Cronyism

CHAPTER 8

CAPTURING THE REGULATIONS

Edward Hurley’s tenure at the Federal Trade Commission (FTC) brought great rewards to the big-business community. The FTC during the Hurley years provided more certainty over what constituted antitrust violations, devised new accounting rules to make pricing more public, and made significant inroads in government-enforced export cartels. The good times did not last. After Hurley resigned in early 1917, President Wilson catered to small businesses through new commissioner appointments, promoted prounion policies in new wartime agencies, and significantly raised taxes on businesses and the rich. Big business learned the hard way that they were not the only interest group trying to capture the corporatist state. However, all was not lost, for by the middle of the 1920s industrialists and their economists and accountants had recaptured the regulations through personnel changes and favorable government legislation. The Department of Commerce and the FTC returned to promoting a pro-big-business corporatist order, which included generous patent protections, export subsidies, burdensome labor and tax compliance costs on smaller firms, and government-backed cartels that restricted market competition in industry and among workers. By the end of the decade the corporatist regulations reduced the profitability of smaller companies relative to larger concerns and rigidified the price- and wage-setting process.

Big Business in the Driver’s Seat

Hurley’s first action at the FTC was to sanction and enforce restrictionist behavior. In the spring of 1915 the commission consulted with trade association lawyer Arthur Eddy and Morgan lawyer Victor Morawetz and adopted the practice known as “advance advice,” where businessmen approached the FTC to learn what constituted “unfair” methods of competition.This informal process, which the FTC’s mandate did not explicitly mention, allowed businessmen to influence trade commissioners regarding what constituted unfair competition (i.e., anything that competitors were doing). In the 1920s, advance advice evolved into the FTC creating forums where individual trade associations defined anticompetitive behavior in their industry, with the FTC agreeing to prosecute noncompliant firms.

Hurley’s next anticompetitive initiative concerned uniform accounting standards. He declared that “a system of cost accounting uniform throughout an industry [allows] companies in the industry [to] compare their costs readily,” which “produces more intelligent competition.” In contrast, “the lack of adequate cost accounting systems” results in businesses “cutting prices right and left and . . . reckless competition.”To put it more pointedly, requiring accounting standards in each industry makes it harder for firms to sell below a given profit margin and enables businesses to collude on prices. This was intelligent competition from the perspective of the businessman, not from the public, who received fewer price discounts.

Under Hurley’s direction, the FTC’s Cost Division worked with the American Association of Public Accountants to devise cost accounting rules, and the FTC’s chief economist Francis Walker helped by providing his profession’s increasingly quantitative precision and statistical analysis. By 1916 Hurley had sent out 230,000 accounting manuals to trade associations and issued letters of approval on their individual accounting standards. This approval set a precedent for the FTC to declare that deviations of individual firms from trade associations’ publicly stated accounting practices constituted unfair competition.

To Hurley’s dismay, Commerce Secretary William Redfield envied his growing informational bureaucracy and wanted it for himself. Redfield killed congressional funding for the program and absorbed the FTC’s Cost Division into his agency’s Bureau of Foreign and Domestic Commerce, a new subunit that had supplanted the export-minded Bureau of Manufacturers. The FTC’s loss notwithstanding, Hurley’s cartelizing efforts lived on in the Department of Commerce.

Last but certainly not least, Hurley aided export cartels after war broke out in the summer of 1914, a great struggle that quickly encompassed Great Britain, France, and Russia on one side and Germany, Austria, and the Ottoman Empire on the other. World War I would tremendously enlarge cronyism throughout the US economy by fostering the corporatist state eagerly desired by bankers, big businesses, intellectuals, and unions.

Big business reaped its gains before America’s entry three years later. The British and French needed $3 billion in explosives, firearms, ammunition, and related war materiel, and their purchasing agent J. P. Morgan & Co. distributed the lion’s share of contracts to corporations affiliated with the investment bank. The Morgan firms responded by ramping up production of military-related goods. As an extra bonus, they exploited new opportunities for foreign investment: General Electric, for example, invested in Panama and ushered in the era of US light and power in South America. The gains were remarkable: the profits of US Steel, for instance, exploded by 440 percent between 1914 and 1916, an increase much greater than the less than 9 percent rise in consumer prices and the various tax increases during this time. No wonder Iron Age described 1916 as “the Greatest of Steel Years.”The annual report for General Electric remarked on the “extraordinary demand for General Electric products” like searchlights and large electric motors.Between 1914 and 1916 the real value (adjusted for price increases) of industrial stocks rose nearly 56 percent. Big business was happy, but the war exports angered Germany and German Americans and significantly increased the possibility that the United States would be drawn into the bloody conflict to help Great Britain and France.

