Lords of Creation

by Frederick Lewis Allen

  They come. Thus speaks authority.

  What shall we say of this man? He was a Bourbon, contemptuous of democratic processes: a believer in the manifest destiny of aristocrats like himself to enjoy and distribute the fruits of industry. The financial methods which he sponsored did much—as we have seen—to widen the gulf between rich and poor; to levy, as it were, a heavy Wall Street tax upon the production of goods, a tax sometimes too heavy to be borne. Whether the gulf might not have been still wider and the tax heavier if he had not lived, whether the concentration of power and of wealth was not inevitable anyhow, whether indeed it did not bring with it advantages—in commercial development—which outweighed its disadvantages, will always be matters of sharp disagreement. Yet even those who look bitterly upon the privileges of concentrated capital which Morgan did so much to extend, cannot fairly deny that he possessed in high degree that quality to which he so often referred in the Pujo inquiry: character. Among those who knew him as a man and not simply as the generator and symbol of enormous power, he was trusted. If such power had to exist, the country was fortunate to have him wield it, and not a less scrupulous man.

  3

  From Baker, who appeared on the witness stand a few weeks later, Untermyer was somewhat more successful in securing enlightenment upon the concentration of power in Wall Street. Baker was frequently vague in his testimony, and his words did not have the sledgehammer force of Morgan’s, but he had an analytical mind, and the closing part of his testimony was of peculiar interest. Pressed by Untermyer, he admitted that he thought the control of credit had “gone about far enough.” He would not admit that “if it got into bad hands, it would wreck the country,” because he did not think it could get into bad hands. He did not think bad hands could manage it; they “could not retain the deposits.”

  Untermyer clearly realized the significance of this reply, with its implication that the only test of the desirability of a policy from the point of view of the country at large was its adequacy from the business point of view. “I am not speaking of incompetent hands,” said he. “We are speaking of this concentration which has come about and the power it brings with it getting into the hands of very ambitious men, perhaps not overscrupulous. You see a peril in that, do you not?”

  “Yes,” said Baker.

  “So that the safety, if you think there is safety in the situation, really lies in the personnel of the men?”

  “Very much.”

  “Do you think that is a comfortable situation for a great country to be in?”

  Very slowly, Baker replied, “Not entirely.”

  The astute counsel for the committee knew when he had a climax. “I think that is all,” said he, and thanked Baker for coming. The spectators, wrote the reporter for the New York Tribune, “sat back with a sigh.”

  4

  On the fourth of March, 1913, Woodrow Wilson became President of the United States. As he stepped forward on the platform before the Capitol to read his inaugural address, his first sentence was momentous. It was a sentence of only seven words: “There has been a change of government.”

  Now at last the forces of reform were securely in power. To be sure, the conservative Southern Democrats were in power along with them; yet the President left little room for doubt that he meant to show them the way in which they should go. A firm believer in the adaptation of some features of the British parliamentary system to American use, Wilson had declared, years before this, his belief that a wise President could and should lead Congress and the country. “The nation as a whole has chosen him,” he had written in his book on Constitutional Government in the United States, “and is conscious that it has no other political spokesman. His is the only national voice in affairs.… He is the representative of no constituency, but of the whole people. If he rightly interprets the national thought and boldly insists upon it, he is irresistible.” Wilson’s inaugural address revealed in every measured and stately phrase his interpretation of the national thought. It was calling for reform: for a reduction of the tariff (that ancient device for the governmental subsidizing of private business), for a revision of the national banking and currency system, and for legislation to curb big business through the establishment of a federal commission with regulatory powers.

  Whether Wilson’s leadership would prove irresistible, no one yet could tell, but at least it was eloquent and determined. A new day seemed to be at hand.

  There were other signs that the old day was ended. Not only were Taft and his Republican aides out of office; not only was Bryan, the one-time idol of the Populists, firmly settled in the State Department as the President’s right-hand man; but the old order was passing in finance and in industry as well. Harriman was dead. Stillman was in semi-retirement. Rockefeller was in complete retirement, busying himself with the establishment of his vast Foundation and submitting himself to the discipline of a caddy who was instructed to chant, as Rockefeller took his stance for a stroke at golf, “Keep your head down! Keep your head down!” Of the other former titans of the “Standard Oil crowd,” Rogers was dead and William Rockefeller was in failing health.

  And now Morgan, too, was gone. In the weeks which followed his appearance before the Pujo Committee, the old man had definitely retired from his banking firm and had left for Europe to conserve his strained and ebbing strength; he died in Rome on the last day of March, 1913—less than three and a half months after his verbal battle with Untermyer and less than a month after Wilson’s inauguration. Not only the American political system but the American economic system, it seemed, was to face a change of government.

