Lords of Creation

by Frederick Lewis Allen

  But should the government any longer even attempt to put big combinations asunder?

  Some of the reformers, hoping to restore the heyday of the little business man, thought it should. LaFollette’s temperament, for example, drew him in this direction. In his Autobiography, published in 1913, LaFollette denounced Roosevelt for not having attacked all the combinations as soon as he entered the White House in 1901; and in his speech before the Periodical Publishers’ Association at Philadelphia in February, 1912, LaFollette spoke of the necessity for “pulling down the false structure of illegal overcapitalization of the trusts.” No wonder the prosperous men who heard the weary LaFollette stumble through that Philadelphia speech thought that he had lost his reason, for not only was it a confused performance—he was over-tired, and talked interminably and harshly, and apparently lost his place in his manuscript—but the “pulling down” which he recommended would have been enough to bring about a great panic, so pervasive and so long-continued had been the process of watering stock. Yet even in that speech LaFollette’s logic was relentless. He held bravely to his convictions; he was no compromiser.

  Roosevelt’s attitude in these later years was different from LaFollette’s. In the 1912 campaign, Roosevelt made it quite clear that he considered it too late to unscramble the economic omelette. He acknowledged that big business had come to stay, that attempts to break it up were futile. He contended that sheer size was not a crime, that only unfair acts ought to be prevented. He proposed to regulate the big corporations by a federal trade commission, and he made no bones of the need of a strong federal government to maintain supervision.

  To some extent Roosevelt’s objection to unscrambling the eggs may have been strengthened by an odd circumstance. It will be recalled that at the crisis of the 1907 panic, Gary and Frick had visited Washington to ask if Roosevelt had any objection to the purchase of the Tennessee Coal & Iron Company by the Steel Corporation, and Roosevelt had approved the purchase. When the Taft Administration, several years later, brought action against the Steel Corporation under the Sherman Act, one of the principal bases of its action was this very Tennessee purchase. The implication was that Roosevelt had had his leg pulled. Roosevelt resented this implication furiously; according to Mark Sullivan, it was the thing which made his break with Taft complete. Roosevelt was very human, and his ego often played a part in forming his opinions; possibly the incident which separated him from Taft also drew him subconsciously closer to the Steel Corporation and other huge concerns. He had approved the Tennessee purchase, therefore it must be all right, and other purchases like it must be all right. The argument may seem naïve, but that was the way in which Roosevelt’s mind sometimes worked.

  Similarly, Roosevelt’s attitude toward the big corporations in 1912 may have been somewhat influenced by his desire to retain the good will of important financiers like Perkins. Perkins was for Roosevelt, Perkins was a fine fellow and a valuable ally, therefore the sort of business in which Perkins had been engaged must be all right.

  But all this is conjecture. The Roosevelt attitude was at least realistic; and his insistence upon a strong federal agency of control harmonized with his continuing preference for a national government which could speak to Wall Street, as to everybody else, with unquestioned authority.

  Wilson arrived at much the same conclusion as Roosevelt, though the color of his philosophy was different. Wilson approached the problem of business concentration as an old-fashioned believer in the rights of the small business man and in the merits of competition. Being a Democratic candidate, Wilson also talked a good deal about states’ rights, suggesting that the states ought to undertake much of the work of business regulation. As Governor of New Jersey, in fact, he gave a demonstration of what a state might do: he secured the passage of new corporation laws which withdrew—for a time—the special privileges which had made New Jersey the favorite spawning-ground for holding companies. This was a genuine move to control combination at its source. But in developing his federal program, Wilson found the pressure of facts stronger than either the theoretical un-desirability of the big combination or the theoretical preferability of state action. He, too, was driven to acknowledge that “the old time of individual competition is probably gone by,” that it was hopeless to make war against sheer bigness, that the thing to do was to make war against monopolistic practices, that the states were helpless to cope with the larger combinations, and that the answer was therefore a federal trade commission: in short, a stronger federal government, willy nilly.

  In fact, one of the oddest things about the campaign of 1912, as one looks back upon it a generation later, is the close agreement between Wilson and Roosevelt on the subject of big business. A voter who heard the Colonel deride and denounce the Princeton professor’s policies would have supposed that the two men were miles apart; but their programs were almost identical, as indeed were some of the key phrases in their economic addresses.

  These programs gave striking testimony (as did the Supreme Court’s rule of reason) to the amount of water which had flowed under the bridge since 1900. The reformers were able to curb business in scores of places remote from its great centers of authority—regulating rates charged for services, regulating conditions of employment and pay, methods of competition, and so forth; but their two chief leaders now virtually admitted that the process of combination was irresistible.

  The odds, they had learned, were all with the big capitalists. If one state withdrew its license to organize holding companies, the promoters simply sought out another state; not unless all states acted in concert would the competition in laxity end. After a big combination was set up, the state governments could make only a poor botch at regulating it; and even the federal government could hardly keep up with the rapid advance of the legal technic of circumvention. The corporation lawyers were always two jumps ahead of the Department of Justice.