In mid-1916, Hurley spoke before the American Iron and Steel Institute and announced that he would recommend legislation that sanctioned and enforced export cartels. Elbert Gary at US Steel exuberantly praised Hurley as a “real statesman.”Redfield thoroughly agreed with such legislation, as did many trade associations representing smaller- and medium-sized firms. As a result, the House quickly passed the Webb-Pomerene bill, which required “every association now engaged solely in export trade” to register with the FTC.Their export activities received exemption from the Sherman Antitrust Act and from the Clayton Antitrust Act’s prohibitions on intercompany stockholding. Crucially, the FTC could now go after “unfair methods of competition in export trade,” which could include practices like “pricecutting by free goods and premiums; price discrimination; [and] rebates and discounts conditioned on exclusive dealing.”In other words, the FTC could aid the cartelization of American firms in foreign markets by attacking competitive price-cutting behaviors. Though anti-big-business senators delayed its passage until 1918, the Webb-Pomerene Act constituted a sizable corporatist victory because it allowed the FTC to create government-enforced cartels in international markets.

In January 1917, Jeremiah Jenks boasted that the FTC had “secur[ed] the confidence of . . . the great corporations.”Jack Morgan assessed the overall business situation and noted that while “the Democratic party has tried its best to cripple us in every way it could, [in] that they had Steel investigations, Pujo investigations and Clayton bills . . . we have gone ahead and got along pretty well.”Indeed, after years of planning and defending, big business had counterattacked by securing the right personnel and producing for the Allies’ war effort. Government favors burst forth in the form of new European export subsidies and a friendly FTC that promoted restrictive domestic and international trade agreements.

Industry Loses Control

It was not to last. “Practically overnight,” writes George Davis Jr., “the Federal Trade Commission had assumed new and controversial responsibilities in its relations with commerce and industry.”This revolution caused by new personnel, along with new wartime regulations, union favoritism, and higher taxes after the US entered the Great War, reduced the crony rewards big business received from the burgeoning corporatist state. As a result, the big-business community turned against the FTC they had worked so hard to create and devised new regulatory proposals.

The same month Jenks made his assessment, Edward Hurley resigned from the FTC. He returned to the private sector, telling Wilson that he had to devote “personal attention to my business affairs.”Unlike at the Federal Reserve Bank of New York, where Benjamin Strong’s long tenure guaranteed a steady stream of rewards to Wall Street, at the FTC the reshuffling of personnel created alternating periods of regulatory capture by different special interests.

Wilson, victorious in his reelection and ensconced in the White House for four more years, returned to rewarding the Populist and Progressive interest groups who had soured on the early FTC. Due to Hurley’s retirement and other vacancies, Wilson appointed opponents of big business, such as former Kansas journalist and congressman Victor Murdock. In a rapid change of course, the new commissioners investigated the Beef Trust, US Steel, Standard Oil of New Jersey (SONJ), and other corporations accused of war profiteering.

Big businesses’ wartime profiteering became a much bigger concern after April 1917, when the US declared war on Germany for attacking its armed merchant ships. Now the US government needed to purchase its own materiel. By June, the FTC was advocating new regulations for “the public and dependent industries in war times against unreasonable prices.”With inquisitional zeal, the new commissioners drastically increased cease and desist orders against businesses and trade associations: after issuing only six from 1914 to 1917, the commission issued thirty in 1918 alone. The FTC’s attacks on bigness hampered businesses’ use of cost efficiencies. Its calls for price controls promised to create shortages because the demand for goods was increasing as a result of the Federal Reserve’s wartime monetary expansion.

By mid-1918, industrialists were attacking the commission they once considered a friend. The United States Chamber of Commerce, reflecting the sentiments of J. P. Morgan & Co., National City Bank, General Electric, Armour & Co., International Harvester, and its other large donors, declared that after showing the “promise of becoming a constructive body . . . during the past year or eighteen months [the Federal Trade] Commission’s attitude and procedure have changed.”Recognizing that the problem lay with the new personnel, in August the US Chamber wrote to Wilson and asked for a meeting, looking to persuade him to fill two vacancies with probusiness commissioners. Instead, in 1919 and 1920 Wilson appointed anti-big-business lawyer Huston Thompson and Nelson Gaskill, his assistant attorney general while governor of New Jersey.

