It is a common misconception that the Progressive Era of the United States was a critical turning point in U.S. business–a time when vicious big companies were brought under the wise guardianship of state regulatory agencies for consumer protection.
Why, then, were these very businesses the main driving force in the creation of these regulatory agencies?
The following selection is pulled from my upcoming book, The Tale of Two Gospels. While the book does not primarily have an economics focus, the chapter on the American Progressive Era deals a bit with the creation of the corporate state in the United States, and a selection of that chapter has been edited for use here. If you would like to learn more about the book, visit LCKeagy.com/TwoGospels.
During the latter half of the 19th century, America experienced a veritable industrial explosion, bypassing all industrial European counterparts in production several times over. By 1910, the United States produced 30% of all manufactured goods globally, followed by Great Britain and Germany, each at 10% of global output. Output surge can be seen in a sampling of these statistics. From 1869 to 1899, commodity output increased 350%, agriculture more than doubled, construction increased 250%, manufacturing increased 600%, and mining increased 800%. Steel production increased ten times over, and crude oil production increased by twenty-six fold. And despite massive population increases during this time, commodity output per person (per capita) doubled from 1865 to 1900. [1]
Gross National Product (adjusted for inflation) from 1871 to 1891 increased 80%, while real (inflation adjusted) wages increased by an average of 13% from 1865 to 1891. In sharp contrast to the belief that living conditions worsened during this so-called “Gilded Age,” the cost of living fell on average 31% during those same years. Taken together, those figures equal a 64% increase in real wages with adjustments made for price changes, even while the average number of hours worked dropped from 11 to 10. The massive increase in outputs saw prices for virtually everything fall precipitously. Average prices fell by about 2.5% per year from 1870 to 1890, and the price for essentially every household item fell (and of so-called “monopolies,” only two product prices rose: matches and castor oil.[2])
Prices fell so sharply as business battled tooth and nail to stay ahead of competition both in innovation as well as quality and prices. Even behemoth companies that relaxed their competitive edge found themselves quickly surrendering large portions of market share to new agile companies. True to human nature, the major bosses of these big companies sought ways of preserving their constantly hemorrhaging profits. Specifically, they would seek to cartelize (form a cartel): voluntarily or legally preventing individual companies from having control over prices.
The process followed a pretty typical pattern. First, the major players in an industry would try to form a voluntary cartel (called “pooling” at the time): an agreement that they would not sell for less than a given price, offer discounts, or otherwise try to undercut each other. This would inevitably fail, either because a cartel member would secretly find other ways to draw in more customers or new companies would undercut the cartel, forcing prices down once more.
So companies would turn to politics to secure their process of cartelization, pouring money and energy into lobbying for government regulatory agencies that would allow for price-fixing (preventing a price from going above or below a certain point). Of course, the politicians had to sell such plans as a public benefit or else risk electoral backlash, so regulatory legislation was typically sold as a means of protecting consumers against high prices or vicious monopolies. But once these regulatory agencies were created, they would more often than not be staffed by members of the major companies, as well as so-called expert managers who were able to argue that their regulations were established by scientific expertise. This last point was already an easy selling point; such was a trademark of the era.
In many cases, even the regulatory agencies would not serve the companies as well as hoped. This was frequently because once it was established, political money would consume the process of trying to draw the agencies to certain competing ends. For example, Theodore Roosevelt, whose major donors and allies were associates of big banker John Pierpont Morgan, would frequently use regulatory agencies to attack companies affiliated with the Rockefellers, who were major rivals to the Morgans. Meanwhile. he would virtually leave Morgan-affiliated companies alone. Or the Interstate Commerce Commission (ICC), set up to regulate railroad rates (with the full support of the railroad companies,) ultimately fell sway to the major shipping companies—the customers of the railroads who wanted the lower prices. So when even regulation did not prove to adequately protect the big businesses from competition, they finally sought nationalization: direct government control, which most accomplished during World War I (at least for the duration). Of course, their own “scientific” experts would still populate the government offices in charge of the regulations.
