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George Washington: An Image and Its Influence

David Gordon — Fri, 15 Dec 2017 00:00:00 -0600

George Washington took office as president in 1789 with an asset of inestimable value. People viewed him as the hero of the American Revolution who, disdaining power, had like the Roman general Cincinnatus returned home to his farm. When he allowed himself, with great reluctance, to be nominated as chief executive, his prestige was unparalleled. Indeed, his reputation was worldwide. When he died,

Napoleon Bonaparte decreed that the standards and flags of the French army be dressed in mourning crepe. The flags of the British Channel Fleet were lowered to half-mast to honor the fallen hero. Talleyrand, the French minister of foreign affairs, ... [called] for a statue of Washington to be erected in Paris.Matthew Spalding and Patrick J. Garrity, A Sacred Union of Citizens (Lanham, Md.: Rowman and Littlefield, 1996), p. 189.</p>

Poets likewise sang his praises.

Washington achieved mythic status in his own lifetime, receiving poetic encomia from English poets as different as William Blake and Byron, who contrasted Washington favorably with the despotic Napoleon. ... His contemporaries were impressed by the fact that the general who led a successful revolution did not establish a personal dictatorship.Michael Lind, ed., Hamilton’s Republic (New York: The Free Press, 1997), p. 99.

Were the effects of the influence that accompanied this prestige good or bad for liberty? This chapter shall endeavor to show that in two instances, these effects were bad; in one case, though, Washington’s fame led to fortunate consequences for individual freedom. Washington, though not a principal author of the Constitution, supported calling a convention to revise the Articles of Confederation. At the convention itself, he strongly backed Madison’s plans for centralized control.

On assuming power, Washington soon faced a division of opinion in his cabinet. Secretary of the Treasury Alexander Hamilton was not satisfied with the centralization already achieved by the Constitution. He called for a national bank and a governmentally directed program of industrial development. Thomas Jefferson raised a decisive objection to Hamilton’s proposal: Did it not entirely exceed the bounds of power granted the central government by the new Constitution? The constitutional issue did not faze Hamilton, who produced an analysis that granted the central government broad power to do whatever Hamilton thought best. In this conflict, Washington once again weighed in on the side of the centralizers.

In his Farewell Address, though, Washington at least partially redeemed himself, from a classical-liberal standpoint. He cautioned against America’s involvement in European power politics, with which the United States had no concern. His warning against permanent alliances guided much of American foreign policy in the nineteenth century; and, in the twentieth, opponents of the bellicose policies of Woodrow Wilson and Franklin Roosevelt appealed to it. Washington’s prestige for once had beneficial results.

We have spoken of whether Washington’s influence was “good” or “bad” for liberty. By what standard are these judgments made? This author writes from a classical-liberal perspective, in which the growth of government is viewed as an unmitigated disaster and expansionist foreign policy is resolutely opposed. Thus, “states’ rights” receive support as against increases in federal authority, and wars, except in cases of exercising self-determination or repelling direct invasion, are opposed.A classical-liberal analysis of just wars has been well set forth by Murray Rothbard in “America’s Two Just Wars: 1775 and 1861” in The Costs of War, John V. Denson, ed., 2nd ed. (New Brunswick, N.J.: Transaction Publishers, 1999), pp. 119–33.

One might object to the proposed criterion in this way. The goal of classical liberalism is to promote individual liberty. Why then tie it down to the specific policies indicated?

In certain cases, may not the federal government serve better to protect the individual than the states?For a defense of this position, see Clint Bolick, The Affirmative Action Fraud (Washington, D.C.: The Cato Institute, 1996). See also my criticisms in The Mises Review 2, no. 2 (Summer 1996): 13–17. Further, even if local control is in ideal circumstances best, may not a decentralized polity prove no match for a strong opponent? Along the same lines, why must a realistic foreign policy be confined to defense of the national territory? In some cases, may not the best defense be to strike at a prospective enemy first?Walter Lippmann opposed “isolationist” policy during the 1930s, charging it with unrealistically ignoring the increasing power of Germany. For a criticism of his views, see my “A Common Design: Propaganda and World War” in The Costs of War, John V. Denson, ed., 2nd ed. (New Brunswick, N.J.: Transaction Publishers, 1999), pp. 312–19.

These worries cannot be addressed in detail here. Suffice it to say that a good rule-utilitarian case can be constructed for spurning federal interventions that allegedly aim at promoting liberty. In like fashion, aggressive war shackles us with devastation and restriction of liberty in order to combat speculative dangers.For a strong historical case showing that war has led to growth in government, see Robert Higgs, Crisis and Leviathan (New York: Oxford University Press, 1987).

These remarks have at least the appearance of dogmatism, and they are advanced rather to indicate a viewpoint than to make a case. One illustration of how such a case would proceed is taken from Murray Rothbard. The Articles of Confederation established a much less centralized system than the Constitution. Yet because ratification by all the states was required for the Articles to come into effect, most of the American Revolution was fought with no written structure of authority over the states at all. As Rothbard notes,

The Articles were not exactly received with huzzahs; rather, they were greeted quietly and dutifully, as a needed part of the war effort against Britain. One of the keenest critiques of the Articles, as might be expected, came from Thomas Burke, who warned that, under cover of the war emergency, eager power-seekers were trying to impose a central government upon the states. ... [t]he Articles of Confederation were not to be ratified and go into effect until 1781, when the Revolutionary War would be all but over.Murray N. Rothbard, Conceived in Liberty, vol. 4, The Revolutionary War, 1775–1784 (Auburn, Ala.: The Mises Institute, 1999), pp. 255–56. Donald W. Livingston argues that David Hume saw a confederation of small republics as the solution to the defense problem. Further, Livingston argues that Hume influenced the American founders. See his Philosophical Melancholy and Delirium (Chicago: University of Chicago Press, 1998), pp. 317–32.

So much for the supposed necessity for a strong central government to combat other nations.

However much supporters of localism might view even the Articles as going too far in the wrong direction, Washington held a decidedly different view. In 1783, he wrote to Alexander Hamilton: “It is clearly my opinion, unless Congress have powers competent to all general purposes, that the distresses we have encountered, the expense we have incurred, and the blood we have spilt, will avail nothing.”W.E. Woodward, George Washington: The Image and the Man (New York: Horace Liveright, 1962), p. 411.

Among the “distresses” of which Washington spoke, one may speculate that personal considerations loomed large. Throughout his adult life, Washington avidly sought land. “His family had first speculated in Ohio Valley land decades ago [before the 1780s], and Washington owned nearly sixty thousand acres.”Richard Brookhiser, Founding Father: Rediscovering George Washington (New York: The Free Press, 1996), p. 49.

A project that aroused his interest offered a chance to appreciate greatly the value of his land. “If a canal could be pushed over the mountains to link up with the Allegheny river system, then all the future produce of the Ohio Valley could flow through Virginia land, (not coincidentally, past Mount Vernon).”Ibid., p. 48.

A crucial obstacle confronted Washington’s hopes for a Potomac Canal. Under the Articles of Confederation, a state had the right to levy fees on the use of waterways that passed through its boundaries. If the states bordering the Potomac were to do so, the proposed canal might generate no profit for him. One can readily see why the great general was “distressed.” As one observer notes, “[h]e was drawn to the plan by important private and public interests, and the political steps he took to fulfill it led directly to the Constitutional Convention, if not a canal.”Ibid., p. 49. A strong central government would remove the threat of interstate taxation.

This is not to suggest that Washington’s economic interests determined his support for a stronger central government. To do so would be to fall into the fallacy that wrecked Charles Beard’s An Economic Interpretation of the Constitution. Nevertheless, personal interest cannot be neglected in an explanation of Washington’s policy.

Regardless of Washington’s motives, the fact that someone of his probity and reputation advocated a Constitutional Convention eased the doubts of those who feared centralization. How could one suspect the proposed convention of aims destructive of liberty if Washington, the Cincinnatus who had spurned dictatorship, endorsed the call for it? Was not the case for the good intentions of the proposed convention conclusively made once it became known that Washington himself had agreed to serve as a delegate to it? Richard Brookhiser puts the essential point well:

Much of the political class was happy with the current arrangements. ... Supporters of change would have to make the case that a new government would not threaten liberty. ... Washington’s presence would help immeasurably to make that case. He had already held more power than any man in America, and after eight and half years, he had surrendered it. He was the most conspicuous example of moderation and disinterestedness that the nation could supply.Ibid., p. 56.

At the convention, Washington’s primary aim was not to enact a particular plan of government. The need rather was to act immediately, so that centralization could be secured as fast as possible.

During the constitutional debates, Washington insisted that the Articles of Confederation be overhauled quickly. “Otherwise,” he wrote, “like a house on fire, whilst the most regular mode of extinguishing it is contended for, the building is reduced to ashes.” What was needed, Washington thought, was any solid national government.Russell Hardin, Liberalism, Constitutionalism, and Democracy (New York: Oxford University Press, 1999), p. 273, citing a letter from Washington to Henry Knox, February 3, 1787.

Washington was quite willing to push his argument to extremes. So essential did he deem centralization that he contemplated a monarchy for America, should the Constitutional Convention fail. He was not himself a monarchist—far from it. But a letter of March 31, 1787, to James Madison shows that conceivable circumstances might change him into one.

In his definitive study of James Madison’s political thought, Lance Banning summarizes Washington’s thoughts in this vital letter:

No one could deny the indispensability of a complete reform of the existing system, which he hoped the Constitutional Convention would attempt. But only if complete reform were tried, and the resulting system still proved inefficient, would a belief in the necessity of greater change begin to spread “among all classes of the people. Then, and not till then is my [Washington’s] opinion, can it [monarchy] be attempted without involving all the evils of civil discord.”Russell Hardin, Liberalism, Constitutionalism, and Democracy (New York: Oxford University Press, 1999), p. 273, citing a letter from Washington to Henry Knox, February 3, 1787.

One wonders how those whose fears of the convention had been calmed by Washington’s endorsement would have reacted had they known of this letter. But of course the convention, by its own lights, did not fail; and the fact that Washington contemplated monarchy remained hidden.

Any centralized form of government, Washington held, was desirable so long as it could be quickly established. But it does not follow from this that Washington was indifferent to the type of centralized government established. He soon fell in with the radical nationalism of Madison’s Virginia Plan.

To Madison, Washington’s presence at the convention was essential: It was “an invitation to the most select characters from every part of the Confederacy.”Gary Rosen, American Compact: James Madison and the Problem of Founding (Lawrence: University Press of Kansas, 1999), p. 85, citing a letter from Madison to Washington, December 7, 1786. Madison reported that Washington arrived at the Philadelphia convention “amidst the acclamations of the people, as more sober marks of the affection and veneration which continue to be felt for his character.”Ibid., p. 86, citing a letter from Madison to Thomas Jefferson, May 15, 1787.

With Washington present, Madison hoped to achieve his aims. One political theorist, a disciple of Leo Strauss, summarizes these aims in this way: Washington’s presence and the presence of “lesser figures of impeccable republican credentials allowed the convention to rebut the charge of being an aristocratic conspiracy while conferring on it the opportunity to behave like one.”Ibid.

Strong words, but the details of Madison’s plans bear out the interpretation that the Straussian Gary Rosen has advanced. Madison and other extreme nationalists sought to eviscerate entirely the power of the states to thwart the will of the nation.

Under the Virginia Plan, which Madison submitted to Washington before the convention opened, Congress could veto any law enacted by a state legislature that it deemed unconstitutional.

It called, as Washington’s summary of Madison’s draft put it, for a “due supremacy of the national authority,” including “local authorities [only] whenever they can be subordinately useful.” ... Madison had originally called for an even more sweeping national power over state laws, a “negative in all cases whatever.”Brookhiser, Founding Father, p. 63.

In fairness to Washington, he did not vote in favor of Madison’s radical proposal of an unlimited congressional veto. But neither did he oppose the plan. Madison noted that

Gen. W. was “not consulted.” How could he not have been consulted? He never missed a session. Most probably, Gen. W. had been consulted privately, and the result of the consultation was that, since Madison had the voters anyway, Washington chose not to take a public stand on an inflamed issue.Ibid., p. 64.

It seems quite clear that opposition by Washington would have at once ended so far-reaching a plan, but it was not forthcoming. Surely then he cannot have been very strongly against it. Had he been, he need only have spoken a word. But why speculate on Washington’s private opinion of Madison’s proposal? Its importance for our purposes is this: Many of those who feared that the convention would strike a fatal blow at states’ rights were reassured by Washington’s presence. But, unknown to them, he was at least a fellow traveler of radical centralism. His image as a Cincinnatus averse to power led many into error. It did not follow from Washington’s personal reluctance to hold office that he was not an opponent of states’ rights, as this concept was understood in the 1780s.

Fortunately, for those opposed to centralism, no version of the congressional veto survived into the Constitution’s final draft. But the Constitution, even without it, was far more centralizing than the Articles; and Washington’s image once again proved useful when the Constitution came up for ratification. Just as before, skeptics could be reassured: Would Washington support a regime inimical to liberty? Thus, in Virginia, opposition to the Constitution was in part disarmed by Washington’s prestige. “Few, if any of Virginia’s revolutionary leaders questioned Madison’s republican credentials. All, no doubt, were comforted by their awareness that George Washington would head the federal government if it were put into effect.”Banning, The Sacred Fire of Liberty, p. 253.

By no means is this meant to suggest a monocausal view, in which Washington’s image sufficed to quell all opposition to the new document. Quite the contrary, in the very passage just cited, Lance Banning maintains that Madison’s skill at argument was needed to win over the recalcitrant. Confidence in Washington was not enough because in 1788, “quite unlike today, few believed that the executive would set the federal government’s directions.”Ibid. Nevertheless, the importance of the “Washington-image factor” cannot be gainsaid.

The Constitution did not in all respects settle the nature of the American system. What sort of government would result from it? Would its provisions be interpreted loosely, to enable the central government to seize as much power from the states as possible? Two conflicting approaches to government split Washington’s cabinet, one favored by Alexander Hamilton and the other by Thomas Jefferson.

These divergent views have been ably summarized by Forrest McDonald.

In Federalist Essay number 70, Hamilton had said that “energy in the executive is a leading ingredient in the definition of good government.” ... In essays 71 and 73, he made his position clearer: “It is one thing,” he said, for the executive “to be subordinate to the laws, and another to be dependent on the legislative body.” In other words, the executive authority must operate independently and with a wide range of discretion in its field, the Constitution and laws providing only broad guidelines and rules.Forrest McDonald, The Presidency of George Washington (Lawrence: University Press of Kansas, 1974), pp. 94–95.

Jefferson and his followers saw matters entirely otherwise.

In Jefferson’s view, and that of most Republicans, such discretionary authority was inherently dangerous and smacked of monarchy. ... A society would grow better ... by stripping social and governmental institutions to the bare minimum so that the natural aristocracy might rise to the top.Ibid., pp. 95–96.

The differences between Hamilton and Jefferson were not confined to abstract argument, but quietly became manifest in practical affairs. Although Hamilton considered himself a student of economics, his views embodied the discredited doctrines of mercantilism.

One of the duties of the federal government, according to the Hamilton philosophy, is the active promotion of a dynamic industrial capitalist economy ... by establishment of sound public finance, public investment in infrastructure, and promotion of new industrial sectors unlikely to be profitable in their early stages.

As Hamilton wrote in The Report on Manufactures:

Capital is wayward and timid in leading itself to new undertakings, and the state ought to excite the confidence of capitalists, who are ever cautious and sagacious, by aiding them to overcome the obstacles that lie in the way of all experiments.Lind, ed., Hamilton’s Republic, p. 5, quoting Hamilton’s Report.

Where the State would acquire the requisite understanding to direct the economy, Hamilton neglected to inform his readers; and Jefferson and his followers were reluctant to take the matter on faith. In particular, the Jeffersonians rejected Hamilton’s plan, as part of reforming public finance, to establish a national bank.

In this opposition they had a seemingly irrefutable argument. Hamilton’s plan for a bank clearly violated the Constitution. Nowhere does that document give Congress the power to charter a national bank. So small a matter did not deter Hamilton from avid pursuit of his scheme.

In response to a request by Washington, Hamilton delivered a “Defense of the Constitutionality of the Bank” to him on February 23, 1791.

The well-known part of the defense spelled out the “loose constructionist” doctrine of the Constitution. The Constitution, said Hamilton, defined only in general terms the broad purposes for which the federal government was created. ... If Congress determined to achieve an end authorized by the Constitution, it was empowered by the final clause in Article I, Section 8 [the “necessary and proper” clause] ... to use any means that were not prohibited by the Constitution.McDonald, The Presidency of George Washington, p. 77.

Hamilton’s argument by far exceeded in importance the matter of the bank, though that in itself was no small thing. If Hamilton’s views were accepted, little of limited government could remain. Given the vaguest aims, for example, the promotion of “the general welfare,” the government had the power, Hamilton alleged, to do whatever it thought was needed to attain them.

Faced with so blatant a challenge to constitutional rule, what did Washington do? He accepted Hamilton’s opinion, refusing Madison’s advance to veto the bank bill. Hamilton’s “defense convinced Washington, and on February 25 [1791], he signed the bank bill into law.”Ibid., p. 26.

Once again Washington lent his prestige and authority to the cause of a strong central state. From a classical-liberal perspective, his course of action was a disastrous blunder.

But the record is not all black. So far Washington has been presented as an opponent of the libertarian tradition. He used his fame to secure unwarranted credence for a convention that aimed to strengthen the central government. At that convention, he gave the most extreme centralizers at least tacit support. And, as we have just seen, he accepted an argument that freed the government from all constitutional restraint. Nevertheless, from the classical-liberal perspective, Washington almost redeemed himself.

In his Farewell Address, Washington set forward principles of foreign policy that, if followed, would virtually immunize America from involvement in foreign wars. (The Address was not delivered as a speech. It was a circular published in The American Daily Advertiser, September 19, 1796.)Spalding and Garrity, A Sacred Union of Citizens, p. 57. For the controversy about Hamilton’s role in drafting the Address, see pp. 55ff.

In the Address, Washington sharply separated European affairs from those of the United States.

Europe has a set of primary interests, which to us have none or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence therefore it must be unwise in us to implicate ourselves, by artificialities, in ... the ordinary combinations and collisions of her friendships, or enmities.Ibid., p. 186, quoting the text of the Address.

But, interventionists such as Walter Lippmann were later to object, does not the argument of the Address wrongly take for granted that European politics do not concern America? What if a single power dominated the continent? Would this not threaten us? If so, should we not be concerned actively to prevent such domination?

Washington rejected this contention in advance.

Our detached and distant situation invites and enables us to pursue a different course. If we remain in one People, under an efficient government, the period is not far off, when we may defy material injury from external annoyance. . . . Why forego the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground.Ibid.

Here Washington adopts the much maligned Fortress America stance so derided by critics of isolation. Given the manifest perils of war, will not a classical-liberal system take advantage of a favorable geographic position to steer clear of foreign entanglements? Such, at any rate, was Washington’s argument; and for once, his immense prestige aided the cause of liberty.For a contemporary defense of the soundness of the foreign policy prescriptions of the Address, see Eric Nordlinger, Isolationism Reconfigured (Princeton, N.J.: Princeton University Press, 1995).

Opponents of American entry into the world wars frequently appealed to the Address. If they were ultimately unsuccessful, at least the fame of the Address and its author helped slow the race toward war and statism.

[This is chapter 2 from Reassessing the Presidency: The Rise of the Executive State and the Decline of Freedom, edited by John V. Denson. Buy it in hardcover for $12.95.]

John Prince Smith and the German Free-Trade Movement

Ralph Raico — Thu, 30 Nov 2017 00:00:00 -0600

John Prince Smith was the creator of the German free trade movement and its leader from the 1840s until his death in 1874.Julius Becker, Das Deutsche Manchesterturn (Karlsruhe: G. Braun, 1907), p. 26. Wilhelm Roscher refers to Prince Smith as "the leader of the whole [free trade] tendency"; Roscher, Geschichte der National-Oekonomik in Deutschland (Munich: R. Oldenbourg, 1874), p. 1015. W. O. Henderson terms him the rival of Friedrich List: see his "Prince Smith and Free Trade in Germany," The Economic History Review, Second Series, II, no. 3, (1950): 295–302. The standard biography is by Otto Wolff, John Prince-Smith: Eine Lebensskizze, in John Prince Smith, Gesammelte Schriften III, Karl Braun, ed. (Berlin: Herbig, 1880), pp. 209–398. See also Donald G. Rohr, The Origins of Social Liberalism in Germany (Chicago and London: University of Chicago Press, 1963), pp. 85–91. He was born in London in 1809, and, after leaving Eton prematurely, on account of the death of his father, began working at the age of thirteen for a London commercial firm, later turning to journalism. His journalistic activity brought him to Germany, where in 1831 he took a position as a teacher of English and French at the Gymnasium in Elbing, in East Prussia. It was in these years that he acquired fluency in the German language, to the point where he was later able to earn a living as a writer on economics and politics.

It appears likely that Prince Smith's acquaintance with economic literature, while still a young man in England, was not extensive and that he taught himself the elements of the discipline after he had settled in Germany.Wolff, John Prince Smith: Eine Lebensskizze, p. 215. He claimed that Bentham's utilitarianism exerted a strong influence on his thinking.Ibid. As we shall see, however, his commitment to laissez faire was considerably more "doctrinaire" (or consistent) than Bentham's. Prince Smith's interest in economic questions may also have been stimulated through personal acquaintance with some of the leaders of the anti-corn law agitation which was occurring in England at the time and which he followed closely.

While still a teacher at the Elbing Gymnasium, Prince Smith contributed articles to the local paper, including one, in 1835, on the question of how wages are determined. In this piece he presented an "optimistic" view, that is, suggesting a steady, long-range improvement in living standards for working people in a free market economy. That he was already in some wider sense a liberal by the mid-1830s is shown by his attitude towards the "Göttingen Seven," the professors at the University of Göttingen who in 1837 protested the revocation of the Hanoverian constitution and were accordingly dismissed.Ibid., pp. 226–27. Göttingen University had been a main center for the spread of the free trade ideas of Adam Smith throughout Germany in the last decades of the eighteenth century; see, Wilhelm Treue, "Adam Smith in Deutschland: Zum Problem des 'Politischen Professors' zwischen 1776 und 1810," in Johannes U. Ruth Muhle, ed., Deutscheland und Europa: Historische Studien zur Völker-und Staatenord-nung des Abendlandes (Dusseldorf: Droste, 1951), p. 102. Prince Smith attempted to stir up a protest in Elbing, eliciting a stinging reprimand from the office of the Prussian minister of the interior. Further difficulties with the educational administration (stemming in part from his lack of any talent for teaching twelve and thirteen year olds) led to his leaving his post in 1840. He turned to free-lance journalism full-time.

His first production was a series of articles entitled, "Apology for Industrial Freedom," in which he dealt, among other subjects, with the source of pauperism. This he attributed mainly to the costs of a bloated military establishment.Wolff, John Prince Smith: Eine Lebensskizze, pp. 234–35. Prince Smith's anti-militarist and anti-war attitudes remained constant, at least until the last years of his life, when the heady Prussian triumphs over Austria and Franceseem to have affected him as they did so many other liberals. Twenty years after this early work, in 1863, he wrote in his essay, "The Market":

The great evil for the workers lies in this, that the profit on capital and capital accumulation are to such a great extent diminished by state expenditures on unproductive purposes—the capitalists would be able to give to the people who work for them much more to consume, if they did not have to support so many peace-time soldiers besides, whose consumption is not reimbursed through labor. If the Swiss militia system were introduced in all European states, in a short time capital would so increase, wages would so rise, that there would be no more question of want in the working class. Here lies the solution of the worker-question.John Prince Smith, Gesemmelte Schriften, I, Otto Michaelis, ed. (Berlin: Herbig, 1877), p. 20.

It may be remarked that the proposal to replace the Prussian standing army with a citizens' militia would tend to cast Prince Smith as a much more politically radical thinker than has usually been supposed. For one thing, the consequences for the Prussian authoritarian (obrigkeitlich) monarchy would have been incalculable and perhaps fatal.

In 1843 Prince Smith published a pamphlet, in Königsberg, "On Hostility to Trade," a major event in the history of the free trade movement in Germany. Here he placed the cause of free trade in a historical and sociological context more reminiscent of the industrialist school of French thinkers of the early nineteenth century than of Bentham. He already had to submit to attacks as "the Englishman,"Later his protectionist enemies spread the story that he was in the pay of English interests. Georg Mayer, Die Freihandeblehre in Deutschland: Ein Beitrag zur Gesellschaftslehre des wirtschaftlichen Liberalismus (Jena: Gustav Fischer, 1927), p. 53. although by this time he had become in spirit and legal fact a Prussian. An Address (sic) to Robert Peel which Prince Smith composed and which he and several of his associates sent in 1846 congratulated the British Prime Minister on his work in connection with the income tax, the bank act, and, above all, repeal of the Corn Law. Peel replied, which created something of a cause célèbre and thereby fostered public discussion of the free trade question. Later that year, Prince Smith moved to Berlin.

By now a crusading free trader,Prince Smith used the term "free trade" in a wide sense, as in his assertion in Rentzsch's Handwörterbuch der Volkswirtschaftslehre that "To the state free trade assigns no other task than just this: the production of security." Cited in Becker, Das Deutsche Manchestertum, p. 103 (emphasis added). It may be of importance that Prince Smith makes use of the term popularized by Charles Dunoyer and other of the French school of liberal economists. his aim was to establish a movement on the model of the Anti-Corn Law League, and lead it to victory. In December 1846 he gathered a number of business leaders and scholars together to consider the formation of a German Free Trade Union (Deutscher Freihandelsverein). Despite some harassment from the police, the organizing meeting took place the next March in the Hall of the Berlin Stock Exchange, where about 200 people, the great majority of them businessmen, were present (among them a Mendelssohn).Wolff, John Prince Smith, pp. 267–68. Some of those attending objected to Prince Smith's concept of an association devoted to propagating free trade ideas, preferring one that would discuss the question of free trade versus protectionism. In deference to this group, the name "Scientific Union for Trade and Industry" (Wissenschaftlicher Verein für Handel und Gewerbe) was adopted; very soon, however, the organization came to be referred to simply as the Free Trade Union (Freihandelsverein). Branches were set up in Hamburg, Stettin, and other German towns.

Prince Smith led the German delegation to the famous Free Trade Congress that met in Brussels on September 16, 1847, at the invitation of the Belgian Free Trade Union. His biographer, Otto Wolff, characterized the banquet that concluded the conference as "the high point of that first period of the European free trade movement, which had celebrated its greatest triumph in the reform of the English tariff and which doubtless would even then have led to practical free trade reforms in a great part of the continent, if the revolution of 1848 and its consequences had not intervened."Ibid., p. 273.

Prince Smith seems to have remained comparatively unaffected by the great movement for liberal constitutional reform and national unification of 1848; his efforts were, and continued to be, focused instead on economic reform in a free trade direction. He addressed a petition to the National Assembly in Frankfurt on "Protection Against the Limitation of Trade," outlining his views on the current state of affairs.Ibid., p. 286. The European situation, in his view, was one of "armed peace," characterized by the maintenance of standing armies, excessive governmental power, "monstrous" taxes, mass impoverishment, and threats to the social order. The cause he identified as the ambitions of the political power, which has become an end in itself. Free trade and maximum economic freedom were the remedies.

The petition, however, attracted little interest or support from the liberals at the Paulskirche, who were concentrating their efforts precisely on the issues Prince Smith considered secondary. By now he had married Auguste Sommerbrod, the daughter of an affluent Berlin banker and settled in quarters on Unter den Linden; after the revolutionary turmoil died down, he turned to renewed activity on behalf of his cause.

His chief goal was to establish a free trade association that would cover all of Germany, and, probably with the experience of the Anti-Corn Law League in mind, he was very conscious of the need for substantial amounts of money to achieve this end. Money was needed to publish brochures and books, to arrange to

have articles sent to the newspapers, and to train talented journalists in the principles of political economy. An organization was formed, the Central Union for Freedom of Trade (Zentralbund für Handelsfreiheit), which did not, however, succeed in attracting any considerable support. It was chiefly helpful in tunneling contributions from free trade circles in seacoast cities like Hamburg and Stettin to Prince Smith for use in propaganda. The plan to train journalists fell through for lack of suitable candidates. (In the 1860s and early 70s, free trade views came to dominate the German press.) Prince Smith was active, however, in disseminating good translations of the works of Frederic Bastiat and in gathering about him a circle of like-minded enthusiasts. Ibid., pp. 296–97, 309–11.

A good deal of his activity in this period consisted in persuading the German political liberals of the desirability of free trade. Many of the leading liberals of southern and western Germany, such as Robert von Mohl, were protectionists. As Becker notes:

At that time liberal and free-trader were indeed so little identical that the south-German liberals were the most interested representatives of the protective tariff system, while conversely the conservative farmers of the north and east figured as the chief supporters of the free trade party ... as a consequence of later political constellations, the appearance has emerged that political liberalism was always Manchesterite and that Manchesterism was always liberal-democratic. Nothing is as false as this view.Becker, Das Deutsche Manchestertum, pp. 33–34.

In order to influence liberal and radical opinion, Prince Smith, along with his friend and fellow free-trader Julius Faucher, collaborated on the Berlin newspaper, the Demokratische Zeitung (later the Abendpost). It would seem that it was in this period that the polarization of liberal and free trader on the one side and socialist and collectivist on the other began to form.Prince Smith was aware of the danger socialism posed for his cherished social system as early as 1850, and wrote to a friend on how crucial the need to "conquer the masses" for free trade. Wolff, John Prince Smith, p. 315. When the Abendpost was closed down by the censors. Prince Smith wrote:

The purpose of my collaboration on the Abendpost has to a great extent been achieved. I have brought respect for the free trade doctrine to the most extreme left. Free trade and bureaucracy, or competition and exploitation no longer count as identical with the party whose absurd conception of property made it dangerous. I have demonstrated that the doctrine of economic freedom is much more progressive [freisinnig] than all the projects and teachings of ordinances on property and earnings that are arbitrary and realizable only through barbaric force and that, moreover, could not in the long run be implemented by any conceivable force.Ibid., pp. 315–16.

The extension of the Zollverein, or German customs union, was proceeding apace at this time, and Prince Smith, who was acquainted with a number of the Prussian leaders, including the chief minister, Manteuffel, probably influenced them in the free trade direction. At any rate, his preference was always for working to persuade those in power, rather than adopting an oppositional stance. Continuing his agitation, he composed a declaration on behalf of commercial and landed associations in West and East Prussia that were calling for occupational freedom (Gewerbefreiheit) and free trade. This declaration is of political interest, since it shows the strong support for free trade principles in the regions of Prussia most "backward" from the point of view of political liberalism. Its theoretical interest stems from the fact that in it he associated "protectionism" with "systematic socialism," a linkage that was standard in the writings of Bastiat.It would be desirable to know more about Prince Smith's connections with the French liberals of his time. He was perfectly fluent in French and contributed to the Journal des Économistes. Ibid., p. 335. In 1858, the Kongress deutscher Volkswirte (Congress of German Economists) was founded, assembling the chief believers in the cause, many of whom had been led to it by Prince Smith during his previous twenty years of labors. Now there were many others to join him in his propagandistic and agitational work. Although Prince Smith did not assume the presidency of the Congress (evidently for various reasons), he participated in the yearly meetings, submitting papers such as the one at the 1860 gathering in Cologne against the legal limitation on interest rates. At the 1863 meeting in Dresden he spoke against patents, and the next year, in Hanover, he attacked "unredeemable paper money with so-called compulsory exchange-rate."Ibid., pp. 337, 346–47. He also kept closely involved with the Congress's various activities, which continued to promote laissez faire until the end. (Its last meeting was held in 1885.) Those members who grew increasingly disenchanted with the Congress's position on the "social question" left and, with others, founded the Verein für Socialpolitik, in 1872, in Eisenach. In his opening address at this conference, Gustav Schmoller testified to the influence of the movement that Prince Smith had created when he referred to "the economic doctrines which unconditionally dominate the day's market, those which have found expression in the Congress.Becker, Das Deutsche Manchestertum, p. 100.

From 1860 until his death Prince Smith was the head of the Economic Society (Volkswirtschaftliche Gesellschaft), the successor to the Free Trade Union. His home in Berlin became a meeting place for Prussian politicians, some of whom went onto (sic) form the Progressive Party (Fortschrittspartei) soon after.Wolff, John Prince Smith, p. 339. In 1863, the Vierteljahrschrift für Volkswirtschaft, Politik, und Kulturgeschichte (Quarterly Journal for Economy, Politics, and Cultural History) began to appear in Berlin, under the editorship of Julius Faucher, perhaps Prince Smith's closest collaborator. The chief theoretical organ of classical liberalism in Germany, this periodical continued to be published for the next thirty years. Prince Smith was an important contributor to the Vierteljahrschrift, and a number of his most important essays were first printed there.

The quarterly journal, the Berlin society, the congress of economists, and the informal influencing of politicians and officials were all elements of the same movement, facets of the same activism, and all fired by the spirit of John Prince Smith. This was the case also with the Handwörterbuch der Volkswirtschaftslehre (Concise Dictionary of Economics), edited by H. Rentzsch, published in 1866.Becker, Das Deutsche Manchestertum, p. 100. According to Becker, Rentzsch later gave up free trade. Ibid., p. 108. This work is similar in many respects to the one edited by Coquelin and Guillaumin in France. For the Handwörterbuch, it was Prince Smith who was selected to write the article on "Freedom of Trade-Free Traders."

The article presents his characteristic views on economics and politics. "Liberalism," he writes, "only recognizes one task which the State can perform, namely, the production of security."Quoted in Charles Gide and Charles Rist, A History of Economic Doctrines from the Time of the Physiocrats to the Present Day, trans. R. Richards (Boston/New York/ Chicago: D. C. Heath, n.d.), p. 439n. Gide and Rist, perhaps relying too heavily on anti-liberal German sources, comment that "Liberalism had nowhere assumed such extravagant proportions as it had in Germany. Prince Smith, who is the best-known representative of Liberalism after Dunoyer [sic], was convinced that the State had nothing to do beyond guaranteeing security, and denied that there was any element of solidarity between economic agents save such as results from the existence of a common market."Ibid., p. 439. At any rate, Prince Smith's "minimalist" view of the functions of the state goes considerably beyond Bentham's "agenda."On Bentham, see Lionel Robbins, The Theory of Economic Policy in English Classical Political Economy (London: Macmillan, 1953), pp. 38–43.

From 1862 to 1866, Prince Smith represented Stettin in the Prussian House of Deputies, where he was not an outstanding figure, addressing the House only seldom and then mainly on economic questions. This was the period of the bitter—and ultimately decisive—constitutional struggles between Bismarck and the German liberals, whose vanguard had formed the Progressive Party in 1861. Prince Smith's political views had always been "moderate," and as the liberals became radicalized in the face of what they viewed as the government's arbitrary and unconstitutional actions, he distanced himself from them increasingly. In 1866, he declined to stand for reelection. With Königgratz and the crushing Prussian victory over Austria, Bismarck scored a victory over the recalcitrant liberals as well, one that some believe sealed the fate of German liberalism before Reich was even formed.Ludwig von Mises, Omnipotent Government (New Haven: Yale University Press, 1944), pp. 27–28.

Prince Smith was elected to the German Reichstag from Anhalt-Zerbst, but failing health prevented him from taking any but a negligible part in the proceedings, except for addressing the body on two occasions, in November 1871, on the question of currency reform.

He died in 1874, his patriotism and economic liberalism both gratified by the reality of a Germany united and committed to free trade. In Becker's words:

He had the luck, which is granted to few men in public life, to die at a moment when the definitive victory of the ideas he represented seemed to be a question of only a short time, and when the few contrary signs still, by a long way, gave no hint of how quickly the whole splendor would collapse.Becker, Das Deutsche Manchestertum, p. 41.

This is not, however, entirely correct. In his history of German economic thought (published in the same year as Prince Smith's death), Wilhelm Roscher, after mentioning some of the practical achievements of the German free trade school, was moved to write: "But also theoretically I must warn as much against the underestimation of this school, which now is frequent, as against that overestimation which permitted it at an earlier time to be mistaken for economics altogether."Roscher, Geschichte der National-Oekonomik in Deutschland, p. 1017.

There is little doubt that in historical retrospect Prince Smith—as well as German liberalism as a whole—has suffered from the rout of the system he fought for. The eclipse of liberalism by national-social and imperialist currents and by Marxist (later pseudo-Marxist) socialism has tended to relegate the entschieden liberalsThe term is standard; see, e.g., Ina Susanne Lorenz, Eugen Richter: Der entschiedene Liberalismus in wilhelminischer Zelt 1871 bis 1906 (Husum: Matthiesen, 1981). Entschieden means "determined" or "firm." of nineteenth century Germany to the class of historical curiosities, even of creatures absurdly out of their natural element. Yet, the thinking of John Prince Smith deserves consideration, from a number of points of view.

For example. Prince Smith's famous essay, "On the So-Called Worker-Question,"John Prince Smith, G. S., I, pp. 26–42. was for decades after its first publication, in 1864, the target of harsh attacks,Besides Becker, Das Deutsche Manchestertum, pp. 81–86; see Heinrich Herkner, Die Arbeiterfrage: Eine Einführung (Berlin: J. Guttentag, 1908), pp. 512–17; Werner Sombart, Sozialismus und Soziale Bewegung (Jena: Gustav Fisher, 1908), p. 192, where Prince Smith's essay is dismissed as "pitiable"; and Hans Gehrig, Die sozialpolitischen Anschauungen der deutschen Freihandelsschule (Jena: Gustav Fisher, 1909), pp. 19–21. Gehrig at least concedes what many critics have not, that there was an ethical basis to Manchesterism and Prince Smith's position: "Because we are ourselves responsible, therefore we must be free: so runs the argumentation of a teaching that has often enough been reproached with materialism, and in characterizing which only the negative sides, as the 'theory of the nightwatchman state,' have been emphasized." Ibid., p. 24. Contrast with Becker, Das Deutsche Manchestertum, pp. 106–07, who asks whether Ferdinand Lassalle was not "completely correct" when he wrote of the "Manchester men": "Those modern barbarians who hate the state, not this or that state, not this or that state-form, but the state altogether. And who, as they now and again clearly have admitted, would most prefer to abolish the state, auction off justice and police to the cheapest suppliers, and have war run by joint-stock companies, so that there should nowhere in all of creation still be an ethical point from which resistance could be offered to their capital-armed mania for exploitation." for which its contentious title probably bears some responsibility. Yet there can be little doubt that the essay is motivated by a genuine good will toward workers and a desire to aid in the improvement of their living standards; furthermore, it is at least arguable that it is informed with an intelligent appreciation of how that improvement is most likely to be effected.

The reference to [the] "so-called" worker-question should not be taken to indicate any "heartlessness" on the part of Pri[n]ce-Smith to what he well knew to be the stringent conditions of the laboring class. The cause of the sarcasm (if that is what it is) stems form his belief that: "By 'worker-question' one understands namely the question: 'How can the economic situation of workers be suddenly improved, independently of the general rise of the economy, which one does not wish to wait for?'" John Prince Smith, G.S., p. 29. Prince Smith held that:

For a scarcity in the means of satisfying wants there is obviously no other remedy than increased production. And evidently more can only be produced by increasing knowledge, skill, industriousness, and above all capital. Ibid., p. 27. The unsupported assumption of most of his critics in this area seems to be that the "social question" in the mid-nineteenth century could have been "solved" by trade-unionism and the redistribution of wealth from capitalists to workers.

To the "iron law of wages" proclaimed by Lassalle, Prince Smith opposed a "golden law," which affirmed the steady, long-range improvement in living standards of working people.Ibid., pp. 21, 32–33. As for the poor:

The ones really in want are those whose labor power lacks nearly any support through capital and therefore produces correspondingly little, those who have remained on a pre-economic level, and for whose integration into genuine economic enterprise the available capital is still insufficient. Yet all the capital sufficient for full employment can easily and even quickly be created with full freedom of economic action—as long as the state does not devour too much of what is created."Der Markt," in ibid., pp. 21–22. A curious feature of the essay on the working class is Prince Smith's discussion of the underclass of modern society, "an old and entrenched hereditary derelict culture," from which "most of the criminals proceed." "As ineradicable lichen and fungi coat every lightless, damp surface, so these demoralized ones nestle and multiply in all the unclean recesses of human dwelling places. ... Against proliferating demoralization there is only one remedy: it must be exterminated, as dry-rot is exterminated, by letting in the air and light of civilization down to the deepest and most hidden spaces of the social edifice, and where possible snatch the children from their moldy birthplaces." Ibid., p. 37.

A field in which greater originality has been claimed for Prince Smith is historical sociology. In the view of Georg Mayer, Prince Smith's early essay, "On the Political Progress of Prussia" (1843), shows a surprising resemblance to historical materialism; for Prince Smith, "it is exclusively changes in the economic structure that are considered as the ultimate motives of events." Because of economic developments, Prussia is entering the stage in which the feudal element must necessarily dwindle internally and peaceful commercial relations become the rule in foreign affairs.Georg Mayer, Die Freihandelslehre in Deutschland, pp. 56–57.

Although Mayer emphasizes the "Marxist" overtones of this essay,The dependence of both political evolution and the structure of ideas on economic change in Prince Smith's thought is also emphasized by Julius Paul Kohler, Staat und Gesellschaft in der deutschen Theorie des auswärtigen Wirtschaftspolitik und des intemationalen Hahdels van Schlettwein bis auf Fr. List und Prince Smith (Stuttgart: W. Kohlhammer, 1926), pp. 118–23. Köhler, however, does not link this to the thought of Marx, stating simply that it "reflects contemporary sociologies," p. 123. it appears that Prince Smith's thinking here bears a much greater resemblance to the ideas of the French Industrialist school and of the Benjamin Constant of De l’esprit de conquéte. (It is likely that by the 1920s, when Mayer was writing, these writers had been completely lost sight of in Germany.) There would perhaps be a place for a study on Prince Smith and his historical sociology, which would serve also to draw attention to the French writers mentioned above. At the same time it would help correct [the] commonly accepted legend of Marxism's monopoly on the idea of the "priority of the economic over the political."

[Chapter 23 from Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, eds. Walter Block and Llewellyn H. Rockwell Jr. (1988).]

10. The Progressive Era and the Family

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

While the “Progressive Era” used to be narrowly designated as the period 1900–1914, historians now realize that the period is really much broader, stretching from the latter decades of the nineteenth century into the early 1920s. The broader period marks an era in which the entire American polity — from economics to urban planning to medicine to social work to the licensing of professions to the ideology of intellectuals — was transformed from a roughly laissez-faire system based on individual rights to one of state planning and control. In the sphere of public policy issues closely related to the life of the family, most of the change took place, or at least began, in the latter decades of the nineteenth century. In this paper we shall use the analytic insights of the “new political history” to examine the ways in which the so-called progressives sought to shape and control select aspects of American family life.Originally published in The American Family and the State, Joseph R. Peden and Fred R. Glahe, eds. (San Francisco: Pacific Research Institute, 1986), pp. 109–34.

1. Ethnoreligious Conflict and the Public Schools

In the last two decades, the advent of the “new political history” has transformed our understanding of the political party system and the basis of political conflict in nineteenth century America. In contrast to the party systems of the twentieth century (the “fourth” party system, 1896–1932, of Republican supremacy; the “fifth” party system, 1932–? of Democratic supremacy), the nineteenth century political parties were not bland coalitions of interests with virtually the same amorphous ideology, with each party blurring what is left of its image during campaigns to appeal to the large independent center. In the nineteenth century, each party offered a fiercely contrasting ideology, and political parties performed the function of imposing a common ideology on diverse sectional and economic interests. During campaigns, the ideology and the partisanship became fiercer and even more clearly demarcated, since the object was not to appeal to independent moderates — there were virtually none — but to bring out the vote of one’s own partisans. Such partisanship and sharp alternatives marked the “second” American party system (Whig versus Democrat, approximately 1830 to the mid-1850s) and the “third” party system (closely fought Republican versus Democrat, mid-1850s to 1896).

Another important insight of the new political history is that the partisan passion devoted by rank-and-file Democrats and Republicans to national economic issues, stemmed from a similar passion devoted at the local and state level to what would now be called “social” issues. Furthermore, that political conflict, from the 1830s on, stemmed from a radical transformation that took place in American Protestantism as a result of the revival movement of the 1830s.

The new revival movement swept the Protestant churches, particularly in the North, like wildfire. In contrast to the old creedal Calvinist churches that stressed the importance of obeying God’s law as expressed in the church creed, the new “pietism” was very different. The pietist doctrine was essentially as follows: Specific creeds of various churches or sects do not matter. Neither does obedience to the rituals or liturgies of the particular church. What counts for salvation is only each individual being “born again” — a direct confrontation between the individual and God, a mystical and emotional conversion in which the individual achieves salvation. The rite of baptism, to the pietist, therefore becomes secondary; of primary importance is his or her personal moment of conversion.

But if the specific church or creed becomes submerged in a vague Christian interdenominationalism, then the individual Christian is left on his own to grapple with the problems of salvation. Pietism, as it swept American Protestantism in the 1830s, took two very different forms in North and South, with very different political implications. The Southerners, at least until the 1890s, became “salvationist pietists,” that is, they believed that the emotional experience of individual regeneration, of being born again, was enough to ensure salvation. Religion was a separate compartment of life, a vertical individual-God relation carrying no imperative to transform man-made culture and interhuman relations.In contrast, the Northerners, particularly in the areas inhabited by “Yankees,” adopted a far different form of pietism, “evangelical pietism.” The evangelical pietists believed that man could achieve salvation by an act of free will. More particularly, they also believed that it was necessary to a person’s own salvation — and not just a good idea — to try his best to ensure the salvation of everyone else in society:

“To spread holiness,” to create that Christian commonwealth by bringing all men to Christ, was the divinely ordered duty of the “saved.” Their mandate was “to transform the world into the image of Christ.”The quotations are, respectively, from the Minutes of the Ohio Annual Conference of the Methodist Episcopal Church, 1875, p. 228; and the Minutes of the Annual Meeting of the Maine Baptist Missionary Convention, 1890, p. 13. Both are cited in Kleppner, The Third Electoral System, 1853–1892, p. 190. Professor Kleppner is the doyen of the “new political,” also known as the “ethnocultural,” historians. See also his The Cross of Culture.

Since each individual is alone to wrestle with problems of sin and salvation, without creed or ritual of the church to sustain him, the evangelical duty must therefore be to use the state, the social arm of the integrated Christian community, to stamp out temptation and occasions for sin. Only in this way could one perform one’s divinely mandated duty to maximize the salvation of others.In contrast to previous Christian groups, which were either amillennial (the return of Jesus will bring an end to human history) or premillennial (the return of Jesus will usher in a thousand-year reign of the Kingdom of God on earth), most evangelical pietists were postmillennialists. In short, whereas Catholics, Lutherans, and most Calvinists believed that the return of Jesus is independent of human actions, the postmillennialists held that Christians must establish a thousand-year reign of the Kingdom of God on earth as a necessary precondition of Jesus’s return. In short, the evangelicals will have to take over the state and stamp out sin, so that Jesus can then return. And to the evangelical pietist, sin took on an extremely broad definition, placing the requirements for holiness far beyond that of other Christian groups. As one antipietist Christian put it, “They saw sin where God did not.” In particular, sin was any and all forms of contact with liquor, and doing anything except praying and going to church on Sunday. Any forms of gambling, dancing, theater, reading of novels — in short, secular enjoyment of any kind — were considered sinful.

The forms of sin that particularly agitated the evangelicals were those they held to interfere with the theological free will of individuals, making them unable to achieve salvation. Liquor was sinful because, they alleged, it crippled the free will of the imbibers. Another particular source of sin was Roman Catholicism, in which priests and bishops, arms of the Pope (whom they identified as the Antichrist), ruled the minds and therefore crippled the theological freedom of will of members of the church.

Evangelical pietism particularly appealed to, and therefore took root among, the “Yankees,” i.e., that cultural group that originated in (especially rural) New England and emigrated widely to populate northern and western New York, northern Ohio, northern Indiana, and northern Illinois. The Yankees were natural “cultural imperialists,” people who were wont to impose their values and morality on other groups; as such, they took quite naturally to imposing their form of pietism through whatever means were available, including the use of the coercive power of the state.

In contrast to evangelical pietists were, in addition to small groups of old-fashioned Calvinists, two great Christian groups, the Catholics and the Lutherans (or at least, the high-church variety of Lutheran), who were “liturgicals” (or “ritualists”) rather than pietists. The liturgicals saw the road to salvation in joining the particular church, obeying its rituals, and making use of its sacraments; the individual was not alone with only his emotions and the state to protect him. There was no particular need, then, for the state to take on the functions of the church. Furthermore, the liturgicals had a much more relaxed and rational view of what sin really was; for instance, excessive drinking might be sinful, but liquor per se surely was not.

The evangelical pietists, from the 1830s on, were the northern Protestants of British descent, as well as the Lutherans from Scandinavia and a minority of pietist German synods; the liturgicals were the Roman Catholics and the high-church Lutherans, largely German.

Very rapidly, the political parties reflected a virtually one-to-one correlation of this ethnoreligious division: the Whig, and later the Republican Party consisting chiefly of the pietists, and the Democratic Party encompassing almost all the liturgicals. And for almost a century, on a state and local level, the Whig/Republican pietists tried desperately and determinedly to stamp out liquor and all Sunday activities except church (of course, drinking liquor on Sunday was a heinous double sin). As to the Catholic Church, the pietists tried to restrict or abolish immigration, since people coming from Germany and Ireland, liturgicals, were outnumbering people from Britain and Scandinavia. Failing that and despairing of doing anything about adult Catholics poisoned by agents of the Vatican, the evangelical pietists decided to concentrate on saving Catholic and Lutheran youth by trying to eliminate the parochial schools, through which both religious groups transmitted their precious religious and social values to the young. The object, as many pietists put it, was to “Christianize the Catholics,” to force Catholic and Lutheran children into public schools, which could then be used as an instrument of pietist Protestantization. Since the Yankees had early taken to the idea of imposing communal civic virtue and obedience through the public schools, they were particularly receptive to this new reason for aggrandizing public education.

To all of these continuing aggressions by what they termed “those fanatics,” the liturgicals fought back with equal fervor. Particularly bewildered were the Germans who, Lutheran and Catholic alike, were accustomed to the entire family happily attending beer gardens together on Sundays after church and who now found the “fanatic” pietists trying desperately to outlaw this pleasurable and seemingly innocent activity. The pietist Protestant attacks on private and parochial schools fatally threatened the preservation and maintenance of the liturgicals’ cultural and religious values; and since large numbers of the Catholics and Lutherans were immigrants, parochial schools also served to maintain group affinities in a new and often hostile world — especially the world of Anglo-Saxon pietism. In the case of the Germans, it also meant, for several decades, preserving parochial teaching in the beloved German language, as against fierce pressures for Anglicization.

In the last three decades of the nineteenth century, as Catholic immigration grew and the Democratic Party moved slowly but surely toward a majority status, the Republican, and — more broadly — pietist pressures became more intense. The purpose of the public school, to the pietists, was “to unify and make homogeneous the society.” There was no twentieth century concern for separating religion and the public school system. To the contrary, in most northern jurisdictions only pietist-Protestant church members were allowed to be teachers in the public schools. Daily reading of the Protestant Bible, daily Protestant prayers and Protestant hymns were common in the public schools, and school textbooks were rife with anti-Catholic propaganda. Thus, New York City school textbooks spoke broadly of “the deceitful Catholics,” and pounded into their children, Catholic and Protestant alike, the message that “Catholics are necessarily, morally, intellectually, infallibly, a stupid race.”Cited in David B. Tyack, The One Best System: A History of American Urban Education (Cambridge, MA: Harvard University Press, 1974), pp. 84–85.

Teachers delivered homilies on the evils of Popery, and also on deeply felt pietist theological values: the wickedness of alcohol (the “demon rum”) and the importance of keeping the Sabbath. In the 1880s and 1890s, zealous pietists began working ardently for antialcohol instruction as a required part of the public-school curriculum; by 1901, every state in the Union required instruction in temperance.

Since most Catholic children went to public rather than parochial schools, the Catholic authorities were understandably anxious to purge the schools of Protestant requirements and ceremonies, and of anti-Catholic textbooks. To the pietists, these attempts to de-Protestantize the public schools were intolerable “Romish aggression.” The whole point of the public schools was moral and religious homogenization, and here the Catholics were disrupting the attempt to make American society holy — to produce, through the public school and the Protestant gospel, “a morally and politically homogeneous people.” As Kleppner writes:

When they [the pietists] spoke of “moral education,” they had in mind principles of morality shared in common by the adherents of gospel religion, for in the public school all children, even those whose parents were enslaved by “Lutheran formalism or Romish superstition,” would be exposed to the Bible. That alone was cause for righteous optimism, for they believed the Bible to be “the agent in converting the soul,” “the volume that makes human beings men.”Kleppner, Third Electoral System, p. 222 n.1.

In this way, “America [would] be Saved Through the Children.”Our Church Work (Madison, WI), July 17, 1890. Cited in ibid., p. 224.

The pietists were therefore incensed that the Catholics were attempting to block the salvation of America’s children — and eventually of America itself — all at the orders of a “foreign potentate.” Thus, the New Jersey Methodist Conference of 1870 lashed out with their deepest feelings against this Romish obstructionism:

Resolved, That we greatly deprecate the effort which is being made by “Haters of Light,” and especially by an arrogant priesthood, to exclude the Bible from the Public Schools of our land; and that we will do all in our power to defeat the well-defined and wicked design of this “Mother of Harlots.”Minutes of the New Jersey Annual Conference of the Methodist Episcopal Church, 1870, p. 24. Cited in ibid., p. 230. Similar reactions can be found in the minutes of the Central Pennsylvania Methodists in 1875, the Maine Methodists in 1887, the New York Methodists of 1880, and the Wisconsin Congregationalists of 1890.

Throughout the nineteenth century, “nativist” attacks on “foreigners” and the foreign-born were really attacks on liturgical immigrants. Immigrants from Britain or Scandinavia, pietists all, were “good Americans” as soon as they got off the boat. It was the diverse culture of the other immigrants that had to be homogenized and molded into that of pietist America. Thus, the New England Methodist Conference of 1889 declared:

We are a nation of remnants, ravellings from the Old World. ... The public school is one of the remedial agencies which work in our society to diminish this ... and to hasten the compacting of these heterogeneous materials into a solid nature.Minutes of the Session of the New England Annual Conference of the Methodist Episcopal Church, 1889, p. 85. Cited in ibid., p. 223.

Or, as a leading citizen of Boston declared, “the only way to elevate the foreign population was to make Protestants of their children.”Tyack, p. 84, n.3.

Since the cities of the North, in the late nineteenth century, were becoming increasingly filled with Catholic immigrants, pietist attacks on sinful cities and on immigrants both became aspects of the anti-liturgical struggle for a homogeneous Anglo-Saxon pietist culture. The Irish were particular butts of pietist scorn; a New York City textbook bitterly warned that continued immigration could make America “the common sewer of Ireland,” filled with drunken and depraved Irishmen.Ibid., p. 85, n. 3.

The growing influx of immigrants from southern and eastern Europe toward the end of the nineteenth century seemed to pose even greater problems for the pietist progressives, but they did not shrink from the task. As Ellwood P. Cubberley of Stanford University, the nation’s outstanding progressive historian of education, declared, southern and eastern Europeans have

served to dilute tremendously our national stock, and to corrupt our civil life. ... Everywhere these people tend to settle in groups or settlements, and to set up here their national manners, customs, and observances. Our task is to break up these groups or settlements, to assimilate and amalgamate these people as a part of our American race and to implant in their children ... the Anglo-Saxon conception of righteousness, law and order, and popular government ...Ellwood P. Cubberley, Changing Conceptions of Education in America (Boston: Houghton Mifflin, 1909), pp. 15–16.

2. Progressives, Public Education, and the Family: The Case of San Francisco

The molding of children was of course the key to homogenization and the key in general to the progressive vision of tight social control over the individual via the instrument of the state. The eminent University of Wisconsin sociologist Edward Alsworth Ross, a favorite of Theodore Roosevelt and the veritable epitome of a progressive social scientist, summed it up thus: The role of the public official, and in particular of the public school teacher, is “to collect little plastic lumps of human dough from private households and shape them on the social kneadingboard.”Edward Alsworth Ross, Social Control (New York, 1912). Cited in Paul C. Violas, “Progressive Social Philosophy: Charles Horton Cooley and Edward Alsworth Ross,” in Roots of Crisis: American Education in the 20th Century, C.J. Karier, P.C. Violas, and J. Spring, eds. (Chicago: Rand McNally, 1973), pp. 40–65.

The view of Ross and the other progressives was that the state must take up the task of control and inculcation of moral values once performed by parents and church. The conflict between middle- and upper-class urban progressive Anglo-Saxon Protestants and largely working-class Catholics was sharply delineated in the battle over control of the San Francisco public school system during the second decade of the twentieth century. The highly popular Alfred Roncovieri, a French-Italian Catholic, was the elected school superintendent from 1906 on. Roncovieri was a traditionalist who believed that the function of schools was to teach the basics, and that teaching children about sex and morality should be the function of home and church. Hence, when the drive for sex hygiene courses in the public schools got under way, Roncovieri consulted with mothers’ clubs and, in consequence, kept the program out of the schools.

By 1908, upper-class progressives launched a decade-long movement to oust Roncovieri and transform the nature of the San Francisco public school system. Instead of an elected superintendent responding to a school board elected by districts, the progressives wanted an all-powerful school superintendent, appointed by a rubber-stamp board that in turn would be appointed by the mayor. In other words, in the name of “taking the schools out of politics,” they hoped to aggrandize the educational bureaucracy and maintain its power virtually unchecked by any popular or democratic control. The purpose was threefold: to push through the progressive program of social control, to impose upper-class control over a working-class population, and to impose pietist Protestant control over Catholic ethnics.The cities were already beginning to reach the point where class and ethnic divisions almost coincided, where, in other words, few working-class Anglo-Saxon Protestants resided in the cities.

The ethnoreligious struggle over the public schools in San Francisco was nothing new; it had been going on tumultuously since the middle of the nineteenth century.For an excellent study and analysis of the ethnoreligious struggle over the San Francisco public schools from the mid-nineteenth through the first three decades of the twentieth century, see the neglected work of Victor L. Shradar, “Ethnic Politics, Religion, and the Public Schools of San Francisco, 1849–1933” (Ph.D. dissertation, School of Education, Stanford University, 1974). In the last half of the nineteenth century, San Francisco was split into two parts. Ruling the city was a power elite of native-born old Americans, hailing from New England, including lawyers, businessmen, and pietist Protestant ministers. These comprised successively the Whig, Know-Nothing, Populist, and Republican parties in the city. On the other hand were the foreign-born, largely Catholic immigrants from Europe — Irish, Germans, French, and Italians — who comprised the Democratic Party.

The Protestants early tried to use the public schools as a homogenizing and controlling force. The great theoretician and founder of the public school system in San Francisco, John Swett, “the Horace Mann of California,” was a lifelong Republican and a Yankee who had taught school in New Hampshire before moving West. Moreover, the Board of Education was originally an all-New England show, consisting of emigrants from Vermont, New Hampshire, and Rhode Island. The mayor of San Francisco was a former mayor of Salem, Massachusetts, and every administrator and teacher in the public schools was a transplanted New Englander. The first superintendent of schools was not exactly a New Englander, but close: Thomas J. Nevins, a Yankee Whig lawyer from New York and an agent of the American Bible Society. And the first free public school in San Francisco was instituted in the basement of a small Baptist chapel.

Nevins, installed as superintendent of schools in 1851, promptly adopted the rule of the New York City schools: Every teacher was compelled to begin each day with a Protestant Bible reading and to conduct daily Protestant prayer sessions. And John Swett, elected as Republican state superintendent of public instruction during the 1860s, declared that California needed public schools because of its heterogeneous population: “Nothing can Americanize these chaotic elements, and breathe into them the spirit of our institutions,” he warned, “except the public schools.”Ibid., p. 14 n.13.

Swett was keen enough to recognize that the pietist educational formula meant that the state takes over jurisdiction of the child from his parents, since “children arrived at the age of maturity belong, not to the parents, but to the State, to society, to the country.”Rousas John Rushdoony, “John Swett: The Self-Preservation of the State,” in The Messianic Character of American Education: Studies in the History of the Philosophy of Education (Nutley, N.J.: Craig Press, 1963), pp. 79–80.

A seesaw struggle between the Protestant Yankees and Catholic ethnics ensued in San Francisco during the 1850s. The state charter of San Francisco in 1855 made the schools far more responsive to the people, with school boards being elected from each of a dozen wards instead of at large, and the superintendent elected by the people instead of appointed by the board. The Democrats swept the Know-Nothings out of office in the city in 1856 and brought to power David Broderick, an Irish Catholic who controlled the San Francisco as well as the California Democratic Party. But this gain was wiped out by the San Francisco Vigilance Movement, a private organization of merchants and New England-born Yankees, who, attacking the “Tammany” tactics of Broderick, installed themselves in power and illegally deported most of the Broderick organization, replacing it with a newly formed People’s Party.

The People’s Party ran San Francisco with an iron hand for ten years, from 1857 to 1867, making secret nominations for appointments and driving through huge slates of at-large nominees chosen by a single vote at a public meeting. No open nomination procedures, primaries, or ward divisions were allowed, in order to ensure election victories by “reputable” men. The People’s Party promptly reinstalled an all-Yankee school board, and the administrators and teachers in schools were again firmly Protestant and militantly anti-Catholic. The People’s Party itself continually attacked the Irish, denouncing them as “micks” and “rank Pats.” George Tait, the People’s Party-installed superintendent of schools in the 1860s, lamented, however, that some teachers were failing to read the Protestant Bible in the schools, and were thus casting “a slur on the religion and character of the community.”

By the 1870s, however, the foreign-born residents outnumbered the native-born, and the Democratic Party rose to power in San Francisco, the People’s Party declining and joining the Republicans. The Board of Education ended the practice of Protestant devotions in the schools, and Irish and Germans began to pour into administrative and teaching posts in the public school system.

Another rollback began, however, in 1874, when the Republican state legislature abolished ward elections for the San Francisco school board, and insisted that all board members be elected at large. This meant that only the wealthy, which usually meant well-to-do Protestants, were likely to be able to run successfully for election. Accordingly, whereas in 1873, 58% of the San Francisco school board was foreign-born, the percentage was down to 8% in the following year. And while the Irish were approximately 25% of the electorate and the Germans about 13%, the Irish were not able to fill more than one or two of the 12 at-large seats, and the Germans virtually none.

The seesaw continued, however, as the Democrats came back in 1883, under the aegis of the master politician, the Irish Catholic Christopher “Blind Boss” Buckley. In the Buckley regime, the post-1874 school board dominated totally by wealthy native-born, Yankee businessmen and professionals, was replaced by an ethnically balanced ticket with a high proportion of working-class and foreign-born. Furthermore, a high proportion of Irish Catholic teachers, most of them single women, entered the San Francisco schools during the Buckley era, reaching 50% by the turn of the century.

In the late 1880s, however, the stridently anti-Catholic and anti-Irish American Party became strong in San Francisco and the rest of the state, and Republican leaders were happy to join them in denouncing the “immigrant peril.” The American Party managed to oust the Irish Catholic Joseph O’Connor, principal and deputy superintendent, from his high post as “religiously unacceptable.” This victory heralded a progressive Republican “reform” comeback in 1891, when none other than John Swett was installed as superintendent of schools in San Francisco. Swett battled for the full reform program: to make everything, even the mayoralty, an appointive rather than an elective office. Part of the goal was achieved by the state’s new San Francisco charter in 1900, which replaced the 12-man elected Board of Education by a four-member board appointed by the mayor.

The full goal of total appointment was still blocked, however, by the existence of an elective superintendent of schools who, since 1906, was the popular Catholic Alfred Roncovieri. The pietist progressives were also thwarted for two decades by the fact that San Francisco was ruled, for most of the years between 1901 and 1911, by a new Union Labor Party, which won on an ethnically and occupationally balanced ticket, and which elected the German-Irish Catholic Eugene Schmitz, a member of the musician’s union, as mayor. And for eighteen years after 1911, San Francisco was governed by its most popular mayor before or since, “Sunny Jim” Rolph, an Episcopalian friendly to Catholics and ethnics, who was pro-Roncovieri and who presided over an ethnically pluralistic regime.

It is instructive to examine the makeup of the progressive reform movement that eventually got its way and overthrew Roncovieri. It consisted of the standard progressive coalition of business and professional elites, and nativist and anti-Catholic organizations, who called for the purging of Catholics from the schools. Particular inspiration came from Stanford educationist Ellwood P. Cubberley, who energized the California branch of the Association of Collegiate Alumnae (later the American Association of University Women), led by the wealthy Mrs. Jesse H. Steinhart, whose husband was later to be a leader in the Progressive Party. Mrs. Steinhart got Mrs. Agnes De Lima, a New York City progressive educator, to make a survey of the San Francisco schools for the association. The report, presented in 1914, made the expected case for an “efficient,” business-like, school system run solely by appointed educators. Mrs. Steinhart also organized the Public Education Society of San Francisco to agitate for progressive school reform; in this she was aided by the San Francisco Chamber of Commerce.

Also backing progressive reform, and anxious to oust Roncovieri, were other elite groups in the city, including the League of Women Voters, and the prestigious Commonwealth Club of California.

At the behest of Mrs. Steinhart and the San Francisco Chamber of Commerce, which contributed the funds, Philander Claxton of the U.S. Office of Education weighed in with his report in December 1917. The report, which endorsed the Association of Collegiate Alumnae study and was extremely critical of the San Francisco school system, called for all power over the system to go to an appointed superintendent of schools. Claxton also attacked the teaching of foreign languages in the schools, which San Francisco had been doing, and insisted on a comprehensive “Americanization” to break down ethnic settlements.

The Claxton Report was the signal for the Chamber of Commerce to swing into action, and it proceeded to draft a comprehensive progressive referendum for the November 1918 ballot, calling for an appointed superintendent and an appointed school board. This initiative, Amendment 37, was backed by most of the prominent business and professional groups in the city. In addition to the ones named above, there were the Real Estate Board, elite women’s organizations such as the Federation of Women’s Clubs, wealthy neighborhood improvement clubs, and the San Francisco Examiner. Amendment 37 lost, however, by two to one, since it had little support in working-class neighborhoods or among the teachers.

Two years later, however, Amendment 37 passed, aided by a resurgence of pietism and virulent anti-Catholicism in postwar America. Prohibition was now triumphant, and the Ku Klux Klan experienced a nationwide revival as a pietist, anti-Catholic organization. The KKK had as many as 3,500 members in the San Francisco Bay Area in the early 1920s. The anti-Catholic American Protective Association also enjoyed a revival, led in California by a British small businessman, the anti-Irish Grand Master Colonel J. Arthur Petersen.

In opposing Amendment 37 in the 1920 elections, Father Peter C. Yorke, a prominent priest and Irish immigrant, perceptively summed up the fundamental cleavage: “The modern school system,” he declared, “is not satisfied with teaching children the 3 Rs…it reaches out and takes possession of their whole lives.”

Amendment 37 passed in 1920 by the narrow margin of 69,200 to 66,700. It passed in every middle- and upper-class Assembly District, and lost in every working-class district. The higher the concentration of foreign-born voters in any district, the greater the vote against. In the Italian precincts 1 to 17 of the 33rd A.D., the Amendment was beaten by 3 to 1; in the Irish precincts, it was defeated by 3 to 1 as well. The more Protestant a working-class district, the more it supported the Amendment.

The bulk of the lobbying for the Amendment was performed by the ad hoc Educational Conference. After the victory, the conference happily presented a list of nominees to the school board, which now consisted of seven members appointed by the mayor, and which in turn appointed the superintendent. The proposed board consisted entirely of businessmen, of whom only one was a conservative Irish Catholic. The mayor surrendered to the pressure, and hence, after 1921, cultural pluralism in the San Francisco school system gave way to unitary progressive rule. The board began by threatening to dock any teacher who dared to be absent from school on St. Patrick’s Day (a San Francisco tradition since the 1870s), and proceeded to override the wishes of particular neighborhoods in the interest of a centralized city.

The superintendent of schools in the new regime, Dr. Joseph Marr Gwinn, fit the new dispensation to a tee. A professional “scientist” of public administration, his avowed aim was unitary control. The entire package of typical progressive educational nostrums was installed, including a department of education and various experimental programs. Traditional basic education was scorned, and the edict came down that children should not be “forced” to learn the 3 Rs if they didn’t feel the need. Traditional teachers, who were continually attacked for being old-fashioned and “unprofessional,” were not promoted.

Despite continued opposition by teachers, parents, neighborhoods, ethnic groups, and the ousted Roncovieri, all attempts to repeal Amendment 37 were unsuccessful. The modern dispensation of progressivism had conquered San Francisco. The removal of the Board of Education and school superintendent from direct and periodic control by the electorate had effectively deprived parents of any significant control over the educational policies of public schools. At last, as John Swett had asserted nearly 60 years earlier, schoolchildren belonged “not to the parents, but to the State, to society, to the country.”

3. Ethnoreligious Conflict and the Rise of Feminism

A. Women’s Suffrage

By the 1890s, the liturgically oriented Democracy was slowly but surely winning the national battle of the political parties. Culminating the battle was the Democratic congressional victory in 1890 and the Grover Cleveland landslide in the presidential election of 1892, in which Cleveland carried both Houses of Congress along with him (an unusual feat for that era). The Democrats were in way of becoming the majority party of the country, and the root was demographic: the fact that most of the immigrants were Catholic and the Catholic birthrate was higher than that of the pietist Protestants. Even though British and Scandinavian immigration had reached new highs during the 1880s, their numbers were far exceeded by German and Irish immigration, the latter being the highest since the famous post-potato-famine influx that started in the late 1840s. Furthermore, the “new immigration” from southern and eastern Europe, almost all Catholic — and especially Italian — began to make its mark during the same decade.

The pietists became increasingly embittered, stepping up their attacks on foreigners in general and Catholics in particular. Thus, the Reverend T.W. Cuyler, president of the National Temperance Society, intemperately exclaimed in the summer of 1891: “How much longer [will] the Republic ... consent to have her soil a dumping ground for all Hungarian ruffians, Bohemian bruisers, and Italian cutthroats of every description?”

The first concrete political response by the pietists to the rising Catholic tide was to try to restrict immigration. Republicans successfully managed to pass laws partially cutting immigration, but President Cleveland vetoed a bill to impose a literacy test on all immigrants. The Republicans also managed to curtail voting by immigrants, by getting most states to disallow voting by aliens, thereby reversing the traditional custom of allowing alien voting. They also urged the lengthening of the statutory waiting period for naturalization.

The successful restricting of immigration and of immigrant voting was still not enough to matter, and immigration would not really be foreclosed until the 1920s. But if voting could not be restricted sharply enough, perhaps it could be expanded — in the proper pietist direction.

Specifically, it was clear to the pietists that the role of women in the liturgical “ethnic” family was very different from what it was in the pietist Protestant family. One of the reasons impelling pietists and Republicans

toward prohibition was the fact that, culturally, the lives of urban male Catholics — and the cities of the Northeast were becoming increasingly Catholic — evolved around the neighborhood saloon. The men would repair at night to the saloon for chitchat, discussions, and argument — and they would generally take their political views from the saloonkeeper, who thus became the political powerhouse in his particular ward. Therefore, prohibition meant breaking the political power of the urban liturgical machines in the Democratic Party.

But while the social lives of liturgical males revolved around the saloon, their wives stayed at home. While pietist women were increasingly independent and politically active, the lives of liturgical women revolved solely about home and hearth. Politics was strictly an avocation for husbands and sons. Perceiving this, the pietists began to push for women’s suffrage, realizing that far more pietist than liturgical women would take advantage of the power to vote.

As a result, the women’s suffrage movement was heavily pietist from the very beginning. Ultrapietist third parties like the Greenback and the Prohibition parties, which scorned the Republicans for being untrustworthy moderates on social issues, supported women’s suffrage throughout, and the Populists tended in that direction. The Progressive Party of 1912 was strongly in favor of women’s suffrage; theirs was the first major national convention to permit women delegates. The first woman elector, Helen J. Scott of Wisconsin, was chosen by the Progressive Party.

Perhaps the major single organization in the women’s suffrage movement was the Women’s Christian Temperance Union, founded in 1874 and reaching an enormous membership of 300,000 by 1900. That the W.C.T.U. was also involved in agitating for curfew, antigambling, antismoking, and antisex laws — all actions lauded by the women’s suffrage movement — is clear from the official history of women’s suffrage in the 19th century:

[The W.C.T.U.] has been a chief factor in State campaigns for statutory prohibition, constitutional amendment, reform laws in general and those for the protection of women and children in particular, and in securing anti-gambling and anti-cigarette laws. It has been instrumental in raising the “age of protection” for girls in many States, and in obtaining curfew laws in 400 towns and cities. ... The association [W.C.T.U.] protests against the legalization of all crimes, especially those of prostitution and liquor selling.Anthony and Harper, The History of Woman Suffrage, vol. 4, pp. 1046–47.

Not only did Susan B. Anthony begin her career as a professional prohibitionist, but her two successors as president of the leading women’s suffrage organization, the National American Woman Suffrage Association — Mrs. Carrie Chapman Catt and Dr. Anna Howard Shaw — also began their professional careers as prohibitionists. The leading spirit of the W.C.T.U., Frances E. Willard, was prototypically born of New England-stock parents who had moved westward to study at Oberlin College, then the nation’s center of aggressive, evangelical pietism, and had later settled in Wisconsin. Guided by Miss Willard, the W.C.T.U. began its prosuffrage activities by demanding that women vote in local option referendums on prohibition. As Miss Willard put it, the W.C.T.U. wanted women to vote on this issue because “majorities of women are against the liquor traffic ...”Cited in Flexner, Century of Struggle: The Woman’s Rights Movement in the United States, p. 183.

Conversely, whenever there was a voters’ referendum on women’s suffrage, the liturgicals and the foreign-born, responding to immigrant culture and reacting against the pietist-feminist support of prohibition, consistently opposed women’s suffrage. In Iowa, the Germans voted against women’s suffrage, as did the Chinese in California. The women’s suffrage amendment in 1896 in California was heavily supported by the bitterly anti-Catholic American Protective Association. The cities, where Catholics abounded, tended to be opposed to women’s suffrage, while pietist rural areas tended to favor it. Thus, the Oregon referendum of 1900 lost largely because of opposition in the Catholic “slums” of Portland and Astoria.

A revealing religious breakdown of votes on an 1877 women’s suffrage referendum was presented in a report by a Colorado feminist. She explained that the Methodists (the most strongly pietistic) were “for us,” the (less pietistic) Presbyterians and Episcopalians “fairly so,” while the Roman Catholics “were not all against us” — clearly they were expected to be.Anthony and Harper, The History of Woman Suffrage, vol. 3, p. 724 n.15. And, testifying before the U.S. Senate Judiciary Committee in favor of women’s suffrage in 1880, Susan B. Anthony presented her own explanation of the Colorado vote:

In Colorado ... 6,666 men voted “Yes.” Now, I am going to describe the men who voted “Yes.” They were native-born men, temperance men, cultivated, broad, generous, just men, men who think. On the other hand, 16,007 voted “No.” Now, I am going to describe that class of voters. In the southern part of that State are Mexicans, who speak the Spanish language. ... The vast population of Colorado is made up of that class of people. I was sent out to speak in a voting precinct having 200 voters; 150 of those voters were Mexican greasers, 40 of them foreign-born citizens, and just 10 of them were born in this country; and I was supposed to be competent to convert those men to let me have so much right in this Government as they had ...Quoted in Grimes, The Puritan Ethic and Woman Suffrage, p. 87.

A laboratory test of which women would turn out to vote occurred in Massachusetts, where women were given the power to vote in school board elections from 1879 on. In 1888, large numbers of Protestant women in Boston turned out to drive Catholics off the school board. In contrast, Catholic women scarcely voted, “thereby validating the nativist tendencies of suffragists who believed that extension of full suffrage to women would provide a barrier against further Catholic influence.”Camhi “Women Against Women: American Antisuffragism, 1880–1920,” p. 198. See also Kenneally, “Catholicism and Woman Suffrage in Massachusetts,” p. 253. Joining in the demand that only Protestants be elected to the Boston school board were, in addition to British-American clubs and numbers of Protestant ministers, the W.C.T.U., the Loyal Women of American Liberty, the National Women’s League, and the League of Independent Women Voters. See Kleppner, Third Electoral System, p. 350 n.1. See also Tyack, pp. 105–06, n.1; and Lois Bannister Merk, “Boston’s Historic Public School Crisis,” New England Quarterly 31 (June, 1958): 172–99. During the last two decades of the 19th century “the more hierarchical the church organization and the more formal the ritual, the greater was its opposition to women suffrage, while the democratically organized churches with little dogma tended to be more receptive.”Camhi, p. 200 n.20. Hierarchically organized pietist churches, like the Methodist or the Scandinavian Lutheran, were no less receptive to women’s suffrage than the others.

Four mountain states adopted women’s suffrage in the early and mid-1890s. Two, Wyoming and Utah, were simply ratifying, as new states, a practice they had long adopted as territories: Wyoming in 1869 and Utah in 1870. Utah had adopted women’s suffrage as a conscious policy by the pietistic Mormons to weight political control in favor of their polygamous members, who contrasted to the Gentiles, largely miners and settlers who were either single men or who had left their wives back East. Wyoming had adopted women’s suffrage in an effort to increase the political power of its settled householders, in contrast to the transient, mobile, and often lawless single men who peopled that frontier region.

No sooner had Wyoming Territory adopted women’s suffrage than it became evident that the change had benefited the Republicans, particularly since women had mobilized against Democratic attempts to repeal Wyoming’s Sunday prohibition law. In 1871, both houses of the Wyoming legislature, led by its Democratic members, voted to repeal women’s suffrage, but the bill was vetoed by the Republican territorial governor.

Two additional states adopting women’s suffrage in the 1890s were Idaho and Colorado. In Idaho the drive, adopted by referendum in 1896, was led by the ultrapietistic Populists and by the Mormons, who were dominant in the southern part of the state. The Populist counties of Colorado gave a majority of 6,800 for women’s suffrage, while the Republican and Democratic counties voted a majority of 500 against.Furthermore, in the Colorado legislature that submitted the women’s suffrage amendment to the voters in 1893, the party breakdown of voting was as follows: Republicans, 19 for women’s suffrage and 25 against; Democrats, 1 in favor and 8 against; Populists, 34 in favor and 4 against. See Grimes, p. 96 n.16 and passim.

It may be thought paradoxical that a movement — women’s suffrage — born and centered in the East should have had its earliest victories in the remote frontier states of the Mountain West. But the paradox begins to clear when we realize the pietist-Anglo-Saxon-Protestant nature of the frontiersmen, many of them Yankees hailing originally from that birthplace of American pietism, New England. As the historian Frederick Jackson Turner, that great celebrant of frontier ideals, lyrically observed:

In the arid West these pioneers [from New England] have halted and have turned to perceive an altered nation and changed social ideals. ... If we follow back the line of march of the Puritan farmer, we shall see how responsive he has always been to isms. ... He is the Prohibitionist of Iowa and Wisconsin, crying out against German customs as an invasion of his traditional ideals. He is the Granger of Wisconsin, passing restrictive railroad legislation. He is the Abolitionist, the Anti-mason, the Millerite, the Woman Suffragist, the Spiritualist, the Mormon, of Western New York.Frederick Jackson Turner, “Dominant Forces in Western Life,” in The Frontier in American History (New York: Holt, Rinehart & Winston, 1962), pp. 239–40. Quoted in Grimes, pp. 97–98, n.19.

B. Eugenics and Birth Control

Thus the women’s suffrage movement, dominated by pietist progressives, was not directed solely to achieving some abstract principle of electoral equality between males and females. This was more a means to another end: the creation of electoral majorities for pietist measures of direct social control over the lives of American families. They wished to determine by state intervention what those families drank and when and where they drank, how they spent their Sabbath day, and how their children should be educated.

One way of correcting the increasingly pro-Catholic demographics was to restrict immigration; another to promote women’s suffrage. A third way, often promoted in the name of “science,” was eugenics, an increasingly popular doctrine of the progressive movement. Broadly, eugenics may be defined as encouraging the breeding of the “fit” and discouraging the breeding of the “unfit,” the criteria of “fitness” often coinciding with the cleavage between native, white Protestants and the foreign born or Catholics — or the white-black cleavage. In extreme cases, the unfit were to be coercively sterilized.

To the founder of the American eugenics movement, the distinguished biologist Charles Benedict Davenport, a New Yorker of eminent New England background, the rising feminist movement was beneficent provided that the number of biologically superior persons was sustained and the number of the unfit diminished. The biologist Harry H. Laughlin, aide to Davenport, associate editor of the Eugenical News, and highly influential in the immigration restriction policy of the 1920s as eugenics expert for the House Committee on Immigration and Naturalization, stressed the great importance of cutting the immigration of the biologically “inferior” southern Europeans. For in that way, the biological superiority of Anglo-Saxon women would be protected.

Harry Laughlin’s report to the House Committee, printed in 1923, helped formulate the 1924 immigration law, which, in addition to drastically limiting total immigration to the United States, imposed national origin quotas based on the 1910 census, so as to weight the sources of immigration as much as possible in favor of northern Europeans. Laughlin later emphasized that American women must keep the nation’s blood pure by not marrying what he called the “colored races,” in which he included southern Europeans as well as blacks: for if “men with a small fraction of colored blood could readily find mates among the white women, the gates would be thrown open to a final radical race mixture of the whole population.” To Laughlin the moral was clear: “The perpetuity of the American race and consequently of American institutions depends upon the virtue and fecundity of American women.”Cited in Donald K. Pickens, Eugenics and the Progressives (Nashville, Tenn.: Vanderbilt University Press, 1968), p. 67.

But the problem was that the fecund women were not the pietist progressives but the Catholics. For, in addition to immigration, another source of demographic alarm to the pietists was the far higher birthrate among Catholic women. If only they could be induced to adopt birth control! Hence, the birth control movement became part of the pietist armamentarium in their systemic struggle with the Catholics and other liturgicals.

Thus, the distinguished University of California eugenicist, Samuel J. Holmes, lamented that “the trouble with birth control is that it is practiced least where it should be practiced most.” In the Birth Control Review, leading organ of the birth control movement, Annie G. Porritt was more specific, attacking “the folly of closing our gates to aliens from abroad, while having them wide open to the overwhelming progeny of the least desirable elements of our city and slum population.”Annie G. Porritt, “Immigration and Birth Control, an Editorial,” The Birth Control Review 7 (September, 1923): 219. Cited in Pickens, p. 73 n.24. In short, the birth controllers were saying that if one’s goal is to restrict sharply the total number of Catholics, “colored” southern European or no, then there is no point in only limiting immigration while the domestic population continues to increase.

The birth control and the eugenics movement therefore went hand in hand, not the least in the views of the well-known leader of the birth control movement in the United States: Mrs. Margaret Higgins Sanger, prolific author, founder, and long-time editor of the Birth Control Review. Echoing many of the various strains of progressivism, Mrs. Sanger hailed the emancipation of women through birth control as the latest in applied science and “efficiency.” As she put it in her Autobiography:

In an age which has developed science and industry and economic efficiency to their highest points, so little thought has been given to the development of a science of parenthood, a science of maternity which could prevent this appalling and unestimated waste of womankind and maternal effort.Quoted in Pickens, p. 80 n.24.

To Mrs. Sanger, “science” also meant stopping the breeding of the unfit. A devoted eugenicist and follower of C.B. Davenport, she in fact chided the eugenics movement for not sufficiently emphasizing this crucial point:

The eugenists wanted to shift the birth control emphasis from less children for the poor to more children for the rich. We went back of that and sought first to stop the multiplication of the unfit. This appeared the most important and greatest step toward race betterment.Ibid., p. 83.

4. Gathered Together: Progressivism as a Political Party

Progressivism was, to a great extent, the culmination of the pietist Protestant political impulse, the urge to regulate every aspect of American life, economic and moral — even the most intimate and crucial aspects of family life. But it was also a curious alliance of a technocratic drive for government regulation, the supposed expression of “value-free science,” and the pietist religious impulse to save America — and the world — by state coercion. Often both pietistic and scientific arguments would be used, sometimes by the same people, to achieve the old pietist goals. Thus, prohibition would be argued for on religious as well as on alleged scientific or medicinal grounds. In many cases, leading progressive intellectuals at the turn of the 20th century were former pietists who went to college and then transferred to the political arena, their zeal for making over mankind, as a “salvation by science.” And then the Social Gospel movement managed to combine political collectivism and pietist Christianity in the same package. All of these were strongly interwoven elements in the progressive movement.

All these trends reached their apogee in the Progressive Party and its national convention of 1912. The assemblage was a gathering of businessmen, intellectuals, academics, technocrats, efficiency experts and social engineers, writers, economists, social scientists, and leading representatives of the new profession of social work. The Progressive leaders were middle and upper class, almost all urban, highly educated, and almost all white Anglo-Saxon Protestants of either past or present pietist concerns.

From the social work leaders came upper-class ladies bringing the blessings of statism to the masses: Lillian D. Wald, Mary Kingsbury Simkhovitch, and above all, Jane Addams. Miss Addams, one of the great leaders of progressivism, was born in rural Illinois to a father, John, who was a state legislator and a devout nondenominational evangelical Protestant. Miss Addams was distressed at the southern and eastern European immigration, people who were “primitive” and “credulous,” and who posed the danger of unrestrained individualism. Their different ethnic background disrupted the unity of American culture. However, the problem, according to Miss Addams, could be easily remedied. The public school could reshape the immigrant, strip him of his cultural foundations, and transform him into a building block of a new and greater American community.See Violas, “Jane Addams and the New Liberalism,” in Karier et al., eds. Roots of Crisis, pp. 66–83 n.11.

In addition to writers and professional technocrats at the Progressive Party convention, there were professional pietists galore. Social Gospel leaders Lyman Abbott, the Reverend R. Heber Newton, and the Reverend Washington Gladden were Progressive Party notables, and the Progressive candidate for governor of Vermont was the Reverend Fraser Metzger, leader of the Inter-Church Federation of Vermont. In fact, the Progressive Party proclaimed itself as the “recrudescence of the religious spirit in American political life.”

Many observers, indeed, reported in wonder at the strongly religious tone of the Progressive Party convention. Theodore Roosevelt’s acceptance address was significantly entitled, “A Confession of Faith,” and his words were punctuated by “amens” and by a continual singing of Christian hymns by the assembled delegates. They sang “Onward, Christian Soldiers,” “The Battle Hymn of the Republic,” and finally the revivalist hymn, “Follow, Follow, We Will Follow Jesus,” except that “Roosevelt” replaced the word “Jesus” at every turn.