The changes at the FTC paralleled corporations’ decline in profits brought about by the flurry of wartime agencies, wartime-induced unionization, and higher taxes. US Steel’s profits increased by just 41 percent between 1916 and 1918, a noticeable slowdown that was swallowed by the 38 percent rise in consumer prices. In general, the real value of industrial stocks plummeted 37 percent over these two years. During the entire span of the conflict, between 1914 and 1918, they slid roughly 2 percent.

After Congress declared war, it established the War Industries Board (WIB) to coordinate wartime production, along with similar agencies for fuel, rail, and food allocation. Corporatist businessmen and economists staffed the WIB. Bernard Baruch, a Wall Street speculator who donated $47,500 to Wilson’s two elections, headed the agency. Alexander Legge of International Harvester, retired millionaire Robert Brookings, and farm equipment manufacturer George Peek joined him. Wesley Clair Mitchell of Columbia University, the German-trained dean of the Harvard Graduate School of Business Administration Edwin Gay, and other technocratic economists jumped at the government employment opportunity. Mitchell, according to his wife, adhered to “the idea of developing social statistics, not merely as a record but as a basis of planning,” with the implication that this overseeing was to be administered by new philosopher kings such as himself.

The WIB made enormous strides toward a corporatist state by negotiating prices, outputs, and product varieties with newly organized industrial cartels. To big businesses’ delight, this occurred under a virtual suspension of antitrust enforcement. The US Chamber enthused that the new arrangement “promises to furnish the basis for a truly national organization of industry. . . . War is the stern teacher that is driving home the lesson of cooperative effort.”The crackdown on competition hurt business innovation, which in turn reduced consumer welfare: for example, in the name of instituting uniformity and eliminating waste the WIB restricted the number of styles and sizes of clothing, plow models, drills, and other products.

Industry quickly learned that the WIB prioritized the war effort and not big-business cronyism. The FTC’s pricing reports informed the WIB’s negotiations, and when industry committees refused the government’s offers, the Wilson administration often threatened nationalization and strict price controls. This happened in the steel industry, where Baruch and Elbert Gary frequently clashed. In some cases, the WIB ordered a decline in private sector production, angering producers and the consumers who bought the goods; the most notable instance was in the emerging automobile industry. Baruch rationalized that his heavy-handed decisions protected businesses from more aggressive federal actions.

At the same time, new labor regulatory agencies and policies raised costs and reduced profit margins, much to the consternation of big business. Wilson created a War Labor Administration to be headed by his secretary of labor, William Wilson. In turn, Secretary Wilson created the National War Labor Board to mediate labor disputes and the War Labor Policies Board to determine standards for wages, hours, and working conditions. American Association for Labor Legislation (AALL) intellectuals worked in these agencies—for example, Felix Frankfurter, the AALL’s new legal counsel and a Harvard law professor, headed the labor standards board. Many of the labor boards’ rulings hurt nonunionized workers. For example, when the labor disputes board advocated equal pay “to make it no more profitable to employ women than men,” it did not intend to achieve equality between the sexes.Instead, the board intended to make females less economical to hire; it concurrently minimized the investigatory powers of female examiners and prevented women from serving on the commission. As one final sop to organized labor, Congress crushed less-educated and low-skilled substitutes through the Immigration Act of 1917, which banned immigration from all of Asia save for the Philippines and Japan and imposed a literacy test on all worldwide entrants.

The government’s labor policies elevated the American Federation of Labor (AFL) and other unions to formidable powers in the corporatist state. Union ranks swelled by over two million between 1916 and 1920, and membership as a share of the nonfarm labor force rose from 11.2 percent to 17.6 percent. While unions received higher wages from restricting competition in their labor markets, the excess workers pushed down wages in other industries.

As the last injury to big businesses’ bottom line, Secretary of the Treasury William McAdoo and other redistributionist Democrats partially financed the war with taxes on the wealthy and on businesses. The rates were much higher than what was advised by Wall Street bankers and by Assistant Secretary of the Treasury Russell Leffingwell, a former lawyer at the Wall Street firm Cravath & Henderson whose clients included US Steel. The Revenue Act of 1916 raised the corporate income tax to 2 percent, increased the top marginal rate for personal incomes to 15 percent, instituted a new 12.5 percent excess profits tax on munitions makers, and created an inheritance tax that hit 10 percent on the largest estates. This was minor in comparison to the Revenue Acts of 1917 and 1918 that increased the corporate income tax to 12 percent, the top personal income tax bracket to 77 percent, the excess profits tax to between 30 and 65 percent of all industry returns classified as above average, and the top inheritance tax to 25 percent. The personal income tax’s ensnaring net now extended to 15 percent of families, but the wealthiest 1 percent accounted for 80 percent of its revenue. These higher taxes crushed the incentive to work, save, and produce goods valued by consumers.