The first major industry to follow this process would be the railroad companies. Throughout the 1860s and 1870s, attempts at voluntary cartels failed over and over for reasons already stated. As railroad guru Albert Fink said in 1876, bemoaning this reality, “Government supervision and authority may be required to some extent to accomplish the object in view.”[3] When, in the late 1870s and early 1880s, Congress began discussing regulatory legislation (which would produce the Interstate Commerce Commission), railroad bosses were pleased. As John Green, the vice president of the Pennsylvania Railroad company testified before the House Commerce Committee in 1884, “a large majority of the railroads in the United States would be delighted if a railroad commission or any other power could make rates upon their traffic which would insure them six per cent dividends, and I have no doubt, with such a guarantee, they would be very glad to come under the direct supervision and operation of the National Government.”[4]
When the bill passed in 1887, the Chicago Inter-Ocean wrote that “Perhaps the strongest argument that can be presented in favor of the passage of this bill is found in the fact that many of the leading railway managers admit the justice of its terms and join in the demand for its passage.” [5] So the ICC was created, and as the railroad boss Charles Adams said, “In the hands of the right men,” the bill “would produce the desired results.”
Seeing the (at least temporary) success of the railroad companies and having experienced their own failures in voluntary cartels, other major businesses followed suit in seeking government regulation as a means of cartelization. This would be seen in sugar, manufacturing, banking, iron, steel, petroleum and so forth. Murray Rothbard offers a great summary:
In manufacturing as well as railroads, then, mergers as well as cartels had systematically failed to achieve the fruits of monopoly on the free market. It was time, then, for those industrial and financial groups who had sought monopoly to emulate the example of the railroads: to turn to government to impose the cartels on their behalf. Except that even more than in the railroads the regulation would have to be ostensibly in opposition to a business “monopoly” on the market, and even more would it have to be put through in conjunction with the opinion-molding groups in society. The stage was set, at the turn of the 20th century, for the giant leap into statism to become known as the Progressive Period.[6]
To proceed through all the various measures taken by government officials and big business leaders would merit a much more extensive post, and the full discussion can be read about in Rothbard’s extensive The Progressive Era. But a few significant advancements in pursuit of these goals ought to be noted.
Individual companies increasingly lobbied the government throughout the 1890s and the early 20th century. Over time, however, they also began to work together. In 1900, the National Civic Federation (NCF) was organized as an expansion of the Chicago Civic Federation (CCF). The CCF had been created in 1893, and held a series of conferences in the late 1890s. One CCF conference—the Chicago Conference on Trusts (1899)—featured speakers such as the progressive economists Jeremiah Jenks and John Commons. Also in attendance were numerous governors, including then New York governor Theodore Roosevelt. At the conference, speakers called for government regulation of virtually all industry. Then, to focus their goals, they held a unanimous vote among the CCF executives to create the National Civic Federation.
The NCF was quickly headed and staffed by big business leaders and allies[7], and would go on to push for a number of goals in the cartelization process of industry.[8] A major move toward government regulation was the NCF’s National Conference on Trusts and Combinations (NCTC) in 1907, at which businessmen were the largest group and closely affiliated with then-U.S. president Theodore Roosevelt. The NCTC recommended a number of major proposals. Not the least significant of these was a recommendation that the government license and regulate corporations “in the public interest.” This would virtually give major quasi-monopolized companies (called trusts) legality by getting a government stamp of approval and removing them from threat of lawsuit under the Sherman Anti-Trust Act.[9]
Roosevelt and many of the hundreds of government representatives at the conference were delighted by the proposals, and asked the NCF to write the very legislation that would enforce these proposals. Of course, the NCF complied with a committee of business leaders to draft the bill.[10] The bill would temporarily fail when a flood of opposition by smaller businesses made the bill politically untenable. Still, the NCF would eventually pursue their goal again through what became the Federal Trade Commission in 1914, and would effectively accomplish many of the earlier goals.