The New York Times of August 6, 1912, summed up the unusual experience by calling the Progressive assemblage “a convention of fanatics.” And, “It was not a convention at all. It was an assemblage of religious enthusiasts. It was such a convention as Peter the Hermit held. It was a Methodist camp following done over into political terms.”Cited in John Allen Gable, The Bull Moose Years: Theodore Roosevelt and the Progressive Party (Port Washington, NY: Kennikat Press, 1978), p. 75.

Thus the foundations of today’s massive state intervention in the internal life of the American family were laid in the so-called “progressive era” from the 1870s to the 1920s. Pietists and “progressives” united to control the material and sexual choices of the rest of the American people, their drinking habits, and their recreational preferences. Their values, the very nurture and education of their children, were to be determined by their betters. The spiritual, biological, political, intellectual, and moral elite would govern, through state power, the character and quality of American family life.

5. Significance

It has been known for decades that the Progressive Era was marked by a radical growth in the extension and dominance of government in America’s economic, social, and cultural life. For decades, this great leap into statism was naively interpreted by historians as a simple response to the greater need for planning and regulation of an increasingly complex economy. In recent years, however, historians have come to see that increasing statism on a federal and state level can be better interpreted as a profitable alliance between certain business and industrial interests, looking for government to cartelize their industry after private efforts for cartels and monopoly had failed, and intellectuals, academics, and technocrats seeking jobs to help regulate and plan the economy as well as restriction of entry into their professions. In short, the Progressive Era re-created the age-old alliance between Big Government, large business firms, and opinion-molding intellectuals — an alliance that had most recently been embodied in the mercantilist system of the sixteenth through eighteenth centuries.

Other historians uncovered a similar process at the local level, especially that of urban government beginning with the Progressive Era. Using the influence of media and opinion leaders, upper-income and business groups in the cities systematically took political power away from the masses and centralized this power in the hands of urban government responsive to progressive demands. Elected officials, and decentralized ward representation, were systematically replaced either by appointed bureaucrats and civil servants, or by centralized at-large districts where large-scale funding was needed to finance election races. In this way, power was shifted out of the hands of the masses and into the hands of a minority elite of technocrats and upper-income businessmen. One result was an increase of government contracts to business, a shift from “Tammany” type charity by the political parties to a taxpayer-financed welfare state, and the imposition of higher taxes on suburban residents to finance bond issues and redevelopment schemes accruing to downtown financial interests.

During the last two decades, educational historians have described a similar process at work in public, especially urban, school systems. The scope of the public school was greatly expanded, compulsory attendance spread outside of New England and other “Yankee” areas during the Progressive Era, and a powerful movement developed to try to ban private schools and to force everyone into the public school system.

From the work of educational historians, it was clear that the leap into comprehensive state control over the individual and over social life was not confined, during the Progressive and indeed post-Progressive eras, to government and the economy. A far more comprehensive process was at work. The expansion of compulsory public schooling stemmed from the growth of collectivist and anti-individualist ideology among intellectuals and educationists. The individual, these “progressives” believed, must be molded by the educational process to conform to the group, which in practice meant the dictates of the power elite speaking in the group’s name. Historians have long been aware of this process.For further discussion of education, see Robert B. Everhart, ed., The Public School Monopoly: A Critical Analysis of Education and the State in American Society (San Francisco: Pacific Institute for Public Policy Research, 1982). But the accruing insight into progressivism as a business cartelizing device led historians who had abandoned the easy equation of “businessmen” with “laissez-faire” to see that all the facets of progressivism — the economic and the ideological and educational — were part of an integrated whole. The new ideology among business groups was cartelist and collectivist rather than individualist and laissez-faire, and the social control over the individual exerted by progressivism was neatly paralleled in the ideology and practice of progressive education. Another parallel to the economic realm, of course, was the increased power and income accruing to the technocratic intellectuals controlling the school system and the economy.

If the action of business and intellectual elites in turning toward progressivism was now explained, there was still a large gap in the historical explanation and understanding of progressivism and therefore of the leap into statism beginning in the early 20th century. There was still a need to explain mass voting behavior and the ideology and programs of the political parties in the American electoral system. This chapter applies the illuminating findings of recent “ethnoreligious historians” to significant changes that took place during the Progressive Era in the power of government over the family. In particular, we discuss the movement to expand the power of the public school and the educationist elite over the family, as well as the women’s suffrage and eugenics movement, all important features of the Progressive movement. In every case, we see the vital link between these intrusions into the family and the aggressive drive by Anglo-Saxon Protestant “pietists” to use the state to “make America holy,” to stamp out sin and thereby assure their own salvation by maximizing the salvation of others. In particular, all of these measures were part and parcel of the long-standing crusade by these pietists to reduce if not eliminate the role of “liturgicals,” largely Roman Catholics and high-church Lutherans, from American political life. The drive to stamp out liquor and secular activities on Sundays had long run into successful Catholic and high-church Lutheran resistance. Compulsory public schooling was soon seen as an indispensable weapon in the task of “Christianizing the Catholics,” of saving the souls of Catholic children by using the public schools as a Protestantizing weapon. The neglected example of San Francisco politics was urged as a case study of this ethnoreligious political battle over the schools and hence over the right of Catholic parents to transmit their own values to their children without suffering Anglo-Saxon Protestant obstruction. Women’s suffrage was seized upon as a means of increasing Anglo-Saxon Protestant voting power, and immigration restriction as well as eugenics was a method of reducing the growing demographic challenge of Catholic voters.

In sum, recent insights into the cartelizing drive of various business interests have provided an important explanation of the rapid growth of statism in the 20th century. Ethnoreligious history provides an explanation of mass voting behavior and political party programs that neatly complement the cartelizing explanation of the actions of business elites.

11. Origins of the Welfare State in America

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

Standard theory views government as functional: a social need arises, and government, semi-automatically, springs up to fill that need. The analogy rests on the market economy: demand gives rise to supply (e.g., a demand for cream cheese will result in a supply of cream cheese on the market). But surely it is strained to say that, in the same way, a demand for postal services will spontaneously give rise to a government monopoly Post Office, outlawing its competition and giving us ever-poorer service for ever-higher prices.Originally published in Journal of Libertarian Studies 12, no. 2 (1996): 193–232.

Indeed, if the analogy fails when even a genuine service (e.g., mail delivery or road construction) is being provided, imagine how much worse the analogy is when government is not supplying a good or service at all, but is coercively redistributing income and wealth.

When the government, in short, takes money at gun point from A and gives it to B, who is demanding what? The cream cheese producer on the market is using his resources to supply a genuine demand for cream cheese; he is not engaged in coercive redistribution. But what about the government’s taking from A and giving the money to B? Who are the demanders, and who are the suppliers? One can say that the subsidized, the “donees,”

are “demanding” this redistribution; surely, however, it would be straining credulity to claim that A, the fleeced, is also “demanding” this activity. A, in fact, is the reluctant supplier, the coerced donor; B is gaining at A’s expense. But the really interesting role here is played by G, the government. For apart from the unlikely case where G is an unpaid altruist, performing this action as an uncompensated Robin Hood, G gets a rake-off, a handling charge, a finder’s fee, so to speak, for this little transaction. G, the government, in other words, performs his act of “redistribution” by fleecing A for the benefit of B and of himself.

Once we focus on this aspect of the transaction, we begin to realize that G, the government, might not just be a passive recipient of B’s felt need and economic demand, as standard theory would have it; instead, G himself might be an active demander and, as a full-time, paid Robin Hood, might even have stimulated B’s demand in the first place, so as to be in on the deal. The felt need, then, might be on the part of the governmental Robin Hood himself.

1. Why the Welfare State?

Why has government increased greatly over this century? Specifically, why has the welfare state appeared, grown, and become ever-larger and more powerful? What was the functional need felt here? One answer is that the development of poverty over the past century gave rise to welfare and redistribution. But this makes little sense, since it is evident that the average person’s standard of living has grown considerably over the past century-and-a-half, and poverty has greatly diminished.

But perhaps inequality has been aggravated, and the masses, even though better off, are upset by the increased income gap between themselves and the wealthy? English translation: the masses may be smitten with envy and rankle furiously at a growing income disparity. But it should also be evident from one glance at the Third World that the disparity of income and wealth between the rich and the masses is far greater there than in Western capitalist countries. So what’s the problem?

Another standard answer more plausibly asserts that industrialization and urbanization, by the late 19th century, deprived the masses, uprooted from the soil or the small town, of their sense of community, belonging, and mutual aid.Harold Wilensky put it baldly and succinctly: “Economic growth is the ultimate cause of welfare state development.” Harold Wilensky, The Welfare State and Equality (Berkeley: University of California Press, 1975), p. 24. Alienated and deracinated in the city and in the factory, the masses reached out for the welfare state to take the place of their old community.

Certainly it is true that the welfare state emerged during the same period as industrialization and urbanization, but coincidence does not establish causation.

One grave flaw in this urbanization theory is that it ignores the actual nature of the city, at least as it had been before it was effectively destroyed in the decades after World War II. The city was not a monolithic agglomeration but a series of local neighborhoods, each with its own distinctive character, network of clubs, fraternal associations, and street corner hangouts. Jane Jacobs’s memorable depiction of the urban neighborhood in her Death and Life of Great American Cities was a charming and accurate portrayal of the unity in diversity of each neighborhood, of the benign role of the “street watcher” and the local storekeeper. Large city life in the United States by 1900 was almost exclusively Catholic and ethnic, and both the political and social life of Catholic males in each neighborhood revolved, and still, to an extent, revolves, around the neighborhood saloon. There the men of the neighborhood would repair each evening to the saloon, where they would drink a few beers, socialize, and discuss politics. Typically, they would receive political instruction from the local saloonkeeper, who was generally also the local Democratic ward heeler. Wives socialized separately, and at home. The beloved community was still alive and well in urban America.

On deeper historical inquiry, moreover, this seemingly plausible industrialism explanation falls apart, and not only on the familiar problem of American exceptionalism, the fact that the United States, despite industrializing more rapidly, lagged behind European countries in developing the welfare state. Detailed investigations of a number of industrialized countries, for example, find no correlation whatsoever between the degree of industrialization and the adoption of social insurance programs between the 1880s and the 1920s or the 1960s.Thus, Flora and Alber find no correlation between levels of industrialization and social insurance programs of 12 European nations between the 1880s and the 1920s. Peter Flora and Jens Alber, “Modernization, Democratization, and the Development of Welfare States in Western Europe,” in The Development of Welfare States in Europe and America, Peter Flora and Arnold Heidenheimer, eds. (New Brunswick, NJ: Transaction Press, 1981), pp. 37–80. Likewise, Collier and Messick find no relation between industrialization and the adoption of social insurance programs in 59 nations between the 1880s and the 1960s. David Collier and Richard Messick, “Prerequisites versus Diffusion: Testing Alternative Explanations of Social Security Adoption,” American Political Science Review 69 (1975): 1299–315. Cited in Theda Skocpol, Protecting Soldiers and Mothers: The Political Origins of Social Policy in the United States (Cambridge, MA: Belknap Press of Harvard University Press, 1992), pp. 559–60.

More strikingly, the same findings hold true within the United States, where American exceptionalism can play no role. The earliest massive social welfare program in the United States was the dispensing of post-Civil War pensions to aging veterans of the Union Army and their dependents. Yet, these post-Civil War pensions were more likely to aid farmers and small townsmen than residents of large industrial cities. County level post-Civil War pension studies in Ohio in the late 1880s, the peak years for these pension payments, demonstrate a negative correlation between the degree of urbanism, or percentage of people living in homes rather than on farms, and the rates of receipt of pensions.Heywood Sanders, “Paying for the ‘Bloody Shirt’: The Politics of Civil War Pensions,” in Political Benefits, Barry Rundquist, ed. (Lexington, MA: D.C. Heath, 1980), pp. 150–54. The author of the study concluded that “generally, pensions were distributed to predominantly rural, Anglo-Saxon areas,” while the major city of Cleveland had the lowest per capita rate of receipt of pensions. Furthermore, pioneers in unemployment insurance and other social legislation were often the less-industrialized and more rural states, such as Wisconsin, Minnesota, Oklahoma, and Washington state.Edwin Amenta, Elisabeth Clemens, Jefren Olsen, Sunita Parikh, and Theda Skocpol, “The Political Origins of Unemployment Insurance in Five American States,” Studies in American Political Development 2 (1987): 137–82; Richard M. Valelly, Radicalism in the States: the Minnesota Farmer-Labor Party and the American Political Economy (Chicago: University of Chicago Press, 1989); and Skocpol, Protecting Soldiers, pp. 560–61.

Another standard view, the left-liberal or “social democratic model,” as its practitioners call it, holds that the welfare state came about not through the semi-automatic functioning of industrialization, but rather through conscious mass movements from below, movements generated by the demands of the presumptive beneficiaries of the welfare state themselves: the poor, the masses, or the oppressed working class. This thesis has been summed up boldly by one of its adherents. Everywhere, he says, the welfare state has been the product of

a highly centralized trade union movement with a class-wide membership base, operating in close coordination with a unified reformist-socialist party which, primarily on the basis of massive working class support, is able to achieve hegemonic status in the party system.Michael Shalev, “The Social Democratic Model and Beyond: Two Generations of Comparative Research on the Welfare State,” Comparative Social Research 6 (1983): 321. A similar sentiment is: “the welfare state is a product of the growing strength of labour in civil society.” John Stephens, The Transition from Capitalism to Socialism (London: Macmillan, 1979), p. 89.

Certainly, much of this thesis is overdrawn even for Europe, where much of the welfare state was brought about by conservative and liberal bureaucrats and political parties, rather than by unions or socialist parties. But setting that aside and concentrating on the United States, there has been, for one thing, no massively supported socialist party, let along one which has managed to achieve “hegemonic status.”

We are left, then, with labor unions as the only possible support for the social-democratic model for the United States. But here, historians, almost uniformly starry-eyed supporters of labor unions, have wildly exaggerated the importance of unions in American history. When we get past romantic stories of strikes and industrial conflicts (in which the union role is inevitably whitewashed if not glorified), even the best economic historians don’t bother informing the reader of the meager quantitative role or importance of unions in the American economy. Indeed, until the New Deal, and with the exception of brief periods when unionization was coercively imposed by the federal government (during World War I, and in the railroads during the 1920s), the percentage of union members in the labor force typically ranged from a minuscule 1% to 2% during recessions, up to 5% or 6% during inflationary booms, and then down to the negligible figure in the next recession.The percentage of union membership to the American population, aged 15–64, amounted to only 1.35% in 1871, 0.7% in 1880, and, after the development of the AFL and the modern labor movement in 1886, totaled 1.0% in 1890 and 1.9% in 1900. Lloyd Ulman, The Rise of the National Trade Union (Cambridge, MA: Harvard University Press, 1955). The best works on trade union memberships in this period are still Leo Wolman, The Growth of American Trade Unions, 1880–1923 (New York: National Bureau of Economic Research, 1924), and Leo Wolman, Ebb and Flow in Trade Unionism (New York: National Bureau of Economic Research, 1936).

Furthermore, in boom or bust, labor unions, in the free-market environment, were only able to take hold in specific occupations and areas of the economy. Specifically, unions could only flourish as skilled-craft unions (a) which could control the supply of labor in the occupation because of the small number of workers involved, (b) where this limited number constituted a small fraction of the employer’s payroll, and (c) where, because of technological factors, the industry in question was not very actively competitive across geographical regions. One way to sum up these factors is to say, in economists’ jargon, that the employers’ demand schedule for this type of labor is inelastic — that is, that a small restriction in the supply of such labor could give rise to a large wage increase for the remaining workers. Labor unions could flourish, moreover, in such geographically uncompetitive industries as anthracite coal, which is found in only a small area of northeastern Pennsylvania; and the various building trades (carpenters, masons, electricians, joiners, etc.), since building construction in, say, New York City, is only remotely competitive with similar construction in Chicago or Duluth. In contrast, despite determined efforts, it was impossible for unions to prosper in such industries as bituminous coal, which is found in large areas of the United States, or clothing manufacture, where factories can move readily to another, non-unionized area.

It was a shrewd understanding of these principles that enabled Samuel Gompers and the craft unions in his American Federation of Labor to flourish, while other, more radical and socialistic unions, such as The Noble Order of the Knights of Labor, collapsed quickly and faded from the scene.For the classic exposition of Gompersian unionism by an economist and student of John R. Commons, the Wisconsin institutional economist who was virtually Gompers’s theoretician, see Selig Perlman, A Theory of the Labor Movement (New York: Augustus M. Kelley, 1949); also see the companion volume by Perlman, A History of Trade Unionism in the United States (New York: Macmillan, 1922).

It should be obvious, then, that the advent and growth of the welfare state in the United States had little or nothing to do with the growth of the labor movement. On the contrary, the growth of labor unionism in America — during World War I and during the 1930s, its two great spurts of activity — were brought about by governmental coercion from above. Labor unions, then, were an effect rather than a cause of the welfare state, at least in the United States.

2. Yankee Postmillennial Pietism

If it wasn’t industrialism or mass movements of the working class that brought the welfare state to America, what was it? Where are we to look for the causal forces? In the first place, we must realize that the two most powerful motivations in human history have always been ideology (including religious doctrine), and economic interest, and that a joining of these two motivations can be downright irresistible. It was these two forces that joined powerfully together to bring about the welfare state.

Ideology was propelled by an intensely held religious doctrine that swept over and controlled virtually all Protestant churches, especially in “Yankee” areas of the North, from 1830 on. Likewise, a growing corollary ideology of statism and corporate socialism spread among intellectuals and ministers by the end of the 19th century. Among the economic interests promoted by the burgeoning welfare state were two in particular. One was a growing legion of educated (and often overeducated) intellectuals, technocrats, and the “helping professions” who sought power, prestige, subsidies, contracts, cushy jobs from the welfare state, and restrictions of entry into their field via forms of licensing. The second was groups of big businessmen who, after failing to achieve monopoly power on the free market, turned to government — local, state, and federal — to gain it for them. The government would provide subsidies, contracts, and, particularly, enforced cartelization. After 1900, these two groups coalesced, combining two crucial elements: wealth and opinion-molding power, the latter no longer hampered by the resistance of a Democratic Party committed to laissez-faire ideology. The new coalition joined together to create and accelerate a welfare state in America. Not only was this true in 1900, it remains true today.

Perhaps the most fateful of the events giving rise to and shaping the welfare state was the transformation of American Protestantism that took place in a remarkably brief period during the late 1820s. Riding in on a wave from Europe, fueled by an intense emotionalism often generated by revival meetings, this Second Great Awakening conquered and remolded the Protestant churches, leaving such older forms as Calvinism far behind. The new Protestantism was spearheaded by the emotionalism of revival meetings held throughout the country by the Rev. Charles Grandison Finney. This new Protestantism was pietist, scorning liturgy as papist or formalistic, and equally scornful of the formalisms of Calvinist creed or church organization. Hence, denominationalism, God’s Law, and church organization were no longer important. What counted was each person’s achieving salvation by his own free will, by being “born again,” or being “baptized in the Holy Spirit.” An emotional, vaguely defined pietist, non-creeded, and ecumenical Protestantism was to replace strict creedal or liturgical categories.

The new pietism took different forms in various regions of the country. In the South, it became personalist, or salvational; the emphasis was on each person achieving this rebirth of salvation on his own, rather than via social or political action. In the North, especially in Yankee areas, the form of the new Protestantism was very different. It was aggressively evangelical and postmillennialist, that is, it became each believer’s sacred duty to devote his energies to trying to establish a Kingdom of God on Earth, to establishing the perfect society in America and eventually the world, to stamp out sin and “make America holy,” as essential preparation for the eventual Second Advent of Jesus Christ. Each believer’s duty went far beyond mere support of missionary activity, for a crucial part of the new doctrine held that he who did not try his very best to maximize the salvation of others would not himself be saved. After only a few years of agitation, it was clear to these new Protestants that the Kingdom of God on Earth could only be established by government, which was required to bolster the salvation of individuals by stamping out occasions for sin. While the list of sins was unusually extensive, the PMPs (postmillennial pietists) stressed in particular the suppression of Demon Rum, which clouds men’s minds to prevent them from achieving salvation, slavery which prevented the enslaved from achieving such salvation, any activities on the Sabbath except praying or reading the Bible and any activities of the Anti-Christ in the Vatican, the Pope of Rome and his conscious and dedicated agents who constituted the Catholic Church.

The Yankees who particularly embraced this view were an ethno-cultural group descending from the original Puritans of Massachusetts, and who, beginning in rural New England, moved westward and settled upstate New York (“the Burned-Over District”), northern Ohio, northern Indiana, northern Illinois, and neighboring areas. As early as the Puritan days, the Yankees were eager to coerce themselves and their neighbors; the first American public schools were set up in New England to inculcate obedience and civic virtue in their charges.Those two great ideological and political opponents of the late 1880s and early 1890s, Grover Cleveland and Benjamin Harrison, embodied this battle within the Presbyterian Church. Cleveland, an old-fashioned Calvinist Presbyterian from Buffalo, was the son of a Calvinist clergyman, a Democrat, a “wet” on liquor, and a personal bon vivant; the prim, dour Harrison was a pietist Presbyterian from Indiana, and a Republican. See Jensen, The Winning of the Midwest: Social and Political Conflict, 1888–1896, pp. 79–80.

The concentration of the new statists in Yankee areas was nothing short of remarkable. From the Rev. Finney on down to virtually all the Progressive intellectuals who would set the course of America in the years after 1900, they were, almost to a man, born in Yankee areas: rural New England and their migrant descendants in upstate and western New York, northeastern Ohio (the “Western Reserve,” originally owned by Connecticut and settled early by Connecticut Yankees), and the northern reaches of Indiana and Illinois. Almost to a man, they were raised in very strict Sabbatarian homes, and often their father was a lay preacher and their mother the daughter of a preacher.Rural, because urban New England centers such as Boston had gone Unitarian during the 18th century. The Unitarians, on the other hand, were allied to the PMPs in advocating a more secular version of the coercive Utopian Kingdom to be achieved by government. On Unitarianism, Calvinism, and the Kingdom of God on Earth, especially as it dominated the public school movement in the 19th century, see the important but neglected work by Rousas John Rushdoony, The Messianic Character of American Education, pp. 18–32, 40–48. It is very likely that the propensity of the Yankees, in particular, to take so quickly to the coercive, crusading aspect of the new Protestant pietism was a heritage of the values, mores, and world outlook of their Puritan ancestors, and of the community they had established in New England. Indeed, we have in recent years been strikingly reminded of the three very different and clashing groups, all Protestants, who came from very different regions of Great Britain, and who settled in different regions of North America: the coercive, community-oriented Puritans from East Anglia who settled in New England, the manor-and-plantation-oriented Anglian Cavaliers who came from Wessex and settled in the Tidewater South, and the feisty, individualistic Presbyterian Borderers who came from the border country in northern England and southern Scotland and who settled in the Southern and Western back country.See the massive and fascinating work by David Hackett Fischer, Albion’s Seed: Four British Folkways in America (New York: Oxford University Press, 1989).Whether or not these Borderers, or Scotch-Irish, are Celtic is controversial, with Fischer denying it, and most other authorities, notably Grady McWhiney and Forrest McDonald, maintaining this thesis.

The Rev. Charles Grandison Finney, who essentially launched the pietist sweep, was virtually a paradigmatic Yankee. He was born in Connecticut; at an early age, his father joined the emigration by taking his family to a western New York farm, on the Ontario frontier. In 1812, fully 2/3 of the 200,000 people living in western New York had been born in New England. While a nominal Presbyterian, in 1821 at the age of 29, Finney converted to the new pietism, experiencing his second baptism, his “baptism of the Holy Spirit,” his conversion being greatly aided by the fact that he was self-educated in religion and lacked any religious training. Tossing aside the Calvinist tradition of scholarship in the Bible, Finney was able to carve out his new religion and ordain himself in his new version of the faith. Launching his remarkably successful revival movement in 1826 when he was an attorney in northeastern Ohio, his new pietism swept the Yankee areas in the East and Midwest. Finney wound up at Oberlin College, in the Western Reserve area of Ohio, where he became president, and transformed Oberlin into the preeminent national center for the education and dissemination of postmillennial pietism.On Finney and the revival movement, see Bernard A. Weisberger, They Gathered at the River: The Story of the Great Revivalists and their Impact Upon Religion in America (Boston: Little, Brown, 1958). Also see the classic work by Whitney R. Cross, The Burned-Over District: The Social and Intellectual History of Enthusiastic Religion in Western New York, 1800–1850 (New York: Harper Torchbooks, 1950).

The pietists quickly took to statist paternalism at the local and state level: to try to stamp out Demon Rum, Sabbath activity, dancing, gambling, and other forms of enjoyment, as well as trying to outlaw or cripple Catholic parochial schools and expand public schools as a device to Protestantize Catholic children, or, in the common phrase of the later 19th century, to “Christianize the Catholics.” But use of the national government came early as well: to try to restrict Catholic immigration, in response to the Irish Catholic influx of the late 1840s, to restrict or abolish slavery; or to eliminate the sin of mail delivery on Sunday. It was therefore easy for the new pietists to expand their consciousness to favor paternalism in national economic affairs. Using big government to create a perfect economy seemed to parallel employing such government to stamp out sin and create a perfect society. Early on, the PMPs advocated government intervention to aid business interests and to protect American industry from the competition of foreign imports. In addition, they tended to advocate public works and government creation of mass purchasing power through paper money and central banking. The PMPs therefore quickly gravitated toward the statist Whig Party, and then to the vehemently anti-Catholic American (or “Know-Nothing”) Party, finally culminating in all-out support for the Republican Party, the “party of great moral ideas.”On the enormous, but neglected, importance of anti-Catholicism and the co-opting of Know-Nothings in the Republican rise to major party status, see William E. Gienapp, “Nativism and the Creation of a Republican Majority in the North before the Civil War,” Journal of American History 72 (December, 1985): 529–59.

On the other hand, all religious groups that did not want to be subjected to the PMP theocracy — Catholics, High Church (or liturgical) German Lutherans, old-fashioned Calvinists, secularists, and Southern personal salvationists — naturally gravitated toward the laissez-faire political party, the Democrats. Becoming known as the “party of personal liberty,” the Democrats championed small government and laissez-faire on the national economic level as well, including separation of government and business, free trade, and hard money, which included the separation of government from the banking system.

The Democrat Party was the champion of laissez-faire, minimal government, and decentralization from its inception until its takeover by the ultra-pietist Bryanite forces in 1896. After 1830, the laissez-faire Democratic constituency was greatly strengthened by an influx of religious groups opposed to Yankee theocracy.

If postmillennial Protestantism provided a crucial impetus toward State dictation over society and the economy, another vital force on behalf of the partnership of government and industry was the zeal of businessmen and industrialists eager to jump on the bandwagon of state privilege. Vital to the Republican coalition, then, were the big railroads, dependent on government subvention and heavily in debt, and the Pennsylvania iron and steel industry, almost chronically inefficient and in perpetual need of high tariffs to protect them from import competition. When industrialists, as was often the case, were at one and the same time Yankee postmillennial pietists seeking to impose a perfect society, and also inefficient industrialists seeking government aid, the fusion of religious doctrine and economic interest became a powerful force in guiding their actions.

3. Yankee Women: The Driving Force

Of all the Yankee activists in behalf of statist “reform,” perhaps the most formidable force was the legion of Yankee women, in particular those of middle- or upper-class background, and especially spinsters whose busybody inclinations were not fettered by the responsibilities of home and hearth. One of the PMPs’ favorite reforms was to bring about women’s suffrage, which was accomplished in various states and localities long before a constitutional amendment imposed it on the entire country. One major reason: it was obvious to everyone that, given the chance to vote, most Yankee women would be quick to troop to the ballot-box, whereas Catholic women believed their place to be at home and with the family, and would not bother about political considerations. Hence, women’s suffrage was a way of weighting the total vote toward the postmillennialists and away from the Catholics and High Church Lutherans.

The impact of the revivalist transformation of Protestantism in the 1820s and 1830s upon female activism is well described by the feminist historian Carroll Smith-Rosenberg:

Women’s religious movements multiplied. Female revival converts formed Holy Bands to assist the evangelist in his revival efforts. They gathered with him at dawn to help plan the day’s revival strategies. They posted bills in public places urging attendance at revival meetings, pressured merchants to close their shops and hold prayer services, and buttonholed sinful men and prayed with them. Although “merely women,” they led prayer vigils in their homes that extended far into the night. These women for the most part were married, respected members of respectable communities. Yet, transformed by millennial zeal, they disregarded virtually every restraint upon women’s behavior. They self-righteously commanded sacred space as their own. They boldly carried Christ’s message to the streets, even into the new urban slums.Carroll Smith-Rosenberg, Disorderly Conduct (New York: Alfred A. Knopf, 1985), pp. 85–86.

The early suffragette leaders began as ardent prohibitionists, the major political concern of the postmillennial Protestants. They were all Yankees, centering their early activities in the Yankee heartland of upstate New York. Thus, Susan Brownell Anthony, born in Massachusetts, was the founder of the first women’s temperance (prohibitionist) society, in upstate New York in 1852. Susan B. Anthony’s co-leader in generating suffragette and prohibitionist women’s activities, Elizabeth Cady Stanton, came from Johnston, New York, in the heart of the Yankee Burned-Over District. Organized prohibitionism began to flourish in the winter of 1873–74, when spontaneous “Women’s Crusades” surged into the streets, dedicated to direct action to closing down the saloons. Beginning in Ohio, thousands of women took part in such actions during that winter. After the spontaneous violence died down, the women organized the Women’s Christian Temperance Union (W.C.T.U.) in Fredonia (near Buffalo), New York, in the summer of 1874. Spreading like wildfire, the W.C.T.U. became the outstanding force for decades on behalf of the outlawry of liquor.

What is less well known is that the W.C.T.U. was not a one-issue organization. By the 1880s, the W.C.T.U. was pushing, throughout states and localities, for a comprehensive statist program for government intervention and social welfare. These measures included the outlawing of licensed brothels and red light districts, imposition of a maximum 8-hour working day, the establishment of government facilities for neglected and dependent children, government shelters for children of working mothers, government recreation facilities for the urban poor, federal aid to education, mothers’ education by government, and government vocational training for women. In addition, the W.C.T.U. pushed for the new “kindergarten movement,” which sought to lower the age when children began to come under the purview of teachers and other educational professionals.See Ruth Bordin, Woman and Temperance: the Quest for Power and Liberty, 1873–1900 (Philadelphia: Temple University Press, 1981). On the postmillenialists and women suffrage, see the excellent work by Grimes, The Puritan Ethic and Woman Suffrage.

4. Progressives and the Gradual Secularization of Postmillennial Pietism: Ely, Dewey, and Commons

A critical but largely untold story in American political history is the gradual but inexorable secularization of Protestant postmillennial pietism over the decades of the middle and late 19th century.But see the illuminating article by Jean B. Quandt, “Religion and Social Thought: The Secularizing of Postmillenialism,” American Quarterly 25 (October, 1973): 390–409. Also see James H. Moorhead, “The Erosion of Postmillennialism in American Religious Thought, 1865–1925,” Church History 53 (March, 1984): 61–77. The emphasis, almost from the beginning, was to use government to stamp out sin and to create a perfect society in order to usher in the Kingdom of God on Earth. Over the decades, the emphasis slowly but surely shifted: more and more away from Christ and religion, which became ever-vaguer and woollier, and more and more toward a Social Gospel, with government correcting, organizing, and eventually planning the perfect society. From paternalistic mender of social problems, government became more and more divinized, more and more seen as the leader and molder of the organic social whole. In short, Whigs, Know-Nothings, and Republicans were increasingly becoming Progressives, who were to dominate the polity and the culture after 1900; a few of the more radical thinkers were openly socialist, with the rest content to be organic statists and collectivists. And as Marxism became increasingly popular in Europe after the 1880s, the progressives prided themselves on being organic statist middle-of-the-roaders between old fashioned dog-eat-dog laissez-faire individualism on the one hand, and proletarian socialism on the other. Instead, the progressive would provide to society a Third Way in which Big Government, in the service of the joint truths of science and religion, would harmonize all classes into one organic whole.

By the 1880s, the focus of postmillennial Christian endeavor began to shift from Oberlin College to the liberal “New Theology” at Andover Theological Seminary in Massachusetts. The Andover liberals, as Jean Quandt points out, stressed “the immanence of God in nature and society, a concept derived in part from the doctrine of evolution.” Furthermore, “Christian conversion ... came more and more to mean the gradual moral improvement of the individual.” Thus, says Quandt, “Andover’s identification of God with all the regenerating and civilizing forces in society, together with its Arminian emphasis on man’s moral achievements, pointed toward an increasingly secular version of America’s transfiguration.”Quandt, “Secularization,” p. 394. Professor Quandt sums up the gradual but fateful change as a change that amounted to “a secularization of the eschatological vision.” As Quandt writes:

The outpourings of the Holy Spirit which were to usher in the kingdom of the 1850s were replaced, in the Gilded Age and the Progressive Era, by advances in knowledge, culture, and ethical Christianity. Whereas evangelical Protestantism had insisted that the kingdom would come by the grace of God acting in history and not by any natural process, the later version often substituted the providential gift of science for redeeming grace. These changes toward a more naturalistic view of the world’s progress were paralleled by a changing attitude toward the agencies of redemption. The churches and the benevolent societies connected with them were still considered important instruments of the coming kingdom, but great significance was now attached to such impersonal messianic agencies as the natural and social sciences. The spirit of love and brotherhood ... was (now) often regarded as an achievement of human evolution with only tenuous ties to a transcendent deity.Ibid., p. 396.

Progressive intellectuals and social and political leaders reached their apogee in a glittering cohort which, remarkably, were almost all born in precisely the year 1860, or right around it.See the impressive list of the 1860 and environs cohort of Progressives in Robert M. Crunden, Ministers of Reform: The Progressives Achievement in American Civilization, 1889–1920 (New York: Basic Books, 1982), pp. 275–76.

Richard T. Ely was born on a farm in western New York, near Fredonia, in the Buffalo area.For a biography of Ely, see Benjamin G. Rader, The Academic Mind and Reform: the Influence of Richard T. Ely on American Life (Lexington: University of Kentucky Press, 1966). His father, Ezra, a descendant of Puritan refugees from Restoration England, came from a long line of Congregationalist and Presbyterian clergy. Ezra, who had come from rural Connecticut, was a farmer whose poor soil was suited only to grow barley; yet, as an ardent prohibitionist, he refused to give his sanction to barley, since its main consumer product was beer. Highly intense about religion, Ezra was an extreme Sabbatarian who prohibited games or books (except the Bible) upon the Sabbath, and hated tobacco as well as liquor.

Richard was highly religious but not as focused as his father; he grew up mortified at not having had a conversion experience. He learned early to get along with wealthy benefactors, borrowing a substantial amount of money from his wealthy Columbia classmate, Edwin R.A. Seligman, of the New York investment-banking family. Graduating from Columbia in 1876, in a country where there was not yet a Ph.D. program, Ely joined most of the economists, historians, philosophers, and social scientists of his generation in traveling to Germany, the land of the Ph.D., for his doctorate. As in the case of his fellows, Ely was enchanted with the third way or organic statism that he and the others thought they found in Hegel and in German social doctrine. As luck would have it, Ely, on his return from Germany with a Ph.D. at the young age of 28, became the first instructor in political economy at America’s first graduate university, Johns Hopkins. There, Ely taught and found disciples in a glittering array of budding statist economists, social scientists, and historians, some of whom were barely older than he was, including Chicago sociologist and economist Albion W. Small (b. 1854), Chicago economist Edward W. Bemis, economist and sociologist Edward Alsworth Ross, City College of New York president John H. Finlay, Wisconsin historian Frederick Jackson Turner, and future president Woodrow Wilson.

During the 1880s, Ely, like so many postmillennial pietists remarkably energetic, founded the American Economic Association and ran it with an iron hand for several years; he also founded, and became the first president of, the Institute for Christian Sociology, which pledged “to present ... (God’s) kingdom as the complete ideal of human society to be realized on earth.” Ely also virtually took over the summer evangelical Chautauqua movement, and his textbook, Introduction to Political Economy, became a best-seller, largely by being distributed through, and becoming required reading for, the Chautauqua Literary and Scientific Circle for literally a half-century. In 1891, Ely founded the Christian Social Union of the Protestant Episcopal Church, along with the avowedly socialist Rev. William Dwight Porter Bliss, who was the founder of the Society of Christian Socialists. Ely was also enamored by the socialist “One Big Union” Knights of Labor, which he hailed as “truly scientific” and lauded in his book The Labor Movement (1886); the Knights, however, collapsed abruptly after 1887.

Discouraged about not getting a full professorship at Hopkins, Ely, moving through his old student Frederick Jackson Turner, who was teaching at Wisconsin, managed to land not only a professorship at that university in 1892, but also became director, with the highest salary on campus, of a new institute, a School of Economics, Political Science, and History. A gifted academic empire-builder, he managed to acquire funding for an assistant professor, a graduate fellow, and a large library at his institute.

Ely brought his favorite former students to Wisconsin, and Ely and his former and later students became the key advisors to the administration of Robert M. La Follette (b. 1855), who became the Progressive governor of Wisconsin in 1900. Through La Follette, Ely and the others pioneered welfare-state programs on a state level. Significantly, La Follette had gotten his start in Wisconsin politics as an ardent prohibitionist.

The key to Ely’s thought was that he virtually divinized the State. “God,” he declared, “works through the State in carrying out His purposes more universally than through any other institution.”Fine, Laissez Faire Thought and the General-Welfare State, p. 180. Once again, Professor Quandt sums up Ely best:

In Ely’s eyes, government was the God-given instrument through which we had to work. Its preeminence as a divine instrument was based on the post-Reformation abolition of the division between the sacred and the secular and on the State’s power to implement ethical solutions to public problems. The same identification of sacred and secular ... enabled Ely to both divinize the state and socialize Christianity: he thought of government as God’s main instrument of redemption.Quandt, “Secularization,” p. 403.

It must not be thought that Ely’s vision was totally secular. On the contrary, the Kingdom was never far from his thoughts. It was the task of the social sciences to “teach the complexities of the Christian duty of brotherhood.” Through such instruments as the industrial revolution, the universities, and the churches, through the fusion of religion and social science, there will arrive, Ely believed, “the New Jerusalem” “which we are all eagerly awaiting.” And then, “the earth [will become] a new earth, and all its cities, cities of God.” And that Kingdom, according to Ely, was approaching rapidly.

A striking example of the secularization of a postmillennial progressive leader is the famed founder of pragmatist philosophy and progressive education, the prophet of atheistic higher Democracy, philosopher John Dewey (b. 1859). It is little known that in an early stage of his seemingly endless career, Dewey was an ardent preacher of postmillennialism and the coming of the Kingdom. Addressing the Students’ Christian Association at Michigan, Dewey argued that the Biblical notion of the Kingdom of God come to earth was a valuable truth which had been lost to the world, but now, the growth of modern science and the communication of knowledge has made the world ripe for the temporal realization of “the Kingdom of God…the common incarnate Life, the purpose ... animating all men and binding them together into one harmonious whole of sympathy.” Science and democracy, exhorted Dewey, marching together, reconstruct religious truth, and with this new truth, religion could help bring about “the spiritual unification of humanity, the realization of the brotherhood of man, all that Christ called the Kingdom of God ... on earth.”

For Dewey, democracy was “a spiritual fact.” Indeed, it is the “means by which the revelation of truth is carried on.” It was only in democracy, asserted Dewey, that “the community of ideas and interest through community of action, that the incarnation of God in man (man, that is to say, as an organ of universal truth) becomes a living, present thing.”

Dewey concluded with a call to action: “Can anyone ask for better or more inspiring work? Surely to fuse into one the social and religious motive, to break down the barriers of Pharisaism and self-assertion which isolate religious thought and conduct from the common life of man, to realize the state as one Commonwealth of truth — surely, this is a cause worth battling for.”Crunden, Ministers of Reform, pp. 57–58. Also see Quandt, “Secularization,” pp. 404–05. Thus, with Dewey the final secularization is at hand: the truth of Jesus Christ was the unfolding truth brought to man by modern science and modern democracy. Clearly, it was but one small step for John Dewey, as well as for other, similarly situated progressives, to abandon Christ and to keep his ardent faith in government, science, and democracy to bring about an atheized Kingdom of God on earth.Dewey, as H.L. Mencken put it, was “born of indestructible Vermont stock and a man of the highest bearable sobriety.” Dewey was the son of a small town Vermont grocer; his mother was an ardent evangelical Congregationalist. H.L. Mencken, “Professor Veblen,” in A Mencken Chrestomathy (New York: Alfred A. Knopf, 1949), p. 267.

If Richard T. Ely was the leading PMP and progressive in economics and the social sciences, the leading progressive activist was his indefatigable and beloved No. 2 man, Professor John Rogers Commons (b. 1862). Commons was a student of Ely at Johns Hopkins graduate school, but even though he flunked out of graduate school, he continued ever afterward as Ely’s right-hand man and perpetual activist, becoming professor of economics at the University of Wisconsin. Commons was a major force in the National Civic Federation, which was the leading Progressive organization pushing for statism in the economy. The National Civic Federation was a big-business-financed outfit that wrote and lobbied for model legislation on a state and federal level favoring state unemployment insurance, federal regulation of trade, and regulation of public utilities. Further, it was the dominant force for progressive policies from 1900 until U.S. entry into World War I. Not only that, Commons was a founder and the leading force in the even more explicitly leftist American Association for Labor Legislation (AALL), powerful from 1907 on in pushing for public works, minimum wages, maximum hours, and pro-union legislation. The AALL, financed by Rockefeller and Morgan industrialists, was highly influential in the 1920s and 1930s. The executive secretary of the AALL was for many decades John B. Andrews, who began as a graduate assistant of Commons at the University of Wisconsin.

John R. Commons was a descendant of the famed English Puritan martyr John Rogers. His parents moved from rural Vermont to the heavily Yankee, rabidly PMP Western Reserve section of northeastern Ohio. His father was a farmer, his extremely energetic mother a schoolteacher and graduate of the virtual PMP headquarters, Oberlin College. The family moved to northeastern Indiana. Commons’ mother, the financial mainstay of the family, was a highly religious pietist Presbyterian and an ardent lifelong Republican and prohibitionist. Ma Commons was anxious for her son to become a minister, and when Commons enrolled in Oberlin in 1882, his mother went with him, mother and son founding and editing a prohibitionist magazine at Oberlin. Although a Republican, Commons voted Prohibitionist in the national election of 1884. Commons felt himself lucky to be at Oberlin, and to be in at the beginnings there of the Anti-Saloon League, the single-issue pressure group that was to become the greatest single force in bringing Prohibition to America. The national organizer of the league was Howard H. Russell, then a theological student at Oberlin.

At Oberlin, Commons found a beloved mentor, James Monroe, professor of political science and history, who managed to get two Oberlin trustees to finance Commons’ graduate studies at Johns Hopkins.See John R. Commons, Myself (Madison: University of Wisconsin Press, [1934] 1964). Monroe himself was a deeply religious PMP, a protectionist and prohibitionist, and for 30 years had been a Republican Congressman from the Western Reserve. Commons was graduated from Oberlin in 1888 and proceeded to Johns Hopkins. Before going to Wisconsin, Commons taught at several colleges, including Oberlin, Indiana University, and Syracuse, and helped found the American Institute for Christian Sociology on behalf of Christian Socialism.

Not only did Commons go on to Wisconsin to become the major inspirer and activist of the “Wisconsin Idea,” helping to set up the welfare and regulatory state in that region, several of his doctoral students at Wisconsin were to become highly influential in the Roosevelt New Deal. Selig Perlman, who was appointed to the Commons Chair at Wisconsin was, following his mentor, the major theoretician for the policies and practices of Commons’ beloved American Federation of Labor. And two of Commons’ other Wisconsin students, Arthur J. Altemeyer and Edwin E. Witte, were both high officials in the Industrial Commission of Wisconsin, founded by Commons to administer that state’s pro-union legislation. Both Altemeyer and Witte went on from there to be major founders of Franklin Roosevelt’s Social Security legislation.See Dorfman, The Economic Mind in American Civilization, 1918–1933, vol. 4, pp. 395–98.

5. Yankee Women Progressives

The Elys, Commonses, and Deweys might have might have been more notable, but the Yankee women progressives provided the shock troops of the progressive movement and hence the burgeoning welfare state. As in the case of the males, gradual but irresistible secularization set in over the decades. The abolitionist and slightly later cohort were fanatically postmillennial Christian, but the later progressive cohort, born, as we have seen, around 1860, were no less fanatical but more secular and less Christian-Kingdom oriented. The progression was virtually inevitable; after all, if your activism as a Christian evangelist had virtually nothing to do with Christian creed or liturgy or even personal reform, but was focused exclusively in using the force of government to shape up everyone, stamp out sin, and usher in a perfect society, if government is really God’s major instrument of salvation, then the role of Christianity in one’s practical activity began to fade into the background. Christianity became taken for granted, a background buzz; one’s practical activity was designed to use the government to stamp out liquor, poverty, or whatever is defined as sin, and to impose one’s own values and principles on the society.

Not only that, but by the late 19th century, as the 1860 cohort came of age, there arose greater and more specialized opportunities for female activism on behalf of statism and government intervention. The older groups, the Women’s Crusades, were short-run activities, and hence could rely on short bursts of energy by married women. However, as female activism became professionalized, and became specialized into social work and settlement houses, there was little room left for any women except upper-class and upper-middle-class spinsters, who answered the call in droves. The settlement houses, it must be emphasized, were not simply centers for private help to the poor; they were, quite consciously, spearheads for social change and government intervention and reform.

The most prominent of the Yankee progressive social workers, and emblematic of the entire movement, was Jane Addams (b. 1860). Her father, John H. Addams, was a pietist Quaker who settled in northern Illinois, constructed a sawmill, invested in railroads and banks, and became one of the wealthiest men in northern Illinois. John H. Addams was a lifelong Republican, who attended the founding meeting of the Republican Party at Ripon, Wisconsin in 1854 and served as a Republican State Senator for 16 years.

Graduating from one of the first all-women colleges, the Rockford Female Seminary, in 1881, Jane Addams was confronted by the death of her beloved father. Intelligent, upper class, and energetic, she was faced with the dilemma of what to do with her life. She had no interest in men, so marriage was not in the cards; indeed, in her lifetime, she seems to have had several intense lesbian affairs.Recent feminist historians have been happy to overcome the reluctance of older historians, and have proudly “outed” the lesbianism of Addams and many other spinster Yankee progressive activists of that epoch. Probably these feminists are right, and the pervasive lesbianism of the movement is crucial to a historical understanding of why this movement got under way. At the very least, they could not simply follow other women and make a career of marriage and homemaking.

After eight years of indecision, Jane Addams decided to devote herself to social work and founded the famed settlement house, Hull House, in the Chicago slums in 1889. Jane was inspired by reading the highly influential English art critic John Ruskin, who was an Oxford professor, Christian Socialist, and bitter critic of laissez-faire capitalism. Ruskin was the charismatic leader of Christian Socialism in England, which was influential in the ranks of the Anglican clergy. One of his disciples was the historian Arnold Toynbee, in whose honor Canon Samuel A. Barnett, another Ruskinian, founded the settlement house of Toynbee Hall in London in 1884. In 1888, Jane Addams went to London to observe Toynbee Hall, and there she met Canon W.H. Freemantle, close friend and mentor of Canon Barnett, and this visit settled the matter, inspiring Jane Addams to go back to Chicago to found Hull House, along with her former classmate and intimate lesbian friend Ellen Gates Starr. The major difference between Toynbee Hall and its American counterparts is that the former was staffed by male social workers who stayed for a few years and then moved on to build their careers, whereas the American settlement houses almost all constituted lifelong careers for spinster ladies.

Jane Addams was able to use her upper-class connections to acquire fervent supporters, many of them women who became intimate and probably lesbian friends of Miss Addams. One staunch financial supporter was Mrs. Louise de Koven Bowen (b. 1859), whose father, John de Koven, a Chicago banker, had amassed a great fortune. Mrs. Bowen became an intimate friend of Jane Addams; she also became the treasurer and even built a house for the settlement. Other society women supporters of Hull House included Mary Rozet Smith, who had a lesbian affair with Jane Addams, and Mrs. Russell Wright, the mother of the future-renowned architect Frank Lloyd Wright. Mary Rozet Smith, indeed, was able to replace Ellen Starr in Jane Addams’s lesbian affection. She did so in two ways: by being totally submissive and self-deprecating to the militant Miss Addams, and by supplying copious financial support to Hull House. Mary and Jane proclaimed themselves “married” to each other.

One of Jane Addams’s close colleagues, and probable lesbian lover, at Hull House was the tough, truculent Julia Clifford Lathrop (b. 1858), whose father, William, had migrated from upstate New York to Rockford in northern Illinois.On Jane Addams and her friends and colleagues, see Allen F. Davis, American Heroine: The Life and Legend of Jane Addams (New York: Oxford University Press, 1973). For a critical assessment of Addams, see Christopher Lasch, The New Radicalism in America, 1889–1963: The Intellectual as a Social Type (New York: Random House, 1965), pp. 3–37. It is all too clear that, in her 1910 autobiography, Jane Addams lied by ennobling her motivation for founding Hull House, claiming that it was the sheer horror of watching a bullfight in Spain. None of that alleged horror shines through her letters at the time. William Lathrop, an attorney, was a descendant of the eminent English Nonconformist and Yankee minister, the Reverend John Lathrop. William became a trustee of the Rockford Female Seminary, and was elected Republican U.S. Senator from Illinois. His daughter Julia was graduated from the Seminary earlier than Addams, and then went on to Vassar College. Julia Lathrop moved to Hull House in 1890, and from there developed a lifelong career in social work and government service. Julia founded the first Juvenile Court in the country, in Chicago in 1899, and then moved on to become the first female member of the Illinois State Board of Charities, and president of the National Conference of Social Work. In 1912, Lathrop was appointed by President Taft as head of the first U.S. Children’s Bureau.

Ensconced in the federal government, the Children’s Bureau became an outpost of the welfare state and social work engaging in activities that eerily and unpleasantly remind one of the modern era. Thus, the Children’s Bureau was an unremitting center of propaganda and advocacy of federal subsidies, programs, and propaganda on behalf of the nation’s mothers and children — a kind of grisly foreshadowing of “family values” and Hillary Rodham Clinton’s concerns for “the children” and the Children’s Defense Fund. Thus, the Children’s Bureau proclaimed “Baby Week” in March 1916, and again in 1917, and designated the entire year 1918 as “The Year of the Child.”

After World War I, Lathrop and the Children’s Bureau lobbied for, and pushed through Congress in late 1921, the Sheppard-Towner Maternity and Infancy Protection Act, providing federal funds to states that set up child hygiene or child welfare bureaus, as well as providing public instruction in maternal and infant care by nurses and physicians. Here we had the beginnings of socialized medicine as well as the socialized family. This public instruction was provided in home conferences and health centers, and to health care professionals in each area. It was also chillingly provided that these states, under the carrot of federal subsidy, would remove children from the homes of parents providing “inadequate home care,” the standard of adequacy to be determined, of course, by the government and its alleged professionals. There was also to be compulsory birth registration for every baby and federal aid for maternity and infancy.

Julia Lathrop was instrumental in persuading Sheppard-Towner to change the original bill from a welfare measure to those unable to pay into a bill designed to encompass everyone. At Lathrop put it, “The bill is designed to emphasize public responsibility for the protection of life just as already through our public schools we recognize public responsibility in the education of children.” The logic of cumulative government intervention was irresistible; it’s unfortunate that no one turned the logic the other way and instituted a drive for the abolition of public schooling.

If none of the opponents of Sheppard-Towner went so far as to call for the abolition of public schooling, James A. Reed (D-Mo.), the staunch laissez-faire Senator, did well enough. Caustically, Senator Reed declared that “It is now proposed to turn the control of the mothers of the land over to a few single ladies holding government jobs in Washington. ... We would better reverse the proposal and provide for a committee of mothers to take charge of the old maids and teach them how to acquire a husband and have babies of their own.”Skocpol, Protecting Soldiers and Mothers, pp. 500–01. Perhaps Senator Reed thereby cut to the heart of the motivation of these Yankee progressives.

At about the same time that Jane Addams and friends were founding Hull House, settlement houses were being founded in New York and Boston, also by spinster Yankee females, and also under the inspiration of Toynbee Hall. Actually, the founder of the first ephemeral settlement in New York was the male Stanton Coit (b. 1857), born in northern Ohio to a prosperous merchant, and a descendant of the Puritan Massachusetts Yankee, John Coit. Coit obtained a Ph.D. from the University of Berlin, worked at Toynbee Hall, and then established the short-lived Neighborhood Guild settlement in New York in 1886; it failed the following year. Inspired by this example, however, three Yankee lesbians followed by founding the College Settlement Association in 1887, which established College Settlements in New York in 1889, and in Boston and Philadelphia several years later. The leading female founder was Vida Dutton Scudder (b. 1861), a wealthy Bostonian and daughter of a Congregational missionary to India. After graduating from Smith College in 1884, Vida studied literature at Oxford, and became a disciple of Ruskin and a Christian Socialist, ending up teaching at Wellesley College for over 40 years. Vida Scudder became an Episcopalian, a frank socialist, and a member of the Women’s Trade Union League. The two other founders of the College Settlements were Katharine Coman (b. 1857), and her long-time lesbian lover Katharine Lee Bates. Katharine Coman was born in northern Ohio to a father who had been an ardent abolitionist and teacher in upstate New York and who moved to a farm in Ohio as a result of wounds suffered in the Civil War. Graduating from the University of Michigan, Coman taught history and political economy at Wellesley, and later became chairman of the Wellesley department of economics. Coman and Bates traveled to Europe to study and promote social insurance in the United States. Katharine Bates was a professor of English at Wellesley. Coman became a leader of the National Consumers League and of the Women’s Trade Union League.

The founder of the concept of the Children’s Bureau, Florence Kelley, who lobbied for both the Children’s Bureau and Sheppard-Towner, was one of the few women activists who was in some way unique and not paradigmatic. In many ways, she did share the traits of the other progressive ladies. She was born in 1859, her father was a wealthy, lifelong Republican Congressman from Philadelphia, William D. Kelley, whose devotion to protective tariffs, especially for the Pennsylvania iron industry, was so intense as to earn him the sobriquet “Pig Iron” Kelley. A Protestant Irishman, he was an abolitionist and Radical Republican.

Florence Kelley differed from her colleagues on two counts: (1) she was the only one who was an outright Marxist, and (2) she was married and not a lesbian. However, in the long run, these differences did not matter very much. For Kelley’s open Marxism was not, in practice, very different, in policy conclusions, from the less-systematic Fabian socialism or progressivism of her sisterhood. As such, she was able to take her place at the end of a spectrum that was not really very far from the mainstream of non-Marxian ladies. On the second count, Florence Kelley managed to dispose of her husband in fairly short order, and to palm off the raising of her three children onto doting friends. Thus, home and hearth proved no obstacle to Florence Kelley’s militancy.

Graduating from Cornell, Florence went to study at the University of Zurich. There she promptly became a Marxist and translated Engels’s Condition of the Working Class in England into English. In Zurich, Florence met and married a Russian — Jewish Marxist medical student, Lazare Wischnewetsky, in 1884, moving with her husband to New York, and having three children by 1887. In New York, Florence promptly formed the New York Consumers League and got a law passed for inspecting women in factories. In 1891, Florence fled her husband with her kids and went to Chicago for reasons that remain unknown to her biographers. In Chicago, she gravitated inevitably to Hull House, where she stayed for a decade. During this time, the large, volcanic, and blustery Florence Kelley helped to radicalize Jane Addams. Kelley lobbied successfully in Illinois for a law creating a legal-maximum eight-hour work day for women. She then became the first chief factory inspector in the state of Illinois, gathering about her an all-socialist staff.

Florence Kelley’s husband, Dr. Wischnewetsky, had been pushed off the pages of history. But what about her children? While Florence went about the task of socializing Illinois, she was able to pass off the raising of her children onto her friends Henry Demarest Lloyd, prominent leftist Chicago Tribune journalist, and his wife, the daughter of one of the owners of the Tribune.

In 1899, Florence Kelley returned to New York, where she resided for the next quarter-century at what was by then the most prominent settlement house in New York City, the Henry Street Settlement on the Lower East Side. There, Kelley founded the National Consumers League, and was the chief lobbyist for the federal Children’s Bureau and for Sheppard-Towner. She battled for minimum wage laws and maximum-hours laws for women, fought for an Equal Rights Amendment to the Constitution, and was a founding member of the NAACP. When accused of being a Bolshevik in the 1920s, Florence Kelley disingenuously pointed to her Philadelphia blue blood heritage — how could someone of such a family possibly be a Marxist?On Kelley, see Dorothy Rose Blumberg, Florence Kelley: The Making of A Social Pioneer (New York: Augustus M. Kelley, 1966). Also, see Kathryn Kish Sklar, “Hull House — the 1890s: A Community of Women Reformers,” Signs 10, no. 4 (Summer 1985): 685–777.

Another prominent and very wealthy Yankee woman in New York City was Mary Melinda Kingsbury Simkhovitch (b. 1867). Born in Chestnut Hill, Massachusetts, Mary Melinda was the daughter of Isaac Kingsbury, a prominent Congregationalist and Republican merchant. She was the niece of an executive of the Pennsylvania Railroad and a cousin of the head of Standard Oil of California. Graduating from Boston University, Mary Melinda toured Europe with her mother, studied in Germany, and was deeply moved by socialism and Marxism. Becoming engaged to Vladimir Simkhovitch, a Russian scholar, she joined him in New York when he acquired a post at Columbia. Before marrying Simkhovitch, Mary Melinda became head resident of the College Settlement in New York, studied socialism further, and learned Yiddish so as to be able to communicate better with her Lower East Side neighbors. Even after marrying Simkhovitch and acquiring two children, Mary Melinda founded her own settlement at Greenwich House, joined the New York Consumers League and Women’s Trade Union League, and fought for government old-age pensions and public housing.

Particularly important for New York statism and social reform were the wealthy and socially prominent Dreier family, which gave rise to several active daughters. The Dreiers were German-Americans, but they could just as well have been Yankees, since they were fervent — if not fanatical — German evangelical pietists. Their father, Theodore Dreier, was an emigrant from Bremen who had risen to become a successful merchant; during the Civil War, he returned to Bremen and married his younger cousin, Dorothy Dreier, the daughter of an evangelical minister. Every morning, the four Dreier daughters and their brother, Edward (b. 1872), were swathed in Bible readings and the singing of hymns.

In 1898, father Dreier died, leaving several million dollars to his family. Eldest daughter Margaret (b.1868) was able to dominate her siblings into engaging in radical and philanthropic activities at her beck and call.The one sister who slightly broke the Dreier mold was Katherine (b. 1877), an artist and patroness of modern art who, interested in organic philosophy, became pro-Nazi during the 1930s. To dramatize her altruism and alleged “sacrifice,” Margaret Dreier habitually wore shoddy clothes. Active in the Consumers League, Margaret joined, and heavily financed, the new Women’s Trade Union League in late 1904, joined by her sister Mary. Soon, Margaret was president of the New York WTUL and treasurer of the national WTUL. Indeed, Margaret Dreier presided over the WTUL from 1907 until 1922.

In the spring of 1905, Margaret Dreier met and married the Chicago-based progressive adventurer Raymond Robins (b. 1873). They had met, appropriately enough, when Robins delivered a lecture on the Social Gospel at an evangelical church in New York. The Robinses became the country’s premier progressive couple; Margaret’s activities scarcely slowed down, since Chicago was at least as active a center for the welfare reformers as New York.

Raymond Robins had a checkered career as a wanderer and nomad. Born in Florida, deserted by his father and absent a mother, Robins wandered around the country and managed to earn a law degree in California, where he became a pro-union progressive. Prospecting gold in Alaska, he saw a vision of a flaming cross in the Alaska wilds and became a social-gospel-oriented minister. Moving to Chicago in 1901, Robins became a leading settlement house worker, associating, of course, with Hull House and “Saint Jane” Addams.

Two years after the Robins-Dreier marriage, sister Mary Dreier came to Robins and confessed her overwhelming love. Robins persuaded Mary to transmute her shameful secret passion on the altar of leftist social reform, and the two of them engaged in a lifelong secret correspondence based on their two-person “Order of the Flaming Cross.”

Perhaps the most important function of Margaret Dreier for the cause was her success in bringing top female wealth into financial and political support of the leftist and welfare-state programs of the Women’s Trade Union League. Included among WTUL supporters were Anne Morgan, daughter of J. Pierpont Morgan; Abby Aldrich Rockefeller, daughter of John D. Rockefeller, Jr.; Dorothy Whitney Straight, heiress to the Rockefeller-oriented Whitney family; Mary Eliza McDowell (b. 1854), a Hull House alumnus whose father owned a steel mill in Chicago; and the very wealthy Anita McCormick Blaine, daughter of Cyrus McCormick, inventor of the mechanical reaper, who had already been inducted into the movement by Jane Addams.See Elizabeth Ann Payne, Reform, Labor, and Feminism: Margaret Dreier Robins and the Women’s Trade Union League (Urbana: University of Illinois Press, 1988).

We should not leave the Chicago scene without noting a crucial activist and academic transition to the next generation. An important academic wealthy spinster was Sophonisba Breckinridge (b. 1866), who came from a prominent Kentucky family and was the great-granddaughter of a U.S. Senator. She, too, was not a Yankee, but she was pretty clearly a lesbian. Unhappy as a lawyer in Kentucky, Sophonisba went to the University of Chicago graduate school and became the first woman Ph.D. in political science in 1901. She continued to teach social science and social work at the University of Chicago for the rest of her career, becoming the mentor and probable long-time lesbian companion of Edith Abbott (b. 1876). Edith Abbott, born in Nebraska, had been secretary of the Boston Trade Union League and had studied at the London School of Economics, where she was strongly influence by the Webbs, leaders of Fabian Socialism. She lived and worked, predictably, at a London Settlement House. Then Edith studied for a Ph.D. in economics at the University of Chicago, which she earned in 1905. Becoming an instructor at Wellesley, Edith soon joined her slightly younger sister Grace at Hull House in 1908, where the two sisters lived for the next dozen years, Edith as social research director of Hull House. In the early 1920s, Edith Abbott became Dean of the University of Chicago School of Social Service Administration and co-edited the school’s Social Service Review with her friend and mentor, Sophonisba Breckinridge.

Grace Abbott, two years younger than Edith, took more of an activist route. The Abbott sisters’ mother had come from upstate New York and graduated from Rockford Female Seminary; their father was an Illinois lawyer who became Lieutenant Governor of Nebraska. Grace Abbott, also living at Hull House and a close friend of Jane Addams, became Julia Clifford Lathrop’s assistant at the federal Children’s Bureau in 1917, and, in 1921, succeeded her mentor Lathrop as head of the Children’s Bureau.

If the female social reform activists were almost all Yankee, by the late 19th century, Jewish women were beginning to add their leaven to the lump. Of the crucial 1860s cohort, the most important Jewess was Lillian D. Wald (b. 1867). Born to an upper-middle-class German and Polish-Jewish family in Cincinnati, Lillian and her family soon moved to Rochester, where she became a nurse. She then organized, in the Lower East Side of New York, the Nurses’ Settlement, which was soon to become the famed Henry Street Settlement. It was Lillian Wald who first suggested a federal Children’s Bureau to President Theodore Roosevelt in 1905, and who led the agitation for a federal constitutional amendment outlawing child labor. While she was not a Yankee, Lillian Wald continued in the dominant tradition by being a lesbian, forming a long-term lesbian relationship with her associate Lavinia Dock. Wald, while not wealthy herself, had an uncanny ability to gain financing for Henry Street, including top Jewish financiers such as Jacob Schiff and Mrs. Solomon Loeb of the Wall Street investment-banking firm of Kuhn-Loeb, and Julius Rosenwald, then head of Sears Roebuck. Also prominent in financing Henry Street was the Milbank Fund, of the Rockefeller-affiliated family who owned the Borden Milk Company.

Rounding out the important contingent of socialist-activist Jews were the four Goldmark sisters, Helen, Pauline, Josephine, and Alice. Their father had been born in Poland, became a physician in Vienna, and was a member of the Austrian Parliament. Fleeing to the United States after the failed Revolution of 1848, Dr. Goldmark became a physician and chemist, became wealthy by inventing percussion caps, and helped organized the Republican Party in the 1850s. The Goldmarks settled in Indiana.

Dr. Goldmark died in 1881, leaving eldest daughter Helen as the head of the family. Helen married the eminent Felix Adler, philosopher and founder of the Society for Ethical Culture in New York, a kind of Jewish Unitarianism. Alice married the eminent Boston Jewish lawyer Louis

Dembitz Brandeis, helping to radicalize Brandeis from moderate classical liberal to socialistic progressive. Pauline (b. 1874), after graduating from Bryn Mawr in 1896, remained single, did graduate work at Columbia and Barnard in botany, zoology, and sociology, and then became assistant secretary of the New York Consumers League. Even more successful an activist was Josephine Clara Goldmark (b. 1877), who graduated from Bryn Mawr in 1898, did graduate work in education at Barnard, and then became publicity secretary of the National Consumers League and author of the NCL’s annual handbooks. In 1908, Josephine became chairman of the new NCL Committee on Legislation, and she, her sister Pauline, and Florence Kelley (along with Alice) persuaded Brandeis to write his famed Brandeis brief in the case of Muller v. Oregon (1908), claiming that the Oregon maximum-hours law for women was constitutional. In 1919, Josephine Goldmark continued her rise by becoming secretary of the Rockefeller Foundation’s Committee for the Study of Nursing Education. Josephine Goldmark culminated her career by writing the first hagiographical biography of her close friend and mentor in socialistic activism, Florence Kelley.Josephine Goldmark, Impatient Crusader: Florence Kelley (Champaign: University of Illinois Press, 1953).

6. The New Deal

It was not long before these progressives and social reformers exerted an impact on American national politics. The Progressive Party was launched in 1912 by the Morgans — the party was headed by Morgan partner George W. Perkins — in a successful attempt to nominate Theodore Roosevelt, and thereby destroy President William Howard Taft, who had broken with his predecessor Roosevelt’s Pro-Morgan policies. The Progressive Party included all the spearheads of this statist coalition: academic progressives, Morgan businessmen, social-gospel Protestant ministers, and, of course, our subjects, the leading progressive social workers.

Thus, delegates to the national Progressive convention of 1912 in New York City included Jane Addams, Raymond Robins, and Lillian D. Wald, as well as Henry Moskowitz of the New York Society of Ethical Culture, and Mary Kingsbury Simkhovitch of New York’s Greenwich House. True to its feminist stance, the Progressive Party was also the first, except for the Prohibition Party, to include women delegates to the convention, and the first to name a woman elector, Helen J. Scott of Wisconsin. After the success of the Progressive Party in the 1912 elections, the social workers and social scientists who had flooded into the party were convinced that they were bringing the pristine values (or rather, non-values) of “science” to political affairs. Their statist proposals were “scientific,” and any resistance to such measures was, therefore, narrow and opposed to the spirit of science and social welfare.

In its permanent organization of 1913, the Progressive Party adopted “A Plan of Work” proposed by Jane Addams just after the election. Its major division was Progressive Science, headed by New York social worker, attorney, and sociologist Frances A. Kellor. Assisting Frances Kellor as director of the Legislative Reference Bureau, a department of the Progressive Science division, was Chicago pro-union labor lawyer Donald Richberg, later to be prominent in the Railway Labor Act of the 1920s and in the New Deal. Prominent in the Party’s Bureau of Education was none other than John Dewey. But particularly important was the Party’s Department of Social and Industrial Justice, headed by Jane Addams. Under her, Henry Moskowitz headed the Men’s Labor committee, and upper-class philanthropist Mary E. McDowell headed Women’s Labor. The Social Security Insurance committee was headed by Paul Kellogg, editor of the leading social work magazine, Survey, while Lillian Wald played a prominent role in the Child Welfare committee.On the Progressive Party, see Gable, The Bull Moose Years.

More important than the heady few years of the Progressive Party, however, was the accelerating accumulation of influence and power in state and federal government. In particular, the ladies’ settlement-house movement exerted enormous influence in shaping the New Deal, an influence that has been generally underrated.

Take, for example, Mary H. Wilmarth, daughter of a gas fixture manufacturer and one of the upper-class Chicago socialites who had been brought into the group of wealthy supporters of Hull House. Soon, Mary Wilmarth was to become one of the major financial supporters of the radical Women’s Trade Union League. Mary’s sister, Anne Wilmarth, married a Progressive Chicago attorney, the curmudgeon Harold L. Ickes, who soon became legal counsel for the W.T.U.L. During the New Deal, Ickes was to become Franklin Roosevelt’s high-profile Secretary of the Interior.

At the other end of the social and ethnic spectrum from the Wilmarth sisters was the short, fiery, aggressively single Polish-American Jewess, Rose Schneiderman (b. 1882). One of the most frankly left-wing figures among the female agitators, Miss Schneiderman emigrated to New York in 1890 with her family, and at the age of 21 became the organizer of the first women’s local of the Jewish Socialist United Cloth Hat and Cap Makers Union. Rose was prominent in the W.T.U.L and played a key role in organizing the International Ladies Garment Workers Union, landing on that union’s Executive Board. Rose Schneiderman was appointed to the Labor Advisory Board during the New Deal.

From Florence Kelley’s National Consumers League, there came into the New Deal Molly Dewson, who became a member of Franklin Roosevelt’s Social Security Board, and Josephine Roche, who became Assistant Secretary of the Treasury in the New Deal.

But there were significantly bigger fish to fry than these few lesser figures. Perhaps the leading force emerging from the women’s statist, social-welfare movement was none other than Eleanor Roosevelt (b. 1884), perhaps our first bisexual First Lady. Eleanor fell under the influence of the passionately radical London prep school headmistress, Madame Marie Souvestre, who apparently set Eleanor on her lifelong course. Back in New York, Eleanor joined Florence Kelley’s National Consumers League and became a lifelong reformer. During the early 1920s, Eleanor was also active in working for, and financially supporting, Lillian Wald’s Henry Street Settlement and Mary Simkhovitch’s Greenwich House. In the early 1920s, Eleanor joined the W.T.U.L. and helped to finance that radical organization, agitating for maximum-hour and minimum wage laws for women. Eleanor became a close friend of Molly Dewson, who later joined the Social Security Board, and of Rose Schneiderman. Eleanor also brought her friend, Mrs. Thomas W. Lamont, wife of the then-most-powerful Morgan partner, into her circle of social-reform agitators.

The woman who rose highest in rank during the New Deal, and who was highly influential in its social legislation, was Madame Frances Perkins (b. 1880), Secretary of Labor and first female Cabinet member in U.S. history. Frances Perkins was born in Boston; both parents, who came from Maine, were active Congregationalists, and her father, Fred, was a wealthy businessman. Frances went to Mt. Holyoke in 1898, where she was elected class president. At Mt. Holyoke, Frances was swept up in the intense religious-pietist wave sweeping that college; every Saturday night, each class would conduct a prayer meeting.

The leader of what we might call the “religious Left” on the campus was American history professor Annabelle May Soule, who organized the Mt. Holyoke chapter of the National Consumers League, urging the abolition of child labor, and of low-wage sweatshops, another prominent statist cause. It was a talk at the Mt. Holyoke by the charismatic Marxist and national leader of the NLC, Florence Kelley, that changed Frances Perkins’s life and brought her on the road to lifelong welfare-state reform.

In 1913, Frances Perkins was married, in a secret ceremony, to economist Paul C. Wilson. Wilson was a wealthy, cheerful, but sickly social reformer, providing Frances a good entry into municipal reform circles. While the marriage was supposed to be a love match, it is doubtful how much the marriage meant to the tough-minded Perkins. Her friend, the unmarried welfare activist Pauline Goldmark, lamented that Frances had married, but added that she “did it to get it off her mind.” In a gesture of early feminism, Frances refused to take her husband’s name. When she was named Secretary of Labor by Franklin Roosevelt, she rented a house with a close friend, the powerful and prodigiously wealthy Mary Harriman Rumsey, daughter of the great tycoon E.H. Harriman. The Harriman family was extremely powerful in the New Deal, an influence that has been largely neglected by historians. Mary Harriman Rumsey, who had been widowed in 1922, was head of the Maternity Center Administration in New York, and under the New Deal, she was chairman of the Consumer Advisory Committee of the National Recovery Administration.On Mrs. Perkins, see George Whitney Martin, Madame Secretary: Frances Perkins (Boston: Houghton Mifflin, 1976).

The close interrelation between social work, female activism, and extremely wealthy financiers is seen in the career of Frances Perkins’s close friend Henry Bruere (b. 1882), who had been Wilson’s best friend. Bruere was born to a physician in St. Charles, Missouri, went to the University of Chicago, attended a couple of law schools, and then did graduate work in political science at Columbia. After graduate school, Bruere resided at College Settlement and then University Settlement, and then went on from there to become Personnel Director at Morgan’s International Harvester Corporation.

From then on, Bruere’s life was a revolving door, going from social agencies to private corporations and back again. Thus, after Harvester, Bruere founded the Bureau of Municipal Research in New York and became president of the New York City Board of Social Welfare. From there, it was on to vice president of Metropolitan Life and the CEO of the Bowery Savings Bank, which became his operating base from the late 1920s until the early 1950s.

But Henry Bruere still had plenty of time for good works. In the late 1920s and early 1930s, Bruere was a member of the Executive Committee and Board of the Welfare Council of New York City, leading the drive for government unemployment relief. Bruere was appointed by Perkins as chairman of the New York State Committee on the Stabilization of Industry in 1930, which presaged the National Recovery Administration idea of coerced government cartelization of industry. During the New Deal, Bruere also became an advisor to the federal Home Owners Loan Corporation, Federal Credit Association, to unemployment and old-age insurance, and was an advisor to the Reconstruction Finance Corporation. Bruere also became executive assistant to William Woodin, Roosevelt’s first Secretary of the Treasury.

In the meanwhile, however, and this should be underscored, in addition to the high federal posts and social-welfare jobs, Bruere also hobnobbed with the financial greats, becoming a director of Harriman’s Union Pacific Railroad and a treasurer of Edward A. Filene’s left-liberal Twentieth-Century Fund. Filene was the millionaire retailer who was the major sponsor of the legal activities of his friend and oft-time counselor, Louis D. Brandeis.

As we can see from the case of Henry Bruere, after Yankee women pioneered in welfare and social-work organizations, men began to follow suit. Thus, heavily influenced by their stays at Hull House were the prominent journalist Francis Hackett; the distinguished historian and political scientist Charles A. Beard, who had also stayed at Toynbee House in London; the man who would become one of the most preeminent state-cartelists in American industry, Gerard Swope, head of the Morgans’ General Electric Company; and the man who would become one of the major social and labor activists for John D. Rockefeller, Jr., and eventually the Rockefellers’ man as Liberal Premier of Canada for many years, William Lyon Mackenzie King.

But perhaps the most important of the male social workers who became prominent in the New Deal was the man who became Roosevelt’s Brain Truster, Secretary of Commerce, and eventually the shadowy virtual (if unofficial) Secretary of State, Harry Lloyd Hopkins (b. 1890). Hopkins, along with Eleanor Roosevelt, might be considered the leading statist social worker and activist of the 1880s cohort, the generation after the 1860s founders.

Hopkins was born in Iowa, the son of a harness maker who later operated a general store. Following in the Yankee pietist social gospel mold, Hopkins’s Canadian mother, Anna Pickett Hopkins, was a gospel teacher and had become president of the Methodist Home Mission Society of Iowa. Hopkins graduated from Grinnell College in Iowa in 1912 in the social sciences. Moving to New York, Hopkins promptly married the first of three wives, the Jewish heiress Ethel Gross. Hopkins plunged into the settlement-house movement, becoming a resident of the Christodora House in New York before his marriage. He then went to work for the Association for Improving the Condition of the Poor (AICP) and became a protégé of the general director of the AICP, John Adams Kingsbury (b. 1876). Kingsbury, no relation to the wealthy Mary Kingsbury Simkhovitch, had been born in rural Kansas to a father who became a socialist high school principal in Seattle. Kingsbury, on graduation from Teachers College, Columbia, in 1909, went into professional social work.

During the Reform Administration of New York Mayor John Purroy Mitchell, Kingsbury became Commissioner of Public Charities in New York, and Hopkins was executive secretary of the Board of Child Welfare, serving on the Board together with such rising social-reform luminaries as Henry Bruere, Molly Dewson, and Frances Perkins.

From 1917 to 1922, Hopkins administered the Red Cross in the South, returning to New York to become assistant director of the AICP, while Kingsbury became CEO of the highly influential Milbank Fund, which financed many medical and health projects, and was in the Rockefeller orbit. Kingsbury funded a major project for the New York Tuberculosis Association after Hopkins became its director in 1924. Kingsbury became more and more openly radical, praising to the skies the alleged medical achievements of the Soviet Union and agitating for compulsory health insurance in the United States. Kingsbury became such an outspoken agitator against the American Medical Association that the AMA threatened a boycott of Borden’s milk (the major business of the Milbank family), and succeeded in getting Kingsbury fired in 1935. But not to worry; Harry Hopkins promptly made his old friend Kingsbury a consultant to Hopkins’s make-work Works Progress Administration.

How did Harry Hopkins rise from being a settlement-house worker to one of the most-powerful people in the New Deal? Part of the answer was his close friendship with W. Averill Harriman, scion of the Harriman

family, his friendship with John Hertz, partner of the powerful investment-banking firm of Lehman Brothers; and his association with the rising political leader of the powerful Rockefeller family, Nelson Aldrich Rockefeller. Indeed, when Hopkins was made Secretary of Commerce in the New Deal, he offered the Assistant Secretary post to Nelson Rockefeller, who turned it down.

7. The Rockefellers and Social Security

The Rockefellers and their intellectual and technocratic entourage were, indeed, central to the New Deal. In a deep sense, in fact, the New Deal itself constituted a radical displacement of the Morgans, who had dominated the financial and economic politics of the 1920s, by a coalition led by the Rockefellers, the Harrimans, Kuhn-Loeb, and the Lehman Brothers investment banking firms.See Thomas Ferguson, “Industrial Conflict and the Coming of the New Deal: The Triumph of Multinational Liberalism in America,” in The Rise and Fall of the New Deal Order, 1930–1980, S. Fraser and G. Gerstle, eds. (Princeton, NJ: Princeton University Press, 1989), pp. 3–31. The Business Advisory Committee of the Department of Commerce, for example, which proved highly influential in drawing up New Deal measures, was dominated by the scion of the Harriman family, W. Averill Harriman, and by such Rockefeller satraps as Walter Teagle, head of Standard Oil of New Jersey. Here we have space to trace only the influence of the Rockefellers, allied with the Wisconsin progressives and the graduates of the settlement houses, in creating and imposing on America the Social Security System. Here, too, was the end product of a gradual but sure process of secularization of the messianic ideal of the postmillennial pietists. Perhaps it is only fitting that a movement that began with postmillennial Yankee harridans going out into the streets and trying to destroy saloons would conclude with Wisconsin social scientists, technocrats, and Rockefeller-driven experts manipulating the levers of political power to bring about a top-down revolution in the form of the welfare state.The Rockefellers were originally ardent postmillennialist Baptists, John D. Sr., hailing originally from upstate New York. John D. Jr., headed the moral as well as philanthropic wing of the Rockefeller Empire, heading a grand jury in New York City in 1920 dedicated to stamping out vice in that city. After World War I, however, the Rockefeller family’s handpicked personal minister, the Reverend Harry Emerson Fosdick, spearheaded the drive of “liberal Protestantism,” a secularized version of postmillennialism, in order to repel a rising tide of premillennialist “fundamentalism” in the church. Harry Fosdick became head of the Federal Council of Churches of Christ, the mainstream liberal Protestant organization. In the meanwhile, John D., Jr. made Fosdick’s brother, Raymond Blaine Fosdick, head of the Rockefeller Foundation and eventually John D., Jr’s official biographer. Fosdick had been a settlement house worker. The Fosdicks were born in Buffalo to a New England Yankee family. On the Fosdicks, see Murray N. Rothbard, “World War I as Fulfillment: Power and the Intellectuals,” Journal of Libertarian Studies 9, no. 1 (Winter 1989): 92–93, 120. [Editor’s remarks] See Chapter 13 below, pp. 414–19.

Social Security began in 1934 when President Franklin Roosevelt commissioned a triad of his top officials to select the membership of a Committee on Economic Security (CES), which would draw up the legislation for the Social Security system. The three officials were Secretary of Labor Frances Perkins, Director of the Federal Emergency Relief Administration Harry Hopkins, and Secretary of Agriculture Henry A. Wallace. The most important of this triad was Perkins, whose department came closest to jurisdiction over social security, and who presented the administration’s viewpoints at Congressional hearings. Perkins and the others decided to entrust the all-important task to Arthur Altmeyer, a Commons disciple at Wisconsin who had been secretary of the Wisconsin Industrial Commission and had administered Wisconsin’s system of unemployment relief. When Roosevelt imposed the corporatist collectivist National Recovery Administration (NRA) in 1933, Altmeyer was made director of the NRA Labor Compliance Division. Corporatist businessmen heartily approved of Altmeyer’s performance on the task, notably Marion Folsom, head of Eastman Kodak, and one of the leading members of the Business Advisory Council.

Altmeyer’s first choice to become chairman of the CES was none other than Dr. Bryce Stewart, director of research for the Industrial Relations Councilors (IRC). The IRC had been set up in the early 1920s by the Rockefellers, specifically John D., Jr., in charge of ideology and philanthropy for the Rockefeller empire. The IRC was the flagship scholarly and activist outfit to promote a new form of corporatist labor-management cooperation, as well as promoting pro-union and pro-welfare-state policies in industry and government. The IRC also set up influential Industrial Relations departments in Ivy League universities, notably Princeton.

Bryce Stewart, however, was hesitant about so openly taking charge of the Social Security effort on behalf of the IRC and the Rockefellers. He preferred to remain behind the scenes, do advisory consulting to the CES, and co-direct a study of unemployment insurance for the Council.

Turned down by Stewart, Altmeyer turned to his successor as secretary of the Wisconsin Industrial Commission, Commons disciple Edwin E. Witte. Witte became Executive Secretary of the CES, with the task of appointing the other members. At the suggestion of FDR, Altmeyer consulted with powerful members of the BAC, namely Swope, Teagle, and John Raskob of DuPont and General Motors, about the makeup and policies of the CES.

Altmeyer and Witte also prepared names for FDR to select an Advisory Council to the CES, consisting of employer, union, and “citizen” members. In addition to Swope, Folsom, and Teagle, the Advisory Council included two other powerful corporatist businessmen. The first, Morris Leeds, was president of Leeds & Northrup, and a member of the corporate, pro-union, pro-welfare-state American Association for Labor Legislation. The second, Sam Lewisohn, was vice president of Miami Copper Company, and former president of the AALL. Selected to head the Advisory Council was an academic front man, the much beloved Southern liberal, Frank Graham, president of the University of North Carolina.

Altmeyer and Witte appointed as the members of the key Technical Board of the CES three distinguished experts, Murray Webb Latimer, J. Douglas Brown, and Barbara Nachtried Armstrong, who was the first female law professor at the University of California at Berkeley. All three were IRC affiliates, and Latimer and Brown were, indeed, eminent members of the Rockefeller-IRC network. Latimer, chairman of the Railroad Retirement Board, was a long-time employee of the IRC, and had compiled the IRC’s study of industrial pensions, as well as having hammered out the details of the Railroad Retirement Act. Latimer was a member of the AALL and helped administer insurance and pension plans for Standard Oil of New Jersey, Standard Oil of Ohio, and Standard Oil of California.

J. Douglas Brown was head of Princeton’s IRC-created Industrial Relations Department and was the point man for the CES in designing the old-age pension plan for Social Security. Brown, along with the big-business members of the Advisory Council, was particularly adamant that no employers escape the taxes for the old-age pension scheme. Brown was frankly concerned that small business not escape the cost-raising consequences of these social security tax obligations. In this way, big businesses, who were already voluntarily providing costly old-age pensions to their employees, could use the federal government to force their small-business competitors into paying for similar, costly, programs. Thus, Brown explained, in his testimony before the Senate Finance Committee in 1935, that the great boon of the employer “contribution” to old-age pensions is that

it makes uniform throughout industry a minimum cost of providing old-age security and protects the more liberal employer now providing pensions from the competition of the employer who otherwise fires the old person without a pension when superannuated. It levels up cost of old-age protection on both the progressive employer and the unprogressive employer.Jill Quadagno, The Transformation of Old Age Security: Class and Politics in the American Welfare State (Chicago: University of Chicago Press, 1988), p. 112; Jill Quadagno, “Welfare Capitalism and the Social Security Act of 1935,” American Sociological Review 49 (October, 1984): 641. Also see G. William Domhoff, The Power Elite and the State: How Policy is Made in America (New York: Aldine de Gruyter, 1990).

In other words, the legislation deliberately penalizes the lower cost, “unprogressive,” employer and cripples him by artificially raising his costs compared to the larger employer. Also injured, of course, are the consumers and the taxpayers who are forced to pay for this largess.

It is no wonder, then, that the bigger businesses almost all backed the Social Security scheme to the hilt, while it was attacked by such associations of small business as the National Metal Trades Association, the Illinois Manufacturing Association, and the National Association of Manufacturers. By 1939, only 17% of American businesses favored repeal of the Social Security Act, while not one big business firm supported repeal.

Big business, indeed, collaborated enthusiastically with social security. When the Social Security Board faced the formidable task of establishing 26 million accounts for individuals, it consulted with the BAC, and Marion Folsom helped plan the creation of regional SSB centers. The BAC got the Board to hire the director of the Industrial Bureau of the Philadelphia Chamber of Commerce to serve as head registrar, and J. Douglas Brown was rewarded for his services by becoming chairman of the new, expanded Advisory Council for the Social Security Administration.

The American Association for Labor Legislation was particularly important in developing the Social Security system. This leftist social-welfare outfit, founded by Commons and headed for decades by his student John B. Andrews, was financed by Rockefeller, Morgan, and other wealthy

corporate liberal financial and industrial interests. The AALL was the major developer of disability and health insurance proposals during the 1920s, and then in 1930 turned to work on model state bills for unemployment insurance. In 1932, Wisconsin adopted the AALL’s plan and, under the force of AALL lobbying, the Democratic Party incorporated it into its platform. In developing Social Security, key CES Technical Board and Advisory Council posts were staffed with AALL members. Not only that, but in early 1934, Secretary Perkins asked none other than Paul Rauschenbush, the AALL’s Washington lobbyist, to draft a bill for Social Security which became the basis for further discussions in the CES. The AALL was also closely associated with Florence Kelley’s National Consumers League.