Corporations and the rich fought to lower their tax burdens. Most significantly, General Electric’s Owen Young lobbied on behalf of his friend Senator Henry Hollis’s contribution to the Revenue Act of 1917, which enabled individuals to deduct up to 15 percent of their taxable income if they donated it to universities and other nonprofits. Dwight Morrow, a Morgan partner and soon-to-be General Electric board member, provided Young crucial assistance. Hollis’s amendment enabled big businessmen to shield their incomes from aggressive taxes and direct them to corporatist intellectuals who researched and advocated favorable policies for them. By donating to their own foundations that spent money on pet projects or to universities and new institutes, businessmen could lower their tax payments. It is no coincidence that a flurry of institutes emerged around the time of the sharp increase in taxes. Wealthy businessmen plowed money into the Rockefeller Foundation (1913), the Institute for Government Research (1916, later reorganized into the Brookings Institution), the National Bureau of Economic Research (1920), the Council on Foreign Relations (1921), and others.

In addition to engaging in foundation funneling, industrialists lowered tax payments by allocating their money into nontaxable funds earmarked for maintenance and depreciation (regardless of whether they actually spent the money for those purposes), investing in tax-exempt Liberty Bonds, and raising corporate officers’ salaries. As an example of the last practice, Bethlehem Steel, one of US Steel’s largest competitors, increased its president’s salary through bonuses from $12,000 in 1916 to $2.9 million in 1917 and 1918 (he did pay $1.8 million in income taxes those two years, but the overall change is telling).

When the war ended in November 1918, business elites prepared to recapture the regulatory environment. They wanted to preserve the wartime attack on competition but revise the regulations and the personnel who administered them to prioritize big-business profits. The US Chamber urged Congress to “complete[ly] revise” antitrust laws, pack the FTC by increasing the commissioners from five to nine, and formulate new “standards of general business conduct.”Big businessmen desired government-enforced cartels and monopolies, not a capitalist free-enterprise economy. One of their other pressing issues was subsidizing exports to war-torn Europe and facilitating investments on the Continent given the newfound strength of the dollar. Morgan partners Thomas Lamont and Henry Davison lobbied the Wilson administration to subsidize American exports to Europe to increase the exporting corporations’ stock values and reduce the burdens of the countries who had borrowed from their bank. The main loser in this plan, unsurprisingly, was the American taxpayer.

To the frustration of the US Chamber and the Morgans, the Wilson administration and Congress rejected these proposals. But they still had Commerce Secretary Redfield. After the WIB disbanded, corporate leaders convinced him to create a new Industrial Board in the Department of Commerce. Industry’s “biggest asset,” according to the Industrial Board’s chairman, was the board’s ability to publicly back businesses’ price agreements and tell other businesses that “this is as low a price as you could get.” Publicly announced price floors would stabilize cartel pricing and allow businesses to “get along with half the number of salesmen and less than half the advertising.”This was the kind of mandated cartelization big business heartily endorsed. To their frustration, the Industrial Board lived a short life. After the board negotiated with Gary and the steel industry to prop up steel prices in March 1919, the FTC, the Railroad Administration (which purchased steel rails), and an attorney general eager to return to antitrust prosecution angrily protested. Wilson dissolved the board in May.

The failure of the Industrial Board led corporatist big businessmen to regroup and craft new policy proposals on all fronts. The US Chamber’s stance on the FTC influenced the Republican Party platform, which attacked the “Democratic” commission for its “persecution of honest business” and endorsed the earlier policy of advance advice.Businessmen would look once more for favorable appointments at the FTC and the Department of Commerce. On the labor question, after the new labor boards were disbanded, unions fought to consolidate their gains—strikes as a share of total employment surged from 6.2 percent in 1919 to 20.8 percent in 1920. Some old liners like Gary refused to countenance unions and hired black and Mexican strikebreakers. On the other hand, Owen Young and other corporate leaders sought new ways to conciliate unions while relegating them back to junior partnership status. In terms of taxes, Assistant Secretary Leffingwell found an opening when McAdoo retired and the new secretary of the Treasury, Carter Glass, gave him wide latitude to write a proposal for tax reform. Leffingwell stressed a reduction of taxes on the rich and an “increase of the normal tax.”This would normalize the income tax in peacetime and shift some of the burden onto the middle class.