Numerous other measures were taken to pursue the corporate state during the Progressive Era, including, but not limited to the creation of the Department of Commerce and Labor, the Food and Drug Administration, and so forth. Many readers today will understand these to be basic essentials of consumer protection, but their beginnings, too, were laden with anti-competition motive, and intended to protect and cartelize the major producers.[11] Also notably, the era saw the creation of the Federal Reserve System in 1914. This was the bankers’ ultimate cartelization devise, drawn up by the major bankers and a few politicians in a highly secret meeting on Jekyll Island off the coast of Georgia. In the words of Senator Nelson Aldrich, a key figure in its creation, “The organization proposed is not a bank, but a cooperative union of all the banks of the country for definitive purposes.”[12]
Additionally, the three major Progressive Presidents—Theodore Roosevelt, William Howard Taft and Woodrow Wilson—would all enact a host of Progressive reforms and measures, many helping to create a corporate state—a state closely associated with the big businesses of the time.
[1] By 1910, the United States produced 30% of all manufactured goods globally, followed by Great Britain and Germany, each at 10%. Output surge can be seen in a sampling of these statistics. From 1869 to 1899, commodity output increased 350%, agriculture more than doubled, construction increased 250%, manufacturing increased 600%, and mining increased 800%. Steel production increased ten times over, and crude oil production increased by twenty-six fold. And despite massive population increases during this time, commodity output per person (per capita) doubled from 1865 to 1900. Source: U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C.: Government Printing Office, 1960). All statistics in this section are derived from this source, vis-à-vis Murray Rothbard’s The Progressive Era on page 92.
[2] This information is cited in the article here by Thomas E. Woods, Ph.D., which dismantles the commonly held belief that monopolies in a free market are harmful. As a few added statistics, during the 1880s, the price of steel rails fell from $68 to $32 a ton (and ultimately to $17/ton by 1898), refined sugar fell from 9 cents to 7 cents, and zinc prices fell from $5.51 to $4.40 per pound. Likewise, oil prices fell from 30 cents a gallon in 1869 to 8 cents a gallon by the end of the 1880s.
[3] Qtd. in Rothbard, 67.
[4] Ibid, 72.
[5] Ibid, 74.
[6] Ibid, 107.
[7] Examples include Marcus Hanna, a close associate to John Rockefeller, the Chicago utilities boss Samuel Insull, Chicago banker (and later Treasury Secretary) Franklin MacVeagh, Andrew Carnegie, and several members of the J.P.Morgan company. Of the largest 367 corporations in the United States, one third had representatives in the NCF.
[8] One example included regulations such as mandatory workman’s competition that would impose costs on all businesses, but proportionally more on smaller businesses, cutting back on competition. The NCF also pushed for public ownership of utilities (gas, trolleys and electricity), which meant that the government would award a single company in an area the right to produce these utilities. Of course, for the company that received the contract, profit was guaranteed; it was a government-created monopoly. In 1905, members of the NCF, including John Commons, were part of a commission specifically intended to scientifically study the European method of public utilities, which ultimately formed the basis for their proposals and a series of laws enacted in states.
[9] Readers who know this history are aware that the Sherman Anti-Trust Act was passed in 1880 ostensibly to allow the government to break apart monopolies, or trusts. It had seldom been used, partly because monopolies under the free market were nearly impossible to maintain, as we’ve seen. Theodore Roosevelt began to use the Act to sue companies—namely Rockefeller affiliated companies—as president. Roosevelt, however, was not against trusts, per se, as he was quite happy with the NCTC recommendation that the government simply regulate rather than abolish trusts that it approved of.
[10] In order to ensure that readers are not simply having to take my word for it, some of the members of the committee created to draft the legislation were as follows. Judge Gary: chairman of the board of U.S. Steel. Isaac Seligman and James Speyer: major New York investment bankers. George Perkins: significant Morgan ally. The copy of the bill was ultimately written by J.P. Morgan’s attorney, Francis Stetson and the attorney for a major railroad company, Victor Morawhetz.
[11] For example, the Chicago meat packing plants were firm lobbyists for the Food and Drug Act, as getting the federal government’s stamp of approval would make them more competitive in European markets and create higher regulatory costs for competitors. Contrary to the popular belief that meat was heavily unsanitary, however, the meat packers still had local inspectors (which European governments did not recognize; Europeans wanted state-approved meat), and no lawsuits were ever brought against the meat packers for adulterated meat. That does not mean that it was always pure or clean, but the idea of good government versus bad corporations takes on a far more complex and interesting than our cartoonish versions of history suggest.
[12] Qtd. in Rothbard, 476.
[13] Qtd. in ibid, 294.