Paul Rauschenbusch had a fascinating pedigree in his own right. Paul was the son of the leading Social-Gospel Baptist minister Walter Rauschenbusch. Paul studied under John R. Commons and was the principle author of the Wisconsin unemployment insurance law. There was even more of a progressive cast to Rauschenbusch, for he married none other than Elizabeth Brandeis, daughter of the famed progressive jurist. Elizabeth also studied under Commons and received a Ph.D. from Wisconsin. What’s more, she was also a close friend of the Marxist Florence Kelley and helped edit her aunt Josephine Goldmark’s loving biography of Kelley. Elizabeth also helped write the Wisconsin unemployment compensation law. She taught economics at Wisconsin, rising to the post of full professor.

We can conclude by noting, with historian Irwin Yellowitz, that all these reform organizations were dominated and funded by “a small group of wealthy patricians, professional men, and social workers. Wealthy women, including some from New York society, were indispensable to the financing and staffing.”Irwin Yellowitz, Labor and the Progressive Movement in New York State, 1897–1916 (Ithaca, NY: Cornell University Press, 1965), p. 71. See in particular J. Craig Jenkins and Barbara G. Brents, “Social Protest, Hegemonic Competition, and Social Reform: A Political Struggle Interpretation of the American Welfare State,” American Sociological Review 54 (December, 1989): 891–909; and J. Craig Jenkins and Barbara Brents, “Capitalists and Social Security: What Did They Really Want?” American Sociological Review 56 (February, 1991): 129–32.

12. War Collectivism in World War I

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

More than any other single period, World War I was the critical watershed for the American business system.Originally published in A New History of Leviathan, Ronald Radosh and Murray N. Rothbard, eds. (New York: E.P. Dutton & Co., 1972), pp. 66–110. Rothbard numbered but did not name the subsections of this essay; to keep all the chapters of the book uniform titles to the subsections have been added by the editor. It was a “war collectivism,” a totally planned economy run largely by big-business interests through the instrumentality of the central government, which served as the model, the precedent, and the inspiration for state-corporate capitalism for the remainder of the 20th century. That inspiration and precedent emerged not only in the United States but also in the war economies of the major combatants of World War I. War collectivism showed the big-business interests of the Western world that it was possible to shift radically from the previous, largely free-market, capitalism to a new order marked by strong government, and extensive and pervasive government intervention and planning, for the purpose of providing a network of subsidies and monopolistic privileges to business, and especially to large business, interests. In particular, the economy could be cartelized under the aegis of government, with prices raised and production fixed and restricted, in the classic pattern of monopoly, and military and other government contracts could be channeled into the hands of favored corporate producers. Labor, which had been becoming increasingly rambunctious, could be tamed and bridled into the service of this new, state-monopoly-capitalist order, through the device of promoting a suitably cooperative trade unionism, and by bringing the willing union leaders into the planning system as junior partners.

In many ways, the new order was a striking reversion to old-fashioned mercantilism, with its aggressive imperialism and nationalism, its pervasive militarism, and its giant network of subsidies and monopolistic privileges to large business interests. In its 20th-century form, of course, the New Mercantilism was industrial rather than mercantile, since the industrial revolution had intervened to make manufacturing and industry the dominant economic form. But there was a more significant difference in the New Mercantilism. The original mercantilism had been brutally frank in its class rule, and in its scorn for the average worker and consumer.On the attitudes of the mercantilists toward labor, see Edgar S. Furniss, The Position of the Laborer in a System of Nationalism (New York: Kelley & Millman, 1957). Thus, Furniss cites the English mercantilist William Petyt, who spoke of labor as a “capital material ... raw and undigested … committed into the hands of supreme authority, in whose prudence and disposition it is to improve, manage, and fashion it to more or less advantage.” Furniss adds that “it is characteristic of these writers that they should be so readily disposed to trust in the wisdom of the civil power to ‘improve, manage and fashion’ the economic raw material of the nation.” p. 41. Instead, the new dispensation cloaked the new form of rule in the guise of promotion of the overall national interest of the welfare of the workers through the new representation for labor, and of the common good of all citizens. Hence the importance, for providing a much-needed popular legitimacy and support, of the new ideology of 20th-century liberalism, which sanctioned and glorified the new order. In contrast to the older laissez-faire liberalism of the previous century, the new liberalism gained popular sanction for the new system by proclaiming that it differed radically from the old, exploitative mercantilism in its advancement of the welfare of the whole society. And in return for this ideological buttressing by the new “corporate” liberals, the new system furnished the liberals the prestige, the income, and the power that came with posts for the concrete, detailed planning of the system as well as for ideological propaganda on its behalf.

For their part, the liberal intellectuals acquired not only prestige and a modicum of power in the new order, they also achieved the satisfaction of believing that this new system of government intervention was able to transcend the weaknesses and the social conflicts that they saw in the two major alternatives: laissez-faire capitalism or proletarian, Marxian socialism. The intellectuals saw the new order as bringing harmony and cooperation to all classes on behalf of the general welfare, under the aegis of big government. In the liberal view, the new order provided a middle way, a “vital center” for the nation, as contrasted to the divisive “extremes” of left and right.

1. Big Business and War Collectivism

We have no space here to dwell on the extensive role of big business and business interests in getting the United States into World War I. The extensive economic ties of the large business community with England and France, through export orders and through loans to the Allies — especially those underwritten by the politically powerful J.P. Morgan & Co. (which also served as agent to the British and French governments) — allied to the boom brought about by domestic and Allied military orders, all played a leading role in bringing the United States into the war. Furthermore, virtually the entire eastern business community supported the drive toward war.On the role of the House of Morgan, and other economic ties with the Allies in leading to the American entry into the war, see Charles Callan Tansill, America Goes to War (Boston: Little, Brown & Co., 1938), pp. 32–134. [Editor’s remarks] See also Chapter 14, below, pp. 487–89.

Apart from the role of big business in pushing America down the road to war, business was equally enthusiastic about the extensive planning and economic mobilization that the war would clearly entail. Thus, an early enthusiast for war mobilization was the United States Chamber of Commerce, which had been a leading champion of industrial cartelization under the aegis of the federal government since its formation in 1912. The chamber’s monthly, The Nation’s Business, foresaw in mid-1916 that a mobilized economy would bring about a sharing of power and responsibility between government and business. And the chairman of the U.S. chamber’s executive committee on national defense wrote to the du Ponts, at the end of 1916, of his expectation that “this munitions question would seem to be the greatest opportunity to foster the new spirit” of cooperation between government and industry.Quoted in Paul A.C. Koistinen, “The ‘Industrial-Military Complex’ in Historical Perspective: World War I,” Business History Review (Winter 1967): 381.

The first organization to move toward economic mobilization for war was the Committee on Industrial Preparedness, which in 1916 grew out of the Industrial Preparedness Committee of the Naval Consulting Board, a committee of industrial consultants to the navy dedicated to considering the ramifications of an expanding American navy. Characteristically, the new CIP was a closely blended public-private organization, officially an arm of the federal government but financed solely by private contributions. Moreover, the industrialist members of the committee, working patriotically without fee, were thereby able to retain their private positions and incomes. Chairman of the CIP, and a dedicated enthusiast for industrial mobilization, was Howard E. Coffin, vice president of the important Hudson Motor Co. of Detroit. Under Coffin’s direction, the CIP organized a national inventory of thousands of industrial facilities for munitions making. To propagandize for this effort, christened “industrial preparedness,” Coffin was able to mobilize the American Press Association, the Associated Advertising Clubs of the World, the august New York Times, and the great bulk of American industry.The leading historian of World War I mobilization of industry, himself a leading participant and director of the Council of National Defense, writes with scorn that the scattered exceptions to the chorus of business approval “revealed a considerable lack ... of that unity of will to serve the Nation that was essential to the fusing of the fagots of individualism into the unbreakable bundle of national unity.” Grosvenor B. Clarkson, Industrial America in the World War (Boston: Houghton Mifflin Co., 1923), p. 13. Clarkson’s book, incidentally, was subsidized by Bernard Baruch, the head of industrial war collectivism; the manuscript was checked carefully by one of Baruch’s top aides. Clarkson, a public relations man and advertising executive, had begun his effort by directing publicity for Coffin’s industrial preparedness campaign in 1916. See Robert D. Cuff, “Bernard Baruch: Symbol and Myth in Industrial Mobilization,” Business History Review (Summer 1969): 116.

The CIP was succeeded, in late 1916, by the fully governmental Council of National Defense, whose advisory commission — largely consisting of private industrialists — was to become its actual operating agency. (The council proper consisted of several members of the cabinet.) President Wilson announced the purpose of the CND as organizing “the whole industrial mechanism ... in the most effective way.” Wilson found the council particularly valuable because it “opens up a new and direct channel of communication and cooperation between business and scientific men and all departments of the Government ...”Clarkson, Industrial America in the World War, p. 21. He also hailed the personnel of the council’s advisory commission as marking “the entrance of the nonpartisan engineer and professional man into American governmental affairs” on an unprecedented scale. These members, declared the president grandiloquently, were to serve without pay, “efficiency being their sole object and Americanism their only motive.”Ibid., p. 22.

Exulting over the new CND, Howard Coffin wrote to the du Ponts in December, 1916 that “it is our hope that we may lay the foundation for that closely knit structure, industrial, civil and military, which every thinking American has come to realize is vital to the future life of this country, in peace and in commerce, no less than in possible war.”Koistinen, “The ‘Industrial-Military Complex’ in Historical Perspective,” p. 385.

Particularly influential in establishing the CND was Secretary of the Treasury William Gibbs McAdoo, son-in-law of the president and formerly promoter of the Hudson and Manhattan Railroad and associate of the Ryan interests in Wall Street.Originating the idea of the CND was Dr. Hollis Godfrey, president of the Drexel Institute, an industrial training and management education organization. Also influential in establishing the CND was the joint military-civilian Kernan Board, headed by Colonel Francis J. Kernan, and including as its civilian members: Benedict Crowell, chairman of Crowell & Little Construction Co. of Cleveland and later Assistant Secretary of War; and R. Goodwyn Rhett, president of the People’s Bank of Charleston, and president as well of the Chamber of Commerce of the United States. Ibid., pp. 382, 384. Head of the advisory commission was Walter S. Gifford, who had been one of the leaders of the Coffin Committee and had come to government from his post as chief statistician of the American Telephone and Telegraph Co., a giant monopoly enterprise in the Morgan ambit. The other “nonpartisan” members were Daniel Willard, president of the Baltimore and Ohio Railroad, Wall Street financier Bernard M. Baruch, Howard E. Coffin, Julius Rosenwald, president of Sears, Roebuck and Co., Samuel Gompers, president of the AF of L, and one scientist and one leading surgeon.

Months before American entry into the war, the advisory commission of the CND designed what was to become the entire system of purchasing war supplies, the system of food control, and censorship of the press. It was the advisory commission that met with the delighted representatives of the various branches of industry, and told the businessmen to form themselves into committees for sale of their products to the government, and for the fixing of the prices of these products. Daniel Willard was, unsurprisingly, put in charge of dealing with the railroads, Howard Coffin with munitions and manufacturing, Bernard Baruch with raw materials and minerals, Julius Rosenwald with supplies, and Samuel Gompers with labor. The idea of establishing committees of the various industries, “to get their resources together,” began with Bernard Baruch. CND commodity committees, in their turn, invariably consisted of the leading industrialists in each field; these committees would then negotiate with the committees appointed by industry.As one of many examples, the CND’s “Cooperative Committee on Copper” consisted of the president of Anaconda Copper, the president of Calumet and Hecla Mining, the vice president of Phelps Dodge, the vice president of Kennecott Mines, the president of Utah Copper, the president of United Verde Copper, and Murray M. Guggenheim of the powerful Guggenheim family interests. And the American Iron and Steel Institute furnished the representatives of that industry. Clarkson, Industrial America in the World War, pp. 496–97; Koistinen, “The ‘Industrial-Military Complex’ in Historical Perspective,” p. 386.

At the recommendation of the advisory commission, Herbert Clark Hoover was named head of the new Food Administration. By the end of March, 1917, the CND appointed a Purchasing Board, to coordinate government’s purchases from industry. Chairman of this board, the name of which was soon changed to the General Munitions Board, was Frank A. Scott, a well-known Cleveland manufacturer and president of Warner & Swasey Co.

Yet centralized mobilization was proceeding but slowly through the tangle of bureaucracy, and the United States Chamber of Commerce urged Congress that the director of the CND “should be given power and authority in the economic field analogous to that of the chief of state in the military field.”Clarkson, Industrial America in the World War, p. 28. Finally, in early July, the raw materials, munitions, and supplies departments were brought together under the new War Industries Board, with Scott as chairman, the board that was to become the central agency for collectivism in World War I. The functions of the WIB soon became the coordinating of purchases, the allocation of commodities, and the fixing of prices and priorities in production.

Administrative problems beset the WIB, however, and a satisfactory “autocrat” was sought to rule the entire economy as chairman of the new organization. The willing autocrat was finally discovered in the person of Bernard Baruch in early March, 1918. With the selection of Baruch, urged strongly on President Wilson by Secretary McAdoo, war collectivism had achieved its final form.Scott and Willard had successively been Chairman, which post was then offered to Homer Ferguson, president of the Newport News Shipbuilding Co. and later head of the United States Chamber of Commerce. Baruch’s credentials for the task were unimpeachable; an early supporter of the drive toward war, Baruch had presented a scheme for industrial war mobilization to President Wilson as early as 1915.

The WIB developed a vast apparatus that connected to the specific industries through commodity divisions largely staffed by the industries themselves. The historian of the WIB, himself one of its leaders, exulted that the WIB had established

a system of concentration of commerce, industry, and all the powers of government that was without compare among all the other nations. ... It was so interwoven with the supply departments of the army and navy, of the Allies, and with other departments of the Government that, while it was an entity of its own ... its decisions and its acts ... were always based on a conspectus of the whole situation. At the same time, through the commodity divisions and sections in contact with responsible committees of the commodities dealt with, the War Industries Board extended its antennae into the innermost recesses of industry. Never before was there such a focusing of knowledge of the vast field of American industry, commerce, and transportation. Never was there such an approach to omniscience in the business affairs of a continent.Clarkson, Industrial America in the World War, p. 63.

Big-business leaders permeated the WIB structure from the board itself down to the commodity sections. Thus, Vice Chairman Alexander Legge came from International Harvester Co.; businessman Robert S. Brookings was the major force in insisting on price fixing; George N. Peek, in charge of finished products, had been vice president of Deere & Co., a leading farm-equipment manufacturer. Robert S. Lovett, in charge of priorities, was chairman of the board of Union Pacific Railroad, and J. Leonard Replogle, Steel Administrator, had been president of the American Vanadium Co. Outside of the direct WIB structure, Daniel Willard of the Baltimore & Ohio was in charge of the nation’s railroads, and big businessman Herbert C. Hoover was the “Food Czar.”

In the granting of war contracts, there was no nonsense about competitive bidding. Competition in efficiency and cost was brushed aside, and the industry-dominated WIB handed out contracts as it saw fit.

Any maverick individualistic firm that disliked the mandates and orders of the WIB was soon crushed between the coercion wielded by government and the collaborating opprobrium of his organized business colleagues. Thus, Grosvenor Clarkson writes,

Individualistic American industrialists were aghast when they realized that industry had been drafted, much as manpower had been. ... Business willed its own domination, forged its bonds, and policed its own subjection. There were bitter and stormy protests here and there, especially from those industries that were curtailed or suspended. ... [But] the rents in the garment of authority were amply filled by the docile and cooperative spirit of industry. The occasional obstructor fled from the mandates of the Board only to find himself ostracized by his fellows in industry.Ibid., pp. 154, 159.

One of the most important instrumentalities of wartime collectivism was the Conservation Division of the WIB, an agency again consisting largely of leaders in manufacturing. The Conservation Division had begun as the Commercial Economy Board of the CND, the brainchild of its first chairman, Chicago businessman A.W. Shaw. The Board, or Division, would suggest industrial economies and encourage the industry concerned to establish cooperative regulations. The board’s regulations were supposedly “voluntary,” a voluntarism enforced by “the compulsion of trade opinion — which automatically policed the observance of the recommendations.” For “a practice adopted by the overwhelming consent and even insistence of ... [a man’s] fellows, especially when it bears the label of patriotic service in a time of emergency, is not lightly to be disregarded.”Ibid., p. 215.

In this way, in the name of wartime “conservation,” the Conservation Division set out to rationalize, standardize, and cartelize industry in a way that would, hopefully, continue permanently after the end of the war. Arch W. Shaw summed up the division’s task as follows: to drastically reduce the number of styles, sizes, etc., of the products of industry, to eliminate various styles and varieties, and to standardize sizes and measures. That this ruthless and thoroughgoing suppression of competition in industry was not thought of as a purely wartime measure is made clear in this passage by Grosvenor Clarkson:

The World War was a wonderful school. ... It showed us how so many things may be bettered that we are at a loss where to begin with permanent utilization of what we know. The Conservation Division alone showed that merely to strip from trade and industry the lumber of futile custom and the encrustation of useless variety would return a good dividend on the world’s capital. ... It is, perhaps, too much to hope that there will be any general gain in time of peace from the triumphant experiment of the Conservation Division. Yet now the world needs to economize as much as in war.Ibid., p. 230.

Looking forward to future cartelization, Clarkson declared that such peacetime “economizing ... implies such a close and sympathetic affiliation of competitive industries as is hardly possible under the decentralization of business that is compelled by our antitrust statutes.”

Bernard Baruch’s biographer summarized the lasting results of the compulsory “conservation” and standardization as follows:

Wartime conservation had reduced styles, varieties, and colors of clothing. It had standardized sizes. ... It had outlawed 250 different types of plow models in the U.S., to say nothing of 755 types of drills ... mass production and mass distribution had become the law of the land. ... This, then, would be the goal of the next quarter of the twentieth century: “To Standardize American Industry”; to make of wartime necessity a matter of peacetime advantage.Margaret L. Coit, Mr. Baruch (Boston: Houghton Mifflin Co., 1957), p. 219.

Not only the Conservation Division, but the entire structure of wartime collectivism and cartelization constituted a vision to business and government of a future peacetime economy. As Clarkson frankly put it,

It is little wonder that the men who dealt with the industries of a nation ... meditated with a sort of intellectual contempt on the huge hit-and-miss confusion of peacetime industry, with its perpetual cycle of surfeit and dearth and its internal attempt at adjustment after the event. From their meditations arose dreams of an ordered economic world. ...Clarkson, Industrial America in the World War, p. 312.

They conceived of America as “commodity sectioned” for the control of world trade. They beheld the whole trade of the world carefully computed and registered in Washington, requirements noted, American resources on call, the faucets opened or closed according to the circumstances. In a word, a national mind and will confronting international trade and keeping its own house in business order.

Heart and soul of the mechanism of control of industry by the WIB were its 60-odd commodity sections, committees supervising the various groups of commodities, which were staffed almost exclusively by businessmen from the respective industries. Furthermore, these committees dealt with over three hundred “war service committees” of industry appointed by the respective industrial groupings under the aegis of the Chamber of Commerce of the United States. It is no wonder that in this cozy atmosphere, there was a great deal of harmony between business and government. As Clarkson admiringly described it,

Businessmen wholly consecrated to government service, but full of understanding of the problems of industry, now faced businessmen wholly representative of industry ... but sympathetic with the purpose of government.Ibid., p. 303.

And:

The commodity sections were business operating Government business for the common good. ... The war committees of industry knew, understood, and believed in the commodity chiefs. They were of the same piece.Ibid., pp. 300–01.

All in all, Clarkson exulted that the commodity sections were “industry mobilized and drilled, responsive, keen, and fully staffed. They were militant and in serried ranks.”Ibid., p. 309. On the War Industries Board, the commodity sections, and on big-business sentiment paving the path for the coordinated industry-government system, see Weinstein, The Corporate Ideal in the Liberal State, 1900–1918, p. 223 and passim.

The Chamber of Commerce was particularly enthusiastic over the war service committee system, a system that was to spur the trade association movement in peacetime as well. Chamber president Harry A. Wheeler, vice president of the Union Trust Co. of Chicago, declared that

Creation of the War Service Committees promises to furnish the basis for a truly national organization of industry whose preparations and opportunities are unlimited. ... The integration of business, the expressed aim of the National Chamber, is in sight. War is the stern teacher that is driving home the lesson of cooperative effort.In The Nation’s Business (August, 1918): 9–10. Quoted in Koistinen, “The ‘Industrial-Military Complex’ in Historical Perspective,” pp. 392–93.

The result of all this newfound harmony within each industry, and between industry and government, was to “substitute cooperation for competition.” Competition for government orders was virtually nonexistent, and “competition in price was practically done away with by Government action. Industry was for the time in ... a golden age of harmony,” and freed from the menace of business losses.Clarkson, Industrial America in the World War, p. 313.

One of the crucial functions of wartime planning was price fixing, set in the field of industrial commodities by the Price Fixing Committee of the War Industries Board. Beginning with such critical areas as steel and copper early in the war and then inexorably expanding to many other fields, the price fixing was sold to the public as the fixing of maximum prices in order to protect the public against wartime inflation. In fact, however, the government set the price in each industry at such a rate as to guarantee a “fair profit” to the high-cost producers, thereby conferring a large degree of privilege and high profits on the lower-cost firms.See George P. Adams, Jr., Wartime Price Control (Washington, D.C.: American Council on Public Affairs, 1942), pp. 57, 63–64. As an example, the government fixed the price of copper f.o.b. New York at 23 ½ cents per pound. The Utah Copper Co., which produced over 8% of the total copper output, had estimated costs of 11.8 cents per pound. In this way, Utah Copper was guaranteed nearly 100% profit on costs. Ibid., p. 64n. Clarkson admitted that this system

was a tremendous invigoration of big business and hard on small business. The large and efficient producers made larger profits than normally and many of the smaller concerns fell below their customary returns.Clarkson, Industrial America in the World War.

But the higher-cost firms were largely content with their “fair profit” guarantee.

The attitude of the Price-Fixing Committee was reflected in the statement of its Chairman, Robert S. Brookings, a retired lumber magnate, addressed to the nickel industry: “We are not in an attitude of envying you your profits; we are more in the attitude of justifying them if we can. That is the way we approach these things.”Adams, Wartime Price Control, pp. 57–58.

Typical of the price-fixing operation was the situation in the cotton textile industry. Chairman Brookings reported in April, 1918, that the Cotton Goods Committee had decided to “get together in a friendly way” to try to “stabilize the market.” Brookings appended the feeling of the larger cotton manufacturers that it was better to fix a high long-run minimum price than to take full short-run advantage of the very high prices then in existence.Weinstein, The Corporate Ideal in the Liberal State, 1900–1918, pp. 224–25.

The general enthusiasm of the business world, and especially big business, for the system of war collectivism can now be explained. The enthusiasm was a product of the resulting stabilization of prices, the ironing out of market fluctuations, and the fact that prices were almost always set by mutual consent of government and the representatives of each industry. It is no wonder that Harry A. Wheeler, president of the United States Chamber of Commerce, wrote in the summer of 1917 that war “is giving business the foundation for the kind of cooperative effort that alone can make the U.S. economically efficient.” Or that the head of American Telephone and Telegraph hailed the perfecting of a “coordination to ensure complete cooperation not only between the Government and the companies, but between the companies themselves.” The wartime cooperative planning was working so well, in fact, opined the chairman of the board of Republic Iron and Steel in early 1918, that it should be continued in peacetime as well.Melvin I. Urofsky, Big Steel and the Wilson Administration (Columbus: Ohio State University Press, 1969), pp. 152–53.

The vitally important steel industry is an excellent example of the workings of war collectivism. The hallmark of the closely knit control of the steel industry was the close “cooperation” between government and industry, a cooperation in which Washington decided on broad policy, and then left it up to Judge Elbert Gary, head of the leading steel producer, United States Steel, to implement the policy within the industry. Gary selected a committee representing the largest steel producers to help him run the industry. A willing ally was present in J. Leonard Replogle, head of American Vanadium Co. and chief of the Steel Division of the WIB. Replogle shared the long-standing desire of Gary and the steel industry for industrial cartelization and market stability under the aegis of a friendly federal government. Unsurprisingly, Gary was delighted with his new powers in directing the steel industry and urged that he be given total power “to thoroughly mobilize and if necessary to commandeer.” And Iron Age, the magazine of the iron and steel industry, exulted that

it has apparently taken the most gigantic war in all history to give the idea of cooperation any such place in the general economic program as the country’s steel manufacturers sought to give it in their own industry nearly ten years ago

with the short-lived entente cordiale between Judge Gary and President Roosevelt.Ibid., pp. 153–57. In his important study of business-government relations in the War Industries Board, Professor Robert Cuff has concluded that federal regulation of industry was shaped by big-business leaders, and that relations between government and big business were smoothest in those industries, such as steel, whose industrial leaders had already committed themselves to seeking government-sponsored cartelization. Robert D. Cuff, “Business, Government, and the War Industries Board” (Doctoral dissertation in history, Princeton University, 1966).

It is true that wartime relations between government and steel companies were sometimes strained, but the strain and the tough threat of government commandeering of resources was generally directed at smaller firms, such as Crucible Steel, which had stubbornly refused to accept government contracts.Urofsky, Big Steel and the Wilson Administration, p. 154.

In the steel industry, in fact, it was the big steelmakers — U.S. Steel, Bethlehem, Republic, etc. — who, early in the war, had first urged government price fixing, and they had to prod a sometimes confused government to adopt what eventually became the government’s program. The main reason was that the big steel producers, happy at the enormous increase of steel prices in the market as a result of wartime demand, were anxious to stabilize the market at a high price and thus ensure a long-run profit position for the duration of the war. The government-steel industry price-fixing agreement of September, 1917, was therefore hailed by John A. Topping, president of Republic Steel, as follows:

The steel settlement will have a wholesome effect on the steel business because the principle of cooperative-regulation has been established with Government approval. Of course, present abnormal profits will be substantially reduced but a runaway market condition has been prevented and prosperity extended. ... Furthermore, stability in future values should be conserved.In Iron Age (September 27, 1917). Quoted in Urofsky, Big Steel and the Wilson Administration, pp. 216–17.

Furthermore, the large steel firms were happy to use the fixed prices as a rationale for imposing controls and stability on wages, which were also beginning to rise. The smaller steel manufacturers, on the other hand, often with higher costs, and who had not been as prosperous before the war, opposed price fixing because they wished to take full advantage of the short-run profit bonanza brought about by the war.Urofsky, pp. 203–06. Also see Robert D. Cuff and Melvin I. Urofsky, “The Steel Industry and Price-Fixing During World War I,” Business History Review (Autumn 1970): 291–306.

Under this regime, the steel industry achieved the highest level of profits in its history, averaging 25% per year for the two years of war. Some of the smaller steel companies, benefiting from their lower total capitalization, did almost twice as well.Urofsky, Big Steel and the Wilson Administration, pp. 228–33.

The most thoroughgoing system of price controls during the war was enforced not by the WIB but by the separate Food Administration, over which Herbert Clark Hoover presided as “Food Czar.” The official historian of wartime price control justly wrote that the food control program “was the most important measure for controlling prices which the United States ... had ever taken.”Paul Willard Garrett, Government Control Over Prices (Washington, D.C.: Government Printing Office, 1920), p. 42.

Herbert Hoover accepted his post shortly after American entry into the war, but only on the condition that he alone have full authority over food, unhampered by boards or commissions. The Food Administration was established without legal authorization, and then a bill backed by Hoover was put through Congress to give the system the full force of law. Hoover was also given the power to requisition “necessaries,” to seize plants for government operation, and to regulate or prohibit exchanges.

The key to the Food Administration’s system of control was a vast network of licensing. Instead of direct control over food, the FA was given the absolute power to issue licenses for any and all divisions of the food industry, and to set the conditions for keeping the license. Every dealer, manufacturer, distributor, and warehouser of food commodities was required by Hoover to maintain its federal license.

A notable feature introduced by Hoover in his reign as Food Czar was the mobilization of a vast network of citizen volunteers as a mass of eager participants in enforcing his decrees. Thus, Herbert Hoover was perhaps the first American politician to realize the potential — in gaining mass acceptance and in enforcing government decrees — in the mobilizing of masses through a torrent of propaganda to serve as volunteer aides to the government bureaucracy. Mobilization proceeded to the point of inducing the public to brand as a virtual moral leper anyone dissenting from Mr. Hoover’s edicts. Thus

The basis of all ... control exercised by the Food Administration was the educational work which preceded and accompanied its measures of conservation and regulation. Mr. Hoover was committed thoroughly to the idea that the most effective method to control foods was to set every man, woman, and child in the country at the business of saving food. ... The country was literally strewn with millions of pamphlets and leaflets designed to educate the people to the food situation. No war board at Washington was advertised as widely as the U.S. Food Administration. There were Food Administration insignia for the coat lapel, store window, the restaurant, the train, and the home. A real stigma was placed upon the person who was not loyal to Food Administration edicts through pressure by the schools, churches, women’s clubs, public libraries, merchants’ associations, fraternal organizations, and other social groups.Ibid., p. 56.

The method by which the Food Administration imposed price control was its requirement that its licensees should receive “a reasonable margin of profit.” This “reasonable margin” was interpreted as a margin over and above each producer’s costs, and this cost plus “reasonable profit” for each dealer became the rule of price control. The program was touted to the public as a means of keeping profits and food prices down. Although the administration certainly wished to stabilize prices, the goal was also and more importantly to cartelize. Industry and government worked together to make sure that individual maverick competitors did not get out of line; prices in general were to be set at a level to guarantee a “reasonable” profit to everyone. The goal was not lower prices, but uniform, stabilized, noncompetitive prices for all. The goal was far more to keep prices up than to keep them down. Indeed, any overly greedy competitor who tried to increase his profits above prewar levels by cutting his prices was dealt with most severely by the Food Administration.

Let us consider two of the most important food-control programs during World War I: wheat and sugar. Wheat price control, the most important program, came in the wake of wartime demand, which had pushed wheat prices up very rapidly to their highest level in the history of the United States. Thus, wheat increased by one dollar a bushel in the course of two months at the start of the war, reaching the unheard of price of three dollars a bushel. Control came in the wake of agitation that government must step in to thwart “speculators” by fixing maximum prices on wheat. Yet, under pressure by the agriculturists, the government program fixed by statute, not maximum prices for wheat but minima; the Food Control Act of 1917 fixed a minimum price of two dollars a bushel for the next year’s wheat crop. Not content with this special subsidy, the president proceeded to raise the minimum to $2.26 a bushel in mid-1918, a figure that was then the precise market price for wheat. This increased minimum effectively fixed the price of wheat for the duration of the war. Thus, the government made sure that the consumers could not possibly benefit from any fall in wheat prices.

To enforce the artificially high price of wheat, Herbert Hoover established the Grain Corporation, “headed by practical grain men,” which purchased the bulk of the wheat crop in the United States at the “fair price” and then resold the crop to the nation’s flour mills at the same price. To keep the millers happy, the Grain Corporation guaranteed them against any possible losses from unsold stocks of wheat or flour. Moreover, each mill was guaranteed that its relative position in the flour industry would be maintained throughout the war. In this way, the flour industry was successfully cartelized through the instrument of government. Those few mills who balked at the cartel arrangement were dealt with handily by the Food Administration; as Garrett put it: “their operations ... were reasonably well controlled ... by the license requirements.”Ibid., p. 66.

The excessively high prices of wheat and flour also meant artificially high costs to the bakers. They, in turn, were taken under the cozy cartel umbrella by being required, in the name of “conservation,” to mix inferior products with wheat flour at a fixed ratio. Each baker was of course delighted to comply with a requirement that he make inferior products, which he knew was also being enforced upon his competitors. Competition was also curtailed by the Food Administration’s compulsory standardization of the sizes of bread loaves, and by prohibiting price cutting through discounts or rebates to particular customers — the classic path toward the internal breakup of any cartel.Ibid., p. 73.

In the particular case of sugar, there was a much more sincere effort to keep down prices — due to the fact that the United States was largely an importer rather than a producer of sugar. Herbert Hoover and the Allied governments duly formed an International Sugar Committee, which undertook to buy all of their countries’ sugar, largely from Cuba, at an artificially low price, and then to allocate the raw sugar to the various refiners. Thus, the Allied governments functioned as a giant buying cartel to lower the price of their refiners’ raw material.

Herbert Hoover instigated the plan for the International Sugar Committee, and the U.S. government appointed the majority of the five-man committee. As Chairman of the committee, Hoover selected Earl Babst, president of the powerful American Sugar Refining Co., and the other American members also represented refiner interests. The ISC promptly fixed a sharp reduction of the price of sugar: lowering the New York price of Cuban raw sugar from its high market price of six and three-quarter cents per pound in the summer of 1917 to six cents per pound. When the Cubans understandably balked at this artificially forced price reduction of their cash crop, the United States State Department and the Food Administration collaborated to coerce the Cuban government into agreement. Somehow, the Cubans were unable to obtain import licenses for needed wheat and coal from the United States Food Administration, and the result was a severe shortage of bread, flour, and coal in Cuba. Finally, the Cubans capitulated in mid-January, 1918, and the import licenses from the United States were rapidly forthcoming.See Robert F. Smith, The United States and Cuba (New York: Bookman Associates, 1960), pp. 20–21. Cuba also induced to prohibit all sugar exports except to the International Sugar Committee.

Apparently, Mr. Babst ensured an extra bonus to his American Sugar Refining Company, for, shortly, officials of competing American refineries were to testify before Congress that this company had particularly profited from the activities of the International Sugar Committee and from the price that it fixed on Cuban sugar.Ibid., p. 191.

Although the American government pursued with great diligence the goal of pushing down raw material prices for U.S. refiners, it also realized that it could not force down the price of raw sugar too low, since the government had to consider the marginal U.S. cane and beet-sugar producers, who had to receive their duly appointed “fair return.” Jointly to harmonize and subsidize both the sugar refiners and the sugar growers in the United States, Mr. Hoover established a Sugar Equalization Board that would simultaneously keep the price of sugar low to Cuba while keeping it high enough for the American producers. The Board accomplished this feat by buying the Cuban sugar at the fixed low price and then reselling the crop to the refiners at a higher price to cover the American producers.Garrett, Wartime Price Control, pp. 78–85.

The result of the artificially low prices for sugar was, inevitably, to create a severe sugar shortage, by reducing supplies and by stimulating an excessive public consumption. The result was that sugar consumption was then severely restricted by federal rationing of sugar.

It is not surprising that the food industries were delighted with the wartime control program. Expressing the spirit of the entire war-collectivist regime, Herbert Hoover, in the words of Paul Garrett

maintained, as a cardinal policy from the beginning, a very close and intimate contact with the trade. The men, whom he chose to head his various commodity sections and responsible positions, were in a large measure tradesmen. ... The determination of the policies of control within each branch of the food industry was made in conference with the tradesmen of that branch. ... It might be said ... that the framework of food control, as of raw material control, was built upon agreements with the trade. The enforcement of the agreements once made, moreover, was intrusted in part to the cooperation of constituted trade organizations. The industry itself was made to feel responsible for the enforcement of all rules and regulations.Ibid., pp. 55–56.

Also separate from the War Industries Board were the nation’s railroads, which received the greatest single ministration of government dictation as compared to any other industry. The railroads, in fact, were seized and operated directly by the federal government.

As soon as the United States entered the war, the administration urged the railroads to unite as one in behalf of the war effort. The railroads were delighted to comply and quickly formed what became known as the Railroads’ War Board, promising faithfully to pursue a goal that they had long sought in peacetime: to cease competitive activities and to coordinate railroad operations.See Kerr, American Railroad Politics, 1914–1920, pp. 44 ff. Daniel Willard, president of the Baltimore & Ohio Railroad and Bernard Baruch’s predecessor as head of the WIB, happily reported that the railroads had agreed to vest their War Board with complete authority to override individual railroad interests. Under its Chairman, Fairfax Harrison of the Southern Railroad, the War Board established a Committee on Car Service to coordinate national car supplies. Aiding the coordination effort was the Interstate Commerce Commission, the longtime federal regulatory body for the railroads. Once again, the government-promoted monopoly was an inspiration to many who were looking ahead to the peacetime economy. For several years the railroads had been agitating for “scientific management” as a means of achieving higher rates from the ICC and a governmentally imposed cartelization, but they had been thwarted by the pressure of the organized shippers, the industrial users of the railroads.

But now even the shippers were impressed. Max Thelen, chairman of the California Railroad Commission, president of the National Association of Railway and Utilities Commissions, and the leading spokesman for the organized shippers, agreed that the critical railroad problem was “duplication” and the “irrational” lack of complete inter-railroad coordination. And Senator Francis G. Newlands (D., Nev.), the most powerful congressman on railroad affairs as the chairman of a joint committee on transportation regulation, opined that the wartime experience was “somewhat shattering our old views regarding antitrust laws.”Ibid., p. 48.

Soon, however, it became clear that the system of voluntary private coordination was not really working well. Traffic departments of individual roads persisted in competitive practices, the railroad brotherhood unions were persistently demanding substantial wage increases, and the railroads and organized shippers locked horns over railroad demands for an across-the-board rate increase. All groups felt that regional coordination and overall efficiency would best be achieved by outright federal operation of the railroads. The shippers first proposed the scheme as a method of achieving coordination and to forestall higher freight rates; the unions seconded the plan in order to obtain wage increases from the government, and the railroads cheerfully agreed when President Wilson assured them that each road would be guaranteed its 1916/17 profits — two years of unusually high profits for the railroad industry. With the federal government offering to take on the headaches of wartime dislocation and management, while granting the roads a very high guaranteed profit for doing nothing, why shouldn’t the railroads leap to agreement?

The most enthusiastic administration proponent of federal operation of the railroads was Secretary of the Treasury McAdoo, a former New York railroad executive and close associate of the Morgan interests, who in turn were the leading underwriters and owners of railroad bonds. McAdoo was rewarded by being named head of the United States Railroad Administration after Wilson seized the railroads on December 28, 1917.

Federal rule by the Morgan-oriented McAdoo proved to be a bonanza for the nation’s railroads. Not only were the railroads now fully monopolized by direct government operation, but also the particular railroad executives now found themselves armed with the coercive power of the federal government. For McAdoo chose as his immediate assistants a group of top railroad executives, and all rate-setting powers of the ICC were shifted to the railroad-dominated Railroad Administration for the duration.McAdoo’s “cabinet,” which assisted him in running the railroads, included Walker D. Hines and Edward Chambers, respectively chairman of the board and vice president of the Santa Fe R.R.; Henry Walters, chairman of the board of the Atlantic Coast R.R., Hale Holden, of the Burlington R.R., A.H. Smith, president of the New York Central R.R., John Barton Payne, formerly chief counsel of the Chicago Great Western R.R., and Comptroller of the Currency John Skelton Williams, formerly chairman of the board of the Seaboard R.R. Hines was to be McAdoo’s principal assistant; Payne became head of traffic. The Division of Operation was headed by Carl R. Gray, president of the Western Maryland R.R. One Unionist, W.S. Carter, head of the Brotherhood of Firemen and Engineers, was brought in to head the Division of Labor. The significance of the shift is that the railroads, although largely responsible for the inception and growth of the ICC as a cartelizing agency for the railroad industry, had seen control of the ICC slip into the hands of the organized shippers in the decade before the war. This meant that the railroads had found it very difficult to win freight rate increases from the ICC. But now the wartime federal control of the railroads was shunting the shippers aside.Kerr, American Railroad Politics, 1914–1920, pp. 14–22.

McAdoo’s brazen appointment of railroad men to virtually all the leading positions in the Railroad Administration, to the virtual exclusion of shippers and academic economists, greatly angered the shippers, who had launched an intense barrage of criticism of the system by midsummer of 1918. This barrage came to a head when McAdoo increasingly turned the direction of the RA, including the appointment of regional directors, over to his principal assistant, railroad executive Walker D. Hines. Shippers and ICC commissioners complained that

railroad lawyers from the entire country descended on Washington, told their troubles to other railroad lawyers serving on McAdoo’s staff, and were “told to go into an adjoining room and dictate what orders they want.”Ibid., p. 80.

As in the case of the War Industries Board, the railroad executives used their coercive governmental powers to deal a crippling blow to diversity and competition, on behalf of monopoly, in the name of “efficiency” and standardization. Again, over the opposition of shippers, the RA ordered the compulsory standardization of locomotive and equipment design, eliminated “duplicate” (i.e., competitive) passenger service and coal transportation, shut down off-line traffic offices, and ordered the cessation of competitive solicitation of freight by the railroads.

All of these edicts reduced railroad services to the hapless shippers. There were still other coerced reductions of service. One ended the shippers’ privileges of specifying freight routes — and thereby of specifying the cheapest routes for shipping their goods. Another upset the peacetime practice of making the railroads liable for losses and damages to shipments; instead, the entire burden of proof was placed on the shippers. Another RA ruling — the “sailing day plan” — ordered freight cars to remain in their terminals until filled, thus sharply curtailing service to small-town shippers.

The granting of absolute power to the railroad-dominated RA was cemented by the Federal Control Act of March, 1918, which ex post facto legalized the illegal federal takeover. Working closely with railroad lobbyists, the RA, backed by the full support of President Wilson, was able to drive through Congress the transfer of rate-making powers to itself from the ICC. Furthermore, all power was taken away from the invariably shipper-dominated state railroad commissions.

The RA hastened to exercise its rate-setting powers, announcing freight rate increases of 25% across the board in the spring of 1918 — an act that permanently cemented shipper hostility to the system of federal operation. To add insult to injury, the new higher rates were set without any public hearings or consultation with other agencies or interests involved.

2. Intellectuals and the Legacy of War Collectivism

Historians have generally treated the economic planning of World War I as an isolated episode dictated by the requirements of the day and having little further significance. But, on the contrary, the war collectivism served as an inspiration and as a model for a mighty army of forces destined to forge the history of 20th-century America. For big business, the wartime economy was a model of what could be achieved in national coordination and cartelization, in stabilizing production, prices, and profits, in replacing old-fashioned competitive laissez-faire by a system that they could broadly control and that would harmonize the claims of various powerful economic groups. It was a system that had already abolished much competitive diversity in the name of standardization. The wartime economy especially galvanized such business leaders as Bernard Baruch and Herbert Hoover, who would promote the cooperative “association” of business trade groups as secretary of commerce during the 1920s, an associationism that paved the way for the cooperative statism of Franklin Roosevelt’s AAA and NRA.

The wartime collectivism also held forth a model to the nation’s liberal intellectuals, for here was seemingly a system that replaced laissez-faire not by the rigors and class hatreds of proletarian Marxism, but by a new strong State, planning and organizing the economy in harmony with all leading economic groups. It was, not coincidentally, to be a neomercantilism, a “mixed economy,” heavily staffed by these selfsame liberal intellectuals. And finally, both big business and the liberals saw in the wartime model a way to organize and integrate the often unruly labor force as a junior partner in the corporatist system — a force to be disciplined by their own “responsible” leadership of the labor unions.

For the rest of his life, Bernard Mannes Baruch sought to restore the lineaments of the wartime model. Thus, in summing up the experience of the WIB, Baruch extolled the fact that:

many businessmen have experienced during the war, for the first time in their careers, the tremendous advantages, both to themselves and to the general public, of combination, of cooperation and common action ...

Baruch called for the continuance of such corporate associations, in “inaugurating rules” to eliminate “waste” (i.e., competition), to exchange trade information, to agree on the channeling of supply and demand among themselves, to avoid “extravagant” forms of competition and to allocate the location of production. Completing the outlines of a corporate state, Baruch urged that such associations be governed by a federal agency, either the Department of Commerce or the Federal Trade Commission,

an agency whose duty it should be to encourage, under strict Government supervision, such cooperation and coordination ...Bernard M. Baruch, American Industry in the War (New York: Prentice-Hall, 1941), pp. 105–06.

Baruch also envisioned a federal board for the retraining and channeling of labor after the war. At the very least, he urged standby legislation for price control and for industrial coordination and mobilization in the event of another war.Coit, Mr. Baruch, pp. 202–03, 218.

During the 1920s and 1930s, Bernard Baruch served as a major inspiration of the drive toward a corporate state; moreover, many of the leaders of this drive were men who had served under him during the heady days of the WIB and who continued to function frankly as “Baruch’s men” in national affairs. Thus, aided by Baruch, George N. Peek, of the Moline Plow Company, launched in the early 1920s the drive for farm price supports through federally organized farm cartels that was to culminate in President Hoover’s Federal Farm Board in 1929 and then in Roosevelt’s AAA. Peek’s farm-equipment business, of course, stood to benefit greatly from farm subsidies. Hoover appointed as first Chairman of the FFB none other than Baruch’s old top aide from World War I, Alexander Legge of International Harvester, the leading farm machinery manufacturer. When Franklin Roosevelt created the AAA, he first offered the job of director to Baruch and then gave the post to Baruch’s man, George Peek.

Neither was Baruch laggard in promoting a corporatist system for industry as a whole. In the spring of 1930, Baruch proposed a peacetime reincarnation of the WIB as a “Supreme Court of Industry.” In September of the following year, Gerard Swope, head of General Electric and brother of Baruch’s closest confidant Herbert Bayard Swope, presented an elaborated plan for a corporate state that essentially revived the system of wartime planning. At the same time, one of Baruch’s oldest friends, former secretary William Gibbs McAdoo, was proposing a similar plan for a “Peace Industries Board.” After Hoover dismayed his old associates by rejecting the plan, Franklin Roosevelt embodied it in the NRA, selecting Gerard Swope to help write the final draft, and picking another Baruch disciple and World War aide General Hugh S. Johnson — also of the Moline Plow Company — to direct this major instrument of state corporatism. When Johnson was fired, Baruch himself was offered the post.Ibid., pp. 440–43.

Other leading NRA officials were veterans of war mobilization. Johnson’s chief of staff was another old friend of Baruch’s, John Hancock, who had been Paymaster General of the Navy during the war and had headed the naval industrial program for the War Industries Board; other high officials of the NRA were Dr. Leo Wolman, who had been head of the production-statistics division of the WIB; Charles F. Homer, leader of the wartime Liberty Loan drive; and General Clarence C. Williams, who had been Chief of Ordnance in charge of Army war purchasing. Other WIB veterans highly placed in the New Deal were Isador Lubin, United States Commissioner of Labor Statistics in the New Deal; Captain Leon Henderson of the Ordnance Division of the WIB; and Senator Joseph Guffey (D., Pa.), who had worked in the WIB on conservation of oil, and who helped pattern the oil and coal controls of the New Deal on the wartime Fuel Administration.See William E. Leuchtenburg, “The New Deal and the Analogue of War,” in Change and Continuity in Twentieth-Century America, John Braeman et al., eds. (New York: Harper & Row, 1967), pp. 122–23.

Another leading promoter of the new cooperation subsequent to his experience as wartime planner was Herbert Clark Hoover. As soon as the war was over, Hoover set out to “reconstruct America” along the lines of peacetime cooperation. He urged national planning through “voluntary” cooperation among businessmen and other economic groups under the “central direction” of the government. The Federal Reserve System was to allocate capital to essential industries and thereby to eliminate the competitive “wastes” of the free market. And in his term as Secretary of Commerce during the 1920s, Hoover assiduously encouraged the cartelization of industry through trade associations. In addition to inaugurating the modern program of farm price supports in the Federal Farm Board, Hoover urged the coffee buyers to form a cartel to lower buying prices, established a buying cartel in the rubber industry, led the oil industry in working toward restrictions on oil production in the name of “conservation”, tried repeatedly to raise prices, restrict production, and encourage marketing co-ops in the coal industry, and tried to force the cotton textile industry into a nationwide cartel to restrict production. Specifically in furtherance of the wartime abolition of thousands of diverse and competitive products, Hoover continued to impose standardization and “simplification” of materials and products during the 1920s. In this way, Hoover managed to abolish or “simplify” about a thousand industrial products. The “simplification” was worked out by the Department of Commerce in collaboration with committees from each industry.See Herbert Hoover, Memoirs (New York: Macmillan, 1952), vol. 2, pp. 27, 66–70; on Hoover and the export industries, Joseph Brandes, Herbert Hoover and Economic Diplomacy (Pittsburgh: University of Pittsburgh Press, 1962); on the oil industry, Gerald D. Nash, United States Oil Policy, 1890–1964 (Pittsburgh: University of Pittsburgh Press, 1968); on coal, Ellis W. Hawley, “Secretary Hoover and the Bituminous Coal Problem, 1921–1928,” Business History Review (Autumn 1968): 247–70; on cotton textiles, Louis Galambos, Competition and Cooperation (Baltimore: Johns Hopkins Press, 1966). Grosvenor Clarkson hailed the fact that

it is probable that there will never again be such a multiplicity of styles and models in machinery and other heavy and costly articles as there was before the restrictions necessitated by the war. ... The ideas conceived and applied by the War Industries Board in war are being applied in peace by the Department of Commerce ...Clarkson, Industrial America in the World War, pp. 484–85.

Not the least of the influential groups dazzled and marked by the experience of war collectivism were the liberal intellectuals. Never before had so many intellectuals and academicians swarmed into government to help plan, regulate, and mobilize the economic system. The intellectuals served as advisers, technicians, framers of legislation, and administrators of bureaus. Furthermore, apart from the rewards of newly acquired prestige and power, the war economy held out to such intellectuals the promise of transforming the society into a “third way” completely different from the laissez-faire past that they scorned or the looming proletarian Marxism that they reviled and feared. Here was a planned corporate economy that seemed to harmonize all groups and classes under a strong and guiding nation-state with the liberals themselves at or near the helm. In a notable article, Professor Leuchtenburg saw the war collectivism as “a logical outgrowth of the Progressive movement.”Leuchtenburg, “The New Deal,” p. 84n. He demonstrated the enthusiasm of the Progressive intellectuals for the social transformation effected by the war. Thus, the New Republic hailed the “revolutionizing” of society by means of the war; John Dewey hailed the replacement of production for profit and “the absoluteness of private property” by production for use. Economists were particularly enchanted by the “notable demonstration of the power of war to force concert of effort and collective planning” and looked for “the same sort of centralized directing now employed to kill their enemies abroad for the new purpose of reconstructing their own life at home.”Ibid., p. 89.

Rexford Guy Tugwell, ever alert to the advance of social engineering, was soon to look back wistfully on “America’s wartime socialism”; lamenting the end of the war, he declared that “only the Armistice prevented a great experiment in control of production, control of price, and control of consumption.” For, during the war, the old system of industrial competition had “melted away in the fierce new heat of nationalistic vision.”Ibid., pp. 90–92. It was very similar considerations that also brought many liberal intellectuals, especially including those of the New Republic, into at least a temporary admiration for Italian Fascism. Thus, see John P. Diggins, “Flirtation with Fascism: American Pragmatic Liberals and Mussolini’s Italy,” American Historical Review (January, 1966): 487–506.

Not merely the NRA and AAA, but virtually the entire New Deal apparatus — including the bringing to Washington of a host of liberal intellectuals and planners — owed its inspiration to the war collectivism of World War I. The Reconstruction Finance Corporation, founded by Hoover in 1932 and expanded by Roosevelt’s New Deal, was a revival and expansion of the old War Finance Corporation, which had loaned government funds to munitions firms. Furthermore, Hoover, after offering the post to Bernard Baruch, named as first Chairman of the RFC, Eugene Meyer, Jr., an old protégé of Baruch’s, who had been managing director of the WFC. Much of the old WFC staff and method of operations were taken over bodily by the new agency. The Tennessee Valley Authority grew out of a wartime government nitrate and electric-power project at Muscle Shoals, and in fact included the old nitrate plant as one of its first assets. Moreover, many of the public power advocates in the New Deal had been trained in such wartime agencies as the Power Section of the Emergency Fleet Corporation. And even the innovative government corporate form of the TVA was based on wartime precedent.Leuchtenburg, “The New Deal,” pp. 109–10.

Wartime experience also provided the inspiration for the public housing movement of the New Deal. During the war, the Emergency Fleet Corp. and the United States Housing Corp. were established to provide housing for war workers. The war established the precedent of federal housing and also trained architects like Robert Kohn, who functioned as chief of production for the housing division of the United States Shipping Board. After the war, Kohn exulted that “the war has put housing ‘on the map’ in this country,” and in 1933, Kohn was duly named by President Roosevelt to be the director of the New Deal’s first venture into public housing. Furthermore, the Emergency Fleet Corp. and the United States Housing Corp. established large-scale public housing communities on planned “garden city” principles (Yorkship Village, N.J.; Union Park Gardens, Del.; Black Rock and Crane Tracts, Conn.) — principles finally remembered and put into effect in the New Deal and afterward.Ibid., pp. 111–12.

The oil and coal controls established in the New Deal also rested on the precedent of the wartime Fuel Administration. Indeed, Senator Joseph Guffey (D., Pa.), leader in the coal and oil controls, had been head of the petroleum section of the War Industries Board.

Deeply impressed with the “national unity” and mobilization achieved during the war, the New Deal established the Civilian Conservation Corps to instill the martial spirit in America’s youth. The idea was to take the “wandering boys” off the road and “mobilize” them into a new form of American Expeditionary Force. The Army, in fact, ran the CCC camps; CCC recruits were gathered at Army recruiting stations, equipped with World War I clothing, and assembled in army tents. The CCC, the New Dealers exulted, had given a new sense of meaning to the nation’s youth, in this new “forestry army.” Speaker Henry T. Rainey (D., Ill.) of the House of Representatives put it this way:

They [the CCC recruits] are also under military training and as they come out of it ... improved in health and developed mentally and physically and are more useful citizens ... they would furnish a very valuable nucleus for an army.Ibid., p. 117. Roosevelt named union leader Robert Fechner, formerly engaged in war labor work, as director of the CCC to provide a civilian camouflage for the program, p. 115n.

3. The Drive to Prolong War Collectivism

Particularly good evidence of the deep imprint of war collectivism was the reluctance of many of its leaders to abandon it when the war was finally over. Business leaders pressed for two postwar goals: continuance of government price fixing to protect them against an expected postwar deflation, and a longer-range attempt to promote industrial cartelization in peacetime. In particular, businessmen wanted the price maxima (which had often served as minima instead) to be converted simply into outright minima for the postwar period. Wartime quotas to restrict production, furthermore, needed only to remain in being to function as a frank cartelizing for raising prices in time of peace.

Accordingly, many of the industrial War Service Committees, and their WIB Section counterparts, urged the continuance of the WIB and its price-fixing system. In particular, section chiefs invariably urged continued price control in those industries that feared postwar deflation, while advocating a return to a free market wherever the specific industry expected a continuing boom. Thus, Professor Himmelberg concluded,

Section chiefs in their recommendations to the Board consistently followed the wishes of their industries in urging protection if the industry expected price declines and release of all controls when the industry expected a favorable postwar market.Robert F. Himmelburg, “The War Industries Board and the Antitrust Question in November 1918,” Journal of American History (June, 1965): 65.

Robert S. Brookings, Chairman of the Price-Fixing Committee of the WIB, declared that the WIB would be “as helpful ... during the reconstruction period as we have during the war period in stabilizing values.”Ibid.

From the big-business world, meanwhile, Harry A. Wheeler, president of the United States Chamber of Commerce, presented to Woodrow Wilson in early October 1918, an ambitious scheme for a “Reconstruction Commission,” to be composed of all the economic interests of the nation.

The WIB itself concurred and urged the president to allow it to continue after the war. Baruch himself urged on Wilson the continuation of at least the minimum price-fixing policies of the WIB. However, Baruch was gulling the public when he foresaw a postwar WIB as guarding against both inflation and deflation; there was no inclination to impose maximum prices against inflation.

The great problem with these ambitious plans of both industry and government was President Wilson himself. Perhaps a lingering attachment to the ideals, or at least to the rhetoric, of free competition prevented the president from giving any favorable attention to these postwar schemes.Ibid., pp. 63–64; Urofsky, Big Steel and the Wilson Administration, pp. 298–99. The attachment was particularly nourished by Secretary of War Newton D. Baker, of all Wilson’s advisers the closest to a believer in laissez-faire. Throughout October 1918, Wilson rejected all of these proposals. The response of Baruch and the WIB was to put further pressure on Wilson during early November, by publicly predicting and urging that the WIB would definitely be needed during demobilization. Thus The New York Times reported, the day after the Armistice, that

War Industries Board officials declared there would be much work for that organization to do. They foresee no serious industrial dislocation with the Government’s grip on all war industries and material held tight.Quoted in Himmelburg, “The War Industries Board,” p. 64.

The president remained adamant, however, and on November 23 he ordered the complete disbanding of the WIB by the end of the year. The disappointed WIB officials accepted the decision without protest, partly because of expected congressional opposition to any attempt to continue, partly from the hostility to continued controls by those industries anticipating a boom. Thus, the shoe industry particularly chafed at any continuing controls.Favoring continuing price controls were such industries as the chemical, iron and steel, lumber, and finished products generally. Opposing industries included abrasives, automotive products, and newspapers. Ibid., pp. 62, 65, 67. The industries favoring controls, however, urged the WIB at least to ratify their own price minima and agreements for restricting production for the coming winter, and to do so just before the disbandment of the agency. The Board was sorely tempted to engage in this final exploit, and indeed was informed by its legal staff that it could successfully continue such controls beyond the life of the agency even against the will of the president. The WIB, however, reluctantly turned down requests to this effect by the acid, zinc, and steel manufacturers on December 11.Urofsky, Big Steel and the Wilson Administration, pp. 306–07. It only rejected the price-fixing plans, however, because it feared being overturned by the courts should the Attorney General challenge such a decision.

One of the most ardent advocates of continued WIB price control was the great steel industry. Two days after the Armistice, Judge Gary of U.S. Steel urged the WIB to continue its regulations and declared that “The members of the steel industry desire to cooperate with each other in every proper way.” Gary urged a three-month extension of price fixing, with further gradual reductions that would prevent a return to “destructive” competition. Baruch replied that he was personally “willing to go to the very limit,” but he was blocked by Wilson’s attitude.Ibid., pp. 294–302.

If the WIB itself could not continue, perhaps the wartime cartelization could persist in other forms. During November, Arch W. Shaw, Chicago industrialist and head of the Conservation Division of the WIB (whose wartime work in fostering standardization was being transferred to the Department of Commerce) and Secretary of Commerce William Redfield agreed on a bill to allow manufacturers to collaborate in “the adoption of plans for the elimination of needless waste in the public interest,” under the supervision of the Federal Trade Commission. When this proposal fizzled, Edwin B. Parker, Priorities Commissioner of the WIB, proposed in late November a frankly cartelizing bill that would allow the majority of the firms in any given industry to set production quotas that would have to be obeyed by all the firms in that industry. The Parker plan won the approval of Baruch, Peek, and numerous other government officials and businessmen, but WIB’s legal counsel warned that Congress would never give its consent.Himmelberg, “The War Industries Board,” pp. 70–71. Another proposal that interested Baruch was advanced by Mark Requa, Assistant Food Administrator, who proposed a United States Board of Trade to encourage and regulate industrial agreements that “promoted the national welfare.”Ibid., p. 72; Weinstein, The Corporate Ideal in the Liberal State, pp. 231–32.

Whatever the reason, Bernard Baruch failed to press hard for these proposals, and so they died on the vine. If Baruch failed to press matters, however, his associate George Peek, head of the Finished Products Division of the WIB, was not so reticent. By mid-December 1918, Peek wrote Baruch that the postwar era must retain the “benefits of proper cooperation.” In particular,

proper legislation should be enacted to permit cooperation in industry, in order that the lessons we have learned during the war may be capitalized ... in peacetime ... Conservation; ... standardization of products and processes, price fixing under certain conditions, etc., should continue with Government cooperation.Himmelberg, “The War Industries Board,” p. 72.

By late December, Peek was proposing legislation for

some kind of an Emergency Peace Bureau ... in order that businessmen may, in conjunction with such a Bureau, have an opportunity to meet and cooperate with Governmental cooperation.Robert D. Cuff, “A ‘Dollar-a-Year Man’ in Government: George N. Peek and the War Industries Board,” Business History Review (Winter 1967): 417.

The leading business groups endorsed similar plans. In early December, the Chamber of Commerce of the United States called a meeting of the various industrial War Service Committees to convene as a “Reconstruction Congress of American Industry.” The Reconstruction Congress called for revision of the Sherman Act to permit “reasonable” trade agreements under a supervisory body. Furthermore, a nationwide Chamber referendum, in early 1919, approved such a proposal by an overwhelming majority, and President Harry Wheeler urged the “cordial acceptance by organized business” of regulation that would ratify business agreements. The National Association of Manufacturers, before the war devoted to competition, warmly endorsed the same goals.

The last gasp of wartime cartelization came in February 1919, with the establishment by the Department of Commerce of the Industrial Board.On the Industrial Board, see Robert F. Himmelberg, “Business, Antitrust Policy, and the Industrial Board of the Department of Commerce, 1919,” Business History Review (Spring 1968), pp. 1–23. Secretary of Commerce William C. Redfield, formerly president of the American Manufacturers Export Association, had long championed the view that government should promote and coordinate industrial cooperation. Redfield saw an entering wedge with the transfer of the WIB’s Conservation Division to his department shortly after the Armistice. Redfield continued the wartime stimulation of trade associations, and to that end established an advisory board of former WIB officials. One of these advisers was George Peek; another was Peek’s assistant on the WIB, Ohio lumber executive William M. Ritter. It was Ritter, in fact, who originated the idea of the Industrial Board.

The Industrial Board, conceived by Ritter in January, 1919, and enthusiastically adopted and pushed by Secretary Redfield, was a cunning scheme. On its face, and as promoted to President Wilson and to others in the administration and Congress, the Board was merely a device to secure large price reductions, and thereby to lower the inflated level of general prices and to stimulate consumer demand. It was therefore seemingly unrelated to the previous cartelizing drive and hence won the approval of the president, who established the new Board in mid-February. At Ritter’s urging, George Peek was named chairman of the IB; other members included Ritter himself, George R. James, head of a major Memphis dry-goods concern and former chief of the Cotton and Cotton Linters section of the WIB; Lewis B. Reed, vice president of the U.S. Silica Co. and another former assistant to Peek; steel castings manufacturer Samuel P. Bush, former head of the WIB’s Facilities Division; Atlanta steel-fabricating manufacturer Thomas Glenn, also a veteran of the WIB; and two “outsiders,” one representing the Labor Department and the other the Railroad Administration.

No sooner did the IB get under way than it pursued its real, but previously camouflaged, purpose: not to reduce, but rather to stabilize prices at existing high levels. Moreover, the method of stabilization would be the longed-for but previously rejected path of ratifying industrial price agreements arrived at in collaboration with the Board. Deciding on this cartelizing policy in early March, the IB moved toward the first application in a conference with, unsurprisingly, the steel industry on March 19–20, 1919. Opening the conference, Chairman George Peek grandly declared that the event might prove “epoch-making,” especially in establishing “real genuine cooperation between Government, industry, and labor, so that we may eliminate ... the possibility of the destructive forces ...”Himmelburg, “The War Industries Board,” p. 13. The steel men were of course delighted, hailing the “great chance ... to come into close contact with the Government itself ...”Professor Urofsky surmised from the orderly and very moderate price reductions in steel during the first months of 1919 that Robert S. Brookings had quietly given the steel industry the green light to proceed with its own price fixing. Urofsky, Big Steel and the Wilson Administration, pp. 307–08. The IB told the steel industry that any agreement to sustain prices agreed upon by the conference would be immune from the antitrust laws. Not only was the price list offered by the IB to the steel men still very high even if moderately lower than existing prices; but Peek agreed to announce to the public that steel prices would not be lowered further for the remainder of the year. Peek advised the steel men that his statement would be their biggest asset, for “I don’t know what I wouldn’t have given in times past if in my own business I could say that the government of the United States says this is as low a price as you could get.”Himmelburg, “The War Industries Board,” p. 14n.

The IB-steel agreement lowered steel prices by a modest 10% to 14%. The small, high-cost steel producers were disgruntled, but the big steel firms welcomed the agreement as a coordinated, orderly reduction of inflated prices, and especially welcomed the Board’s guarantee of the fixed price for the remainder of the year.

The elated IB proceeded with similar conferences for the coal and building materials industries, but two dark clouds promptly appeared: the refusal of the government’s own Railroad Administration to pay the fixed, agreed-upon, price for steel rails and for coal; and the concern of the Justice Department for the evident violation of the antitrust laws. The railroad men running the RA particularly balked at the reduced but still high price that they were going to be forced to pay for steel rails — at a rate that they declared was at least two dollars per ton above the free-market price. Walker D. Hines, head of the RA, denounced the IB as a price-fixing agency, dominated by steel and other industries, and he called for the abolition of the Industrial Board. This call was seconded by the powerful Secretary of the Treasury Carter Glass. The Attorney General concurred that the IB’s policy was illegal price fixing and in violation of the antitrust laws. Finally, President Wilson dissolved the Industrial Board in early May, 1919; wartime industrial planning had at last been dissolved, its formal cartelization to reappear a decade and a half later.

Yet remnants of wartime collectivism still remained. The high wartime minimum wheat price of $2.26 a bushel was carried over to the 1919 crop, continuing until June, 1920. But the most important carry-over of war collectivism was the Railroad Administration: the government’s operation of the nation’s railroads. When William Gibbs McAdoo resigned as head of the RA at the end of the war, he was succeeded by the previous de facto operating head, railroad executive Walker D. Hines. There was no call for immediate return to private operation because the railroad industry generally agreed on drastic regulation to curb or eliminate “wasteful” railroad competition and coordinate the industry, to fix prices to ensure a “fair profit,” and to outlaw strikes through compulsory arbitration. This was the overall thrust of railroad sentiment. Furthermore, being in effective control of the RA, the roads were in no hurry to return to private operation and jurisdiction by the less reliable ICC. Although McAdoo’s plan to postpone by five years the given 1920 date for return to private operation gained little support, Congress proceeded to use its time during 1919 to tighten the monopolization of the railroads.

In the name of “scientific management,” Senator Albert Cummins (R., Iowa) proceeded to grant the railroads’ fondest dreams. Cummins’ bill, warmly approved by Hines and railroad executive Daniel Willard, ordered the consolidation of numerous railroads, and would set the railroad rates according to a “fair,” fixed return on capital investment. Strikes would be outlawed, and all labor disputes settled by compulsory arbitration. For their part, the Association of Railroad Executives submitted a legislative plan similar to the Cummins Bill. Also similar to the Cummins Bill was the proposal of the National Association of Owners of Railroad Securities, a group composed largely of savings banks and insurance companies. In contrast to these plans, the Citizens National Railroad League, consisting of individual railroad investors, proposed coerced consolidation into one national railroad corporation and the guaranteeing of minimum earnings to this new road.

All of these plans were designed to tip the prewar balance sharply in favor of the railroads and against the shippers, and, as a result, the Cummins Bill, in passing the Senate, ran into trouble in the House. The trouble was fomented by the shippers, who demanded a return to the status quo ante when the shipper-dominated ICC was in charge. Furthermore, for their part, the wartime experience had embittered the shippers, who, along with the ICC itself, demanded a return to the higher quality service provided by railroad competition rather than the increased monopolization provided by the various railroad bills. Unsurprisingly, however, one of the leading nonrailroad business groups favoring the Cummins Bill was the Railway Business Association, a group of manufacturers and distributors of railroad supplies and equipment. The House of Representatives, in its turn, passed the Esch Bill, which essentially reestablished the prewar rule of the ICC.

President Wilson had put pressure on Congress to make a decision by threatening the return of the railroads to private operation by the given date of January 1, 1920, but, under pressure of the railroads who were anxious to push the Cummins Bill, Wilson extended the deadline to March 1. Finally, the joint conference committee of Congress reported out the Transportation Act of 1920, a compromise that was essentially the Esch Bill returning the railroads to the prewar ICC, but adding the Cummins provisions for a two-year guarantee to the railroads to set rates providing a “fair return” of 5.5% on investment. Furthermore, on the agreement of both shippers and the roads, the power to set minimum railroad rates was now granted to the ICC. This agreement was the product of railroads eager to set a floor under freight rates, and shippers anxious to protect budding canal transportation against railroad competition. Furthermore, although railway union objections blocked the provision for the outlawing of strikes, a Railroad Labor Board was established to try to settle labor disputes.On the maneuvering leading to the Transportation Act of 1920, see Kerr, American Railroad Politics, pp. 128–227.

With the return of the railroads to private operation in March, 1920, war collectivism finally and at long last seemed to pass from the American scene. But pass it never really did; for the inspiration and the model that it furnished for a corporate state in America continued to guide Herbert Hoover and other leaders in the 1920s, and was to return full-blown in the New Deal and in the World War II economy. In fact, it supplied the broad outlines for the corporate monopoly state that the New Deal was to establish, seemingly permanently, in the United States of America.

13. World War I as Fulfillment: Power and the Intellectuals

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

I. IntroductionOriginally published in the Journal of Libertarian Studies 9, no. 1 (1989): 81–125.

In contrast to older historians who regarded World War I as the destruction of progressive reform, I am convinced that the war came to the United States as the “fulfillment,” the culmination, the veritable apotheosis of progressivism in American life.The title of this paper is borrowed from the pioneering last chapter of Weinstein’s excellent work, The Corporate Ideal in the Liberal State, 1900–1918. The last chapter is entitled, “War as Fulfillment.” I regard progressivism as basically a movement on behalf of Big Government in all walks of the economy and society, in a fusion or coalition between various groups of big businessmen, led by the House of Morgan, and rising groups of technocratic and statist intellectuals. In this fusion, the values and interests of both groups would be pursued through government. Big business would be able to use the government to cartelize the economy, restrict competition, and regulate production and prices, and also to be able to wield a militaristic and imperialist foreign policy to force open markets abroad and apply the sword of the State to protect foreign investments. Intellectuals would be able to use the government to restrict entry into their professions and to assume jobs in Big Government to apologize for, and to help plan and staff, government operations. Both groups also believed that, in this fusion, the Big State could be used to harmonize and interpret the “national interest” and thereby provide a “middle way” between the extremes of “dog-eat-dog” laissez-faire and the bitter conflicts of proletarian Marxism. Also animating both groups of progressives was a postmillennial pietist Protestantism that had conquered “Yankee” areas of northern Protestantism by the 1830s and had impelled the pietists to use local, state, and finally federal governments to stamp out “sin,” to make America and eventually the world holy, and thereby to bring about the Kingdom of God on earth. The victory of the Bryanite forces at the Democratic national convention of 1896 destroyed the Democratic Party as the vehicle of “liturgical” Roman Catholics and German Lutherans devoted to personal liberty and laissez-faire and created the roughly homogenized and relatively non-ideological party system we have today. After the turn of the century, this development created an ideological and power vacuum for the expanding number of progressive technocrats and administrators to fill. In that way, the locus of government shifted from the legislature, at least partially subject to democratic check, to the oligarchic and technocratic executive branch.

World War I brought the fulfillment of all these progressive trends. Militarism, conscription, massive intervention at home and abroad, a collectivized war economy, all came about during the war and created a mighty cartelized system that most of its leaders spent the rest of their lives trying to recreate, in peace as well as war. In the World War I chapter of his outstanding work, Crisis and Leviathan, Professor Robert Higgs concentrates on the war economy and illuminates the interconnections with conscription. In this paper, I would like to concentrate on an area that Professor Higgs relatively neglects: the coming to power during the war of the various groups of progressive intellectuals.Higgs, Crisis and Leviathan, pp. 123–58. For my own account of the collectivized war economy of World War I, see Rothbard, “War Collectivism in World War I,” pp. 66–110. [Editor’s remarks] See Chapter 12 above. I use the term “intellectual” in the broad sense penetratingly described by F.A. Hayek: that is, not merely theorists and academicians, but also all manner of opinion-molders in society — writers, journalists, preachers, scientists, activists of all sort — what Hayek calls “secondhand dealers in ideas.”F.A. Hayek, “The Intellectuals and Socialism,” in Studies in Philosophy, Politics and Economics (Chicago: University of Chicago Press, 1967), pp. 178 ff. Most of these intellectuals, of whatever strand or occupation, were either dedicated, messianic postmillennial pietists or else former pietists, born in a deeply pietist home, who, though now secularized, still possessed an intense messianic belief in national and world salvation through Big Government. But, in addition, oddly but characteristically, most combined in their thought and agitation messianic moral or religious fervor with an empirical, allegedly “value-free,” and strictly “scientific” devotion to social science. Whether it be the medical profession’s combined scientific and moralistic devotion to stamping out sin or a similar position among economists or philosophers, this blend is typical of progressive intellectuals.

In this paper, I will be dealing with various examples of individual or groups of progressive intellectuals, exulting in the triumph of their creed and their own place in it, as a result of America’s entry into World War I. Unfortunately, limitations of space and time preclude dealing with all facets of the wartime activity of progressive intellectuals; in particular, I regret having to omit treatment of the conscription movement, a fascinating example of the creed of the “therapy” of “discipline” led by upper-class intellectuals and businessmen in the J.P. Morgan ambit.On the conscription movement, see in particular Michael Pearlman, To Make Democracy Safe for America: Patricians and Preparedness in the Progressive Era (Urbana: University of Illinois Press, 1984). See also John W. Chambers II, “Conscripting for Colossus: The Adoption of the Draft in the United States in World War I” (Ph.D. diss., Columbia University, 1973); John Patrick Finnegan, Against the Specter of a Dragon: the Campaign for American Military Preparedness, 1914–1917 (Westport, CT: Greenwood Press, 1974); and John Gany Clifford, The Citizen Soldiers: The Plattsburg Training Camp Movement (Lexington: University Press of Kentucky, 1972). I shall also have to omit both the highly significant trooping to the war colors of the nation’s preachers, and the wartime impetus toward the permanent centralization of scientific research.On ministers and the war, see Ray H. Abrams, Preachers Present Arms (New York: Round Table Press, 1933). On the mobilization of science, see David F. Noble, America By Design: Science, Technology and the Rise of Corporate Capitalism (New York: Oxford University Press, 1977), and Ronald C. Tobey, The American Ideology of National Science, 1919–1930 (Pittsburgh: University of Pittsburgh Press, 1971). [Editor’s footnote] See below, pp. 453–61.

There is no better epigraph for the remainder of this paper than a congratulatory note sent to President Wilson after the delivery of his war message on April 2, 1917. The note was sent by Wilson’s son-in-law and fellow Southern pietist and progressive, Secretary of the Treasury William Gibbs McAdoo, a man who had spent his entire life as an industrialist in New York City, solidly in the J.P. Morgan ambit. McAdoo wrote to Wilson: “You have done a great thing nobly! I firmly believe that it is God’s will that America should do this transcendent service for humanity throughout the world and that you are His chosen instrument.”Cited in Gerald Edward Markowitz, “Progressive Imperialism: Consensus and Conflict in the Progressive Movement on Foreign Policy, 1898–1917” (Ph.D. diss., University of Wisconsin, 1971), p. 375, an unfortunately neglected work on a highly important topic. It was not a sentiment with which the president could disagree.

2. Pietism and Prohibition

One of the few important omissions in Professor Higgs’s book is the crucial role of postmillennial pietist Protestantism in the drive toward statism in the United States. Dominant in the “Yankee” areas of the North from the 1830s on, the aggressive “evangelical” form of pietism conquered Southern Protestantism by the 1890s and played a crucial role in progressivism after the turn of the century and through World War I. Evangelical pietism held that requisite to any man’s salvation is that he do his best to see to it that everyone else is saved, and doing one’s best inevitably meant that the State must become a crucial instrument in maximizing people’s chances for salvation. In particular, the State plays a pivotal role in stamping out sin, and in “making America holy.” To the pietists, sin was very broadly defined as any force that might cloud men’s minds so that they could not exercise their theological free will to achieve salvation. Of particular importance were slavery (until the Civil War), Demon Rum, and the Roman Catholic Church, headed by the Antichrist in Rome. For decades after the Civil War, “rebellion” took the place of slavery in the pietist charges against their great political enemy, the Democratic Party.Hence the famous imprecation hurled at the end of the 1884 campaign that brought the Democrats into the presidency for the first time since the Civil War, that the Democratic Party was the party of “Rum, Romanism, and Rebellion.” In that one phrase, the New York Protestant minister was able to sum up the political concerns of the pietist movement. Then in 1896, with the evangelical conversion of Southern Protestantism and the admission to the Union of the sparsely populated and pietist Mountain states, William Jennings Bryan was able to put together a coalition that transformed the Democrats into a pietist party and ended forever that party’s once proud role as the champion of “liturgical” (Catholic and High German Lutheran) Christianity and of personal liberty and laissez-faire.For an introduction to the growing literature of “ethnoreligious” political history in the United States, see Kleppner, The Cross of Culture; and idem, The Third Electoral System. For the latest research on the formation of the Republican Party as a pietist party, reflecting the interconnected triad of pietist concerns — antislavery, prohibition, and anti-Catholicism — see Gienapp, “Nativism and the Creation of a Republican Majority in the North before the Civil War,” pp. 529–59.,German Lutherans were largely “high” or liturgical and confessional Lutherans who placed emphasis on the Church and its creed or sacraments rather than on a pietist, “born-again” emotional conversion experience. Scandinavian-Americans, on the other hand, were mainly pietist Lutherans.

The pietists of the 19th and early 20th centuries were all postmillennialist: They believed that the Second Advent of Christ will occur only after the millennium — a thousand years of the establishment of the Kingdom of God on earth — has been brought about by human effort. Postmillennialists have therefore tended to be statists, with the State becoming an important instrument of stamping out sin and Christianizing the social order so as to speed Jesus’ return.Orthodox Augustinian Christianity, as followed by the liturgicals, is “a-millennialist,” i.e., it believes that the “millennium” is simply a metaphor for the emergence of the Christian Church and that Jesus will return without human aid and at his own unspecified time. Modern “fundamentalists,” as they have been called since the early years of the 20th century, are “premillennialists,” i.e., they believe that Jesus will return to usher in a thousand years of the Kingdom of God on Earth, a time marked by various “tribulations” and by Armageddon, until history is finally ended. Premillennialists, or “millennarians,” do not have the statist drive of the postmillennialists; instead, they tend to focus on predictions and signs of Armageddon and of Jesus’ advent.

Professor Timberlake neatly sums up this politico-religious conflict:

Unlike those extremist and apocalyptic sects that rejected and withdrew from the world as hopelessly corrupt, and unlike the more conservative churches, such as the Roman Catholic, Protestant Episcopal, and Lutheran, that tended to assume a more relaxed attitude toward the influence of religion in culture, evangelical Protestantism sought to overcome the corruption of the world in a dynamic manner, not only by converting men to belief in Christ but also by Christianizing the social order through the power and force of law. According to this view, the Christian’s duty was to use the secular power of the state to transform culture so that the community of the faithful might be kept pure and the work of saving the unregenerate might be made easier. Thus the function of law was not simply to restrain evil but to educate and uplift.James H. Timberlake, Prohibition and the Progressive Movement, 1900–1920 (New York: Atheneum, 1970), pp. 7–8.

Both prohibition and progressive reform were pietistic, and as both movements expanded after 1900 they became increasingly intertwined. The Prohibition Party, once confined — at least in its platform — to a single issue, became increasingly and frankly progressive after 1904. The Anti-Saloon League, the major vehicle for prohibitionist agitation after 1900, was also markedly devoted to progressive reform. Thus at the League’s annual convention in 1905, Rev. Howard H. Russell rejoiced in the growing movement for progressive reform and particularly hailed Theodore Roosevelt as that “leader of heroic mould, of absolute honesty of character and purity of life, that foremost man of this world ...”Quoted in ibid., p. 33. At the Anti-Saloon League’s convention of 1909, Rev. Purley A. Baker lauded the labor union movement as a holy crusade for justice and a square deal. The League’s 1915 convention, which attracted 10,000 people, was noted for the same blend of statism, social service, and combative Christianity that had marked the national convention of the Progressive Party in 1912.The Progressive Party convention was a mighty fusion of all the major trends in the progressive movement: statist economists, technocrats, social engineers, social workers, professional pietists, and partners of J.P. Morgan & Co. Social Gospel leaders Lyman Abbott, the Rev. R. Heber Newton and the Rev. Washington Gladden, were leading Progressive Party delegates. The Progressive Party proclaimed itself as the “recrudescence of the religious spirit in American political life.” Theodore Roosevelt’s acceptance speech was significantly entitled “A Confession of Faith,” and his words were punctuated by “amens” and by a continual singing of pietist Christian hymns by the assembled delegates. They sang “Onward Christian Soldiers,” “The Battle Hymn of the Republic,” and especially the revivalist hymn, “Follow, Follow, We Will Follow Jesus,” with the word “Roosevelt” replacing “Jesus” at every turn. The horrified New York Times summed up the unusual experience by calling the Progressive grouping “a convention of fanatics.” And it added, “It was not a convention at all. It was an assemblage of religious enthusiasts. It was such a convention as Peter the Hermit held. It was a Methodist camp following done over into political terms.” Cited in Gable, The Bull Moose Years, p. 75. And at the League’s June 1916 convention, Bishop Luther B. Wilson stated, without contradiction, that everyone present would undoubtedly hail the progressive reforms then being proposed.

During the Progressive years, the Social Gospel became part of the mainstream of pietist Protestantism. Most of the evangelical churches created commissions on social service to promulgate the Social Gospel, and virtually all of the denominations adopted the Social Creed drawn up in 1912 by the Commission of the Church and Social Service of the Federal Council of Churches. The creed called for the abolition of child labor, the regulation of female labor, the right of labor to organize (i.e., compulsory collective bargaining), the elimination of poverty, and an “equitable” division of the national product. And right up there as a matter of social concern was the liquor problem. The creed maintained that liquor was a grave hindrance toward the establishment of the Kingdom of God on earth, and it advocated the “protection of the individual and society from the social, economic, and moral waste of the liquor traffic.”Timberlake, Prohibition and the Progressive Movement, p. 24.

The Social Gospel leaders were fervent advocates of statism and of prohibition. These included Rev. Walter Rauschenbusch and Rev. Charles Stelzle, whose tract Why Prohibition! (1918) was distributed, after the United States’ entry into World War I, by the Commission on Temperance of the Federal Council of Churches to labor leaders, members of Congress, and important government officials. A particularly important Social Gospel leader was Rev. Josiah Strong, whose monthly journal, The Gospel of the Kingdom, was published by Strong’s American Institute of Social Service. In an article supporting prohibition in the July 1914 issue, The Gospel of the Kingdom hailed the progressive spirit that was at last putting an end to “personal liberty”:

“Personal Liberty” is at last an uncrowned, dethroned king, with no one to do him reverence. The social consciousness is so far developed, and is becoming so autocratic, that institutions and governments must give heed to its mandate and share their life accordingly. We are no longer frightened by that ancient bogy — “paternalism in government.” We affirm boldly, it is the business of government to be just that — Paternal. ... Nothing human can be foreign to a true government.Quoted in Timberlake, Prohibition and the Progressive Movement, p. 27. Italics in the article. Or, as the Rev. Stelzle put it, in Why Prohibition!, “There is no such thing as an absolute individual right to do any particular thing, or to eat or drink any particular thing, or to enjoy the association of one’s own family, or even to live, if that thing is in conflict with the law of public necessity.” Quoted in David E. Kyvig, Repealing National Prohibition (Chicago: University of Chicago Press, 1979), p. 9.

As true crusaders, the pietists were not content to stop with the stamping out of sin in the United States alone. If American pietism was convinced that Americans were God’s chosen people, destined to establish a Kingdom of God within the United States, surely the pietists’ religious and moral duty could not stop there. In a sense, the world was America’s oyster. As Professor Timberlake put it, once the Kingdom of God was in the course of being established in the United States, “it was therefore America’s mission to spread these ideals and institutions abroad so that the Kingdom could be established throughout the world. American Protestants were accordingly not content merely to work for the kingdom of God in America, but felt compelled to assist in the reformation of the rest of the world also.”Timberlake, Prohibition and the Progressive Movement, pp. 37–38.

American entry into World War I provided the fulfillment of prohibitionist dreams. In the first place, all food production was placed under the control of Herbert Hoover, Food Administration Czar. But if the U.S. government was to control and allocate food resources, shall it permit the precious scarce supply of grain to be siphoned off into the “waste,” if not the sin, of the manufacture of liquor? Even though less than 2% of American cereal production went into the manufacture of alcohol, think of the starving children of the world who might otherwise be fed. As the progressive weekly The Independent demagogically phrased it, “Shall the many have food, or the few have drink?”

For the ostensible purpose of “conserving” grain, Congress wrote an amendment into the Lever Food and Fuel Control Act of August 10, 1917, that absolutely prohibited the use of foodstuffs, hence grain, in the production of alcohol. Congress would have added a prohibition on the manufacture of wine or beer, but President Wilson persuaded the Anti-Saloon League that he could accomplish the same goal more slowly and thereby avoid a delaying filibuster by the wets in Congress. However, Herbert Hoover, a progressive and a prohibitionist, persuaded Wilson to issue an order, on December 8, both greatly reducing the alcoholic content of beer and limiting the amount of foodstuffs that could be used in its manufacture.See David Burner, Herbert Hoover: A Public Life (New York: Alfred A. Knopf, 1979), p. 107.

The prohibitionists were able to use the Lever Act and war patriotism to good effect. Thus, Mrs. W.E. Lindsey, wife of the governor of New Mexico, delivered a speech in November 1917 that noted the Lever Act, and declared:

Aside from the long list of awful tragedies following in the wake of the liquor traffic, the economic waste is too great to be tolerated at this time. With so many people of the allied nations near to the door of starvation, it would be criminal ingratitude for us to continue the manufacture of whiskey.James A. Burran, “Prohibition in New Mexico, 1917,” New Mexico Historical Quarterly 48 (April, 1973): 140–41. Mrs. Lindsey of course showed no concern whatever for the German, allied, and neutral countries of Europe being subjected to starvation by the British naval blockade. The only areas of New Mexico that resisted the prohibition crusade in the referendum in the November 1917 elections were the heavily Hispanic-Catholic districts.

Another rationale for prohibition during the war was the alleged necessity to protect American soldiers from the dangers of alcohol to their health, their morals, and their immortal souls. As a result, in the Selective Service Act of May 18, 1917, Congress provided that dry zones must be established around every army base, and it was made illegal to sell or even to give liquor to any member of the military establishment within those zones, even in one’s private home. Any inebriated servicemen were subject to courts-martial.

But the most severe thrust toward national prohibition was the Anti-Saloon League’s proposed 18th constitutional amendment, outlawing the manufacture, sale, transportation, import, or export of all intoxicating liquors. It was passed by Congress and submitted to the states at the end of December 1917. Wet arguments that prohibition would prove unenforceable were met with the usual dry appeal to high principle: Should laws against murder and robbery be repealed simply because they cannot be completely enforced? And arguments that private property would be unjustly confiscated were also brushed aside with the contention that property injurious to the health, morals, and safety of the people had always been subject to confiscation without compensation.