The early years of the FTC are a testament to the importance of specific personnel for regulatory capture. Congress had enacted a trade commission that could reward either large or small firms. Initially, big business, through Edward Hurley, steered the commission in a direction favorable to its interests. Changing personnel sharply eroded these gains and turned businessmen against the FTC. Corporate elites’ situation deteriorated further with new wartime regulatory agencies that controlled prices, raised labor costs, and taxed away incomes. However much industrialists may have denounced this regulatory nightmare, at no time did they seriously advocate getting rid of their corporatist system. They doubled down on their strategy and pressed forward.

Reestablishing Big-Business Dominance

The 1920s brought propitious times for corporatists. The Harding and Coolidge administrations steadily replaced commissioners until achieving a probusiness majority, and the FTC proceeded to make businessmen’s wildest dreams come true by coercively enforcing domestic and international cartel agreements. Secretary of Commerce Herbert Hoover provided new informational subsidies, export assistance, and patent restrictions to reduce price-cutting and cartelize markets. Industrialists made compromises with the labor interest, accepting a diminished status for unions in return for wage rigidity and other concessions that relatively hurt smaller competitors. Congress slashed taxes on the wealthy while maintaining the broad outlines of the tax structure and the compliance costs of filing taxes. Designed by big business to benefit big business, the era of government-assisted cartels and monopolies, replete with high regulatory costs and less flexible price- and wage-setting practices, had finally arrived.

As the 1920s opened the Federal Trade Commission had few friends in the big-business community. Commissioners freely initiated antitrust investigations into General Electric, US Steel, and other giants and refused to back trade association agreements. “A scourge to the business world” and a “crusading, muck-raking body” were the respective opinions of former Commerce Secretary William Redfield and the Wall Street Journal. Republicans aimed to appoint probusiness commissioners to rectify the situation. Yet the new president, Warren G. Harding, could only appoint new personnel when commissioners’ terms expired. During his short time in office Harding managed only one appointment: Vernon Van Fleet, a former lobbyist for the National Association of Manufacturers.

The real coup came with President Calvin Coolidge’s appointments, which finally tilted the five-man commission to a probusiness majority in 1925. That year he appointed William Humphrey, one of his previous campaign managers and a former lobbyist for lumber interests. Populists criticized his appointment as a “deliberate breaking down of governmental safeguards against the evils of big business” and warned that “big business has no warmer friend or defender.”For good reason: with Humphrey at the helm, big business recaptured their creation and the special privileges it could dispense. The FTC promptly announced a new policy of “‘helping business to help itself ’ wherever and whenever it can be done.”

On the domestic front, both Humphrey and the Justice Department rolled back antitrust activity. This was not an across-the-board deregulation. They directed fewer of their lawsuits toward big business in favor of easy-to-win cases against smaller companies in furniture, apparel, and other trades. The result was to disproportionately saddle minor firms with the high legal costs of antitrust litigation, providing a competitive advantage to large corporations that did not have to deal with as many legal headaches.

Humphrey’s major innovation at the FTC was to formalize and expand the earlier policy of advance advice to industry through new trade practice conferences. The procedure to form a trade practice conference was as follows: First, a trade association requested a meeting with commissioners. Then, at the meeting, the firms devised cartel rules that the commission coercively forced onto the entire industry. As Humphrey proudly proclaimed to the US Chamber, the conferences presented “an invitation and opportunity for the industry to clean its own house, to adopt its own rules or ethics in trade.”Cartel-strengthening rules included prohibitions on deviations from publicized prices, on secretive price-cutting, and on quality deviations from industry standards. These rules raised prices and decreased the product variety available to consumers. From 1926 to 1929, the FTC approved over three hundred rules in fifty industries’ trade practice conferences. As an example, in 1929 the FTC approved a trade practice conference for the American Petroleum Institute that outlawed various marketing practices such as giveaways, lotteries, and deviations from posted prices.

Corporatists praised the new policy. Members of the US Chamber extolled the trade practice conference as “an expeditious and economical means of eliminating the use of unfair methods of competition” and mandating “the rule of business conduct for [an] industry.”According to the Wall Street banker O. H. Cheney, Humphrey understood that “the only way to regulate business effectively is to let it regulate itself . . . and to back it up with the police power of the Commission.”The Magazine of Wall Street agreed: “More and more are objectionable trade practices disposed of by trade practice stipulations. . . . The whole trade reforms itself to comply with the law.”Translation: trade practice conferences replaced market-based business innovations and their consequences—greater production, improved quality, and lower prices—with business-designed cartel agreements and monopolies that resulted in the opposite.