  Again, to harass the big corporations after they were once organized and engaged in business was to fill the whole economic world with a sense of insecurity: all drastic reform is deflationary. The process of combination could only be hedged about with restrictions, it could not be stopped. And even to hedge it about, the government had to add new bureaus, new staffs, new costs of operation. Wall Street and higher taxes both had fate on their side.

  Chapter Six

  PUJO

  IT IS one of the ironies of American history that during the very years when the reformers were trying most vigorously to curb big business, the corporate tree was actually putting forth new branches and blossoms.

  Only fitfully did prosperity return after the Panic of 1907. During 1908 there were valiant attempts to restore it by wishful thinking—by the promotion of a “sunshine movement” and the formation of a “Prosperity League”; in short, by the same sort of incantation which was to be used in 1930 and 1931 to assure the country that “prosperity was just around the corner.” Trade still lagged, however; synthetic optimism would not suffice. There was a revival in 1909 and another in 1912, but they were brief, and during the intervening years the general pace of business was slow and the prospects uncertain. In 1913 there followed another relapse. The financial seers of the day (eager, as usual, to find a political scapegoat for an economic condition) generally attributed this relapse to the uneasiness with which business men faced the reform program of President Wilson; Alexander Dana Noyes, however, attributes it in greater degree to the outbreak of the Balkan War, the widespread fear on the Continent of a general European conflict, and the resulting international financial tension. At any rate, never between 1907 and 1914 was there any such protracted period of intense business activity as had preceded the Panic.

  Yet despite the fitfulness of the economic weather and the alarums and excursions of the reformers, the process of combination and concentration continued. A glimpse of a few of the developments of those years will suffice to suggest the drift.

  It was less than a year after the Panic, for example, that
a promoter-minded automobile manufacturer named William C. Durant brought together under the uncertain shelter of a new holding company several of the numerous automobile concerns that were then battling for the favor of a meager public. This holding company he called the General Motors Company; it was destined in due course to grow to a lusty size.

  Parenthetically we may note that Durant hoped to include Ford in the General Motors combination and came within an ace of doing so; the negotiations fell through only because Ford demanded his eight million dollars in cash and Durant’s bankers ruled that the business was not worth so much money. The man whom the bankers rejected went on alone—went on, in fact, to offer during the next few years a remarkable demonstration of the economic logic of mass production. Ford was concentrating on one model now, instead of many—the awkward, efficient black “tin Lizzie”; his marvelous assembly-line technic of production was cutting his costs; and instead of charging all he thought he could get, he was boldly and systematically reducing the price of his car and thereby increasing enormously his volume of sales. Early in 1914 he carried his logic a step farther—apparently a wholly unnecessary and hazardous step: he announced that he would pay his workmen five dollars a day. Whatever may have been the motives behind this furiously discussed decision, it was prophetic; for it was a spectacular answer—perhaps in its essence the best answer which capitalism could give—to one of the most vexatious questions which were to beset the American economy: how improvements in the technic of production could be made to bring benefit instead of hardship to the masses of the working population. The answer which Ford gave was of course familiar in economic theory and in the oratory of men like Schwab, but not in practice. It was that the benefits of increased efficiency must be deliberately passed on to the consumers—and that the employer’s own workmen are consumers.

  Another example of the process of concentration at work was the way in which power companies were being assembled under the aegis of the General Electric Company. By 1913 the three young holding companies owned by General Electric—the Electric Bond and Share Company, the United Electric Securities Company, and the Electrical Securities Corporation—had already acquired a dominating interest in the local electric-light plants in 78 cities and towns, and in the local gas companies in 19 cities and towns—to the benefit, naturally, of the sale of General Electric equipment. The business of federating public utility companies was making headway.

  In the railroad field the process of combination lagged, partly because of the discouraging attitude of the government and partly because Harriman’s reign was drawing to a close. The Little Napoleon of the railroads—and of the stock market—died at Arden House late in 1909, and presently the empire which he had left was split apart by the government’s decree that the Union Pacific and Southern Pacific systems must be divorced. By an ironical turn of fate it was Pierpont Morgan, once Harriman’s scornful rival, who was to offer the most conspicuous—and in its effects the most flagrant—example of railroad concentration in the years which followed Harriman’s brilliant rise.

  Morgan’s attempt, in his old age, to build up a transportation monopoly in New England through the medium of the New Haven Railroad illustrates almost perfectly the sort of pitfall into which a man with Morgan’s method of accumulation and Morgan’s imperious will was likely to stumble. It was Morgan’s way to undertake vast projects, to pay round prices for the desirable properties without undue haggling, to finance these lavish purchases by loading down his parent company with debts or with quantities of stock, and to trust to a great expansion of business to provide profits with which to carry the debts and pay dividends on the stocks. Wherever the natural tendency of economic growth was favorable, Morgan could make this method work to his own satisfaction and that of the investors. But in some cases, of which the New Haven enterprise was one, the natural tendency was not sufficiently favorable. New England business was not growing rapidly, and the golden day of railroading had reached high noon. An aging and wilful man, Morgan refused to accept these facts.