When the Lever Act made a distinction between hard liquor (forbidden) and beer and wine (limited), the brewing industry tried to save their skins by cutting themselves loose from the taint of distilled spirits. “The true relationship with beer,” insisted the United States Brewers Association, “is with light wines and soft drinks — not with hard liquors ...” The brewers affirmed their desire to “sever, once for all, the shackles that bound our wholesome productions ... to ardent spirits ...” But this craven attitude would do the brewers no good. After all, one of the major objectives of the drys was to smash the brewers, once and for all, they whose product was the very embodiment of the drinking habits of the hated German-American masses, both Catholic and Lutheran, liturgicals and beer drinkers all. German-Americans were now fair game. Were they not all agents of the satanic Kaiser, bent on conquering the world? Were they not conscious agents of the dreaded Hun Kultur, out to destroy American civilization? And were not most brewers German?

And so the Anti-Saloon League thundered that “German brewers in this country have rendered thousands of men inefficient and are thus crippling the Republic in its war on Prussian militarism.” Apparently, the Anti-Saloon League took no heed of the work of German brewers in Germany, who were presumably performing the estimable service of rendering “Prussian militarism” helpless. The brewers were accused of being pro-German, and of subsidizing the press (apparently it was all right to be pro-English or to subsidize the press if one were not a brewer). The acme of the accusations came from one prohibitionist: “We have German enemies,” he warned, “in this country too. And the worst of all our German enemies, the most treacherous, the most menacing are Pabst, Schlitz, Blatz, and Miller.”Timberlake, Prohibition and the Progressive Movement, p. 179.

In this sort of atmosphere, the brewers didn’t have a chance, and the 18th Amendment went to the states, outlawing all forms of liquor. Since 27 states had already outlawed liquor, this meant that only nine more were needed to ratify this remarkable amendment, which directly involved the federal constitution in what had always been, at most, a matter of police power of the states. The 36th state ratified the 18th Amendment on January 16, 1919, and by the end of February, all but three states (New Jersey, Rhode Island, and Connecticut) had made liquor unconstitutional as well as illegal. Technically, the amendment went into force the following January, but Congress speeded matters up by passing the War Prohibition Act of November 21, 1918, which banned the manufacture of beer and wine after the following May and outlawed the sale of all intoxicating beverages after June 30, 1919, a ban to continue in effect until the end of demobilization. Thus total national prohibition really began on July 1, 1919, with the 18th Amendment taking over six months later. The constitutional amendment needed a congressional enforcing act, which Congress supplied with the Volstead (or National Prohibition) Act, passed over Wilson’s veto at the end of October 1919.

With the battle against Demon Rum won at home, the restless advocates of pietist prohibitionism looked for new lands to conquer. Today America, tomorrow the world. In June 1919, the triumphant Anti-Saloon League called an international prohibition conference in Washington and created a World League Against Alcoholism. World prohibition, after all, was needed to finish the job of making the world safe for democracy. The prohibitionists’ goals were fervently expressed by Rev. A.C. Bane at the Anti-Saloon League’s 1917 convention, when victory in America was already in sight. To a wildly cheering throng, Bane thundered:

America will “go over the top” in humanity’s greatest battle [against liquor] and plant the victorious white standard of Prohibition upon the nation’s loftiest eminence. Then catching sight of the beckoning hand of our sister nations across the sea, struggling with the same age-long foe, we will go forth with the spirit of the missionary and the crusader to help drive the demon of drink from all civilization. With America leading the way, with faith in Omnipotent God, and bearing with patriotic hands our stainless flag, the emblem of civic purity, we will soon ... bestow upon mankind the priceless gift of World Prohibition.Quoted in ibid., pp. 180–81.

Fortunately, the prohibitionists found the reluctant world a tougher nut to crack.

3. Women at War and at the Polls

Another direct outgrowth of World War I, coming in tandem with prohibition but lasting more permanently, was the 19th Amendment, submitted by Congress in 1919 and ratified by the following year, which allowed women to vote. Women’s suffrage had long been a movement directly allied with prohibition. Desperate to combat a demographic trend that seemed to be going against them, the evangelical pietists called for women’s suffrage (and enacted it in many western states). They did so because they knew that while pietist women were socially and politically active, ethnic or liturgical women tended to be culturally bound to hearth and home and therefore far less likely to vote. Hence, women’s suffrage would greatly increase pietist voting power. In 1869 the Prohibitionist Party became the first party to endorse women’s suffrage, which it continued to do. The Progressive Party was equally enthusiastic about female suffrage; it was the first major national party to permit women delegates at its conventions. A leading women’s suffrage organization was the Women’s Christian Temperance Union, which reached an enormous membership of 300,000 by 1900. And three successive presidents of the major women’s suffrage group, the National American Woman Suffrage Association — Susan B. Anthony, Mrs. Carrie Chapman Catt, and Dr. Anna Howard Shaw — all began their activist careers as prohibitionists. Susan B. Anthony put the issue clearly:

There is an enemy of the homes of this nation and that enemy is drunkenness. Everyone connected with the gambling house, the brothel and the saloon works and votes solidly against the enfranchisement of women, and, I say, if you believe in chastity, if you believe in honesty and integrity, then ... take the necessary steps to put the ballot in the hands of women.Quoted in Grimes, The Puritan Ethic and Woman Suffrage, p. 78.

For its part, the German-American Alliance of Nebraska sent out an appeal during the unsuccessful referendum in November 1914 on woman suffrage. Written in German, the appeal declared, “Our German women do not want the right to vote, and since our opponents desire the right of suffrage mainly for the purpose of saddling the yoke of prohibition on our necks, we should oppose it with all our might ...”Ibid., p. 116.

America’s entry into World War I provided the impetus for overcoming the substantial opposition to woman suffrage, as a corollary to the success of prohibition and as a reward for the vigorous activity by organized women in behalf of the war effort. To close the loop, much of that activity consisted in stamping out vice and alcohol as well as instilling “patriotic” education into the minds of often suspect immigrant groups.

Shortly after the U.S. declaration of war, the Council of National Defense created an Advisory Committee on Women’s Defense Work, known as the Woman’s Committee. The purpose of the committee, writes a celebratory contemporary account, was “to coordinate the activities and the resources of the organized and unorganized women of the country, that their power may be immediately utilized in time of need, and to supply a new and direct channel of cooperation between women and governmental department.”Ida Clyde Clarke, American Women and the World War (New York: D. Appleton and Co., 1918), p. 19. Chairman of the Woman’s Committee, working energetically and full time, was the former president of the National American Woman Suffrage Association, Dr. Anna Howard Shaw, and another leading member was the suffrage group’s current chairman and an equally prominent suffragette, Mrs. Carrie Chapman Catt.

The Woman’s Committee promptly set up organizations in cities and states across the country and on June 19, 1917, convened a conference of over 50 national women’s organizations to coordinate their efforts. It was at this conference that “the first definite task was imposed upon American women” by the indefatigable Food Czar, Herbert Hoover.Ibid., p. 27. Hoover enlisted the cooperation of the nation’s women in his ambitious campaign for controlling, restricting, and cartelizing the food industry in the name of “conservation” and elimination of “waste.” Celebrating this coming together of women was one of the Woman’s Committee members, the Progressive writer and muckraker Mrs. Ida M. Tarbell. Mrs. Tarbell lauded the “growing consciousness everywhere that this great enterprise for democracy which we are launching [the U.S. entry into the war] is a national affair, and if an individual or a society is going to do its bit it must act with and under the government at Washington.” “Nothing else,” Mrs. Tarbell gushed, “can explain the action of the women of the country in coming together as they are doing today under one centralized direction.”Ibid., p. 31. Actually Mrs. Tarbell’s muckraking activities were pretty much confined to Rockefeller and Standard Oil. She was highly favorable to business leaders in the Morgan ambit, as witness her laudatory biographies of Judge Elbert H. Gary, of U.S. Steel (1925) and Owen D. Young of General Electric (1932).

Mrs. Tarbell’s enthusiasm might have been heightened by the fact that she was one of the directing rather than the directed. Herbert Hoover came to the women’s conference with the proposal that each of the women sign and distribute a “food pledge card” on behalf of food conservation. While support for the food pledge among the public was narrower than anticipated, educational efforts to promote the pledge became the basis of the remainder of the women’s conservation campaign. The Woman’s Committee appointed Mrs. Tarbell as chairman of its committee on Food Administration, and she not only tirelessly organized the campaign but also wrote many letters and newspaper and magazine articles on its behalf.

In addition to food control, another important and immediate function of the Woman’s Committee was to attempt to register every woman in the country for possible volunteer or paid work in support of the war effort. Every woman aged 16 or over was asked to sign and submit a registration card with all pertinent information, including training, experience, and the sort of work desired. In that way the government would know the whereabouts and training of every woman, and government and women could then serve each other best. In many states, especially Ohio and Illinois, state governments set up schools to train the registrars. And even though the Woman’s Committee kept insisting that the registration was completely voluntary, the state of Louisiana, as Ida Clarke puts it, developed a “novel and clever” idea to facilitate the program: women’s registration was made compulsory.

Louisiana’s Governor Ruffin G. Pleasant decreed October 17, 1917 compulsory registration day, and a host of state officials collaborated in its operation. The State Food Commission made sure that food pledges were also signed by all, and the State School Board granted a holiday on October 17 so that teachers could assist in the compulsory registration, especially in the rural districts. Six thousand women were officially commissioned by the state of Louisiana to conduct the registration, and they worked in tandem with state Food Conservation officials and parish Demonstration Agents. In the French areas of the state, the Catholic priests rendered valuable aid in personally appealing to all their female parishioners to perform their registration duties. Handbills were circulated in French, house-to-house canvasses were made, and speeches urging registration were made by women activists in movie theaters, schools, churches, and courthouses. We are informed that all responses were eager and cordial; there is no mention of any resistance. We are also advised that “even the negroes were quite alive to the situation, meeting sometimes with the white people and sometimes at the call of their own pastors.”Ibid., pp. 277, 275–79, 58.

Also helping out in women’s registration and food control was another, smaller, but slightly more sinister women’s organization that had been launched by Congress as a sort of prewar wartime group at a large Congress for Constructive Patriotism, held in Washington, D.C. in late January 1917. This was the National League for Woman’s Service (NLWS), which established a nationwide organization later overshadowed and overlapped by the larger Woman’s Committee. The difference was that the NLWS was set up on quite frankly military lines. Each local working unit was called a “detachment” under a “detachment commander,” district-wide and state-wide detachments met in annual “encampments,” and every woman member was to wear a uniform with an organization badge and insignia. In particular, “the basis of training for all detachments is standardized, physical drill.”Ibid., p. 183.

A vital part of the Woman’s Committee work was engaging in “patriotic education.” The government and the Woman’s Committee recognized that immigrant ethnic women were most in need of such vital instruction, and so it set up a committee on education, headed by the energetic Mrs. Carrie Chapman Catt. Mrs. Catt stated the problem well to the Woman’s Committee: Millions of people in the United States were unclear on why we were at war, and why, as Ida Clarke paraphrases Mrs. Catt, there is “the imperative necessity of winning the war if future generations were to be protected from the menace of an unscrupulous militarism.”Ibid., p. 103. Presumably U.S. militarism, being “scrupulous,” posed no problem.

Apathy and ignorance abounded, Mrs. Catt went on, and she proposed to mobilize 20 million American women, the “greatest sentiment makers of any community,” to begin a “vast educational movement” to get the women “fervently enlisted to push the war to victory as rapidly as possible.” As Mrs. Catt continued, however, the clarity of war aims she called for really amounted to pointing out that we were in the war “whether the nation likes it or does not like it,” and that therefore the “sacrifices” needed to win the war “willingly or unwillingly must be made.” These statements are reminiscent of arguments supporting recent military actions by Ronald Reagan (“He had to do what he had to do”). In the end, Mrs. Catt could come up with only one reasoned argument for the war, apart from this alleged necessity: that it must be won to make it “the war to end wars.”Ibid., pp. 104–05.

The “patriotic education” campaign of the organized women was largely to “Americanize” immigrant women by energetically persuading them (a) to become naturalized American citizens and (b) to learn “Mother English.” In the campaign, dubbed “America First,” national unity was promoted through getting immigrants to learn English and trying to get female immigrants into afternoon or evening English classes. The organized patriot women were also worried about preserving the family structure of the immigrants. If the children learn English and their parents remain ignorant, children will scorn their elders, “parental discipline and control are dissipated, and the whole family fabric becomes weakened. Thus one of the great conservative forces in the community becomes inoperative.” To preserve “maternal control of the young,” then, “Americanization of the foreign women through language becomes imperative.” In Erie, Pennsylvania, women’s clubs appointed “Block Matrons,” whose job it was to get to know the foreign families of the neighborhood and to back up school authorities in urging the immigrants to learn English, and who, in the rather naive words of Ida Clarke, “become neighbors, friends, and veritable mother confessors to the foreign women of the block.” One would like to have heard some comments from recipients of the attentions of the Block Matrons.

All in all, as a result of the Americanization campaign, Ida Clarke concludes, “the organized women of this country can play an important part in making ours a country with a common language, a common purpose, a common set of ideals — a unified America.”Ibid., p. 101.

Neither did the government and its organized women neglect progressive economic reforms. At the organizing June 1917 conference of the Woman’s Committee, Mrs. Carrie Catt emphasized that the greatest problem of the war was to assure that women receive “equal pay for equal work.” The conference suggested that vigilance committees be established to guard against the violation of “ethical laws” governing labor and also that all laws restricting (“protecting”) the labor of women and children be rigorously enforced. Apparently, there were some values to which maximizing production for the war effort had to take second place. Mrs. Margaret Dreier Robins, president of the National Women’s Trade Union’s League, hailed the fact that the Woman’s Committee was organizing committees in every state to protect minimum standards for women and children’s labor in industry and demanded minimum wages and shorter hours for women. Mrs. Robins particularly warned that “not only are unorganized women workers in vast numbers used as underbidders in the labor market for lowering industrial standards, but they are related to those groups in industrial centers of our country that are least Americanized and most alien to our institutions and ideals.” And so “Americanization” and cartelization of female labor went hand in hand.Ibid., p. 129. Margaret Dreier Robins and her husband Raymond were virtually a paradigmatic progressive couple. Raymond was a Florida-born wanderer and successful gold prospector who underwent a mystical conversion experience in the Alaska wilds and became a pietist preacher. He moved to Chicago, where he became a leader in Chicago settlement house work and municipal reform. Margaret Dreier and her sister Mary were daughters of a wealthy and socially prominent New York family who worked for and financed the emergent National Women’s Trade Union League. Margaret married Raymond Robins in 1905 and moved to Chicago, soon becoming longtime president of the league. In Chicago, the Robinses led and organized progressive political causes for over two decades, becoming top leaders of the Progressive Party from 1912 to 1916. During the war, Raymond Robins engaged in considerable diplomatic activity as head of a Red Cross mission to Russia. On the Robinses, see Allen F. Davis, Spearhead for Reform: the Social Settlements and the Progressive Movement, 1890–1914 (New York: Oxford University Press, 1967).,For more on women’s war work and woman suffrage, see the standard history of the suffrage movement, Flexner, Century of Struggle, pp. 288–89. Interestingly, The National War Labor Board (NWLB) frankly adopted the concept of “equal pay for equal work” in order to limit the employment of women workers by imposing higher costs on the employer. The “only check,” affirmed the NWLB, on excessive employment of women “is to make it no more profitable to employ women than men.” Quoted in Valerie I. Conner, “‘The Mothers of the Race’ in World War I: The National War Labor Board and Women in Industry,” Labor History 21 (Winter 1979–80): 34.

4. Saving Our Boys from Alcohol and Vice

One of organized womanhood’s major contributions to the war effort was to collaborate in an attempt to save American soldiers from vice and Demon Rum. In addition to establishing rigorous dry zones around every military camp in the United States, the Selective Service Act of May 1917 also outlawed prostitution in wide zones around the military camps. To enforce these provisions, the War Department had ready at hand a Commission on Training Camp Activities, an agency soon imitated by the Department of the Navy. Both commissions were headed by a man tailor-made for the job, the progressive New York settlement-house worker, municipal political reformer, and former student and disciple of Woodrow Wilson, Raymond Blaine Fosdick.

Fosdick’s background, life, and career were paradigmatic for progressive intellectuals and activists of that era. Fosdick’s ancestors were Yankees from Massachusetts and Connecticut, and his great-grandfather pioneered westward in a covered wagon to become a frontier farmer in the heart of the Burned-Over District of transplanted Yankees, Buffalo, New York. Fosdick’s grandfather, a pietist lay preacher born again in a Baptist revival, was a prohibitionist who married a preacher’s daughter and became a lifelong public school teacher in Buffalo. Grandfather Fosdick rose to become Superintendent of Education in Buffalo and a battler for an expanded and strengthened public school system.

Fosdick’s immediate ancestry continued in the same vein. His father was a public school teacher in Buffalo who rose to become principal of a high school. His mother was deeply pietist and a staunch advocate of prohibition and women’s suffrage. Fosdick’s father was a devout pietist Protestant and a “fanatical” Republican who gave his son Raymond the middle name of his hero, the veteran Maine Republican James G. Blaine. The three Fosdick children, elder brother Harry Emerson, Raymond, and Raymond’s twin sister, Edith, on emerging from this atmosphere, all forged lifetime careers of pietism and social service.

While active in New York reform administration, Fosdick made a fateful friendship. In 1910, John D. Rockefeller, Jr., like his father a pietist Baptist, was chairman of a special grand jury to investigate and to try to stamp out prostitution in New York City. For Rockefeller, the elimination of prostitution was to become an ardent and lifelong crusade. He believed that sin, such as prostitution, must be criminated, quarantined, and driven underground through rigorous suppression. In 1911, Rockefeller began his crusade by setting up the Bureau of Social Hygiene, into which he poured $5 million in the next quarter century. Two years later he enlisted Fosdick, already a speaker at the annual dinner of Rockefeller’s Baptist Bible class, to study police systems in Europe in conjunction with activities to end the great “social vice.” Surveying American police after his stint in Europe at Rockefeller’s behest, Fosdick was appalled that police work in the United States was not considered a “science” and that it was subject to “sordid” political influences.See Raymond B. Fosdick, Chronicle of a Generation: An Autobiography (New York: Harper & Bros., 1958), p. 133. Also see Peter Collier and David Horowitz, The Rockefellers: An American Dynasty (New York: New American Library, 1976), pp. 103–05. Fosdick was particularly appalled that American patrolmen on street duty actually smoked cigars! Fosdick, Chronicle of a Generation, p. 135.

At that point, the new Secretary of War, the progressive former mayor of Cleveland Newton D. Baker, became disturbed at reports that areas near the army camps in Texas on the Mexican border, where troops were mobilized to combat the Mexican revolutionary Pancho Villa, were honeycombed with saloons and prostitution. Sent by Baker on a fact-finding tour in the summer of 1916, scoffed at by tough army officers as the “Reverend,” Fosdick was horrified to find saloons and brothels seemingly everywhere in the vicinity of the military camps. He reported his consternation to Baker, and, at Fosdick’s suggestion, Baker cracked down on the army commanders and their lax attitude toward alcohol and vice. But Fosdick was beginning to get the glimmer of another idea. Couldn’t the suppression of the bad be accompanied by a positive encouragement of the good, of wholesome recreational alternatives to sin and liquor that our boys could enjoy? When war was declared, Baker quickly appointed Fosdick to be chairman of the Commission on Training Camp Activities.

Armed with the coercive resources of the federal government and rapidly building his bureaucratic empire from merely one secretary to a staff of thousands, Raymond Fosdick set out with determination on his twofold task: stamping out alcohol and sin in and around every military camp, and filling the void for American soldiers and sailors by providing them with wholesome recreation. As head of the Law Enforcement Division of the Training Camp Commission, Fosdick selected Bascom Johnson, attorney for the American Social Hygiene Association.The American Social Hygiene Association, with its influential journal Social Hygiene, was the major organization in what was known as the “purity crusade.” The association was launched when the New York physician Dr. Prince A. Morrow, inspired by the agitation against venereal disease and in favor of the continence urged by the French syphilographer, Jean-Alfred Fournier, formed in 1905 the American Society for Sanitary and Moral Prophylaxis (ASSMP). Soon, the terms proposed by the Chicago branch of ASSMP, “social hygiene” and “sex hygiene,” became widely used for their medical and scientific patina, and in 1910 ASSMP changed its name to the American Federation for Sex Hygiene (AFSH). Finally, in late 1913, AFSH, an organization of physicians, combined with the National Vigilance Association (formerly the American Purity Alliance), a group of clergymen and social workers, to form the all-embracing American Social Hygiene Association (ASHA). In this social hygiene movement, the moral and medical went hand in hand. Thus Dr. Morrow welcomed the new knowledge about venereal disease because it demonstrated that “punishment for sexual sin” no longer had to be “reserved for the hereafter.” The first president of ASHA was the president of Harvard University, Charles W. Eliot. In his address to the first meeting, Eliot made clear that total abstinence from alcohol, tobacco, and even spices was part and parcel of the anti-prostitution and purity crusade. On physicians, the purity crusade, and the formation of ASHA, see Ronald Hamowy, “Medicine and the Crimination of Sin: ‘Self-Abuse’ in 19th Century America,” Journal of Libertarian Studies 1 (Summer 1972): 247–59; James Wunsch, “Prostitution and Public Policy: From Regulation to Suppression, 1858–1920” (Ph.D. diss., University of Chicago, 1976); and Roland R. Wagner, “Virtue Against Vice: A Study of Moral Reformers and Prostitution in the Progressive Era” (Ph.D. diss., University of Wisconsin, 1971). On Morrow, also see John C. Burnham. “The Progressive Era Revolution in American Attitudes Toward Sex,” Journal of American History 59 (March, 1973): 899, and Paul Boyer, Urban Masses and Moral Order in America, 1820–1920 (Cambridge, MA: Harvard University Press, 1978), p. 201. Also see Burnham, “Medical Specialists and Movements Toward Social Control in the Progressive Era: Three Examples,” in Building the Organizational Society: Essays in Associational Activities in Modern America, J. Israel, ed. (New York: Free Press, 1972), pp. 24–26. Johnson was commissioned a major, and his staff of 40 aggressive attorneys became second lieutenants.

Employing the argument of health and military necessity, Fosdick set up a Social Hygiene Division of his commission, which promulgated the slogan “Fit to Fight.” Using a mixture of force and threats to remove federal troops from the bases if recalcitrant cities did not comply, Fosdick managed to bludgeon his way into suppressing, if not prostitution in general, then at least every major red light district in the country. In doing so, Fosdick and Baker, employing local police and the federal Military Police, far exceeded their legal authority. The law authorized the president to shut down every red light district in a five-mile zone around each military camp or base. Of the 110 red light districts shut down by military force, however, only 35 were included in the prohibited zone. Suppression of the other 75 was an illegal extension of the law. Nevertheless, Fosdick was triumphant: “Through the efforts of this Commission [on Training Camp Activities] the red light district has practically ceased to be a feature of American city life.”In Daniel R. Beaver, Newton D. Baker and the American War Effort, 1917–1919 (Lincoln: University of Nebraska Press, 1966), p. 222. Also see ibid., pp. 221–24; and C.H. Cramer, Newton D. Baker: A Biography (Cleveland: World Publishing Co., 1961), pp. 99–102. The result of this permanent destruction of the red light district, of course, was to drive prostitution onto the streets, where consumers would be deprived of the protection of either an open market or of regulation.

In some cases, the federal anti-vice crusade met considerable resistance. Secretary of Navy Josephus Daniels, a progressive from North Carolina, had to call out the marines to patrol the streets of resistant Philadelphia, and naval troops, over the strenuous objections of the mayor, were used to crush the fabled red light district of Storyville, in New Orleans, in November 1917.Fosdick, Chronicle of a Generation, pp. 145–47. While prostitution was indeed banned in Storyville after 1917, Storyville, contrary to legend, never “closed” — the saloons and dance halls remained open, and contrary to orthodox accounts, jazz was never really shut down in Storyville or New Orleans, and it was therefore never forced up river. For a revisionist view of the impact of the closure of Storyville on the history of jazz, see Tom Bethell, George Lewis: A Jazzman from New Orleans (Berkeley: University of California Press, 1977), pp. 6–7; and Al Rose, Storyville, New Orleans (Montgomery: University of Alabama Press, 1974). Also, on later Storyville, see Boyer, Urban Masses and Moral Order, p. 218.

In its hubris, the U.S. Army decided to extend its anti-vice crusade to foreign shores. General John J. Pershing issued an official bulletin to members of the American Expeditionary Force in France urging that “sexual continence is the plain duty of members of the A.E.F., both for the vigorous conduct of the war, and for the clean health of the American people after the war.” Pershing and the American military tried to close all the French brothels in areas where American troops were located, but the move was unsuccessful because the French objected bitterly. Premier Georges Clemenceau pointed out that the result of the “total prohibition of regulated prostitution in the vicinity of American troops” was only to increase “venereal diseases among the civilian population of the neighborhood.” Finally, the United States had to rest content with declaring French civilian areas off limits to the troops.See Hamowy, “Crimination of Sin,” p. 262 n. The quote from Clemenceau is in Fosdick, Chronicle, p. 171. Newton Baker’s loyal biographer declared that Clemenceau, in this response, showed “his animal proclivities as the ‘Tiger of France.’” Cramer, Newton Baker, p. 101.

The more positive part of Raymond Fosdick’s task during the war was supplying the soldiers and sailors with a constructive substitute for sin and alcohol, “healthful amusements and wholesome company.” As might be expected, the Woman’s Committee and organized womanhood collaborated enthusiastically. They followed the injunction of Secretary of War Baker that the government “cannot allow these ... young men to be surrounded by a vicious and demoralizing environment, nor can we leave anything undone which will protect them from unhealthy influences and crude forms of temptation.” The Woman’s Committee found, however, that in the great undertaking of safeguarding the health and morals of our boys, their most challenging problem proved to be guarding the morals of their mobilized young girls. For unfortunately, “where soldiers are stationed ... the problem of preventing girls from being misled by the glamour and romance of war and beguiling uniforms looms large.” Fortunately, perhaps, the Maryland Committee proposed the establishment of a “Patriotic League of Honor which will inspire girls to adopt the highest standards of womanliness and loyalty to their country.”Clarke, American Women, pp. 90, 87, 93. In some cases, organized women took the offensive to help stamp out vice and liquor in their community. Thus in Texas in 1917 the Texas Women’s Anti-Vice Committee led in the creation of a “White Zone” around all the military bases. By autumn the Committee expanded into the Texas Social Hygiene Association to coordinate the work of eradicating prostitution and saloons. San Antonio proved to be its biggest problem. Lewis L. Gould, Progressives and Prohibitionists: Texas Democrats in the Wilson Era (Austin: University of Texas Press, 1973), p. 227.

No group was more delighted with the achievements of Fosdick and his Military Training Camp Commission than the burgeoning profession of social work. Surrounded by handpicked aides from the Playground and Recreation Association and the Russell Sage Foundation, Fosdick and the others “in effect tried to create a massive settlement house around each camp. No army had ever seen anything like it before, but it was an outgrowth of the recreation and community organization movement, and a victory for those who had been arguing for the creative use of leisure time.”Davis, Spearheads for Reform, p. 225. The social work profession pronounced the program an enormous success. The influential Survey magazine summed up the result as “the most stupendous piece of social work in modern times.”Fosdick, Chronicle of a Generation, p. 144. After the war, Raymond Fosdick went on to fame and fortune, first as Under Secretary General of the League of Nations, and then for the rest of his life as a member of the small inner circle close to John D. Rockefeller, Jr. In that capacity, Fosdick rose to become head of the Rockefeller Foundation and Rockefeller’s official biographer. Meanwhile, Fosdick’s brother, Rev. Harry Emerson, became Rockefeller’s hand-picked parish minister, first at Park Avenue Presbyterian Church and then at the new interdenominational Riverside Church, built with Rockefeller funds. Harry Emerson Fosdick was Rockefeller’s principal aide in battling, within the Protestant Church, in favor of postmillennial, statist, “liberal” Protestantism and against the rising tide of premillennial Christianity, known as “fundamentalist” since the years before World War I. See Collier and Horowitz, The Rockefellers, pp. 140–42, 151–53.

Social workers were also exultant about prohibition. In 1917, the National Conference of Charities and Corrections (which changed its name around the same time to the National Conference of Social Work) was emboldened to drop whatever value-free pose it might have had and come out squarely for prohibition. On returning from Russia in 1917, Edward T. Devine of the Charity Organization Society of New York exclaimed that “the social revolution which followed the prohibition of vodka was more profoundly important ... than the political revolution which abolished autocracy.” And Robert A. Woods of Boston, the Grand Old Man of the settlement house movement and a veteran advocate of prohibition, predicted in 1919 that the 18th Amendment, “one of the greatest and best events in history,” would reduce poverty, wipe out prostitution and crime, and liberate “vast suppressed human potentialities.”Davis, Spearheads for Reform, p. 226; Timberlake, Prohibition and the Progressive Movement, p. 66; Boyer, Urban Masses and Moral Order, p. 156.

Woods, president of the National Conference of Social Work during 1917–18, had long denounced alcohol as “an abominable evil.” A postmillennial pietist, he believed in “Christian statesmanship” that would, in a “propaganda of the deed,” Christianize the social order in a corporate, communal route to the glorification of God. Like many pietists, Woods cared not for creeds or dogmas but only for advancing Christianity in a communal way; though an active Episcopalian, his “parish” was the community at large. In his settlement work, Woods had long favored the isolation or segregation of the “unfit,” in particular “the tramp, the drunkard, the pauper, the imbecile,” with the settlement house as the nucleus of this reform. Woods was particularly eager to isolate and punish the drunkard and the tramp. “Inveterate drunkards” were to receive increasing levels of “punishment,” with ever-lengthier jail terms. The “tramp evil” was to be gotten rid of by rounding up and jailing vagrants, who would be placed in tramp workhouses and put to forced labor.

For Woods the world war was a momentous event. It had advanced the process of “Americanization,” a “great humanizing process through which all loyalties, all beliefs must be wrought together in a better order.”Eleanor H. Woods, Robert A. Woods: Champion of Democracy (Boston: Houghton Mifflin, 1929), p. 316. Also see ibid., pp. 201–02, 250 ff., 268 ff. The war had wonderfully released the energies of the American people. Now, however, it was important to carry the wartime momentum into the postwar world. Lauding the war collectivist society during the spring of 1918, Robert Woods asked the crucial question, “Why should it not always be so? Why not continue in the years of peace this close, vast, wholesome organism of service, of fellowship, of constructive creative power?”Davis, Spearheads for Reform, p. 227.

5. The New Republic Collectivists

The New Republic magazine, founded in 1914 as the leading intellectual organ of progressivism, was a living embodiment of the burgeoning alliance between big-business interests, in particular the House of Morgan, and the growing legion of collectivist intellectuals. Founder and publisher of the New Republic was Willard D. Straight, partner of J.P. Morgan & Co., and its financier was Straight’s wife, the heiress Dorothy Whitney. Major editor of the influential new weekly was the veteran collectivist and theoretician of Teddy Roosevelt’s New Nationalism, Herbert David Croly. Croly’s two coeditors were Walter Edward Weyl, another theoretician of the New Nationalism, and the young, ambitious former official of the Intercollegiate Socialist Society, the future pundit Walter Lippmann. As Woodrow Wilson began to take America into World War I, the New Republic, though originally Rooseveltian, became an enthusiastic supporter of the war, and a virtual spokesman for the Wilson war effort, the wartime collectivist economy, and the new society molded by the war.

On the higher levels of ratiocination, unquestionably the leading progressive intellectual, before, during, and after World War I, was the champion of pragmatism, Professor John Dewey of Columbia University. Dewey wrote frequently for the New Republic in this period and was clearly its leading theoretician. A Yankee born in 1859, Dewey was, as Mencken put it, “of indestructible Vermont stock and a man of the highest bearable sobriety.” John Dewey was the son of a small town Vermont grocer.Mencken, “Professor Veblen,” p. 267. Although he was a pragmatist and a secular humanist most of his life, it is not as well known that Dewey, in the years before 1900, was a postmillennial pietist, seeking the gradual development of a Christianized social order and Kingdom of God on earth via the expansion of science, community, and the State. During the 1890s, Dewey, as professor of philosophy at the University of Michigan, expounded his vision of postmillennial pietism in a series of lectures before the Students’ Christian Association. Dewey argued that the growth of modern science now makes it possible for man to establish the biblical idea of the Kingdom of God on earth. Once humans had broken free of the restraints of orthodox Christianity, a truly religious Kingdom of God could be realized in “the common incarnate Life, the purpose ... animating all men and binding them together into one harmonious whole of sympathy.”Quoted in the important article by Quandt, “Religion and Social Thought,” p. 404. Also see John Blewett, S.J., “Democracy as Religion: Unity in Human Relations,” in John Dewey: His Thought and Influence, Blewett, ed. (New York: Fordham University Press, 1960), pp. 33–58; and John Dewey: The Early Works, 1882–1889, J. Boydstan et al., eds. (Carbondale: Southern Illinois University Press, 1969–71), vols. 2 and 3. Religion would thus work in tandem with science and democracy, all of which would break down the barriers between men and establish the Kingdom. After 1900 it was easy for John Dewey, along with most other postmillennial intellectuals of the period, to shift gradually but decisively from postmillennial progressive Christian statism to progressive secular statism. The path, the expansion of statism and “social control” and planning, remained the same. And even though the Christian creed dropped out of the picture, the intellectuals and activists continued to possess the same evangelical zeal for the salvation of the world that their parents and they themselves had once possessed. The world would and must still be saved through progress and statism.On the general secularization of postmillennial pietism after 1900, see Quandt, “Religion and Social Thought,” pp. 390–409; and Moorhead, “The Erosion of Postmillennialism in American Religious Thought,” pp. 61–77.

A pacifist while in the midst of peace, John Dewey prepared himself to lead the parade for war as America drew nearer to armed intervention in the European struggle. First, in January 1916 in the New Republic, Dewey attacked the “professional pacifist’s” outright condemnation of war as a “sentimental phantasy,” a confusion of means and ends. Force, he declared, was simply “a means of getting results,” and therefore would neither be lauded nor condemned per se. Next, in April Dewey signed a pro-Allied manifesto, not only cheering for an Allied victory but also proclaiming that the Allies were “struggling to preserve the liberties of the world and the highest ideals of civilization.” And though Dewey supported U.S. entry into the war so that Germany could be defeated, “a hard job, but one which had to be done,” he was far more interested in the wonderful changes that the war would surely bring about in the domestic American polity. In particular, war offered a golden opportunity to bring about collectivist social control in the interest of social justice. As one historian put it,

because war demanded paramount commitment to the national interest and necessitated an unprecedented degree of government planning and economic regulation in that interest, Dewey saw the prospect of permanent socialization, permanent replacement of private and possessive interest by public and social interest, both within and among nations.Carol S. Gruber, Mars and Minerva: World War I and the Uses of the Higher Learning in America (Baton Rouge: Louisiana State University Press, 1975), p. 92.

In an interview with the New York World a few months after U.S. entry into the war, Dewey exulted that “this war may easily be the beginning of the end of business.” For out of the needs of the war, “we are beginning to produce for use, not for sale, and the capitalist is not a capitalist ... [in the face of] the war.” Capitalist conditions of production and sale are now under government control, and “there is no reason to believe that the old principle will ever be resumed. ... Private property had already lost its sanctity ... industrial democracy is on the way.”Quoted in ibid., pp. 92–93. Also see Leuchtenburg, “The New Deal and the Analogue of War,” p. 89. For similar reasons, Thorstein Veblen, prophet of the alleged dichotomy of production for profit vs. production for use, championed the war and began to come out openly for socialism in an article in the New Republic in 1918, later reprinted in his The Vested Interests and the State of the Industrial Arts (1919). See Charles Hirschfeld, “Nationalist Progressivism and World War I,” Mid-America 45 (July, 1963): 150. Also see David Riesman, Thorstein Veblen: A Critical Interpretation (New York: Charles Scribner’s Sons, 1960), pp. 30–31. In short, intelligence is at last being used to tackle social problems, and this practice is destroying the old order and creating a new social order of “democratic integrated control.” Labor is acquiring more power, science is at last being socially mobilized, and massive government controls are socializing industry. These developments, Dewey proclaimed, were precisely what we are fighting for.Hirschfeld, “Nationalist Progressivism and World War I,” p. 150.

Furthermore, John Dewey saw great possibilities opened by the war for the advent of worldwide collectivism. To Dewey, America’s entrance into the war created a “plastic juncture” in the world, a world marked by a “world organization and the beginnings of a public control which crosses nationalistic boundaries and interests,” and which would also “outlaw war.”Gruber, Mars and Minerva, p. 92.

The editors of the New Republic took a position similar to Dewey’s, except that they arrived at it even earlier. In his editorial in the magazine’s first issue in November 1914, Herbert Croly cheerily prophesied that the war would stimulate America’s spirit of nationalism and therefore bring it closer to democracy. At first hesitant about the collectivist war economies in Europe, the New Republic soon began to cheer and urged the United States to follow the lead of the warring European nations and socialize its economy and expand the powers of the State. As America prepared to enter the war, the New Republic, examining war collectivism in Europe, rejoiced that “on its administrative side socialism [had] won a victory that [was] superb and compelling.” True, European war collectivism was a bit grim and autocratic, but never fear, America could use the selfsame means for “democratic” goals.

The New Republic intellectuals also delighted in the “war spirit” in America, for that spirit meant “the substitution of national and social and organic forces for the more or less mechanical private forces operative in peace. ...” The purposes of war and social reform might be a bit different, but, after all, “they are both purposes, and luckily for mankind a social organization which is efficient is as useful for the one as for the other.”Hirschfeld, “Nationalist Progressivism in World War I,” p. 142. It is intriguing that for the New Republic intellectuals, actually existent private individuals are dismissed as “mechanical,” whereas nonexistent entities such as “national and social” forces are hailed as being “organic.” Lucky indeed.

As America prepared to enter the war, the New Republic eagerly looked forward to imminent collectivization, sure that it would bring “immense gains in national efficiency and happiness.” After war was declared, the magazine urged that the war be used as “an aggressive tool of democracy.”

“Why should not the war serve,” the magazine asked, “as a pretext to be used to foist innovations upon the country?” In that way, progressive intellectuals could lead the way in abolishing “the typical evils of the sprawling half-educated competitive capitalism.”

Convinced that the United States would attain socialism through war, Walter Lippmann, in a public address shortly after American entry, trumpeted his apocalyptic vision of the future:

We who have gone to war to insure democracy in the world will have raised an aspiration here that will not end with the overthrow of the Prussian autocracy. We shall turn with fresh interests to our own tyrannies — to our Colorado mines, our autocratic steel industries, sweatshops, and our slums. A force is loose in America. ... Our own reactionaries will not assuage it. ... We shall know how to deal with them.Quoted in Hirschfeld, “Nationalist Progressivism, and World War I,” p. 147. A minority of pro-war socialists broke off from the antiwar Socialist Party to form the Social Democratic League, and to join a pro-war front organized and financed by the Wilson administration, the American Alliance for Labor and Democracy. The pro-war socialists welcomed the war as providing “startling progress in collectivism,” and opined that after the war, the existent state socialism would be advanced toward “democratic collectivism.” The pro-war socialists included John Spargo, Algie Simons, W.J. Ghent, Robert R. LaMonte, Charles Edward Russell, J.G. Phelps Stokes, Upton Sinclair, and William English Walling. Walling so succumbed to war fever that he denounced the Socialist Party as a conscious tool of the Kaiser and advocated the suppression of freedom of speech for pacifists and for antiwar socialists. See ibid., p. 143. On Walling, see Gilbert, Designing the Industrial State, pp. 232–33. On the American Alliance for Labor and Democracy and its role in the war effort, see Ronald Radosh, American Labor and United States Foreign Policy (New York: Random House, 1969), pp. 58–71.

Walter Lippmann, indeed, had been the foremost hawk among the New Republic intellectuals. He had pushed Croly into backing Wilson and into supporting intervention, and then had collaborated with Colonel House in pushing Wilson into entering the war. Soon Lippmann, an enthusiast for conscription, had to confront the fact that he himself, only 27 years old and in fine health, was eminently eligible for the draft. Somehow, however, Lippmann failed to unite theory and praxis. Young Felix Frankfurter, progressive Harvard Law Professor and a close associate of the New Republic editorial staff, had just been selected as a special assistant to Secretary of War Baker. Lippmann somehow felt that his own inestimable services could be better used planning the postwar world than battling in the trenches. And so he wrote to Frankfurter asking for a job in Baker’s office. “What I want to do,” he pleaded, “is to devote all my time to studying and speculating on the approaches to peace and the reaction from the peace. Do you think you can get me an exemption on such high-falutin grounds?” He then rushed to reassure Frankfurter that there was nothing “personal” in this request. After all, he explained, “the things that need to be thought out, are so big that there must be no personal element mixed up with this.” Frankfurter having paved the way, Lippmann wrote to Secretary Baker. He assured Baker that he was only applying for a job and draft exemption on the pleading of others and in stern submission to the national interest. As Lippmann put it in a remarkable demonstration of cant:

I have consulted all the people whose advice I value and they urge me to apply for exemption. You can well understand that this is not a pleasant thing to do, and yet, after searching my soul as candidly as I know how, I am convinced that I can serve my bit much more effectively than as a private in the new armies.

No doubt.

As icing on the cake, Lippmann added an important bit of “disinformation.” For, he piteously wrote to Baker, the fact is “that my father is dying and my mother is absolutely alone in the world. She does not know what his condition is, and I cannot tell anyone for fear it would become known.” Apparently, no one else “knew” his father’s condition either, including his father and the medical profession, for the elder Lippmann managed to peg along successfully for the next ten years.In fact, Jacob Lippmann was to contract cancer in 1925 and die two years later. Moreover, Lippmann, before and after Jacob’s death, was supremely indifferent to his father. Ronald Steel, Walter Lippmann and the American Century (New York: Random House, 1981), p. 5, pp. 116–17. On Walter Lippmann’s enthusiasm for conscription, at least for others, see Beaver, Newton Baker, pp. 26–27.

Secure in his draft exemption, Walter Lippmann hied off in high excitement to Washington, there to help run the war and, a few months later, to help direct Colonel House’s secret conclave of historians and social scientists setting out to plan the shape of the future peace treaty and the postwar world. Let others fight and die in the trenches; Walter Lippmann had the satisfaction of knowing that his talents, at least, would be put to their best use by the newly emerging collectivist State.

As the war went on, Croly and the other editors, having lost Lippmann to the great world beyond, cheered every new development of the massively controlled war economy. The nationalization of railroads and shipping, the priorities and allocation system, the total domination of all parts of the food industry achieved by Herbert Hoover and the Food Administration, the pro-union policy, the high taxes, and the draft were all hailed by the New Republic as an expansion of democracy’s power to plan for the general good. As the Armistice ushered in the postwar world, the New Republic looked back on the handiwork of the war and found it good: “We revolutionized our society.” All that remained was to organize a new constitutional convention to complete the job of reconstructing America.Hirschfeld, “Nationalist Progressivism and World War I,” pp. 148–50. On the New Republic and the war, and particularly on John Dewey, also see Lasch, The New Radicalism in America, pp. 181–224, especially pp. 202–04. On the three New Republic editors, see Charles Forcey, The Crossroads of Liberalism: Croly, Weyl, Lippmann and the Progressive Era, 1900–1925 (New York: Oxford University Press, 1961). Also see David W. Noble, “The New Republic and the Idea of Progress, 1914–1920,” Mississippi Valley Historical Review 38 (December, 1951): 387–402. In a book titled The End of the War (1918), New Republic editor Walter Weyl assured his readers that “the new economic solidarity once gained, can never again be surrendered.” Cited in Leuchtenburg, “New Deal, and the Analogue of War,” p. 90.

But the revolution had not been fully completed. Despite the objections of Bernard Baruch and other wartime planners, the government decided not to make most of the war collectivist machinery permanent. From then on, the fondest ambition of Baruch and the others was to make the World War I system a permanent institution of American life. The most trenchant epitaph on the World War I polity was delivered by Rexford Guy Tugwell, the most frankly collectivist of the Brain Trusters of Franklin Roosevelt’s New Deal. Looking back on “America’s wartime socialism” in 1927, Tugwell lamented that if only the war had lasted longer, that great “experiment” could have been completed: “We were on the verge of having an international industrial machine when peace broke,” Tugwell mourned. “Only the Armistice prevented a great experiment in control of production, control of prices, and control of consumption.”Rexford Guy Tugwell, “America’s War-Time Socialism,” The Nation (1927): 364–65.Quoted in Leuchtenburg, “Th e New Deal and the Analogue of War,” pp. 90–91. Tugwell need not have been troubled; there would soon be other emergencies, other wars.

At the end of the war, Lippmann was to go on to become America’s foremost journalistic pundit. Croly, having broken with the Wilson administration on the harshness of the Versailles Treaty, was bereft to find the New Republic no longer the spokesman for some great political leader. During the late 1920s he was to discover an exemplary national collectivist leader abroad — in Benito Mussolini.In January 1927, Croly wrote a New Republic editorial, “An Apology for Fascism,” endorsing an accompanying article, “Fascism for the Italians,” written by the distinguished philosopher Horace M. Kallen, a disciple of John Dewey and an exponent of progressive pragmatism. Kallen praised Mussolini for his pragmatic approach, and in particular for the élan vital that Mussolini had infused into Italian life. True, Professor Kallen conceded, fascism is coercive, but surely this is only a temporary expedient. Noting fascism’s excellent achievement in economics, education, and administrative reform, Kallen added that “in this respect the Fascist revolution is not unlike the Communist revolution. Each is the application by force ... of an ideology to a condition. Each should have the freest opportunity once it has made a start. ...” The accompanying New Republic editorial endorsed Kallen’s thesis and added that “alien critics should beware of outlawing a political experiment which aroused in a whole nation an increased moral energy and dignified its activities by subordinating them to a deeply felt common purpose.” New Republic 49 (January 12, 1927): 207–13. Cited in John Patrick Diggins, “Mussolini’s Italy: The View from America,” (Ph.D. diss., University of Southern California, 1964), pp. 214–17. That Croly ended his years as an admirer of Mussolini comes as no surprise when we realize that from early childhood he had been steeped by a doting father in the authoritarian socialist doctrines of Auguste Comte’s Positivism. These views were to mark Croly throughout his life. Thus, Herbert’s father, David, the founder of Positivism in the United States, advocated the establishment of vast powers of government over everyone’s life. David Croly favored the growth of trusts and monopolies as a means both to that end and also to eliminate the evils of individual competition and “selfishness.” Like his son, David Croly railed at the Jeffersonian “fear of government” in America and looked to Hamilton as an example to counter that trend.Born in Ireland, David Croly became a distinguished journalist in New York City and rose to the editorship of the New York World. Croly organized the first Positivist Circle in the United States and financed an American speaking tour for the Comtian Henry Edgar. The Positivist Circle met at Croly’s home, and in 1871 David Croly published A Positivist Primer. When Herbert was born in 1869, he was consecrated by his father to the Goddess Humanity, the symbol of Comte’s Religion of Humanity. See the illuminating recent biography of Herbert by David W. Levy, Herbert Croly of the New Republic (Princeton, NJ: Princeton University Press, 1985).

And what of Professor Dewey, the doyen of the pacifist intellectuals-turned-drumbeaters for war? In a little known period of his life, John Dewey spent the immediate postwar years, 1919–21, teaching at Peking University and traveling in the Far East. China was then in a period of turmoil over the clauses of the Versailles Treaty that transferred the rights of dominance in Shantung from Germany to Japan. Japan had been promised this reward by the British and French in secret treaties in return for entering the war against Germany. The Wilson administration was torn between the two camps. On the one hand were those who wished to stand by the Allies’ decision and who envisioned using Japan as a club against Bolshevik Russia in Asia. On the other were those who had already begun to sound the alarm about a Japanese menace and who were committed to China, often because of connections with the American Protestant missionaries who wished to defend and expand their extraterritorial powers of governance in China. The Wilson administration, which had originally taken a pro-Chinese stand, reversed itself in the spring of 1919 and endorsed the Versailles provisions.

Into this complex situation John Dewey plunged, seeing no complexity and of course considering it unthinkable for either him or the United States to stay out of the entire fray. Dewey leaped into total support of the Chinese nationalist position, hailing the aggressive Young China movement and even endorsing the pro-missionary YMCA in China as “social workers.” Dewey thundered that while “I didn’t expect to be a jingo,” Japan must be called to account, and Japan is the great menace in Asia. Thus, scarcely had Dewey ceased being a champion of one terrible world war than he began to pave the way for an even greater one.See Jerry Israel, Progressivism and the Open Door: America and China, 1905–1921 (Pittsburgh: University of Pittsburgh Press, 1971).

6. Economics in Service of the State: The Empiricism of Richard T. Ely

World War I was the apotheosis of the growing notion of intellectuals as servants of the State and junior partners in State rule. In the new fusion of intellectuals and State, each was of powerful aid to the other. Intellectuals could serve the State by apologizing for and supplying rationales for its deeds. Intellectuals were also needed to staff important positions as planners and controllers of the society and economy. The State could also serve intellectuals by restricting entry into, and thereby raising the income and the prestige of, the various occupations and professions. During World War I, historians were of particular importance in supplying the government with war propaganda, convincing the public of the unique evil of Germans throughout history and of the satanic designs of the Kaiser. Economists, particularly empirical economists and statisticians, were of great importance in the planning and control of the nation’s wartime economy. Historians playing preeminent roles in the war propaganda machine have been studied fairly extensively; economists and statisticians, playing a less blatant and allegedly “value-free” role, have received far less attention.For a refreshingly acidulous portrayal of the actions of the historians in World War I, see C. Hartley Grattan, “The Historians Cut Loose,” American Mercury, August 1927, reprinted in Harry Elmer Barnes, In Quest of Truth and Justice, 2nd ed. (Colorado Springs: Ralph Myles Publisher, 1972), pp. 142–64. A more extended account is George T. Blakey, Historians on the Homefront: American Propagandists for the Great War (Lexington: University Press of Kentucky, 1970). Gruber, Mars and Minerva, deals with academia and social scientism, but concentrates on historians. James R. Mock and Cedric Larson, Words that Won the War (Princeton, NJ: Princeton University Press, 1939), presents the story of the “Creel Committee,” the Committee on Public Information, the official propaganda ministry during the war.

Although it is an outworn generalization to say that 19th century economists were stalwart champions of laissez-faire, it is still true that deductive economic theory proved to be a mighty bulwark against government intervention. For, basically, economic theory showed the harmony and order inherent in the free market, as well as the counterproductive distortions and economic shackles imposed by state intervention. In order for statism to dominate the economics profession, then, it was important to discredit deductive theory. One of the most important ways of doing so was to advance the notion that, to be “genuinely scientific,” economics had to eschew generalization and deductive laws and simply engage in empirical inquiry into the facts of history and historical institutions, hoping that somehow laws would eventually arise from these detailed investigations. Thus the German Historical School, which managed to seize control of the economics discipline in Germany, fiercely proclaimed not only its devotion to statism and government control, but also its opposition to the “abstract” deductive laws of political economy. This was the first major group within the economics profession to champion what Ludwig von Mises was later to call “anti-economics.” Gustav Schmoller, the leader of the Historical School, proudly declared that his and his colleagues’ major task at the University of Berlin was to form “the intellectual bodyguard of the House of Hohenzollern.”

During the 1880s and 1890s bright young graduate students in history and the social sciences went to Germany, the home of the Ph.D. degree, to obtain their doctorates. Almost to a man, they returned to the United States to teach in colleges and in the newly created graduate schools, imbued with the excitement of the “new” economics and political science. It was a “new” social science that lauded the German and Bismarckian development of a powerful welfare-warfare State — a State seemingly above all social classes — that fused the nation into an integrated and allegedly harmonious whole. The new society and polity was to be run by a powerful central government — cartelizing, dictating, arbitrating, and controlling — thereby eliminating competitive laissez-faire capitalism on the one hand and the threat of proletarian socialism on the other. And at or near the head of the new dispensation was to be the new breed of intellectuals, technocrats, and planners, directing, staffing, propagandizing, and “selflessly” promoting the common good while ruling and lording over the rest of society. In short, doing well by doing good. To the new breed of progressive and statist intellectuals in America, this was a heady vision indeed.

Richard T. Ely, virtually the founder of this new breed, was the leading progressive economist and also the teacher of most of the others. As an ardent postmillennialist pietist, Ely was convinced that he was serving God and Christ as well. Like so many pietists, Ely was born (in 1854) of solid Yankee and old Puritan stock, again in the midst of the fanatical Burned-Over District of western New York. Ely’s father, Ezra, was an extreme Sabbatarian, preventing his family from playing games or reading books on Sunday, and so ardent a prohibitionist that, even though an impoverished, marginal farmer, he refused to grow barley, a crop uniquely suitable to his soil, because it would have been used to make that monstrously sinful product, beer.See the useful biography of Ely, Rader, The Academic Mind and Reform. Having been graduated from Columbia College in 1876, Ely went to Germany and received his Ph.D. from Heidelberg in 1879. In several decades of teaching at Johns Hopkins and then at Wisconsin, the energetic and empire-building Ely became enormously influential in American thought and politics. At Johns Hopkins he turned out a gallery of influential students and statist disciples in all fields of the social sciences as well as economics. These disciples were headed by the pro-union institutionalist economist John R. Commons and included the social-control sociologists Edward Alsworth Ross and Albion W. Small, John H. Finlay, president of City College of New York, Dr. Albert Shaw, editor of the Review of Reviews and influential adviser and theoretician to Theodore Roosevelt, the municipal reformer Frederick C. Howe, and the historians Frederick Jackson Turner and J. Franklin Jameson. Newton D. Baker was trained by Ely at Hopkins, and Woodrow Wilson was also his student there, although there is no direct evidence of intellectual influence.

In the mid-1880s Richard Ely founded the American Economic Association in a conscious attempt to commit the economics profession to statism as against the older laissez-faire economists grouped in the Political Economy Club. Ely continued as secretary-treasurer of the AEA for seven years, until his reformer allies decided to weaken the association’s commitment to statism in order to induce the laissez-faire economists to join the organization. At that point, Ely, in high dudgeon, left the AEA.

At Wisconsin in 1892, Ely formed a new School of Economics, Political Science, and History, surrounded himself with former students, and gave birth to the Wisconsin Idea which, with the help of John Commons, succeeded in passing a host of progressive measures for government regulation in Wisconsin. Ely and the others formed an unofficial but powerful brain trust for the progressive regime of Wisconsin Governor Robert M. La Follette, who got his start in Wisconsin politics as an advocate of prohibition. Though never a classroom student of Ely’s, La Follette always referred to Ely as his teacher and as the molder of the Wisconsin Idea. And Theodore Roosevelt once declared that Ely “first introduced me to radicalism in economics and then made me sane in my radicalism.”Fine, Laissez Faire and the General-Welfare State, pp. 239–40.

Ely was also one of the most prominent postmillennialist intellectuals of the era. He fervently believed that the State is God’s chosen instrument for reforming and Christianizing the social order so that eventually Jesus would arrive and put an end to history. The State, declared Ely, “is religious in its essence,” and, furthermore, “God works through the State in carrying out His purposes more universally than through any other institution.” The task of the church is to guide the State and utilize it in these needed reforms.Fine, Laissez Faire and the General-Welfare State, pp. 180–81.

An inveterate activist and organizer, Ely was prominent in the evangelical Chautauqua movement, and he founded there the “Christian Sociology” summer school, which infused the influential Chautauqua operation with the concepts and the personnel of the Social Gospel movement. Ely was a friend and close associate of Social Gospel leaders Revs. Washington Gladden, Walter Rauschenbusch, and Josiah Strong. With Strong and Commons, Ely organized the Institute of Christian Sociology.John Rogers Commons was of old Yankee stock, descendant of John Rogers, Puritan martyr in England, and born in the Yankee area of the Western Reserve in Ohio and reared in Indiana. His Vermont mother was a graduate of the hotbed of pietism, Oberlin College, and she sent John to Oberlin in the hopes that he would become a minister. While in college, Commons and his mother launched a prohibitionist publication at the request of the Anti-Saloon League. After graduation, Commons went to Johns Hopkins to study under Ely, but flunked out of graduate school. See Commons, Myself. Also see Dorfman, Economic Mind in American Civilization, vol. 3, pp. 276–77; Mary O. Furner, Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science, 1865–1905 (Lexington: University Press of Kentucky, 1975), pp. 198–204. Ely also founded and became the secretary of the Christian Social Union of the Episcopal Church, along with Christian Socialist W.D.P. Bliss. All of these activities were infused with postmillennial statism. Thus, the Institute of Christian Sociology was pledged to present God’s “kingdom as the complete ideal of human society to be realized on earth.” Moreover,

Ely viewed the state as the greatest redemptive force in society. ... In Ely’s eyes, government was the God-given instrument through which we had to work. Its preeminence as a divine instrument was based on the post-Reformation abolition of the division between the sacred and the secular and on the State’s power to implement ethical solutions to public problems. The same identification of sacred and secular which took place among liberal clergy enabled Ely to both divinize the state and socialize Christianity: he thought of government as God’s main instrument of redemption.Quandt, “Religion and Social Thought,” pp. 402–03. Ely did not expect the millennial Kingdom to be far off. He believed that it was the task of the universities and of the social sciences “to teach the complexities of the Christian duty of brotherhood” in order to arrive at the New Jerusalem “which we are all eagerly awaiting.” The church’s mission was to attack every evil institution, “until the earth becomes a new earth, and all its cities, cities of God.”

When war came, Richard Ely was for some reason (perhaps because he was in his sixties) left out of the excitement of war work and economic planning in Washington. He bitterly regretted that “I have not had a more active part than I have had in this greatest war in the world’s history.”Gruber, Mars and Minerva, p. 114. But Ely made up for his lack as best he could; virtually from the start of the European war, he whooped it up for militarism, war, the “discipline” of conscription, and the suppression of dissent and “disloyalty” at home. A lifelong militarist, Ely had tried to volunteer for war service in the Spanish-American War, had called for the suppression of the Philippine insurrection, and was particularly eager for conscription and for forced labor for “loafers” during World War I. By 1915 Ely was agitating for immediate compulsory military service, and the following year he joined the ardently pro-war and heavily big-business–influenced National Security League, where he called for the liberation of the German people from “autocracy.”See Rader, Academic Mind and Reform, pp. 181–91. On top big business affiliations of National Security League leaders, especially J.P. Morgan and others in the Morgan ambit, see C. Hartley Grattan, Why We Fought (New York Vanguard Press, 1929), pp. 117–18, and Robert D. Ward, “The Origin and Activities of the National Security League, 1914–1919,” Mississippi Valley Historical Review 47 (June, 1960): 51–65. In advocating conscription, Ely was neatly able to combine moral, economic, and prohibitionist arguments for the draft: “The moral effect of taking boys off street corners and out of saloons and drilling them is excellent, and the economic effects are likewise beneficial.”The Chamber of Commerce of the United States spelled out the long-run economic benefit of conscription, that for America’s youth it would “substitute a period of helpful discipline for a period of demoralizing freedom from restraint.” Finnegan, Against the Specter of a Dragon, p. 110. On the broad and enthusiastic support given to the draft by the Chamber of Commerce, see Chase C. Mooney and Martha E. Layman, “Some Phases of the Compulsory Military Training Movement, 1914–1920,” Mississippi Historical Review 38 (March, 1952): 640. Indeed, conscription for Ely served almost as a panacea for all ills. So enthusiastic was he about the World War I experience that Ely again prescribed his favorite cure-all to alleviate the 1929 depression. He proposed a permanent peacetime “industrial army” engaged in public works and manned by conscripting youth for strenuous physical labor. This conscription would instill into America’s youth the essential “military ideals of hardihood and discipline,” a discipline once provided by life on the farm but unavailable to the bulk of the populace now growing up in the effete cities. This small, standing conscript army could then speedily absorb the unemployed during depressions. Under the command of “an economic general staff,” the industrial army would “go to work to relieve distress with all the vigor and resources of brain and brawn that we employed in the World War.”Richard T. Ely, Hard Times: The Way in and the Way Out (1931), cited in Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking, 1949), vol. 5, p. 671; and in Leuchtenburg, “The New Deal and the Analogue of War,” p. 94.

Deprived of a position in Washington, Ely made the stamping out of “disloyalty” at home his major contribution to the war effort. He called for the total suspension of academic freedom for the duration. Any professor, he declared, who stated “opinions which hinder us in this awful struggle” should be “fired” if not indeed “shot.” The particular focus of Ely’s formidable energy was a zealous campaign to try to get his old ally in Wisconsin politics, Robert M. La Follette, expelled from the U.S. Senate for continuing to oppose America’s participation in the war. Ely declared that his “blood boils” at La Follette’s “treason” and attacks on war profiteering. Throwing himself into the battle, Ely founded and became president of the Madison chapter of the Wisconsin Loyalty Legion and mounted a campaign to expel La Follette.Ely drew up a super-patriotic pledge for the Madison chapter of the Loyalty Legion, pledging its members to “stamp out disloyalty.” The pledge also expressed unqualified support for the Espionage Act and vowed to “work against La Follettism in all its anti-war forms.” Rader, Academic Mind and Reform, pp. 183 ff. The campaign was meant to mobilize the Wisconsin faculty and to support the ultrapatriotic and ultrahawkish activities of Theodore Roosevelt. Ely wrote to T.R. that “we must crush La Follettism.” In his unremitting campaign against the Wisconsin Senator, Ely thundered that La Follette “has been of more help to the Kaiser than a quarter of a million troops.”Gruber, Mars and Minerva, p. 207. “Empiricism” rampant.

The faculty of the University of Wisconsin was stung by charges throughout the state and the country that its failure to denounce La Follette was proof that the university — long affiliated with La Follette in state politics — supported his disloyal antiwar policies. Prodded by Ely, Commons, and others, the university’s War Committee drew up and circulated a petition, signed by the university president, all the deans, and over 90% of the faculty, that provided one of the more striking examples in United States history of academic truckling to the State apparatus. None too subtly using the constitutional verbiage for treason, the petition protested “against those utterances and actions of Senator La Follette which have given aid and comfort to Germany and her allies in the present war; we deplore his failure loyally to support the government in the prosecution of the war.”Ibid., p. 207.

Behind the scenes, Ely tried his best to mobilize America’s historians against La Follette, to demonstrate that he had given aid and comfort to the enemy. Ely was able to enlist the services of the National Board of Historical Service, the propaganda agency established by professional historians for the duration of the war, and of the government’s own propaganda arm, the Committee on Public Information. Warning that the effort must remain secret, Ely mobilized historians under the aegis of these organizations to research German and Austrian newspapers and journals to try to build a record of La Follette’s alleged influence, “indicating the encouragement he has given Germany.” The historian E. Merton Coulter revealed the objective spirit animating these researches: “I understand it is to be an unbiased and candid account of the Senator’s [La Follette’s] course and its effect — but we all know it can lead but to one conclusion — something little short of treason.”Ibid., pp. 208 n.

Professor Gruber well notes that this campaign to get La Follette was “a remarkable example of the uses of scholarship for espionage. It was a far cry from the disinterested search for truth for a group of professors to mobilize a secret research campaign to find ammunition to destroy the political career of a United States senator who did not share their view of the war.”Ibid., pp. 209–10. In his autobiography, written in 1938, Richard Ely rewrote history to cover up his ignominious role in the get–La Follette campaign. He acknowledged signing the faculty petition, but then had the temerity to claim that he “was not one of the ring-leaders, as La Follette thought, in circulating this petition ...” There is no mention of his secret research campaign against La Follette. In any event, no evidence was turned up, the movement failed, and the Wisconsin professoriat began to move away in distrust from the Loyalty Legion.For more on the anti-La Follette campaign, see H.C. Peterson and Gilbert C. Fite, Opponents of War: 1917–1918 (Madison: University of Wisconsin Press, 1957), pp. 68–72; Paul L. Murphy, World War I and the Origin of Civil Liberties in the United States (New York: W.W. Norton, 1979), p. 120; and Belle Case La Follette and Fola La Follette, Robert M. LaFollette (New York: Macmillan, 1953), vol. 2.

After the menace of the Kaiser had been extirpated, the Armistice found Professor Ely, along with his compatriots in the National Security League, ready to segue into the next round of patriotic repression. During Ely’s anti–La Follette research campaign he had urged investigation of “the kind of influence which he [La Follette] has exerted against our country in Russia.” Ely pointed out that modern “democracy” requires a “high degree of conformity” and that therefore the “most serious menace” of Bolshevism, which Ely depicted as “social disease germs,” must be fought “with repressive measures.”

By 1924, however, Richard T. Ely’s career of repression was over, and what is more, in a rare instance of the workings of poetic justice, he was hoisted with his own petard. In 1922 the much-traduced Robert La Follette was reelected to the Senate and also swept the Progressives back into power in the state of Wisconsin. By 1924 the Progressives had gained control of the Board of Regents, and they moved to cut off the water of their former academic ally and empire-builder. Ely then felt it prudent to move out of Wisconsin together with his Institute, and while he lingered for some years at Northwestern, the heyday of Ely’s fame and fortune was over.

7. Economics in Service of the State: Government and Statistics

Statistics is a vital, though much underplayed, requisite of modern government. Government could not even presume to control, regulate, or plan any portion of the economy without the service of its statistical bureaus and agencies. Deprive government of its statistics and it would be a blind and helpless giant, with no idea whatever of what to do or where to do it. It might be replied that business firms, too, need statistics in order to function. But business needs for statistics are far less in quantity and also different in quality. Business may need statistics in its own micro area of the economy, but only on its prices and costs; it has little need for broad collections of data or for sweeping, holistic aggregates. Business could perhaps rely on its own privately collected and unshared data. Furthermore, much entrepreneurial knowledge is qualitative, not enshrined in quantitative data, and of a particular time, area, and location. But government bureaucracy could do nothing if forced to be confined to qualitative data. Deprived of profit and loss tests for efficiency, or of the need to serve consumers efficiently, conscripting both capital and operating costs from taxpayers, and forced to abide by fixed, bureaucratic rules, modern government shorn of masses of statistics could do virtually nothing.Thus, T.W. Hutchison, from a very different perspective, notes the contrast between Carl Menger’s stress on the beneficent, unplanned phenomena of society, such as the free market, and the growth of “social self-consciousness” and government planning. Hutchison recognizes that a crucial component of that social self-consciousness is government statistics. T.W. Hutchison, A Review of Economic Doctrines, 1870–1929 (Oxford: Clarendon Press, 1953), pp. 150–51, 427.

Hence the enormous importance of World War I, not only in providing the power and the precedent for a collectivized economy, but also in greatly accelerating the advent of statisticians and statistical agencies of government, many of which (and who) remained in government, ready for the next leap forward of power.

Richard T. Ely, of course, championed the new empirical “look and see” approach, with the aim of fact-gathering to “mold the forces at work in society and to improve existing conditions.”Fine, Laissez Faire and the General-Welfare State, p. 207. More importantly, one of the leading authorities on the growth of government expenditure has linked it with statistics and empirical data: “Advance in economic science and statistics ... strengthened belief in the possibilities of dealing with social problems by collective action. It made for increase in the statistical and other fact-finding activities of government.”Solomon Fabricant, The Trend of Government Activity in the United States since 1900 (New York: National Bureau of Economic Research, 1952), p. 143. Similarly, an authoritative work on the growth of government in England puts it this way: “The accumulation of factual information about social conditions and the development of economics and the social sciences increased the pressure for government intervention. ... As statistics improved and students of social conditions multiplied, the continued existence of such conditions was kept before the public. Increasing knowledge of them aroused influential circles and furnished working class movements with factual weapons.” Moses Abramovitz and Vera F. Eliasberg, The Growth of Public Employment in Great Britain (Princeton, NJ: National Bureau of Economic Research, 1957), pp. 22–23, 30. Also see M.I. Cullen, The Statistical Movement in Early Victorian Britain: The Foundations of Empirical Social Research (New York: Barnes & Noble, 1975). As early as 1863, Samuel B. Ruggles, American delegate to the International Statistical Congress in Berlin, proclaimed that “statistics are the very eyes of the statesman, nabling him to survey and scan with clear and comprehensive vision the whole structure and economy of the body politic.”See Joseph Dorfman, “The Role of the German Historical School in American Economic Thought,” American Economic Review, Papers and Proceedings 45 (May, 1955): 18. George Hildebrand remarked on the inductive emphasis of the German Historical School that “perhaps there is, then, some connection between this kind of teaching and the popularity of crude ideas of physical planning in more recent times.” George H. Hildebrand, “International Flow of Economic Ideas-Discussion,” ibid., p. 37.

Conversely, this means that stripped of these means of vision, the statesman would no longer be able to meddle, control, and plan.

Moreover, government statistics are clearly needed for specific types of intervention. Government could not intervene to alleviate unemployment unless statistics of unemployment were collected — and so the impetus for such collection. Carroll D. Wright, one of the first Commissioners of Labor in the United States, was greatly influenced by the famous statistician and German Historical School member, Ernst Engel, head of the Royal Statistical Bureau of Prussia. Wright sought the collection of unemployment statistics for that reason and, in general, for “the amelioration of unfortunate industrial and social relations.” Henry Carter Adams, a former student of Engel, and, like Ely, a statist and progressive “new economist,” established the Statistical Bureau of the Interstate Commerce Commission, believing that “ever increasing statistical activity by the government was essential — for the sake of controlling naturally monopolistic industries. ...” And Professor Irving Fisher of Yale, eager for government to stabilize the price level, conceded that he wrote The Making of Index Numbers to solve the problem of the unreliability of index numbers. “Until this difficulty could be met, stabilization could scarcely be expected to become a reality.”

Carroll Wright was a Bostonian and a progressive reformer. Henry Carter Adams, the son of a New England pietist Congregationalist preacher on missionary duty in Iowa, studied for the ministry at his father’s alma mater, Andover Theological Seminary, but soon abandoned this path. Adams devised the accounting system of the Statistical Bureau of the ICC. This system “served as a model for the regulation of public utilities here and throughout the world.”Dorfman, “Role of the German Historical School in American Economic Thought,” p. 23. On Wright and Adams, see Dorfman, Economic Mind in American Civilization, vol. 3, 164–74, 123; and Boyer, Urban Masses and Moral Order, p. 163. Furthermore, the first professor of statistics in the United States, Roland P. Falkner, was a devoted student of Engel’s and a translator of the works of Engel’s assistant, August Meitzen.

Irving Fisher was the son of a Rhode Island Congregationalist pietist preacher, and his parents were both of old Yankee stock, his mother a strict Sabbatarian. As befitted what his son and biographer called his “crusading spirit,” Fisher was an inveterate reformer, urging the imposition of numerous progressive measures including Esperanto, simplified spelling, and calendar reform. He was particularly enthusiastic about purging the world of “such iniquities of civilization as alcohol, tea, coffee, tobacco, refined sugar, and bleached white flour. ...”Irving Norton Fisher, My Father Irving Fisher (New York: Comet Press, 1956), pp. 146–47. Also Fisher, see Irving Fisher, Stabilised Money (London: Allen & Unwin, 1935), p. 383. During the 1920s Fisher was the leading prophet of that so-called New Era in economics and in society. He wrote three books during the 1920s praising the noble experiment of prohibition, and he lauded Governor Benjamin Strong and the Federal Reserve System for following his advice and expanding money and credit so as to keep the wholesale price level virtually constant. Because of the Fed’s success in imposing Fisherine price stabilization, Fisher was so sure that there could be no depression that as late as 1930 he wrote a book claiming that there was and could be no stock crash and that stock prices would quickly rebound. Throughout the 1920s Fisher insisted that since wholesale prices remained constant, there was nothing amiss about the wild boom in stocks. Meanwhile he put his theories into practice by heavily investing his heiress wife’s considerable fortune in the stock market. After the crash he frittered away his sister-in-law’s money when his wife’s fortune was depleted, at the same time calling frantically on the federal government to inflate money and credit and to re-inflate stock prices to their 1929 levels. Despite his dissipation of two family fortunes, Fisher managed to blame almost everyone except himself for the debacle.Fisher, My Father, pp. 264–67. On Fisher’s role and influence during this period, see Murray N. Rothbard, America’s Great Depression, 4th ed. (New York: Richardson & Snyder, 1983). Also see Joseph S. Davis, The World Between the Wars, 1919–39, An Economist’s View (Baltimore: Johns Hopkins University Press, 1975), p. 194; and Melchior Palyi, The Twilight of Gold, 1914–1936: Myth and Realities (Chicago: Henry Regnery, 1972), pp. 240, 249.

As we shall see, in view of the importance of Wesley Clair Mitchell in the burgeoning of government statistics in World War I, Mitchell’s view on statistics are of particular importance.Wesley C. Mitchell was of old Yankee pietist stock. His grandparents were farmers in Maine and then in Western New York. His father followed the path of many Yankees in migrating to a farm in northern Illinois. Mitchell attended the University of Chicago, where he was strongly influenced by Veblen and John Dewey. Dorfman, Economic Mind in American Civilization, vol. 3, p. 456. Mitchell, an institutionalist and student of Thorstein Veblen, was one of the prime founders of modern statistical inquiry in economics and clearly aspired to lay the basis for “scientific” government planning. As Professor Dorfman, friend and student of Mitchell’s, put it:

“clearly the type of social invention most needed today is one that offers definite techniques through which the social system can be controlled and operated to the optimum advantage of its members.” (Quote from Mitchell.) To this end he constantly sought to extend, improve and refine the gathering and compilation of data. ... Mitchell believed that business-cycle analysis ... might indicate the means to the achievement of orderly social control of business activity.Dorfman, Economic Mind in American Civilization, vol. 4, pp. 376, 361.

Or, as Mitchell’s wife and collaborator stated in her memoirs:

... he [Mitchell] envisioned the great contribution that government could make to the understanding of economic and social problems if the statistical data gathered independently by various Federal agencies were systematized and planned so that the interrelationships among them could be studied. The idea of developing social statistics, not merely as a record but as a basis for planning, emerged early in his own work.Emphasis added. Lucy Sprague Mitchell, Two Lives (New York: Simon and Schuster, 1953), p. 363. For more on this entire topic, see Murray N. Rothbard, “The Politics of Political Economists: Comment,” Quarterly Journal of Economics 74 (November, 1960): 659–65.

Particularly important in the expansion of statistics in World War I was the growing insistence, by progressive intellectuals and corporate liberal businessmen alike, that democratic decision-making must be increasingly replaced by the administrative and technocratic. Democratic or legislative decisions were messy, “inefficient,” and might lead to a significant curbing of statism, as had happened in the heyday of the Democratic Party during the 19th century. But if decisions were largely administrative and technocratic, the burgeoning of state power could continue unchecked. The collapse of the laissez-faire creed of the Democrats in 1896 left a power vacuum in government that administrative and corporatist types were eager to fill. Increasingly, then, such powerful corporatist big business groups as the National Civic Federation disseminated the idea that governmental decisions should be in the hands of the efficient technician, the allegedly value-free expert. In short, government, in virtually all of its aspects, should be “taken out of politics.” And statistical research with its aura of empiricism, quantitative precision, and nonpolitical value-freedom, was in the forefront of such emphasis. In the municipalities, an increasingly powerful progressive reform movement shifted decisions from elections in neighborhood wards to citywide professional managers and school superintendents. As a corollary, political power was increasingly shifted from working class and ethnic German Lutheran and Catholic wards to upper-class pietist business groups.See in particular Weinstein, The Corporate Ideal in the Liberal State; and Hays, “The Politics of Reform in Municipal Government in the Progressive Era,” pp. 157–69.

By the time World War I arrived in Europe, a coalition of progressive intellectuals and corporatist businessmen was ready to go national in sponsoring allegedly objective statistical research institutes and think tanks. Their views have been aptly summed up by David Eakins:

The conclusion being drawn by these people by 1915 was that fact-finding and policymaking had to be isolated from class struggle and freed from political pressure groups. The reforms that would lead to industrial peace and social order, these experts were coming to believe, could only be derived from data determined by objective fact-finders (such as themselves) and under the auspices of sober and respectable organizations (such as only they could construct). The capitalist system could be improved only by a single-minded reliance upon experts detached from the hurly-burly of democratic policy-making. The emphasis was upon efficiency — and democratic policymaking was inefficient. An approach to the making of national economic and social policy outside traditional democratic political processes was thus emerging before the United States formally entered World War I.David Eakins, “The Origins of Corporate Liberal Policy Research, 1916–1922: The Political-Economic Expert and the Decline of Public Debate,” in Building the Organizational Society, Israel, ed., p. 161.

Several corporatist businessmen and intellectuals moved at about the same time toward founding such statistical research institutes. In 1906–07, Jerome D. Greene, secretary of the Harvard University Corporation, helped found an elite Tuesday Evening Club at Harvard to explore important issues in economics and the social sciences. In 1910 Greene rose to an even more powerful post as general manager of the new Rockefeller Institute for Medical Research, and three years later Greene became secretary and CEO of the powerful philanthropic organization, the Rockefeller Foundation. Greene immediately began to move toward establishing a Rockefeller-funded institute for economic research, and in March 1914 he called an exploratory group together in New York, chaired by his friend and mentor in economics, the first Dean of the Harvard Graduate School of Business, Edwin F. Gay. The developing idea was that Gay would become head of a new “scientific” and “impartial” organization, The Institute of Economic Research, which would gather statistical facts, and that Wesley Mitchell would be its director.Herbert Heaton, Edwin F. Gay, A Scholar in Action (Cambridge: Harvard University Press, 1952). Edwin Gay was born in Detroit of old New England stock. His father had been born in Boston and went into his father-in-law’s lumber business in Michigan. Gay’s mother was the daughter of a wealthy preacher and lumberman. Gay entered the University of Michigan, was heavily influenced by the teaching of John Dewey, and then stayed in graduate school in Germany for over a dozen years, finally obtaining his Ph.D. in economic history at the University of Berlin. The major German influences on Gay were Gustav Schmoller, head of the Historical School, who emphasized that economics must be an “inductive science,” and Adolf Wagner, also at the University of Berlin, who favored large-scale government intervention in the economy in behalf of Christian ethics. Back at Harvard, Gay was the major single force, in collaboration with the Boston Chamber of Commerce, in pushing through a factory inspection act in Massachusetts, and in early 1911 Gay became president of the Massachusetts branch of the American Association for Labor Legislation, an organization founded by Richard T. Ely and dedicated to agitating for government intervention in the area of labor unions, minimum wage rates, unemployment, public works, and welfare.

Opposing advisers to John D. Rockefeller, Jr., won out over Greene, however, and the institute plan was scuttled.On the pulling and hauling among Rockefeller advisers on The Institute of Economic Research, see David M. Grossman, “American Foundations and the Support of Economic Research, 1913–29,” Minerva 22 (Spring–Summer 1982): 62–72. Mitchell and Gay pressed on, with the lead now taken by Mitchell’s longtime friend, chief statistician and vice president of AT&T, Malcolm C. Rorty. Rorty lined up support for the idea from a number of progressive statisticians and businessmen, including Chicago publisher of business books and magazines, Arch W. Shaw, E.H. Goodwin of the U.S. Chamber of Commerce, Magnus Alexander, statistician and assistant to the president of General Electric, like AT&T, a Morgan-oriented concern, John R. Commons, economist and aide-de-camp to Richard T. Ely at Wisconsin, and Nahum I. Stone, statistician, former Marxist, a leader in the “scientific management” movement, and labor manager for the Hickey Freeman clothing company. This group was in the process of forming a “Committee on National Income” when the United States entered the war, and they were forced to shelve their plans temporarily.See Eakins, “Origins of Corporate Liberal Policy Research,” pp. 166–67; Grossman, “American Foundations and the Support of Economic Research,” pp. 76–78; Heaton, Edwin F. Gay. On Stone, see Dorfman, Economic Mind in American Civilization, vol. 4, pp. 42, 60–61; and Samuel Haber, Efficiency and Uplift: Scientific Management in the Progressive Era, 1890–1920 (Chicago: University of Chicago Press, 1964), pp. 152, 165. During his Marxist period, Stone had translated Marx’s Poverty of Philosophy. After the war, however, the group set up the National Bureau of Economic Research, in 1920.See Guy Alchon, The Invisible Hand of Planning: Capitalism, Social Science, and the State in the 1920’s (Princeton, NJ: Princeton University Press, 1985), pp. 54 ff.

While the National Bureau was not to take final shape until after the war, another organization, created on similar lines, successfully won Greene and Rockefeller’s support. In 1916 they were persuaded by Raymond B. Fosdick to found the Institute for Government Research (IGR).Collier and Horowitz, The Rockefellers, p. 140. The IGR was slightly different in focus from the National Bureau group, as it grew directly out of municipal progressive reform and the political science profession. One of the important devices used by the municipal reformers was the private bureau of municipal research, which tried to seize decision-making from allegedly “corrupt” democratic bodies on behalf of efficient, nonpartisan organizations headed by progressive technocrats and social scientists. In 1910 President William Howard Taft, intrigued with the potential for centralizing power in a chief executive inherent in the idea of the executive budget, appointed the “father of the budget idea,” the political scientist Frederick D. Cleveland, as head of a Commission on Economy and Efficiency. Cleveland was the director of the New York Bureau of Municipal Research. The Cleveland Commission also included political scientist and municipal reformer Frank Goodnow, professor of public law at Columbia University, first president of the American Political Science Association and president of Johns Hopkins, and William Franklin Willoughby, former student of Ely, Assistant Director of the Bureau of Census, and later president of the American Association for Labor Legislation.Eakins, “Origins of Corporate Liberal Policy Research,” p. 168. Also see Furner, Advocacy and Objectivity, pp. 282–86. The Cleveland Commission was delighted to tell President Taft precisely what he wanted to hear. The Commission recommended sweeping administrative changes that would provide a Bureau of Central Administrative Control to form a “consolidated information and statistical arm of the entire national government.” And at the heart of the new Bureau would be the Budget Division, which was to develop, at the behest of the president, and then present “an annual program of business for the Federal Government to be financed by Congress.”Stephen Skowronek, Building a New American State: The Expansion of the National Administrative Capacities, 1877–1920 (Cambridge: Cambridge University Press, 1982), pp. 187–88.

When Congress balked at the Cleveland Commission’s recommendations, the disgruntled technocrats decided to establish an Institute for Government Research in Washington to battle for these and similar reforms. With funding secured from the Rockefeller Foundation, the IGR was chaired by Goodnow, with Willoughby as its director.Vice chairman of the IGR was retired St. Louis merchant and lumberman and former president of Washington University of St. Louis, Robert S. Brookings. Secretary of the IGR was James F. Curtis, formerly Assistant Secretary of the Treasury under Taft and now secretary and deputy governor of the New York Federal Reserve Bank. Others on the board of the IGR were ex-President Taft, railroad executive Frederic A. Delano, uncle of Franklin D. Roosevelt and member of the Federal Reserve Board, Arthur T. Hadley, economist and president of Yale, Charles C. Van Hise, progressive president of the University of Wisconsin, and ally of Ely, reformer and influential young Harvard Law professor, Felix Frankfurter, Theodore N. Vail, chairman of AT&T, progressive engineer and businessman, Herbert C. Hoover, and financier R. Fulton Cutting, an officer of the New York Bureau of Municipal Research. Eakins, “Origins of Corporate Liberal Policy Research,” pp. 168–69. Soon Robert S. Brookings assumed responsibility for the financing.

When America entered the war, present and future NBER and IGR leaders were all over Washington, key figures and statisticians in the collectivized war economy.

By far the most powerful of the growing number of economists and statisticians involved in World War I was Edwin F. Gay. Arch W. Shaw, an enthusiast for rigid wartime planning of economic resources, was made head of the new Commercial Economy Board by the Council of National Defense as soon as America entered the war.On the Commercial Economy Board, see Clarkson, Industrial America in the World War, pp. 211ff. Shaw, who had taught at and served on the administrative board of Harvard Business School, staffed the board with Harvard Business people; the secretary was Harvard economist Melvin T. Copeland, and other members included Dean Gay. The board, which later became the powerful Conservation Division of the War Industries Board, focused on restricting competition in industry by eliminating the number and variety of products and by imposing compulsory uniformity, all in the name of “conservation” of resources to aid the war effort. For example, garment firms had complained loudly of severe competition because of the number and variety of styles, and so Gay urged the garment firms to form a trade association to work with the government in curbing the surfeit of competition. Gay also tried to organize the bakers so that they would not follow the usual custom of taking back stale and unsold bread from retail outlets. By the end of 1917, Gay was tired of using voluntary persuasion and was urging the government to use compulsory measures.

Gay’s major power came in early 1918 when the Shipping Board, which had officially nationalized all ocean shipping, determined to restrict drastically the use of ships for civilian trade and to use the bulk of shipping for transport of American troops to France. Appointed in early January 1918 as merely a “special expert” by the Shipping Board, Gay in a brief time became the key figure in redirecting shipping from civilian to military use. Soon Edwin Gay had become a member of the War Trade Board and head of its statistical department, which issued restrictive licenses for permitted imports, head of the statistical department of the Shipping Board, representative of the Shipping Board on the War Trade Board, head of the statistical committee of the Department of Labor, head of the Division of Planning and Statistics of the War Industries Board (WIB), and, above all, head of the new Central Bureau of Planning and Statistics. The Central Bureau was organized in the fall of 1918, when President Wilson asked WIB chairman Bernard Baruch to produce a monthly survey of all the government’s war activities. This “conspectus” evolved into the Central Bureau, responsible directly to the president. The importance of the bureau is noted by a recent historian:

The new Bureau represented the “peak” statistical division of the mobilization, becoming its “seer and prophet” for the duration, coordinating over a thousand employees engaged in research and, as the agency responsible for giving the president a concise picture of the entire economy, becoming the closest approximation to a “central statistical commission.” During the latter stages of the war it set up a clearinghouse of statistical work, organized liaisons with the statistical staff of all the war boards, and centralized the data production process for the entire war bureaucracy. By the war’s end, Wesley Mitchell recalled, “we were in a fair way to develop for the first time a systematic organization of federal statistics.”Alchon, Invisible Hand of Planning, p. 29. Mitchell headed the price statistics section of the Price-Fixing Committee of the War Industries Board.

Within a year, Edwin Gay had risen from a special expert to the unquestioned czar of a giant network of federal statistical agencies, with over a thousand researchers and statisticians working under his direct control. It is no wonder then that Gay, instead of being enthusiastic about the American victory he had worked so hard to secure, saw the Armistice as “almost ... a personal blow” that plunged him “into the slough of despond.” All of his empire of statistics and control had just been coming together and developing into a mighty machine when suddenly “came that wretched Armistice.”Heaton, Edwin F. Gay, p. 129. Truly a tragedy of peace.