Corporatist intellectuals lauded the arrangements because the government cartelization required data collection and increased the demand for academic experts. Harvard economists in the Graduate School of Business Administration who specialized in cost accounting, including Paul Cherington and Edwin Gay, stood out. Gay was also a founding member of the National Bureau of Economic Research, a new organization that gathered statistics on the economy and received funding from the Rockefeller Foundation. Cherington and Gay urged that trade practice conferences utilize business surveys and statistical number crunching. Accountants joined in and worked with the FTC “to aid in the cooperative effort by helping clients to gather data on costs . . . so businesses could set ‘fair prices.’”Leaping into their quasi-bureaucratic role, accountants ensured that individual firms complied with their industry’s cost-accounting standards. Cooperative economists and accountants had found a comfortable place in the FTC’s probusiness dispensation.

On the international front, Humphrey’s tenure strengthened export cartels. The FTC interpreted the Webb-Pomerene Act to allow export companies to partner with foreign cartels and create worldwide restraints of trade that raised prices abroad. For example, through the counsel of Sullivan & Cromwell lawyer John Foster Dulles, Standard Oil of New Jersey informally merged with the German chemical cartel giant I. G. Farben through mutual stock ownership. SONJ also created the Export Petroleum Association with other American producers in 1929 so it could cartelize international oil markets with the British Anglo-Persian Oil Company and Royal Dutch Shell. In 1928, US Steel and Bethlehem Steel formed the Steel Export Association of America to partner with the International Steel Cartel. General Electric did not directly organize under Webb-Pomerene until 1931, but in 1925 its subsidiary, the International General Electric Company, played an important role in forming the Phoebus Agreement, whereby it forcibly controlled European lamp prices through patents.

The FTC’s regulations worked in conjunction with the export subsidies in the Dawes Plan of 1924 when Owen Young, the new chairman of the board of General Electric, proposed that Wall Street bankers and other financiers loan $200 million to Germany to aid its postwar recovery. The loan would be paid back with new German taxes. In other words, Wall Street loans, encouraged by the Federal Reserve’s inflation, and new German taxes would indirectly subsidize American firms that exported to or invested in German companies. US Steel and other producers did not export to or invest in Germany, but J. P. Morgan & Co. and Dillon, Read & Co. heavily financed steel companies in Germany that indirectly cartelized with American companies. General Electric and SONJ, in contrast to US Steel, directly invested and marketed in Germany. It is no coincidence that Young was the major engineer of the Dawes Plan: his company purchased stock ownership in Germany’s principal electrical manufacturer throughout the latter half of the decade. Nor is it a coincidence that Young earned a hefty sum in early 1929 when he sold his entire stock portfolio for $2.2 million.

While the Humphrey-led FTC was working to restrain competition and facilitate collusive agreements in domestic and foreign markets, the Commerce Department, under new management, provided its own favors. Industrialists found a sympathetic ally in Herbert Hoover, the new secretary of commerce. Hoover, a former engineer, was an unabashed Progressive who believed he could help organize and control society through corporatism. Instead of free-market competition, Hoover’s ideal society involved the government encouraging business sectors and workers into medieval-style guilds that restricted prices and production. In a 1924 speech to the US Chamber that the AFL endorsed, Hoover praised trade associations and unions because they could aid in the fight against the “small minority who will not play the game”—that is, those businesses and workers who decide not to cartelize but to compete by accepting lower prices and wage rates.Unsurprisingly, Hoover lauded the FTC’s trade practice conferences for preventing “destructive competition” through “self-regulation.”

During his long tenure as secretary of commerce (1921 to 1928) Hoover increased his department’s personnel by more than 50 percent, almost doubled its appropriations, and constructed the largest building in Washington other than the Capitol Building (where Congress met). Quite the fiefdom. Hoover’s department facilitated corporatism in industry and labor in several ways. He publicized valuable data on wholesale and retail prices and other statistics in a monthly Survey of Current Business, which trade associations and businesses could use to cartelize and prevent cheating. In compiling these statistics, Hoover worked with the big business–financed National Bureau of Economic Research, which included on its payroll economists Mitchell and Gay, both of whom became presidents of the American Economic Association during the 1920s. Hoover promoted American exports by expanding the Bureau of Foreign and Domestic Commerce. He staffed the bureau with industry experts who cooperated with seventeen industrial advisory committees. In many cases, department officials stayed for a couple of years and then returned to the private sector for higher-paying jobs, a clear illustration of the revolving door between Washington and business.