  The professor in the White House managed his legislative campaign with vigor and with cool discretion. He drove his tariff act through both houses, and this act not only lowered customs rates, but also put into effect what seemed to the conservatives of those days an alarming method of raising revenue—the Federal income tax. He pushed to enactment a bill establishing the Federal Reserve System: an extremely important reform of which there will be more to say in the next chapter of this book. Within a year of his inauguration, both the new tariff act and the Federal Reserve Act having been triumphantly passed and signed, Wilson proposed to Congress the fulfillment of the Democratic pledge to regulate big business and to bring monopoly to an end.

  The legislation which Wilson called for took due shape in two measures, the Federal Trade Commission Act and the Clayton Act. The Clayton Act tried to clear up some of the confusion which surrounded the interpretation of the Sherman Anti-Trust Law, first by definitely specifying that it was not to be applied to labor organizations, and second by specifying certain business practices as monopolistic and therefore illegal. For instance, it would be illegal to quote different prices to different people with whom one did business, if the discrimination in prices tended to lessen competition or create a monopoly; it would be illegal to make selling or leasing contracts which forbade the purchaser or dealer to do business with a competing concern. It would be illegal for a corporation to acquire stock in another concern if the acquisition would lessen competition; and it would be illegal for a man to serve as a director in two competing concerns with capital, surplus, and undivided profits of over a million dollars, or to serve as a director or officer of more than one bank with capital, surplus, and undivided profits of over five million dollars. (These latter provisions showed the influence of the Pujo Committee’s inquiry.) The Federal Trade Commission Act set up a commission of five men, empowered, first, to investigate business concerns which did an interstate business, and second, to issue “cease and desist” orders, forbidding them to continue practices which were unfair or dishonest.

  In general, these two acts may be said to have put into practice the policies advocated by both Wilson and Roosevelt in the 1912 campaign. The giants of industry were not to be destroyed, but they were to be prevented from destroying the little fellows; they were to be made to behave themselves, and they were given a clearer idea than before of what would be consid
ered bad behavior. The principle was furthermore established that their actions were matters of public concern. The Federal Trade Commission became a sort of federal detective force and police force, to deal with the big corporations somewhat as an apprehensive mother once was said to have asked her husband to deal with the children: “Find out what they’re doing and tell them not to do it.” This detective and police force was provided only with lightish weapons—but there was always the Sherman Act, now clarified by the addition of the Clayton Act, to serve as a heavy club in case of need. And the new legislation gave the government a marked advantage: a chance, in theory at least, to deal with business abuses reasonably promptly—without waiting for years while Sherman Act cases dragged slowly through the courts.

  By the summer of 1914 these measures were being hammered into shape in Congress. The Federal Reserve System was in slow process of organization. Many of the recommendations of the Pujo Committee had been lost sight of in the press of new legislation—including its recommendations for the elimination of security affiliates, for the incorporation of stock exchanges so that they might be regulated, for the setting of stiffer margin requirements for stock-market speculators, for the prevention of stock-market manipulation, and for the supervision of security issues by the federal government; they were destined, in fact, to remain half-forgotten for nineteen years. Even without them, however, Wall Street felt that it faced a period of uncertainty and of governmental restraint. Change was assuredly in the air.

  Nobody, however, foresaw the change which was actually to take place: the great and appalling event which was to twist out of shape the whole fabric of American life during the years to come, thrusting new issues and new problems before the country, shifting men into new alignments, and completely altering the pattern which these years of the reformers’ counter-offensive had set. It came without warning. During most of the month of July, 1914, the commodity and security and money markets, those sensitive indices of the hopes and fears of men, gave no indication of any great disturbance ahead; and the minds of Americans generally were as unprepared for what was to happen as were the traders whose purchases and sales determined the tranquil course of these markets. But at the end of July the fires of war burst forth in Europe, and within a few days they had leaped from country to country and had set the Continent aflame.

  Chapter Seven

  WAR

  THE events of the war years were so convulsively abnormal that to narrate them in detail would be to overload and distort the story which this book aims to tell. I propose therefore to run through them very rapidly, leaving to the reader’s imagination (or memory) the crowded excitements of the period, and concentrating rather on the effects of the war adventure upon the American economy, and particularly upon the processes of economic growth and concentration. These effects were prodigious. When the war and the brief boom and depression which succeeded it were at last over and the country had returned to what President Harding liked to call “normalcy,” the scene was very different from what it had been in July, 1914. This chapter will attempt to suggest briefly how some of the major alterations came about.

  One warning must be given at once. Drastic as were the effects of the war upon America from the moment when the armies first mobilized in Europe, the reader must not be deceived into supposing that the reform movement petered out at once. It did nothing of the sort.