Gay tried valiantly to keep the war machinery going, continually complaining because many of his aides were leaving and bitterly denouncing the “hungry pack” who, for some odd reason, were clamoring for an immediate end to all wartime controls, including those closest to his heart, foreign trade and shipping. But one by one, despite the best efforts of Baruch and many of the wartime planners, the WIB and other war agencies disappeared.See Rothbard, “War Collectivism,” pp. 100–12. [Editor’s remarks] See Chapter 12, pp. 390–99. For a while, Gay pinned his hopes on his Central Bureau of Planning and Statistics (CBPS), which, in a fierce bout of bureaucratic infighting, he attempted to make the key economic and statistical group advising the American negotiators at the Versailles peace conference, thereby displacing the team of historians and social scientists assembled by Colonel House in the Inquiry. Despite an official victory, and an eight-volume report of the CBPS delivered to Versailles by the head of CBPS European team, John Foster Dulles of the War Trade Board, the bureau had little influence over the final treaty.See Heaton, Edwin F. Gay, pp. 129ff.; and the excellent book on the Inquiry, Lawrence E. Gelfand, The Inquiry: American Preparations for Peace, 1917–1919 (New Haven, CT: Yale University Press, 1963), pp. 166–68, 177–78.

Peace having finally and irrevocably arrived, Edwin Gay, backed by Mitchell, tried his best to have the CBPS kept as a permanent, peacetime organization. Gay argued that the agency, with himself of course remaining as its head, could provide continuing data to the League of Nations, and above all could serve as the president’s own eyes and ears and mold the sort of executive budget envisioned by the old Taft Commission. CBPS staff member and Harvard economist Edmund E. Day contributed a memorandum outlining specific tasks for the bureau to aid in demobilization and reconstruction, as well as rationale for the bureau becoming a permanent part of government. One thing it could do was to make a “continuing canvass” of business conditions in the United States. As Gay put it to President Wilson, using a favorite organicist analogy, a permanent board would serve “as a nervous system to the vast and complex organization of the government, furnishing to the controlling brain [the president] the information necessary for directing the efficient operation of the various members.”Heaton, Edwin F. Gay, p. 135. Also see Alchon, Invisible Hand of Planning, pp. 35–36. Although the President was “very cordial” to Gay’s plan, Congress refused to agree, and on June 30, 1919, the Central Bureau of Planning and Statistics was finally terminated, along with the War Trade Board. Edwin Gay would now have to seek employment in, if not the private, at least the quasi-independent, sector.

But Gay and Mitchell were not to be denied. Nor would the Brookings-Willoughby group. Their objective would be met more gradually and by slightly different means. Gay became editor of the New York Evening Post under the aegis of its new owner and Gay’s friend, J.P. Morgan partner Thomas W. Lamont. Gay also helped to form and become first president of the National Bureau of Economic Research in 1920, with Wesley C. Mitchell as research director. The Institute for Government Research achieved its major objective, establishing a Budget Bureau in the Treasury Department in 1921, with the director of the IGR, William F. Willoughby, helping to draft the bill that established the bureau.In 1939 the Bureau of the Budget would be transferred to the Executive Office, thus completing the IGR objective. The IGR people soon expanded their role to include economics, establishing an Institute of Economics headed by Robert Brookings and Arthur T. Hadley of Yale, with economist Harold G. Moulton as director.Moulton was a professor of economics at the University of Chicago, and vice president of the Chicago Association of Commerce. See Eakins, “Origins of Corporate Liberal Policy Research,” pp. 172–77; Dorfman, Economic Mind in American Civilization, vol. 4, pp. 11, 195–97. The institute, funded by the Carnegie Corporation, would be later merged, along with the IGR, into the Brookings Institution. Edwin Gay also moved into the foreign policy field by becoming secretary-treasurer and head of the Research Committee of the new and extremely influential organization, the Council on Foreign Relations (CFR).Gay had been recommended to the group by one of its founders, Thomas W. Lamont. It was Gay’s suggestion that the CFR begin its major project by establishing an “authoritative” journal, Foreign Affairs. And it was Gay who selected his Harvard historian colleague Archibald Cary Coolidge as the first editor and the New York Post reporter Hamilton Fish Armstrong as assistant editor and executive director of the CFR. See Lawrence H. Shoup and William Minter, Imperial Brain Trust: The Council on Foreign Relations and United States Foreign Policy (New York: Monthly Review Press, 1977), pp. 16–19, 105, 110.

And finally, in the field of government statistics, Gay and Mitchell found a more gradual but longer-range route to power via collaboration with Herbert Hoover, soon to be Secretary of Commerce. No sooner had Hoover assumed the post in early 1921 when he expanded the Advisory Committee on the Census to include Gay, Mitchell, and other economists and then launched the monthly Survey of Current Business. The Survey was designed to supplement the informational activities of cooperating trade associations and, by supplying business information, aid these associations in Hoover’s aim of cartelizing their respective industries. Secrecy in business operations is a crucial weapon of competition, and conversely, publicity and sharing of information is an important tool of cartels in policing their members. The Survey of Current Business made available the current production, sales, and inventory data supplied by cooperating industries and technical journals. Hoover also hoped that by building on these services, eventually “the statistical program could provide the knowledge and foresight necessary to combat panic or speculative conditions, prevent the development of diseased industries, and guide decision-making so as to iron out rather than accentuate the business cycle.”Ellis W. Hawley, “Herbert Hoover and Economic Stabilization, 1921–22,” in Herbert Hoover as Secretary of Commerce: Studies in New Era Thought and Practice, E. Hawley, ed. (Iowa City: University of Iowa Press, 1981), p. 52. In promoting his cartelization doctrine, Hoover met resistance both from some businessmen who resisted prying questionnaires and sharing competitive secrets and from the Justice Department. But, a formidable empire-builder, Herbert Hoover managed to grab statistical services from the Treasury Department and to establish a “waste elimination division” to organize businesses and trade associations to continue and expand the wartime “conservation” program of compulsory uniformity and restriction of the number and variety of competitive products. As assistant secretary to head up this program, Hoover secured engineer and publicist Frederick Feiker, an associate of Arch Shaw’s business publication empire. Hoover also found a top assistant and lifelong disciple in Brigadier General Julius Klein, a protégé of Edwin Gay’s, who had headed the Latin American division of the Bureau of Foreign and Domestic Commerce. As the new head of the bureau, Klein organized 17 new export commodity divisions — reminiscent of commodity sections during wartime collectivism — each with “experts” drawn from the respective industries and each organizing regular cooperation with parallel industrial advisory committees. And through it all Herbert Hoover made a series of well-publicized speeches during 1921, spelling out how a well-designed government trade program, as well as a program in the domestic economy, could act both as a stimulant to recovery and as a permanent “stabilizer,” while avoiding such unfortunate measures as abolishing tariffs or cutting wage rates. The best weapon, both in foreign and domestic trade, was to “eliminate waste” by a “cooperative mobilization” of government and industry.Hawley, “Herbert Hoover,” p. 53. Also see ibid., pp. 42–54. On the continuing collaboration between Hoover, Gay, and Mitchell throughout the 1920s see Alchon, Invisible Hand of Planning.

A month after the Armistice, the American Economic Association and the American Statistical Association met jointly in Richmond, Virginia. The presidential addresses were delivered by men in the forefront of the exciting new world of government planning, aided by social science, that seemed to loom ahead. In his address to the American Statistical Association, Wesley Clair Mitchell proclaimed that the war had “led to the use of statistics, not only as a record of what had happened, but also as a vital factor in planning what should be done.” As he had said in his final lecture in Columbia University the previous spring, the war had shown that when the community desires to attain a great goal “then within a short period far-reaching social changes can be achieved.” “The need for scientific planning of social change,” he added, “has never been greater, the chance of making those changes in an intelligent fashion ... has never been so good.” The peace will bring new problems, he opined, but “it seems impossible” that the various countries will “attempt to solve them without utilizing the same sort of centralized directing now employed to kill their enemies abroad for the new purpose of reconstructing their own life at home ...”

But the careful empiricist and statistician also provided a caveat. Broad social planning requires “a precise comprehension of social processes” and that can be provided only by the patient research of social science. As he had written to his wife eight years earlier, Mitchell stressed that what is needed for government intervention and planning is the application of the methods of physical science and industry, particularly precise quantitative research and measurement. In contrast to the quantitative physical sciences, Mitchell told the assembled statisticians, the social sciences are “immature, speculative, filled with controversy” and class struggle. But quantitative knowledge could replace such struggle and conflict by commonly accepted precise knowledge, “objective” knowledge “amenable to mathematical formulation” and “capable of forecasting group phenomena.” A statistician, Mitchell opined, is “either right or wrong,” and it is easy to demonstrate which. As a result of precise knowledge of facts, Mitchell envisioned, we can achieve “intelligent experimenting and detailed planning rather than ... agitation and class struggle.”

To achieve these vital goals, none other than economists and statisticians would provide the crucial element, for we would have to be “relying more and more on trained people to plan changes for us, to follow them up, to suggest alterations.”Alchon, Invisible Hand of Planning, pp. 39–42; Dorfman, Economic Mind in American Civilization, vol. 3, p. 490.

In a similar vein, the assembled economists in 1918 were regaled with the visionary presidential address of Yale economist Irving Fisher. Fisher looked forward to an economic “world reconstruction” that would provide glorious opportunities for economists to satisfy their constructive impulses. A class struggle, Fisher noted, would surely be continuing over distribution of the nation’s wealth. But by devising a mechanism of “readjustment,” the nation’s economists could occupy an enviable role as the independent and impartial arbiters of the class struggle, these disinterested social scientists making the crucial decisions for the public good.

In short, both Mitchell and Fisher were, subtly and perhaps half-consciously, advancing the case for a postwar world in which their own allegedly impartial and scientific professions could levitate above the narrow struggles of classes for the social product, and thus emerge as a commonly accepted, “objective” new ruling class, a 20th-century version of the philosopher-kings.

It might not be amiss to see how these social scientists, prominent in their own fields and spokesmen in different ways for the New Era of the 1920s, fared in their disquisitions and guidance for the society and the economy. Irving Fisher, as we have seen, wrote several works celebrating the alleged success of prohibition and insisted, even after 1929, that since the price level had been kept stable, there could be no depression or stock market crash. For his part, Mitchell culminated a decade of snug alliance with Herbert Hoover by directing, along with Gay and the National Bureau, a massive and hastily written work on the American economy. Published in 1929 on the accession of Hoover to the presidency, with all the resources of scientific and quantitative economics and statistics brought to bear, there is not so much as a hint in Recent Economic Changes in the United States that there might be a crash and depression in the offing.

The Recent Economic Changes study was originated and organized by Herbert Hoover, and it was Hoover who secured the financing from the Carnegie Corporation. The object was to celebrate the years of prosperity presumably produced by Secretary of Commerce Hoover’s corporatist planning and to find out how the possibly future President Hoover could maintain that prosperity by absorbing its lessons and making them a permanent part of the American political structure. The volume duly declared that to maintain the current prosperity, economists, statisticians, engineers, and enlightened managers would have to work out “a technique of balance” to be installed in the economy.

Recent Economic Changes, that monument to “scientific” and political folly, went through three quick printings and was widely publicized and warmly received on all sides.One exception was the critical review in the Commercial and Financial Chronicle (May 18, 1929), which derided the impression given the reader that the capacity of the United States “for continued prosperity is well-nigh unlimited.” Quoted in Davis, World Between the Wars, p. 144. Also on Recent Economic Changes and economists’ opinions at the time, see ibid., pp. 136–51, 400–17; Eakins, “The Development of Corporate Liberal Policy Research in the United States, 1885–1965,” pp. 166–69, 205; and Edward Angly, comp., Oh Yeah? (New York: Viking Press, 1931). Edward Eyre Hunt, Hoover’s long-time aide in organizing his planning activities, was so enthusiastic that he continued celebrating the book and its paean to American prosperity throughout 1929 and 1930.In 1930, Hunt published a book-length, popularizing summary, An Audit of America. On Recent Economic Changes, also see Alchon, Invisible Hand, pp. 129–33, 135–42, 145–51, 213.

It is appropriate to end our section on government and statistics by noting an unsophisticated yet perceptive cry from the heart. In 1945 the Bureau of Labor Statistics approached Congress for yet another in a long line of increases in appropriations for government statistics. In the process of questioning Dr. A. Ford Hinrichs, head of the BLS, Representative Frank B. Keefe, a conservative Republican Congressman from Oshkosh, Wisconsin, put an eternal question that has not yet been fully and satisfactorily answered:

There is no doubt but what it would be nice to have a whole lot of statistics. ... I am just wondering whether we are not embarking on a program that is dangerous when we keep adding and adding and adding to this thing ...

We have been planning and getting statistics ever since 1932 to try to meet a situation that was domestic in character, but were never able to even meet that question. ... Now we are involved in an international question. ... It looks to me as though we spend a tremendous amount of time with graphs and charts and statistics and planning. What my people are interested in is what is it all about? Where are we going, and where are you going?Department of Labor — FSA Appropriation Bill for 1945. Hearings Before the Subcommittee on Appropriations. 78th Congress, 2nd Session, Part I (Washington, 1945), pp. 258ff, 276ff. Quoted in Rothbard, “Politics of Political Economists,” p. 665. On the growth of economists and statisticians in government, especially during wartime, see also Herbert Stein, “The Washington Economics Industry,” American Economic Association Papers and Proceedings 76 (May, 1986): 2–3.

AppendixToward the Centralization of Science: The National Research Council[Editor’s footnote] Due to space constraints, Rothbard did not include this section in the final draft of his paper. It is published here for the first time as an appendix.

Scientific research before World War I was free, diffuse, individualistic, and independent, with very little guidance or control exerted by the federal government. Most scientists and Americans in general approved of this system, but there were always one or two visionaries yearning for an alternative. George Ellery Hale, one of the founders of astrophysics, the director of Mt. Wilson Observatory and one of the founders of the California Institute of Technology, was one of those visionaries, particularly after he was named to the National Academy of Sciences (NAS) in 1902. The NAS had been charted in 1863 as a private organization of scientists to consult with the government on scientific and military matters during the Civil War. By the turn of the 20th century, the NAS was moribund, forgotten by all, including the president of the United States. But George Ellery Hale, turning from the joys of science to the rather different joys of bureaucratic empire and power-building, had a different vision. He sought to make the NAS a vibrant, activist organization, and one of his most important visions was that the NAS should, with the aid of government, acquire a dominant, centralizing power over all scientific research in the nation. And sitting at or near the pinnacle of scientific power, of course, would be George Ellery Hale. He delivered a series of lectures and published articles at the NAS to that effect in 1913–14, but the old fuddy-duddies of the Academy weren’t listening.

George Hale did not come to his vision purely on this own. As director of the Mt. Wilson Observatory, he had gained a powerful friend and political mentor — one of the most influential men of the Eastern Establishment: Wall Street lawyer, Secretary of War, Secretary of State, U.S. Senator from New York, and personal attorney for J.P. Morgan, Elihu Root. Root, the son of a professor of astronomy, informed Hale upon his election to the unknown NAS of the untapped potential of the agency for advising and coordinating science on behalf of the government. And it was clear that Root would do all he could to further that objective.Noble, America by Design, p. 151.

Then, as luck would have it, the World War began in Europe. By the spring of 1916, Hale was champing at the bit to enter the war on the Allied side, averring his deep hatred for Germans, and bitterly attacking the anti-interventionist stance of Henry Ford and William Jennings Bryan. Hale was certainly succinct about what he would do with these dissidents. “They ought to be imprisoned as traitors,” he wrote, “or thoroughly chloroformed.”Tobey, The American Ideology of National Science, p. 35. Hale pressured the more laggard patriots of the executive council of the NAS to offer the services of the Academy to the federal government in case of war. After the surprised president learned of the existence of the NAS, Wilson accepted the offer.

George Ellery Hale quickly became chairman of the new NAS committee to plan the Academy’s services after war came. His most enthusiastic collaborator on the NAS was Robert A. Millikan, a University of Chicago physicist who had become a member in 1915. Hale exulted that war would be “the greatest chance we ever had to advance research in America.”Ibid., p. 36. By June 1916, Hale and Millikan had decided that the NAS should create a new agency, the National Research Council (NRS), which would have the operating power to coordinate scientific research when war came. Under pressure from Elihu Root, Wilson approved the idea of the NRC in July. The next problem was to secure funding, since the NRC would be a privately-financed agency, and since the NAS had very little spare money of its own. Financial support was obtained from the Engineering Foundation, which committed its entire annual income of $10,000 to the project, in addition to a personal contribution of $5000 put in by the founder and chairman of the Engineering Foundation, the Cleveland machine-tool and telescope manufacturer Ambrose Swasey, an old friend of Hale.

Its financing secured, the National Research Council was launched in September, dedicated to: performing an inventory of all scientific researchers, projects, and equipment in the country, in preparation for war planning; to cooperate with educational institutions and research foundations; and to function as a “clearing house” to coordinate research projects and scientific information. Moreover, the NRC was to encourage research on national defense and resource problems.

The Board of the Engineering Foundation, launched in 1914, obtained representation of the various national engineering societies. Vice-chairman of the Engineering Foundation, and another old friend of the ubiquitous Hale, was another scientific visionary: the Serbian immigrant, physicist, inventor, and Columbia University professor, Michael Pupin. While recognizing the importance of individualism and freedom in science, Pupin insisted that there was a far more important requisite for the growth and success of science: “creative coordination,” which he explicitly defined as cooperation enforced by compulsion. Without coercion binding everything together, Pupin philosophized, all would be anarchy and chaos, including science. And, of course, as Pupin correctly noted, the State is overwhelmingly the most important instrument of coercion. Therefore, there must be centralization of science under State dictation. Pupin’s goal is what he termed, probably not ironically, “ideal democracy,” which consisted of the “state organism” being ruled and directed by the “trained intellects” guiding the destiny of the people. Of course, scientists were a crucial, if not the most vital, part of the trained intellect serving as brain of the social organism. Michael Pupin of course hailed the NRC as the first step toward the compulsory coordination of America’s intellectuals and their organizations.Michael Pupin, The New Reformation (1927); and Tobey, American Ideology of National Science, pp. 38 ff.

They were an effective team for a collectivized science: Michael Pupin the theoretician, and George Hale the activist, assisted by Millikan. To ensure the NRC’s stellar role in the war effort, Hale lobbied successfully to make the NRC an official department of the Council of National Defense, with sole responsibility for coordinating scientific resources for war. The NRC now happily set up subcommittees in each discipline: Hale’s good friend Edwin Conklin as chairman of the biology subcommittee. James McKeen Cattell in charge of the psychology subcommittee, and Pupin and Robert A. Millikan dominating the physics subcommittee.Cattell was also a long-time advocate of the government-supported and controlled science. His power base was the Committee of One Hundred on Scientific Research of the American Association for the Advancement of Science, of which Cattell was secretary. The Committee was established in 1913 to try to organize a scientific inventory of the nation. When war came, Cattell coordinated the AAAS activities with the NRC. Millikan, who became the major personality and ideological force in American science during the 1920s, was a former student and protégé of Michael Pupin. An assistant professor of physics at the University of Chicago, Millikan had floundered in his researches from 1896 on, until finally becoming extremely successful; by 1912, he had embarked on his researches on electron charge that would win him the Nobel Prize. Millikan, was made a member of the organizing committee of the NRC in 1916, and went from there to become a member of the executive committee, and then vice president and chief administrative officers of the NRC, as well as chairman of the physics committee of the Anti-Submarine Council. So dedicated was Millikan to the war effort that he left Chicago to plunge into full-time war work in Washington, with a commission as an army officer.Robert A. Millikan was the son of an Iowa preacher, and attended the Yankee pietist stronghold of Oberlin College. From 1893 to 1895 he was the only graduate student in physics at Columbia, with Pupin one of his teachers. After obtaining his doctorate in 1895, Pupin loaned Millikan the money to do post-doctoral study at the University of Berlin. Many of the nation’s leading scientists and engineers entered the armed forces. Thus, physicist Ernest Merritt, of Cornell, entered the navy in order to head up the New London, Connecticut anti-submarine warfare naval base staffed by university scientists.

Well before the end of the war, the problem uppermost in the minds of the scientists was to make the NRC permanent. The organized scientists and in particular the scientists connected with industry, from the beginning envisioned the NRC not merely as a wartime agency, but as a permanent government force sponsoring and coordinating the application to science in industry. Thus, George Hale circulated an anonymous, strictly confidential memorandum within the NRC executive council in May 1919, proclaiming the original intent and the future goal of the agency:

The Academy organized the National Research Council ... with a view to stimulating the growth of science and its application to industry and particularly with a view to the coordination of research agencies for the sake of enabling the United States, in spite of its democratic, individualistic organization, to bend its energies effectively toward a common purpose.Noble, America by Design, p. 154; also Tobey, American Ideology of National Science, p. 52.

As early as eight months before the Armistice, the organized scientists began to agitate for a quick presidential order making the NRC a permanent, peacetime agency. Since the agency, though governmental, had to be financed by private funds, the first step was to demonstrate secure, durable financing. The Carnegie Corporation, headed by none other than Hale’s friend and mentor, Elihu Root, happily obliged with a $5 million grant for an NRC building and an operating endowment. Soon, Hale’s old friends at the Engineering Foundation assumed continuing financial responsibility for the NRC, and at that point Elihu Root managed to persuade Colonel House to secure President Wilson’s approval.The leading lights of the Engineering Foundation now included Hale’s old friend Gano Dunn, of the J.G. White Engineering Company, Frank B. Jewett, head of Bell Labs for the Morgan-oriented A.T.&T. and apostle of organized scientific research; Arthur D. Little, a Boston born chemical engineer and head of the nation’s largest engineering consulting firm; and president E. Wilbur Rice of Morgan-oriented General Electric. Jewett, son of a top engineer for the Morgan-dominated Atchison, Topeka & Santa Fe Railroad, received a Ph.D. in physics from the University of Chicago, studying under Millikan, and eventually joined A.T.&T. as an electrical engineer. See Nobel, America by Design, pp. 115, 127, 155. Wilson created a permanent National Research Council by executive order on May 11, 1918.

By the time of Wilson’s imprimatur, the irrepressible George Hale was already circulating a letter proclaiming a shift in emphasis from military to permanent industrial research. To that end, he informed his colleagues of the NRC, he proceeded to create a new Industrial Relations Division. The Division was composed of six leaders from elite companies engaged in industrial research: Frank Jewett, director of the Western Electric labs, a wholly owned subsidiary of A.T.&T., J.J. Carty, long-time chief engineer at A.T.&T., Arthur D. Little, the nation’s engineering consultant, Raymond Bacon, director of the Mellon Institute, Charles E. Skinner, director of research at the Mellon-oriented Westinghouse Electric, and Willis Whitney, director of research at the Morgan-aligned General Electric.

On May 29, George Hale officially launched the Industrial Relations Division with a gala formal banquet at the University Club of New York, a banquet which symbolized and embodied the new, continuing alliance of the federal government with the top brass in industrial science and research. Addressing the banquet, George Hale proclaimed that “Hitherto, the National Research Council activities have been mostly devoted to war, but plans have been under contemplation for industrial research and the time has arrived to put these plans forward.” In their banquet speeches, Hale and Elihu Root stressed the need for national coordination of industrial resources.

Perhaps the most exuberant of the speakers was the original financier of the NRC, the industrialist Ambrose Swasey. Americans and other nations might at that moment be fighting and dying in one of the most devastating wars in history, but to Swasey the war was an exhilarating experience. “We who are living in these wonderful times,” Swasey exclaimed, “have thrilling opportunities and correspondingly weighty responsibilities.” Enumerating the great advances occasioned by the war, Swasey noted that “whereas a year ago this country produced no optical glass, it is now manufacturing this material by the carload.” Part of the great progress occasioned by the war, he pointed out, was due to the U.S. seizure of German patents. Swasey concluded with a brief demurrer before exulting over the war’s matchless benefits: “While deeply deploring the war,” Swasey proclaimed, “the marvelous advances it was bringing in the mental, moral and spiritual realms, with consequent great benefits to mankind ...”Noble, America by Design, p. 156.

The main harvest of this banquet was the creation of an advisory committee of industrial leaders to the Industrial Research Division, and the publication of a pamphlet on the new division co-authored by some of the most distinguished leaders present at the banquet. Chairman of the advisory committee was the eminent Theodore N. Vail, president of A.T.&T., and other members included Cleveland H. Dodge, vice president of Phelps-Dodge mining and President Wilson’s favorite industrialist, George Eastman, head of Eastman Kodak, Andrew Mellon, head of the mighty Mellon banking and industrial family, and soon to become Secretary of the Treasury, Pierre DuPont, Ambrose Swasey, Elihu Root, Judge Elbert H. Gary, head of the Morgan-influenced U.S. Steel, E. Wilbur Rice, president of General Electric, and Henry S. Pritchett, president of the Carnegie Foundation for the Advancement of Teaching.The son of an astronomer, Henry Pritchett was one of the most prominent astronomers in the country, formerly professor at Washington University of St. Louis, superintendent of the U.S. Coast and Geodetic Survey, and then president of M.I.T., before becoming the founder and first president of the Carnegie Foundation. Pritchett had long sought centralized government standardization as part of national industrial competition against Germany. Ibid., pp. 72–73, 156.

In the pamphlet, the various distinguished contributors beat the drums for a national coordination of science, a veritable coordinated government-science-industry complex. Thus, President Vail of A.T.&T. declared that

Organization and coordination of research for industrial purpose is urgently necessary. ... Plans should be formulated at once. ... Whatever is done should be national in its comprehensiveness. ... Industry may be expected to support generously any organization which promises to effectively coordinate and correlate efforts for the increase of knowledge, since it is now generally recognized that industrial progress and success are chiefly dependent upon our knowledge.Ibid., p. 158.

In the midst of the wartime model, it is not surprising that military-like “discipline” was a common theme of these industrial, scientific and political leaders. Thus, Elihu Root in his article, “The Need for Organization in Scientific Research,” opined that “scientific men are only recently realizing ... that the effective power of a great number of scientific men may be increased by organization just as the effective power of a great number of laborers may be increased by military discipline.” In the war, Root added, the power of science has “amazingly increased the productive power of mankind.” After the war, that same power “will be applied again and the prizes of industrial and commercial leadership will fall to the nation which organizes its scientific forces most effectively.”

And Henry S. Pritchett, of the Carnegie Foundation, who had long admired the German model of a national physical laboratory and national coordination of science, called for post-war America to establish a similar system. Pritchett insisted that “The research men of a nation are not isolated individuals but an organized and cooperating army.”Ibid., pp. 157–58.

In early 1919, the NRC was formally structured for the post-war world into a number of divisions. One of the most active in serving and subsidizing industry was the Industrial Relations Division (later renamed the Industrial Research Division, and finally the Industrial Extension Division), which established cooperative research programs in various industries and initiated research projects in various areas of metals and electroplating. In particular, the Industrial Relations Division created a number of industrial research institutes in collaboration with various trade associations.By 1919, the chairman of the Industrial Relations Division was John Johnston, of U.S. Steel.

Another very active division of the NRC was the Engineering Division, launched during the war in 1918. The Engineering Division was founded under the auspices of the Engineering Foundation which by now had become the research branch of the American Engineering Council, the umbrella organization of all the various engineering associations. Engineering Foundation head Ambrose Swasey also became a member of the new Engineering Division of the NRC. The function of the division was to encourage direct industrial research, the funds often to be supplied by the industry concerned, but the organizing and coordination to be performed by the NRC. The first project of the Engineering Division was a large-scale study of metal fatigue, financed by the Engineering Foundation and by General Electric. On the other hand, a project to study the heat treatment of carbon steel was financed by the federal government, and federal and state governments supported a program of highway research conducted by the division.In 1919, chairman of the Engineering Division was electrical engineer Comfort A. Adams, of Harvard, who was succeeded in 1923 by Frank Jewett. See Noble, America by Design, pp. 162–66.

Another important post-war arm of the NRC, the Research Information Service, also began during the war as the Research Information Committee, under physicist and Bureau of Standards head Samuel Stratton, to disseminate scientific information between the U.S. and its European allies. After the war, the RIS prepared scientific compilations, source books, abstracts, handbooks, and bibliographies and disseminated them, in George Hale’s words, to those who “can use it to advantage.” In the words of Charles L. Reese, research and chemical director of Du Pont, the service operated as an “intelligence agency.”Ibid., p. 161.

The major dispute among the NRC-affiliated and connected scientists was whether or not scientific research in the postwar world should be thoroughly centralized under one governmental research institute and national laboratory, in physics and chemistry. George Vincent, president of the Rockefeller Foundation, and his colleague Edward C. Pickering, head of the Harvard Observatory, had been agitating for the idea of a centralized research institute since 1913, trying to persuade the membership of the American Association for the Advancement of Science. During the war, Vincent, backed by Dr. Simon Flexner, head of the Rockefeller Institute for Medical Research, wrote a letter to the NRC executive proposing the plan for the postwar world. Hale, Pritchett, and Root were highly enthusiastic, but the more cautious Millikan and Whitney advocated three to six regional laboratories at existing university facilities. None of the contending parties, of course, had any desire to return to the good old days of decentralized, free and private scientific research. Finally, all parties agreed on a compromise plan, which provided for no national or regional laboratories, but did set up a massive fellowship program in graduate physics and chemistry, administered by the government NRC and financed entirely by the Rockefeller Foundation. The science centralizers might not have achieved all of their aims, but they were well on the road.

Foreword by Judge Andrew P. Napolitano

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

When I was in my junior and senior years at Princeton studying history in the early 1970s, I became fascinated with the Progressive Era. It attracted me at a time when America rejected as profoundly as it did under Lincoln and the Radical Republicans and even under FDR, the libertarian first principles of the American Revolution.

To pursue this interest, I volunteered to take a course in the Graduate School, a procedure permitted for a few undergraduates at the time. The course was an advanced look at Progressive intellectual thought taught by Woodrow Wilson’s biographer and hagiographer, Professor Arthur S. Link. The readings were all pro-Progressive as were all the other students in the class. We studied Professor Link’s works and the claptrap by his colleague William E. Leuchtenberg.

In my search for a rational understanding of the Era — and for ammunition to use in the classroom where I was regularly beaten up — I asked Professor Link if any academic had made the argument effectively that the Progressives were power-hungry charlatans in the guise of noble businessmen, selfless politicians, and honest academics.

He told me of a young fellow named Rothbard, of whose work he had only heard, but had not read. This advice sent me to Man, Economy, and State, which I devoured; and my ideological odyssey was off to the races.

Like many of Rothbard’s student admirers, I also devoured For a New Liberty, all four volumes of Conceived in Liberty, and The Mystery of Banking. As any student of human freedom in general or of the Austrian school specifically, knows, these must-reads are all a joy to read. And we also know that in those works and others, Rothbard established himself as the great interpreter of Ludwig von Mises.

While he was writing those books and lecturing nationally and producing many ground-breaking articles and essays on human freedom, he began to write discrete chapters of a book he would not live to publish on the Progressive Era.

One of his great young interpreters, Florida Southern College professor and Mises Fellow Patrick Newman, has picked up where our hero left off. Professor Newman is a brilliant interpreter of Rothbard. His assemblage of these heretofore unpublished chapters, and the vast notes he has added to them have produced a masterpiece that might actually have made Murray Rothbard blush.

Readers of The Progressive Era will carry away an overwhelming impression that history is “a comprehensive resurrection of the past.” Rothbard was never satisfied with the presentation of a general thesis or the sketch of a historical period, which is why readers will find detailed accounts of an enormous number of people. Only a historian of Rothbard’s immense intellectual energy and knowledge could have written what would become The Progressive Era.

Rothbard did not amass details merely to give readers a sense of the Progressive Era, from the 1880s to the 1920s. Rather, he uses these details to support a revolutionary new interpretation. Many people view the Progressives as reformers who fought against corruption and modernized our laws and institutions. Rothbard proves to the hilt that this common opinion is false.

The Progressives aimed to displace a 19th-century America that respected individual rights based on natural law. They claimed that natural law and a free economy were outmoded and unscientific ideas; and argued that through applying science to politics, they could replace a corrupt and stagnant old order with a State-ordered more prosperous and egalitarian one.

Rothbard dissents:

Briefly, the thesis is that the rapid upsurge of statism in this period was propelled by a coalition of two broad groups: (a) certain big business groups, anxious to replace a roughly laissez-faire economy by a new form of mercantilism, cartelized and controlled and subsidized by a strong government under their influence and control; and (b) newly burgeoning groups of intellectuals, technocrats, and professionals: economists, writers, engineers, planners, physicians, etc., anxious for power and lucrative employment at the hands of the State. Since America had been born in an antimonopoly tradition, it became important to put over the new system of cartelization as a “progressive” curbing of big business by a humanitarian government; intellectuals were relied on for this selling job. These two groups were inspired by Bismarck’s creation of a monopolized welfare-warfare state in Prussia and Germany.

Rothbard constantly overturns accepted ideas as he argues for his interpretation. Most of us have heard of the furor early in the 20th century over conditions in the Chicago meat packing industry, set off by Upton Sinclair’s novel The Jungle. Few people are aware, however, that Sinclair’s sensationalism was fiction, in direct contradiction to what contemporary inspections of the meat packing plants revealed.

Rothbard goes much further. He shows how, beginning in the 1880s, the large meat packing plants lobbied for greater regulation themselves.

Unfortunately for the myth, [about The Jungle’s influence] the drive for federal meat inspection actually began more than two decades earlier, and was launched mainly by the big meat packers themselves. The spur was the urge to penetrate the European market for meat, something which the large meat packers thought could be done if the government would certify the quality of meat, and thereby make American meat more highly rated abroad. Not coincidentally, as in all Colbertist mercantilist legislation over the centuries, a governmentally-coerced upgrading of quality would serve to cartelize: to lower production, restrict competition, and raise prices to the consumers.

Rothbard sees in postmillennial pietism a key to the entire Progressive Era. The postmillennials preached that Jesus would inaugurate His kingdom only after the world had been reformed, and they accordingly saw a religious mandate to institute the social reforms they favored.

Their influence was pervasive. For example, Rothbard draws an unexpected connection between their ideas and eugenics:

One way of correcting the increasingly pro-Catholic demographics ... often promoted in the name of “science,” was eugenics, an increasingly popular doctrine of the progressive movement. Broadly, eugenics may be defined as encouraging the breeding of the “fit” and discouraging the breeding of the “unfit,” the criteria of “fitness” often coinciding with the cleavage between native, white Protestants and the foreign born or Catholics — or the white-black cleavage. In extreme cases, the unfit were to be coercively sterilized.

Theodore Roosevelt was the quintessential Progressive, and Rothbard shows in convincing fashion how his analytic framework helps explain that bizarre and flamboyant figure. Roosevelt was allied with the banking interests of the House of Morgan. His “trust busting” activities were very selective. Only the trusts opposed to Morgan control were in Roosevelt’s crosshairs. He supported “good” trusts, i.e., ones allied with the Morgan interests. Besides his Morgan alliance, Roosevelt was dominated by a bellicosity of maniacal proportions. “All his life Theodore Roosevelt had thirsted for war — any war — and military glory.”

War and the Progressives were natural allies. War brought centralized control of the economy, and this allowed the Progressives to put their plans into effect. Rothbard writes:

The wartime collectivism also held forth a model to the nation’s liberal intellectuals; for here was seemingly a system that replaced laissez-faire not by the rigors and class hatreds of proletarian Marxism, but by a new strong State, planning and organizing the economy in harmony with all leading economic groups. It was, not coincidentally, to be a neomercantilism, a “mixed economy,” heavily staffed by these selfsame liberal intellectuals.

And finally, both big business and the liberals saw in the wartime model a way to organize and integrate the often unruly labor force as a junior partner in the corporatist system — a force to be disciplined by their own “responsible” leadership of the labor unions.

I have addressed only a few of the themes analyzed in this vast book. Readers have many insights in store for them, including the origin of the Federal Reserve System, Herbert Hoover’s activities as a Progressive, and the role of the Rockefellers in promoting Social Security. Nor does Rothbard shy away from the constitutional implications in all this, planted by Roosevelt and nurtured by his personal enemy but ideological comrade Woodrow Wilson. Rothbard notes that, the War Between the States aside, the Madisonian model — the federal government may only lawfully do what the Constitution directly permits — prevailed in government from 1789 to the 1880s. After the Progressive Era, the Wilsonian model — the federal government may do whatever there is a political will to do except that which the Constitution expressly prohibits — continues to prevail up to the present day.

We owe the appearance of The Progressive Era to the masterful detective work and patient labor of the good and youthful Professor Newman. In his “Introduction,” he tells the dramatic tale of how Rothbard’s book was discovered and assembled; and he has planted many teasers for the Rothbardian gems to come.

Rothbard’s posthumous masterpiece is the definitive book on the Progressives. Only Murray Rothbard, with his unique scholarship, penetrating intelligence, prodigious work ethic, infectious love of life, and indefatigable devotion to liberty, could have written this book. It will soon be the must read study of this dreadful time in our past.

Andrew P. NapolitanoHampton Township, New JerseyAuthor of Theodore and Woodrow: How Two American Presidents Destroyed Constitutional FreedomAugust 2017

14. The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

To most economists, historians, and lay people,Originally published in Money in Crisis: The Federal Reserve, the Economy, and Monetary Reform, Barry N. Siegel, ed. (San Francisco, CA: Pacific Institute for Public Policy Research, 1984), pp. 89–136. [Editor’s footnote] It is important to keep in mind that a “bank cartel” is different than a traditional cartel. A traditional cartel restricts output and raises prices. The goal of a bank cartel, on the other hand, is not to restrict credit expansion and raise interest rates, but for banks to engage in credit expansion in unison and lower interest rates, and to maintain this by not calling on other banks’ notes and deposits. Just like traditional cartels on the free market fail, bank cartels also fail because of internal and external pressure as banks inside the cartel are faced with the irresistible temptation to call on others’ notes and deposits, and the notes and deposits eventually wind up in other banks outside of the cartel (including foreign banks). See Mises, Human Action, pp. 441–45; Murray Rothbard, The Mystery of Banking (Auburn, AL: Mises Institute, 2008 [1983]), pp. 111–24. On the other hand, government can stabilize bank cartels either by restricting entry to stifle the redemption mechanism, or by providing new sources of reserves. The Federal Reserve promoted general monetary expansion, and also empowered New York City banks by increasing their interbank deposits relative to other central reserve cities through the Federal Reserve Bank of New York’s liberal discount window policies, and by injecting new reserves there first as they led the monetary expansion in the 1920s. Moreover, the Fed personnel was heavily dominated by banking interests. In addition to this chapter, see George Selgin, “New York’s Bank: The National Monetary Commission and the Founding of the Fed,” Cato Institute Policy Analysis (June, 2016): 1–38. a modern economy without a central bank is simply unthinkable. With that kind of mindset, the creation of the Federal Reserve System in December 1913 can be attributed to a simple, enlightened acceptance of the need to bring the economy of the United States into the modern world. It is generally held, in addition, that a central bank is necessary to curb the natural instincts of free-market banks to inflate and, as a corollary, to level out economic fluctuations. It has become all too clear in recent years, however, that the Fed has scarcely succeeded in this supposed task. For since the establishment of the Fed, we have suffered the longest and deepest depression in American history, and we have, since World War II, experienced the unique phenomenon of a chronic, accelerating secular inflation. Since instability, inflation, and depressions have been far worse since the inception of the Federal Reserve, many economists have concluded that the Fed has failed in its task and have come up with various suggestions for reform to try to get it on the correct task.

It is possible, however, that the current critics of the Fed have missed the essential point: that the Fed was designed to meet very different goals. In fact, the Fed was largely fashioned by the banks as a cartelizing device. The government interventions of the Progressive era were systemic devices to restrict competition and cartelize industry, stratagems that followed on the previous failure of industry to sustain successful voluntary cartels. Just as other industries turned to the government to impose cartelization that could not be maintained on the market, so the banks turned to government to enable them to expand money and credit without being held back by the demands for redemption by competing banks. In short, rather than hold back the banks from their propensity to inflate credit, the new central banks were created to do precisely the opposite. Indeed, the record of the American economy under the Federal Reserve can be considered a rousing success from the point of view of the actual goals of its founders and of those who continue to sustain its power.

A proper overall judgment on the actual role of the Fed was delivered by the vice-chairman and de facto head of the Federal Trade Commission, Edward N. Hurley. The Federal Trade Commission was Woodrow Wilson’s other major Progressive reform, following closely on the passage of the Federal Reserve Act. Hurley was president of the Illinois Manufacturers Association at the time of his appointment, and his selection and subsequent performance in his new job were hailed throughout the business community. Addressing the Association of National Advertisers in December 1915, Hurley exulted that “through a period of years the government has been gradually extending its machinery of helpfulness to different classes and groups upon whose prosperity depends in a large degree the prosperity of the country.” Then came the revealing statement: The railroads and shippers had the ICC, the farmers had the Agriculture Department, and the bankers had the Federal Reserve Board. Hurley concluded that “to do for general business that which these other agencies do for the groups to which I have referred was the thought behind the creation of the trade commission.”Kolko, The Triumph of Conservatism, p. 274. What, then, did the Federal Reserve do for the nation’s bankers?

1. The Origins of the Federal Reserve: The Dissatisfaction of New York Bankers

The Federal Reserve did not replace a system of free banking. On the contrary, an approach to free banking existed in the United States only in the two decades before the Civil War. Under the cover of the wartime emergency, the Republican Party put through changes that had long been proposed by the Republicans’ ancestor, the Whig Party. The National Bank Acts of 1863–65 replaced the hard-money free banking of pre-Civil War days with the quasi-centralized regime of the national banking system. By levying a prohibitive federal tax, the national banking system in effect outlawed state bank notes, centralizing the issue of bank notes into the hands of federally chartered national banks. By means of an elaborate set of categories and a structure of fractional reserve requirements, entry into national banking in the big cities was limited to large banks, and bank deposits were encouraged to pyramid on top of a handful of large Wall Street banks. Furthermore, an expansion of any one bank in the pre-Civil War era was severely limited, since the free market would discount the notes of shaky banks, roughly proportionate to the distance of the circulating notes from the home base of the bank.In contrast, notes of more solid banks circulated at par, even at great distances. The national banking acts removed that restraint by forcing every national bank to accept the notes and demand deposits of every other national bank at par. Genuine redeemability of notes and deposits was also restrained by the continued legal prohibition of interstate or even intrastate branch banking, which severely hobbled the efficiency of clearing systems where one bank presents the obligations of another for redemption. Redemption was also curtailed by a rigid statutory maximum limit of $3 million per month by which national bank notes could be contracted. Furthermore, although private national bank liabilities were of course not legal tender, the federal government conferred quasi-legal tender status upon them by agreeing to receive all national bank notes and deposits at par in dues or taxes.

The banking system of the United States after 1865 was, therefore, a halfway house between free and central banking. Banking was subsidized, privileged, and quasi-centralized under the aegis of a handful of large Wall Street banks. Even at that, however, the large national banks and their financial colleagues were far from satisfied. There was no governmental central bank to act as the lender of last resort. The banks could inflate more readily and uniformly than before the Civil War, but when they got into trouble and bank-generated booms turned into recessions, they were forced to contract and deflate to save themselves. As we will see further below, the bankers’ drive for fundamental change was generally couched in terms of an attack on the “inelasticity” of the national banking system. Translated into plain English, “inelasticity” meant the inability of the banking system to inflate money and credit, especially during recessions.See Milton Friedman and Anna Jacob Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: National Bureau of Economic Research, 1963), pp. 168–70. Friedman and Schwartz grant validity to the complaints of inelasticity in at least one sense: that deposits and notes were not easily interconvertible without causing grave problems. If bank clients wished to redeem bank deposits for bank notes, the fractional reserve requirements for deposits but not for notes meant that such simple redemption had a multiple contractionist effect on the supply of money and vice versa, since the exchange of notes for deposits had an expansionist effect. Friedman and Schwartz conclude that this defect justified various centralizing remedies. They fail to point out another alternative: a return to the decentralized banking of pre-Civil War days, which did not suffer from such problems of interconvertibility. One curiosity of the national banking system is that the notes issued by the national banks were rigidly linked by law to the total holdings of federal government bonds by each bank. This provision, a holdover from various state bank systems imposed by the Whigs before the Civil War, was designed to tie the banks to state deficits and the public debt. See Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Washington, D.C.: Cato Institute, 1982), p. 67. The source of “inelasticity,” however, could easily have been remedied by abolishing this link without imposing a central bank. Many of the early bank reforms proposed during the 1890s aimed to do just that. See Robert Craig West, Banking Reform and the Federal Reserve, 1863–1923 (Ithaca, NY: Cornell University Press, 1977), pp. 42ff.

The big banks’ turn to the idea of a central bank came after the beginning of the 20th century. The increased dissatisfaction with the status quo was prompted particularly by the rising competition of state banks and private banks outside the direct purview of the national banks of Wall Street. State banks had recovered from their initial shock and, after the 1860s, grew rapidly by pyramiding loans and deposits on top of national bank notes. These state and other non-national banks provided increasingly stiff competition with Wall Street for the banking resources of the nation. State banks were free of the high legal capital requirements for entry into the national banking business, and banking laws, especially in such important states as Michigan, California, and New York, became more lenient during the 1890s. As a result, the proportion of non-national bank deposits to national bank notes and deposits, which had been 67% in 1873, rose to 101% in 1886 and to 145% in 1901. To make things worse for cartelization, New York City lost its monopoly of designated “central reserve city” status — the base of the nation’s banking pyramid — to St. Louis and Chicago in 1887. As a result, the total bank deposits of St. Louis and Chicago, which had been only 16% of the combined total of the three major cities in 1880, rose sharply to 33% by 1912. Banking in the smaller reserve cities rose even more rapidly in this period: the bank clearings outside of New York, 24% of the national total in 1882, rose to 43% by 1913.U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1957, pp. 626–29.

The major New York banks were understandably perturbed at the rising competition of non-New York and non-national banks. They were upset, too, by the fact that they had to compete with each other for the deposits of the burgeoning state banks. As one New York banker put it: “We love the country bankers, but they are the masters of the situation. We dance at their music and pay the piper.”Quoted in Kolko, Triumph of Conservatism, p. 141.

The New York national bankers were also particularly perturbed at the mushrooming growth of private trust companies in New York, which were gathering the major share of the new and profitable trust business, when national and most state-chartered banks were prohibited by law from handling trust accounts. At the behest of the national banks, the New York Clearing House, a private organization for the clearing of notes and deposits, tried to impose reserve requirements on trust companies to hobble their competition with banks. In reply, 17 of them walked out of the Clearing House for a decade. Finally, the House of Morgan formed the banker-owned Bankers’ Trust Company in 1903 to compete with the private trust companies.See Kolko, Triumph of Conservatism, p. 141; and Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), pp. 25–26.

J.P. Morgan & Co. was the most powerful financial grouping in Wall Street and hence in the country. An investment bank that came to own or control the bulk of the nation’s important railroads, the House of Morgan controlled such leading Wall Street national banks as Guaranty Trust Company, the First National Bank of New York, and, before the 1930s, the Chase National Bank. Despite (or perhaps because of) its mammoth size and influence, Morgan was doing poorly in the gales of competition after 1900. In addition to the factors mentioned above that weakened New York banks, railroads, in which the Morgans had concentrated their forces, began to enter their long secular decline after the turn of the century. Furthermore, virtually all the mergers in the 1898–1902 period that tried to achieve monopoly control and monopoly profits in various industries collapsed with the entry of new firms and suffered major losses. Some of the most egregious failures — including International Harvester, United States Steel, and International Mercantile Marine — were Morgan creations.

J.P. Morgan had long favored corporatism and government cartelization where competition proved inconvenient. After decades of abject failure of Morgan-created railroad cartels, Morgan took the lead in establishing the Interstate Commerce Commission in 1887 to cartelize the railroad industry. Now, after slipping badly in the free market after 1900, Morgan joined other big business interests, such as the Rockefellers and the Belmonts, in calling for the compulsory cartelization of the American economy. This alliance of powerful big business interests, professionals who sought power and place constituted what is now known as the Progressive Era (approximately 1900 to 1918). The Federal Reserve Act was a “progressive” Wilsonian reform that, as Edward Hurley and others pointed out, “did for” the bankers what the other reforms had done for other segments of industry.The major pressure group calling for “progressive” cartelization was the National Civic Federation (NCF), founded in 1900, an organized coalition of big business and intellectual-technocrat groups as well as a few corporatist labor union leaders. On the importance of the NCF, see Weinstein, The Corporate Ideal in the Liberal State. See also Eakins, “The Development of Corporate Liberal Policy Research in the United States,” pp. 53–82. In the past two decades, a massive literature has developed on the Progressive Era from both a cartelizing and a technocratic power-seeking perspective. The best treatments are in Kolko, Triumph of Conservatism; Weinstein, Corporate Ideal in the Liberal State; and Gilbert, Designing the Industrial State. On the railroads and the ICC, see Kolko, Railroads and Regulation.

2. The Road to the Federal Reserve[Editor’s footnote] For more on the background of the Federal Reserve, see Rothbard, “The Origins of the Federal Reserve,” pp. 188–208, 234–59. Here Rothbard describes in much more depth the earlier measures and events, including the 1897 and 1898 Indianapolis Monetary Conventions and the Gold Standard Act of 1900. He also elaborates on the role of bankers, economists, technocrats, and their respective organizations in agitating for a central bank.

During the McKinley and Roosevelt administrations, treasury secretaries Lyman J. Gage and Leslie M. Shaw respectively tried to operate the Treasury Department as a central bank, pumping in money during recessions by purchasing government bonds on the open market and depositing large funds with commercial banks. In 1900, Gage called for the establishment of regional central banks, and Shaw suggested in his last annual report in 1906 that he be given total power to regulate the nation’s banks. Their efforts failed, and these failures helped to spur the big bankers to seek a formal central bank.On Gage’s and Shaw’s proposals and actions in office, see Friedman and Schwartz, Monetary History of the United States, pp. 148–56; and Kolko, Triumph of Conservatism, pp. 149–50.

Neither Gage nor Shaw was an isolated treasury bureaucrat whose power was suddenly going to his head. Before his appointment, Gage was president of the powerful First National Bank of Chicago, one of the major banks in the Rockefeller orbit. He also served as president of the American Bankers Association. After leaving the Treasury Department, Gage became president of the Rockefeller-controlled U.S. Trust Company, and his hand-picked assistant at the department, Frank A. Vanderlip, left to become a top executive at the Rockefellers’ flagship bank, the National City Bank of New York.John D. Rockefeller was the largest stockholder of National City Bank; its president until 1905 was James Stillman, two of whose daughters married sons of Rockefeller’s brother William. See Carl P. Parrini, Heir to Empire: United States Economic Diplomacy, 1916–1923 (Pittsburgh: University of Pittsburgh Press, 1969), pp. 55–65. Gage’s appointment as treasury secretary was secured for him by Mark Hanna, close friend, political mastermind, and financial backer of President McKinley. Hanna, a coal magnate and iron manufacturer, was a close business associate as well as an old friend and high school classmate of John D. Rockefeller, Sr.On Gage’s connections, see Burch, The Civil War to the New Deal, vol. 2, pp. 137, 185, 390.

Leslie Shaw was a small-town Iowa banker who became governor of his state in 1898 and continued as president of the Bank of Denison until the end of his term. He reached his post as governor by being a loyal supporter of the Des Moines Regency, the Republican machine in Iowa, and a close friend of the Regency’s leader, the powerful and venerable U.S. senator William Boyd Allison. Allison was the one who secured the treasury position for his friend Shaw and in turn was tied closely to Charles E. Perkins, a close Morgan ally, president of the Chicago, Burlington and Quincy Railroad, and kinsman of the Forbes financial group of Boston, long associated with the Morgans.On Shaw’s connections, see Burch, Civil War to the New Deal, pp. 148, 402. On Allison and Perkins, see ibid., pp. 65, 121, 122, 128, 151.

After the failure of Shaw’s interventions, and particularly after the Panic of 1907, the big bankers turned in earnest to a drive for the establishment of a central bank in the United States. The movement was launched in January 1906 when Jacob H. Schiff, the head of the powerful investment banking firm of Kuhn, Loeb & Co., urged the New York Chamber of Commerce to advocate fundamental banking reform. Heeding the call, the New York chamber immediately established a special committee to study the problem and propose legislation. The committee was comprised of leaders from commercial and investment banking, including Isidor Straus of R.H. Macy’s (a close friend of Schiff) and Frank A. Vanderlip of the National City Bank. In March, the special committee report, not surprisingly, called for the creation of a strong central bank “similar to the Bank of Germany.”

The New York chamber proved reluctant to endorse this far-reaching scheme, but the big bankers had the bit in their teeth. In mid-1906, the American Bankers Association followed suit by naming a commission of inquiry of leading bankers from the major cities of the country, headed by A. Barton Hepburn, chairman of the board of Chase National Bank. The Hepburn commission was more cautious, and its report of November 1906 called for imperative changes in the existing banking system, including a system of regional clearing houses for the issue of bank notes. The notes would be guaranteed by a common pool built up by taxes levied on the notes.See Kolko, Triumph of Conservatism, p. 152.

A variant of the Hepburn plan was passed by Congress in May 1908, after the Panic of 1907, in the Aldrich-Vreeland Act. Aldrich-Vreeland provided for the issuance of “emergency” currency by groups of bankers clustered in “National Currency Associations.” Although this regional cartel scheme was devised as a stopgap measure, the congressional authorization was to be for seven years, a rather long “temporary” period.On Aldrich-Vreeland, see Friedman and Schwartz, Monetary History of the United States, pp. 170–72. On the jockeying for power among various banking and business groups over different provisions of Aldrich-Vreeland, see Kolko, Triumph of Conservatism, pp. 156–58.

In fact, however, Aldrich-Vreeland provisions were used only once, and that was in 1914, shortly after the launching of the Federal Reserve System. By far the most significant aspect of Aldrich-Vreeland turned out to be its clause setting up a National Monetary Commission to study the American and foreign banking systems and to emerge with a plan of reform. The commission consisted of nine senators and nine representatives and, in standard bureaucratic procedure, the chairman of the commission was Senator Nelson W. Aldrich and the vice-chairman was Representative Edward B. Vreeland.

Representative Vreeland was a banker from the Buffalo area of New York, and little more need be said about him. Far more important was the powerful Senator Nelson W. Aldrich, a Republican from Rhode Island who made millions during his long years of service in the U.S. Senate. One of the prime movers in the creation of the Federal Reserve System, Nelson Aldrich was the father-in-law of John D. Rockefeller, Jr., and may be fairly regarded as Rockefeller’s man in the Senate.When the Rockefeller forces gained control of the Chase National Bank from the Morgans in 1930, one of their first actions was to oust Morgan man Albert H. Wiggins and replace him with Nelson Aldrich’s son Winthrop W. as chairman of the board.

From the inception of the National Monetary Commission until the presentation of its Aldrich plan to Congress four years later, Senator Aldrich and the commission were a vitally important nucleus of the drive for a central bank. Particularly influential in the deliberations of the commission were two men who were not official members. Aldrich asked J.P. Morgan to recommend a banking expert, and Morgan happily responded with Henry P. Davison, a Morgan partner; the other unofficial member was George M. Reynolds of Chicago, president of the American Bankers Association.See West, Banking Reform and the Federal Reserve, p. 70. Investment banking houses were — and still are — partnerships rather than corporations, and Morgan activities in politics as well as industrial mergers were conducted by Morgan partners. Particularly conspicuous Morgan partners in both fields were George W. Perkins, Thomas W. Lamont, Henry P. Davison, Dwight Morrow, and Willard Straight.

Aldrich and the National Monetary Commission, however, were by no means the only focus of the movement for a central bank. Another was Paul Moritz Warburg, one of the most vital influences on the creation of the Federal Reserve System. Warburg, scion of the great international banking family and the German investment banking firm of M.M. Warburg and Company, of Hamburg, emigrated to the United States in 1902 to become a partner in the influential New York banking house of Kuhn, Loeb & Co.Or at least partially emigrated. Warburg spent half of each year in Germany, serving as a financial liaison between the two great banks, if not between the two countries themselves. Warburg was related to Jacob H. Schiff by marriage. Schiff was a son-in-law of Solomon Loeb, a co-founder of Kuhn, Loeb & Co., and Warburg, husband of Nina Loeb, was another son-in-law of Solomon’s by a second wife. The incestuous circle was completed when Schiff’s daughter Frieda married another partner, Warburg’s brother Felix, which in a sense made Paul his brother’s uncle. See Birmingham, “Our Crowd,” pp. 21, 209–10, 383, appendix. From the moment he came to the United States, Warburg worked tirelessly, in person and in print, to bring the blessings of European central banking to this monetarily backward land. Sensitive to American political objections to the idea of centralization or of Wall Street control, Warburg always insisted disingenuously that his plan was not really a central bank. His first printed banking reform essay came in January 1907 in his “A Plan for a Modified Central Bank.” The plan called for centralized reserves and a centralized note issue as a key to assuring economic stability. The most elaborate versions of Warburg’s reform plan were presented in two speeches in 1910: “A United Reserve Bank of the United States” and “Principles that Must Underlie Monetary Reform in the United States.”

Warburg’s United Reserve Bank delineated the major features of the future Federal Reserve System. The key to its power was to be its legal monopoly on all note issue in the United States; to obtain such notes, the banks would have to keep their reserves at the Reserve Bank. Reserves would therefore be centralized at long last. Depositors at the Bank would be strictly limited to the member banks and the federal government. The Bank was to be governed by a board selected equally by three groups: the member banks, the stockholders of the Reserve Bank, and the federal government. Not surprisingly, Warburg’s plan repeated the essential features of the operation of the German Reichsbank, the central bank in his native Germany.On Warburg’s plan, see West, Banking Reform and the Federal Reserve, pp. 54–59. Warburg’s plan and essays, as well as his other activities on behalf of central banking in the United States, are collected in his The Federal Reserve System, 2 vols. (New York: Macmillan, 1930). See also Warburg, “Essays on Banking Reform in the United States,” Proceedings of the Academy of Political Science 4 (July, 1914): 387–612.

The greatest cheerleader for Warburg’s plan, and the man who introduced his banking reform essays to Columbia University’s Academy of Political Science, was Warburg’s kinsman, the Columbia economist Edwin R.A. Seligman, of the investment banking family of J. & W. Seligman and Company.Professor Seligman’s brother Isaac N. was marred to Guta Loeb, sister of Paul Warburg’s wife Nina. This made Seligman the brother of Warburg’s brother-in-law; see Birmingham, “Our Crowd,” appendix.

The top bankers were clear from the beginning that, to assuage widespread fears of centralized and Wall Street control, they would have to avoid the appearance of an orthodox central bank on the lines of England or Germany. The chosen course was a spurious “regionalism” and “decentralization,” the appearance of a virtually uncoordinated set of regional central banks. The idea was in the air when Victor Morawetz made his famous speech in November 1909 calling for regional banking districts under the ultimate direction of one central control board. Although reserves and note issue would be pro forma decentralized in the hands of the regional reserve banks, all would really be centralized and coordinated by the central control board. This specious decentralization was, of course, the scheme eventually adopted in the Federal Reserve System.

Who was Victor Morawetz? He was a distinguished attorney and banker and in particular the counsel and chairman of the executive committee of the Morgan-controlled Atchison, Topeka and Santa Fe Railroad. In 1908, Morawetz had been, along with J.P. Morgan’s personal lawyer, Francis Lynde Stetson, the principal drafter of an unsuccessful Morgan-National Civic Federation bill for a federal incorporation law that would have cartelized and regulated American corporations. Later, Morawetz was to be a top consultant to another “progressive” reform of Woodrow Wilson’s, the Federal Trade Commission.On Morawetz, see West, Banking Reform and the Federal Reserve, pp. 59–62; and Kolko, Triumph of Conservatism, pp. 134, 183–84, 272.

In late 1910, someone in the Aldrich circle, probably Henry P. Davison, got the idea of convening a small group of leading advocates of a central bank in a top secret conclave to draft a bill for a central bank. The clandestine meeting was held in November at a duck-shooting retreat for wealthy members, the Jekyll Island Club on Jekyll Island, Georgia. The cover story given to the press was that the conferees were going down for a duck-hunting expedition. Extraordinary measures were taken to ensure secrecy, with the conferees traveling down to Georgia under assumed names in a private railroad car chartered by Aldrich. Some reporters got wind of the meeting, but Davison managed to talk them out of any publicity.So shrouded in secrecy did the meeting remain that details did not leak out until the publication of the authorized biography of Aldrich 20 years later. It is not even clear which club member arranged the facilities for the meeting, since none of the participants was a member. The best guess on the identity of the helpful Jekyll Island member is J.P. Morgan. See West, Banking Reform and the Federal Reserve, p. 71; see also Nathaniel W. Stephenson, Nelson W. Aldrich (New York: Scribner’s, 1930).

The blue-ribbon participants at the week-long Jekyll Island meeting were:

Senator Nelson W. Aldrich, Rockefeller in-lawHenry P. Davison, Morgan partnerPaul M. Warburg, Kuhn, Loeb & Co. partnerAldrich was in the audience when Warburg delivered his famous “United Reserve Bank Plan” speech to the Academy of Political Science in 1910. The enthusiastic Aldrich who had been greatly impressed by German central banking views during the Monetary Commission’s trip to Europe the previous year, promptly invited Warburg to attend the upcoming Jekyll Island gathering; see Kolko, Triumph of Conservatism, p. 184.Frank A. Vanderlip, vice-president of Rockefeller’s National City BankCharles D. Norton, president of Morgan’s First National Bank of New YorkA. Piatt Andrew, Harvard economist and staff assistant to Aldrich on the Monetary Commission

There is no clearer physical embodiment of the cartelizing coalition of top financial and banking interests that brought the Federal Reserve System into being than the sometimes allied, often clashing Rockefeller-Kuhn, Loeb and Morgan interests, aided by economic technicians.

Using the research of the National Monetary Commission, the Jekyll Island conclave drafted a bill for a central bank. The ideas of this draft, which eventually became the Aldrich Bill, were basically Paul Warburg’s, with a decentralized soupcon taken from Morawetz. The final writing was contributed by Vanderlip. The main disagreement at the meeting was that Aldrich wanted to hold out for a straightforward central bank on the European model, whereas Warburg and the other banks, oddly enough more politically astute on this issue than the veteran senator, insisted that the reality of central banking be clothed in the palatable garb of decentralization. The Jekyll Island draft was presented by Aldrich to the full National Monetary Commission in January 1911. Slightly revised, it was introduced, together with the commission report, a year later as the Aldrich Bill, which in turn became in all essentials the final Federal Reserve Act passed in December 1913.

In the Aldrich-Jekyll Island plan, the central bank with branches was called the National Reserve Association; the main difference between the draft and the eventual legislation is that in the former, the national board of directors was largely chosen by the banks themselves rather than by the president of the United States. This provision was so blatantly cartelist that it was modified for political reasons to have the president name the board. The economist Henry Parker Willis, who played a large role in the enactment of the Federal Reserve System, lamented this alteration: “Political prejudice proved too strong for the establishment of this form of financial self-government or ‘integration’.”Henry Parker Willis, The Theory and Practice of Central Banking (New York: Harper & Bros., 1936), p. 77.

Aldrich and the Monetary Commission took the unusual step of delaying their report to Congress for 12 months, from January 1911 to January 1912. With the Democratic victory in the congressional elections of 1910, it was necessary to spend a year drumming up support for a central bank among Democrats, bankers, and the lay public. Accordingly, at the beginning of February 1911, twenty-two top bankers from 12 cities met for three days behind closed doors in Atlantic City to consider the Aldrich plan; the conference warmly endorsed the plan. In the private deliberation, James B. Forgan, President of the Rockefeller-dominated First National Bank of Chicago, declared outright that everyone there approved of the Aldrich plan and that, as Kolko puts it, “the real purpose of the conference was to discuss winning the banking community over to government control directed by the bankers for their own ends. ... It was generally appreciated that the [Aldrich plan] would increase the power of the big national banks to compete with the rapidly growing state banks, help bring the state banks under control, and strengthen the position of the national banks in foreign banking activities.”Kolko, Triumph of Conservatism, p. 186.

In November 1911, Aldrich won support for his plan from the American Bankers Association. In his address to their convention, he declared: “The organization proposed is not a bank, but a cooperative union of all the banks of the country for definite purposes.”West, Banking Reform and the Federal Reserve, p. 73. The full text of the Aldrich speech is reprinted in Herman E. Krooss and Paul Samuelson, eds., Documentary History of Banking and Currency in the United States (New York: Chelsea House, 1969), vol. 3, p. 1202. See also Kolko, Triumph of Conservatism, p. 189.

The major propaganda organization created for the benefit of the lay public by Aldrich and his colleagues in the spring of 1911 was the National Citizens’ League for the Creation of a Sound Banking System. The league grew out of a resolution that Paul Warburg had pushed through a meeting of the National Board of Trade in January 1910, setting aside January 18 of the following year as a “monetary day” devoted to a “Business Men’s Monetary Conference.” At that January 1911 meeting the conference appointed a committee of seven, headed by Warburg, to organize a business-leaders’ monetary reform league. A group of leading Chicago businessmen, headed by John V. Farwell and Harry A. Wheeler, president of the U.S. Chamber of Commerce, established the National Citizens’ League, with economist J. Laurence Laughlin of the University of Chicago as operating head.

Warburg and the other New York bankers chose Chicago as the site of the Citizens’ League to give the organization a bogus appearance of grass roots populism. In reality, banker control was virtually complete. The stated purpose of the league was to advance the cause of “cooperation, with dominant centralization of all banks by an evolution out of our clearing-house experience”; a decade later, Professor Henry Parker Willis, Laughlin’s top assistant at the league as well as former student and long-time disciple, conceded that the Citizens’ League had been the propaganda organ of the nation’s bankers.Henry Parker Willis, The Federal Reserve System (New York: Ronald Press, 1923), pp. 149–50. At the same time, Willis’s account conveniently ignores the dominant operating role that both he and his mentor played in the work of the Citizens’ League; see West, Banking Reform and the Federal Reserve, p. 82.

There is no need to go into the minutiae of the splits within the Citizens’ League or of the shift by the incoming Democrats in 1913 from the dreaded Republican name of Aldrich to a bill named by their own Representative Carter Class. Much of this conflict revolved around the desire by Laughlin and the Democrats, and to some extent by Warburg, to shed the name Aldrich for a more palatable one. Nevertheless, there was very little substantive difference between the Glass bill, which became the Federal Reserve Act, and the original Aldrich plan. Friedman and Schwartz are surely correct in insisting on the “near identity” of the two plans.See Friedman and Schwartz, Monetary History of the United States, p. 171n. For similar judgments, see West, Banking Reform and the Federal Reserve, pp. 106–07; Kolko, Triumph of Conservatism, p. 222. Two decades after the establishment of the Federal Reserve, Paul Warburg demonstrated in detailed parallel columns the near identity of the Aldrich bill and the Federal Reserve Act; see Paul M. Warburg, The Federal Reserve System: Its Origins and Growth (New York: Macmillan, 1930), vol. 1, chaps. 8 and 9. There are many sources for examining the minutiae of the various drafts and bills; good places to start are West, Banking Reform and the Federal Reserve, pp. 79–135; and Kolko, Triumph of Conservatism, pp. 186–89, 217–47. The important point is that whatever the difference on minor technical points, the nation’s bankers, and especially the big bankers, were overwhelmingly in favor of a new central bank. As A. Barton Hepburn of the Chase National exulted at the annual meeting of the American Bankers Association in August 1913, in the course of his successful effort to get the bankers to endorse the Glass bill: “The measure recognized and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power.”Quoted in Kolko, Triumph of Conservatism, p. 235. Precisely.

All in all, Professor Kolko sums up the point well:

The entire banking reform movement, at all crucial stages, was centralized in the hands of a few men who for years were linked, ideologically and personally, with one another. The problem of the origin of the Federal Reserve Act, and the authorship of specific drafts, was later hotly debated by [men] who greatly exaggerated their differences in order that they might each claim responsibility for the guiding lines of the Federal Reserve System. Yet ... although they may have differed on details they agreed on major policy lines and general theory. The confusion over the precise authorship of the Federal Reserve Act should not obscure the fact that the major function, inspiration, and direction of the measure was to serve the banking community in general, and large bankers specifically.Ibid., p. 22.

3. The Structure of the Federal Reserve

The structure of the Federal Reserve System — which was enacted in December 1913 and opened its doors the following November — was at once cartelizing and inflationary.The terms “inflation” and “inflationary” are used throughout this article according to their original definition — an expansion of the money supply — rather than in the current popular sense of a rise in price. The former meaning is precise and illuminating; the latter is confusing because prices are complex phenomena with various causes, operating from the sides of both demand and supply. It only muddles the issue to call every supply-side price rise (say, due to a coffee blight or an OPEC cartel) “inflationary.” The cartelizing nature of the Fed can be seen in its organization: an intimate partnership between the federal government and the nation’s banking community. There are 12 regional and district Federal Reserve Banks, the stock of which is held by the member banks in the district. Each Bank is governed by nine directors, of whom three are chosen directly by the banks in the district; three others are supposed to represent commerce, agriculture, or industry, but they too are chosen by the member banks in the district. That leaves only three directors appointed by the overall Federal Reserve Board in Washington. Furthermore, of the three publicly appointed directors, one — who becomes the chairman of the district Bank — must be a person of tested banking experience: in short, an ex-banker.

Not only are six — arguably seven — of each Bank’s directors private bankers, but the chief executive officer of each Bank (originally called the governor and now the president) is appointed by the Bank directors themselves, not by the central Reserve Board (even though the latter must approve the choice). The central board has seven members, two of whom must be former bankers; all are appointed by the president of the United States.

Some critics of the Federal Reserve assert that it is really and simply a private central bank, since it is owned wholly by its member banks and it makes profits from its policies. But this view ignores the fact that all profits made by the Banks are now taxed away by the treasury. The point of the cartel is not make profits directly as shareholders of each Reserve Bank, but to benefit from the cartelizing and inflationary policies of the entire system.

At the same time, those who maintain that the Federal Reserve System is a wholly government-controlled institution overstate the case. It is true that all members of the Federal Reserve Board are government appointed and that all district Bank officials are instructed to act within the guidelines set by the Board. But every governor (or president) of a Federal Reserve Bank is selected largely by the bankers of the district, and these governors can exert a considerable amount of influence on Fed policy.A banker’s institution of far less importance is the Federal Advisory Council, composed of bankers selected by the board of directors of their district Bank. The council’s recommendations garner considerable publicity, but it has no power within the system. As we will see below, the banker-elected governor of the Federal Reserve Bank of New York seized the reins of power from the Federal Reserve Board from the inception of the system in 1914 until his death 14 years later.

The Federal Reserve System, like all central banking systems, is inherently inflationary. In the first place, the central bank acts as a lender of last resort, a giant governmentally privileged institution standing ready to bail out banks in trouble. Second, by coordinating bank activities, the central bank can pump in new reserves throughout the system and thereby induce a multiple expansion of bank money and credit. Since the banks can inflate uniformly, individual expanding banks no longer suffer from the constraining redemptions by nonexpanding banks that prevail in a regime of free and decentralized banking. If a bank expands credit on its own, it will soon find that its expanded notes or deposits will be passed on from its own clients to clients of other banks and that in the normal course of business they will be returned to the expanding bank for redemption. Yet the expanding bank will not have the funds to redeem these claims. There is also a third reason, which might not be as evident: Even if legal reserve requirements remain the same, the centralizing of reserves into the hands of the Fed by itself permits a considerable inflation of money and credit. In short, if before the establishment of a central bank every bank keeps its own cash reserves, and if afterward most of the cash is deposited in the central bank, the bank can then pyramid its own liabilities on top of its cash, thereby exerting a multiple leverage effect on the previously existing cash. In an illuminating book on the Federal Reserve and the Great Depression, Phillips, McManus, and Nelson summarize this process:

Thus, if the commercial banks prior to the inauguration of a system of bankers’ banking are required to hold an average reserve, say, of 10 percent against deposit liabilities, their deposits may be ten times that reserve, or, they may expand credit roughly on a ten-fold basis. With the reserves of the commercial banks transferred to the Federal Reserve Banks, and with the latter required to maintain a reserve of only 35 percent against the deposit liabilities due to the member banks, credit expansion may, at its utmost, proceed to approximately thirty times the amount of the reserves. Thus is seen that the establishment of a central banking system [in the United States] magnified the former expansive power virtually three-fold.C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: Macmillan, 1937), pp. 25–26.

This statement overlooks the fact that the pre-Federal Reserve banking system was not free and decentralized, and it therefore exaggerates the quantitative inflationary effect of the creation of the Fed. But the basic point is correct.

A fourth inflationary effect of the creation of the Fed is inherent not so much in its structure as in the legal power to change the reserve requirement of the banks. Thus, before the enactment of the Fed, the average minimum reserve requirement for the nation’s banks was 21.1%. The Federal Reserve Act of 1913 slashed those reserve requirements to an average of 11.6%, a reduction of 45%. Four years later, in June 1917, reserve requirements were further lowered to an average of 9.8% — a cut of 54% since 1913. In short, added to whatever multiple inflation of money and credit was permitted by the centralization inherent in the existence of the Fed, a twofold expansion in four years was permitted by the slash in reserve requirements.The Committee on War Finance of the American Economic Association hailed this development in early 1919: “Recent improvements in our banking system, growing out of the establishment of the Federal Reserve System and its subsequent development, have made our reserve money … more efficient than it formerly was; in other words, have enabled a dollar in reserve to do more money work than before. This in effect is equivalent to increasing the supply of reserve money.” It is indeed, provided that money’s “work” is to be as inflationary as possible and “efficiency” means producing as much inflation as rapidly as possible. See “Report of the Committee on War Finance of the American Economic Association,” American Economic Review 9, Supplement no. 2 (March, 1919): 96–97; quoted in Phillips, McManus, and Nelson, Banking and the Business Cycle, p. 24n (see also pp. 21–24). Furthermore, in an inflationary move that was to become highly significant in the 1920s, the Federal Reserve Act drastically lowered the reserve requirements for time deposits in the banks. Previously, there had been no distinction in the legal reserve requirements between demand and time deposits; both had therefore averaged 21.1%. Now, however, the requirement for time deposits was lowered to 5% and then to a negligible 3% in June 1917.Phillips, McManus, and Nelson, Banking and the Business Cycle, p. 29.

4. The Personnel of the Federal Reserve

The people in positions of power in America’s new central bank were at least as important as its structure. The bankers, warmly hailing the enactment of the Federal Reserve, waited eagerly to see who would be running the powerful new institution.See the reference to the proceedings of the conventions of the Kansas and California bankers associations in May 1914, in Kolko, Triumph of Conservatism, pp. 247–328. Senator Aldrich wrote to a friend in February: “Whether the bill will work all right or not depends entirely … upon the character and wisdom of the men who will control the various organizations, especially the Federal Reserve Board” (p. 248).

Of the seven members of the Federal Reserve Board, two were (by statute at the time) ex officio, the secretary of the treasury and the comptroller of the currency. Before assuming their posts in the Wilson administration, these two men had been close business and financial associates. Secretary of the Treasury William Gibbs McAdoo had been a failing businessman in New York City when he was befriended and bailed out by J.P. Morgan and his associates. The Morgans set McAdoo up as president of New York’s Hudson & Manhattan Railroad until his appointment in the Wilson administration. McAdoo spent the rest of his financial and political life securely in the Morgan ambit. When he was president of the Hudson & Manhattan for a decade, McAdoo’s fellow officers and board members were virtually all Morgan men. His vice-presidents were Edmund C. Converse, president of the Morgan-run Bankers Trust Company, and Walter G. Oakman, president of Morgan’s flagship commercial bank, Guaranty Trust. His fellow directors included Judge Elbert H. Gary, chairman of the board of Morgan’s attempted steel monopoly, U.S. Steel, and a director of another failed Morgan monopoly attempt, International Harvester, Frederic B. Jennings, partner in the “Morgan” law firm of Stetson, Jennings & Russell (whose senior partner, Francis Lynde Stetson, was J.P.’s personal attorney), and John G. McCullough, a director of the Morgan-controlled Atchison, Topeka & Santa Fe Railroad. Directors of Hudson & Manhattan’s parent company, the Hudson Companies, included William C. Lane, a vice-president of Guaranty Trust, and Grant B. Schley, a brother-in-law of one of the country’s top Morgan lieutenants, George F. Baker, head of the First National Bank of New York. Shortly after his appointment as secretary of the treasury, William McAdoo cemented his political stature by marrying President Wilson’s daughter.See Burch, Civil War to the New Deal, pp. 207–09, 214–15, 232–33. On McAdoo, see also John J. Broesamle, William Gibbs McAdoo: A Passion for Change, 1863–1917 (Port Washington, NY: Kennikat Press, 1973).

The comptroller of the currency was a long-time associate of McAdoo’s. A Virginia banker and president of the Richmond Trust & Safe Deposit Company, John Skelton Williams had been a director of McAdoo’s Hudson & Manhattan Railroad and president of the Morgan-oriented Seaboard Airline Railway. When McAdoo became secretary of the treasury, he appointed Williams as one of his two assistant secretaries.

One of President Wilson’s five appointees to the Federal Reserve Board was another close associate of McAdoo’s, Charles S. Hamlin, whom McAdoo had appointed as his other assistant secretary. Hamlin was a Boston attorney who had married into the wealthy Pruyn family of Albany, a family long connected with the Morgan-dominated New York Central Railroad.

Of the other Wilson appointees to the board, one was none other than Paul M. Warburg. Others were Frederic A. Delano, uncle of Franklin D. Roosevelt and president of the Rockefeller-controlled Wabash Railway, William P.G. Harding, president of the First National Bank of Birmingham, Alabama, and son-in-law of Joseph H. Woodward, head of the Woodward Iron Company, which had several prominent Morgan and Rockefeller men on its board, and finally, Professor Adolph C. Miller, economist at the University of California, Berkeley. Miller had married into the wealthy, Morgan-connected Sprague family of Chicago. His father-in-law, Otho S.A. Sprague, had been a prominent businessman and had served as a director of the Morgan-dominated Pullman Company. Miller’s wife’s uncle, Albert A. Sprague, was a director of numerous large firms, including the Chicago Telephone Company, a subsidiary of the mighty Morgan-controlled monopoly American Telephone & Telegraph Company.See Burch, Civil War to the New Deal, pp. 214–15, 236–37. Wilson also tried to appoint to the board his old friend Thomas D. Jones, a Chicago lawyer and director of the Morgans’ International Harvester Company, but the Senate turned down the appointment.

The Federal Reserve Board thus began its existence with three Morgan men, one person in the Rockefeller ambit, a leader of Kuhn, Loeb & Co. (allied with the Rockefellers), a prominent Alabama banker, and an economist with vague family connections to Morgan interests. No board could have better symbolized the alliance of banking and financial interests, aided by a few economists, that had conceived and successfully driven through a radical transformation of the American banking system.

But more important from the inception of the Fed through the 1920s was the man appointed as governor of the Federal Reserve Bank of New York, who swiftly took control of the policies of the system. Benjamin Strong had spent virtually his entire business and personal life in the circle of top aides of J.P. Morgan. Secretary of several trust companies in New York City, Strong lived in the then wealthy suburb of Englewood, New Jersey, where he became close friends of three top Morgan partners: Henry P. Davison, Thomas W. Lamont, and Dwight Morrow. Davison in particular became Strong’s mentor and in 1904 offered him the post of secretary of the new Morgan-created Bankers Trust Company. Strong soon married the daughter of the wealthy Edmund C. Converse, then president of Bankers Trust, and succeeded Thomas W. Lamont as vice-president. Not long after, Strong was acting as virtual president of Bankers Trust under the aging Converse, and in January 1914, he officially became president of the company.

Strong had favored central banking reform at least since 1907, and in August 1911 he participated with Nelson Aldrich in a lengthy meeting on the Aldrich plan with Davison, Vanderlip, and a few other leading bankers on Aldrich’s yacht. He also spoke before the American Bankers Association on its behalf. When, at the suggestion of his close friend Warburg, Strong was offered the post of governor of the New York Fed, he at first refused, since he wanted a “real central bank ... run from New York by a board of directors on the ground” — in short, a frankly and openly Wall Street-run cartelized banking system. After a weekend in the country, Davison and Warburg persuaded Strong to change his mind and accept; presumably, he now realized that he could achieve a Wall Street-run cartel on a little less candid basis from his powerful new post at the heart of the nation’s money market. Strong became governor of the New York Fed in October 1914.See Chandler, Benjamin Strong, pp. 23–41. On the details of the first organization of the Federal Reserve Bank of New York, see Lawrence E. Clark, Central Banking under the Federal Reserve System (New York: Macmillan, 1935), pp. 64–82.

Strong moved for seizure of commanding power shortly after the organization of the Federal Reserve System. At the organizing convention of the system in October 1914, an extra-legal council of governors was formed. At the first meeting of the council in December, Benjamin Strong became chairman not only of the council but also of its operating executive committee. From then on, Strong acted as chairman of the governors and assumed the dominant powers that the statute had envisioned for the Federal Reserve Board. William P.G. Harding, who became governor (now chairman) of the Federal Reserve Board in Washington in 1916, cracked down on the meetings of the council, but Strong continued as the dominant force in the system, a position ensured by his being named the sole agent for the open-market operations of all the Federal Reserve Banks.On the Strong seizure of power, see Clark, Central Banking under the Federal Reserve, pp. 102–5, 161; Chandler, Benjamin Strong, pp. 68–78.

Two years after the establishment of the Federal Reserve and a year before the American entry into World War I, Representative Carter Class, a Democrat from Virginia who had drawn up the final Federal Reserve bill in the House, looked back on his cartelizing handiwork and found it good. He pointed out that his objective was very far from injuring Wall Street financial dominance:

The proponents of the Federal reserve had no idea of impairing the rightful prestige of New York as the financial metropolis of this hemisphere. They rather expected to confirm its distinction, and even hoped to assist powerfully in wresting this scepter from London and eventually making New York the financial center of the world. ... Indeed, momentarily this has come to pass. And we may point to the amazing contrast between New York under the old system in 1907, shaken to its very foundations because of two bank failures, and New York at the present time, under the new system, serenely secure in its domestic banking operations and confidently financing the great enterprises of European nations at war.Quoted in Kolko, Triumph of Conservatism, p. 254. Carter Class was a small-town Virginia newspaper editor and banker.

However, there was still a problem: the failure of the state-chartered banks to join the Federal Reserve System. All national banks were compelled by law to join the system and to keep their reserves with the Fed, but the eagerness with which they joined is revealed by the fact that virtually no national banks abandoned their national status to seek state charters. State banks were free to join or not, and a bane of the Fed’s existence is that virtually none of them did so, preferring the lesser regulation of state law.

In a letter of October 1916, Benjamin Strong lamented the situation, writing: “Frankly, our bankers are more or less an unorganized mob. Until they are educated by experience to the advantages of cooperation through the Reserve System, I believe it is unsafe to rely upon reserves contributed by their voluntary action.”Chandler, Benjamin Strong, p. 81; see also Clark, Central Banking under the Federal Reserve System, pp. 143–48. In such a vein has every cartelist reacted to the ambitions of individual firms or entrepreneurs to kick over the collective discipline of the cartel. All Fed officials felt the same way, and only political considerations have thus far prevented compulsory membership.

5. The Federal Reserve and World War I

The Federal Reserve System arrived fortuitously for the financing of U.S. entry into World War I, for it is doubtful whether the government would have been politically able to finance the war through taxes, borrowing from the public, or the simple printing of greenbacks. As it was, the Fed was able to engineer the doubling of the money supply from its inception in 1914 until 1919.

World War I also led to a strengthening of the power of the Federal Reserve System and particularly of the dominance of Benjamin Strong and the Federal Reserve Bank. With banking subject to treasury demands for financing the huge deficits, Secretary of the Treasury McAdoo and Benjamin Strong assumed virtual joint control of the Federal Reserve. As Willis wrote, “It was the entry of the United States into the World War that finally cast a decisive vote in favor of a still further degree of high centralization; and that practically guaranteed some measure of fulfillment for the ambitions that had centered around the Federal Reserve Bank of New York.”Willis, Theory and Practice of Central Banking, pp. 90–91.

Strong’s new dominance was facilitated by the treasury’s making the Federal Reserve its sole fiscal agent. The secretary of the treasury had not done so before the war arrived, instead continuing the Jacksonian policy of depositing the disbursing funds from its own sub-treasury branches (the Independent Treasury System). Under the spur of war, however, McAdoo fulfilled Strong’s long-standing ambition; the Fed was now clothed with full governmental power. Strong had previously written: “We must, if possible, persuade [McAdoo] to permit the Reserve Banks to become the real, active, and effective fiscal agents for the Government. If he does that, our place in the country’s banking system will be established for all time.”Chandler, Benjamin Strong, p. 105. Strong’s biographer summarizes how treasury operations during the war accelerated the dominance of the New York Fed:

The war and the delegation of fiscal agency had a special effect on the New York Bank and on Strong’s position in the System. Situated in the nation’s great central money market, the New York Bank sold and distributed nearly half of all securities offered by the Treasury during the war and collected and disbursed great sums of money. At the country’s foreign exchange center and gateway to Europe, it handled most of the Treasury’s foreign exchange business, made many financial arrangements for the Treasury with foreign countries, acted as a central depository of funds from the other Reserve Banks as well as the New York district for payment to the representatives of foreign countries or to suppliers of munitions to them, and was the principal purchaser of acceptances. Thus it was only natural that the New York Bank came to enjoy the prestige of being the principal bank of the government, the Treasury came to use it as a channel for communicating with the other Reserve Banks, Strong’s counsel was given heavy weight by the Treasury, and both the New York Bank and Strong emerged from the war with greater prestige, both absolutely and relative to the other Reserve Banks and the Board.Ibid., p. 107.

Moreover, Strong had long wished to concentrate the country’s gold coin and bullion in the hands of the Federal Reserve and outside the control of the public. In that way, cartelization would be intensified, and the inflationary potential of the Fed, which pyramided its own notes and deposits on top of its gold stock, would greatly increase. In 1917, in view of the war, the law was changed to permit the Federal Reserve to issue notes in exchange for gold (previously it could only issue them for commercial notes) and to require all legal bank reserves to be kept as deposits at the Fed rather than in cash. Furthermore, relaxed federal regulations on state banks in 1917 finally induced a considerable number of state banks to join the system, intensifying the concentration of reserves and of gold still further. Finally, from September 1917 to June 1919, the United States went implicitly, though not formally, off the gold standard — at least for foreigners. Foreign exchange operations were controlled and gold exports prohibited. As a result of all of these measures, gold was virtually nationalized and successfully concentrated at the Fed. At the end of 1916, the gold reserves of the Reserve Banks were only $720 million, or 28% of the country’s monetary gold stock. Two years later, gold reserves at the Fed were up to $2.1 billion, or no less than 74% of the nation’s gold.