Significantly, Hoover arranged in 1925 for the US Patent Office to be brought into his department. Scientific American approved the transfer, asserting, “Secretary Hoover . . . knows that the preeminent position of American industry is largely based upon the protection afforded by patents.”Large companies with extensive legal departments and research facilities, rather than the individual inventor, increasingly took control of the patent process—the share of new patents for inventions issued to domestic corporations exploded from 26 percent in 1921 to nearly 41 percent in 1929. Patents continued to stifle innovation by giving the holder squatting rights over competitors’ use of the invention and any innovations upon it. General Electric was a major beneficiary, and Young cozied up to Hoover by advising him on personal investments and sending General Electric administrators to help develop the department. General Electric’s control of tungsten-filament patents enabled it to earn profits on lamp sales that equaled a return on investment of 23–34 percent, well above average returns. It excelled in patent litigation and initiated multiple infringement lawsuits against both independent producers and purchasers of their goods. By 1927, independent producers totaled only 3 percent of the market.

When it came to labor markets, Hoover encouraged new restrictions and interventions. He strongly opposed businesses cutting wages during the postwar Depression of 1920–1921 and urged that they work together to maintain wages in order to maintain purchasing power and avoid unfair competition. Hoover’s position was shared by the AFL, many businessmen, and economists in the AALL and other groups.

Hoover envisioned unions as partners in the corporatist state but often made sure that businessmen were still in the driver’s seat. Businessmen were largely successful, and union membership as a share of the nonfarm labor force shrank over the decade, from 18 percent in 1921 to 10 percent by 1929. Secretary of Labor James Davis was sympathetic to business concerns and largely focused on immigration matters. This pleased unions, who were eager to cut down on foreign competition in peacetime, and mollified businessmen because the Labor Department was not engaging in more intrusive interventions. The Johnson-Reed Immigration Act of 1924 instituted ethnic quotas and a statutory ceiling on immigration (roughly 165,000 immigrants a year). Hoover, angry at those unfair employers who used “the opportunities of unemployment and immigration to lower wages,” lauded immigration restrictions for promoting high wages.

As commerce secretary, Hoover tried to act as an intermediator between business and labor. He often supported “enlightened” corporations’ efforts at establishing company unions—firm-specific organizations whose bargaining power over wage rates and working conditions was more limited relative to traditional unions’. Big business favored company unions because they imposed the fixed cost of dealing with unions on smaller businesses while preventing unions from overreaching by instituting stable wages and limiting their power to strike. Corporate elites advocated the blessings of company unions through the Industrial Relations Counselors (IRC), a consulting group financed by John D. Rockefeller Jr. that sponsored probusiness labor-management centers at the University of Pennsylvania and Princeton University. Two corporate leaders sat on the board: Young of General Electric and the chairman of International Harvester, Cyrus McCormick Jr.

The IRC’s efforts to relegate unions to being junior partners with some influence continued to frustrate small businesses, which had a harder time dealing with the costs of unionization. By 1929 only 4 percent of firms with fewer than 250 employees had company unions, in contrast to 8.7 percent of larger firms. That big business wanted to raise costs for their rivals can be seen in the case of the electrical industry: in 1926 General Electric unsuccessfully tried to organize with the AFL an industrywide union, one with which it “could work on a businesslike basis.”According to Josephine and Everett Case, this union would put “pressure on GE’s competitors to match its program of benefits”—that is, force competitors to raise their costs of production.Big businesses sometimes wanted to raise the costs of larger competitors, too. When President Harding and Hoover successfully pressured US Steel to reduce working hours and raise wages in 1923, they were supported by President Alexander Legge at International Harvester, an IRC affiliate; International Harvester owned Wisconsin Steel Works, which had already adopted similar policies.

With each passing year, corporatist actions that restricted price-cutting and wage cuts became more and more codified into business practice. Reductions in nominal prices and especially in wages, which had been the quick and normal responses to increases in supply or decreases in demand, now became business decisions fraught with potential violations of government edict. The threat of intervention replaced business dynamism with regimentation. To quote Butler Shaffer, “The employment of political sanctions . . . diminish[ed] the effectiveness of the market mechanisms as spontaneous, impersonal disciplinarians of economic behavior.”The result was that businesses adopted rigid and inflexible prices that increased the possibility of chronic surpluses during a downturn.

