people” that paid the tax.If peacetime income taxes became a permanent fixture, executives proposed shifting the burden to the poor, or in the Wall Street Journal’s words, getting them “imposed upon every voter, however small his means.”

Insult was added to injury when rumors circulated that Wilson would next urge legislation prohibiting interlocking directorates, a proposal heartily supported by smaller businessmen eager to weaken their larger rivals by preventing directors from serving on multiple boards. The threat worried J. P. Morgan & Co. so much that in January 1914 it preemptively announced the resignation of its partners from thirty boards of railroads and manufacturing concerns. But this was not enough for Wilson, because they retained positions on the boards of US Steel, International Harvester, and General Electric. April’s resultant Clayton bill, named after the Populist Democrat Henry Clayton of Alabama, proposed outlawing various interlocking directorates among banks and corporations. It also called for an extremely stringent ban on price discrimination that made it harder for large corporations to adjust prices across markets.

However, just as Wilson moved forward on his antitrust program, he conciliated. The deepening recession that had started in 1913 gave him anxiety about the upcoming midterm elections. Big business proceeded along two fronts. In December 1913 the NCF sent its trade commission bill to Joseph Davies, the current head of the Bureau of Corporations. Davies in turn convinced the president, who had previously believed that it was the scheme “of the very men who are to be controlled,” of the usefulness of a trade commission.The president now thought that a trade commission could adopt an anti-big-business and pro–Clayton bill stance if the personnel so desired, but corporate executives had other plans. For their part, throughout 1914 the NFTC and Redfield lobbied to exempt export cartels from antitrust legislation. Though Wilson refused, he supported having the proposed trade commission further study the question.

The Democrats passed the Federal Trade Commission Act and the Clayton Antitrust Act before the fall midterms in 1914, when they maintained control of Congress. The NCF had thus accomplished its main objective: getting the federal government to enact a regulatory commission that could codify the anticompetitive behaviors promoted by the Roosevelt administration and institute new restrictions on market pressures. The free-enterprise alternative of eliminating antitrust regulations and allowing businesses to openly compete and produce betterquality products at lower prices was never considered. It is true that Democrats catered to anti-big-business interests. They did not fully grasp, though, how their newfound conciliation made these progressive laws considerably vaguer than earlier proposals, and how the ambiguity provided the crucial opening for corporatists to capture the regulations.

The Federal Trade Commission Act subsumed the Bureau of Corporations and its publicity functions into a new, independent agency outside of the Department of Commerce, the Federal Trade Commission (FTC). The five-man regulatory board possessed a malleable mandate: “Unfair methods of competition in commerce are hereby declared unlawful.”At the same time, the Clayton Act forbade interlocking directorates and other practices along equally hazy lines: “where the effect of such acquisition may be to substantially lessen competition.”It was up to the trade commissioners to decide just what exactly constituted unfair methods or a lessening of competition and whether to initiate antitrust prosecution against corporations and trade associations or to aid them in restraining the competition they so detested.

According to Owen Young, the vice president and general counsel of General Electric, “If ably manned and directed” the new commission could turn into a “common sense court without too much red tape or delay.”Young believed that with the right personnel he would have “a good deal of confidence in it” and that it would “not become prejudiced and sour as the Interstate Commerce Commission has” against the nation’s railroads. Wilson, who received a flood of letters containing suggestions for commissioners, made sure his appointments placated the business community. After all, his 1916 reelection was right around the corner.

Crucially, when the president made his picks in early 1915, one of them was Edward Hurley, a businessman who had supported Wilson early in his political career. Industrialists could count upon him. He was a former president of the Illinois Manufacturers’ Association and according to Young was “a hardheaded business man, . . . fairly familiar with the ways of business, and . . . [we] can expect from him, I think, absolutely fair treatment.”Furthermore, after serving as a trade commissioner to Latin America on behalf of the Department of Commerce, Hurley had helped form the big business–dominated NFTC. Young’s approval was not misplaced, as Hurley stated, “In my position on the Trade Commission I am there as a business man. . . . I try to work wholly in the interest of business.”

Hurley, who would become the FTC’s most energetic official and its second chairman, constituted big businesses’ “Benjamin Strong” at the FTC. He would exploit the FTC’s vague mandate in a way favorable to industry, interpreting “unfair methods” to mean competitive behaviors that lowered prices, increased quantity, improved quality, and reduced the profits of cartelizing and monopolizing firms. Hurley would not look out for the public. Industrialists and trade associationalists eagerly awaited his tenure, for the guns of war blaring in Europe opened new avenues for sizable profits.

____________________________

Edward Hurley, “Some Business Problems of To-Day,” Economic World 10, no. 23 (December 1915): 721.

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John Archbold, quoted in Flynn, Gold, 372.

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Elbert Gary, November 29, 1911, quoted in US Senate, Hearings before the Committee on Interstate Commerce (Washington, DC: Government Printing Office, 1912), 694.

Seth Low, November 29, 1911, quoted in Senate, Hearings, 522.

George Perkins, December 13, 1911, quoted in Senate, Hearings, 1091–92.

Seth Low, John Bates Clark, Jeremiah Jenks, and Talcott Williams, “Cover Letter to Proposal for a Bill,” December 9, 1913, quoted in Sklar, Corporate, 296–97.

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Becker, Dynamics, 8, 48, 123, 133–34, 140–41; Burch, Elites, 2:211, 235; Leonard, Illiberal, 36; Sanders, Roots, 283–86; and Mira Wilkins, The Emergence of Multinational Enterprise: American Business Abroad from the Colonial Era to 1914 (Cambridge, MA: Harvard University Press, 1970), 81.

Robert Montgomery, “Corporation Tax Returns,” Journal of Accountancy 15, no. 2 (February 1913): 139.

Quoted in Wiebe, Businessmen, 196.

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The Clayton Act (38 Stat. 730), October 15, 1914, quoted in Notz and Harvey, American, 423.

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Owen Young to Arthur Page, January 29, 1915, quoted in Case and Case, Young, 144.

Owen Young to E. B. Parker, June 16, 1915, quoted in Case and Case, Young, 145.

Young to Parker, June 16, 1915, quoted in Case and Case, Young, 145.

Edward Hurley, “Speech to National Industrial Conference Board,” July 1916, quoted in Kolko, Triumph, 274–75.

Burch, Elites, 2:217; Case and Case, Young, 144–45; Kolko, Triumph, 275; Newman, “Personnel,” 1044, 1047; and Stephen A. Schuker, “Owen D. Young,” in Encyclopedia of American Business History and Biography: Banking and Finance, 1913–1989, ed. Larry Schweikart (New York: Facts on File, 1990), 482.