6. Internationalizing the Cartel

The fortunes of the House of Morgan had been declining since the turn of the century, and so the Morgans saw a glorious opportunity open to them upon the outbreak of the war in Europe. The Morgans had close and long-time financial connections with England. In particular, Edward Grenfell (later Lord St. Just), senior partner of Morgan, Grenfell & Co., the London branch of J.P. Morgan & Co., was also a long-time director of the Bank of England. Grenfell had long been the main informal link between the Bank of England and the New York financial community, and the relationship was formalized when the Morgan Bank became the fiscal agent of the Bank of England.Sir Henry Clay, Lord Norman (London: Macmillan, 1957), p. 87; Parrini, Heir to Empire, pp. 55–56. Led by partner Henry P. Davison at the end of 1914, the Morgans got themselves named virtually sole purchasing agent in the United States for British and French war goods. To pay for this immense export of arms and other materiel, the British and French were obliged to float immense loans in the United States, and the House of Morgan became the sole underwriter for these Allied bonds in the United States. Not only did Morgan find these monopolies highly profitable, but it prospered relative to its great rival Kuhn, Loeb & Co. — which, being German and connected with German banking and finance, was excluded from Allied war operations. As the Morgans and the bond market geared up to finance massive munitions and other exports to the Allies, Davison’s old friend and colleague Benjamin Strong stood ready to inflate money and credit to finance these foreign loans.On the interconnections among the Morgans, the Allies, foreign loans, and the Federal Reserve, see Tansill, America Goes to War, pp. 32–134. [Editor’s remarks] Rothbard elsewhere described the motivations of the Morgan ambit in the drive for U.S. involvement in World War I, citing the aforementioned work of Charles Tansill. It is worth quoting his analysis in full:The House of Morgan was hip-deep in the Allied cause from 1914 on … Morgan’s railroads were in increasingly grave financial trouble, and 1914 saw the collapse of Morgan’s $400 million New Haven Railroad. Concentrating on railroads and a bit laggard in moving into industrial finance, Morgan had seen its dominance in investment banking slip since the turn of the century. Now, World War I had come as a godsend to Morgan’s fortunes, and Morgan prosperity was intimately wrapped up in the Allied cause. It is no wonder that Morgan partners took the lead in whipping up pro-British and French propaganda in the United States; and to clamor for the U.S. to enter the war on the Allied side. Henry P. Davison set up the Aerial Coast Patrol in 1915, and Willard D. Straight and Robert Bacon, both Morgan partners, took the lead in organizing the Businessman’s Training Camp at Plattsburgh, New York, to urge universal conscription. Elihu Root and Morgan [Jr.] himself were particularly active in pressing for entering the war on the Allied side. Furthermore, President Wilson was surrounded by Morgan people. His son-in-law, Secretary of the Treasury, William G. McAdoo, had been rescued from financial bankruptcy by Morgan. Colonel Edward M. House, Wilson’s mysterious and powerful foreign policy adviser, was connected with Morgan railroads in Texas. McAdoo wrote to Wilson that war exports to the Allies would bring “great prosperity” to the United States, so that loans to the Allies to finance such exports had become necessary.See Rothbard, The Mystery of Banking, p. 243. See also Rothbard, Wall Street, Banks, and American Foreign Policy, pp. 17–23. The war purchases for Britain and France totaled $3 billion, and the House of Morgan earned a commission of $30 million. Moreover, the Morgans were able to steer British and French war contracts to Morgan affiliated firms, including General Electric and U.S. Steel. See Murray Rothbard, “The Gold Exchange Standard in the Interwar Years,” in A History of Money and Banking in the United States, Joseph Salerno, ed. (Auburn, AL: Ludwig von Mises Institute, 2005), pp. 370–71. The Wilson administration and the Federal Reserve Board were prepared to do likewise.With the exception of the two pro-German members of the Federal Reserve Board. Warburg and Miller, both of German descent, who fought unsuccessfully against bank financing of munitions exports to the Allies. See Tansill, America Goes to War, pp. 105–08.

Benjamin Strong had scarcely been appointed when he began planning for an international cartel, a regime of “international cooperation” between the leading central banks of the world. In practice, such high-sounding terms could mean only cooperation for world monetary expansion. The classical gold standard, which basically prevailed before World War I, placed a firm restraint on the propensity of national central banks to inflate: The expansion of one country’s currency would raise nominal income and prices in that country, cause a deficit in its balance of payments and an outflow of gold, thereby causing a check on inflation and perhaps a compulsion on the central bank to deflate back to its previous position. International central bank “cooperation” (or cartelization) then and now means the establishment of formal and informal mechanisms to prevent pressures for redemption and contraction on an inflating nation’s currency. If this were not the meaning, there would be no need for international cooperation or indeed for central banking at all, since all any individual bank need do to keep itself afloat is to keep its rate of inflating to a minimum.

In the latter part of 1915, Benjamin Strong worked on international central bank collaboration, and in February 1916, he sailed to Europe to launch the first step: the establishment of the banks of England and France as foreign agents or correspondents for the New York Fed. Strong had long admired the central banking record of the Bank of England, and close collaboration with that leading central bank was to be the keystone of the new regime of inter-central bank cartelization. In England in March, Strong worked out an agreement of close collaboration between the New York Fed and the Bank of England, with both banks maintaining an account with each other and the Bank of England purchasing sterling bills on account for the New York Bank. In his usual high-handed manner, Strong expressed his determination to go ahead with the agreement even if the other Reserve Banks objected or failed to go along. Finally, after some backing and filling, the Federal Reserve Board endorsed the scheme as well as the initiating of a similar agreement with the Bank of France.Chandler, Benjamin Strong, pp. 93–98.

Strong made his agreement with the governor of the Bank of England, Lord Cunliffe, but his most fateful meeting in England was with the then assistant to the deputy governor, Montagu Norman. This meeting proved the beginning of the momentous Strong-Norman collaboration that highlighted the international financial world of the 1920s.[Editor’s footnote] The Morgans were also involved in the Strong-Norman connection. Norman’s close friends were directors of the aforementioned Morgan, Grenfell & Co. They were also prominent in the Coolidge administration. One of Calvin Coolidge’s political mentors was Morgan partner Dwight Morrow. Coolidge first offered the Secretary of State position to Morgan attorney Elihu Root, but after he declined, settled for Frank B. Kellogg, who had Morgan connections, along with his assistant secretary Joseph C. Grew. Dwight Morrow and Henry L. Stimson, a disciple of Root, were also involved in international relations with Mexico and Nicaragua. Secretary of the Treasury was Andrew C. Mellon, who was generally allied to the Morgan interests. Morgan influence continued in the Hoover administration, and Dwight Morrow served as an important unofficial advisor to Herbert Hoover. See Rothbard, “The Gold Exchange Standard,” pp. 368–81, 422.

Montagu Collet Norman was born to banking on both sides of his family. His father was a partner in the British banking house of Martin & Co. and was related to the great banking family of Barings. His uncle was indeed a partner of Baring Bros. Norman’s mother was the daughter of Mark W. Collet, a partner in the international banking firm of Brown Shipley & Co. Brown Shipley was the London branch of the great Wall Street banking firm of Brown Brothers. Grandfather Mark Collet, furthermore, had been governor of the Bank of England in the 1880s.

At the age of twenty-one, young Norman began his working life at the family bank of Martin & Co., and then at Brown Shipley. In 1895, he went to work at the New York office of Brown Brothers, where he stayed for three years, returning to London to become a partner of Brown Shipley in 1900.

Strong and Norman became close friends as well as collaborators almost immediately, writing a steady stream of correspondence, personal and financial, and visiting each other at length every year from 1919 until Strong’s death in 1928. They spent long vacations together, sometimes at Bar Harbor or Saratoga but more often in southern France.

7. Britain and the Gold Exchange Standard

Britain, the major gold standard country before World War I, ended the war facing a set of grave, interlocking financial and economic problems, most of its own making. Along with the other warring nations, Britain had inflated sharply to finance the war effort. Each country except the United States (which had de facto suspended gold exports) had therefore been obliged to go off the gold standard. At the end of World War I, Britain determined that its own and the world’s economic health required a return to the gold standard. And, in a fateful decision, it also determined — with surprisingly little discussion — that the pound sterling would have to be reestablished at the traditional prewar par of approximately $4.86.On the portentous consequences of the British decision to return to gold at $4.86, see Lionel Robbins, The Great Depression (New York: Macmillan, 1934), pp. 77–87. Because of the greater inflation in Britain than in the United States, the free-market exchange rate of the two currencies was far lower than $4.86. The British government, with the help of J.P. Morgan & Co., succeeded in artificially pegging the pound at $4.75 from early 1916 until March 1919. Finally, the British let the pound float, and it quickly plummeted, reaching a low of $3.21 in February 1920.See Clay, Lord Norman, p. 135; Chandler, Benjamin Strong, p. 293; and especially Benjamin M. Anderson, Economics and the Public Welfare: Financial and Economic History of the United States, 1914–1946, 2nd ed. (Indianapolis: Liberty Press, 1979), pp. 63–64.

Britain’s curious insistence on returning to the gold standard at a par overvalued by some 34% meant that the British had to face a massive price deflation. It was particularly important for Britain — dependent as it always has been on exports to purchase large quantities of imports — to keep its export prices competitive, and for that, deflation would be necessary. Although difficult at all times, deflation did not present major problems before World War I, since price and wage rates were flexible downward. But during the war, a massive system of high-benefit unemployment insurance and a strong network of trade unions had developed in Britain, making deflation impossible without the repeal of welfare state measures and the rolling back of trade union power. Britain was not willing to take such heroic measures; in fact it wished to continue permanently the pleasant system of cheap credit and inflation that it had pursued during the war. Yet it continued to insist on an unrealistic $4.86 par in order to regain London’s prewar prestige as the world’s financial center.

Britain, in short, insisted on resting its postwar foreign monetary policy on a pair of inconsistent but fiercely held axioms: (1) a return to gold at the overvalued prewar par and (2) a refusal to permit the deflation needed to make axiom 1 at all viable. In fact, it insisted on continuing an inflationary policy. Britain’s entire international financial policy during the 1920s was an attempt to square the circle, to maintain these two inconsistent axioms.

How could it do so? First, Britain would have to force or cajole other countries either to inflate themselves, so that Britain would not lose gold to them, or to return to a peculiar new form of gold standard, which would retain the prestige of gold without the content. Thus, Britain, operating particularly through the Financial Committee of the League of Nations (an organization that it controlled), induced or forced the vanquished or small victor states of postwar Europe (1) to return to gold at overvalued pars, thereby crippling their exports and subsidizing British imports, (2) to acquire their own central banks, so that they too could inflate in collaboration with the Bank of England, to discourage exports or gold from flowing from Britain, and (3), and perhaps most important, to return not to a classical gold standard but to a new form of “gold exchange standard.” In a genuine gold standard, each currency is backed by gold, and gold flows in or out of the country. In the new form, each European country was expected to keep its reserves not in gold, but in pounds sterling, which would be backed by gold. Then, when Britain inflated, instead of losing gold to other countries, the sterling balances would pile up in London and themselves be used as a base on which to pyramid European currencies.

Britain was further protected from its inflationary policies in the 1920s by pledging to redeem pounds not in gold coin, as before the war, but only in large-denomination gold bullion. This ensured that gold could not circulate within the country and that gold would only be redeemed by large-scale international holders.

Having manipulated most of the European countries into ceasing to become a threat to its inflationary policies, Britain was still faced with the problem of the United States. The danger was that a non-inflating, hard-money, genuinely gold standard country such as the United States would soon drain inflating Britain of its gold and thereby wreck the new jerry-built international monetary system. Britain, therefore, had to persuade the United States to inflate pari passu with Great Britain; in particular, U.S. price levels could be no lower than Britain’s and its interest rates no higher, so that gold funds would not be attracted out of London and into the United States. To persuade the United States to inflate — ostensibly in order to help Britain return to the gold standard — then became the premier task of Montagu Norman.See Murray N. Rothbard, “The New Deal and the International Monetary System,” in Leonard P. Liggio and James J. Martin, eds., Watershed of Empire: Essays on New Deal Foreign Policy (Colorado Springs: Ralph Myles, 1976), pp. 20–27. See also Rothbard, America’s Great Depression, pp. 131–32; Chandler, Benjamin Strong, pp. 293–94; Unemployment, a Problem of Industry, chap. 16; and Frederic Benham, British Monetary Policy (London: P. S. King, 1932).

Later in the 1920s, Emile Moreau, governor of the Bank of France and a caustic hard-money critic of Britain’s international financial policy, recorded in his diary that England had established

a basis for putting Europe under a virtual financial domination. The Financial Committee [of the League of Nations] at Geneva has been the instrument of that policy. The method consists of forcing every country in monetary difficulty to subject itself to the Committee at Geneva, which the British control. The remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated at the Bank of England, which serves both to support the pound and to fortify British influence. To guarantee against possible failure they are careful to secure the cooperation of the Federal Reserve Bank of New York. Moreover, they pass on to America the task of making some of the foreign loans if they seem too heavy, always retaining the political advantages of these operations.Chandler, Benjamin Strong, p. 379. Norman did indeed dominate the Financial Committee of the League, particularly through three close associates, Sir Otto Niemeyer of the treasury, Sir Arthur Salter, and Sir Henry Strakosch. The major theoretician of Norman’s imposed gold exchange standard was Ralph Hawtrey, director of financial studies at the treasury. As early as 1913, Hawtrey was advocating international collaboration by central banks to achieve a stable price level, and in 1919, he was one of the first to call for international central bank cooperation in the context of a European gold exchange standard. See Clay, Lord Norman, pp. 137–38; Rothbard, America’s Great Depression, pp. 159–61; Paul Einzig, Montagu Norman (London: Kegan Paul, 1932), pp. 67, 78; Palyi, The Twilight of Gold, pp. 134, 155–59. On the gold exchange standard and Britain’s inducement of European countries to overvalue their currencies, see H. Parker Willis, “The Breakdown of the Gold Exchange Standard and Its Financial Imperialism,” The Annalist 33 (16 October 1931): 626 ff.; and William Adams Brown, Jr., The International Gold Standard Reinterpreted, 1914–1934 (New York: National Bureau of Economic Research, 1940), vol. 2, p. 732–49.

Moreau also recorded a fascinating report sent by his close aide in 1926 on the intentions of Montagu Norman. The aide reported that the chief objective of Norman and his group was

the setting up of links between the various Banks of Issue. ... The economic and financial organization of the world appears to the Governor of the Bank of England to be the major task of the Twentieth Century. ... Hence his campaign in favour of completely autonomous central banks, dominating their own financial markets and deriving their power from common agreement among themselves.Palyi, Twilight of Gold, pp. 134–35.

Norman succeeded in getting the nations of Europe to agree to adopt the postwar gold exchange standard at the Genoa Conference, called by the Supreme Council of the Allies in April 1922. All of the details of the financial world of the 1920s were agreed on then by the Financial Commission of the Conference. Britain actually adopted this standard in 1925, and the other European nations followed at about the same time. The United States had decided at the last minute not to participate at Genoa because of Soviet participation, but the administration, especially the powerful Secretary of Commerce Herbert Hoover, was enthusiastic about the idea of inter-central bank collaboration of currency stabilization.On the Genoa Conference, see ibid., pp. 133–40, 148–49 (the latter for a text of the relevant resolutions); Michael J. Hogan, Informal Entente: The Private Structure of Cooperation in Anglo-American Economic Diplomacy, 1918–1928 (Columbia: University of Missouri Press, 1977), pp. 42–48 (on the administration’s position); Stephen V.O. Clarke, Central Bank Cooperation: 1924–31 (New York: Federal Reserve Bank of New York, 1967), pp. 34–36; and Rothbard, America’s Great Depression, pp. 161–62.

8. Open-Market Purchases in the 1920s

The Federal Reserve generated a monetary expansion averaging approximately 7% per annum in the great boom years from 1921 to 1929, an expansion propelled by an average annual increase of member bank reserves of 6% per year.What would now be considered M-2, all bank deposits and savings and loan shares increased by 6.8% per annum from June 1921 to June 1929, whereas M-2 plus net life insurance policy reserves increased by an average of 7.7% during the same period. The rationale for including the latter is that this completes the figure for all claims redeemable in dollars at par on demand. See Rothbard, America’s Great Depression, pp. 88–96, 100–01; Board of Governors of the Federal Reserve System, Banking and Monetary Statistics (Washington, D.C.: Federal Reserve Board, 1943), p. 34. On time deposits as actually redeemable on demand in the 1920s, see Anderson, Economics and the Public Welfare, pp. 139–42; Phillips, McManus, and Nelson, Banking and the Business Cycle, pp. 98–101. By far the most important factor in generating the increased reserves was open-market purchases by the Federal Reserve Bank of New York. The purchases came in three great bursts: in 1921–22, in 1924, and in the latter half of 1927. In the first surge, the Fed tripled its holding of government securities from $193 million in November 1921 to $603 million in June 1922. This was the Fed’s famous “discovery” of the inflationary effect of open-market purchases, a discovery that the authorities were delighted to make. Before the war, there had been little government securities available on the market and almost no short-run floating treasury debt. There was therefore little scope for open-market operations as a deliberate expansionary or restrictive policy even if this method had been discovered. After World War I, however, there was suddenly a large mass of short-term floating debt on the market that needed to be rolled over.See Rothbard, America’s Great Depression, p. 125; H. Parker Willis, “What Caused the Panic of 1929,” North American Review 229 (February, 1930): 178; Charles O. Hardy, Credit Policies of the Federal Reserve System (Washington, DC: Brookings Institution, 1932), p. 287. See also Esther Rogoff Taus, Central Banking Functions of the United States Treasury, 1789–1941 (New York: Columbia University Press, 1943), pp. 182–83. The Federal Reserve purchased the massive amounts in 1921–22 largely to acquire income-earning assets during the era of business recession. It then saw to its delight that a new and powerful instrument of monetary expansion and inflation had been discovered.

That this discovery was, to an extent, anticipated by Benjamin Strong is indicated by a letter he wrote on April 18, 1922, to Undersecretary of the Treasury S. Parker Gilbert, who had wondered about the Fed’s unusually large purchases of government securities. Strong explained that the policy had been designed not only to add to the Fed’s income-earning assets but also “to establish a level of interest rates, or at least to maintain rates at a level, which would facilitate foreign borrowing in this country” and thus would assure “more stable conditions and [would] facilitate business improvement.” This indicates that, at least to some degree, Strong bought the securities in order to push interest rates lower, to expand money and credit, and to stimulate an economic upturn.Chandler, Benjamin Strong, p. 211. See also Harold L. Reed, Federal Reserve Policy, 1921–1930 (New York: McGraw-Hill, 1930), pp. 14–41. Gilbert, who had come to the Treasury Department from the leading Wall Street law firm of Cravath and Henderson (now Cravath, Swaine & Moore), later became a partner of J.P. Morgan & Co. (Burch, Civil War to the New Deal, pp. 298–99).

The expanded open-market operations led Governor Strong to reconvene the governors conference on a regular and systematized basis. In May 1922, the conference set up an executive committee that would henceforth centralize and execute open-market operations for the entire system; Benjamin Strong was, not coincidentally, made chairman of this governors committee.The full name of the committee was highly descriptive: The Committee of Governors on Centralized Execution of Purchases and Sales of Government Securities by Federal Reserve Banks (Chandler, Benjamin Strong, p. 215). From that point on, and particularly from the time of the second committee meeting in October 1922, Strong was conducting open-market purchases and sales for the entire system, instead of merely functioning as an agent and processing orders from other regional Reserve Banks.

Strong fell ill in February 1923 and was out sick until October. Shortly after, in April, the Federal Reserve Board in Washington, prodded by Adolph Miller, took steps to try to take dominance of the system away from the absent Strong. The board dissolved the extralegal governors committee and reconstituted a new one — the Open Market Investment Committee — strictly under the control of the board. With Strong temporarily gone, the board managed to force the New York Fed to sell most of its remaining government securities, for Miller, and the treasury as well, had continued to be uneasy at the large open-market purchases the Fed had made the previous year. Strong was furious both at the loss of his power and at the sale of securities, which he feared would cause a recession. In November, however, Strong came roaring back, seizing control of the Federal Reserve from that point until his final illness in the spring of 1928. Regaining his power over the Open Market Investment Committee, Strong, as chairman, created a Special System Investment Account at the New York Fed into which committee purchases and holdings were put. He also let it be known that he would expand such purchases whenever any economic downturn loomed: “The Reserve System should not hesitate to resume open-market purchases, thereby again reducing bank borrowings and easing money rates, rather than permit an unwarranted state of mind alone to disturb the even course of the country’s production and consumption.”Ibid., pp. 232–33. On Strong’s resumption of power, see ibid., pp. 222–34; Clark, Central Banking under the Federal Reserve, pp. 162–74.

The next big burst of inflationary credit expansion came in 1924. Shortly after Strong’s return, he began to purchase securities on a massive scale, buying $492 million from October 1923 through 1924. The overriding reason was the determination to help Britain and Montagu Norman return to gold at its overvalued par. To do so, the United States had to embark on an inflationary, cheap money policy to lower interest rates and raise prices relative to Britain so that Britain would not lose gold to the United States. In 1922, Norman had hailed the easy credit and drop in interest rates to match Britain’s credit expansion. During that and the following year, Norman continued to pepper Strong with appeals and demands for further extensions of credit in the United States. But Strong felt that the time was not yet ripe.

Finally, in 1924, with Britain’s return to the gold standard looming the following year, Strong felt that the time was ripe, and the massive open-market purchases began. Furthermore, the pound sterling, which had risen to $4.61 by the end of 1922 with news of the impending return to gold, had fallen sharply to $4.34 by mid-1924. Only massive inflationary pressure in the United States could raise the pound to $4.86.

Strong set forth his basic policies in a lengthy letter on May 27, 1924, to Secretary of the Treasury Andrew Mellon:

There still remains the serious problem of the disparity of price levels in the different countries due to monetary disturbances and currency inflation, the correction of which must be undertaken before a return to actual gold payment will be safe. This may be illustrated by the case of British prices and our own. The pound sterling is, roughly, at 10 percent discount measured in our gold currency ... At the present time it is probably true that British prices for goods internationally dealt in are as a whole, roughly, in the neighborhood of 10 percent above our prices and one of the preliminaries to the re-establishment of gold payment by Great Britain will be to facilitate a gradual readjustment of these price levels before monetary reform is undertaken. In other words, this means some small advance in prices here and possibly some small decline in their prices. ... No one can direct price changes. They will be to a certain extent fortuitous, but can be facilitated by cooperation between the Bank of England and the Federal Reserve System in the maintaining of lower interest rates in this country and higher interest rates in England so that we will become the world’s borrowing market to a greater extent, and London to a less extent. The burden of this readjustment must fall more largely upon us than them. It will be difficult politically and socially for the British Government and the Bank of England to force a price liquidation in England beyond what they have already experienced in face of the fact that their trade is poor and they have over a million unemployed people receiving government aid.Chandler, Benjamin Strong, pp. 282–84.

The inflationary open-market purchases led to a fall of interest rates in the United States below Britain by mid-1924. Sterling rose again, reaching $4.78 by the spring of 1925. Britain resumed the gold standard at the prewar par by the end of the year. This resumption was further aided by the New York Fed’s loan of a line of credit of $200 million to Britain, accompanied by a similar credit of $100 million to Britain by J.P. Morgan & Co.See Rothbard, America’s Great Depression, pp. 133–34; Robbins, Great Depression, p. 80; Chandler, Benjamin Strong, pp. 301–21.

The final great burst of inflation, and the most intense of the 1920s, came in the latter half of 1927, when the Federal Reserve purchased $225 million of government securities and $220 million of banker’s acceptances, adding $445 million to bank reserves from these two sets of purchases alone.Rothbard, America’s Great Depression, pp. 102–03, 107. On the significance of the acceptance market, see “Creating the Acceptance Market,” below.

The problem was that Britain’s return to the gold standard quickly proved an unhappy one. The sharp rise in the value of sterling put great pressure on Britain’s already depressed exports, especially on the coal industry. Britain’s chronic depression intensified and rigid wage rates intensified unemployment. A general strike and a lengthy coal mine strike in 1926 were the direct consequence of the return to gold at an overvalued par. Instead of deflating, therefore, to validate the $4.86, Britain insisted on inflating in a vain attempt to relieve the depression. Prices rose, the Bank of England lowered its discount rate, and the balance of payment deficit and the resulting gold outflow became much worse. The pressure on the sterling intensified. Unwilling to stop inflating and tighten credit, Montagu Norman turned to Benjamin Strong, his old ally.

Benjamin Strong purchased some sterling bills to reverse the dollar flow from Britain and also sold France $60 million in gold to forestall French demands for redemption of sterling. But these were just temporary expedients. So Strong invited three top central bankers for a highly secret conference in New York in July 1927. So secret was the conclave that Strong, in his usual high-handed fashion prevented Gates W. McGarrah, chairman of the board of the Federal Reserve Bank of New York, from attending the meeting, and the Federal Reserve Board in Washington was also kept in the dark.See Anderson, Economics and the Public Welfare, p. 189. Gates McGarrah was a close business associate of Albert H. Wiggin, chairman of the board of Morgan’s Chase National Bank (Clark, Central Banking under the Federal Reserve, p. 267). See also ibid., pp. 313–14; Chandler, Benjamin Strong, pp. 440–54. In addition to Norman, the other European representatives were Professor Charles Rist, deputy governor of the Bank of France, and Hjalmar Schacht, governor of the German Reichsbank. Strong and Norman tried hard to get Rist and Schacht to agree on a concerted and massive four-country cheap credit and inflation, but the Europeans vigorously refused, expressing alarm at the inflationary trend. While Rist and Schacht sailed for home, the Anglo-American combine stayed to weld their pact for inflation, expanded credit, and lower interest rates. Before Rist left, however, Strong told him buoyantly that he was “going to give a little coup de whiskey to the stock market.”Charles Rist, “Notice biographique,” Revue d’economie politique 65 (November-December, 1955): 1006–008. See also Rothbard, America’s Great Depression, pp. 141–42.

President Coolidge and Secretary Mellon endorsed the new inflationary policy, the only high-level objectors being Adolph Miller and Herbert Hoover. The Federal Reserve authorities stayed silent about the reasons for their sudden expansion in late 1927, with only Governor W.J. Bailey of the Kansas City Federal Reserve Bank repeating the line that Strong had told him: that the cheap credit policy — including the open-market purchases, the lowering of rediscount rates, and the lowering of Fed buying rates on acceptances — was being pursued to “help the farmers.” Helping Britain — not a very popular policy in the American heartland at the time — was kept under wraps as the major reason for the inflationary surge.Anderson, Economics and the Public Welfare, pp. 189–91. See also Benjamin H. Beckhart, “Federal Reserve Policy and the Money Market, 1923–1931,” in The New York Money Market, B.H. Beckhart, J.G. Smith, and W.A. Brown, eds. (New York: Columbia University Press, 1931), vol. 4, p. 45.

The importance of helping Britain in the inflationary policy of the 1920s is seen in Benjamin Strong’s comments to Sir Arthur Salter, secretary of the League of Nations and a Norman associate, in Paris in May 1928. Rejecting the idea of a formal meeting of the world’s central banks, Strong cited the political hostility in the United States. Then, as an aide summarized:

To illustrate how dangerous the position might become in the future as a result of the decisions reached at the present time and how inflamed public or political opinion might easily become when the results of past decision became evident, Governor Strong cited the outcry against the speculative excesses now being indulged in on the New York market and the criticism of the Federal Reserve System for its failure to curb or prevent this speculation. He said that very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis.Chandler, Benjamin Strong, pp. 280–81. In the autumn of 1926, a leading banker admitted that bad consequences would follow the cheap money policy but added: “That cannot be helped. It is the price we pay for helping Europe”; see H. Parker Willis, “The Failure of the Federal Reserve,” North American Review 227 (May, 1929): 553. For lavish praise of Strong by English bankers and politicians, see Clark, Central Banking under the Federal Reserve, pp. 315–16.

9. Creating the Acceptance Market

Nowadays there are two methods by which the Federal Reserve can add to bank reserves and therefore to the inflating process of pyramiding new money on top of reserves as a base. One is open-market operations; the other is changing the rediscount rate at which the Fed, as the lender of last resort, lends reserves to banks in trouble. But a third method was highly important in the 1920s: the intense subsidization — indeed, the very creation — of a market in acceptances.

Discount policy was inflationary during the 1920s. In the first place, rates were set below the market instead of a penalty rate above it, thus inducing banks to borrow reserves from the Fed. Second, the Fed decided to lend continuously rather than only in emergencies. As the Federal Reserve Board wrote in its annual report of 1923:

The Federal Reserve banks are ... the source to which the member banks turn when the demands of the business community have outrun their own unaided resources. The Federal Reserve supplies the needed additions to credit in times of business expansion and takes up the slack in times of business recession.Federal Reserve Annual Report 1923, p. 10; cited in Seymour E. Harris, Twenty Years of Federal Reserve Policy (Cambridge, MA: Harvard University Press, 1933), vol. 1, p. 109. See also ibid., pp. 3–10, 39–48, 108–09.

Presidents Harding and Coolidge repeatedly pledged to lower interest rates and to keep them low during the 1920s, and each did his best to fulfill that pledge. In 1922–23, 1925, and 1928, periods when the Federal Reserve was belatedly trying to stop its inflationary policies, the discounting process, spurred by artificially low rediscount rates, came to the banks’ rescue.Rothbard, America’s Great Depression, pp. 102–3; see also pp. 110–17. During the onrushing stock market boom in 1927, President Coolidge and Secretary Mellon stepped in whenever the boom showed signs of flagging and egged it on, predicting lower interest rates and urging higher prices. In one of these statements, Mellon assured the market that “there is an abundant supply of easy money which should take care of any contingencies that might arise.”Ibid., p. 117. See also Anderson, Economics and the Public Welfare, p. 190; Oliver M.W. Sprague, “Immediate Advances in the Discount Rate Unlikely,” The Annalist (1926): 493. Furthermore, both Harding and Coolidge appointed Federal Reserve members who would implement the low discount rate, low interest rate policy.See H. Parker Willis, “Politics and the Federal Reserve System,” Bankers’ Magazine (January, 1925): 13–20; idem, “Will the Racing Stock Market Become a Juggernaut?” The Annalist (24 November 1924): 541–42; and The Annalist (10 November 1924): 477.

The most unusual aspect of the Federal Reserve-generated inflation of the 1920s was its creation and subsidization of the acceptance market in the United States. Commercial paper in the United States had always been confined to single-name promissory notes, often discounted at commercial banks. By contrast, in Europe and particularly in Britain, foreign trade (not domestic) was habitually financed by the mechanism of an endorsement of the debt, or acceptance. The acceptance bank endorsed and purchased the note and then sold it to a “dealer,” or bill broker, who in turn sold it to a commercial bank for discount.

From the inception of the system, the Federal Reserve set out to bring a thriving acceptance market into being by massive subsidization. Since there had been virtually no naturally arising acceptance market in the United States, the demand for acceptances by discount banks was extremely slight. The Federal Reserve, therefore, undertook to buy all acceptances offered to it, either by the member banks or by a tiny group of designated dealers, and to buy them at a very low, subsidized rate. Generally, this rate was lower than the discount rate for similar commercial paper. In this way, the Federal Reserve provided reserves in a way unusually favorable to the banks. First, not only was the rate cheap, but acceptances were, like discounts and unlike open-market operations, always there to be provided by a passive Federal Reserve. And second, the acceptances never had to be repaid to the Fed and therefore, unlike discounts and like open-market purchases, they constituted a permanent addition to the reserves of the banks.For a lucid explanation of acceptance and the Federal Reserve’s role in the market, see Caroline Whitney, “The Bankers’ Acceptance Market,” in The Banking Situation, H. Parker Willis and John M. Chapman, eds. (New York: Columbia University Press, 1934), pp. 725–36. See also H. Parker Willis, Theory and Practice of Central Banking, pp. 201ff.; Rothbard, America’s Great Depression, pp. 117–23.

The dominance of the Federal Reserve in making a market for acceptances can be seen in the proportion of acceptances held by the Fed. On June 30, 1927, over 46% of bankers’ acceptances were held by the Federal Reserve, over 26% for its own account and another 20% for foreign central banks.The Fed held the same proportion in June 1929; see Hardy, Credit Policies of the Federal Reserve, p. 258.

The subsidizing of acceptances was, from the early years, highly concentrated in New York City. In the first place, the New York Fed seized control of the acceptance policy in 1922 and kept it for the remainder of the decade. Second, the bulk of acceptances were on foreign transactions, and all of those acceptances were purchased by the Fed from only nine very large acceptance dealers located in New York City. Third, the number of acceptance banks was also quite small: 118 in the entire country in 1932, of which 40 were located in New York City. And three-quarters of all acceptances were executed by banks in New York City. The acceptance banks were generally large commercial banks but also included the huge International Acceptance Bank of New York, the world’s largest acceptance bank, which in the 1930s merged with the Kuhn, Loeb-dominated Bank of Manhattan Company.One of the nine designated acceptance dealers, the Discount Corporation of New York, was itself organized by a group of accepting banks to deal in bankers’ acceptances; see Whitney, “Bankers’ Acceptance,” 727–28, 732–33. See also Beckhart, Money Market, 3:319, 333, 410; Clark, Central Banking, p. 168; H. Parker Willis, “The Banking Problem in the United States,” in H.P. Willis et al., eds., “Report on an Inquiry into Contemporary Banking in the United States,” 1925, vol. 1, pp. 31–37 (unpublished); Hardy, Credit Policies of the Federal Reserve, pp. 100–101, 256–57; A.S.J. Baster, “The International Acceptance Market,” American Economic Review 27 (June, 1937): 298.

Fed policy on acceptances played an inflationary role at crucial periods during the 1920s. In late 1922, this policy supplemented the role of discounts by far more than offsetting the open-market sale of securities by the Fed. In the 1924 credit expansion, almost twice as many acceptances as government securities were purchased in the open market. And in the fateful 1927 inflationary surge, acceptances (“bills bought”) were equally as powerful in adding to reserves as the Fed’s purchase of securities. Furthermore, during the latter half of 1928, when the Fed stopped buying securities in an attempt to get the runaway boom under control, massive purchases of acceptances kept the boom going.

Benjamin Strong was, of course, the man who instituted and maintained the Federal Reserve creation and subsidizing of the acceptance market. Indeed, Strong often took the lead in urging cheaper and cheaper rates to intensify the subsidy. For Strong, this policy was vital for the promotion of foreign trade and for facilitating international central bank collaboration and management of the world financial system.Chandler, Benjamin Strong, pp. 86–93.

But by far the most enthusiastic and tireless advocate of ever greater Federal Reserve aid to the acceptance market was Strong’s close friend Paul Moritz Warburg. From the very beginning of Warburg’s promotion of a central bank in 1907, that bank’s subsidization of acceptance paper was crucial to his plan. He scoffed at the prevalence of single-name promissory notes in the United States, a practice, he opined, that left the backward United States “at about the same point that had been reached by Europe at the time of the Medicis, and by Asia, in all likelihood, at the time of Hammurabi.” Warburg envisioned a money supply issued by a central bank based on acceptance paper purchased by that bank.Quoted in Elgin Groseclose, America’s Money Machine: The Story of the Federal Reserve (Westport, CT: Arlington House, 1980), p. 49. See also ibid., pp. 48–51, 93–98; and Warburg, Federal Reserve System, vol. 2, pp. 9–25.

We have seen that Paul Warburg was one of the most influential founders and shapers of the Federal Reserve System. He was on the board from 1914 to 1918, when he resigned because of his German ancestry, but he continued to be highly influential through the 1920s as chairman of the Fed’s Federal Advisory Council. In January 1923, Warburg boasted before the American Acceptance Council, a trade association of acceptance banks and dealers organized four years before, that he had been largely responsible for the Fed’s acceptance-buying policy as well as for the repeated statutory widening of eligibility for those purchases. In 1922, Warburg demanded still lower buying rates on acceptances, and in the spring of 1929, when he began to worry about the developing boom, he still called for the Fed to create a wider acceptance market.See Rothbard, America’s Great Depression, pp. 119–20; Harris, Twenty Years, p. 324; The Commercial and Financial Chronicle, 9 March 1929, 1443–44, Warburg’s speech before the American Acceptance Council is in Warburg, Federal Reserve System, vol. 2, p. 822.

It is certainly plausible to hold that Warburg’s unremitting zeal for massive Federal subsidy of the acceptance market, as well as its cartelization in the hands of a few New York acceptance bankers and dealers, was connected to his status as a leading acceptance banker. For Paul Warburg was chairman of the board of the world’s largest acceptance bank, the International Acceptance Bank of New York, from its inception in 1920. He also became a director of the important Westinghouse Acceptance Bank and of several other acceptance houses and was the chief founder and chairman of the executive committee of the American Acceptance Council. His vaunting speech to that council in early 1923 was his presidential address.Rothbard, America’s Great Depression, pp. 120–21; Groseclose, America’s Money Machine, p. 97. It is fitting that after Benjamin Strong’s death, Warburg paid him high tribute by hailing him for “welding the central banks together into an intimate group” and concluding that “members of the American Acceptance Council would cherish his memory” (Warburg, Federal Reserve System, vol. 2, p. 870).

10. From Boom to Depression

In the spring of 1928, with Benjamin Strong ill and absent after mid-May, the Federal Reserve became alarmed by the now exploding stock market and tried to put an end to the inflationary boom. The Fed managed to contract reserves by selling securities, but its efforts were partially offset by large increases in rediscounting spurred by the Fed’s failure to raise rediscount rates sufficiently and by the banks’ shifting of credit from demand to time deposits, which required far less reserves. Still, the contraction of reserves took hold from May through July, and as a result, the rate of money growth leveled off sharply.M-2, which had risen at an annual rate of 7.7% in the latter half of 1927 (8.1% if net life insurance policy reserves are included), increased by only 3.2% in the first half of 1928 (4.3% if life insurance is included), see Rothbard, America’s Great Depression, pp. 102–3. Stock prices rose far more slowly than before, and the gold drain out of the United States began to reverse.

The boom could have ended in mid-1928, and the resulting contraction could have been mild. But this was not to be. Instead, the Fed’s massive purchases of acceptances increased reserves in the latter half of the year, and the money supply growth rose again. One reason for the Fed’s failure to stay its relatively less inflationary course was the great pressure it received from Europe. The short-run “benefits” of the inflationary injection of 1927 in Europe had already dissipated: The pound was sagging again, gold was flowing out of Britain, and interest rates were again higher in the United States than in Britain. With the exception of France, Europe clamored against any tighter money in the United States, and the Fed’s aggravation of inflation in late 1928 eased the flow of gold from Britain.See Harris, Twenty Years, pp. 437–38. And Benjamin Strong, though ill and traveling in Europe, kept up a stream of pressure for easier money. In mid-July, Strong looked back on his handiwork and found it good. In a letter to S. Parker Gilbert, he wrote that his policy since 1924 had

enabled monetary reorganization to be completed in Europe, which otherwise would have been impossible. It was undertaken with the well recognized hazard that we were liable to encounter a big speculation and some expansion of credit. ... Six months ago we faced the new year with practically all the European nations in a strong position in monetary matters. ... Our course was perfectly obvious. We had to undertake it. The conditions permitted it, and the possibility of damage resulting abroad were [sic] at a minimum.Chandler, Benjamin Strong, p. 458; see also pp. 459–63.

Strong went on to express his concern at the “very high rates” then prevailing in New York and looked forward to rate reductions in the fall. On his return to the United States in August, Strong continued to express concern, not over the inflationary boom and the runaway stock market but over what he considered excessively high interest rates. He clearly wished to resume his old inflationary policy.

After Strong’s retirement in August, his faithful followers tried to tread the same path. His successor as governor, George L. Harrison, led the Open Market Committee to worry about excessively high rates and asked and obtained the board’s permission for the authority to engage in massive open-market purchases.

The end of Strong’s reign (he died in October 1928) led to indecisive splits and fragmented power within the Federal Reserve System. Although Harrison attempted to emphasize open-market purchases, the majority of the board wanted the Fed to buy far more acceptances. Each faction wanted its own version of inflationary credit expansion.

One reason for the Fed’s emphasis on acceptances was the increasing adoption in Washington of the curious theory of “moral suasion,” which was to plague efforts to end the inflationary boom during the latter half of 1928 and through 1929. Until the end, President Coolidge was still trying to boost the stock market. But the new President Hoover and Governor Roy Young of the Federal Reserve Board had a different theory: that credit could remain cheap and easy for “legitimate” business but be restrictive toward the stock market. As soon as Hoover assumed office, he tried moral suasion by intimidation, sending an old banker friend, Henry M. Robinson of Los Angeles, to New York to try to persuade the banks to restrict stock loans and calling a meeting of editors and publishers to warn them of high stock prices.See Burner, Herbert Hoover, pp. 246–47. Moral suasion was abandoned by June 1929. The Federal Reserve, after finally shutting off the acceptance window in March by raising its buying rate above the discount rate, delayed raising the rediscount rate under pressure from Hoover. Finally, it raised the rate in August, but typically the Fed offset this check to the boom by lowering the acceptance rate at the same time. As a result of this unprecedented “straddle,” large Fed purchases of acceptances from July to October drove the stock market to new heights. These acceptances were largely sterling bills purchased by the New York Fed once again to help Britain. Great Britain was trying to inflate and pursue cheap credit in the midst of a worsening depression, and the Fed was trying to stem the renewed outflow of gold in the United States.The grave fallacy in the efforts of 1928 and 1929 to keep credit abundant in trade and industry while restricting the stock market was pointed out in an excellent epitaph on this policy by A. Wilfred May: “Once the credit system had become infected with cheap money, it was impossible to cut down particular outlets of this credit without cutting down all credit, because it is impossible to keep different kinds of money in water-tight apartments. It was impossible to make money scarce for stock-market purposes, while simultaneously keeping it cheap for commercial use. ... When Reserve credit was created, there was no possible way that its employment could be directed into specific uses, once it had flowed through the commercial banks into the general credit stream” (“Inflation in Securities,” in Willis and Chapman, eds., Economics of Inflation, pp. 292–93). See also Hardy, Credit Policies of the Federal Reserve, pp. 124–77; and Oskar Morgenstern, “Developments in the Federal Reserve System,” Harvard Business Review 9 (October, 1930): 2–3.

With all eyes on the stock market, however, the great American boom of the 1920s was already over. For despite, or perhaps because of, the waffling and confusion of the Fed, the money supply remained level from the peak at the end of 1928 through September 1929. A recession was now inevitable.

Unbeknownst to most Americans, the economy started turning downward around July 1929. Three months later, on October 24, the great stock market crash brought the shift from boom to depression to the attention of everyone.

The Federal Reserve did not meet the crash with any idea of laissez-faire or of allowing the economy to liquidate the malinvestments of the boom. On the contrary, its inflationist attitude during the boom was matched by a similar and even more aggravated outlook during the depression. In an unprecedented act, the Fed inflated reserves wildly in one week — the week of the crash. In the last week of October, the Fed doubled its holdings of government securities and discounted $200 million for member banks, adding $350 million to total bank reserves. Almost all of these increased reserves were poured into New York in order to prevent liquidation of the stock market and to induce New York City banks to take over the brokers’ loans that nonbank lenders were in the process of unloading. As a result, member banks expanded their deposits during that fateful last week in October by $1.8 billion — a monetary expansion of nearly 10% in one week. Almost all of this amount, totaling $1.6 billion, came from increased deposits in New York City banks. The Federal Reserve at the same time sharply lowered its rediscount and acceptance rates.

By mid-November, the great stock market break was over and, stimulated by artificial credit, began to rise again. Total bank reserves then fell, so that at the end of November they had reached precrash levels. This contraction stemmed from a decline in discounts and acceptances, a gold outflow, and increased money in circulation; the Fed tried to offset this in vain by purchasing more securities. If we compare October 23, the day before the crash, with the situation at the end of 1929, we find that bank reserves controlled by the Fed — all government securities — tripled in size. This expansion was offset by such uncontrolled factors affecting reserves as a decline in gold and an increase in cash in circulation brought on by falling public confidence in the banks and in the dollar itself. The Fed had done its best to inflate in the last quarter of 1929, but its efforts were thwarted by seasonal cash outflows and the exigencies of the gold standard. The result was that the total money supply remained level in the final quarter of 1929.

President Hoover was proud of his experiment in cheap money and, in a speech to a White House conference of several hundred business leaders in December, hailed the nation’s good fortune in possessing the magnificent Federal Reserve System, which had succeeded in saving banks, restoring confidence, and lowering interest rates. Hoover also revealed that he had done his part for the cause by personally urging the banks to rediscount more extensively at the Federal Reserve. Secretary of the Treasury Mellon issued one of his by now traditionally optimistic pronouncements, stating that there was “plenty of credit available.” And William Green, head of the American Federation of Labor, hailed the Federal Reserve for its success in ending the depression. On November 22, 1929, Green opined: “All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months, industrial conditions will become normal, confidence and stabilization of industry and finance will be restored.”The American Federationist 37 (March, 1930): 344. See also Rothbard, America’s Great Depression, pp. 191–93.

Apparently, many leading Federal Reserve officials were disposed, at the end of 1929, to “let the money market ‘sweat it out’ and reach monetary ease by the wholesome process of liquidation.”Anderson, Economics and the Public Welfare, p. 227. But this laissez-faire policy was not to be. Instead, Governor George L. Harrison, head of the New York Fed, led a policy of massive easy money. Rediscount rates at the Fed, buying rates on acceptances, and the call loan rate all fell drastically. At the end of August 1930, Governor Roy Young of the Federal Reserve Board resigned and was replaced by a thoroughgoing inflationist, Eugene Meyer, Jr.Eugene Meyer, Jr., was the son of a partner in the great international banking firm of Lazard Frères. Like stock speculator and close friend Bernard Baruch, Meyer had made a fortune through financial association with the wealthy Guggenheim family and with the Morgans in mining investments. At the time of Meyer’s appointment, his brother-in-law George Blumenthal was a partner at J.P. Morgan and Co. [Editor’s remarks] For more on the origins of Eugene Meyer, Jr., see Rothbard, “From Hoover to Roosevelt,” pp. 278–86. Total bank reserves rose during the year, chiefly through large Fed purchases of government securities. But all this inflationism was to no avail, since a wave of bank failures struck toward the end of the year, and shaky banks had to contract their operations. The net result was that the total money supply remained level throughout the year. For a while stock prices rose again, but they soon fell sharply, and production and employment kept falling steadily.

Meanwhile, the New York Fed continued to lead collaborations with foreign central banks, often against the wishes of the federal administration. Thus, the new “‘central bankers’ bank,” the Bank for International Settlements (BIS), was instigated by Montagu Norman, and much of the American capital for the BIS was put up by J.P. Morgan & Co. The BIS treated the New York Fed as America’s central bank, and Governor Harrison made a trip abroad in late 1930 to confer with European central bankers. Chairman of the BIS’s first organizing committee was Jackson E. Reynolds, a director of the New York Fed, and the first president of the BIS was Gates W. McGarrah, who resigned as chairman of the board of the New York Fed to assume the post. Yet there was no legislative sanction for U.S. participation in the bank.

Despite the administration’s and the Fed’s systemic attempts to inflate and provide cheap money, the inflationists were not satisfied with the course of events. In late October, Business Week thundered against the supposed “deflationists in the saddle,” supposedly inspired by the large commercial and investment banks.Business Week, 22 October 1930. See also Rothbard, America’s Great Depression, pp. 212–13.

In contrast, in the same month Herbert Hoover apparently felt that the time had come for self-congratulation. In an address to the American Bankers Association, he summed up the multifaceted intervention of the preceding year. He hailed the Federal Reserve System as the great instrument of promoting stability and called for an “ample supply of credit at low interest,” which he pointed out was now available “through the cooperation of the banks and the Federal Reserve system.” Hoover proceeded to point out that the Federal Reserve was the locus of a vast system of cartelization:

The reserve system and its member banks and the Treasury participation in fact form a widespread cooperative organization, acting in the broad interest of the whole people. To a large degree it can influence the flow of credit. Bankers themselves are represented at each stage of management. And, in addition, the various boards and advisory committees represent also industry, agriculture, merchandising, and the Government. The reserve system therefore furnished an admirable center for cooperation of the banking business with the production and distribution industries and the Government in the development of broad and detached policies of business stability.William Starr Myers, ed., The State Papers and the Public Writings of Herbert Hoover (Garden City, NY: Doubleday, Doran & Co., 1934), p. 379.

Moreover, these broad and detached policies of cooperation had succeeded in combating the depression:

We have all been much engaged with measures of relief from the effect of the collapse of a year ago. At that time I determined that it was my duty, even without precedent, to call upon the business of the country for coordinated and constructive action to resist the forces of disintegration. The business community, the bankers, labor, and the Government have cooperated in wider spread measures of mitigation than have ever been attempted before. Our bankers and the reserve system have carried the country through the credit storm without impairment.Ibid., p. 381.

The rest is history.

11. Summary

The bleak record of accelerating inflation and recession since the inception of the Federal Reserve in 1913 may be seen in a different light if we reevaluate the purpose that this central bank was intended to serve. For the Federal Reserve was designed not to curb the allegedly inflationary tendencies of freely competing banks but to do precisely the opposite: to enable the banks to inflate uniformly without worrying about calls for redemption by noninflating competitors. In short, the Federal Reserve was designed to act as a government-sponsored and -enforced cartel promoting the income of banks by preventing free competition from doing its constructive work on behalf of the consumer. The Federal Reserve emerged in an era when federal and state governments were embarked on precisely this kind of program in many sectors of industry, and it was designed to do for the banks what the ICC had done for the railroads, the Agriculture Department for the farmers, and the FTC for general industry. These actions of the Progressive era came after widespread attempts, in the late 1890s and earlier, to cartelize or create monopolies voluntarily, attempts that almost all came to swift and resounding failure. Various large business groupings, therefore, came to the conclusion that government would have to play an active and enforcing role if cartelization was to succeed.

This chapter demonstrates the unhappiness of particularly the large Wall Street banks with the “inelasticity” of the pre-Federal Reserve banking system, that is, its inability to create more money and credit. They were unhappy also with the growing decentralization of the nation’s banking by the early part of the 20th century. After the failure of attempts by McKinley and Roosevelt’s secretaries of the treasury to engage in central banking, and particularly after the Panic of 1907, large banking and financial groups, in particular those of Morgan, Rockefeller, and Kuhn-Loeb, began a drive to establish a central bank in the United States. Despite minor political disagreements, the numerous variants of Federal Reserve proposals, from the Aldrich plan to the final bill in 1913, were essentially the same.

The structure of the Federal Reserve Act was cartelizing and inflationary, and the personnel of the Federal Reserve Board reflected the dominance of the large banking groups, particularly the Morgans, in the drive for a central bank. The ruling force in the Federal Reserve System from its inception until his death in 1928 was Benjamin Strong, Governor of the Federal Reserve Bank of New York, who all his life had been firmly in the Morgan ambit.

Strong’s policies were what one might expect. His willingness to inflate money and credit to purchase government deficits was critical to financing America’s entry into World War I. He also moved quickly to internationalize the banking cartel by forming a close tie with the Bank of England, of which the Morgan Bank was fiscal agent. The Morgans were also closely connected with munitions and other war-related exports to Britain and France, and enjoyed the sole privilege of underwriting British and French war bonds in the United States.

Benjamin Strong was obliged to inflate money and credit during the 1920s in order to help Britain return to an inflationary form of the gold standard at a highly overvalued pound. Only by Strong’s increasing the supply of dollars could his close collaborator, Montagu Norman, head of the Bank of England, hope to stem the flow of gold from Britain to the United States. Strong performed this inflationary role not only by keeping rediscount rates below the market and buying treasury securities on the open market but also by subsidizing — indeed, virtually creating — a market in bankers’ acceptances, which the Fed stood ready to buy in any amount offered at artificially cheap rates. This acceptance policy, designed to promote foreign trade (especially in London), was adopted under the influence of one of the founders of the Federal Reserve, Paul M. Warburg of Kuhn-Loeb & Co. who also became the nation’s largest acceptance banker.

When the stock market crash hit, the Federal Reserve and the Hoover administration were scarcely ready to allow free-market processes to bring about recovery. Instead, the Fed, backed strongly by Hoover, inflated reserves wildly, and interest rates fell sharply — all, of course, to no avail.

Introduction by Patrick Newman

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

Murray Rothbard was a scholar of enormous erudition with many diverse research interests. He wrote about economic theory, economic history, history of economic thought, pure history, philosophy, political science, and popular culture. Indeed, David Gordon writes, “A person examining the books and articles of Murray Rothbard without prior acquaintance with their author could not help wondering whether five or six prolific scholars shared the name ‘Murray Rothbard’.”David Gordon, The Essential Rothbard (Auburn, AL: Mises Institute, 2007), p. 7. Among all of these disciplines, one area of research to which Rothbard devoted a significant portion of his academic career and utilized many of the above fields was late 19th and early 20th century United States history, particularly the period that is known as the Progressive Era (approximately from the late 1890s to the early 1920s).

The Progressive Era was one of the most, if not the most, significant periods in U.S. history. The country was transformed from a relatively laissez-faire economy with a minimal government into a heavily regulated economy governed by an interventionist state. Correspondingly, the ideology of public intellectuals, business, the citizenry, and political parties drastically changed and became more interventionist. For most historians, this was the period when the country was growing up, when it realized that minimal government was not suited for a modern industrial economy, because it produced numerous social ills such as frequent business cycles, unemployment, monopolies, crippling deflation, poor quality products, and enormous economic inequality. For Rothbard, on the other hand, it was the turning point, the time when America abandoned its laissez-faire strengths for the welfare-warfare state, and thereby plunged headfirst into all of its destructive consequences in the 20th century.

It is well known that Rothbard was deeply interested in the Progressive Era and throughout his life wrote numerous papers on it. Less well known, if it is known at all, is that Rothbard had also partially written a full blown book on the period, starting with the railroad interventions of the 1860s to the National Civic Federation of the early 1900s. The book was written while Rothbard was heavily involved with the Cato Institute during the 1970s. While Rothbard never formally completed the book, he informally finished it by writing the remaining chapters as various essays which were published in the 1980s and 1990s. Justin Raimondo, Rothbard’s only biographer, commented on the project in 2000:

Rothbard’s writings on the Progressive Era, which have never been put together in a single volume, are a rich vein of analysis that contemporary scholars, libertarian or whatever, would do well to mine. In a fascinating narrative that unfolds like the plot of a novel, Rothbard documents his thesis with the fascinating stories of the men, and especially the women, who led the Progressive movement: ministers, social workers, intellectuals, and other professional do-gooders, whose zeal to remake America in the image of an (often secularized) God was rooted in the theological vision in which humanity would be the agency that would establish the Kingdom of God on earth.Justin Raimondo, An Enemy of the State: The Life of Murray N. Rothbard (Amherst, NY: Prometheus Books, 2000), pp. 252–53.

It is the task of this volume, at long last, to combine the unfinished book and other essays and publish the complete Rothbardian history of the Progressive Era.

In 1962, at the age of 36, the young Murray Rothbard had already produced multiple classics in the Austrian and libertarian tradition. Some of these were of smaller scope in the form of a paper or monograph. Others were much larger and more ambitious, such as his comprehensive treatise on economics. The first two volumes were published in 1962 under the title Man, Economy, and State, the last volume on government intervention deemed too controversial, Power and Market, in 1970. Another was America’s Great Depression, which came out a year later, an economic history that gave the authoritative Austrian interpretation of the United States’ Roaring Twenties and Great Depression. In addition to both of these, he also wrote his dissertation, The Panic of 1819, under Joseph Dorfman, which he defended in 1956 and published in 1962.See Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles, 2 vols., (Princeton, NJ: D. Van Nostrand, 1962); The Panic of 1819: Reactions and Policies (New York: Columbia University Press, 1962); America’s Great Depression (Princeton, NJ: D. Van Nostrand, 1963); Power and Market: Government and the Economy (Menlo Park, CA: Institute for Humane Studies, 1970).,Commenting on this period, Joseph Stromberg wrote that Rothbard was always busy working on multiple major projects. Joseph Stromberg, “Introduction,” in Murray Rothbard, Man, Economy, and State, with Power and Market, 1st ed., (Auburn, AL: Mises Institute, 2004), p. lxii. This would continue throughout his life. If he had ended his career then, Rothbard would have already cemented his status as one of the foremost scholars in Austrian economics and libertarianism.

However, Rothbard did not end his career, and he was still eager to write prodigiously, especially on completely different topics. In a letter to Kenneth S. Templeton, Jr., an associate of the Volker Fund which provided the research grant for Man, Economy, and State, he wrote:

I am also happy to have the opportunity to leave the realm of economic theory, for, with the books published and especially with Man, Economy, and State, I believe I have said whatever I have to say about economics, and am now eager to move on. I have a constitutional aversion to repeating myself and milking my previous stuff ad infinitum — which seems to be a way of life for so many scholars.Rothbard to Templeton, November 19, 1962; quoted in Stromberg, “Introduction,” p. lxxxii. Indeed, one can detect a shift in research interests around this time by looking at his book reviews written for internal circulation at the Volker Fund, published in Murray Rothbard, Strictly Confidential: The Private Volker Fund Memos of Murray N. Rothbard, David Gordon, ed. (Auburn, AL: Mises Institute, 2010). The reviews on economic works included in the volume dated mostly from 1959–60, while his reviews on history and foreign policy were from 1961–62. The latter were on a wide range of topics, from the American Revolution to Jacksonian America up to World War II. They demonstrate that Rothbard was well versed in historical method as well as current works. See also Sheldon Richman, “Commentator on Our Times: A Quest for the Historical Rothbard,” in Man, Economy, & Liberty: Essays in Honor of Murray N. Rothbard, Walter Block and Llewellyn H. Rockwell, Jr., eds. (Auburn, AL: Mises Institute, 1988), pp. 361–69.

For the remainder of the 1960s, Rothbard would focus his energies on a number of different fields, including history, political philosophy, and popular libertarianism. Like before, he would work on many projects of varying sizes at the same time. His next major work was a history of the United States. In late 1962, through the auspices of Templeton, he received a grant from the Lilly Endowment that would last until 1966 to write a one volume text on American history from a libertarian perspective. He was to work with Leonard Liggio, a young historian Rothbard’s junior who had developed a close connection with him in the 1950s.

Rothbard’s major projects frequently took on a life of their own. Man, Economy, and State was originally supposed to be a textbook translation of his mentor Ludwig von Mises’s Human Action; instead, after careful deliberation, Rothbard decided to transform it into a full blown treatise on economics.Ludwig von Mises, Human Action: A Treatise on Economics (New Haven, CT: Yale University Press, 1949). The last work of his life, An Austrian Perspective on the History of Economic Thought, was originally supposed to be a small volume that provided the anti-Heilbroner alternative to economic thought from Adam Smith onward. It too became a massive two-volume work (the planned third volume was unfortunately never written) that spanned from the ancient Greek philosophers to Karl Marx.Murray Rothbard, An Austrian Perspective on the History of Economic Thought, vol. 1: Economic Thought Before Adam Smith (Brookfield, VT: Edward Elgar, 1995); An Austrian Perspective on the History of Economic Thought, vol. 2: Classical Economics (Brookfield, VT: Edward Elgar, 1995). And the current history project would not be published as a general overview of American history at all, but instead a five-volume work titled Conceived in Liberty which spanned from the founding of the American colonies to the United States Constitution.Murray Rothbard, Conceived in Liberty, vol. 1: A New Land, A New People: The American Colonies in the Seventeenth Century (New Rochelle, NY: Arlington House Publishers, 1975); Conceived in Liberty, vol. 2: “Salutary Neglect”: The American Colonies in the First Half of the Eighteenth Century (New Rochelle, NY: Arlington House Publishers, 1975); Conceived in Liberty, vol. 3: Advance to Revolution, 1760–1775 (New Rochelle, NY: Arlington House Publishers, 1976); Conceived in Liberty, vol. 4: The Revolutionary War, 1775–1784 (New Rochelle, NY: Arlington House Publishers, 1979). The first two volumes were written with the assistance of Leonard Liggio, and Rothbard was the primary author. The fifth volume on the American Constitution was never published, it was handwritten and then dictated into an audio recorder, which was lost. For more on the project, see Brian Doherty, Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement (New York: PublicAffairs, 2007), pp. 296, 339, 672; Leonard P. Liggio, “A Classical Liberal Life,” in I Chose Liberty: Autobiographies of Contemporary Libertarians, Walter Block, ed. (Auburn, AL: Mises Institute, 2010), pp. 187–88; Murray Rothbard, “A Conversation with Murray N. Rothbard,” in Austrian Economics Newsletter 11, no. 2 (Summer 1990): 3–4. Commenting on the evolution of the project in an interview, which equally applies to his other work, Rothbard said “I don’t chart this stuff in advance. I don’t like to work that way. I go step by step and it keeps getting longer.”Murray Rothbard, “A Conversation with Murray N. Rothbard,” p. 4.

The major theme of Conceived in Liberty, which also applied to his other historical work, was the idea of Liberty versus Power. Throughout history, there has been an eternal battle between those who wield the coercive power of the State apparatus, and those who wish to resist it. Throughout most of human history, to quote the famous words of Thomas Hobbes, life was “nasty, brutish and short.” Tyrants of all stripes, emperors, kings, feudal barons, and warlords, subjugated the masses and ruled over them with an iron first. The dominant economic system of this ancien régime was mercantilism, where government subsidies and other forms of protectionism were granted to favored businesses and other special interests. Then suddenly, in Britain and the American colonies in the 17th and 18th centuries, this changed, and much different forms of government were created — ones that were more limited in scope and allowed for greater liberty. The American colonies in particular cast off the oppressive shackles of their royal governors, and then later the British government completely in the American Revolution, in favor of a far more limited government and laissez-faire economic system that the people directly controlled. The fight was not over however, as those fighting for liberty and limited government continually clashed with those wishing to expand the size of government in the 19th century.

How did this occur? How were the ideas of Liberty versus Power disseminated to the broad populace? Why, for so long, did the public stand the depredations of their rulers in the ancien régime? Why did they later revolt against this dispensation and fight for liberty? And fast forwarding to the Progressive Era, why did the pendulum shift back to statism and acceptance of increased state rule?

The answers to all of these questions involve the role of ideology and intellectuals filtering these messages down to the public. Throughout history, there have been two types of intellectuals. The first are the court intellectuals, originally the priests and the clergymen. Their job was to convince the public of the righteousness and legitimacy of the ruler through religious means (such as “The King is Divine”) and to truckle to his predations. In return for these necessary public relations, the court intellectuals were to receive their fair share of the pelf taken from the public. This relationship was the famous Alliance of Throne and Altar that existed throughout most of history in various forms. On the other hand, there are the radical and revolutionary intellectuals who were out to spread the message of liberty and fight against the coercive order. They were not in it for power or prestige but instead liberty and justice.

The principal transmission mechanism during the American Revolution was the natural rights theory of John Locke. While Locke’s work provided the ultimate theoretical edifice, it was very abstract, and the message was instead distributed to the public through the much more popular and easier readings of Cato’s Letters, written by John Trenchard and Thomas Gordon.Murray Rothbard, Conceived in Liberty, 4 vols. (Auburn, AL: Mises Institute, 2011), pp. xv–xvi, 1114–1120. Much of this analysis was published earlier in Murray Rothbard, “Economic Determinism, Ideology, and the American Revolution,” in Libertarian Forum (November 1974): 4–7. For appreciative surveys of Rothbard’s approach, see Gordon, The Essential Rothbard, pp. 55–61; Gerard Casey, Murray Rothbard: Major Conservative and Libertarian Thinkers (New York: Continuum, 2010), pp. 103–06. Here were the works that instilled in the public a radical libertarian ideology that emanated in various ways in subsequent years. The importance of intellectuals in filtering ideas to the public, statist or libertarian, would be a major theme of Rothbard’s historical work.

Rothbard never did write a complete history of the United States, as originally intended, but he did subsequently concentrate on certain periods, particularly the late 19th and early 20th centuries, which included everything from the Progressive Era to World War I to the Great Depression.The closest Rothbard came to writing a detailed overview of American history in its entirety was a review written for the Volker Fund on an American history book. Severely critical, he wrote a review well over 100 pages extensively on each era (from colonial times to post-World War II), and documented all of the historical episodes that the authors needed to revise their interpretations on or include in their work. Murray Rothbard, “Report on George B. DeHuszar and Thomas Hulbert Stevenson, A History of the American Republic, 2 vols.,” in Strictly Confidential, Gordon, ed., pp. 86–188. The Progressive Era was the main catalyst behind later events, for it provided the necessary framework that created the modern welfare-warfare state and increases in government power. In 1965, while heavily researching American history and writing Conceived in Liberty, in his seminal article “Left and Right: Prospects for Liberty” Rothbard had already laid out his general framework for understanding this transformation, using the historical work of Gabriel Kolko:

In The Triumph of Conservatism, Kolko traces the origins of political capitalism in the “reforms” of the Progressive Era. ... Despite the wave of mergers and trusts formed around the turn of the century, Kolko reveals, the forces of competition on the free market rapidly vitiated and dissolved these attempts at stabilizing and perpetuating the economic power of big business interests. It was precisely in reaction to their impending defeat at the hands of the competitive storms of the market that big business turned, increasingly after the 1900s, to the federal government for aid and protection. In short, the intervention by the federal government was designed, not to curb big business monopoly for the sake of the public weal, but to create monopolies that big business (as well as trade associations of smaller business) had not been able to establish amidst the competitive gales of the free market ...

Thus, Kolko shows that, beginning with Theodore Roosevelt’s New Nationalism and culminating in Wilson’s New Freedom, in industry after industry, for example, insurance, banking, meat, exports and business generally, regulations that present-day rightists think of as “socialistic” were not only uniformly hailed, but conceived and brought about by big businessmen. This was a conscious effort to fasten upon the economy a cement of subsidy, stabilization, and monopoly privilege.Murray Rothbard, “Left and Right: The Prospects for Liberty,” Left and Right 1, no. 1 (Spring 1965): 13–14.

Here Rothbard explains the central idea that big business, far from being laissez-faire ideologues, was interested in developing government regulations to actively hamper their competitors and help it cartelize in order to restrict supply and raise prices. He would extend this theme in two later essays he wrote shortly thereafter on the Progressive Era, “War Collectivism in World War I” and “Herbert Hoover and the Myth of Laissez-Faire.”Murray Rothbard, “War Collectivism in World War I” and “Herbert Hoover and the Myth of Laissez-Faire,” in A New History of Leviathan, Ronald Radosh and Murray Rothbard, eds. (New York: E.P. Dutton, 1972), pp. 66–110, 111–45.

Kolko, along with the Chicago school economist George Stigler, espoused what later came to be labelled the “capture” theory of regulation. This theory states that regulation purportedly designed to curb business abuses is actually often “captured” by various businesses in order to enhance their own profits and weaken their competitors. In addition, in many cases the regulation is even promoted by the businesses themselves for this specific purpose. This is opposed to the “public interest” theory, which argues that regulation is designed for, and ultimately benefits, the general public, and the “bureaucratic” theory, which argues that regulations are enacted to empower various bureaucrats and government agencies. As will be seen below, Rothbard combined both the capture and bureaucratic theories in his historical narrative of the Progressive Era.See Gabriel Kolko, The Triumph of Conservatism (Glencoe, IL: The Free Press, 1963); Gabriel Kolko, Railroads and Regulation (Princeton, NJ: Princeton University Press, 1965); George Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management (Spring 1971). For a contextualization of Kolko’s works in comparison with other contemporary historians and economists, see Robert L. Bradley Jr., Capitalism at Work (Salem, MA: M&M Scrivener Press, 2009), pp. 142–81. For a discussion of Kolko’s works by various historians, including Kolko, see Otis L. Graham, Jr. ed., From Roosevelt to Roosevelt: American Politics and Diplomacy, 1901–1941 (New York, 1971), pp. 70–109. See also Thomas K. McCraw, “Regulation in America: A Review Article,” The Business History Review (Summer 1975): 159–83; Jack High, “Introduction: A Tale of Two Disciplines,” in Regulation: Economic Theory and History, Jack High, ed. (Ann Arbor: University of Michigan Press, 1991); Robert L. Bradley, Jr. and Roger Donway, “Reconsidering Gabriel Kolko: A Half-Century Perspective,” Independent Review (Spring 2013): 561–76; William D. Burt, “Gabriel Kolko’s Railroads and Regulation at Fifty,” Railroad History (Spring-Summer 2016): 23–45. His narrative was intimately linked with his general historical method, which sought to understand the various motivations of special interests who lobby for government legislation.

While Rothbard was Mises’s foremost student in wielding the praxeological method to deduce a body of abstract economic theorems, he was also his foremost student in applying them to history and utilizing his thymological method, best described in Theory and History.Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution (New Haven, CT: Yale University Press, 1957). In contrast to praxeology, the science of human action, thymology is the science of understanding why humans act a certain way, or “psychologizing” their behavior (psychology understood in the common-sense definition). This historical method strives to answer the eternal question “Cui bono?” or, “Who Benefits?” from an action, particularly a change in government institutions. More specifically, the thymological method looks at both pecuniary and nonpecuniary (such as religious) motivations, and seeks to answer the question “Who thinks they stand to benefit?” The latter question emphasizes that not all results of a government intervention are intended, and that not all special interest groups who lobby for a regulation actually do benefit ex post. To answer the latter question, one needs to engage in a detailed historical understanding of the various actors involved and not just a statistical test, which is the usual approach of an economist.

Rothbard’s use of the thymological method in his historical analysis is also closely related to his consistent application of the sociological law called “The Iron Law of Oligarchy.” The law states that governments, politicians, and legislation are not controlled by democratic majorities or public opinion, but instead by a small entrenched group of individuals. This group contains a mix of big businesses, politicians, and bureaucrats who wield the state apparatus for their own benefit at the expense of the rest of society. Court intellectuals supply the necessary public relations in various ways, such as by arguing that the government is not controlled by a small elite or that certain government actions are necessary, in return for power and prestige. There is a close relationship between this law and the method in political science called “Power Elite analysis.” Governments are controlled by well-established financial and political elites who pull the levers “behind the scenes,” and government officials and bureaucrats often have many important links, including familial ties, with the business community that provide powerful motivations for explaining why they acted a certain way while in office. These approaches and Rothbard’s consistent application of them have often been criticized as crank “conspiracy theories,” but it is important to note that proper use of them is only an extension of Mises’s thymological method, which seeks to understand human action and explain its motivations. Government officials do not fall from the sky without any prior connections to the political and business world, and they are just as self-interested as those in the private sector. There is a strong similarity between what is called “Public Choice analysis” and the thymological approach, although the two are not completely identical. The thymological method places more emphasis on engaging in pure historical work in understanding the motivations of acting individuals, as well as the fact that individuals often act in a certain way and expect to benefit but do not actually do so. In addition, Rothbard’s particular application also places much more emphasis on the oligarchical and coercive aspects of State rule.On Rothbard’s historical studies and their connection with Mises’s method, see the important work by Joseph T. Salerno, “Introduction,” in Murray Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, Joseph Salerno ed. (Auburn, AL: Mises Institute, 2005), pp. 7–43.

As the late 1960s and early 1970s passed, Rothbard would not turn away from utilizing the thymological method in his scholarly work. On the contrary, he would continue to elaborate on the method in important popular articles, updating Conceived in Liberty for publication and publishing other historical papers, such as “The New Deal and the International Monetary System.”Murray Rothbard, “The New Deal and the International Monetary System,” in Watershed of Empire: Essays on New Deal Foreign Policy, Leonard Liggio and James Martin, eds. (Colorado Springs, CO: Ralph Myles, 1976), pp. 19–64. For examples of popular articles, see Murray Rothbard, “Only One Heartbeat Away,” Libertarian Forum (September 1974): 5–7; “The Conspiracy Theory of History Revisited,” Reason (April, 1974): 39–40. During the 1970s into the 1980s Rothbard also encouraged other scholars, including prominent Progressive Era historians, to contribute academic articles on the Progressive Era to either Libertarian Forum or Journal of Libertarian Studies, both of which Rothbard edited. See, among others, Arthur A. Ekirch, Jr., “The Reform Mentality, War, Peace, and the National State: From the Progressives to Vietnam,” The Journal of Libertarian Studies 3, no. 1 (Spring 1979): 55–72; Paul Kleppner, “Religion, Politics, and the American Polity: A Dynamic View of Relationships,” Journal of Libertarian Studies 6, no. 3 (Summer/Fall 1982): 349–52. During this time, in 1973 Rothbard also gave a lecture series on the Progressive Era at a Cornell University event sponsored by the Institute for Humane Studies. Forrest McDonald was the other speaker. Rothbard’s lectures were recorded and titled “20th Century American Economic History.” See also Liggio, “A Classical Liberal Life,” p. 193; Murray Rothbard, “Selected Bibliographical Essay,” (n.d.). More importantly for our purposes here, Rothbard also began writing his book on the Progressive Era while affiliated with the Cato Institute.

With this work Rothbard planned to continue his project on American history, only now fast forwarding from the change in ideology and government from statism to liberty to the change from liberty to statism. He would chronicle how the battle of Liberty versus Power was lost around the turn of the 20th century. He was not only going to utilize the works of Kolko, but also the works of other notable revisionist historians who wrote on the period in recent years, such as James Weinstein, Paul Kleppner, Richard Jensen, and James Gilbert. Rothbard succinctly described his thesis in a book proposal:

The purpose of this projected book is to synthesize the remarkable quantity and quality of new and fresh work on the Progressive Era (roughly the late 1890s to the early 1920s) that has been done in the past twenty years. In particular, the object is to trace the causes, the nature, and the consequences of the dramatic shift of the U.S. polity from a relatively laissez-faire system to the outlines of the statist era that we are familiar with today.

The older paradigm of historians held the burst of statism in the Progressive Era to be the response of a coalition of workers, farmers, and altruistic intellectuals to the rising tide of big business monopoly, with the coalition bringing in big government to curb and check that monopoly.

Research in the past two decades has overthrown that paradigm in almost every detail.

The burst in statism would be explained by an alliance between big business, big unions, big government, and big intellectuals who were able to take control due to a seismic change in the political system following the election of 1896:

[T]he essence of Progressivism was that certain elements of big business, having sought monopoly through cartels and mergers on the free market without success, turned to government — federal, state, and local — to achieve that monopoly through government-sponsored and enforced cartelization ...

In the last decade, the “new political history” stressing ethno-religious determinants of mass political attitudes, voting, and political parties ... has added another important dimension to this story ... Kleppner explains that the triumph of the Bryan forces in the Democratic Party in 1896 marked the end of the Democrats as a laissez-faire party, and the subsequent lack of real electoral choice left a power vacuum for Progressive technocrats, intellectuals, and businessmen to fill.Murray Rothbard, “Roots of the Modern State: The Progressive Era” (n.d.). Reprinted in Preface below, pp. 39–40.

The original outline of the book was “roughly as follows,” and appears to have been the following nine chapters:

Chapter 1: IntroductionChapter 2: The Failure of Attempts at MonopolyChapter 3: Government as CartelistChapter 4: Centralization of the CitiesChapter 5: Science and Morality: the Intellectual as CorporatistChapter 6: The New American EmpireChapter 7: World War I: the Culmination of the Corporatist SystemChapter 8: The 1920’s Corporatism After the WarChapter 9: Epilogue: to the PresentMurray Rothbard, “Roots of the American Corporate State: 1890’s–1920’s” (n.d.).

Chapter 2 would explain the ways in which business attempts at cartelization, mergers, or monopolies failed, whether it was railroads or major industrial firms such as U.S. Steel. Chapter 3 would document the resultant state and federal attempts at cartelization pushed by big businesses, such as the Interstate Commerce Commission (ICC), the Federal Trade Commission (FTC), meatpacking legislation, the Federal Reserve System (FRS), and the importance of the National Civic Federation in spurring the new interventions. Chapter 4 would describe local Progressive politics and the drive by reformers to weaken the ethnic immigrants and push for prohibition and public schools. Chapter 5 would explain the evolution of intellectuals into acting as apologists for the new big government, and Chapter 6 would be on the pre-World War I changes in American foreign policy, including interventions in Asia, South America, and the Spanish- American War. Chapter 7 would explain the Wilson administration’s push for intervening in the European war, the devolution of the Democratic Party away from its laissez-faire heritage, and how the war represented the culmination of the Progressive movement. Chapter 8 would document the Progressivism of Herbert Hoover and the 1920s monetary interventions of Benjamin Strong, and Chapter 9 would briefly extend the analysis up into the present.Rothbard presented brief summaries for each chapter except for Chapter 1, the Introduction. Rothbard apparently never wrote it since he most likely planned to write it after he finished the book.

When writing the manuscript, Rothbard more or less followed this outline, with one major exception. Instead of postponing the transformation of the Democratic Party to the World War I Chapter 7 (in order to explain the Wilson administration’s drive toward war), Rothbard moved it up to right after the failure of the merger movement and monopolies (listed above as Chapter 2). Rothbard decided to move up explaining the Democratic and Republican parties during the third party system up until the election of 1896, when both parties became center-statist and there was no longer a clear laissez-faire party in American politics.

Rothbard appears to have worked on the manuscript from 1978 to 1981. Like many of his projects, the book took on a life of its own and grew much bigger than the original plan. By 1981, Rothbard wrote rough drafts of nine chapters, but he was only still on what was planned to be Chapter 3 of the original proposal! Chapter 2 on monopolies grew into three chapters, with two whole chapters devoted to the railroad question, which Rothbard initially planned to only visit “briefly.” Explaining the third party system and the election of 1896 took three entire chapters, and Rothbard devoted two entire chapters to the Progressive cartelization during the Roosevelt administration, and a stand-alone chapter on the National Civic Federation, and was still not done with what he wanted to write about in the original chapter 3.

By 1981, Rothbard was no longer working on the remaining chapters of the book. But by no means was Rothbard not finishing the book. Instead, he was writing the remaining chapters as papers that were published in the 1980s, early 1990s, or posthumously after his unexpected death in 1995. On the material planned to be in Chapter 4, such as the feminist movement and women’s suffrage, urban reform, prohibition, and other aspects of local Progressivism, Rothbard wrote “The Progressive Era and the Family” and “Origins of the Welfare State in America.” In addition to the above topics and on the material in Chapters 5 and 7 on intellectuals and World War I, Rothbard wrote “World War I as Fulfillment: Power and the Intellectuals.” On the progression of American foreign policy planned for Chapters 6, 7, and 9, Rothbard wrote “Wall Street, Banks, and American Foreign Policy.” Rothbard devoted the most space to the origins of the Federal Reserve (part of Chapter 3) and on 1920s monetary interventions (part of Chapter 8), such as the historical sections in The Mystery of Banking, “The Federal Reserve as a Cartelization Device, The Early Years: 1913–1930,” the historical sections in The Case Against the Fed, “The Gold Exchange Standard in the Interwar Years,” “The Origins of the Federal Reserve,” and “From Hoover to Roosevelt: The Federal Reserve and the Financial Elites.”Murray Rothbard, The Mystery of Banking (New York: Richardson & Snyder, 1983); “The Federal Reserve as a Cartelization Device, The Early Years: 1913–1930,” in Money in Crisis: The Federal Reserve, the Economy, and Monetary Reform, Barry N. Siegel, ed. (San Francisco: Pacific Institute for Public Policy Research, 1984), pp. 89–136; “Wall Street, Banks, and American Foreign Policy,” World Market Perspective (August 1984); “The Progressive Era and the Family,” in The American Family and the State, Joseph R. Peden and Fred R. Glahe, eds. (San Francisco: Pacific Research Institute, 1986), pp. 109–34; “World War I as Fulfillment: Power and the Intellectuals,” Journal of Libertarian Studies 9, no. 1 (1989): 81–125; The Case Against the Fed (Auburn, AL: Mises Institute, 1994); “Origins of the Welfare State in America,” Journal of Libertarian Studies 12, no. 2 (1996): 193–232; “The Gold-Exchange Standard in the Interwar Years,” in Money and the Nation State: The Financial Revolution, Government and the World Monetary System, Kevin Dowd and Richard H. Timberlake, Jr., eds. (New Brunswick, NJ: Transaction Publishers, 1998), pp. 105–63; “The Origins of the Federal Reserve,” Quarterly Journal of Austrian Economics 2, no. 3 (Fall 1999): 3–51; “From Hoover to Roosevelt: The Federal Reserve and the Financial Elites,” in Salerno, ed., pp. 263–347. In addition, Rothbard also wrote on Progressivism in his contributions to Congressmen Ron Paul and Lewis Lehrman’s Minority Report for the 1981–1982 Gold Commission. In the section completely written by Rothbard on the 19th century, he included his analysis of electoral politics leading up to the election of 1896, and in the section on the 20th century which he partially wrote (many of the initial paragraphs are extremely similar to what appeared in The Mystery of Banking), he wrote on his basic thesis of the Progressive Era and the origins of the Federal Reserve. See “A History of Money and Banking in the United States Before the 20th Century” and “Money and Banking in the United States in the 20th Century,” in The Case For Gold: A Minority Report of the U.S. Gold Commission, Rep. Ron Paul and Lewis Lehrman, eds. (Washington, D.C: Cato Institute, 1982), pp. 111–22. He was selected to be a reviewer in 1985 for Robert Higgs’s Crisis and Leviathan: Critical Episodes in the Growth of American Government, in which he wrote an in-depth review that showed he was still deeply immersed and interested in the Progressive Era.Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987). Higgs notes with astonishment that the review ran 26 single spaced pages at probably over 12,000 words and contained a detailed list of bibliographic information he recommended Higgs to include. In addition, he apparently recalled most of the citation information off the top of his head as he did not have access to his library at the time. Robert Higgs, Murray N. Rothbard: In Memoriam, Llewellyn H. Rockwell, Jr., ed. (Auburn, AL: Mises Institute, 1995), pp. 56–60. Moreover, while teaching at Brooklyn Polytechnic, Rothbard taught a class in 1986 on the Progressive Era, in which he lectured on segments of the book manuscript as well as other Progressive Era essays he had written or was working on.The class lectures were recorded and titled “The American Economy and the End of Laissez-Faire: 1870 to World War II.”

It could be said that, in the last decade or so of Rothbard’s life, aside from working on his all-encompassing history of economic thought, Progressivism was the next most significant area of research on his mind. That Rothbard was interested in Progressivism right up until his untimely death in 1995 can be seen when reading The Case Against the Fed, the last book published in his lifetime, since Rothbard devoted a significant portion of it to providing a brief overview of Progressivism and the history of the Federal Reserve. No doubt, if Rothbard lived to write his third volume on the history of economic thought, which planned to cover topics ranging from the 1871 Marginal Revolution to the 1930s Keynesian Revolution and beyond, he would have written extensively about the Progressivist intellectuals.

Rothbard’s book manuscript and the essays contained in The Progressive Era, represent a lifetime of deep research in American history. Rothbard was deeply immersed in all areas of American history, especially the Progressive Era, and he was able to collate a massive amount of research and facts and synthesize them to create his own unique narrative of the era. The remainder of this introduction will provide a brief overview of the Rothbardian interpretation as well as a general summary of the chapters and essays contained therein.

Rothbard’s central thesis is that big businesses had previously tried to cartelize on the free market around the turn of the 20th century, but had failed to do so. Try as they might, the cartel agreements and mergers failed because of the internal pressure of collaborators cheating and the external pressure of new competitors entering the market to cut prices and break the cartels. Having failed in this endeavor, they turned to government regulations in order to help them cartelize by preventing various forms of price and product competition and preventing new smaller competitors from successfully entering markets by raising their costs. Big Business allied itself with Big Government, who wanted the regulations in order to increase its own power, and Big Unions, to help stifle the radical opposition of labor. However, this was a resurrection of the ancien régime in a different form, and it could not simply be imposed on the public who was all too familiar with this system and instilled with relatively laissez-faire principles. In order to sell it to the public they needed a new breed of collectivist intellectuals, many of whom were thoroughly convinced of the ways of Bismarckian socialism after receiving their Ph.D.s in Germany in the post-Civil War era. The Alliance of Throne and Altar was back with a vengeance, between the favored government interests and the intellectual apologists, only that this time the intellectuals were not convincing the public that the King’s mandate was the word of God and his depredations were divine, but that Big Government was needed in order to improve the public welfare and cure the social problems brought on by unfettered capitalism. In return, the intellectuals were to benefit by becoming professionalized and given lucrative jobs in planning and administering the whole apparatus. The Alliance saw itself as a middle of the road stabilizer between anarchic and outdated laissez-faire capitalism and confiscatory and extremist socialism.

This dramatic change at the beginning of the 20th century was not able to be instituted on the existing political system, but occurred after a seismic change in the orientation of the political parties. This resulted from the ethnoreligious political battles between the Democrats and the Republicans in the 1880s and 1890s which led to the climactic election of 1896.

During the third party system (1854–1896) of American politics, the great mass of the public was ideological and learned their respective economic positions from political activists who translated them into ethno-cultural and religious terms. On the one hand, there was the Republican Party, “The Party of Great Moral Ideas,” dominated by pietist “Yankee” natives. They were “postmillennial” in that they believed in order for Jesus to return to earth and usher in the end of history, they must first bring about a thousand year Kingdom of God. In order to do so, they not only needed to save themselves, but also save others, even if it required state force. Thus the pietists were hell-bent on stamping out all forms of sin, including instituting prohibition and weakening the “Roman Popery” of the Catholic schools, along with other measures such as immigration restriction and women’s suffrage (to boost the pietist vote). This paternalistic intervention on the local ethnoreligious level was translated to a paternalistic intervention on the larger economic realm, such as enacting various government subsidies, tariffs, or greenback inflation. On the other hand, there was the Democratic Party, “The Party of Personal Liberty,” dominated by liturgical natives and immigrants, such as Catholics and Lutherans. These religious denominations did not have the evangelical zeal to actively save others and stamp out sin, but only to follow the teachings and practices of their respective churches. As a result, they criticized all Republican local interventions as paternalistic drives to meddle and control their lives, correspondingly saw their economic policies as allied, and consequently favored a more laissez-faire agenda, including less government spending, low tariffs, and the gold standard. The laissez-faire Democrats were also called the Bourbon Democrats, who were generally centered in the Northeast and Midwest, and whose ancestors belonged to the laissez-faire wing of the Jacksonian Democrats. The battle of Liberty versus Power was being fought once again in American history.