Big business was determined to make sure Congress did not tax away the profits they earned from their corporatist regulations. The new secretary of the Treasury, Andrew Mellon, was one of the country’s richest men, having amassed a fortune from banking, oil, aluminum, and other investments. Assistant Secretary Leffingwell had left the government when Mellon arrived, but his “right-hand man” S. Parker Gilbert stayed on and communicated his proposals.Gilbert was trusted by Mellon and most likely wrote his promotional book on taxes. Working with Price, Waterhouse & Co. accountants along with Edwin Seligman and other economists, Gilbert crafted a series of tax cuts. Over several years Republicans in Congress eliminated the excess profits tax, slashed the top marginal tax rate from 73 percent to 25 percent, and sliced the inheritance tax from 25 percent to 20 percent. To his credit, Mellon resisted Gilbert’s advice to double or triple the normal tax rate to shift the burden onto lower income groups and decided to cut their taxes as well (Mellon correctly estimated that the rich would work and save more, thereby generating more revenue).

There were some harmful features of the revised tax structure. First, income taxes did not return to prewar levels or get eliminated for any group. It was official: income taxes were a permanent fixture over American society. This meant that individuals would need to continue hiring accountants to prepare tax returns (the 1924 tax law, for instance, gave accountants the right to represent clients in tax appeals). Second, the corporate income tax was maintained at around 12 percent. This meant that corporations still needed to hire tax accountants, which disproportionately hurt smaller firms unable to afford the expense. Third, the Fordney-McCumber Tariff of 1922 brought back protectionist rates, which raised the relative prices consumers paid for foreign goods and hampered exports.

Despite these downsides, the new tax system was a net benefit because it drastically reduced government intervention and encouraged individuals to work and save more. Or, as Seligman astutely pointed out, high tax rates reduce savings or “lessen the tendency to accumulate capital, . . . [which] serves to prevent what would otherwise be a rise of wages and a reduction of interest.”Precisely.

The pro-big-business corporatism increased compliance costs, whether through trade conference practices, publicity disclosures, patent restrictions, labor-management relations, or other regulations. Higher legal fees, accounting paperwork, patent compliance, company unions, and other burdens raised operating costs and made smaller firms less competitive as business structures. The growth in the regulatory costs of doing business encouraged the combination of multiple firms into larger enterprises that could more easily handle them. From 1925 to 1929 a new merger movement developed where 1,922 manufacturing and mining firms worth $6.2 billion combined into larger companies. Leading the pack in securities issuances was, of course, J. P. Morgan & Co.

Government-induced consolidation extended to the burgeoning utilities sector. Over the first three decades of the twentieth century state regulatory commissions had thoroughly reduced competition in the production of electricity and other utilities, raising prices and guaranteeing profits. After the erection of significant barriers to entry, the Morgans moved in to consolidate, creating United Corporation in 1929. This $300 million holding company controlled more than one-third of electricity production in twelve eastern states. Other electricity giants included Samuel Insull’s empire and the Electric Bond and Share Company, owned by the Morgan affiliate General Electric.

As the 1920s ended, business elites and affiliated economists, lawyers, and accountants could look with satisfaction upon their growing corporatist state. Far from championing free enterprise, big business had lobbied for state intervention after they failed to control competition. Corporations lobbied for a commerce department and a trade commission along with favorable personnel to run them. Officials administered public disclosure requirements to cripple secretive price-cutting and enforced industry-devised rules that made it harder for firms to disrupt trade association agreements. Furthermore, industrialists acquired more patent grants and secured government approval to form cartels with foreign producers. Lastly, they tamed the labor interest into a junior corporatist partner, one that would listen to big business while raising costs for smaller firms. All of these regulations hampered firms’ abilities to quickly adjust prices and wages and respond to changing market conditions. Other special-interest groups had managed to wrangle control of the machinery through new personnel appointments and agencies, but only for a time. After a brief disruption, big business regained control and righted their ship.

While Wall Street and corporate interests secured the Federal Reserve and the FTC, the railroads already had the Interstate Commerce Commission (ICC), the original corporatist sanctum that other industries envied and emulated. The railroads had wanted to strengthen the ICC since the 1890s, but they faced growing opposition from shippers and unions, who sought to use it for their own advantage. Overcoming their opponents, the railroads too would solidify a favorable corporatist regulatory environment and railroad cartelization to stop competitive rate cutting.

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