  In so far as it depended upon Theodore Roosevelt and the Progressive Party, to be sure, it did. The election of 1912 had virtually killed the Progressive Party. Woodrow Wilson proceeded to steal their best thunder, and by 1914 Roosevelt gloomily confessed to a friend that in making speeches for the Bull Moose cause he knew he was carrying a dead horse on his shoulders. Roosevelt himself tried to be contented with the inactive life of a man of letters, rushed off in despair to explore the sources of a South American river, returned in shaken health to further dismal inactivity—and then found the joy of battle once more in a cause quite different from that of social justice: the cause of “Americanism” and of preparedness for American participation in the war. The fierce campaign upon which he now entered satisfied his ego by giving him an opportunity to lead an attack upon the administration in power; it suited his temperament by pitting him against Wilson, whose cool caution was hateful to his headlong and belligerent spirit; it engaged his nationalistic zeal, his boyish enthusiasm for the manly arts of war, his moral ardor; but it did not engage the economic reformer in him. In fact, as a friend of the Allies and an apostle of the Plattsburg movement he found ranged beside him most of the men whom he had once decried as malefactors of great wealth. By 1916 Roosevelt was quite at home in Wall Street. The past was forgotten; these fellows were “good Americans.”

  Yet the reform movement went on without him. The Wilson Administration not only pushed through the Clayton Act and the Federal Trade Commission Act but went bravely ahead to enforce them, busily hacking away, year after year, at monopolistic practices and unscrupulous trade methods. It wrote on the statute books the LaFollette Seamen’s Act to improve labor conditions for American sailors; in the Adamson Act it decreed an eight-hour day for railroad employees; after the United States had entered the war it threw its influence behind the principle of collective bargaining and behind liberal labor policies for plants making war materials; and it gaye Gompers a place among the advisers of the Council of National Defense. Men like Newton Baker and Brand Whitlock and George Creel, who had been enemies of the political power of big business, now sat in the seats of power. What happened was not that the reformers lost heart or position or that the Wilson Administration lost its liberal complexion, but rather that the war dwarfed every other enterprise, submerged every other issue, distorted the organization of American life, colored every emotion; and that when the war was at last over and the demobilization of men and of enthusiasm had been effected, the national spiritual exhaustion was such that the wish to regulate and control business and finance was thoroughly played out.

  2

  When the armies began to march in Europe at the end of July, 1914, the first effect upon the American economy was a stroke of almost complete financial paralysis. The New York Stock Exchange was closed at once, to remain closed for months; if it had not been, the rush of European investors to convert their American securities into money against the unpredictable emergencies of war financing would have knocked prices down to the bottom, undermined bank loans, and imperiled the whole financial structure. Frightened hoarding began at once, and a panic worse than that of 1907 might easily have followed if there had not been invoked a half-forgotten monetary measure (passed in 1908 as a result of the lessons of 1907 and known as the Aldrich-Vreeland Act) which permitted banks, in such an emergency, to issue notes based upon non-government securities and commercial paper as well as upon government bonds. The very real danger to American credit was averted only by the bold action of a group of New York bankers, headed by the Morgan forces, in forming a gold pool to meet the requisitions of the outside world. Not for a long time did the disorganized processes of finance come back to anything like a normal equilibrium; for example, not until the first of April, 1915, a full eight months after the invasion of Belgium by the Germans, was it considered safe to open the New York Stock Exchange to unrestricted trading.

  The second effect was a partial paralysis of business. Nobody knew how widely the war might spread or what forms it might take, whether exports would reach their destination safely, whether European buyers would be able to pay their bills; foreign trade was violently disrupted, the prices of wheat and cotton and other commodities dropped, citizens were implored to “buy a bale of cotton” to save the South from disaster, business as a whole shrank rapidly, and unemployment spread. The winter of 1914–15 was a very lean winter for America—even for those parts of it in which the war still seemed to most people a remote unreality. There is no more instructive example of the difficulty of business forecasting than the fact that for almost a year after the war broke
out, few Americans had any notion of the vast prosperity which it would shortly bring to their country.

  When the recovery came, however, toward the middle of 1915, it was sweeping. The largest cause of it, of course, was the discovery of the Allies, and particularly of the British, that they could not hope to win without buying war materials and supplies abroad in quantity. But there were other causes. The world was calling for food and for other products of which the belligerent nations could no longer produce enough to meet the demand. Neutral markets, once dominated by the British or the Germans, were now open to American invasion. The British fleet had virtually cleared the seas of German warships; commerce with the Allies could now be undertaken without much risk. By the autumn of 1915 American factories were roaring, American farmers were closing a profitable season, the tonic effects of prosperity were stimulating business from coast to coast, and in Wall Street there was already a frenzy of speculation in the “war stocks”; the front pages of the newspapers told the happy story of the broker who in 1914 had staked his all on fifty shares of Electric Boat and was now worth half a million, and of another happy creature who had bought 1,000 shares of Bethlehem Steel at 18 for his baby and now estimated that the baby was worth $364,000; and the sober Commercial and Financial Chronicle felt it necessary to remind its readers that the boom in war stocks was not “based on an enduring condition.”

  The expansion of currency and of credit which the war boom invited was greatly facilitated by the Federal Reserve System, now at last in full operation. The creation of this system had come about through a curious combination of forces.