The Democrats were slowly but surely winning, and in the late 1880s and early 1890s made a remarkable series of gains, shocking the Republican elite. In order to counter this trend, Republican elites strategically decided to downplay ethno-cultural issues and become more hard money in order to stop alienating liturgicals at the expense of aggravating pietists. This also fortuitously coincided with the Panic of 1893, a severe economic depression that (unjustly) hurt the incumbent Bourbon Democrats at the polls. To make matters worse, at the same time the Southern and Western Democratic pietist populists, who were becoming increasingly “Yankee” and activist, were able to wrest control of the Democratic Party machine while the Bourbon leaders were weakened due to the depression. William Jennings Bryan, not Grover Cleveland, was now the standard bearer for the new Democratic Party. Liturgicals went to the Republicans in droves while pietists flocked to the Democrats. With this remarkable turnaround, in the election of 1896 the moderate statist Republican presidential nominee William McKinley resoundingly defeated the pietist inflationist Democratic presidential nominee William Jennings Bryan and established Republican dominance for the next several decades. This ended the third party system of American electoral politics, when the parties were fiercely ideological and polarized, and brought about the fourth party system (1896–1932), when both parties became less ideologically defined and more center-statist, with increasing control granted to bureaucrats from the resultant de-democratization. The weakening of the Bourbon forces reduced the Democrats to minority status, and ended any laissez-faire majority party in America. This lacuna, and the increasing similarity and center statism between the two parties due to the recent metamorphosis, created the power vacuum that allowed for the new quadripartite alliance to take hold of America.

With this rejuvenation of the Alliance, embodied in the newly formed National Civic Federation, came a whole spate of “Progressive” measures, including increased railroad regulation, trustbusting, compulsory publicity laws, conservation laws, meatpacking legislation, the Pure Food and Drug Act, employers’ compensation laws, safety legislation, the minimum wage, the Federal Reserve System, and the Federal Trade Commission. The once staunchly pietist Progressive intellectuals arguing on behalf of the entire system slowly but surely became increasingly secularized and more committed to using state coercion to ostensibly improve public welfare than to create the Kingdom of God. Moreover, academia in general and its disciplines, such as economics, began to denigrate theory and embrace statistics and empirical analysis in an attempt to vainly ape the natural sciences. The need for greater data collection and inductive reasoning went hand-in-hand with greater government planning and interventionism.

The transformation of the American government and subsequent interventions were not isolated events unconnected to specific financial and political elites, but were deeply related to the growing clash between the two dominant power elites in the ruling oligarchy, the Morgan ambit, which included the financial groups surrounding J.P. Morgan & Company, and the Rockefeller ambit, which included the financial groups surrounding Standard Oil. In the latter part of the third party system, the Morgans were the dominant interest behind the Democratic Party, and the Rockefellers behind the Republican Party. While the last Cleveland administration (1893–1897) was Morgan dominated, the subsequent McKinley administrations (1897–1901) were Rockefeller dominated, with the Morgans as junior partners since they supported McKinley over Bryan. Matters quickly changed when McKinley was assassinated in 1901 and his vice president, the Morgan affiliated Theodore Roosevelt, took office, and the Morgans were to remain the dominant financial group for the next decade. Ultimately, the Roosevelt administrations (1901–1909) were dominated by the Morgan interests, who were largely able to shield their larger corporations from antitrust and divert Roosevelt’s “trustbusting” to non-Morgan companies, in particular Standard Oil in 1906. This led to a Rockefeller counterattack, mainly through the more Rockefeller-affiliated William Howard Taft, whose administration (1909–1913) launched antitrust suits against the Morgan-dominated companies U.S. Steel and International Harvester. Infuriated at Taft, the Morgans deliberately sabotaged his reelection by encouraging Roosevelt to come out of retirement and run on the Progressive Party ticket in 1912, which split the Republican vote and allowed the Democrat Woodrow Wilson, with Morgan and other financial affiliations, to squeak by and capture the presidency — the only Democrat to do so in the fourth party era.

The culmination, the apogee, or the “fulfillment” of not only the new warfare state but also Progressivism, was during World War I, when collectivist fever was at its height and there was an enormous desire among businesses, bureaucrats, and intellectuals to top-down cartelize and plan the economy, and to maintain it in some form after the war. In the 1920s, when the Morgans were still dominant, Progressivist activism, though reduced, continued, especially through the efforts of the Secretary of Commerce Herbert Hoover, and government intervention accelerated during his ill-fated term as president, and then especially during Franklin Roosevelt’s New Deal, with its fascist tendencies. The Morgans were to remain dominant throughout the 1920s until they were savagely removed from political power during the New Deal, which was supported by the Rockefellers and other anti-Morgan interests. With the end of World War II the modern American welfare-warfare empire had matured and grown into being, with its roots all from the Progressive Era.

The nine chapters of the original book draft and the six published essays describe this thesis, along with its many other facets, in much greater detail. The essays were chosen by the present editor because they were generally hard to find or had not been published previously in a collection of Rothbard’s essays.Many of Rothbard’s other works on the Progressive Era and beyond, particularly on the Federal Reserve from its origins to World War II, can be found in Rothbard, A History of Money and Banking. The essays contained therein should definitely be read in tandem with the current volume.

Chapters 1 and 2, “Railroads: The First Big Business and the Failure of the Cartels” and “Regulating the Railroads” document the history of the railroad industry from the Civil War onward. Much like the later mergers, the railroads, which were previously granted lavish subsidies, tried hard to cartelize on the free market but failed. Correspondingly, many of them turned to government to push for state enforced cartelization, which led to the Interstate Commerce Act in 1887. Armed with this new legislation, the railroads tried to cartelize but were not entirely successful, which resulted in future legislative attempts to control the railroad industry until the regulations and rival interests suffocated the railroads, leading to government ownership during World War I. Chapter 3 “Attempts at Monopoly in American Industry” documents repeated cases of various businesses’ failures to monopolize and consequently saw their market share slipping: Standard Oil, U.S. Steel, and International Harvester, among others. This would later instill the drive for government cartelization.

Chapters 4, 5, and 6, “The Third Party System: Pietists vs. Liturgicals,” “The Democratic Triumph of 1892,” and “1896: The Collapse of the Third Party System and of Laissez-Faire Politics” describe the ethno-cultural background behind the third party system, and the battles fought between the pietist Republicans and liturgical Democrats. This ultimately led to the election of 1896 where the Republicans were able to decisively defeat the Democrats, change the future of American politics, and allow for an unmitigated increase in government intervention in the new century with the Democrats permanently weakened.

Chapters 7, 8, and 9, “Theodore Roosevelt: The First Progressive, Part I,” “Theodore Roosevelt: The First Progressive, Part II,” and “The National Civic Federation: Big Business Organized for Progressivism” describe the beginnings of this new Progressive alliance and the repeated attempts at various forms of cartelization. The fascinating struggles between the power elites are documented, and Theodore Roosevelt is exposed as a Morgan affiliate whose actions opened the floodgates of Progressivism. The highly touted Progressive reforms are shown to be driven largely by businesses wishing to hamper their competitors and bureaucrats interested in enhancing their own power, and the National Civic Federation is seen as the major organ for the new Progressive partnership to work through.

The remaining chapters are previously published essays. Chapters 10 and 11, “The Progressive Era and the Family” and “Origins of the Welfare State in America” further describe and elaborate on the recent ethnoreligious history. Local Progressivism and various urban reforms are described, ranging from the fight over public schools to the welfare state, along with many urban reformers, economists, and other crusaders. Chapters 12 and 13, “War Collectivism in World War I” and “World War I as Fulfillment: Power and the Intellectuals” describe Progressivism during the war, when business collectivism was at its peak, along with various other Progressive reforms such as prohibition and women’s suffrage. The evolution of intellectuals and their turn towards increased interventionism and empiricism are also chronicled.A previously unpublished section of Chapter 13 is included as an appendix.

Chapter 14, “The Federal Reserve as a Cartelization Device: The Early Years, 1913–1930” describes the origins of the Federal Reserve and its subsequent monetary policy during World War I and the 1920s. The Fed is seen to have originated from a coalition of various bankers, especially the Morgans, who wanted a central bank to help them expand credit and solidify the dominance of New York City finance. Later on, in the 1920s, the Fed played an increasingly international role in helping Great Britain return to the gold standard, largely through the efforts of the governor of the New York Fed Benjamin Strong and his connection with the governor of the Bank of England, Montagu Norman. Chapter 15, “Herbert Hoover and the Myth of Laissez-Faire” describes the 1920s Progressivism driven by Herbert Hoover and refutes the myth that Hoover was a noninterventionist and advocate of laissez-faire while president during the Great Depression.

The Progressive Era is one of Rothbard’s finest achievements as an academic, and should be read by anyone interested in the Progressive Era or American history in general. Rothbard’s analysis is essential for anyone who wishes to understand the evolution of the American state from relatively laissez-faire leanings in the 19th century to the modern welfare-warfare state of the 20th and 21st centuries.

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The nine chapters of the current volume were rough drafts and in many places lacked references. No doubt, judging from his later essays, if Rothbard finished the book, he would have gone back, revised it, and added a plethora of source material for the reader. As editor, I have, albeit imperfectly, done my best to edit the manuscript and track down and cite all of the material in the nine chapters. In addition, I have provided commentary and sources for the reader on various ideas that Rothbard mentioned and planned to later elaborate on but did not. These are either in [Editor’s remarks], my additions to existing footnotes, or [Editor’s footnote], my entirely new footnotes.

I would like to thank the Ludwig von Mises Institute, and academic vice president Joseph Salerno in particular, for providing me with the opportunity to work on this book. Archivist Barbara Pickard was indispensable in tracking down the book manuscript. In addition, Joseph Salerno, Jonathan Newman, and Chris Calton were very helpful in proofreading various parts of the book. I would also like to thank editor Judy Thommesen for finalizing the book and correcting typographical mistakes. All errors are entirely my own.

Patrick NewmanLakeland, FloridaApril 2017

15. Herbert Hoover and the Myth of Laissez-Faire

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

1. Herbert Hoover as Secretary of CommerceOriginally published in A History of Leviathan, Ronald Radosh and Murray N. Rothbard, eds. (New York: E.P. Dutton & Co., 1972), pp. 111–15. Rothbard did not provide subsections to this essay; to keep the format of the chapters uniform subsections have been added by the editor.

The conventional wisdom, of historian and layman alike, pictures Herbert Hoover as the last stubborn guardian of laissez-faire in America. The laissez-faire economy, so this wisdom runs, produced the Great Depression in 1929, and Hoover’s traditional, do-nothing policies could not stem the tide. Hence, Hoover and his hidebound policies were swept away, and Franklin Roosevelt entered to bring to America a New Deal, a new progressive economy of state regulation and intervention fit for the modern age.

The major theme of this chapter is that this conventional historical view is pure mythology and that the facts are virtually the reverse: that Herbert Hoover, far from being an advocate of laissez-faire, was in every way the precursor of Roosevelt and the New Deal, that, in short, he was one of the major leaders of the 20th-century shift from relatively laissez-faire capitalism to the modern corporate state. In the terminology of William A. Williams and the New Left, Hoover was a preeminent “corporate liberal.”

When Herbert Hoover returned to the United States in late 1919, fresh from his post as Relief Administrator in Europe, he came armed with a suggested “Reconstruction Program” for America. The program sketched the outlines of a corporate state; there was to be national planning through “voluntary” cooperation among businesses and groups under “central direction.”Hoover’s earlier career confirms this appraisal of his views; there is no space here, however, to analyze his earlier ideas and activities. The Federal Reserve System was to allocate capital to essential industries and thereby eliminate the industrial “waste” of free markets. Hoover’s plan also included the creation of public dams, the improvement of waterways, a federal home-loan banking system, the promotion of unions and collective bargaining, and governmental regulation of the stock market to eliminate “vicious speculation.”See Dorfman, The Economic Mind in American Civilization, vol. 4, pp. 26–28; Hoover, Memoirs, vol. 2, pp. 27ff.; and Rothbard, America’s Great Depression, p. 170 and Part 3. It is no wonder that Progressive Republicans as well as such Progressive Democrats as Louis Brandeis, Herbert Croly, and others on the New Republic, Edward A. Filene, Colonel Edward M. House, and Franklin D. Roosevelt boomed Hoover for the presidency during the 1920 campaign.

Hoover was appointed Secretary of Commerce by President Harding under pressure by the Progressive wing of the party, and accepted under the condition that he would be consulted on all the economic activities of the federal government. He thereupon set out deliberately to “reconstruct America.”Hoover to Professor Wesley C. Mitchell, July 29, 1921. Mitchell, Two Lives, p. 364.

Hoover was only thwarted from breaking the firm American tradition of laissez-faire during a depression by the fact that the severe but short-lived depression of 1920–21 was over soon after he took office. He also faced some reluctance on the part of Harding and the Cabinet. As it was, however, Hoover organized a federal committee on unemployment, which supplied unemployment relief through branches and subbranches to every state, and in numerous cities and local communities. Furthermore, Hoover organized the various federal, state, and municipal governments to increase public works, and persuaded the biggest business firms, such as Standard Oil of New Jersey and United States Steel, to increase their expenditure on repairs and construction. He also persuaded employers to spread unemployment by cutting hours for all workers instead of discharging the marginal workers — an action he was to repeat in the 1929 Depression.Hoover, Memoirs, vol. 2, p. 46; and Joseph H. McMullen, “The President’s Unemployment Conference of 1921 and Its Results” (Master’s thesis, Columbia University, 1922), p. 33.

Hoover called for these interventionist measures with an analogy from the institutions of wartime planning and collaboration, urging that Americans develop “the same spirit of spontaneous cooperation in every community for reconstruction that we had in war.”On the lasting significance of government economic planning and “war collectivism” during World War I, see Leuchtenburg, “The New Deal and the Analogue of War,” pp. 81–143.

An important harbinger for Hoover’s later Depression policies was the president’s Conference on Unemployment, a gathering of eminent leaders of industry, banking, and labor called by President Harding in the fall of 1921 at the instigation of Hoover. In contrast to Harding’s address affirming laissez-faire as the proper method of dealing with depressions, Hoover’s opening address to the Conference called for active intervention.See E. Jay Howenstine, Jr., “Public Works Policy in the Twenties,” Social Research (December, 1946): 479–500. Furthermore, the Conference’s major recommendation — for coordinated federal state expansion of public works to remedy depressions — was prepared by Hoover and his staff in advance of the conference.Playing a crucial role on this staff was Otto Tod Mallery, the nation’s leading advocate of public works as a remedy for depressions. Mallery had inspired the nation’s first such stabilization program, in Pennsylvania in 1917, and had been a leading official on public works in the Wilson administration. He was also a leader in the American Association for Labor Legislation, an influential group of eminent citizens, businessmen, and economists devoted to government intervention in the fields of labor, employment, and welfare. The AALL, endorsing the Conference, boasted that the Conference’s proposals followed the pattern of its own recommendations, which had been formulated as far back as 1915. Apart from Mallery, the Conference employed the services of nine economists who were also officials of the AALL. The AALL singled out for particular praise Joseph H. Defrees, of the U.S. Chamber of Commerce, who appealed to business organizations to cooperate with the Conference’s program, and to accept “business responsibility” for the unemployment problem. See Dorfman, Economic Mind in American Civilization, vol. 4, pp. 7–8; McMullen, “The President’s Unemployment Conference,” p. 16; and John B. Andrews, “The President’s Unemployment Conference–Success or Failure?” American Labor Legislation Review (December, 1921): 307–10. Of particular importance was the provision that public works and public relief were to be supplied only at the usual wage rate — a method of trying to maintain the high wage rates of the preceding boom during a depression.

Although these interventions did not have time to take hold in the 1921 depression, a precedent for federal intervention in an economic depression had now been set, as one of Hoover’s admiring biographers writes, “rather to the horror of conservatives.”Eugene Lyons, Our Unknown Ex-President (New York: Doubleday and Co., 1948), p. 230.

The president’s Conference established three permanent research committees, headed overall by Hoover, which continued during the 1920s to publish studies advocating public-works stabilization during depressions. One such book, Seasonal Operations in the Construction Industry (Washington, D.C.: Conference on Unemployment (1921), the foreword to which was written by Hoover, urged seasonal stabilization of construction. This study was in part the result of a period of propaganda emitted by the American Construction Council, a trade association for the construction industry, which of course was enthusiastic about large-scale programs of government contracts for the construction industry. This Council was founded jointly by Herbert Hoover and Franklin D. Roosevelt in the summer of 1922, with the aim of stabilizing and cartelizing the industry, and of planning the entire construction industry through the imposition of various codes of “ethics” and of “fair practice.” The codes were the particular idea of Herbert Hoover. Following the path of all would-be cartelists who are hostile to no one more than the individualistic competitor, Franklin D. Roosevelt, president of the American Construction Council, took repeated opportunity to denounce rugged individualism and profit-seeking by individuals.See Daniel Fusfeld, The Economic Thought of Franklin D. Roosevelt and the Origins of the New Deal (New York: Columbia University Press, 1956), pp. 102 ff.

Throughout the 1920s Hoover supported numerous bills in Congress for public-works programs during depressions. He was backed in these endeavors by the American Federation of Labor, the United States Chamber of Commerce, and the American Engineering Council, of which Hoover was for a time president. It was clear that the engineering profession would also benefit greatly from government subsidization of the construction industry. By the middle twenties, President Coolidge, Secretary Mellon, and the National Democratic Party had been converted to the scheme, but Congress was not yet convinced.

After he was elected president, but before taking office, Hoover allowed his public-works plan (the “Hoover Plan”) to be presented to the Conference of Governors in late 1928 by Governor Ralph Owen Brewster of Maine. Brewster called the plan the “Road to Plenty,” a name that Hoover had taken from Foster and Catchings,Waddill Catchings was a prominent investment banker who founded the Pollak Foundation for Economic Research, with Dr. William T. Foster as director, Foster was Brewster’s technical advisor at the Governor’s Conference. Foster and Catchings had called for a $3 billion public-works program to iron out the business cycle and stabilize the price level. William T. Foster and Waddill Catchings, The Road to Plenty (Boston: Houghton Mifflin & Co., 1928), p. 187. Brewster’s presentation can be found in Ralph Owen Brewster, “Footprints on the Road to Plenty–A Three Billion Dollar Fund to Stabilize Business,” Commercial and Financial Chronicle (November 28, 1928), p. 2, 527. Foster and Catchings reciprocated by praising the “Hoover Plan” a few months later. The Plan, they exulted, would iron out prices and the business cycle; “it is business guided by measurement instead of hunches. It is economics for an age of science–economics worthy of the new President.” William T. Foster and Waddill Catchings, “Mr. Hoover’s Plan: What It Is and What It Is Not — the New Attack on Poverty,” Review of Reviews (April, 1929): 77–78. the popular co-authors of a plan for massive inflation and public works as the way to end depressions. Although seven or eight governors were enthusiastic about the plan, the Governors’ Conference tabled the scheme. A large part of the press hailed the plan extravagantly as a “pact to outlaw depression.” Leading the applause was William Green, head of the AF of L, who hailed the plan as the most important announcement on wages and employment in a decade, and John P. Frey of the AF of L who announced that Hoover had accepted the AF of L theory that depressions are caused by low wages. The press reported that “labor is jubilant” because the new president’s remedy for unemployment is “identical with that of labor.”

The close connection between Hoover and the labor leadership was no isolated phenomenon. Hoover had long agitated for industry to encourage and incorporate labor unionism within the framework of the emerging industrial order. Moreover, he played a crucial role in converting the labor leaders themselves to the idea of a corporate state with unions as junior partners in the system, a state that would organize and harmonize labor and capital.

Hoover’s pro-union views first achieved prominence when, as chairman of President Wilson’s Second Industrial Conference (1919/20), he guided this conference of corporate-liberal industrialists and labor leaders to criticize “company unionism” and to urge the expansion of collective bargaining, government arbitration boards for labor disputes, and a program of national health and old-age insurance. Soon afterward Hoover arranged a meeting of leading industrialists with “advanced views” in an unsuccessful attempt to persuade them to “establish liaison” with the AF of L. In January, 1921, the AF of L journal published a significant address by Hoover, which called for the “definite organization of great national associations” of economic groups and their mutual cooperation. This cooperation would serve to promote efficiency and mitigate labor-management conflict. Above all, workers would be protected from “the unfair competition of the sweatshop.” Still more did this mean “protection” of the lower-cost large employers from the competition of their smaller “sweatshop” rivals — a typical instance of monopolizers using humanitarian rhetoric to gain public support for the restriction and suppression of competition. Hoover went so far in this address as to support the closed shop, provided that the closure was to be for the sake of unity of purpose in aiding the employer to increase production and to mold a cooperative labor force. In conclusion, Hoover called for a new economic system, what was in effect a corporate state, that would provide an alternative to old-fashioned laissez-faire capitalism on the one hand and Marxian socialism on the other.Herbert Hoover, “A Plea for Cooperation,” The American Federationist (January, 1921). Also see the important work by Ronald Radosh, “The Development of the Corporate Ideology of American Labor Leaders, 1914–1933” (Doctoral dissertation in history, University of Wisconsin, 1967), pp. 82ff.

In an authoritative study, William English Walling, an intimate of Samuel Gompers, wrote of the crucial influence of Hoover’s theories upon Gompers and the AF of L, especially from 1920 on. This influence was particularly strong in persuading the labor leaders to endorse the idea of organizing all the large occupation groups and then effecting their mutual harmony and cooperation under the aegis and control of the federal government. Capital and labor in each industry, organized in collaboration, were to have the role of government of that particular industry.William English Walling, American Labor and American Democracy (New York: Harper & Bros., 1926), vol. 2: Labor and Government, cited in Radosh, “The Development of Corporate Ideology,” pp. 85ff. Addressing the International Association of Technical Engineers, Architects and Draftsmen in May, 1921, Gompers spoke enthusiastically of the close “entente” that had developed between engineering groups and the AF of L. It was Gompers, furthermore, who persuaded Hoover to accept the presidency of the American Engineering Council. It was indeed appropriate for the French politician Edouard Herriot to praise Hoover in 1920 for his idea of fusing the “economic trinity” of labor, capital, and government into one system, thus putting an end to the class struggle.Radosh, “The Development of the Corporate Ideology of American Labor Leaders,” p. 88n.

Another reason for Hoover’s pro-union attitude was that he had adopted the increasingly popular thesis that high wage rates were a major cause of prosperity. It then followed that wage rates must not be lowered during depressions. In contrast to all prior depressions, including 1920–21, when wage rates were cut sharply, wage-cutting was considered by Hoover to be impermissible and as leading to a failure in purchasing power and the perpetuation of depression. These views were to prove a fateful harbinger of the policies used during the Great Depression.

One of Hoover’s most important labor interventions during the 1920s came in the steel industry. He persuaded Harding to hold a conference of steel manufacturers in May, 1922, after which he and Harding called upon the steel magnates to bow to the workers’ demand to shift from a 12-hour to an eight-hour day. In doing so, Hoover was siding with the liberal wing of the steel industry, led by Charles R. Hook and Alexander Legge, whose plants had already instituted the shorter workday, and who of course were anxious to impose higher costs on their lagging competitors. When Judge Gary of United States Steel and other leading steelmen refused to go along, Hoover acted to mobilize public opinion against them. Thus, he induced the national engineering societies to endorse the eight-hour day, and himself wrote the introduction to the endorsement. Finally, Hoover wrote a stern letter of rebuke for President Harding, which Harding sent to Gary on June 18, 1923, forcing Gary to capitulate.

Herbert Hoover also played a leading role in collectivizing labor relations in the railroad industry, thereby cartelizing that industry still further than before and incorporating railway unions within the cartel framework. After repeated and largely unsuccessful interventions to try to gain pro-union concessions during the railroad strike of 1922, Hoover became a major author — along with union lawyers Donald Richberg and David E. Lilienthal — of the Railway Labor Act of 1926, by which the railway unions got themselves established in the industry. The ancestor of the New Deal’s Wagner Act, the Railway Labor Act, imposed collective bargaining upon the industry; in return, the unions agreed to give up the strike weapon. The great majority of the railroads warmly supported this new departure in American labor relations.For a pro-union account of the affair by a leading participant, see Donald R. Richberg, Labor Union Monopoly (Chicago: Henry Regnery, 1957), pp. 3–28.

In a major address before the United States Chamber of Commerce, on May 7, 1924, Hoover spelled out his corporatist views in some detail. He called for the self-regulation of industry by way of trade associations, farm groups, and unions. In a vein strongly reminiscent of English Guild Socialism, Hoover harked back to the Middle Ages for his model: the guilds, he asserted, obtained “more stability through collective action.” The job of the associations was to strengthen “ethical standards” in industry by eliminating “waste” and “destructive competition.” In short, Hoover was calling for the national cartelization of industry under the aegis of government.In his book American Individualism, Hoover had hailed the growing “cooperation” and “associational activities” of American industry and the consequent reduction of “great wastes of over-reckless competition.” Hoover, American Individualism (New York: Doubleday, 1922). Samuel Gompers hailed the address and considered this “new economic policy” to be the same as the newly forged position of the AF of L.Samuel Gompers, “The Road to Industrial Democracy,” American Federationist (June, 1921). Also see Ronald Radosh, “The Corporate Ideology of American Labor Leaders from Gompers to Hillman,” Studies on the Left (November–December, 1966): 70. After Gompers’ death in 1924, his successor, William Green, continued the close AF of L collaboration with Hoover. See Radosh, The Development of Corporate Ideology, pp. 201ff.

Herbert Hoover’s entire program of activities as Secretary of Commerce was designed to advance the subsidization of industry and the interpenetration of government and business. As Hoover’s admirer and former head of the United States Chamber of Commerce put it, Hoover had advanced the “teamplay of government with the leaders of character in the various industries.”Julius H. Barnes, “Herbert Hoover’s Priceless Work in Washington,” Industrial Management (April, 1926), pp. 196–197. Also see Brandes, Herbert Hoover and Economic Diplomacy, p. 3. Thus, Hoover expanded the Bureau of Foreign and Domestic Commerce fivefold, opening numerous offices at home and abroad. His trade commissioners and attachés aided American exports in numerous ways. He also reorganized the Bureau along commodity lines, with each commodity division headed by someone chosen by the particular trade or industry, from the trade “he knows and represents.”Brandes, Herbert Hoover and Economic Diplomacy, p. 5. Furthermore, Hoover promoted the cartelization of each industry by inducing each trade to create a committee to cooperate with the Department of Commerce, and to select the industry’s choice for head of the commodity division. Officials in the Department were systematically recruited from business to stay in the Department for a few years and then to return to private business at higher-paying jobs.

One favorite method of Hoover’s for subsidizing as well as cartelizing exports was to foster the creation of export-trade associations. Thus, in 1926, Hoover repeatedly urged the coffee trade to band together and create a National Coffee Council, so that all American coffee buyers could join together to lower buying prices. Hoover and his aides craftily suggested to the coffee trade that one union leader and one woman consumer be named to the proposed Coffee Council as a public-relations device to relieve public fears of a cartel.Ibid., pp. 17–18, 132–139.

The difficulties of forming a coffee cartel proved insurmountable; but Hoover had more luck with the rubber industry, organizing it to fight British cartel restrictions on Asian rubber production that had been imposed in 1922. Hoover led the rubber industry in a drive to induce Americans to buy less rubber and hence to lower the price, as well as to promote American-owned sources of supply, by such means as government subsidies to new United States-owned rubber plantations in the Philippines.On Hoover’s repeated urging of American oil companies to join in the development of petroleum in Mesopotamia, see Nash, United States Oil Policy, pp. 56–57. An American rubber-buying pool was established in 1926 and lasted until the end of British restrictions two years later.Harvey Firestone was the most enthusiastic rubber user backing the Hoover program, and also in organizing American owned rubber plantations in Liberia. The mighty U.S. Rubber Co., on the other hand, already owned large rubber plantations in the Dutch East Indies, which were not subject to British restrictions. U.S. Rubber was therefore the rubber user least enthusiastic about the buying pool. Brandes, Herbert Hoover and Economic Diplomacy, pp. 84–128. On Firestone’s acquisition of Liberian land, see Frank Chalk, “The Anatomy of an Investment: Firestone’s 1927 Loan to Liberia,” Canadian Journal of African Studies (March, 1967): 12–32.

As soon as he assumed office, Hoover induced President Harding to pressure investment bankers to require that the proceeds of their loans abroad be used to purchase American exports. When little came of this pressure, Hoover began to threaten congressional action if the banks did not agree. For Hoover, the aim of subsidizing exports was so important that even unsound foreign loans that could serve this purpose were considered worthwhile.See Jacob Viner, “Political Aspects of International Finance, Part II,” Journal of Business (July, 1928): 339; Hoover, Memoirs, vol. 2, p. 90. Also see Brandes, Herbert Hoover and Economic Diplomacy, pp. 170–91. Hoover also clashed with banks that made foreign loans to Germany, since he was worried about the loans building up competitors to American firms, especially chemical manufacturers. Ibid., pp. 192–95.

Hoover’s opposition to foreign “monopoly” did not of course prevent him from supporting a protective tariff in the United States, thus providing privilege to American domestic as well as export firms. During the 1920s, Hoover was also active in promoting the cartelization of the domestic oil industry. As an active member of President Coolidge’s Federal Oil Conservation Board since its inception in 1924, Hoover worked in collaboration with a growing majority of the oil industry in behalf of restrictions on oil production in the name of “conservation.” This was a “conservation,” by the way, that was urged regardless of whether American oil resources seemed to be scarce or superabundant. Hoover was particularly interested in removing antitrust limitations on industrial cooperation in such restrictive measures.Nash, United States Oil Policy, pp. 81–97.

In the field of coal, Hoover sponsored repeated attempts at cartelization. The first attempt was a bill in 1921 to establish a federal coal commission to gather and publish statistics of the coal industry, so as to publicize price data and thereby facilitate industry-wide price-fixing. Failing a commission, the Department of Commerce was eager to take on the task. However, this and a later scheme by Hoover to encourage marketing cooperatives in coal by exemption from antitrust laws, were defeated by the opposition of competitive low-cost Southern coal operators. Undaunted, Hoover, in 1922, prepared a full-fledged cartelizing plan. The idea was to establish unemployment insurance in the coal industry, so designed as to penalize in the cost of the plan the part-time and seasonal coal mines, and thereby to drive these higher-cost mines out of business. The coal industry would then form cooperatives, which would fix and allocate quotas on production, putting more mines out of operation, the owners to be compensated out of the increased cartel profits made by the rest of the industry. The district coal cooperatives were to market all the coal and then divide the revenues proportionately. But once again Hoover could not command the needed support from the coal industry and the public.See Hawley, “Secretary Hoover and the Bituminous Coal Problem, 1921–1928,” pp. 247–70. Also see Hoover, Memoirs, vol. 2, p. 70. During the coal strike in the spring of 1922, Hoover organized an emergency system of rationing and price controls. Harking back to his wartime experience, he established a network of district committees to hold down coal prices. After the typically Hooverian “voluntary” controls failed to work, Hoover called for governmental price-fixing, and by late September, Congress had passed a law appointing a Federal Fuel Distributor to enforce “fair prices.”

Hoover played a similar role in cartelizing the cotton textile industry. Favoring the “open-price” plan for stimulating price agreements, Hoover used his Department of Commerce to provide the price publicity that might be illegal for a trade association. Hoover also played a role in forcing the cotton textile industry to establish a nationwide rather than a regional trade association, to the delight of the bulk of the industry. Hoover repeatedly urged the many reluctant firms to join this Cotton Textile Institute, which gave promise of stabilizing the industry and eliminating “waste” in production. Hoover went so far as to endorse, in 1927, the CTFs plan to urge each of the member firms to cut production by a certain definite amount.Galambos, Competition and Cooperation, pp. 78–83, 102–03, 108, 114–15, 123, 128–29. The cotton textile industry urged Secretary Hoover to become the first president of their new Institute; as it was, the president was a man recommended by Hoover.

One of the clearest indications of how far removed Hoover was from laissez-faire was his leading role in nationalizing the airwaves of the fledgling radio industry. Hoover put through the nationalizing Radio Act in 1927 as a substitute for the courts’ increasing application of the common law, granting private ownership of the airwaves to the first radio stations that put them into use.See in particular Ronald H. Coase, “The Federal Communications Commission,” Journal of Law and Economics (October, 1959): 30 ff. Also see Hoover, Memoirs, vol. 2, pp. 139–42.

One of the most pervasive and least studied methods by which Hoover helped to monopolize industry during the 1920s was to impose standardization and “simplification” of materials and products. In this way, Hoover managed to eliminate the “least necessary” varieties of a myriad of products, greatly reducing the number of competitive sizes, for example, of automobile wheels and tires, and threads for nuts and bolts. All in all, about three thousand articles were thus “simplified.” The recommendations for simplification were worked out by the Department of Commerce with the aid of the eager committees representing each trade.Hoover, Memoirs, vol. 2, pp. 66–68.

Hoover’s approach to the farm question was consistent: a repeated emphasis on the cartelization of agriculture.In the case of salmon fishing, Hoover called for federal regulations from 1922 on. In that year he induced Harding to create salmon reservations in Alaska, thus cutting salmon production and raising prices. See Donald C. Swain, Federal Conservation Policy, 1921–1933 (Berkeley: University of California Press, 1963), pp. 25 ff. At first, the favored means was the subsidizing by government of farm cooperatives. Hoover helped write the act of August, 1921, which expanded the funds allotted to the War Finance Corporation and permitted it to lend directly to the farm co-ops. He also supported the farm-bloc bill for an extensive system of Federal Intermediate Credit Banks and a Federal Farm Loan Board, which were to lend federal funds to farm co-ops. In the Department of Commerce, he was able to help farm co-ops with marketing programs and with aid in finding export markets.

Hoover soon enlarged his ideas of farm intervention; he was one of the earliest proponents of a Federal Farm Board, designed to raise and support farm prices by creating federal stabilization corporations that were to purchase farm products and to lend money to farm co-ops for such purchases. And to this end, in 1924, Hoover helped write the unsuccessful Capper-Williams Bill. As a presidential candidate in 1928 he promised the farm bloc that he would promptly institute a farm price-support program.It was not only the farm bloc that wanted a nationally cartelized agriculture. Two of the fathers of the agitation for farm price support were George N. Peek and General Hugh S. Johnson, heads of the Moline Plow Company, one of the largest farm-equipment manufacturers. As such they were directly interested in the subsidizing of farmers. Big business in general was also enthusiastic, the farm price-support plan being warmly supported by the Business Men’s Commission on Agriculture, established jointly by the U.S. Chamber of Commerce and the National Industrial Conference Board. See Dorfman, The Economic Mind in American Civilization, vol. 4, pp. 79–80. It was a promise that he hastened to keep, for as soon as he became president, Hoover drove through the Agricultural Marketing Act of 1929. This Act created a Federal Farm Board with a revolving fund of $500 million to raise and support farm prices and to aid farm co-ops; the Board was to conduct its price-raising operations through stabilization corporations for the various commodities, with the corporations also serving as marketing agencies for the coops. Furthermore, Hoover appointed to the Board representatives of the various agricultural and farm co-op interests: a cartelization operated by the cartelists themselves.Chairman of the eight-man FFB was Alexander Legge, president of International Harvester Co., one of the major farm machinery manufacturers, and like Peek and Johnson, a protege of financier Bernard M. Baruch since the days of the economic planning of World War I. Others represented on the Board were the tobacco co-ops, the livestock co-ops, the Midwest grain interests, and the fruit growers. See Theodore Saloutos and John D. Hicks, Agricultural Discontent in the Middle West (Madison: University of Wisconsin Press, 1951), pp. 407–12.

2. Herbert Hoover Fights the Great Depression

Mobilizer and economic planner of World War I; persistent advocate of cartelization and government-business partnership in stabilizing industry; pioneer in promoting a pro-union outlook in industry as a method of insuring the cooperation of labor; booster of high wages as a sustainer of purchasing power and business prosperity; ardent proponent of massive public-works schemes during depressions; advocate of government programs to boost farm prices and farm co-ops; no one could have been as ideally suited as Herbert Clark Hoover to be president at the onset of a Great Depression and to react with a radical program of statism to be trumpeted as a “New Deal.” And that is precisely what Herbert Hoover did. It is one of the great ironies of historiography that the founder of every single one of the features of Franklin Roosevelt’s New Deal was to become enshrined among historians and the general public as the last stalwart defender of laissez-faire.

Let us consider the New Deal — a rapid intensification of government intervention that began in response to a severe depression, and featured: cartelization of industry through government-and-business planning; bolstering of prices and wage rates, expansion of credit, massive unemployment relief and public-works programs, support of farm prices, and propping up of weak and unsound business positions. Every one of these features was founded, and consciously so, by President Hoover. Hoover consciously and deliberately broke sharply and rapidly with the whole American tradition of a laissez-faire response to depression. As Hoover himself proclaimed during his presidential campaign of 1932:

... we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action. ... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times. ... For the first time in the history of depressions, dividends, profits and the cost of living, have been reduced before wages have suffered. ... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world.Rothbard, America’s Great Depression, pp. 169–86. One of the first observers who saw that the radical break with the past came with Hoover and not with F.D.R. was Walter Lippmann, who wrote in 1935 that the “policy initiated by President Hoover in the autumn of 1929 was something utterly unprecedented in American history. The national government undertook to make the whole economic order operate prosperously. ... The state attempted to direct by the public wisdom a recovery in the business cycle which had hitherto been left with as little interference as possible to individual exertion.” Walter Lippmann, “The Permanent New Deal,” reprinted in The Shaping of Twentieth-Century America, R.M. Abrams and L.W. Levine, eds. (Boston: Little, Brown & Co., 1965), p. 430. Similarly, the perceptive term “Hoover New Deal” was coined by the contemporary observer and economist Benjamin M. Anderson. See “The Road Back to Full Employment,” in Financing American Prosperity, P. Homan and F. Machlup, eds. (New York: Twentieth Century Fund, 1945), pp. 9–70; and Anderson, Economics and the Public Welfare.

Hoover began his “gigantic” program as soon as the stock market crashed on October 24, 1929. His most fateful act was to call a series of White House Conferences with the nation’s leading financiers and industrialists and induce them to pledge that wage rates would not be lowered and that they would expand their investments. Hoover explained the general aim of these conferences to be the coordination of business and government agencies in concerted action. Industrial group after group pledged that wage rates would be maintained. Hoover insisted that, contrary to previous depressions when wage rates fell promptly and rapidly (and, we might add, the depression was then soon over), wage rates must now be the last to fall, in order to prop up mass purchasing power. The entire burden of the recession, then, must fall upon business profits. The most important of these conferences occurred on November 21, when such great industrial leaders as Henry Ford, Julius Rosenwald, Walter Teagle, Owen D. Young, Alfred P. Sloan, Jr., and Pierre du Pont pledged their cooperation to the Hoover program. These agreements were made public, and Hoover hailed them at a White House conference on December 5, as an “advance in the whole conception of the relationship of business to public welfare ... a far cry from the arbitrary and dog-eat-dog attitude of ... the business world of some thirty or forty years ago.” The AF of L lauded this new development; never before, it proclaimed, have the industrial leaders “been called upon to act together ...”The American Federationist (January, 1930). On the White House Conferences, see Robert P. Lamont, “The White House Conferences,” The Journal of Business (July, 1930): 269. By the following March, the AF of L was reporting that the big corporations were indeed keeping their agreement to maintain wage rates.The American Federationist (March, 1930): 344.

In September, 1930, Hoover took another step to relieve unemployment and, by the way, to prop up wage rates. By administrative decree, Hoover in effect barred almost all further immigration into the country. In keeping with this policy of curing unemployment by forcing people out of the labor force, he deliberately accelerated the deportation of “undesirable” aliens, the deportation level reaching 20,000 per year.

The wage agreement held firm in the midst of a cataclysmic Depression and unprecedented and prolonged mass unemployment.Particularly active in keeping industry in line was the President’s Emergency Committee for Employment; see E.P. Hayes, Activities of the President’s Emergency Committee for Employment, October 17, 1930–August 19, 1931 (Printed by the author, 1936). In fact, since prices were falling rapidly, this meant that the real wage rates of those lucky enough to remain employed were increasing sharply. The economist Leo Wolman noted at the time that it “is indeed impossible to recall any past depression of similar intensity and duration in which the wages of prosperity were maintained as long as they have been in the depression of 1930–31.”Leo Wolman, Wages in Relation to Economic Recovery (Chicago: University of Chicago Press, 1931). It was a record hailed by liberals from the AF of L to John Maynard Keynes. It was only by 1932, after several years of severe depression and catastrophic unemployment, that businesses could keep up wage rates no longer. When, in the fall of 1931, the United States Steel Corporation finally summoned up the courage to cut wage rates, it did so over the opposition of its own president and to the accusation of William Green that its 1929 pledge to the White House was being violated.See Fred R. Fairchild, “Government Saves Us from Depression,” Yale Review (Summer 1932): 667ff; and Dorfman, The Economic Mind in American Civilization, vol. 5, p. 620. The large firms were particularly slow to break the agreement, and even then many of the cuts were made in executive salaries where the unemployment problem was at a minimum. Even with the cuts in wages, wage rates fell by only 23% from 1929 to 1933 — less than the decline of prices. Thus, real wage rates actually rose over the period, by over 8% in the leading manufacturing industries. The drop in wage rates had been far more prompt and extensive in the far milder 1921 depression. In the face of this record of wage maintenance, the unemployment rate rose to 25% of the labor force by 1933, and to a phenomenal 46% in the leading manufacturing industries. There were, unfortunately, only a few observers and economists who understood the causal connection between these events: that maintenance of wage rates was precisely the major factor in deepening and prolonging mass unemployment and the Depression.See the unfortunately neglected study by Sol Shaviro, “Wages and Payroll in the Depression, 1929–1933” (Master’s essay, Columbia University, 1947). Also see Rothbard, America’s Great Depression, pp. 236–39, 290–94; Phillips, McManus, and Nelson, Banking and the Business Cycle, pp. 231–32; National Industrial Conference Board, Salary and Wage Policy in the Depression (New York: Conference Board, 1933), pp. 31–38; and Dale Yoder and George R. Davies, Depression and Recovery (New York: McGraw-Hill, 1934), p. 89.

Hoover did his best, furthermore, to engineer a massive inflation of money and credit. In the crucial figure of government securities owned by the Federal Reserve Banks, Federal Reserve holdings rose from $300 million in September, 1929, to $1,840 million in March, 1933 — a sixfold increase. Ordinarily this would have led to a sixfold expansion of bank reserves and an enormous inflation of the money supply. But the Hoover drive for inflation was thwarted by the forces of the economy. Federal Reserve rediscounts fell by half a billion due to sluggish business demand, despite a sharp drop in the Federal Reserve’s discount rate, cash in circulation increased by one and a half billion due to the public’s growing distrust of the shaky and inflated banking system, and the banks began to pile up excess reserves because of their fear of making investments amidst the sea of business failures. The Hoover administration grew livid with the banks, and Hoover denounced the “lack of cooperation of the commercial banks ... in the credit expansion drive.” Atlee Pomerene, head of the Reconstruction Finance Corporation, went so far as to declare that any bank that is liquid and doesn’t extend its loans is a “parasite on the country.”New York Times, May 20, 1932. Hoover told Secretary of the Treasury Ogden Mills to form a committee of leading industrialists and bankers to pressure the banks into extending their credit.Chairman of the committee was Owen D. Young of General Electric. Included in the committee were Walter S. Gifford of AT&T, Charles E. Mitchell of National City Bank, and Walter C. Teagle of Standard Oil of New Jersey. For more on Hoover’s, threats against the banks, see Herbert Stein, “Pre-Revolutionary Fiscal Policy: The Regime of Herbert Hoover,” Journal of Law and Economics (October, 1966): 197n. By the end of his term and the abject failure of his inflationist program, Hoover was proposing what are surely typical New Deal measures: bank holidays and at least temporary federal “insurance” of bank deposits.

In fact, Hoover seriously considered invoking a forgotten wartime law making the “hoarding” of gold (that is, redemption of dollars into gold) a criminal offense.Jesse H. Jones and Edward Angly, Fifty Billion Dollars (New York: Macmillan, 1951), p. 18. Also see H. Parker Willis and John M. Chapman, The Banking Situation (New York: Columbia University Press, 1934), pp. 9 ff. Furthermore, Hoover’s Secretary and Undersecretary of the Treasury had decided, by the end of their terms, that the gold standard should be abolished. New York Herald Tribune, May 5, 1958, p. 18. Although he did not go that far, he did try his best to hamper the workings of the gold standard by condemning and blackening the names of people who lawfully redeemed their dollars in gold or their bank deposits into cash. In February, 1932, Hoover established the Citizens’ Reconstruction Organization under Colonel Frank Knox of Chicago, dedicated to condemning “hoarders” and unpatriotic “traitors.” Leading industrialists and labor leaders joined the CRO. Hoover also secretly tried to stop the American press from printing the full truth about the banking crisis and about the rising public criticism of his administration.Kent Cooper, Kent Cooper and the Associated Press (New York: Random House, 1959), p. 157.

Neither was Hoover lax in increasing the expenditures of the federal government. Federal expenditures rose from $3.3 billion in fiscal 1929 to $4.6 billion in fiscal 1932 and 1933, a rise of 40%. Meanwhile, federal budget receipts fell in half, from $4 billion to less than $2 billion, demonstrating that Hoover was so much of a proto-Keynesian that he was willing to incur a deficit of nearly 60% of the budget. This was, to that moment, the largest peacetime federal deficit in American history.

Part of this massive rise of federal expenditures went, as one might expect, into public works. So promptly did Hoover act to expand public works (proposing a $600 million increase by December, 1929) that by the end of 1929 the economist J.M. Clark was already hailing Hoover’s “great experiment in constructive industrial statesmanship.”John Maurice Clark, “Public Works and Unemployment,” American Economic Review, Papers and Proceedings (May, 1930): 15 ff. In February, 1931, Hoover’s Emergency Committee for Employment was instrumental in pushing through Congress Senator Wagner’s (D., N.Y.) Employment Stabilization Act, which established an Employment Stabilization Board to expand public works in a depression, and a fund of $150 million to put the plan into effect. In happily signing the measure, Hoover gave a large amount of credit to the veteran public-works agitator, Otto Tod Mallery.See Irving Bernstein, The Lean Years (Boston: Houghton Mifflin, 1960), p. 272; Dorfman, The Economic Mind in American Civilization, vol. 5, p. 7n. In his memoirs, Hoover recalled with pride that his administration had constructed more public works than had the federal government over the previous thirty years, and that he personally had induced state and local governments to expand their public-works programs by $1.5 billion. He also launched the Boulder, Grand Coulee, and California Central Valley dams, and, after agitating for the project since 1921, Hoover signed a treaty with Canada to build a St. Lawrence Seaway, a treaty rejected by the Senate.It is instructive to note the attitude of private electrical companies toward the government-built Boulder Dam. They looked forward to purchasing cheap, subsidized governmental power, which they would then resell to their customers. The private-power companies also saw Boulder Dam as a risky, submarginal project, the costs of which they were happy to see shouldered by the taxpayers. See Harris Gaylord Warren, Herbert Hoover and the Great Depression (New York: Oxford University Press, 1959), p. 64. Furthermore, the Boulder project was the first example of large-scale, federal, multipurpose river basin planning.See Swain, Federal Conservation Policy, pp. 25 ff, 161ff.

It must be noted, however, that in the last year of his term, Hoover, the veteran pioneer of public-works stabilization, began to find the accelerating movement toward ever greater public works going beyond him. As writers, economists, politicians, businessmen, and the construction industry called loudly for many billions in public works, Hoover began to draw back. He began to see public works as costly, and as bringing relief to a selected group only. He came to favor a relatively greater emphasis on federal grants-in-aid and on public works that would be self-liquidating. As a result, federal public-works spending increased only slightly during 1932. As we shall see, Hoover’s growing doubts on public works were symptomatic of a more general process of being left behind by the accelerating onrush toward collectivist thinking that developed during his final year as president.See Vladimir D. Kazakevich, “Inflation and Public Works,” in H. Parker Willis and John M. Chapman, eds., The Economics of Inflation (New York: Columbia University Press, 1935), pp. 344–49.

Another massive dose of government intervention was President Hoover’s Home Loan Bank System, established in the Federal Home Loan Act of July, 1932. Supported enthusiastically by the building and loan associations, the act paralleled the Federal Reserve Act in relation to these associations. Twelve district banks were established under a Federal Home Loan Bank Board, with a $25 million capital supplied by the Treasury, as a compulsory, central mortgage-discount bank for the building and loan industry. Hoover had originally proposed a grandiose national mortgage-discount system that would also include savings banks and insurance companies, but the latter refused to agree to the scheme. As it was, Hoover complained that Congress had placed excessively rigorous limits on the amount of discounting that could be made by the Board; but he did his best to spur use of the new system.

One of Mr. Hoover’s clearest harbingers of the New Deal was his creation in January, 1932, of the Reconstruction Finance Corporation. The RFC was clearly inspired by and modelled after the old wartime War Finance Corporation, which had extended emergency loans to business. One of the leading originators of the RFC was Eugene Meyer, Jr., Governor of the Federal Reserve Board and former Managing Director of the WFC; most of the old WFC staff were employed by the new organization.Leuchtenburg, “The New Deal and the Analogue of War,” pp. 98–100. Also see Gerald D. Nash, “Herbert Hoover and the Origins of the Reconstruction Finance Corporation,” Mississippi Valley Historical Review (December, 1959): 455–68.

The RFC began in the fall of 1931 as the National Credit Corporation, through which leading banks were persuaded, at a secret conference with Hoover and his aides, to extend credit to shaky banks, with Federal Reserve assistance. When the banks balked at this scheme, Hoover threatened legislation to compel their cooperation; in return for their agreement to the NCC, the administration agreed that it would be strictly temporary, to be replaced soon by an RFC.

The RFC bill was passed hurriedly by Congress in January, 1932. The Treasury furnished it with half a billion dollars, and it was empowered to issue debentures up to $1.5 billion. Meyer was chosen to be chairman of the new organization.Many large loans were made by the RFC to banks that were in the ambit of RFC directors themselves, or of others high up in the Hoover administration. Thus, shortly after General Charles Dawes resigned as President of the RFC, the bank that he headed, the Central Republic Bank and Trust Co., received a large RFC loan. See John T. Flynn, “Inside the RFC,” Harpers’ Magazine (1933): 161–69. In the first half of 1932, the RFC extended, in the deepest secrecy, $1 billion of loans, largely to banks and railroads. The railroads received nearly $50 million simply to repay debts to the large banks, notably J.P. Morgan & Co. and Kuhn, Loeb and Co. One of the important enthusiasts for this policy was Eugene Meyer, Jr., on the grounds of “promoting recovery” and frankly, of “putting more money into the banks.” Meyer’s enthusiasm might well have been bolstered by the fact that his brother-in-law, George Blumenthal, was an officer of J.P. Morgan & Co., and that he himself had served as an officer of the Morgan bank.

But Hoover wasn’t satisfied with the massiveness of the RFC program. He insisted that RFC be able to lend more widely to industry and to agriculture, and that it be able to make capital loans. This amendment — the Emergency Relief and Construction Act — passed Congress in July, 1932; the Act nearly doubled total RFC capital from $2 billion to $3.8 billion and greatly widened the scope of RFC lendingSee J. Franklin Ebersole, “One Year of the Reconstruction Finance Corporation,” Quarterly Journal of Economics (May, 1933): 464–87.. During 1932, the RFC extended loans totaling $2.3 billion.

Herbert Hoover’s enthusiasm for government aid to industry and banking was not matched in the area of Depression relief to the poor; here his instincts were much more voluntarist. Hoover steadfastly maintained his voluntary relief position until mid-1932. As early as 1930/31, he had been pressured on behalf of federal relief by Colonel Arthur Woods, the Chairman of Hoover’s Emergency Committee for Employment, who had previously been a member of Rockefeller’s General Education Board. But in mid-1932 a group of leading Chicago industrialists was instrumental in persuading Hoover to change his mind and establish a federal relief program. In addition to widening the powers of the RFC loans to industry, Hoover’s Emergency Relief and Construction Act was the nation’s first federal relief legislation. The RFC was authorized to lend $300 million to the states for poor relief.Bernstein, The Lean Years, p. 467.

Throughout the Depression, Herbert Hoover gave vent to his long-standing dislike of speculation and the stock market. In the fall of 1930, Hoover threatened federal regulation of the New York Stock Exchange, hitherto thought to be constitutionally subject only to state regulation. Hoover forced the Exchange to agree “voluntarily” to withhold loans for purposes of short selling. Hoover returned to the attack during 1932, threatening federal action against short selling. He also induced the Senate to investigate “sinister ... bear raids” on the Exchange. Hoover seemed to find it sinful and vaguely traitorous for the stock market to judge stock values on the basis of current (low) earnings. Hoover went on to propose what later came to pass as the New Deal’s SEC, a regulation that Hoover openly applauded.

Hoover’s Federal Farm Board was ready to move when the Depression arrived and the FFB proceeded on its proto-New Deal farm policy of attempting to raise and support farm prices.

The FFB’s first big operation was in wheat. The Board advised the receptive wheat farmers to act like cartelists: in short, to hold wheat off the market and wait for higher prices. Soon it began to lend $100 million to wheat co-ops to withhold wheat stocks, and thereby raise prices; and it established a central grain corporation to centralize and coordinate the wheat cooperatives. When the loans to coops failed to stem the tide of falling wheat prices, the grain corporation began to buy wheat on its own. The FFB loans and purchases managed to sustain wheat prices for a time; but by the spring of 1930 this had only aggravated the wheat surplus by inducing farmers to expand their production, and the only result was further declines in price.

It became clear to the Hoover administration that the cartelizing and price-raising policy could not work unless wheat production was reduced. A typical Hooverian round of attempted voluntary persuasion ensued, led by the Secretary of Agriculture and the FFB; a group of economists was sent from Washington to urge the marginal Northwestern wheat farmers — the original agitators for wheat price supports — to shift from wheat into some other crop. Secretary of Agriculture Arthur M. Hyde and the FFB’s Alexander Legge toured the Middle West, urging farmers to lower their wheat acreage. But, as could have been foreseen, none of this moral exhortation was effective, and wheat surpluses continued to pile up and prices to fall. By November, the government’s Grain Stabilization Corporation had purchased over 65 million bushels of wheat to hold off the market, but to no avail. Then, in November, 1930, Hoover authorized the GSC to purchase as much wheat as might be necessary to stop any further fall in wheat prices. But economic forces could not be defeated so easily, and wheat prices continued to fall. Finally, the FFB conceded defeat and dumped its accumulated wheat stocks, further intensifying the fall in wheat prices.

Similar price-support programs were tried in cotton, but with similar disastrous results. Chairman James C. Stone of the Federal Farm Board even tried to mobilize the state governors to plow under every third row of cotton, but still to no avail. Similar calamitous attempts at cartelization occurred in wool, butter, grapes, and tobacco.

It was becoming clear that the cartelizing program could not work unless there were compulsory restrictions on production; there were simply too many farmers for voluntary exhortations to have any effect. President Hoover began to move down that road, recommending at least that productive land be withdrawn from cultivation, that crops be plowed under, and that immature farm animals be slaughtered — all to reduce the very surpluses that Hoover’s price supports had accumulated.It was left for the conservative Senator Arthur H. Vandenberg (R., Mich.) to propose the final link in the chain that was to form the New Deal’s AAA: compelling farmers to cut production. Gilbert N. Fite, “Farmer Opinion and the Agricultural Adjustment Act, 1933,” Mississippi Valley Historical Review (March, 1962): 663.

Meanwhile, President Hoover pursued cartelization in other fields with more success. In May, 1931, he ordered the cessation of new leases in the federal forests for purposes of lumbering. He also withdrew over two million acres of forest land from production and into “national forests,” and increased the area of national parks by 40%.Warren, Herbert Hoover and the Great Depression, p. 65. Hoover also endorsed the privately financed Timber Conservation Board, formed to encourage cooperation in the lumber industry. Ellis W. Hawley, “Herbert Hoover and the Economic Planners, 1931–32” (Unpublished manuscript, 1968), p. 9. In a prefigurement of the New Deal’s CCC, Hoover’s Forestry Service put through a large-scale program of work relief for the unemployed in public-works construction in the national forests. Swain, Federal Conservation Policy, p. 25.

Hoover put through the McNary-Watres Act of April, 1930, which deliberately used postal air-mail subsidies and regulation to bring commercial airlines under federal organization and control. Hoover’s admiring biographers wrote that as a result of this law, “The routes were consolidated into a carefully planned national system of commercial airways. ... The Nation was saved from a hodgepodge of airways similar to the tangle that had grown up in rail transportation.”William Starr Myers and Walter H. Newton, The Hoover Administration (New York: Charles Scribners, 1936), p. 430.

Hoover also urged upon Congress what would have been the first federal regulation of electric power companies. Hoover’s original proposal was to give the Federal Power Commission the power to set interstate power rates in collaboration with state power commissions. But Congress refused to go that far, and the FPC, although expanded, continued to exercise power only over water power in rivers.

In the coal industry, Hoover sympathized with the Appalachian Coal combine, which marketed three-quarters of Appalachian bituminous coal, in an attempt to raise coal prices and allocate production quotas to the various coal mines. Hoover also called for the reduction of “destructive competition” reigning in the coal industry.Myers and Newton, The Hoover Administration, p. 50; Waldo E. Fisher and Charles M. James, Minimum Price Fixing in the Bituminous Coal Industry (Princeton, NJ: Princeton University Press, 1955), pp. 21–27.

Hoover was more specific in helping to cartelize the oil industry. Hoover and his Secretary of the Interior Ray Lyman Wilbur stimulated such states as Texas and Oklahoma to pass oil proration laws in the name of “conservation” to curtail crude oil production and thereby raise prices and to establish an interstate compact to collaborate in the proration program. Hoover also aided these laws by suspending all further oil leases on public lands and by pressuring oil operators near the public domain to agree to restrict oil production.

In sponsoring and encouraging proration laws particularly, Hoover was taking his stand with the large oil companies. Hoover and Wilbur’s suggestion of general Sunday shutdowns of oil production was approved by the large companies, but defeated by the opposition of the smaller producers. The smaller firms particularly urged a protective tariff on imported crude and petroleum products, which Hoover finally agreed to in 1932. The tariff served to make the domestic cartel and proration laws more generally effective. In its restriction of imports, the tariff demonstrated that the drive for proration laws had little to do with simply conserving domestic oil reserves, but was rather aimed at cutting the supply of oil available to the domestic market.

Despite these services by Hoover, the oil industry was still restive; the industry wanted more, it wanted federal legislation in outright support of restricting production and raising prices. Here, too, President Hoover was beginning to lose the leadership of the accelerating cartelization movement in American industry.See George W. Stocking, “Stabilization of the Oil Industry: Its Economic and Legal Aspects,” American Economic Review, Papers and Proceedings (May, 1933): 59–70.

In the cotton textile industry, the trade association, the Cotton Textile Institute, which had long been close to Hoover, cunningly decided to press for monopolistic curtailment of production under the guise of “humanitarianism.” The device was to call for the abolition of night work for women and children; such a drive was neatly calculated to appeal both to Hoover’s (and to the industry’s) monopoloid convictions, as well as to his humanitarian rhetoric. CTI’s campaign of 1930/31 to pressure the various mills to abolish night work for women and children was substantially aided by Hoover and his Department of Commerce, who actively “helped to whip the non-cooperators into line.” Hoover publicized his firm support, and Secretary of Commerce Lamont sent personal letters to cotton textile operators, urging their adherence to the plan.Galambos, Competition and Cooperation, pp. 153–57, 165–69. Intense administration pressure continued throughout 1931 and 1932. Lamont called a special conference to which he brought several leading bankers and the endorsement of Hoover to pressure the holdouts into line.

But this cartel scheme also failed, for cotton textile prices continued to fall. As a result, compliance with the curtailment of production began to crack. The cartel failed for reasons similar to the failure of the FFB: despite the intense administration pressure, the production cuts remained only voluntary. So long as there was no outright governmental compulsion on the textile firms to obey the production quotas, prices could not be raised. By 1932, the cotton textile industry, too, was becoming impatient with its old friend Hoover; the industry was rapidly beginning to agitate for governmental coercion to make cartelization work.Ibid., pp. 176–84.

This attitude of the cotton textile, petroleum, and agricultural industries spread rapidly throughout American industry during 1931 and 1932: an impatience with the pace of America’s movement toward the corporate state. Under the impact of the Great Depression, American industry, along with the nation’s intellectuals and labor leaders, began to clamor for the outright collectivism of a corporate state — for federal organization of trade associations into compulsory cartels for restricting production and raising prices. In short, a general clamor arose for an economy of fascism.

The most important call for the compulsory cartelization of a corporate state was sounded by Gerard Swope, the veteran corporate liberal who headed General Electric. Swope delivered his famous “Swope Plan” before the National Electrical Manufacturers Association in the fall of 1931, and it was endorsed by the United States Chamber of Commerce in December.The text of the Swope address can be found in Monthly Labor Review 32 (1931): 834 ff. Also see David Loth, Swope of GE (New York: Simon and Schuster, 1958), pp. 202 ff. Particularly enthusiastic was Henry I. Harriman, president of the Chamber, who declared that any dissenting businessmen would be “treated like any maverick. ... They’ll be roped and branded, and made to run with the herd.”Quoted in Arthur M. Schlesinger, Jr., The Crisis of the Old Order, 1919–1933 (Boston: Houghton Mifflin Co., 1957), pp. 182–83. Charles F. Abbott of the American Institute of Steel Construction hailed the Swope Plan as “a measure of public safety” to crack down on “the blustering individual who claims the right to do as he pleases.”J. George Frederick, Readings in Economic Planning (New York: The Business Course, 1932), pp. 333–34. The AF of L endorsed a similar program, with a slightly greater share to go to the unions in overall control; particularly enthusiastic were John L. Lewis and Sidney Hillman, later to form the New Deal-oriented CIO.See Rothbard, America’s Great Depression, pp. 245–49; Rothbard, “The Hoover Myth: Review of Albert U. Romasco, The Poverty of Abundance,” in James Weinstein and David W. Eakins, eds., For a New America (New York: Random House, 1970), pp. 162–79; and Hawley, “Herbert Hoover and the Economic Planners,” pp. 4ff.

Dr. Virgil Jordan, economist for the National Industrial Conference Board, summed up the state of business opinion when he concluded, approvingly, that businessmen were ready for an “economic Mussolini.”Schlesinger, Crisis of the Old Order, p. 268.

In the light of Herbert Hoover’s lengthy corporatist career, the business leaders naturally expected him to agree wholeheartedly with the new drive toward business collectivism.Hawley, “Herbert Hoover and the Economic Planners,” pp. 4–11. Hence they were greatly surprised and chagrined to find Hoover sharply drawing back from the abyss, from pursuing the very logic toward which his entire career had been leading.

It is not unusual for revolutions to devour their fathers and pioneers. As a revolutionary process accelerates, the early leaders begin to draw back from the implicit logic of their own life work and to leap off the accelerating bandwagon that they themselves had helped to launch. So it was with Herbert Hoover. All his life he had been a dedicated corporatist; but all his life he had also liked to cloak his corporate-state coercion in cloudy voluntarist generalities. All his life he had sought and employed the mailed fist of coercion inside the velvet glove of traditional voluntarist rhetoric. But now his old friends and associates — men like his longtime aide and Chamber of Commerce leader Julius Barnes, railroad magnate Daniel Willard, and industrialist Gerard Swope — were in effect urging him to throw off the voluntarist cloak and to adopt the naked economy of fascism. This Herbert Hoover could not do; and as he saw the new trend he began to fight it, without at all abandoning any of his previous positions. Herbert Hoover was being polarized completely out of the accelerating drive toward statism; by merely advancing at a far slower pace, the former “progressive” corporatist was now becoming a timid moderate in relation to the swift rush of the ideological current. The former leader and molder of opinion was becoming passé.Hoover had done his best to further corporatism in more moderate and gradual ways. In addition to the measures described above, Hoover sponsored the highly protectionist Smoot-Hawley Tariff in 1929/30, and he signed the Norris-LaGuardia Act of 1932, which sponsored labor unionism by outlawing contractual agreements not to join unions and greatly curtailing the use of injunctions in labor disputes.

Hoover began to fight back, and to insist that a certain proportion of individualism, a certain degree of the old “American system,” must be preserved. The Swope and similar plans, he charged, would result in a complete monopolization of industry, would establish a vast governmental bureaucracy, and would regiment society. In short, as Hoover told Henry Harriman in exasperation, the Swope-Chamber of Commerce Plan was, simply, “fascism.”See Hawley “Herbert Hoover and the Economic Planners,” p. 21n. Hoover also resisted corporate-collectivist pressure from within his own administration, notably from such men as Frederick Feiker, head of the Bureau of Foreign and Domestic Commerce, and his old friend Secretary of the Interior Ray Lyman Wilbur. Herbert Hoover had finally seen the abyss of fascism and was having none of it.

Franklin Roosevelt was to have no such scruples. Hoover’s decision had vital political consequences: for Harriman told him bluntly at the start of the 1932 campaign that Franklin Roosevelt had accepted the Swope Plan — as he was to prove amply with the NRA and AAA. If Hoover persisted in being stubborn, Harriman warned, the business world, and especially big business, would back Roosevelt. Hoover’s brusque dismissal led to big business carrying out its threat. It was Herbert Hoover’s finest hour.Hoover, Memoirs, vol. 3, pp. 334–35. Also see Loth, Swope of GE, pp. 208–10; Eugene Lyons, Herbert Hoover (Garden City, N.Y.: Doubleday & Co., 1964), pp. 293–94; Myers and Newton, The Hoover Administration, pp. 245–56, 488–89. America’s legion of corporate liberals, who found their Holy Grail with the advent of Franklin Roosevelt’s New Deal, never forgave or forgot Herbert Hoover’s hanging back from America’s entry into the Promised Land. To the angry liberals, Hoover’s caution looked very much like old-fashioned laissez-faire. Hence Herbert Hoover’s pervasive entry into the public mind as a doughty champion of laissez-faire individualism.For a penetrating exception to this common view, see William Appleman Williams, The Contours of American History (Cleveland: World Publishing Co., 1961), pp. 385, 415, 425–38. It was an ironic ending to the career of one of the great pioneers of American state corporatism.

Preface by Murray N. Rothbard

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

The aim of this proposed book is to trace the origins of the current welfare-warfare state in America, in what is loosely called “The Progressive Period,” from approximately the mid-1890s to the mid-1920s. Briefly, the thesis is that the rapid upsurge of statism in this period was propelled by a coalition of two broad groups: (a) certain big business groups, anxious to replace a roughly laissez-faire economy by a new form of mercantilism, cartelized and controlled and subsidized by a strong government under their influence and control; and (b) newly burgeoning groups of intellectuals, technocrats, and professionals: economists, writers, engineers, planners, physicians, etc., anxious for power and lucrative employment at the hands of the State. Since America had been born in an antimonopoly tradition, it became important to put over the new system of cartelization as a “progressive” curbing of big business by a humanitarian government; intellectuals were relied on for this selling job. These two groups were inspired by Bismarck’s creation of a monopolized welfare-warfare state in Prussia and Germany.

The big government created by this business-intellectual partnership had important repercussions for all aspects of American life, in addition to the cartelized and regulated economy. For one thing, the drive of pietists and compulsory “moralists” could now be foisted on the American public in the name of the newly burgeoning medical “science.” The result: Prohibition, antisex laws, antidrug laws, and Sunday blue laws. Another result, which made heavy and effective use of the “morality” theme, was the business-professional drive to centralize and take over the nation’s cities, thereby reaping good government as against the wicked and corrupt old urban machines — which were responsive to poorer and immigrant groups. One of the major aspects of this urban centralization was to centralize the public school system, and force children into them, so that the immigrant Catholic groups would be “Christianized” and be inculcated in the values of the American State and the new system.

In foreign affairs, the new partnership of government and business meant a substitution of a new American imperialism for the older roughly “isolationist” and neutralist foreign policy. The U.S. government was now supposed to open up markets for American exports abroad, use coercion to protect American investors and bondholders overseas, and seize territory on behalf of these aims. It was to be willing to go to war on behalf of these aims. The increasing militarism also meant heavy government contracts and subsidies for favored arms manufacturers.

A third group, virtually created by the new system as a junior partner, was labor unions, which were weak until they were called to share the ruling power of the “collectivist planning” of World War I. Creating favored unions was an instrument of cartelization, as well as insuring worker cooperation in the new order. Partly to mold the immigrants more easily, and partly as a boon to labor unions, immigration was virtually abolished during and after World War I, fueled by the racism sponsored by American social scientists.

Thus, from a roughly free and laissez-faire society of the 19th century, when the economy was free, taxes were low, persons were free in their daily lives, and the government was noninterventionist at home and abroad, the new coalition managed in a short time to transform America into a welfare-warfare imperial State, where people’s daily lives were controlled and regulated to a massive degree. In this way, the coalition, inspired by Bismarck’s example and its success in World War I, was able to reach its apogee in Europe, in Mussolini’s “corporate state” and derivative political regimes. In the United States, its apogee was reached in Roosevelt’s New Deal and post-World War II America.[Editor’s footnote] Excerpted from Murray Rothbard, “Roots of the American Corporate State: 1890’s–1920’s” (n.d.).

The purpose of this projected book is to synthesize the remarkable quantity and quality of new and fresh work on the Progressive Era (roughly the late 1890s to the early 1920s) that has been done in the past 20 years. In particular, the object is to trace the causes, the nature, and the consequences of the dramatic shift of the U.S. polity from a relatively laissez-faire system to the outlines of the statist era that we are familiar with today.

Research in the past two decades has overthrown that paradigm in almost every detail. Gabriel Kolko, James Weinstein, James Gilbert, Samuel P. Hays, Louis Galambos and many others have shown that the essence of Progressivism was that certain elements of big business, having sought monopoly through cartels and mergers on the free market without success, turned to government — federal, state, and local — to achieve that monopoly through government-sponsored and enforced cartelization. Modern scholars of Herbert Hoover, such as Ellis W. Hawley, Joan Hoff Wilson, William A. Williams, and Robert F. Himmelberg, have confirmed the new view of Hoover as Progressive and proto-New Dealer.

Allied to these big business elements in imposing Progressivism were what Gilbert calls “collectivist intellectuals,” whose goals no longer seem that altruistic. Rather, they seem like the first great wave of the “New Class” of modern intellectuals out for a share of power and for the fruits of similar governmental cartelization. There has been a proliferation of research in the past two decades on these intellectuals, ranging from illuminating general studies by Gilbert, Christopher Lasch, and Arthur A. Ekirch, Jr., among others, to studies of particular groups of professionals, technocrats, or social workers. Much has been done on the history of medical licensing in this period, the rise of the eugenics movement, guild actions by engineers and social workers, and the imposition of the anti-sex laws — Donald K. Pickens, Allen F. Davis, David W. Noble, and Ronald Hamowy, are just a few of the studies that come to mind.

In the last decade, the “new political history” stressing ethno-religious determinants of mass political attitudes, voting, and political parties — notably the work of Paul Kleppner and others such as Richard J. Jensen, Victor L. Shradar, and Ronald P. Formisano — has added another important dimension to this story. Kleppner stresses the intense drive for statism from the mid-19th century by the pietist Protestant groups, particularly of the New England stock, as opposed to the laissez-faire and libertarian attitudes of the liturgical Christians, particularly Catholics and high Lutherans. For the remainder of the century, the pietists tried continually to impose prohibition, Sunday blue laws, and enforced public school education as a means of “Christianizing the Catholics”; the liturgicals resisted bitterly. From these personal, religious matters, the party leaders (Republican for the pietists, Democrat for the liturgicals) expanded the interests of their followers to the economic realm: the pietists tending to favor big government, subsidies and regulations, the liturgicals in favor of free trade and free markets. Kleppner explains that the triumph of the Bryan forces in the Democratic Party in 1896 marked the end of the Democrats as a laissez-faire party, and the subsequent lack of real electoral choice left a power vacuum for Progressive technocrats, intellectuals, and businessmen to fill.

Tightening public school control as a means of molding Catholic and immigrant children became important in the Progressive Era, which saw the completion of compulsory education in all the states. The research of Joel Spring, Clarence J. Karier, Colin Greer, and others have revised the older starry-eyed view of the growth of the public school system.

Many of the Progressive intellectuals can best be described as a fusion of supposedly scientific technocracy with a pietist background or pietist allies. As James H. Timberlake points out, the Prohibition movement finally succeeded when wartime was joined to the dictates of medical “science” and long-time pietist crusading.

Finally, Progressivism brought the triumph of institutionalized racism, the disfranchising of blacks in the South, the cutting off of immigration, the building up of trade unions by the federal government into a tripartite big government, big business, big union alliance, the glorifying of military virtues and conscription, and a drive for American expansion abroad.

In short, the Progressive Era ushered the modern American politico-economic system into being. Despite the spate of studies in the past two decades, no one has yet put all the pieces together into a coherent explanatory framework. That will be the aim of this book.[Editor’s footnote] From ibid.

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1. Railroads: The First Big Business and the Failure of the Cartels

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

1. Subsidizing the Railroads

Railroads were the first Big Business, the first large-scale industry, in America. It is therefore not surprising that railroads were the first industry to receive massive government subsidies, the first to try to form substantial cartels to restrict competition, and the first to be regulated by government.Since this book is not meant to be a history of late 19th-century industry or of railroads, we do not discuss here fully the land grants and other subsidies to railroads. What we are interested in is an historical analysis of the development of railroad regulation and other manifestations of statism.

It was the decade of the 1850s, rather than as once believed, the Civil War, that saw the beginnings of America’s epic story of rapid and remarkable growth.See Ralph Andreano, ed., The Economic Impact of the American Civil War, 2nd ed. (Cambridge, MA: Schenkman, 1967). The railroads, leading the parade, had spurted ahead of canals as the major form of inland transportation during the 1840s. In the 1850s the railroads established a formidable transportation network as far west as the Mississippi. During the 1860s, the railroads reached westward across the Continent, spurred by massive federal land grants, which eclipsed state government subsidies in this crucial period.

The Republicans had proved able to use their virtual one-party control of Congress during and immediately after the Civil War, to enact the nationalist and statist economic program they had inherited from the Whigs, a program which included massive subsidies to business in the form of protective tariffs to industry and land grants to railroads. Before the Civil War, the Democratic Party, roughly the laissez-faire party since its inception in the late 1820s, had clearly been the permanent majority of the country: the Democrats were only out of the presidential office for two terms in over three decades. But with the Democrats demoralized, seceded from the Union or branded as traitors, the Republicans saw their golden opportunity and drove through their program.[Editor’s footnote] For more on the political history of the country and the free-market orientation of the Democratic Party in the 19th century, see Chapter 4 below, pp. 109–21.

One example of the way in which the railroads fed at the public trough during the 1860s is the case of the 800,000 acre Cherokee tract in southeastern Kansas. The tract was grabbed from the Cherokees by the federal government, and then sold, in one chunk, to James F. Joy, known as “The Railroad King,” and head of the Kansas City, Fort Scott, and Gulf Railroad. The sale to Joy, negotiated in secret, was a curious one, since he was not the high bidder for the land. There was a great deal of protest when it was discovered that the sale made no provisions for settlers some 20,000 strong, who had already homesteaded the land. Finally, the government, which had sold the land to Joy at $1.00 an acre on generous credit terms, allowed the settlers to buy their land from Joy for an average sum of $1.92 per acre in cash.

Joy’s highly favorable treatment at the hands of the federal government may have been related to the fact that Secretary of the Interior Orville H. Browning, the director of the public lands and the man who had negotiated the sale, was James Joy’s brother-in-law. Not only that: Browning had been Joy’s attorney, and was soon to be so again. And the man employed by Joy to negotiate with Browning over the Cherokee land was none other than Browning’s own law partner. A cozy little group!See Paul W. Gates, “The Homestead Law in an Incongruous Land System,” The American Historical Review (July 1936): 672–75.

Of nearly 200 million acres of valuable land in the original federal grants, almost half were handed over to the four large transcontinental railroads: Central Pacific, Southern Pacific, Union Pacific, and Northern Pacific.See Alfred D. Chandler, Jr., ed., The Railroads: The Nation’s First Big Business (New York: Harcourt, Brace & World, 1965), pp. 49–50. The typical modus operandi of these railroads was as follows: (1) a small group of inside promoters and managers would form the railroad, putting up virtually no money of their own; (2) they would use their political influence to get land grants and outright loans (for the Union and Central Pacific) from the federal government; (3) they would get aid from various state and local governments; (4) they would issue a huge amount of bonds to sell to the eager public; and (5) they would form a privately-held construction company, issuing themselves bonds and shares, and would then mulct themselves as managers of the railroad (or rather, mulct railroad shareholders and bondholders) by charging the road highly inflated construction costs.

The Central Pacific was founded by four Sacramento merchants — “The Big Four”: Collis P. Huntington, the dominant partner; Mark Hopkins, the inside man who managed the books; Charles Crocker, who ran the construction work; and Leland Stanford, who took care of the political end by becoming Governor of California. Stanford saw to it that the state and local governments in California along the route kicked in substantial aid to the Central Pacific. One example of his methods occurred when the people of San Francisco voted on a $3 million bond issue to be contributed to the Central Pacific Railroad. To make sure that the people voted correctly, the Governor’s brother, Philip Stanford, drove to the polls and distributed gold pieces to the voters, who duly obliged their benefactors.

The four founders had the idea of launching the railroad. But how to do so with only the paltry sum of $200,000 between them? The partners understood where the economics of the business truly lay — in obtaining a lucrative federal charter for the road. Collis Huntington took the $200,000 with him to Washington in his trunk, and when he was through lobbying in Washington, his money was all gone — in a mysteriously unrecorded manner — but the charter for the Central Pacific Railroad was theirs. The charter was the key, for it not only handed nine million acres in land grants to the road, but it also agreed to pay a subsidy in government bonds, amounting to $26 million to serve as a first mortgage on the railroad. Once the charter was received, money would be pouring into the railroad from federal and state governments, and from the sale of stocks and especially bonds to the public.

The profits siphoned off by the four founders came largely through their creation of the Credit and Finance Corporation as a separate construction company for the Central Pacific, a company which had the sole right to purchase all material and actually to construct the road. The CFC was wholly owned and directed by the four founders of the Central Pacific, and the founders, as heads of the railroad, made sure to pay munificent and extravagant sums to themselves as the construction company, thereby fleecing the shareholders and bondholders of the railroad. The railroad paid a total of $79 million to the CFC for the construction work, funds acquired from governments and investors, and it has been estimated that over $36 million was in excess of reasonable cost for the construction. Typical of the great waste in construction was the time when the burgeoning Central Pacific encountered the small, already existing Sacramento Valley Railroad along its route. The economic course would have been to simply buy the Sacramento Valley road; instead, the Central Pacific built its own, longer line around it in a twisting and senseless route. The reason: “because it was cheaper to build at the government expense than to buy a railroad already existing ...”Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861–1901 (New York: Harcourt, Brace & World, 1962), p. 88. [Editor’s remarks] Ibid., pp. 78–89; Chandler, ed., The Railroads, p. 50.

The same device was used for the Union Pacific, which, laying track westward from Omaha, joined the Central Pacific in Utah. In this case, the insiders’ construction company was the Crédit Mobilier, the federal land grants to the railroad totaled 12 million acres, and the bond subsidy was $27 million. The inside directors running the Crédit Mobilier charged the Union Pacific $94 million for constructing the road, when $44 million was the estimated true cost.

This time, the distributor of the largesse to Congressmen and other government officials to induce them to vote for chartering the road was Republican Representative Oakes Ames of Massachusetts. Ames distributed the stock of the real profit-maker, the Crédit Mobilier, judiciously to key members of Congress in advance of the vote, either giving them the stock outright or charging them next to nothing. They became known, unsurprisingly, as the “Railway Congressmen.” As Ames put it, he distributed the stock “where it will do most good for us.” For, “we want more friends in this Congress. There is no difficulty in getting men to look after their own property.” The payoff list included the “Christian Statesman” Vice President Schuyler Colfax of Indiana, James G. Blaine of Maine, Secretary of the Treasury George S. Boutwell, future president James A. Garfield of Ohio, Senator Henry Wilson of Massachusetts, and a dozen other Congressmen, including James Brooks of New York, House minority leader, as a sop to the Democrats. As for Oakes Ames himself, he not only received some stock for his trouble, but his shovel manufacturing firm surprisingly received the Crédit Mobilier contract for shovels in constructing the railroad.[Editor’s footnote] Josephson, The Robber Barons, pp. 78, 89–93, 164; Chandler, ed., The Railroads, p. 50. One of the promoters of the Union Pacific was Grenville M. Dodge. Dodge, who previously was helpful in getting Iowa Republicans to support Abraham Lincoln for president in 1860, later was promoted to an army general in the Civil War and was tasked with removing the Indians from the Union Pacific’s land. Part of the railroad’s costs were subsidized in this manner. Murray Rothbard, “Bureaucracy and the Civil Service in the United States,” Journal of Libertarian Studies 11, no. 2 (Summer 1995): 39–41.

The railroad financier with closest ties to the Republican administrations was the redoubtable banker, Jay Cooke, head of Jay Cooke & Co. A small Philadelphia financier at the outset of the Civil War, Cooke had the vision to found his banking house and to wangle from the federal government a monopoly on underwriting the massive bond issues floated during the war. To sell them to the gullible public, Cooke launched the first modern propaganda campaign for selling the bonds, employing thousands of subagents and such slogans for the credulous as “A national debt a national blessing.”

Cooke obtained the highly lucrative monopoly underwriting concession from Washington through his influence on Secretary of the Treasury Salmon P. Chase. Cooke’s journalist brother, Henry, was a long-time aide of Chase, from the latter’s tenure of Governor of Ohio. Henry then followed Chase to Washington. After extensive wining and dining of Chase, and after demonstrating his propaganda methods in selling government bonds, Jay Cooke won the coveted concession that was to make him one of the richest men in America and his new Jay Cooke & Co. by far the leading investment bank. Cooke became widely known as “The Tycoon,” and the phrase “as rich as Jay Cooke” became a popular saying.

Cooke found many ingenious ways to expand the market for his bonds. He bribed financial reporters and Congressmen extensively, and he demanded kickbacks in bond purchases from every war contractor and military supplier. Particularly adroit was Cooke’s success in taking Chase’s plan and persuading Congress to transform the American banking system. The notes of state chartered banks, which constituted all the banks in the country before the onset of the Civil War, were taxed out of existence by the federal government, to be replaced by the notes of a few newly chartered, large-scale national banks. The legal structure of the national banks, in turn, was such that the amount of bank notes they could issue was based on how many federal bonds they held. Hence, by lobbying for a new, centralized banking system dependent upon government bonds, Cooke assured himself a huge increase in the market for the very bonds over which he had acquired a monopoly.[Editor’s footnote] Josephson, The Robber Barons, pp. 53–58. For more on Jay Cooke and the 1863 and 1864 National Banking Acts, see Murray Rothbard, “A History of Money and Banking in the United States Before the Twentieth Century,” in A History of Money and Banking in the United States: The Colonial Era to World War II, Joseph Salerno, ed. (Auburn, AL: Mises Institute, 2005 [1982]), pp. 132–47; Patrick Newman, “Origins of the National Banking System: The Chase-Cooke Connection and the New York City Banks,” Independent Review (Winter 2018).

Considering Cooke’s credentials, it is no wonder that the biggest land bonanza of all the railroad charters, the Northern Pacific, enjoying its federal gift of 47 million acres, should have fallen into the hands of the Tycoon, in 1869.

Before launching actual construction of the Northern Pacific, Cooke lobbied in Washington in 1870 for a new charter, which provided for Jay Cooke & Co. to be the sole fiscal agent of the railroad, and for Cooke’s bank to receive the enormous fee of 12% as well as 20% in Northern Pacific stock, for all bonds it was able to sell.

Thus, Cooke did not need a separate construction company to mulct the other shareholders and bondholders of the railroad, as did his counterparts in the Central and Union Pacific boondoggles; for he already had his private banking house in place. Cooke’s handsome charter was aided by the fact that America’s leading politicians rushed to help the Northern Pacific in return for shares of its stock. Cooke’s old friend, the now Chief Justice of the U.S. Supreme Court, Salmon P. Chase, even offered to become president of the Northern Pacific at a “good salary.” Other powerful stockholders brought in by Cooke were: Vice President Schuyler Colfax, future President Rutherford B. Hayes of Ohio, and Secretary of the Treasury Hugh McCulloch. President Ulysses S. Grant’s wholehearted favor was assured by the influence of his old friend and advisor Henry Cooke, and of his private secretary, General Horace Porter, who offered his friendly services to Cooke in return for a handsome bribe.

The payoff to Northern Pacific was opposed by a rival group, who sought similar favors for a new Southern Pacific Railroad. The major backer for the Southern Pacific group was Speaker of the House James G. Blaine, of Maine, one of the powers of the Republican Party. To persuade Blaine of the error of his ways, Jay Cooke & Co. granted the Speaker a sizable personal loan based on collateral that was not investigated with the bank’s usual care.

With the charter firmly in tow, Jay Cooke geared up a mammoth propaganda machine such as he had used to successfully sell government bonds in the Civil War. Traveling agents were hired, and newspapermen were systematically bribed to sing the praises of the Northern Pacific and of the climate along its prospective route. The purpose was twofold: to induce the general public to buy Northern Pacific bonds; and to induce settlers to immigrate to the Northwestern territories along the route. The migrants would have to buy the land granted to the railroad and to become customers of the railroad after it was built. Favored stockholder Henry Ward Beecher, the most celebrated minister in the country, wrote blurbs for the railroad in his Christian Union; and Cooke’s hired pamphleteers had the fertile imagination to claim the climate of the future states of Minnesota and Montana to be “a cross between Paris and Venice.”[Editor’s footnote] Josephson, The Robber Barons, pp. 93–99. For a comparison between the inefficient government sponsored transcontinentals created by the 1862 and 1864 Pacific Railway Acts with the more private Great Northern operated by James J. Hill, see Burton Folsom, Jr., The Myth of the Robber Barons: A New Look at the Rise of Big Business in America (Herndon, VA: Young America’s Foundation, 2007 [1987]), pp. 17–39. The main drawback of the government sponsored transcontinentals was that they were not funded through market savings but instead government loans and land grants, and were thus not disciplined by profit and loss. By granting subsidies, the government diverted resources away from where consumers would have spent their money (and hence valued more highly). See Murray Rothbard, Man, Economy, and State with Power and Market (Auburn, AL: Mises Institute 2009 [1962]), pp. 946–53, 1040–41. That transcontinental railroads still would have been created can be seen through Hill’s Great Northern, built after buying the previously subsidized and bankrupt St. Paul & Pacific Railroad, which received a land grant far smaller than the other transcontinentals.