  His influence was commanding in the New Haven management. According to Clarence Barron’s notes, Charles S. Mellen, the president of the road, acknowledged that he “wore the Morgan collar” and was proud of it. Said Mellen to Barron, “I took orders from J. P. Morgan, Sr. I did as I was told, and when Morgan, Sr., who always sat at my left hand in the meetings of the board, desired the approval of the directors, he got it, and don’t you think he didn’t! When he wanted their negative vote he got that just as quick! Once in a while William Rockefeller would interpose some objection, but even he was most of the time dominated by the force and power of ‘the old man’ Morgan.” At the time when Mellen said this he was presumably over-anxious to emphasize Morgan’s authority; yet clearly it was with Morgan’s hearty backing that the New Haven embarked upon a great program of purchasing properties in New England. It acquired the Boston & Maine Railroad; the Maine Central; the New York, Ontario & Western; it acquired steamship companies, street-railway companies, electric-light and water and gas companies. It paid amazing prices: for instance, it paid thirty-six million dollars for a little suburban road outside of New York which had no terminal in Manhattan and lost money consistently.

  As always when men are determined to buy regardless of price or of legal obstacles, the railroad’s agents were surrounded by swarming birds of prey: how much of the New Haven’s money was dissipated in graft and in speculative profits for insiders, one can only guess from a few disclosures here and there. As a result of the orgy of purchasing, the bonded indebtedness of the New Haven was multiplied nearly twentyfold in nine years. The dénouement came in 1913, when the company was obliged to pass its dividend, thereby beginning the impoverishment of many a New England family. For years thereafter the road teetered on the verge of bankruptcy. A government suit under the Sherman Act smashed its monopoly. Its directors were criminally indicted; all New England rocked with the scandal.

  By this time Morgan was dead. But the grievous effects of his insistence upon consolidating where consolidation on such terms could not succeed long outlived him.

  During these same years, new devices for the quiet extension of financial power were being conceived: for example, that choicest of blossoms watered by corporation lawyers, the banking affiliate. For a long time past, bankers who were restive under the legal limitations which safeguarded national banks had found ways of securing simultaneously the advantages of operating a national bank and the advantages of operating a state institution under different regulations. For example, in the year 1903 the First National Bank of Chicago had incorporated another institution, the First Trust and Savings Bank, to serve as a sort of Siamese twin; it was managed by the same directors as the First National and for the benefit of the same stockholders, but could engage in business which was denied by law to a national bank.

  The idea of thus achieving for a bank a dual personality was fascinating, and in 1908 it took a different turn. George F. Baker’s mighty First National Bank in New York had been informed by the Comptroller of the Treasury that it must not hold the stock of other banks. While the tremors of the Panic of 1907 were still agitating Wall Street, the First National set up its own Siamese twin, the First Security Company, for the purpose of holding bank stocks and other securities which the bank could not properly hold.

  In 1911 Stillman’s National City Bank likewise achieved a dual personality by setting up the National City Company. By 1913 twelve national banks in various parts of the country with capital of a million dollars or more were equipped with affiliates, while several hundred other banks enjoyed the benefits of affiliation in one way or another.

  The way in which an affiliate was organized was a beautiful example of the legerdemain of the corporation lawyer. Suppose the national bank which found the legal limitations of national banking cumbersome was fortunate enough to have built up a huge surplus, as were Baker’s First National and Stillman’s National City Bank. Out of this surplus it now dec
lared a huge dividend to its stockholders, proposing that the money (which now technically belonged to the stockholders) be straightway invested in a new company, the affiliate. This new company would have the same directors as the bank; it would have the same officers; it would occupy the same quarters; its stock would not be salable except along with the stock of the bank—and yet it would not be a national bank, but a corporation empowered by state charter to embark in almost any business it chose! It might hold the stock of other banks, it might speculate, and the Comptroller of the Treasury could not object. It was completely outside his jurisdiction.

  Surely the invention of the security affiliate was a masterpiece of legal humor. And surely it was also a body-blow at the principle of disinterested commercial banking; for although of course the affiliate did not directly involve the funds of the depositors in its various ventures, inevitably its existence invited bank officials to serve two masters.

  The years which followed 1907 witnessed further concentration at the center of the financial world: a quiet drawing-together of the great powers of Wall Street. Morgan and George F. Baker had long worked hand in glove, but Stillman, the head of the National City, had been largely independent of them, sometimes an associate, sometimes a rival. Now the cold and imperious Stillman drew closer to the other two giants of Wall Street.

  To be sure, Stillman spent most of his time in the quiet of the Rue Rembrandt or touring the Continent; but always he kept his finger on the pulse of Wall Street through carefully coded cablegrams and letters to his associate, Frank Vanderlip, and more than once he urged collaboration with the House of Morgan. The collaboration was forthcoming. Very often, now, the names of J. P. Morgan & Co. and the National City Bank appeared together on the announcements of new security issues. Morgan bought a stock interest in the National City and his son became a director of it. Stillman joined forces with Morgan and Baker in the purchase of a block of the shares of the National Bank of Commerce. Morgan, too, was spending much time in Europe now, and he and Stillman hobnobbed as friends.