By the early 1870s, however, the bonanza era for the railroads and their promoters had come to an abrupt end. The reasons were threefold. In the first place, there was a general revulsion at the way in which the railroads had been able to outdo each other in feeding hugely at the public trough. 1871 was the year of the last federal land grant to the railroads, for the decade of the 1870s saw a widespread “antimonopoly” movement, which also succeeded in slowing down state and local aid to new railroads. In some states, new constitutions prohibited government loans to corporations (which, in those days, meant mainly railroads).

The revulsion against public partnership with railroads coincided with the second reason, the renaissance of the Democratic Party. For the eager mercantilism of the 1860s reflected the virtual absence in Congress on the political scene of the traditionally laissez-faire party. By the early 1870s, the Democratic Party had recouped its fortunes, only to have the presidential election purloined from Samuel Tilden in 1876. From the early 1870s to the mid-1890s, the Democratic Party was to be almost as strong as the Republicans, often controlling at least one house of Congress if not so often the presidency itself. Apart from their ideological affinities, the Democrats could be expected to make political capital out of Republican corruption, so much of which had centered on the railroads.

The third reason for the end of the railroad bonanza was the shocking bankruptcy and collapse of the mighty Jay Cooke in the Panic of 1873.[Editor’s footnote] For more on Jay Cooke, the inflationist bent of the railroads, and the Panic of 1873, see Rothbard, “A History of Money and Banking,” pp. 148–56. For the background behind the Panic of 1873 and evidence that the length and severity of the ensuing depression was exaggerated, see Patrick Newman, “The Depression of 1873–1879: An Austrian Perspective,” Quarterly Journal of Austrian Economics (Winter 2014): 485–97. One problem with massive government aid is that it subsidizes inefficiency, and the far from completed Northern Pacific was increasingly in huge financial arrears. Also, the Tycoon’s touch in selling bonds was no longer so magical as it had been in peddling government securities. Led by the powerful Rothschilds, European bankers and investors stayed away in droves from Northern Pacific bonds — a striking contrast to the general enthusiasm of European investors in American railroads during the latter half of the 19th century. Meanwhile, at home, the brash new firm of investment bankers, Drexel, Morgan & Co., headed by Cooke’s Philadelphia rival, Anthony Drexel, and by young John Pierpont Morgan of New York, acted against Cooke and helped bring about the failure of Cooke’s U.S. government bond issue in early 1873. Half a year later, all of these factors combined to cause the failure and bankruptcy of Jay Cooke & Co., precipitating the Panic of 1873. As a result, Cooke was now succeeded by J.P. Morgan as the nation’s leading investment banker.([Editor’s remarks] Josephson, The Robber Barons, pp. 165–73.) Since Morgan and August Belmont, the Rothschilds’ agent in New York, were generally allied, we may speculate that the Rothschilds’ rebuff to the Northern Pacific bonds may have been part of a successful cabal to bring down Jay Cooke and replace him with Morgan in the American banking firmament. On the Morgan-Belmont-Rothschild alliance, see Stephen Birmingham, “Our Crowd”: The Great Jewish Families of New York (New York: Pocket Books, 1977). ([Editor’s remarks] Ibid., pp. 39, 44–45, 73, 94, 131, 152–57). Morgan had other important European connections. His father, Junius, was an American-born banker at the London branch of George Peabody & Co. Since Morgan was a Democrat, his ascension symbolized the important political shift returning the country to a genuine two-party system.

2. The Rationale of Railroad Pricing

The “anti-monopoly” and later movements that wanted government to do something about the railroads arose partly in response to the outrageous handouts that government had granted to the roads. The healthy demand of the protestors was to stop or rollback the subsidies: the former successfully stopped the land grant process, while the latter focused on a demand for local governments to tax unused land that the railroads had received as a bonus and were holding off the market. Many of the protestors went further, however, and demanded various forms of regulation to hold down railroad rates, especially for freight, which was economically far more significant than passenger service.

The public demand for rate regulation, when not based on self-interest (as will be seen below), reflected a profound ignorance of the basic economics of railroad pricing. The idea that rates were in some sense “too high,” or that railroads were monopolies, ran against the hard fact that railroads were tremendously and even fiercely competitive, and that the consuming public was being served, not only by land-based transportation across the Continent,It is difficult for the modern reader to comprehend that, before the advent of the railroads, there was literally no way to move over land apart from unsatisfactory local dirt roads. Hence, before the mid-19th century, transportation had to take place over water, and centers of population and production had to be locally nearby. but also by continued, competitive, and substantial lowering of freight rates.

Railroads competed between the same cities and towns, they also competed with each other between regions, and they competed with canals and coastal shipping. Obviously, as in any other commodity pricing, the prices of railway rates were set by the degree of competition in the various areas. Along routes where railroads competed directly with canals or coastal shipping, freight rates were forced lower than where such competition did not exist. There was intra-railroad competition between regions developing between the several transcontinental railroad routes. There was also fierce competition between the five competing “trunk lines” between the Eastern cities and the Midwest — The Erie, Baltimore & Ohio (B&O), Pennsylvania, New York Central, and Grand Trunk. It is interesting that, in their public arguments, the various railroads argued that rates “should” be set in accordance with whatever pricing “theory” benefited the particular road. Thus, the Baltimore & Ohio and Pennsylvania railroads, which were the shortest of the five trunk lines, argued that rates should be set according to distance, which of course would allow them to undercut their competitors. The New York Central, which had the lowest costs of operation (easier grades, denser traffic, etc.) argued that rates should be determined solely by operating costs. And the Grand Trunk, weak and perpetually teetering on the edge of bankruptcy, claimed that prices should only be high enough to cover operating costs, ignoring dividends and interest.See Edward C. Kirkland, Industry Comes of Age: Business, Labor, and Public Policy, 1860–1897 (New York: Holt, Rinehart, and Winston, 1961), pp. 77–79.

There was also vigorous competition between railroads serving the same cities. By the mid-1880s, indeed, there was scarcely a large town in the United States that wasn’t served by two or more railroads. For one example, there were in this period no less than 20 competitive railway routes between St. Louis and Atlanta.

Complaints by customers (farmers, merchants, and other shippers) and by the general public about freight rates generally centered around the railroad practice of multiform pricing, of charging one shipper different rates from another. In each case, the shippers paying higher rates denounced the action as “price discrimination” stemming from some sort of conspiracy indulged in by the railroads. But in each case, there were sound economic reasons for the pricing practice. The complaints may be grouped into several categories.

(1) Continuing complaints that railroads were charging lower, proportional, per-mile rates for long-haul as compared to short-haul traffic. But such pricing was the result, not of some demonic conspiracy against the short-haul areas, but of the economics of the situation. In the first place, railroads had high fixed terminal costs — the costs of loading and unloading at the two terminals for each shipment — which were incurred regardless of the length of the trip. These would tend to yield lower rates for longer hauls. Secondly, the Western railroads, in particular, were built far ahead of traffic and therefore had to keep freight rates low in order to induce farmers and others to develop the region. This would account for lower “through,” long-haul interstate rates from West to East.

The Eastern farmers, hit hard by the competition from the West, were of course more disposed to rail about conspiracy than to consult the economic reasons for the differences in freight rates. They complained about the resulting loss of their “natural” markets in the Eastern cities. Similar bitter complaints about higher rates were indulged in by Eastern merchants and agricultural-based manufacturers, who saw themselves outcompeted by products made further west. Thus, millers in Rochester denounced the lower freight rates enjoyed to their New York City makers by the millers in Minneapolis.

(2) One would think that the Western farmers, at least would be delighted by the lower rates on long-haul through traffic from West to East. But true to both human nature and the political value of pressure and complaints, the Western farmers, too, claimed to be unhappy. They protested the higher local rates they had to pay, as well as the discounts that railroads gave to large as compared to small shippers.

The rationale for granting discounts for large shipments should be familiar to the current reader. Larger orders reduce the risk of producing or shipping a desired minimum volume; and larger orders are less costly to process, since there is a certain fixed cost for writing out and processing any given order.

(3) As indicated above, railroad rates will naturally tend to be lower where competition is fiercer, either with other roads in the same town, other regions, or with other forms of transportation. Thus, New York City, with many competing railroads, paid far lower rates per mile on grain shipped from Chicago than did Pittsburgh, which was only served by one railroad, the Pennsylvania. Worchester, Massachusetts merchants paid more for their Western grain than did the merchants from more distant Boston. Naturally, the result was continued grumbling from cities which considered themselves disadvantaged.

(4) The most intense and persistent griping over alleged geographical freight rate “discrimination” has been Southern charges that the South has always been forced to pay substantially higher freight rates than other regions, particularly the East. In a notable article, the eminent historian David M. Potter has explained these persistently higher Southern rates by demonstrating their economic rationale.David M. Potter, “The Historical Development of Eastern-Southern Freight Relationships,” Law and Contemporary Problems (Summer 1947): 420–23.

Potter uncovered several reasons for the higher freight rates in the South. In the first place, the density of population is greater in the East, the lower density of traffic in the South imposing higher costs. Secondly, the principal shipment from the South has been cotton. Railroads early realized that they had to “classify” commodities when deciding on freight rates; for heavy, bulky commodities selling at a low cost per unit weight could not afford to pay the high freight rates per ton-mile that lighter-weight, more specialized consumer commodities could afford. Hence, if they were to move these bulky commodities at all, the railroads had to classify the bulky commodities such as coal, wheat, livestock, ore, or cotton into lower rate categories than, say, groceries or clothing. Hence, to make up for the low rates which the Southern railroads had to charge for cotton, they had to set comparatively high rates on other, higher-grade goods, including Northern goods that were shipped southward.

Thirdly, it was the peculiarity of Southern rail traffic that there were for a long time no trunk roads for long-haul traffic from the South to the Eastern markets. Instead, the railroad traffic was local, carrying produce from the interior to the coastal ports, thence to ship by the coastal trade. Local traffic meant higher freight rates. Indeed, the stiff water competition in much of the South — one the coastal route, by river boats on the large and small rivers — meant unusually lower railroad rates on the competing routes, and correspondingly higher local rates where this competition was absent.

Fourthly, even after trunk lines were built, the only through traffic was triangular: shipping foodstuffs from the Midwest to the South, and cotton from South to East. This meant one-way traffic, a costly process which meant little or no return shipments to reduce overhead costs. Again, the result was higher through rates in the Southern trade.

(5) Particularly troubling to critics was the practice of railroads in granting “rebates” off freight rates to their shippers. It was charged that the practice was discriminatory and monopolistic and was used to grant special privileges to favored shippers, such as Standard Oil.

What the critics failed to realize was that, far from being in some way “monopolistic,” granting rebates was precisely the major way by which railroads competed with each other and with other forms of transportation. The practice of giving discounts off list price to attract or hold customers is a common one in industry now, and there are few accusations that the custom is either monopolistic or discriminatory. The point is that business firms, understandably, do not like to cut prices. If they are forced, by competition, to cut prices, they try at first not to change their lists, but instead, hoping such cuts will be temporary, grant off-list discounts to their customers. The price-cutting process begins with one or two customers, either to gain new customers or to keep them from shifting to a competitor.

If the discounts cannot be sustained, they will disappear and the list will be maintained; but if the general trend turns out to be toward lower prices, the discounts or rebates will spread, especially as other customers tend to find out and demand similar treatment. In short, lower prices will tend to manifest themselves through the spread of discounts off-list.[Editor’s footnote] Rothbard’s reasoning for why firms prefer to engage in secret price discounts rather than publicly stated price cuts is an illuminating explanation for why many prices may appear “stickier” than what they actually are. The historical price data which supposedly look stable over long periods of time may not be the actual prices which transactions are conducted at. Hidden price increases can also occur through reclassifications of goods in pricing categories or charging for previously free services. In his class lectures on this point, Rothbard mentioned the work of George Stigler. See George Stigler and James Kindahl, The Behavior of Industrial Prices (New York: NBER, 1970); Murray Rothbard, “The Railroading of the American People” in The American Economy and the End of Laissez-Faire: 1870 to World War II, 75:00 onward. Of course, prices are not perfectly flexible, but neither are they as rigid as commonly believed.

There is another reason for the prevalence of rebates: that businesses are often willing to charge less in return for a definite order. As one railroad man explained in U.S. Senate hearings on the widespread use of rebates: “A man may say, ‘I can give you so much business.’ If you can depend on that you may make definite arrangements accordingly.”Kirkland, Industry Comes of Age, p. 84.

We can see, then, that pricing in the business world, in contrast to the neatly determined quantities and charts of the economics textbooks, is a continuing process of discovery — of trying to figure out what the best and most profitable prices may be in any given situation.[Editor’s footnote] Rothbard’s emphasis on pricing as a discovery process is a major [Editor’s footnote] Rothbard’s emphasis on pricing as a discovery process is a major theme in Austrian economics. The argument is that competition, far from being accurately captured in the staid end state model of perfect competition where buyers and sellers have no influence on prices and possess perfect information, is actually better described as a dynamic interactive process where rivalrous buyers and sellers have to appraise the pertinent market data, make speculative forecasts, and continually adjust their behavior. The market process, or the actions of entrepreneurs engaging in economic calculation to allocate scarce resources, is one of equilibration rather than equilibrium. Markets are efficient and welfare enhancing even if they are not in perfect competition or general equilibrium. See Murray Rothbard, Man, Economy, and State, pp. 687–98, 720–39; Dominick T. Armentano, Antitrust and Monopoly: Anatomy of a Policy Failure, 2nd ed. (Oakland, CA: Independent Institute, 1990), pp. 13–48, and the sources of other Austrians cited therein. Rothbard later in his life did criticize the discovery procedure paradigm and preferred to characterize entrepreneurs in the market as appraisers and uncertainty bearers instead of discoverers. See Murray Rothbard, “The End of Socialism and the Calculation Debate Revisited,” in Economic Controversies (Auburn, AL: Mises Institute, 2010 [1991]), pp. 845–48. For an analysis of the railroad industry which uses the perfectly competitive benchmark and therefore ignores the above argument, see Robert Harbeson, “Railroads and Regulation, 1877–1916, Conspiracy or Public Interest?” Journal of Economic History (June 1967): 230–42. For an Austrian perspective on the “natural monopoly” concept of which railroads were frequently assumed to be, see Chapter 9 below, p. 288. This is particularly true of railroads, which have had to price literally thousands of items over a myriad of different routes and conditions.

Perhaps this complexity of the discovery process accounts for the fact that railroad rebates, far from being confined to a few large shippers such as Standard Oil, were widespread during the latter half of the 19th century for petroleum refining as well as in most other industries. Such rebates were one of the major ways in which railroads competed with each other. Thus, the New York Central typically had six thousand cases of “special contracts,” or rebates, outstanding; and in California, rebates were granted on virtually every contract. Reductions off list could easily go as far as 50%.

(6) At once the most important and the most absurd charge was that railroad rates were “too high” in the decades after the Civil War. There is, first of all, the lack of any rational and non-arbitrary standard to determine how high or how low the price “should have been.” But, apart from that, one of the remarkable phenomena of these decades was the continuing and massive fall in freight rates over the years. It was an era that ushered in a new age of cheap transportation over vast distances.

Generally, the railroad rates fell, as did other prices, during recessions, but did not rise nearly as much during succeeding booms. As a result, the trend was rapidly downward. These were glorious decades in America when the increased supply of goods and services emanating from our own Industrial Revolution lowered most prices. As in all of the 19th century except for periods of wartime inflation, the general trend of prices was downward. But even in relation to other falling prices, the fall in railroad freight rates was truly remarkable.

The fall in rates took several forms. One was an outright and evident fall in nominal rates. Over the decades, these nominal rates fell by one-half to two-thirds. Thus, the price for shipping wheat from Chicago to New York fell from 65 cents per 100 pounds in 1866 to 20 cents thirty-one years later. Dressed beef shipments between the two cities fell from 90 cents per 100 pounds in 1872 to 40 cents by the end of the century. In westbound traffic from New York to Chicago, the most expensive, or Class 1 goods, fell in price from $2.15 per 100 pounds in the spring of 1865, to $.75 at the end of 1888. Class 4 goods fell, during the same period, from $.96 to $.35.

The most remarkable rate cuts occurred during the great rate wars of 1876–77, between the great trunk lines, soon after the completion of the Baltimore & Ohio route to Chicago in 1874. Class 1 rates fell, in those two years, from $.75 to $.25 per 100 pounds, while class 4 rates fell to $.16. Eastbound freight rates from Chicago to New York dropped phenomenally by 85%, from $1.00 to $.15. Passenger rates were cut in half in this brief period.

Apart from the outright reductions in rates, real freight rates were also lowered by improving the services supplied by the railroads, such as providing storage or carting services without charge. One particular method of lowering freight rates without nominally doing so was by systematically re-classifying commodities from higher to lower-paying categories. Thus, the nominal rates in each class could remain the same, but if goods were transferred from higher to lower rate categories, the real effect was to lower the cost of railroad transportation. For example, before 1887, two-thirds of all the items shipped westward in trunk-line roads were bracketed into high class 1 to class 3 categories; after that year, reclassification in 1887 left only 53% of the items in these highest three classes.

That same year, a huge increase was granted by the trunk lines in the number of types of items that were entitled to lower rates for being shipped in full carload lots. Before that year, only 14% of westbound items on the trunk lines were entitled to discounts in carloads; afterwards, fully 55% of the items were entitled to the same privilege. Hence, real freight rates fell because more items could now obtain quantity discount privileges.Kirkland, Industry Comes of Age, pp. 79–80, 83–84, 93–94.

Overall, railroad rates had fallen far below the wildest dreams of the Grangers and the other anti-railroad movements of the 1870s. Albert Fishlow, indeed, estimates that, by 1910, “real freight rates [had fallen by] more than 80 percent from their 1849 level, and real passenger charges 50 percent.”Albert Fishlow, “Productivity and Technological Change in the Railroad Sector, 1840–1910,” in National Bureau of Economic Research, Output, Employment and Productivity in the United States After 1800 (New York, 1966), p. 629. [Editor’s remarks] The Grangers were a farmer protest movement that advocated restrictive railroad regulation, among other interventions. The economic suffering of farmers in the late 19th century was overblown. In general, the real price of freight for western farmers was roughly constant throughout this period, and their terms of trade improved. Nor were they crippled by rising real interest payments, in fact, interest rates were competitive, most farmers did not take out mortgages, and mortgages that were taken out were short term and anticipated future deflation. Farmer anger was mainly due to their income rising less than other groups, and the increased competitiveness and changing environment they operated in. See Charles Morris, The Tycoons (New York: Owl Books, 2005), pp. 115–17; Susan Previant Lee and Peter Passell, A New Economic View of American History (New York: W.W. Norton & Co, 1979), pp. 292–301.

One particularly piquant group of complainers against the railroads were the railroad investors themselves. Often mulcted by unscrupulous promoters and inside managers (as in the case of the major transcontinental roads), induced by eager local, state, and federal governments to over-expand and wastefully manage their operations, the railroad owners found, over the decades, a none too munificent rate of return sinking even lower. Thus, around 1870, railroad bond yields averaged about 6% while stock dividends were approximately 7%; by the end of the century, average bond yields had sunk to 3.3% and dividends to 3.5%. In addition to this virtually 50% drop, only 30–40% of railroad stock paid any dividend at all during the 1890s.Kirkland, Industry Comes of Age, p. 71. Railroad bankruptcies and reorganizations were extensive during the same decade.

3. The Attempts to Form Cartels

Early in the career of large-scale railroads, some railroad men sought a way out from the rigors of competition and competitive price-cutting. What they sought was the time-honored device of the cartel agreement, in which all the firms in a certain industry agree to raise their selling prices. If the firms could be trusted to abide by the agreement, then all could raise prices and every firm could benefit.

The general public conceives of price-raising and price-fixing agreements to be as easy as a whispered conversation over cocktails at the club. They are, however, extremely difficult to arrange and even harder to maintain. For prices have been driven low by the competition of supply and production; in order to raise prices successfully, the firms will also have to agree to cut production. And there is the sticking point: for no business firm, no entrepreneur, and no manager likes to cut production. What they prefer to do is expand. And, if the businessman is to agree, grudgingly, to cut production, he has to make sure that his competitors will do the same. And then there will be interminable quarrels about how much production each firm is supposed to cut. Thus, if several firms are, collectively, producing 1 million tons of Metal X and selling it at $100 a ton, and the firms wish to agree to raise the price to $150 a ton, they will have to agree on how far below the million tons to cut production, and who should cut how much. And such agreements are at best very difficult to arrive at.

But this is only the beginning of the headaches in store for our cartelists. Generally, they will agree on quota production cuts under the output of a base year, usually the current year of operation. So, if the cartel is being formed in the year 1978, firms A, B, C, etc. may each agree to cut its output in 1979 20% below the previous year. But very quickly in the cartel agreement, and more and more as time goes on, human nature is such that each businessman and manager is thinking as follows: “Darn it, why am I stuck with the maximum production based on 1978 production? This is now 1979 (or 1980, etc.) and now we have installed such-and-such a new process, or we have such-and-such a hotshot product or salesman, that I know, if our company were all free to compete and to cut prices, we could sell more, pick up a larger share of the market, and make more profits, than we did that year.” As 1978 recedes more and more into the past, and 1978 conditions become more obsolete, each firm chafes increasingly at the bit, longing to be able to cut prices and compete once more. A firm might petition the cartel for an increased quota, but other firms, whose production would have to be cut, would protest bitterly and turn down the request.

Eventually, the internal pressures within the cartel become too great, and the cartel falls apart, prices tumbling once more. A characteristic pattern of cartel breaking is secret price-cutting. The restless firm, anxious to cut prices, decides to try to have its cake and eat it too. While its boobish fellow-producers keep sticking to the agreed cartel price of, say, $150 a ton, our hypothetical firm approaches a few customers whom it is anxious to keep, or others whom it is eager to acquire. “Look, because you’re such a great person and your firm is such a good one, I’m going to let you have our metal for $130 a ton. In return, I want you to keep quiet about it, so that your and our competitors won’t find out about the deal.” For a few months, this will work, and the firm will be reaping extra profits at its competitors’ expense. But, truth will get out, and eventually the word spreads to the firm’s other customers and competitors about the secret price-cut. Other customers will demand similar treatment, the competitors will self-righteously denounce our firm as a “rate-buster,” a “cheat,” and a traitor, and the cartel will dissolve in intensified competition, price-cutting, and intra-industry recriminations.

That is one inexorable way in which a cartel will break up: from internal pressure, pressures arising from the firms within the cartel. But there is another, equally formidable, source of insurmountable pressure to crack the cartel: external pressure, from outside the cartel. For here is the cartel in our hypothetical metal industry. Outside firms, outside investors, clear-sighted entrepreneurs seeking profits, look at this industry and see that a cartel has been formed, its price has gone up by 50%, and consequently, the industry is now enjoying unaccustomed profits. To extend our hypothetical case, suppose that the cartel has raised its profits from 5% to 15%. Outside investors say: “Aha! These fellows have a good thing going. Why shouldn’t I, who am not bound in any sense by the cartel agreement, nip into this industry, build a new plant and a new firm, and undercut the cartel? I could sell at $130 a ton, and besides, I could build an entirely new plant with the latest equipment and the latest processes, while these fellows would have to compete possessing older and partially obsolete plants.” And so, the higher price and the higher profit rates acts as an umbrella and a lure to tempt new and possibly more competitive firms into the industry.

How will the cartel meet the challenge of new and dangerous competitors? If it wishes to keep the high cartel price, it will have to draw the new firm into the cartel, by assigning the firm a production quota of its own. But that would mean that the old firms, each of which detests the idea of cutting production in the first place, would have to cut still more — and all for the benefit of a new and unwelcome interloper. It is unlikely that the new firm could be absorbed into the cartel, and therefore the likely event is a breakup of the cartel, with prices tumbling down again. Except that this time the permanent result will be a menacing new competitor which might well out-compete and drive out some of the existing firms. And even if the new firm is absorbed into the cartel, the success can only be temporary, since more new firms will continue to be attracted to the industry, and the problem will begin all over again. Eventually, the cartel will bust up, from the external pressure of new entrants into the industry.

Thus, every cartel, every voluntary agreement by competing firms to raise prices and cut production, will inexorably break apart from internal and/or external pressures. A cartel cannot long succeed on the free market.[Editor’s footnote] Rothbard elsewhere argued that even if a cartel was able to successfully restrict output and raise prices, this is not evidence that there is an overall restriction in production, since the cut down in an industry’s production releases nonspecific factors and allows them to be absorbed by other industries, who can now increase their production of goods. The sustainable higher price of the cartel is evidence that the industry overproduced, and the resources are more highly valued in other industries. The fact that time and time again, most cartels were not successful is evidence that consumers valued the resources more highly in the cartelized industries than elsewhere. Rothbard, Man, Economy, and State, pp. 638, 690. Governments can sustain cartels by forcibly weakening the internal and external mechanisms that break them. For a survey of the various ways in which government intervention cartelizes markets, see ibid., pp. 1089–1147. As will be extensively shown below, virtually all of these were enacted during the Progressive Era.

In every industry that has ever attempted the cartel device, the story has been the same repeatedly confirming the above basic economic insight. In the case of the railroads, the plot repeats itself, except that the cartels were called “pools,” production was freight shipments, prices were freight rates, and price-cutting took the form of secretly increasing rebates to shippers.

The first important railroad pool was the Iowa Pool, formed in 1870.See Julius Grodinsky, The Iowa Pool: A Study in Railroad Competition, 1870–1884 (Chicago: University of Chicago Press, 1950). There were fitful attempts to organize railroad pools in the mid and late 1850s, including one by the trunk lines, but they broke up quickly and with little effect. See Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: The Belknap Press of Harvard University Press, 1977), p. 135. The twin cities of Omaha, Nebraska — Council Bluffs, Iowa were the eastern terminus of the great new transcontinental Union Pacific-Central Pacific route to California. The rail route from Chicago westward to Omaha therefore took on enormous importance. There were three major competing routes between Chicago and Omaha: the most northerly, the Chicago and Northwestern; the Chicago, Rock Island, and Pacific (“The Rock Island Line”); and the most southerly “Burlington System” (among other things, interconnecting the Chicago, Burlington, and Quincy with the Burlington and Missouri railroads). As luck would have it, the three competitors were controlled by two businessmen and their associates. The entire Burlington System was controlled by James F. Joy, the “Railroad King,” backed by a group of Boston capitalists. Meanwhile, John F. Tracy, backed by numerous capitalists, including Dutch finance, controlled both the Chicago and Northwestern and the Rock Island Line.

With only two businessmen controlling the three competing lines, conditions seemed ripe for a cartel. Both men were eager for the experiment, since both Joy and Tracy had overborrowed in order to acquire their holdings and were in shaky financial shape. And so, in late 1870, Tracy initiated the formation of the Iowa Pool, which tried to prop up freight rates by reducing aggregate traffic and by pooling half the earnings of the three lines and equally dividing the Pool — thereby greatly reducing the incentive to engage in competitive profit-seeking or price-cutting.More specifically, the railroads pooled 50% of their freight receipts and 55% of their earnings from passenger traffic.

Despite the seemingly favorable conditions, and the long official life of the cartel (until 1884), the Iowa Pool was plagued with grave difficulties from the very beginning and broke up after only four years. Competitive rate-cutting, breaking the agreement, occurred early and on many levels. There was, first, severe rate-cutting even within the Burlington System and within the Tracy holdings — the sales managers and managerial heads of each railroad understandably wishing to increase the profits of their own organization. There was also vigorous competition and rate-cutting between the Burlington and the Tracy railroads, with charges of “cheating” rife between the various parties. But intra- and inter-organizational rivalry did not complete the competitive picture in the Iowa Pool. For the entire transcontinental railroad system was also in vigorous competition with the Pacific Mail Steamship line, which sailed between the East and West Coasts with overland carriage across Panama. In 1870 there was also an agreement between the Steamship line and Union Pacific to prop up freight rates and allocate an agreed division of traffic between railroad and steamship: in effect, to impose maximum shipping quotas on each mode of transportation in order to raise freight rates. By 1873, however, a rate war developed between the steamships and the railroads, helping to push the entire Pool into collapse a year later.

Another important factor in the breakup of the Pool was the intervention of the Union Pacific. For one of the first actions of the Iowa Pool was the demand of the Union Pacific a higher share of the transcontinental, Chicago-San Francisco railroad income. Angered, the Union Pacific decided to crush this demand by dealing with the individual members of the Burlington System, and also by shifting more business to the St. Louis rather than the Chicago terminus. All this competition, from within and without the Pool, led to its collapse after only four years of turbulent operation.[Editor’s footnote] Grodinsky, The Iowa Pool, passim; Gabriel Kolko, Railroads and Regulation: 1877–1916 (Princeton, NJ: Princeton University Press, 1965), p. 8.

The next important pool was an attempt to cartelize trunk line railroads insofar as they were making shipments in the burgeoning new petroleum industry. Ever since the first oil well had been drilled in Titusville, Pennsylvania, in 1859, crude oil had been extracted from western Pennsylvania oil fields and refined largely in Cleveland. At the behest of Thomas A. Scott, head of the Pennsylvania Railroad, in 1871 three great trunk lines, the Pennsylvania, the Erie, and the New York Central formed the South Improvement Company. In order to raise freight rates, the company allocated maximum quotas of oil shipments among themselves. The Pennsylvania was to obtain 45% of oil shipments, while the Erie and the New York Central were each allocated 27.5% of the oil freight. To make sure that the railroads stuck to their agreement, a group of oil refiners was brought into the pact, the refiners being pledged to act as “eveners” to insure that each railroad would not exceed its quota of petroleum freight.

What were the refiners to get in return for providing such essential service to the railroad cartel? They were to obtain freight rebates up to 50%. Furthermore, they were promised a subsidy amounting to a rebate on all oil shipments made by refiners outside the South Improvement Company agreement. And since the refiners within the group were acting as eveners for all petroleum shipments made by these railroads, they received waybills for these shipments and were therefore able to police the honesty of the railroads in keeping the subsidy agreement.

Oil refining was a highly competitive industry, and so, despite the fact that the South Improvement pool meant higher freight rates, some refiners were willing to join the pool in order to gain a rebate-and-subsidy advantage over their competitors. Besides, they might succeed in cartelizing oil refining as well. The complying refiners were led by the largest oil refiner in the industry, John D. Rockefeller’s Standard Oil Company of Ohio (SOHIO). Originating in 1867 as the partnership of Rockefeller, Flagler & Andrews Co., SOHIO was formed as a $1 million corporation three years later. While Rockefeller was hardly averse to achieving a monopoly, he was skeptical of the success of the cartel and entered it only with reluctance. The South Improvement Pool, indeed, turned out to be still-born; when news of the agreement leaked out, angry pressure by the other refiners and by crude oil producers forced the dissolution of the cartel. As will be seen below in Chapter 3, John D. Rockefeller then turned to the merger route in an attempt to achieve a monopoly in oil refining.[Editor’s footnote] Allan Nevins, Study in Power: John D. Rockefeller, Industrialist and Philanthropist (New York: Charles Scribner’s Sons, 1953), vol. 1, pp. 95–131; Kirkland, Industry Comes of Age, p. 84. Also see Chapter 3 below, pp. 93–98.

The first important Eastern pool was formed in August 1874. Competition between the great East-Midwest trunk lines had been intense during the Panic of 1873, with a consequent decline in freight rates. The three major trunk lines — New York Central, Erie, and Pennsylvania — were also worried about the imminent completion of a new competition in the Baltimore & Ohio, which would clearly send rates down further. As a result, the presidents of the three trunk lines met at Saratoga, New York, at the home of New York Central’s William H. Vanderbilt, and hammered out an agreement to keep up freight rates, and to appoint two regional commissions to enforce the agreement.

But the trunk line agreement soon dissolved from pressures both within and outside the cartel. John W. Garrett, president of the B&O, decided to keep out of the agreement in the hope of outcompeting the other roads and picking up a larger share of the freight business. Externally, the Grand Trunk of Canada took advantage of the pact to open up a new northerly trunk line route from Chicago to Boston via Canada. The result was a speedy collapse of the agreement, and bitter rate wars between the trunk lines followed during 1875 and particularly 1876.See D.T. Gilchrist, “Albert Fink and the Pooling System,” Business History Review (Spring 1960): 33–34; Kolko, Railroads and Regulation, pp. 8–9.

Desperate, the trunk lines called in Albert Fink, German-born engineer and former vice president of the Louisville & Nashville Railroad who had become the foremost theoretician, promoter, and manager of railroad pools. By 1873, Fink was urging for the railroads to raise and equalize their rates, and to do it through cartel agreements and divisions of the traffic. Fink was fresh from forming the Southern Railway and Steamship Association in the fall of 1875, in which 32 railway lines formed such an agreement, naming Fink himself as commissioner of the Association with power to supervise the agreement.

In 1877, the trunk lines decided to call in Fink to help them try again. In April, the four largest trunk lines signed the Seaboard Differential Agreement, fixing eastbound freight rates to Philadelphia and Baltimore at 2 and 3 cents per 100 pounds less than to New York or Boston. On westbound traffic, differentials on some freight was the same; on others, it was as much as 6 and 8 cents per 100 pounds. The Seaboard Agreement reflected a shift of power from New York to Baltimore and Philadelphia, with Vanderbilt’s New York Central and the Erie forced to agree to maintain freight rates higher than the Pennsylvania Railroad, which had its eastern terminus in Philadelphia, or the B&O, which ended in Baltimore. The agreement was engineered by Philadelphia financier Anthony J. Drexel and J.P. Morgan of Drexel, Morgan, and Co., a major stockholder as well as creditor of the Baltimore & Ohio. Pressure was also put on by allied English bankers, headed by Morgan’s father Junius S. Morgan.

In July 1877, a reinforcing agreement between the four trunk lines allocated quotas of all westbound freight from New York: the Erie and the New York Central to receive 33% each, the Pennsylvania 25%, and the remaining 9% to the B&O. Moreover, the railroads established a Trunk Line Association, headed by Albert Fink, to regulate and supervise the pool and rate agreements. August of the following year, the trunk lines and major Western railroads expanded the cartel idea to form a Western Executive Committee to fix and raise rates and pool freight; and in December, at the suggestion of the ubiquitous Fink, the Trunk Line Association and Western Executive Committee formed a Joint Executive Committee to supervise the entire integrated agreement, headed again by Albert Fink. Fink and the Joint Executive also supervised regional subcommittees in all the major cities included in the agreement. By 1881, pooling of freight was extended to eastbound traffic as well.

And yet, this mightiest and continuing attempt to create a voluntary railroad pool proved, like its predecessors, to be a dismal failure. From the beginning, the Grand Trunk line of Canada kept cutting rates, and the completion of the Grand Trunk line to Chicago made matters worse. Furthermore, rate cutting by railroads within the cartel kept plaguing Fink and the railroads, largely through secret rebates which Fink could not detect until it was too late and much damage had been done to the rate structure and the relative shares of the market. Competitive rebates to shippers were concealed by such deceptive devices as billing freight from more distant points than actually used, under-recording of weight, and spurious classification of freight into cheaper categories of freight rates than had been agreed. Fink tried to counter these practices with a system of freight inspection, but lacking coercive police power, there was little that he could do.

As early as February 1878, Fink attempted to blacklist all railroad executives granting secret rebates; but, a month later, the division of freight between Detroit and Milwaukee was already collapsing in competitive rate and shipping wars. In 1878 and again in 1880 severe rate wars and competition for freight broke out between the trunk lines themselves.

From the beginning of the agreement, the merchants and shippers of New York had been understandably unhappy at the fixed competitive disadvantage that New York was suffering in relation to Philadelphia and Baltimore. Finally, in 1881, under pressure from these merchants and their Boards of Trade, the New York Central broke ranks and initiated a fierce rate war; in three months during 1881, freight rates were cut in half, East and West. Fink tried desperately to stem the tide by gaining an agreement to raise rates to the pre-rate war level and to try to crack down on zealous railroad sales managers (freight agents and freight solicitors) who engaged in secret rebates in order to gain sales. But all this was in vain. In March 1882, Fink and the Joint Executive tried once more, appointing a Joint Agent at every important traffic center, with the power to examine all the railroads’ books and bills of lading. But by the end of the year, this attempt had collapsed as well.

One of the major reasons for the failure of Fink and the trunk cartels was the truly heroic activities of one of the most maligned railroad financiers of this era: Jay Gould. In his search for profits, Gould was inadvertently the people’s champion by his inveterate activities as “traitor” and “rate-buster,” as wrecker of railroad cartels.Interestingly enough, Gould has been maligned by left-wing historians as well. Thus, the perfervid Matthew Josephson refers to Gould as “Mephistopheles,” and speaks of “A Jay Gould [who] flies about preying upon the rich debris ...” Josephson, The Robber Barons, pp. 170, 192. Ever alert to profits to be made from undercutting railroad pools and cartels, Gould would either break the agreement from within or build external railroads to compete with the bloated and vulnerable railroad pool.

Thus, it was Gould who initiated much of the Eastern rate wars of 1881–1883 by building the West Shore Railroad in New Jersey as well as the Delaware, Lackawanna and Western in New York to compete directly with the New York Central.On the trunk lines, Fink, and Gould, see Gilchrist, “Albert Fink and the Pooling System,” pp. 34–46; Kolko, Railroads and Regulation, pp. 17–20. [Editor’s remarks] Lee Benson, Merchants, Farmers, and Railroads: Railroad Regulation and New York Politics, 1850–1887 (Cambridge, MA: Harvard University Press, 1955), pp. 39–54; Paul W. MacAvoy, The Economic Effects of Regulation: The Trunk-Line Railroad Cartels and the Interstate Commerce Commission Before 1900 (Cambridge, MA: The MIT Press, 1965), pp. 39–109. For the Joint Executive Committee, significant price wars occurred in 1881, 1884, and 1885. The long run trend of the official grain rate declined from 40 cents per 100 pounds at the beginning of 1880, to 30 cents in early 1883, to 24 cents in mid-1886. See Robert H. Porter, “A Study of Cartel Stability: the Joint Executive Committee, 1880–1886,” Bell Journal of Economics (Autumn 1983): 311. In his fascinating re-evaluation of Jay Gould, Julius Grodinsky demonstrates how this “disturber of the peace” benefited the public and shippers by continually building new railroads and breaking railroad pools and rate agreements. Gould performed this function repeatedly in the Middle-West and West, as well as the East. Grodinsky also points out that the extensive rate wars initiated by Gould in the Gould filled the image of the self-made man that fitted so many of the entrepreneurs of these decades, including Rockefeller and James J. Hill. Gould was born poor in upstate New York, taught himself surveying, and went on to become a brilliant speculator and corporate financier. See Julius Grodinsky, Jay Gould: His Business Career, 1867–1892 (Philadelphia: University of Pennsylvania Press, 1957).

All in all, by the mid-1880s the railroads generally were in the position that Gabriel Kolko describes for the Eastern trunk cartelists by 1883:

By this time the Joint Executive Committee was merely an empty piety without real power or meaning. Fink warned the railroad men that they would lose money by their policies — which they very well realized — but he was unable to obtain their cooperation. There were too many parties, too many potential areas of friction, for successful control to come via voluntary agreements.Kolko, Railroads and Regulation, p. 20. [Editor’s remarks] Ibid., pp. 7–20.

In 1884, the freight rate structure was in collapse, and the Trunk Line Association “did little more than stand by helplessly.” During that year, Charles Francis Adams, Jr., scion of the famous Massachusetts family, and one of the leaders of the Trunk Line Association, wrote that one of its meetings

struck me as a somewhat funereal gathering. Those comprising it were manifestly at their wit’s end. ... Mr. Fink’s great and costly organization was all in ruins. ... They reminded me of men in a boat in the swift water above the rapids of Niagara.Quoted in Gilchrist, “Albert Fink and the Pooling System,” p. 46.

The trunk lines struggled to another agreement in late 1885, but it was again to collapse the following year. And the railroad associations in other regions of the country were doing no better. Alfred Chandler’s conclusion is apt: “By 1884 nearly all the railroad managers and most investors agreed that even the most carefully devised cartels were unable to control competition.”Chandler, The Visible Hand, p. 142. [Editor’s remarks] Ibid., pp. 137–43.

2. Regulating the Railroads

Murray N. Rothbard — Thu, 09 Nov 2017 00:00:00 -0600

1. The Drive for Regulation

Characteristically, it was Albert Fink who saw it first. If the railroads could not form successful cartels by voluntary action, then they would have to get the government to do the job for them. Only government compulsion could sustain a successful cartel. As Fink put it in a letter as early as 1876, “Whether this cooperation can be secured by voluntary action of the transportation companies is doubtful. Governmental supervision and authority may be required to some extent to accomplish the object in view.”Gilchrist, “Albert Fink and the Pooling System,” pp. 32–33.

The railroad men were scarcely averse to calling in government to help solve their problems. As we have seen, the railroads had been hip deep in government subsidy for many years, and particularly since the Civil War. Of the railroad presidents in the 1870s, 80% held political jobs before, during, or after their tenure. Specifically, of 53 railroad presidents in the 1870s, 28 held down political jobs before or during their presidency, and 14 went into them after they left their railroad posts.Ruth Crandall, “American Railroad Presidents in the 1870’s: Their Backgrounds and Careers,” Explorations in Entrepreneurial History (July 15, 1950), p. 295. Cited in Kolko, Railroads and Regulation, p. 15. [Editor’s remarks] For the dominance of railroad interests in the presidential administrations of the post-Civil War years, see Philip H. Burch, Jr., Elites in American History: The Civil War to the New Deal (New York: Holmes & Meier Publishers, Inc., 1981), pp. 15–67.

Railroad regulation by the states was renewed after the Civil War, beginning with the establishment of the Massachusetts Railroad Commission in 1869. Historians once thought that these state commissions had been put in by farmers to lower railroad rates, but then it was discovered that much of the agitation for regulation came from groups of merchants in specific localities who were disturbed at the pattern of railroad rates, especially the relative height in their own localities. But far from the state commissions being at all anti-railroad, there is strong evidence that the railroads welcomed the commissions and tried to use them to cartelize. Thus, Charles Francis Adams, Jr., of the patrician Adams family, chief architect of the Massachusetts law and Chairman of the Railroad Commission, was scarcely a pariah in the railroad industry. On the contrary, he went on to become a railroad pool administrator and then to be president of the Union Pacific. Moreover, Chauncey M. Depew, attorney for the New York Central, and William H. Vanderbilt, head of the New York Central, were early converts to the regulatory concept. As Depew later wrote, he had become “convinced of their necessity ... for the protection of both the public and the railroads ...”Kolko, Railroads and Regulation, pp. 16–17.

Much has been made of the fact that the New England and New York commissions of the 1870s and 1880s were merely advisory, and could only hold public hearings and encourage publicity, while Illinois and several other Midwestern states gave their commissions compulsory rate-setting powers. In practice, however, there was little difference, and the “weak” state commissions were scarcely voluntary. As the Senate Committee on Interstate Commerce reported in 1887, concerning the Massachusetts Commission, the railroad men obeyed the commission’s edicts because

self-interest admonishes them of the supreme folly of encouraging or engaging in a losing contest with the forces of public opinion as concentrated and made effective through the commission. It is not because the managers, directors, or stockholders personally shrink from public criticism, but because back of the commission stands the legislature and back of the legislature stands the people ...Kirkland, Industry Comes of Age, p. 120.

But state regulation was proving too diverse and inefficient; in particular, it was impossible to regulate the vitally important through rates, the rates on shipments that extended beyond the boundaries of any one state. And so, while farmers complained that state commissions were too friendly to railroads, railroad men began to turn to federal regulation, to federal cartelization, as the solution. In the summer of 1877, John A. Wright, a director of the Pennsylvania Railroad, wrote in the Railway World that the federal government must “protect” the railroads from speculators competing ruthlessly toward “cutthroat” competition in railway rates. The federal government should not only control railroad investments and charters, but should fix freight and passenger rates, to be enforced “under penalty of criminal prosecution.”Kolko, Railroads and Regulation, p. 14.

By 1879, there was general agreement among railroad pool executives, including Albert Fink, that the federal government would have to step in to cartelize railroad freight, for the pools could not succeed without governmental enforcement. In the same year, Joseph Nimmo, Jr., head of the first government railroad statistics department, reported that

At the present time railroad managers appear to be quite generally of the opinion that the only practicable remedy for the evils of unjust and improper discriminations, is to be found in a confederation of the railroads under governmental sanction and control, the principle of the apportionment of competitive traffic being recognized as a feature of such a confederation.Ibid., pp. 26–27.

The Interstate Commerce Act of 1887, regulating the railroads, was one of the first federal regulatory acts in American history. The Act began with a bill introduced in the House by Democratic Representative James H. Hopkins of Pittsburgh, in 1876 at the behest of a group of independent oil producers of western Pennsylvania. The major provision of the Hopkins Bill was the outlawing of railroad rebates. Gabriel Kolko is the first historian to point out that the motives of the Pennsylvania oil men were not anti-railroad. Quite the contrary, they were pro-railroad and anti-Standard Oil. The oil men were peeved at the superior competition of Standard Oil and its ability to get rebates from the railroads. Bested at competition, they turned to use the federal government to hobble their successful competitor. Formed into the Petroleum Producers’ Union the following year, the Union championed the railroads and wailed that Standard Oil was enslaving the giant New York Central, Pennsylvania, and B&O railroads. The railroads were delighted to form an alliance with the weaker oil men, in order to rid themselves of the annoyingly competitive device of rebating; this may be seen in the fact that the Hopkins Bill was apparently written by the attorney for the Philadelphia and Reading Railroad.Ibid., pp. 21–22.

The Pennsylvania oil men quickly organized a massive petition campaign for the Hopkins Bill. Over 2,000 signatures of Pennsylvania oil producers and Pittsburgh businessmen poured into the Congress agitating for the Hopkins proposal. The Hopkins Bill died in committee, but a similar bill, drafted by the Petroleum Producers’ Union, was introduced in early 1878, by Representative Lewis F. Watson of Pennsylvania. Rapidly, nearly 15,000 signatures on petitions poured into the House from Pennsylvania, attacking rebates and railroad rate “discrimination.” The Pennsylvania legislature, followed by Indiana and Nevada, sent similar resolutions to Congress during 1879.

There began almost a decade of jockeying among railroads and other interests on the precise form that federal railroad cartelization would take. The Watson Bill was reported out of the House Commerce Committee headed by Representative John H. Reagan of Texas, and the new Reagan Bill had been amended to outlaw railroad pooling. The Reagan Bill quickly passed the House in December, 1878.[Editor’s footnote] The motivation behind the Reagan bill has not been sufficiently explored until recently. Railroad tycoon Thomas Scott’s fledging empire, the Texas & Pacific and the Pennsylvania, was involved in heated conflicts with other large railroad giants in the 1870s. The former was wrestling with Collis P. Huntington’s Central Pacific for control of transportation from California to the South, and the latter against the Erie and New York Central for Standard Oil’s lucrative oil shipments. Scott wanted federal subsidies to strengthen the Texas & Pacific in order to compete with Huntington. John Reagan of Texas was eager to help Scott in order to get a transcontinental railroad in his congressional district, a goal he long desired. This was mixed in with the election of Rutherford B. Hayes and the Compromise of 1877, in which the Republicans were able to offer vague promises to Southern Democrats — including John Reagan — in the form of subsidies to the Texas & Pacific in return for their admittance for the electoral commission to count the disputed electoral ballots for Hayes. After the election the Republicans reneged, so Scott received no federal subsidies, and Reagan no transcontinental railroad. The subsequent Reagan Bill, which outlawed pooling and interstate rebates to shippers and discrimination, was designed to strengthen Scott’s empire and hamper its rivals connected with Standard’s de facto railroad cartel. The prohibition of rebates and rate discrimination applied only to interstate trade, shrewdly designed to cripple the Pennsylvania’s competitors. Moreover, the Texas & Pacific opposed price discrimination in favor of government involvement with rate setting. See Samuel DeCanio, Democracy and the Origins of the American Regulatory State (New Haven, CT: Yale University Press, 2015), pp. 149–79. While happy to see rebates outlawed, the railroads wanted the pool agreements to be enforced rather than prohibited, and this prohibition was their major objection to the Reagan Bill. As Albert Fink testified before the Senate the following year, the railroads wanted to carry out the objective of the Reagan Bill. Fink approved the outlawing of rebates and the requirement to publicize rates (thus having a chilling effect on secret rebates); he also urged a legalized and enforced pooling process, to be governed by a federal railroad commission. Prefiguring the later provisions of the Interstate Commerce Act, Fink suggested the following clauses:

Section 3. That all competing railroad companies shall jointly establish a tariff for all competing points.

Section 4. That the tariff so established shall be submitted to a commission of experts appointed by the Federal Government, and if they find that the tariff is just and equitable and based upon correct commercial principles ... then such tariff shall be approved, and shall become the law of the land, until changed in the same manner by the same authority.

Section 5. In cases where railroad companies cannot agree upon such tariffs, or upon any other questions such as might lead to a war of rates between railroad companies, the questions of disagreement shall be settled by arbitration, the decision of the arbitrator to be enforced in the United States Courts.Gilchrist, “Albert Fink and the Pooling System,” p. 40.

The railroads preferred the Rice Bill of 1879 in the House, and the later Henderson Bill, both written by railroad leader Charles Francis Adams. The bill, which called for a federal railroad commission to legalize and enforce railroad pooling, was endorsed by notables of the Pennsylvania and Erie railroads.

The jockeying in Congress for the next several years was largely over the details of regulation, especially over the railroads’ desire to legalize pooling and to administer the statue by a regulatory commission. In testimony before the House Commerce Committee in 1884, railroad men were overwhelmingly in favor of regulation, particularly if administered by an appointed commission. John P. Green, vice president of the Pennsylvania Railroad, declared that “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.”Kolko, Railroads and Regulation, p. 35. See also pp. 26–29.

Writing to Massachusetts Representative John D. Long on why the railroads were so insistent on a federal commission, the shrewd Charles Francis Adams pointed out:

If you only get an efficient Board of Commissioners, they could work out of it whatever was necessary. No matter what sort of bill you have, everything depends upon the men who, so to speak, are inside of it, and who are to make it work. In the hands of the right men, any bill would produce the desired results.On March 1, 1884. Ibid., p. 37.

What those desired results were, and why federal regulation was needed, were spelled out in an 1884 article in the Chicago Railway Review by George R. Blanchard, head of the Erie. Clearly, such great pools as even the Joint Executive Committee could not succeed in imposing joint rates on the railroads. Therefore, what was needed was “a national railway commission to cooperate with and not oppose this recognized committee ... their cooperative traffic federations [of the railroads] which are intended, within just limits, to secure uniformity, stability and impartiality among railways, their patrons and the States, should be reinforced, ratified and legalized by an intelligent public conviction.”Ibid., p. 38.

In hearings before the Senate Interstate Commerce Committee during 1885, dozens of prominent railroad men testified, and all but one strongly endorsed at least the principle of federal regulation. Almost all the railroad leaders favored a regulatory commission. In more detail, many called for legalizing of pools and for the outlawing of rebates. In reporting out the regulatory bill by Senator Shelby M. Cullom of Illinois, the Committee pointed to its support among the railroad interests.

In the meanwhile, a former vice president of the Erie Railroad wrote to the Commercial and Financial Chronicle criticizing traditional American adherence to laissez-faire: “It has always been the fashion in this country to argue that the less government we have the better, and that this constitutes the main advantage of this country over Europe. But there are some things that the Government must do if society is to hold together” — in particular, assist the railroads through regulation.In Commercial and Financial Chronicle (July 4, 1885), p. 7. Quoted in Kirkland, Industry Comes of Age, p. 127. In turn, free-market adherents were horrified at the unanimity with which railroads and shippers alike were calling “for the same soothing syrup — legislative enactment.”Commercial and Financial Chronicle (June 6, 1885), pp. 666–68. Quoted in ibid., p. 127.

By late 1886, the Senate had passed over the Cullom Bill and the House the Reagan Bill. Both bills outlawed rebates; neither gave the federal government the power to fix railroad rates directly. The railroads were in favor of the Senate bill because, unlike the Reagan Bill, it did not explicitly outlaw private railroad pools and, more particularly, because it established a federal commission to work its will in interpreting and enforcing a vague law, whereas the Reagan Bill left enforcement solely to the courts. In a conference of the two houses, Reagan conceded all points to the Senate, except to maintain the prohibition on pooling. The country was given a law vague in all matters except outlawry of rebates and of some rate discrimination in favor of long-haul freight. The power of interpretation and enforcement in the courts was given to a five-man commission. The compromise bill, backed by the railroads, passed both houses overwhelmingly in January 1887 by a vote of 36 to 12 in the Senate, and 219 to 41 in the House.[Editor’s footnote] Kolko, Railroads and Regulation, pp. 43–44; George W. Hilton, “The Consistency of the Interstate Commerce Act,” Journal of Law and Economics (October, 1966): 103–07. For a survey of the diverse opinions on government regulation by railroad leaders and other businessmen, see Edward A. Purcell, Jr., “Ideas and Interests: Businessmen and the Interstate Commerce Act,” Journal of American History (December 1967): 561–78; DeCanio, Democracy and the Origins of the American Regulatory State, pp. 173–74. That the Erie and New York Central opposed the Reagan bill because it would weaken their position relative to the Pennsylvania, or that the Union Pacific, Central Pacific, and Southern Pacific were opposed to a rival transcontinental railroad, is not surprising. In addition, some railroads opposed the ICC because they were not fully satisfied with the results, and it is not a stretch to assume that since some railroads thrived at breaking rate agreements and cartels, others opposed the measure as well.

The Chicago Inter-Ocean, a leading railroad magazine, summed up the railway men’s case for the Interstate Commerce Act shortly before its passage:

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. ... The irregularities that have gradually crept into [the railroads] ... got beyond their capacity to manage. …The effort to maintain rates was equally unsuccessful. Then came the last resort — the pool — but that, too, proved impotent. ... And now, acknowledging the inefficiency of their own weak inventions … the managers are content to leave the settlement of the whole matter to the law-making power of the country ...January 2, 1887. Quoted in Kolko, Railroads and Regulation, p. 41.

With the law passed, “everything depend[ed],” as Adams had said, on who the Interstate Commerce Commissioners would be. The first Commission, in particular, would set the pattern for the future with its interpretations and rulings. Would the railroads, or the shippers, or the farmers, control this commission? Or, more precisely, whom would President Grover Cleveland appoint?

The United States was, politically, in the midst of a new era: in 1884 the Democratic Party had, in the person of Grover Cleveland, captured the presidency for the first time since the Civil War. From now until the late 1890s, the United States would be a genuine two-party country once again, with power shifting easily from one party to the other. We have mentioned above that, in the Panic of 1873, J.P. Morgan had succeeded the fallen Jay Cooke as the nation’s premier investment banker. And since the railroads were the only genuine big business in these decades, this meant the successor as the leading railroad financier. But while Jay Cooke had been a Republican, J.P. Morgan was a Democrat. If we consider that August Belmont, U.S. representative of the powerful European banking house of Rothschild, was treasurer of the national Democratic Party for many years, we can see that such financial powers as Morgan and Belmont wielded enormous influence over the personnel and the policies of the Democratic Party.[Editor’s footnote] Burch, Elites in American History, pp. 50, 60, 87, 115.

Before the Civil War, the Democratic Party had been the laissez-faire, minimal government party in America. This continued to be the case, although not quite as strongly. But the party was now vulnerable, for if Morgan, Belmont, and financiers or railroad men in their ambit should begin to shift to a statist position in one or more areas, the Democratic Party was likely to follow. And this is in fact what happened.

J.P. Morgan had become the foremost sponsor of railroad pools, and his as well as other railroads had now endorsed the ICC as an instrument of imposed cartelization. The new President, Grover Cleveland, was also generally in favor of laissez-faire, but he had long been in the railroad ambit. When he ran for Governor of New York in 1882, he was known, with considerable justice, as a “railroad attorney” in Buffalo. Cleveland had been an attorney for several railroads, including the New York Central. His pro-railroad appointments to the New York Railroad Commission were consistent with this image.See Benson, Merchants, Farmers, and Railroads, pp. 181–82, 187–88, 200. [Editor’s remarks] Cleveland’s first presidential administration was also dominated by railroad interests, even more so than the preceding Republican regimes. Burch, Elites in American History, p. 91. Cleveland also had a close long-time relationship with J.P. Morgan. During his administration as President, he frequently consulted with both Morgan and Belmont Jr., and Cleveland’s old law partner, Francis Lynde Stetson, later became the attorney for J.P. Morgan and Co. and one of the most important counselors in the Morgan circle.[Editor’s footnote] For more on the Cleveland-Morgan connection, see Chapter 7 below, pp. 199–200.

The railroad men therefore regarded Cleveland as safe, and they turned out to be right. Cleveland did not, of course, veto the Interstate Commerce Act. His appointments to the ICC were even more revealing. At the urging of Senator Cullom, Cleveland chose as chairman the distinguished jurist, Thomas McIntyre Cooley. A proponent of strict construction and laissez-faire, Cooley unfortunately chose the railroad industry to make his most conspicuous exception to this general rule. This choice was perhaps not unconnected with his accepting employment, from 1882 on, as administrator and arbitrator in Albert Fink’s Joint Executive Committee railroad pool. In addition, Cooley served since 1885 as a receiver for the Wabash Railroad. As a result of accepting these posts, Cooley had shifted by 1887 to favoring government legalization and control of pooling through a federal commission.

Of the four other commissioners, two were leading railroad men. Augustus Schoonmaker had been associated with Cleveland in New York politics, and then had become a railroad attorney; and Aldace F. Walker was a veteran railroad man who was to resign after two years on the ICC to become head of the major railroad rates association, and eventually to be chairman of the board of the Atchison, Topeka & Santa Fe. The other two members were hack Democratic politicians, one of whom had already been a state railroad commissioner in Alabama. It was no wonder that the Railway Review hailed the appointments: “Fortunately, its present membership is not made up of the stuff that is liable to shrink from doing what it conceives to be its duty ...”Railway Review (April 16, 1887): 220. Kolko, Railroads and Regulation, pp. 47–49.

The Interstate Commerce Commission quickly moved in the direction desired by the railroads. On the one hand, the ICC allowed the railroads themselves to suspend the provision prohibiting discrimination against short-haul rates when it was advantageous for them to be higher, thereby giving the ICC sanction to their practices. Aldace Walker wrote that this policy was “capable of very general application ... and it is a fact that as a prevention of rate wars and destructive competition it is already recognized by intelligent railroad men as better than the pool.”Aldace F. Walker to Joseph Nimmo, Jr., November 22, 1887. Quoted in ibid., p. 52. On the other hand, the railroad men were anxious to have the ICC follow strictly the prohibition of rebates to shippers, and the ICC eagerly complied. Railroad leaders kept a vigilant eye on violations of the new law by their competitors and enthusiastically turned them into the authorities. As Charles Francis Adams, Jr., now president of the Union Pacific, declared: “... we would welcome the rigid and literal enforcement of every provision of the interstate commerce act.”Speech in December 1888. Ibid., p. 57.

At first, the railroads, under the friendly regime of the ICC, were able to raise rates, but soon, by the end of 1887, the dreaded rebates began again as a few railroads decided to compete vigorously once more. The railroads decided to try to bring pools in by the back door. While pools were technically outlawed, voluntary rate associations, which simply fixed rates without allocating freights and markets, were still legal. Indeed, Professor George Hilton concurs with pro-railroad opinion at the time that the language of the Interstate Commerce Act, taken from the original Cullom Bill, “almost compels” collusive ratemaking on the part of the railroads.Hilton, “The Consistency of the Interstate Commerce Act,” pp. 108–09.

The ICC was therefore in keeping with the law when, to the delight of the railroads, it decided to give its sanction and imprimatur to the freight rates worked out by the railroad rate associations — in short, to use the federal government to ratify rates decided upon by private railroad cartels. Despite the official outlawry of pools, therefore, the ICC was to serve as a powerful instrument of railroad cartels.

It is no wonder that, very soon after its inception, the Interstate Commerce Act and the ICC were lauded by the railway men, while the merchants’ and farmers’ groups who had high hopes for the ICC quickly came to call for its repeal. Thus, during 1890, numerous merchants and farmers groups called for repeal of the outlawry of pro-long haul discrimination, while the Detroit and Indianapolis Boards of Trade went so far as to call for outright repeal of the Interstate Commerce Act because it protected railroads and raised railway rates.Kolko, Railroads and Regulation, pp. 50–53.

But if the ICC looked with favor at cartel rates fixed by rate associations, it had no power to fix or enforce them. As competition resumed and freight rates fell further, the presidents of the leading Western roads were called to New York by the tireless J.P. Morgan to seek ways of maintaining freight rates and enforcing violations of the anti-rebate law. The railroad men met with the ICC commissioners in 1889, and the ICC encouraged the railroads to form what would virtually be a pool agreement. As a result, 22 roads signed an agreement to keep freight rates from falling; and, while no shares of freight were formally allocated between the roads, thus keeping narrowly within the letter of the law, the agreement authorized the railroads to take such steps as may be necessary and legal “to secure to each Company its due share of the competitive traffic.”Ibid., pp. 57–59. The pool, with its agreement to ration business and thereby allow a raise in rates, was back in all but name. And this time the ICC was there to help enforce it.

The new cartel organization called itself the “Inter-State Commerce Railway Association,” and it avowed that its purpose was “to exercise their power and influence in the maintenance of rates and the enforcement of all the provisions of the Inter-State Law.” It was, in short, merely altruistically interested in law enforcement! The Association pledged itself to enforce the agreement by notifying the ICC of any violation of law. And, to top matters off, and to underscore the incestuous relationship the new Association had with the ICC, Aldace Walker resigned as a member of the ICC to become chairman of the new organization. Gabriel Kolko aptly calls the Association, “in fact nothing more than a massive railway effort to interpret and enforce, with Commission sanction, the Act of 1887.”Ibid., p. 60.

The presidents of the Pennsylvania and New York Central railroads, the representative of the Northwest Railroad Board, and Charles Francis Adams, Jr., were all enthusiastic about the agreement. In imitation, ten major Eastern lines signed a similar agreement in February, appointing the ubiquitous cartelist Albert Fink as its commissioner. Again, the sanctimonious purpose was “to aid in the enforcement of the provisions of the Interstate Commerce Law,” and to inform on all violations to the Commission.Ibid., p. 61.

But even with ICC sanction, the winds of competition proved far too great for the railroad cartels. By the spring of 1889, vehement rate wars in the West had wrecked the Association. Repeated attempts to establish rate associations in the Southwest and to reconstitute the one in the West continued to fail, despite J.P. Morgan’s best efforts and the ICC endorsement. Rates continued to fall, sparked by secret competitive rebates, throughout the 1890s. The railroads continued to try to form and reconstitute rate associations, but all to no avail. In late 1895, 31 major Eastern roads set up the Joint Traffic Association, along almost the same lines as the defunct Inter-State Commerce Railway Association. The U.S. Supreme Court killed the association in October 1898 by calling such agreements illegal pools, following a similar decision the previous year. But it should be noted that the Association had foundered on the rock of competition and rate-cutting before the court’s decision was announced.Ibid., pp. 72–73, 83. On railroad competition up to the early 1890s, see also Julius Grodinsky, Transcontinental Railway Strategy, 1869–1893: A Study of Businessmen (Philadelphia: University of Pennsylvania Press, 1962), pp. 312–429. On the ICC as an attempt to enforce railroad cartelization, see MacAvoy, The Economic Effects of Regulation, pp. 110–204.

Throughout the 1890s, the railroads agitated for what were called “legalized pools,” but were actually pools that would be legally enforceable. In bills sponsored or written by railroads and submitted to Congress, railroad pools would fix rates, and then the ICC would ratify and enforce them. As the attorney for the B&O, who wrote one of the bills, declared: “we say unhesitatingly we are not afraid for one instant of the intervention of the Commission. We do not want an agreement to go into effect without their approval ...” The railroad point of view was put cogently by A.B. Stickney, president of the Minnesota & Northwestern Railroad, in a book written in 1891:

For a quarter of a century they [the railroads] have been attempting, by agreements between themselves, to make and maintain uniform and stable rates. But as such contracts are not recognized as binding by the law, they have rested entirely on the good faith of each company, and to a great extent upon the capacity as well as good faith of each of the traffic officials and employees. In the past they have not been efficacious, and ... it is too much to hope for any sufficient protection to the rights of owners growing out of such agreements. ... Their alternative protection is the strong arm of the law. Let the law name the rates, and let the law maintain and protect their integrity.Quoted in ibid., Railroads and Regulation, pp. 74–75, 77. [Editor’s remarks] Some critics of Kolko have argued that since many railroads were just trying to get the government to enforce their voluntary cartel agreements and uphold contracts that they mutually agreed upon, they were not nearly as interventionist as Kolko and others have portrayed them. See Robert L. Bradley, Jr. and Roger Donway, “Reconsidering Gabriel Kolko: A Half-Century Perspective,” Independent Review (Spring 2013): 570–71, 573. It is important to note that, at least from Rothbard’s perspective, the free market does not enforce promises unless some goods have already been physically exchanged. This includes cartel agreements, which are explicitly dealt with in Rothbard, Man, Economy, and State, p. 181. See also Murray Rothbard, The Ethics of Liberty (New York: New York University Press, 2002 [1982]), pp. 133–48. Therefore, the drive for railroads to get the government to enforce their cartel arrangements does constitute as an intervention.

But despite the enthusiastic support of the ICC, Congress stubbornly refused to pass any such legislation. Now, after 1898, even the rate association route was declared illegal by the courts. As a result, railroad and ICC pressure on Congress for legalized pools intensified still further.

2. Strengthening the Interstate Commerce Commission

And so, by the turn of the century, the railroad leaders had realized that the existing Interstate Commerce Act was not sufficiently powerful to act as a successful cartelizer of the railroad industry. For the first decade of the 20th century, as Hilton states, “the history of the statutory authority of the ICC is best interpreted as an effort to convert the Act of 1887 into an effective cartelizing statute.”Hilton, “Consistency of the Interstate Commerce Act,” p. 110.

To aid in this effort, the railroad men were fortunate in the man who succeeded the pro-railroad Shelby M. Cullom in 1899 as chairman of the Senate Interstate Commerce Committee. He was the even more pro-railroad and more vigorous Stephen Benton Elkins of West Virginia, who quickly became the most important Congressional influence on railroad legislation. Elkins had always had his eye on the main chance. During the 1870s he had become the largest landowner in New Mexico by shrewd use of his post as U.S. District Attorney; he then was fortunate enough to marry the daughter of Henry G. Davis, a coal and railroad tycoon in West Virginia. Through this marriage, Elkins became the largest mine owner in the Atlantic area; he and his father-in-law also controlled the West Virginia Central and Pittsburgh Railroad. In short, Elkins’ passion for the interests of the railroads was not unconnected with his own status as railroad owner.Kolko, Railroads and Regulation, pp. 90–91.

The railroad cartelists were also fortunate in the sudden accession to the presidency of the United States of Theodore Roosevelt, the preeminent political symbol of Progressivism whose long political career was always close to the House of Morgan.For more on the Roosevelt-Morgan connection, see Chapter 7 below, pp. 203–28. By the end of the 1890s, Morgan had gained far more predominance in the railroad industry than he had ever had before, and his drive for cartelization — in general industry as well as railroads — had intensified. It is no wonder that Morgan’s ally Roosevelt would come to be labeled as the railroad men’s “best friend.”Kolko, Railroads and Regulation, p. 155.

The first fruit of the new cartelizing drive was the Progressive Elkins Anti-Rebating Act of 1903. Rebates had been outlawed in the Act of 1887, but this mighty instrument of intense competition had continued to flourish, even though hidden, in the form of such devices as false classification and underestimating the weights of freight. Alexander J. Cassatt, president of the Morgan-associated Pennsylvania Railroad since 1899, had long been dedicated to cartels and “stabilization.” His attempt to end Pennsylvania rebates to the powerful Carnegie Steel Co. led to a mighty battle in which Andrew Carnegie and George Jay Gould threatened to build parallel railroads, while Morgan countered with a powerful attempt at monopoly in the steel industry known as United States Steel.([Editor’s remarks] Gabriel Kolko, The Triumph of Conservatism (Glencoe, IL: The Free Press, 1963), p. 32.) For more, see Chapter 3 below, pp. 98–100. Cassatt did not hesitate to turn to the secular arm by having his general counsel, James A. Logan, write the Elkins Bill in 1901 to crack down on rebating. Logan told a press conference that if his bill should pass, the railroads would “no longer be subject to the dictation of the great shippers as to rates and facilities.”Kolko, Railroads and Regulation, pp. 94–97. The original Elkins Bill as it passed the Senate also achieved the long-standing railroad objective of legalizing pooling; while the final compromise bill did not officially legalize pools, it did the equivalent by declaring rates jointly arrived at by railroads to be legal, and providing that any joint rate filed with the ICC “shall be conclusively deemed to be the legal rate, and any departure from such rate, or any offer to depart therefrom to be an offense ...”Ibid., p. 100. The Elkins Act also made corporations as well as individuals liable for violations and provided that both the giver and receiver of rebates could be prosecuted. Thus, not only did the Elkins Act of 1903 greatly strengthen the prohibition of rebates, but it restored the legalization of associated rates that the Supreme Court had knocked down a half-decade before.

The railroads exulted at the passage of the Elkins Act which passed unanimously in the Senate and with virtually no opposition in the House. The Railroad Gazette declared that the law should have been passed five years earlier, and gloated that “all that will be asked of the Commissioners by the public will be that they go ahead and catch every law-breaking rate-cutter in the country.”Railroad Gazette (February 20, 1903): 134. Quoted in ibid., p. 101. The importance of the Elkins Act, which has been rather neglected by historians, is underscored by George Hilton as revealing “the overall framework of regulation” of the railroads. George W. Hilton, “Review of Albro Martin, Enterprise Denied,” Bell Journal of Economics and Management Science (Autumn 1972): 629. ([Editor’s remarks] The above article is a trenchant critique of Albro Martin’s Enterprise Denied, a book on railroads which criticized parts of Kolko’s thesis. Rothbard earlier praised the article in “Recommended Reading,” Libertarian Forum (December, 1972): 6. See Albro Martin, Enterprise Denied: The Origins of the Decline of the American Railroads, 1897–1917 (New York: Columbia University Press, 1971). However, as shown below, Rothbard does agree with some aspects of Martin’s thesis, such as that after 1910 the railroads drowned under the ICC’s regulations.) Even Chandler, who is generally unsympathetic to the cartelizing interpretation of railroad legislation, concedes that the railroads overwhelmingly supported the Elkins Act, although he fails to realize that the Act strengthened the ICC and legalized joint railroad rates. Chandler, The Visible Hand, p. 174.

Various merchant and shipper groups were not satisfied with the existing law, and they agitated after 1903 for outright rate-fixing powers to be given to the ICC. They were opposed by other shippers, however, including the National Association of Manufacturers, which reversed itself on the issue. As a result of this split, and of railroad opposition, such bills as the Esch-Townsend Bill were ultimately defeated in Congress.[Editor’s remarks] Kolko, Railroads and Regulation, pp. 103–06, 118–20. There has been much discussion over the railroad opposition to regulation in 1904 and 1905. Some have argued, contra Kolko, that the railroads were unanimously opposed to any new regulation. See Martin, Enterprise Denied, pp. 111–14; Richard H.K. Vietor, “Businessmen and the Political Economy: The Railroad Rate Controversy of 1905,” Journal of American History (June, 1977): 50–53. However, Kolko argued that the railroad opposition, especially in the Senate Committee meetings, was mainly directed against the Esch-Townsend Bill, which allowed the ICC to fix definite rates, and in speeches and railroad journals they were more sympathetic to other types of regulation. Kolko, Railroads and Regulation, pp. 117–44.

A different law, the Hepburn Act, written in the councils of the Roosevelt administration, passed Congress almost unanimously in 1906. As Kolko points out, historians have made a great to-do about the Hepburn Act as an allegedly controversial “reform” measure directed against the railroads while overlooking the fact (a) that the controversies were all minor, and (b) that everyone, especially including the railroads, accepted the principles of the bill and quibbled only over details. An examination of the Hepburn Act reveals why the railroads and railroad journals praised the law. Perhaps most importantly, the Hepburn Act strengthened the Elkins Act against rebating. For one thing, it extended the law to cover express and sleeping-car railroads, private-car lines, and pipe-lines, thus extending the cartel by bringing competing forms of transportation under the same regulation. Secondly, the Hepburn Act outlawed railroads transporting products which they owned themselves, a measure aimed at competing “industrial roads,” such as anthracite railroads, which owned coal mines.The Railway and Engineering Review spoke for most railroad opinion in hailing the provision of the new law outlawing industrial railroads: “... the ‘Industrial Roads’ will go out of business. They ought never to have been allowed to begin it.” Railway and Engineering Review, Sept. 15, 1906, p. 714. Quoted in Kolko, Railroads and Regulation, p. 150. [Editor’s remarks] Ibid., pp. 144–51. Third, it required 30 days’ notice for rate changes, which slowed down competitive rate cutting, and rebate penalties were stiffened, with fines equaling three times the value of the rebate, and a possible penalty of two years imprisonment was imposed for violating the law. Fourth, the railroad cartel was expanded by outlawing free passes by railroads to their customers, as well as various other free services to shippers. This, of course, was the equivalent of compulsory raising of rates by outlawing forms of price-cutting. Fifth, if rates arrived at by railroads were challenged by shippers, the ICC had the right to set its own maximum rates, if it found those rates not to be “just, fair, and reasonable.” The ICC’s rulings would be subject to review by the courts, and even though these were to be maximum rates, giving them the force of law made collusion between the railroads much easier, and hence strengthened the cartels.See Hilton, “Review of Albro Martin, Enterprise Denied,” p. 269. [Editor’s remarks] Hilton’s controversial argument regarding the cartelizing effect of maximum rates seems to have been that the railroads could push for a higher maximum rate, and by making this rate official, downward price cutting from it could be deemed illegal.

Particularly enthusiastic about the Hepburn Act was A.J. Cassatt, head of the Pennsylvania Railroad, who proclaimed his agreement with Roosevelt’s position. The Pennsylvania pointed out, in its 1906 Annual Report, that its aim of achieving the end of rebating having been achieved with the Hepburn Act, and “the maintenance of tariff rates [having] been practically secured,” it could go ahead and sell the stock it had purchased in its competitors.Quoted in Kolko, Railroads and Regulation, p. 147. G.J. Grammar of the New York Central exulted in the compulsory elimination of the free passes and services. Key railroad leaders such as John W. Midgley (a veteran pool organizer) and Samuel Spencer were anxious to bring private-car railroad lines under regulation. The Railway and Engineering Review crowed over the abolition of the industrial railroads. E.H. Harriman, second only to Morgan in controlling railroads, favored the Hepburn Act. And, upon its passage, George W. Perkins, partner of J.P. Morgan & Co., wrote to Morgan that the new law “is going to work out for the ultimate and great good of the railroads. There is no question but that rebating has been dealt a death blow.”Perkins to Morgan, June 25, 1906. Quoted in ibid., p. 148. [Editor’s remarks] Harriman favored the act relative to more hostile regulation. By late 1906, his clout with Roosevelt had significantly deteriorated. See Chapter 7 below, pp. 223–28.

The railroads had been so exercised about the rebating problem that the executives of virtually all of the Western roads had met in December 1905, to consider steps to combat the practice. They decided to inform the ICC of all violations of the law.

The Hepburn Act was drawn up by Attorney-General William H. Moody. President Roosevelt had consulted with several railroad leaders, including Cassatt, Midgley, and Spencer. Roosevelt had been converted to the railroad cause, and to the desirability of railroad pools, by his Secretary of the Navy Paul Morton, formerly vice president of the Morgan-controlled Atchison, Topeka & Santa Fe Railroad.Ibid., pp. 111 and 125. We know, too, that Roosevelt’s chairman of the Bureau of Corporations James R. Garfield, was consulting during 1905 with two powerful corporate attorneys: Victor Morawetz, of the Atchison, Topeka & Santa Fe, and Francis Lynde Stetson, personal lawyer for J.P. Morgan. Probably, Morawetz and Stetson were most influential in beginning the drive for what later would become the Federal Trade Commission, but railroad matters “might” also have been discussed. Ibid., p. 113.

In his December, 1905 message to Congress, Roosevelt explained his call for railroad regulation in terms of restricting railroad competition, of protecting “good” as against “bad” (that is, particularly vigorous) competitors:

I believe that on the whole our railroads have done well and not ill; but the railroad men who wish to do well should not be exposed to competition with those who have no such desire, and the only way to secure this end is to give some Government tribunal the power to see that justice is done by the unwilling exactly as it is gladly done by the willing. Moreover, if some Government body is given increased power the effect will be to furnish authoritative answer on behalf of the railroad whenever irrational clamor against it is raised, or whenever charges made against it are disproved.Ibid., p. 115.

Contemplating the growing drive for what would become the Hepburn Act, the Wall Street Journal keenly noted the enthusiasm by the railroad men as well as the growing general business interest in their own regulation:

Nothing is more noteworthy than the fact that President Roosevelt’s recommendation in favor of government regulation of railroad rates and Commissioner Garfield’s recommendation in favor of federal control of interstate companies have met with so much favor among managers of railroads and industrial companies. It is not meant by this that much opposition has not developed, for it has ... The fact is that many of the railroad men and corporate managers are known to be in favor of these measures, and this is of vast significance. In the end it is probable that all of the corporations will find that a reasonable system of federal regulation is to their interest. ... It is known that some of the foremost railroad men of the country are at this time at work in harmony with the President for the enactment of a law providing for federal regulation of rates which shall be equitable both to the railroads and to the public.Wall Street Journal, December 28, 1904. Quoted in ibid., p. 120.

One consequence of the Hepburn Act indicates, contrary to accepted propaganda, whom the act really injured and whom it benefited. As soon as the act was passed, the New York Central happily complied by abolishing free storage facilities for New York flour merchants, the Chicago and Eastern Illinois Railroad inaugurated charges for switching, and free car service and loading in Philadelphia was abolished. The Railway World happily reported that:

notwithstanding the fears of many that railroads would be hurt by the operation of the law, no complaint has been heard from railroad men against its general provisions. On the contrary, the complaints are coming from the shippers, who were supposed to be the chief beneficiaries of the law.Railway World, August 29, 1906, p. 729. Quoted in ibid., p. 150.

In 1910, Congress passed the Mann-Elkins Act completing the trilogy of cartelizing railroad acts passed during the first decade of the 20th century. The original bill of the Taft administration would have legalized railroad agreements to fix freight rates — a measure that the railroads had long yearned for. The roads could not get this provision through Congress, and they had to accept the clause that the ICC might suspend and review railroad rate changes.

In point of fact, the railroads welcomed governmental review and approval of rates provided this power were used primarily to prevent rate reductions rather than increases. To insure this, the railroads welcomed the achievement of an old demand in the Mann-Elkins Act: the creation of a new, special Federal Court of Commerce with the power to review all ICC rate decisions on appeal. It was expected by everyone that the new Commerce Court would be solidly pro-railroad, and so it proved to be. The chairman of the Commerce Court was the previous chairman of the ICC, Martin A. Knapp, who had long opposed competition in railroads and favored legalized pooling enforced by the government, and he now reaffirmed this stand, as well as calling for higher railroad rates.[Editor’s footnote] Ibid., p. 199.

Also a force for cartelization was another provision of Mann-Elkins, reestablishing the original prohibition, in the Interstate Commerce Act, of rate discrimination for long-haul over short-haul traffic — a clause that had been nullified in the Supreme Court’s Alabama Midland Railway decision in 1897. By restoring this prohibition, Congress strengthened railroad cartels by preventing competitive rate reductions for long-haul traffic.

Professor Hilton trenchantly sums up the effect of the Mann-Elkins and other acts:

The investigation and suspension procedures established in 1910 and recognized for decades, were a powerful inhibition to promiscuous rate reduction, and the Mann-Elkins Act’s revision in Section 4 of the Act of 1887 restored its effectiveness against the practice of charging more for a shorter haul than for a longer haul. Without an effective Section 4, the Commission was unable to put down rate wars in which a railroad cut rates between points which it served in rivalry to parallel railroads below the level of rates to intermediate points. Basically, what the legislation of 1903, 1906, and 1910 did was rectify the adverse judicial decisions of the 1890s and otherwise patch up the Commission’s statutory body of authority so that it could accomplish what Congress had set out to do in 1887: stabilize the railroad cartels without pooling.Hilton, “Review of Albro Martin, Enterprise Denied,” p. 630. As Kolko points out, the Supreme Court’s decisions of the late 1890s, striking down various rate regulations and refusing to sanction cartel agreements, were not, as most historians have believed, “pro-railroad” decisions. On the contrary, they were examples of the Court clashing with the railroads. Kolko, Railroads and Regulation, pp. 80–83.

But the railroads were getting worried about the performance of their creation, the ICC, as witness their eagerness to place as many rate-setting powers as possible in the Commerce Court. For the organized shippers, with their interest in lower rates, were growing in political strength. They had managed to block important pro-railroad Taft administration provisions in Congress, and they grew in influence after 1910. In consequence, the ICC repeatedly rejected rate increases urged by the railroads after 1910, and, after the Supreme Court emasculated the powers of the Commerce Court in 1912, the shippers persuaded Congress to abolish the latter the following year.[Editor’s footnote] Ibid., pp. 195–202.

But despite their uneasiness at shipper influence on the ICC, for the nation’s railroads there was no turning back. They were strongly committed to federal government regulation, and the stronger the better.[Editor’s footnote] Therefore, despite repeated efforts, the ICC was a failure for the railroads and was ultimately captured by the rival shipping interests. Robert Higgs has aptly characterized the situation of growing shipper power thwarting the railroads’ efforts:Not infrequently, however, business support for regulatory harmonization at the federal level gave birth to an unmanageable offspring. Like Dr. Frankenstein’s monster, the newly created federal regulatory agencies often stopped heeding their business progenitors’ voice. Within twenty years, for example, the ICC had fallen under the sway of shipper interests, and by refusing to approve reasonable rate increases, the commission proceeded to compress the railroad companies in a merciless cost-price squeeze. So severely had the railroad firms suffered in the decade after 1906 that during World War I they collapsed, financially exhausted, into the loving arms of the U.S. Railroad Administration; afterward, under the terms of the Transportation Act of 1920, they found themselves reduced to little more than regulated public utilities.Robert Higgs, “Regulatory Harmonization: A Sweet-Sounding, Dangerous Development,” in Against Leviathan: Government Power and a Free Society (Oakland, CA: Independent Institute 2004 [2000]), p. 76. For one thing, federal regulation was bound to be more uniform, and therefore more effective in imposing a nationwide cartel, than state regulation, and probably it would be more enthusiastically pro-cartel. In the summer of 1914, the newly formed Railroad Executives’ Advisory Committee, including most of the nation’s railroads and headed by Frank Trumbull of the Chesapeake & Ohio, called for comprehensive federal control of the country’s railroads along the lines of federal control of the banks in the new Federal Reserve Act.[Editor’s footnote] Kolko, Railroads and Regulation, pp. 219–20. For more on the origins of the Federal Reserve, see Chapter 14 below, pp. 463–78. E.P. Ripley, president of the Santa Fe Railroad, called explicitly for a partnership between the federal government and the railroads. In return for control over rates, the government would guarantee all railroads a fixed minimum rate of profit. This, opined Ripley, “would do away with the enormous wastes of the competitive system ...”Traffic World, October 31, 1914, p. 798. In Kolko, Railroads and Regulation, pp. 215–16. Daniel Willard, head of the Baltimore & Ohio, called for speeding up the process of federalizing railroad regulation, and likened this need to the recent federal regulation embodied in the Federal Reserve and Federal Trade Commission acts.

The shippers had managed to block railroad rate increases before the ICC in 1910 by arguing for greater “efficiency” and “scientific management” on the part of the railroads. The railroad leaders, in their subsequent agitation for enlarged and comprehensive federal regulation, turned the tables by linking the typically progressive concept of “efficiency” with imposing uniformity and eliminating “competitive waste.” More specifically, this would come through cooperative, i.e., cartel-like, reductions in service and in railroad traffic, as well as quota allocations of freight, all in the name of efficient elimination of waste. The role of the federal government was to be as supervisor and enforcer of this cartelizing process. All this was supposed to require, and indeed was meant as the prop for, higher railroad rates.See K. Austin Kerr, American Railroad Politics, 1914–1920: Rates, Wages, and Efficiency (Pittsburgh: University of Pittsburgh Press, 1968), pp. 16, 22–24.

All in all, Fairfax Harrison, president of the Chicago, Indianapolis & Louisville Railroad, spoke for the railroad leaders when he declared that the ICC was necessary to assure general increases in rates when profits might be low, and thereby to prop up and increase railway earnings. This would be far better than free competition or the vagaries of state regulation. Trumpeted Harrison: “The day of the Manchester school and laissez faire is gone. ... Personally, I do not repine at the change ...”Fairfax Harrison, “Speech Before the Transportation Club of Indianapolis,” March 31, 1911 (1911), p. 1. In Kolko, Railroads and Regulation, pp. 206–07.

In response, the Republican platform of 1916 duly called for total federal control of railroad regulation. For their part, the Democrats were blazing the same path through the views and actions of President Woodrow Wilson. On September 10, 1914, Wilson wrote to Trumbull that, in view of declining railroad earnings, the railroads must be “helped in every possible way, whether by private co-operative effort or by the action, wherever feasible, of governmental agencies ...”Railway Age Gazette, September 11, September 18, 1914, pp. 462, 506. In ibid., p. 213. The Railway World reported massive business approval of Wilson’s sentiments, and the Railway Business Association passed a resolution hailing the President. J.P. Morgan, Jr. wrote to Wilson expressing his gratitude for the Trumbull letter.

Moreover, in response to a request from Trumbull, President Wilson, in his December 1915 message to Congress, urged an inquiry into a comprehensive grappling with the nation’s railroad problem. Trumbull enthusiastically wired Wilson that “I am confident that you will do for the railroads of this country as much as you have already done for the banks.”Frank Trumbull to Woodrow Wilson, December 7, 1915. In ibid., p. 223. At the subsequent hearings of the Congressional Joint Committee headed by Senator Francis G. Newlands, established in July 1916, the major railroad position was delivered by Alfred P. Thom, chief counsel of the Railroad Executives’ Advisory Committee. Thom not only called for exclusive federal regulation of the railroads, but also for their protection. He urged the model of the Federal Reserve System, with regional ICC’s, ICC setting of minimum as well as maximum rates, and the compulsory federal incorporation of all railroads as well as exclusive federal regulation of railroad security issues.

President Wilson called for strengthening of the ICC along similar lines in August 1916 — as well as advocating higher rates — and repeated his request in his December message to Congress. As we shall see below, the coming of America’s entry into World War I in April 1917 paved the way for the culmination of this, as well as other aspects of the progressives’ cartelizing programs for American industry. During the war, the railroad cartelists, viewing the “nationalization” of their industry, couldn’t have been happier.[Editor's footnote] See Chapter 12 below, pp. 379–82, 394–96.